可口可樂 (KO) 2011 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Coca-Cola Company's first-quarter 2011 earnings results conference call.

Today's call is being recorded.

If you have any objection, you may disconnect at this time.

All participants will be in a listen-only mode until the formal question-and-answer portion of the call.

(Operator instructions) Due to the interest in today's conference, we request a limit of one question per person.

I would like to remind everyone that the purpose of this conference is to talk with investors, and therefore, questions from the media will not be addressed.

Media participants should contact Coca-Cola's media relations department if they have questions.

I would now like to introduce Mr.

Jackson Kelly, Vice President and Director of Investor Relations.

Mr.

Kelly, you may begin.

Good morning, and thank you for being with us today.

I'm joined by Muhtar Kent, our Chairman and Chief Executive Officer, and Gary Fayard, our Chief Financial Officer.

Following prepared remarks this morning, we will turn the call over for your questions.

Before we begin, I would like to remind you that this conference call may contain forward-looking statements, including statements concerning long-term earnings objectives, and should be considered in conjunction with cautionary statements contained in our earnings release and in the Company's most recent periodic SEC report.

In addition, I would also like to note that we have posted schedules on our Company website at www.thecoca-colacompany.com under the Reports and Financial Information tab in the Investor section, which reconciles certain non-GAAP financial measures that may be referred to by our Senior Executives in our discussions this morning, and from time to time in discussing our financial performance to our results as reported under Generally Accepted Accounting Principles.

Please look on our website for this information.

Now I will turn the call over to Muhtar.

Thank you, Jackson, and good morning, everyone.

Let me begin by saying that I'm pleased with our first-quarter results.

Despite ongoing global geopolitical challenges, we once again delivered consistent quality growth across all five of our geographic operating groups.

We are winning share in the marketplace.

We gained volume and value share globally in nonalcoholic beverages, as well as in both the sparkling and still ready-to-drink beverage categories.

We are winning with our global sparkling beverage portfolio.

Brand Coca-Cola grew 3% in the quarter.

In addition, Fanta is our fourth global brand to surpass the $10 billion retail sales value threshold.

And we are winning with our global still beverage portfolio as Del Valle, a brand we acquired in 2007, recently achieved billion dollar brand status.

Del Valle is now our Company's 15th billion dollar brand, and our first with roots in Latin America.

Importantly, we are decisively executing our 2020 vision together with our global bottling partners, and delivering consistent, long-term, sustainable growth.

Before we review this quarter's operating results, I would like to take a moment to address recent events in Japan in light of last month's tragic earthquake and tsunami.

First, I would like to acknowledge and sincerely thank our leadership team in Japan for their tireless efforts in helping to ensure the health and safety of our associates and the people of Japan during this time of crisis.

I would also like to express our heartfelt appreciation to all of our Japan bottling partners who have been at the very forefront of our system's efforts to assist with immediate disaster relief.

Our bottling partners have been diligently producing, distributing beverages to affected areas and restoring our business operations.

Last month, days following the quake and tsunami, I visited Tokyo to meet with our associates, customers, and our bottling partners to gain firsthand insight into the initial rebuilding efforts.

Given our nearly 60-year presence in Japan, and our deep connection with its people, we are committed to doing everything we can to help the recovery relief and rebuilding of this great country.

To date, we have pledged $31 million to the ongoing relief efforts, including donations of over 7 million bottles of product.

Through our Coca-Cola Japan reconstruction fund we are going to help rebuild schools and community facilities all across the country.

As for our business in Japan, we can confirm that outside of the hardest hit regions in north and east Japan, our system's bottling operations have been only minimally impacted, and all eight bottling plants in the region most affected by the earthquake are now back up and running.

We have also announced plans to reduce our power usage this summer in east Japan, mostly in vending machines, to ensure we are responsive to the needs of the community while ensuring our machines stay on and in support of small businesses which rely on the vending channel.

With regards to this quarter's results in Japan, our volume was up 1%, gaining volume and value share in nonalcoholic ready-to-drink beverages, reflecting the strong momentum our Japan business built across our portfolio in the time prior to the earthquake and tsunami.

In light of recent events, we are actively re-evaluating our Japan business plan to ensure we restore and sustain our momentum, and meet evolving customer and consumer needs.

As this topic is top of mind for many of our share owners, Gary will review later in our call a very early estimate of the full-year impact these recent events may have on our business in Japan.

And be assured that in the coming months we will keep providing routine and ongoing updates regarding Japan.

We appreciate your patience and understanding as we navigate through this evolving operating environment.

Turning now to our total Company performance results, our volume grew 6% for the quarter, including the benefit of our new cross-licensed brands, primarily Dr Pepper brands in North America.

Excluding these brands, our quarterly volume grew a strong 5%, ahead of our long-term growth target and fueled by organic volume growth in all five geographic operating groups.

We are happy about these results and confident about our future, as we achieved these good performance results despite natural disasters, political uncertainties, and a global macroeconomic environment still in recovery and pressured by rising inflation and commodity prices.

As the global recovery and rate of volatility continue, we may see some bumps along the way as we have seen in the past.

However, our strong brands and solid business fundamentals provide us with confidence that we will continue to meet and exceed our long-term growth targets.

Now let's review our performance results across our global markets in more detail, beginning with North America, our flagship market.

North America volume was up 6% this quarter, with organic volume growth of 2% excluding the benefit of our new cross-licensed brands.

This marks a fourth consecutive quarter of positive organic growth for North America.

And importantly, North America once more gained volume and value share in nonalcoholic ready-to-drink beverages this quarter.

In the United States, trademark Coca-Cola gained share while Diet Coke was named the number two sparkling beverage right behind our number one brand, Coca-Cola.

Coca-Cola Zero once again delivered double-digit volume growth in North America for the 20th consecutive quarter.

Both Sprite and Fanta continued to grow in North America, up 3% and 5%, respectively, this past quarter.

These successes reaffirm that our system is executing the right strategies and taking the right actions to sustainably drive long-term growth across our entire North America sparkling beverage portfolio.

Turning to North America still beverages, I'm pleased to report 8% growth for the quarter.

We have now grown volume share for our still beverages for 13 of the past 15 quarters, and value share for 14 of the last 15.

Our North America juice and juice drink business delivered positive growth this quarter, fueled once again by our Simply brand which grew 20%.

This marks the 17th consecutive quarter that Simply has gained both volume and value share in the US.

Our Glaceau brands gained volume and value share this quarter, growing 12% with our Vitamin Water trademark up high-single-digits and Smartwater up double-digits.

POWERADE delivered impressive results, growing 21% this past quarter and once again outperforming the North America sports drink category.

Our North America tea business extended its momentum, delivering 12% growth for the quarter.

We also completed a transaction that began three years ago by acquiring the remaining interest in Honest Tea, the nation's top-selling organic bottled tea company.

We are excited to fully welcome this great and innovative brand to our family.

In total, our results in North America are a testament to how well our new leadership team and operating structure are working.

We remain clearly focused on our integration efforts, which are proceeding as planned.

At the same time, we are leveraging our strong marketing and sales capabilities to accelerate our leadership position within North America, and to deliver profitable and sustainable growth.

Now let me turn to our Pacific group, which was up 5% in the quarter, led by double-digit growth in both China and Korea, and gaining share in both sparkling and still beverages.

Our return to double-digit growth in China was driven by the effective execution of our Chinese New Year programs and sustained investment in our brands across multiple categories.

As a result, our sparkling beverages gained share and grew double-digits in China this quarter.

This growth was led by trademark Coca-Cola and trademark Sprite, with both also growing double-digits.

In fact, our sparkling beverage share in China is now at the highest level we've seen in over two years.

Our still beverages in China also gained share and grew double-digits this quarter led by Minute Maid Pulpy, which was up 27%.

As discussed in our last earnings call, we are introducing a wider variety of packages in China to promote affordability and enhance the consumer experience with our brands, all with a focus to drive increased transactions and to build brand equity.

In support of this strategy, we launched a new single-serve 300ml package for our sparkling beverages across parts of the country, and have plans to introduce a 500ml offering nationwide this summer.

Moving now to Latin America, volume grew a strong 7% for the quarter, including 5% growth for brand Coca-Cola.

Latin America's broad-based growth was led by Mexico, our highest global per capita market, and a market sometimes overlooked because of its consistently solid performance.

This quarter Mexico grew 14%, including an 11% increase for brand Coca-Cola.

And we captured total nonalcoholic ready-to-drink beverage volume and value share in Mexico this past quarter, continuing a trend we have consistently seen in nearly every quarter over the last four years.

Brazil was up 2% for the quarter despite unseasonably cold and wet weather.

Importantly, our business in Brazil continues to outperform the marketplace, marking the fifth consecutive quarter that Brazil has gained volume and value share in nonalcoholic beverages.

And our South Latin business, which includes Argentina and Chile, delivered high-single-digit growth capturing market share, again, in both sparkling and still beverages.

Our Eurasia and Africa business grew 8% in the quarter led by strong results in Russia, Turkey, and India.

Russia grew 27% this past quarter led by strong sparkling beverage growth.

Brand Coca-Cola grew 24% in Russia posting its fifth consecutive quarter of double-digit growth.

Additionally, Fanta and Sprite also delivered strong double-digit growth in Russia this past quarter.

And our business in Russia gained volume and value share in total nonalcoholic ready-to-drink beverages, contributing more than 50% of nonalcoholic ready-to-drink beverage growth in Russia this past quarter.

Turkey delivered 17% growth this quarter, and gained sparkling beverage share led by trademark Coca-Cola, up a strong 19%.

India meanwhile, once again delivered solid results, growing 9%.

This now marks the 19th consecutive quarter of positive growth for this key market.

India also once again delivered balanced growth across our entire portfolio with sparkling beverages up 10% and still beverages up 9% this quarter.

Moving now to Europe, volume was up 1%, this region's third consecutive quarter of positive growth despite ongoing macroeconomic challenges.

We also gained share in global nonalcoholic beverages, as well as in both the sparkling and still beverage categories in Europe this quarter.

Our sparkling beverages in Europe were up 1% for the quarter, including trademark Coca-Cola also up 1%.

And Coca-Cola Zero kept its strong momentum in Europe, increasing double-digits once again.

Our still beverages in Europe continued to grow and gain share across multiple categories, including sports drinks, energy drinks, and ready-to-drink tea.

Germany delivered balanced 4% volume growth.

This growth was balanced across our portfolio, with sparkling beverages up 4% and still beverages up double-digits, leading to total nonalcoholic ready-to-drink beverage volume and value share gains.

Finally, our business in northwest Europe keeps delivering solid results with positive growth in Great Britain, Sweden, Belgium, and France.

In fact, this marks France's 11th consecutive quarter of positive growth.

Now let's return to a few of the global brand success stories referenced at the start of today's call.

Last quarter, I shared how Fanta had become our third global brand to surpass $2 billion in annual unit case sales.

Fanta is also our fourth global brand to surpass the $10 billion retail sales value threshold, joining Coca-Cola, Sprite, and Diet Coca-Cola.

Building on this momentum we have extended Fanta's existing marketing efforts into a unified and global integrated campaign to reach consumers worldwide in regions representing 90% of Fanta's global sales volume.

This highlights both our commitment to marketing productivity, as well as our belief in investing behind our global brands.

I mentioned earlier that Del Valle recently became our 15th billion dollar brand.

When we partnered with Coca-Cola FEMSA to jointly acquire the Jugos del Valle business in 2007, the Del Valle brand was available in only three countries across Latin America with annual retail sales of under $500 million.

Today, working in partnership with our entire Mexican bottling system, we have expanded Del Valle to 34 flavors and varieties in 15 countries, making Del Valle the first of our billion dollar brands with its roots in our Latin America region.

If we take a step back to reflect on this achievement, we can see that it is the latest example of how our global system can be so nimble and flexible, as well as fast in achieving success.

It is important to remember that our last three brands to achieve billion dollar status, Simply, Minute Maid Pulpy, and Del Valle, have all followed unique paths to success.

Simply represents a classic case study, in fact, of how we organically built a new brand to complement our existing juice portfolio in order to take juice and juice drink category leadership in the United States.

Minute Maid Pulpy is a great example of how we developed a unique brand experience tailored to meet local tastes in China, and then leveraged our scale to spread the success across multiple regions.

And now Del Valle stands as a prime illustration of how we can partner with our system to quickly achieve scale and address an area of opportunity in our beverage portfolio all across Latin America.

The growth of these brands has played a significant role in our Company becoming the global leader in juice and juice drinks.

Yet we believe we have really just begun to tap our global potential in this key beverage category.

As we advance our momentum around the world, we are also committed to building a better tomorrow.

I've mentioned the work we are doing to support the rebuilding efforts in Japan, as it always has been part of our Company's DNA to support communities in need.

For example, this year is the 10th anniversary of the Coca-Cola Africa Foundation.

This Foundation focuses on transforming lives and empowering communities across the African continent.

We're involved in programs focused on improving access to clean water, preventative health, education, and entrepreneurship training, among others.

Over the past decade, the Foundation, Coca-Cola Africa Foundation has implemented more than 160 community projects in nearly 40 countries, investing more than $100 million across Africa.

Looking ahead to the next decade, the Foundation is committed to expanding its footprint and to implementing a project in every country on the continent.

Another way we are building for a better tomorrow is by further advancing our sustainability efforts.

In the past, we have talked about the advancement of our PlantBottle, a package that functions like a regular fully recyclable plastic bottle but is made with plant-based materials resulting in a lighter footprint on the planet.

Last month we announced that all Dasani and Odwalla single-serve bottles in the United States would now be available in our PlantBottle.

In fact, Odwalla's new packaging is entirely composed of materials derived from sugar cane, making our Company the first to develop and enter the market with a 100% plant-based fully recyclable package.

And this past February at the CAGNY conference, we announced a special partnership with Heinz to expand the use of our PlantBottle in the United States.

We are pleased to see this technology adapted by other companies, as we believe that innovative collaboration and an open exchange between companies is more important today than ever, especially as it relates to the environment.

As we build for a better tomorrow, our efforts and performance are being recognized.

This past quarter, we have been honored to receive several acknowledgements.

FORTUNE magazine ranked us number 6 in their 2011 list of the World's Most Admired Companies, up from number 10 in 2010.

DiversityBusiness magazine placed us at number 4 in their list of the Top 50 Organizations for Multicultural Business Opportunities.

And we received two Edison awards, including a Silver Award in the packaging category for our PlantBottle, and a Gold Award in the new retail frontiers category for our freestyle fountain drink dispenser.

While all of us at the Coca-Cola Company are proud of these achievements, we understand that they only represent a snapshot of where we are today, rather than where we aspire to be tomorrow.

It is our good fortune to steward an incredibly dynamic global commercial enterprise, and a very special brand that will celebrate its 125th anniversary in just a couple of weeks on May 8.

As we look toward the future, we do so against the backdrop of a global economy that is still rebalancing.

But there is no question that we are all experiencing a complex global geopolitical climate.

Yet, this complexity, and the challenges they raise, also bring real opportunities and exciting growth prospects.

In fact, since day one of our 2020 Vision's guiding principles has been that our system has only just begun to achieve its potential.

As we look forward, the opportunities before us are clearly abundant.

A billion people entering the middle class in the next decade, the corresponding political, economic, and social rise of the emerging world, and an unparalleled expansion of cities, personal mobility, technology, and education.

Today, we live in a paradoxical world of remarkable promise and great challenges.

Yet together with our bottling partners, we have been preparing for this world, aligning our system behind the strategies and priorities called in our 2020 Vision.

This strong alignment has not only helped us navigate recent storms, it has put us in a position of real strength.

The growing strength of our brands, and our consistent operating and financial performance, are proof positive of how we are steadily and strategically advancing our global momentum.

That is why, as we look ahead to 2020 and beyond, we are confident that our system is well positioned to meet and exceed our long-term targets, and to usher in a new era of winning for all of our share owners.

With that, I would now like to turn the call over to Gary.

Thanks, Muhtar.

Good morning, everyone.

As Muhtar shared, we are off to a good start this year, advancing our momentum with 6% worldwide volume growth, and the delivery of another quarter of consistent quality growth in line with our expectations.

We feel particularly good about these results since we delivered them while productively integrating our North America business and while navigating several unforeseen global events, including the tragedy in Japan, the unrest in the Middle East, and a volatile global commodity cost environment.

While as expected, there are many puts and takes to consider in reviewing our quarterly results, and I will go through all of those, I want to affirm that, except for Japan, we do not see any of these puts and takes changing our full-year bottom line expectations.

In fact, this quarter's good results are a testament to our global system's ability to execute our strategic plans in keeping with our 2020 Vision and long-term growth targets.

So let me start by reviewing our earnings results for the quarter.

As outlined in our release, we reported comparable earnings per share of $0.86, up 7% versus the prior year, and in line with our long-term growth targets.

While this result came in $0.01 below consensus in many analysts' models, it includes a $0.01 dilutive effect from the timing of marketing expenses, as we are required to conform our newly acquired North American bottling business to the Coca-Cola Company's accounting policies.

Let me take a moment to explain what this accounting treatment means in plain English.

As many of you know, we apply something we call a sales curve accounting policy to our marketing expenses, which means we recognize marketing on a pennies-per-case basis.

So basically, the same pennies per case of marketing for the full year, as we spread the marketing across the year.

For example, when we sponsor and activate an event like the recent NCAA March Madness basketball tournament, rather than recognizing the entire cost of the sponsorship in the quarter, we recognize the cost over the full year, in line with our estimated volume, along with all the other marketing.

Once our 2011 quarterly business plans were finalized in the first quarter of this year, we began to apply the same accounting policy to marketing expenses associated with our newly acquired North American business.

The application of this sales curve accounting policy pulled incremental marketing expenses into the first-quarter results, diluting our comparable first-quarter 2011 earnings per share by $0.01.

As we couldn't tell you about this accounting adjustment until we finalized our quarterly business plan spreads, we realize that many of you do not have this accounting adjustment reflected in your model.

As you consider how to model this adjustment going forward, please note that this sales curve dilution will reverse itself in the fourth quarter of this year.

Our first-quarter results also reflect the effect of the recent tragic events in Japan on our business.

As Muhtar mentioned earlier, we finished the quarter in Japan up 1%.

But prior to the March 11 earthquake and tsunami, our business was actually on track to deliver quarterly volume growth of 3% to 4%.

Although it is impossible to precisely calculate what might have happened, our best estimate is that recent events in Japan had a $0.01 dilutive effect on our first quarter's comparable earnings per share due to lost revenues primarily related to shifts in product package and channel mix.

Separately, we have identified a set of one-time items in Japan this quarter primarily related to bottler assistance and our $31 million reconstruction fund that total approximately $80 million.

These are duly reflected in our GAAP/non-GAAP tables, and have no impact on our comparable results.

Finally, our very early estimate of how events in Japan may further influence our full-year results is that it could dilute the rest of our full-year comparable earnings per share between $0.02 and $0.04.

We expect the majority of this impact to fall in the third and fourth quarter.

As Muhtar mentioned earlier, our Japan team is doing everything they can to restore our business in Japan.

Going forward, I can assure you that we will keep providing routine and ongoing updates regarding our business in Japan.

We also expect that many of you have questions regarding our updated currency and commodity outlook, especially as both continue to move in today's volatile marketplace.

Let me start with currencies.

Since our last earnings call in February, we have seen a higher benefit than expected from currency.

Considering both our hedge positions and current spot rates, we now believe that currencies will have a low- to mid-single-digit positive benefit on our operating income on a full-year basis.

But before you flow this currency benefit through to our bottom line, please note that since our last earnings call, we've also seen our total Company commodity cost exposure for this year increase by approximately $250 million to $300 million, primarily driven by a continued rise in the price of PET.

And while PET is not a commodity that can be hedged, we are actively pursuing and executing plans to mitigate and offset some of this increase, including the acceleration of several supply chain initiatives that would reduce our overall commodity exposure.

In addition, we are strategically leveraging our brand, pack, channel, and pricing strategies where and when appropriate to further balance this exposure.

For example, we recently announced our plans to raise prices on our refrigerated orange juice products in North America by 6% to 9% starting in April.

As a result, and based on our current best estimates, we expect our ongoing pricing and supply chain efforts, as well as our improved currency benefits, to help offset almost all of the $250 million to $300 million increase 2011 commodity cost exposure over the course of this year.

And please know that we are continuing to actively hedge our commodity and currency exposures.

This past quarter, we had net unrealized gains of $36 million related to our hedging activities on commodities.

Consistent with how we treated these gains in the fourth quarter of 2010, we elected to exclude the gains, which would have been a benefit of $0.01 per share to our comparable earnings results.

For your reference, we have called out our net unrealized hedge gains in the notes to our GAAP and non-GAAP schedule, and will continue to do so in our future earnings reports.

Let me share one final note before we go into details of our operating results.

Now that we are integrating our North America business, it is operating as a single consolidated entity for financial reporting purposes.

For example, pieces of our North America business that used to operate in a concentrate model are now operating as a finished goods model.

In addition, we now have single sales teams that sell all of our products across customer accounts in a way that is no longer comparable to how our brands were sold prior to the Coca-Cola Enterprises North America transaction.

Integrating and changing the way we run our North America business is a necessary step in order for us to release the synergies associated with this transaction.

As a result, we are simply unable to separate out the results for portions of Coca-Cola Refreshment that used to be a part of CCE North America.

This means that when reviewing our North America and total Company results, there will be several financial statement line items and calculations that will look different to you this quarter than they have in the past, and will continue to look different through the balance of this year until we fully cycle the effects of the CCE transaction.

To best help you understand our business and performance this year, we'll keep providing you with comparable currency-neutral results consistent with how we've always communicated our results.

Having said that, we recognize that some line items are significantly altered due to the CCE transaction.

In those cases, we'll supplement our financial results with additional commentary in order to always provide you with as complete a picture of our underlying business performance as possible.

For the quarter, comparable operating income was up 10%, including a 3% benefit from currency.

Further, our business delivered comparable net revenue growth of 40%, benefiting from a 4% increase in concentrate sales, a 2% currency benefit, positive price mix, and a significant increase due to our recent CCE transaction.

This quarter's price mix calculation is an example of a calculation that looks different this quarter as a direct result of the CCE transaction.

We understand that price mix is a key metric for understanding our results.

We've therefore estimated that our first-quarter retail pricing in North America was positive between 1% and 2%.

We can also confirm that our combined international and Bottling Investment Group price mix was up 2% this quarter.

So based on this, our total Company price mix was positive this quarter, in line with our full-year guidance and consistent with our long-term growth targets.

Looking at a few other line items whose calculations were influenced this quarter by the CCE transaction, we saw comparable currency-neutral gross profit growth of 30%, comparable currency-neutral cost of goods sold rise by 53%, and comparable currency-neutral SG&A expenses increase by 49%.

To better understand this quarter's SG&A, it is helpful to look at our consolidated results in pieces.

First, as you would expect, North America's SG&A is clearly higher due to our acquisition of CCE's North America business and the application of the sales curve accounting policy to our marketing expenses, resulting in unfavorable operating expense leverage.

This increase in SG&A will remain through the year until we fully cycle the acquisition.

Second, our Bottling Investment Group's SG&A was up 5% on a comparable currency-neutral basis excluding structural change, such as Norway and Sweden.

This is to be expected as we make strategic investments to further expand our production and sales capabilities in key growth markets in line with the guidance provided in our last call.

Third, our International operating segment's SG&A was slightly up this quarter due to an increase in our direct marketing expenses as we remain committed to investing in our brands for long-term growth.

Taking these increases in SG&A in consideration, and considering the dilutive effect recent events in Japan may have had on our full-year gross profit, we now anticipate our Company's operating expense leverage to be even for the full year.

Similarly, and not surprising, our gross margins for this quarter were also influenced by the inclusion of the CCE transaction in our results as North America becomes a larger portion of our consolidated gross margins.

It is important to note, however, that both our international operations and our Bottling Investments Group saw positive comparable currency-neutral gross margin growth in the quarter after excluding structural items.

Finally, this quarter, our cash flow from operations was $458 million.

Part of this is attributable to the inclusion of CCE's North America business in our results, as these operations have traditionally required increased levels of working capital in the first quarter.

In addition, please note that this cash flow result is net of $769 million in contributions made to our pension plans as part of our previously announced 2011 contribution schedule.

For the full-year 2011 we plan to contribute about $800 million.

So pretty much all of it already contributed in the quarter.

Now let me take a moment to update our view on a few other items related to our 2011 outlook.

Our productivity initiatives are well on track, and we'll deliver $500 million in annual savings by the end of this year as per our original plan.

As for synergies related to the CCE transaction, we can reaffirm our commitment to capture between $140 million and $150 million of net cost synergies in 2011.

With regard to our share repurchase program, we have been active in the marketplace and are well on track to achieve at least $2 billion and $2.5 billion in share repurchases over the course of the full year.

As for equity income, we recently sold our ownership stake in Embonor, and thus will no longer recognize equity income from Embonor's results.

Looking forward, equity income will also be affected by the proposed merger between the bottlers Arca and Grupo Continental in Mexico.

If and when this deal is approved and completed, our ownership in the new company would be reduced so that we would no longer apply the equity method of accounting to the resulting entity.

It's our best estimate that when you consider the sale of our ownership stake of Embonor, as well as the expected change in accounting resulting from the proposed Arca/CONTAL merger, our Company's equity income would decrease by approximately $0.01 on a full-year basis.

Finally, with respect to our tax rate, our underlying effective rate stands at 24%, in line with a full-year estimate range of between 23.5% and 24.5% provided in our last call.

In closing, we are greatly encouraged to see our business deliver another quarter of solid volume, revenue, and profit results.

Our seasoned management team and our highly capable global bottling partners are clearly taking the right actions and executing the right strategies to advance our global momentum and drive our 2020 Vision.

We remain confident that we'll keep winning in the marketplace, enhancing the health of our brands, and driving long-term sustainable growth and value for our shareholders.

Operator, we are now ready for questions.

Thank you.

(Operator instructions) And, sir, our first question comes from Carlos Laboy from Credit Suisse.

Good morning, everyone.

Morning.

Congratulations on the momentum.

Can you shed some light on the drivers that sustain this momentum going into the second half?

But I think if you could, please, direct a portion of your answer to the Bottler Investment Group performance.

I think specifically, we'd like to hear if you can expand on China, how important is Pulpy to the relative mix there now.

As it continues to grow in India what drivers sustain that growth in the second half?

And in the Philippines, you always seem to use these macro downturns or these economic periods of difficulty to reset the business in your favor.

How do you modify the Philippines plan to win in this inflationary environment?

Yes, Carlos, good morning.

This is Muhtar.

Let me just start.

I think you know, what you saw in the first quarter of global, huge global geopolitical challenges, natural disasters, and I'm very pleased, I can say that we've delivered consistent quality growth across all five of the geographic operating groups that gives me confidence about going into the year.

We are winning with our global sparkling beverage portfolio, brand Coke again grew an impressive 3% in the quarter.

In addition Fanta, which is our fourth global brand, passing the $10 billion retail value.

So with growth in all five geographic operating groups excluding cross-licensed brands of 6% internationally, and if you look at -- it is important to look at what we are cycling in each quarter.

We are consistently delivering volume growth in line with our long-term targets or above.

And what you see from an international perspective is Q1 of 2010 we are cycling 5%.

So we are actually increasing the momentum.

Last quarter of 2010, Q4, was 5% international.

We are again accelerating that growth in the midst of huge economic, political and natural challenges.

So I think that gives us confidence as we go into the year.

And, again, when you look at our US business, delivering, again, the fourth consecutive quarter.

We are investing, as we do this, our brands are getting healthier, our share results, market share and value share, volume and value share results in this past quarter are the best we've seen in a long time.

In fact, we have a chart that shows by category, by region share.

Except for one metric on that chart, everything is green this past quarter, which we haven't seen it like that for a very long time.

So, again, India and China, you referenced, I think China, as we, Q1 sparkling gained volume share.

Q1 still gained volume and value share.

And sparkling beverage share, as I mentioned in the call in my remarks, is now at the highest level we have seen in over two years, and we are making some proactive changes to our packaging, architecture in China.

Our bottlers are investing.

When you look at the investment plan that we announced back in 2009, we are ahead of that, with $2 billion from 2009, 2010, and 2011.

The three plants that we opened last year have all come -- are all contributing to being part of the communities that they serve.

And that India, again, we took a sizable price increase in Q1 and held with it in Q1 in 2011.

And maintained, chose to maintain it in the face of aggressive discounting from various factions.

And, again, we delivered very impressive results with brand Coke growing, Sprite growing, Thums Up growing in a very healthy manner as well as our still portfolio led by Maaza growing.

Overall, that gives me confidence when I see our brands, and just last point, in China Pulpy was up, again, almost 30%.

You asked about the Philippines.

I think the Philippines post-elections have been a very challenging environment after the economy was heated artificially pre-elections.

And what we are doing is making sure that our business stays healthy.

We invest in our brands in the Philippines.

Our brand metrics are getting stronger in the Philippines and Philippines in this quarter was down in volume.

But we believe that we are doing the right things in the Philippines to win in the long term.

And as far as Bottling Investment Group is concerned, if you actually take out the structural elements related to Sweden, Norway and so forth, actually it was up 3% just similar to the same period prior year.

So we are happy with the healthy performance also BIG.

Germany, as you can see, is beginning to look like really a turnaround story.

Again, another quarter of healthy growth and gaining share in Germany against all the challenges that we have with the marketplace there in Germany as it relates to discounters.

So we are winning again in all channels in Germany now and it is beginning to look like a very positive story.

So that is what I would like to sort of frame up.

I don't know if I missed anything.

But that is how I would frame your question, Carlos.

Thank you very much.

Thank you, sir.

Our next question comes from Mark Swartzberg from Stifel Nicolaus.

Good morning, folks.

Good morning, Muhtar.

I wanted to probe a little more, if we could, ask for some more visibility on what is going on with Germany.

That 4% number is a good number.

Can you talk about two things, Muhtar?

Number one, what you think is driving that, the role of spending in that?

And then number two, as we think about your gross margin outlook for Germany, you have got potentially the benefit of some volume leverage, potentially the benefit of mix, potentially some positives there in the GM side.

But, of course, commodities are a challenge.

So how are you thinking about the gross margin outlook for Germany as well at the bottling level?

Well, I think, first, as you see, all the restructuring that we have been involved in for the past 36 months in Germany is beginning to pay out.

As volume grows in that restructured, more productive infrastructure that we have both in terms of production, as well as distribution, as well as warehousing in Germany.

And then with strong brands, when you look at brand Coke, again, in Germany, which was actually up 4%, supported by very strong marketing and then some other brands, Sprite, very healthy growth, up almost 7%.

Very good brand portfolio metrics in Germany, and also still beverages doing very well like Nestea in Germany.

Overall, I would say that gross margins, we don't give forward-looking outlook, but I would say that we are pleased with the improvements we are seeing across the margins in Germany, particularly as the benefits of the restructuring are beginning to come alive as the volume is beginning to pick up in multiple channels in Germany.

And then also, I would like to stress all the work that has been done by our Bottling Investment Group under the leadership of Damian in Germany is also beginning to show in the immediate consumption transactions in Germany.

Hey, Mark, it is Gary.

One other thing to recognize as well is that when you reference commodity cost versus Germany, remember that most all of those commodities are priced in dollars.

So as I was talking about in the prepared remarks, there is an inner relationship to a large extent between commodities and currency.

So in Germany, with the strength of the euro is offsetting some of the cost of commodities as well.

So you get different views on commodity costs as you look at different countries.

And one last thing, Mark.

Make note that this is the highest absolute unit case volume sales in Germany we have seen in a decade.

And the way the bottling business works, if you look at the restructured, more productive, leaner system that we have in place after the hard work of the last 36 months and as you sort of model increase in volume that translates into better margins.

Helpful stuff.

If I could make one follow-up there, Muhtar.

The role of package mix in the bottling operations, you mentioned immediate consumption.

But how impactful, how beneficial is package mix affecting the bottling ops there?

Are you talking about Germany or overall?

Yes, Germany specifically.

I think the only way that we have begun to win with discounters is through a very, very decisive and very novel and innovative packaging strategy.

You have seen us employ a very innovative packaging strategy in order to be able to be represented with all our brands and also the discounted channels.

Great.

Thank you, guys.

Thank you.

Our next question comes from Bill Pecoriello, Consumer Edge Research.

Good morning, everybody.

Good morning.

Gary, thanks for the detailed explanation on the puts and takes on the quarter.

A couple of other points, I just wanted to clarify, with the 7% operating profit growth in the quarter, currency neutral, you mentioned the commodity hedge timing.

The market spend timing.

We also have the Easter shift and one less shipping day.

So trying to best understand the underlying operating profit growth, do you view it as high-single-digits when you account for those other puts and takes?

Oh yes, Bill, in fact, this is -- one of the difficulties, as you know, is, let's say, one less day, shipping day, the Easter shift, et cetera.

You are now into estimates of what might it have been and those kinds of things, which is why I did not try to actually quantify those.

But there are a couple of things we know we can quantify.

If you put the impact, if our best estimate is that the impact of Japan is $0.01.

The impact of the sales curve on CCR North America is $0.01.

And that one just reverses Q1 and Q4.

But if you just put those things together right there, that is two to three points on OI growth.

Just those two things.

And then the hedges, we took the commodity hedge gains, that is another $36 million.

Another $0.01.

We took those out.

Those will go back in kind of primarily third quarter-ish timing.

But that's another 1.5 points of growth on OI.

So that is why we feel comfortable.

I mean, it is a dynamic world out there.

But we feel comfortable with all the puts and takes.

There are some real bad things like the tragedy in Japan.

There are some good things where we made some decisions to change accounting policies and it is a Q1 and Q4 quarterly thing, it doesn't impact the year at all, but we just think it is the right way to go.

And one other thing to add, Bill, also, that you have to see that we are continuing to aggressively invest in our brands.

And that is something, so in the quarter, you will have seen continued growth in direct marketing and marketing expenses.

And, again, that is something that we are very adamant to continue despite all the different challenges of commodities and other things that are happening around the world.

Great.

And, Gary, on the Easter shift, the reason it is also more complicated, not only did the timing shift but now with the accounting of CCE the concentrate was booked into Q1 last year and now shifted into Q2 this year.

It is booked along with the bottler case sales so that was also a complication in how to model the timing on that, correct?

You are exactly right, and in fact, Bill, I was sitting with some of my finance people yesterday and we were going through exactly that, and going through what do we think the impact of the Easter shift was.

We were actually starting to focus, as you might imagine, on quarter two.

And then we got into, okay, so what does the shift in July 4th do?

And what days do they fall on, of the week?

As it turns out, July 4th is a Monday, if you look.

So that is part of, as we are kind of looking.

But you do have, you are absolutely right.

You have both impacts.

You have got the calendar impact and then because of the acquisition, you have got the impact of when the revenue is actually recognized in the financial statements.

Great.

Thank you very much.

Thanks, Bill.

Thank you.

Our next question comes from John Faucher from JPMC.

Great.

Thank you very much.

Good morning.

Wanted to follow up a little bit on the North America price/mix commentary, which you guys said, I guess, in the call you said 1% to 2%.

Can you talk a little bit about mix and how we should view mix now that the gap between full revenue cases and concentrate cases is different?

I assume we are just going to see significantly less full revenue case mix, et cetera.

And then as we look at the scanner data that we get, the pricing doesn't sort of flow with that.

So can you talk a little bit about the price pack architecture and sort of how we should look at changes, sort of package versus package versus different packages coming through and also some of the channel differentials right now?

Thanks.

Yes, good morning, John.

I think, first, what I would like to state is that in North America, particularly in the US, sparkling IC transactions, again, grew this past quarter.

That is the second quarter in a row.

And prior to this, you would need to note that transactions had declined every quarter dating back all the way to 2007.

So that is something, again, we are focusing on very heavily to continue to drive transactions.

So I think in regard to transactions overall we grew IC package volume a good 2%, which would translate to overall transaction growth for the portfolio.

So that is very positive.

And that somewhat compensates also for the price increases that have been referenced as 1% to 2% in the last call.

What I would like to also frame for the remainder of the year, though, is we will be looking at every opportunity, every opportunity in North America to see if we can generate a higher price than the overall 1% to 2% and more like maybe 3% to 4% as we look into the balance of the year.

And we believe that our brand strength will allow us to generate a higher price increase than the 1% to 2%.

At the same time, we will be diligently, again, putting all our efforts to grow IC transactions in the United States.

You know, recognizing that the higher price increase may have some volume impact but driving transactions will be the key in North America.

And I don't know if Gary would like to add to your other question that is related to the revenue realization given that the business is now operating as one integrated business.

One other thing I would like to add is that, again, the 16-ounce package was up -- was up double-digits again in the quarter which is giving us, again, good metrics for the future.

John, Gary.

Just a couple of things on North America and then I want to focus on and reemphasize one thing that Muhtar just said as well.

When we look at it, we took, we took different pricing percentages on different packages and different channels, obviously, as you would expect in North America.

But the weighted average of all of that is in the 1% to 2% range.

That is analysis in the market and we are getting that.

We'd have to kind of look at the scanner data that you are referring to because a lot of -- remember that Nielsen and IRI only covers about, I think, about 40% of the US, our US market.

That there is so much that's not in Nielsen and IRI.

So that is a large part of it.

But then as Muhtar says, we are going to look at additional pricing this year in the US, as well.

Now with that said, I want to emphasize something else he was talking about, which is driving on transactions.

We have all talked volume for years and years.

But transactions is really about creating health for the brand, love for the brand, and really drive sustainable long-term value, we think, for brand.

You saw us downsize packages in North America, going to the 14- and 16-ounce.

And the reason to do that was to drive transactions and recruit and re-recruit users of our brands.

You'll see us doing the same kinds of things of downsizing in other countries as well.

So that is going to have an impact on volume results.

But, if you will, help drive transactions and could be an implicit kind of price increase as well, where you downsize a package, but hold the price and can get pricing as well.

You'll see us doing that in different markets around the world as we talk about it.

So, all in all, I think you are seeing some actions that we are taking that we think will prove good, long-term for the health of brands, as well as build value for the Company as well.

Great, thanks.

Thanks John.

Thank you.

Our next question comes from Caroline Levy with CLSA.

Good morning.

I wonder if you could address two things.

In order to cover the commodity cost pressures, I'm assuming you mainly feel them in North America and in the Bottling Group.

How much pricing would be required to fully offset that?

If you didn't have anything else to work with in terms of cost cuts?

And then I'm just wondering if you could tell us a little bit more about how things are operating in Japan, and where the earnings drag might be?

Is it a mix shift?

Is it that you need to give away product?

Is it the cost of doing business?

Just a little more insight into Japan?

Yes, Caroline, good morning.

As far as commodity, Gary signaled some levels of commodities, updates in terms of the additional commodity pressures that are coming into our business.

Yes, you are right in looking at the fact that as far as commodities' impact for our business is concerned, it is mainly North America and BIG.

But we look at this holistically across the world from a system point of view.

There are some hedges in place, there is puts and takes, so it is not just a simple equation, here's the number and how much price increase would you need.

All we can signal is that, obviously, you mentioned, you heard me talk about immediate consumption business growing, that is a big benefit.

Because those packages have a higher margin, they have a higher price, and as the mix shifts in favor of immediate consumption, then, obviously, we get a benefit and a windfall and we don't have to go out and take pricing across all categories, all channels.

That is the way we kind of think about our business.

You heard me, again, in my comments, talk about new packages coming on stream in China.

You see us doing this same thing in the Philippines, across the whole world.

Germany, many new packages.

So I think we are employing a much more flexible, fast, nimble, brand, price, pack, channel architecture that is designed to ensure that we don't have to take across-the-board pricing.

That is why this business of ours actually performs so well across the world in such a troubling macroeconomic environment, and also, by the way, if there isn't going to be an inflationary period coming, that will benefit us overall as a business, as a system, as a structure, as a category.

So I think all of that bodes well for how we look at the future.

I think the other part of the question was related to Japan, and I would like to just say in Japan, I said that all the plants that are in the impacted area, eight plants, are back up and running.

Really, you are talking about a, somewhat of a shift in channels.

I think the vending channel, obviously, because a lot of factories were not able to operate fully in Japan, so there is a shift in channel.

There is a shift in the business.

That's going to have some impact.

And then overall, I think supply chain is still stressed in Japan in terms of being able to supply the market, in terms of being able to empty out the warehouses, in terms of being able to distribute effectively.

All of that will go, will be part of the numbers that Gary mentioned as far as the full year impact in Japan is concerned.

However, let me just stress this.

Just prior to the earthquake our business was up 4% in the quarter in Japan, until the earthquake hit.

So we were having very good, positive momentum, on top of a good year last year, with our brand, with our portfolio, all four cylinders of our Japan business firing well.

And, therefore, once -- fundamentals of the business is really the brand health.

And given, and our bottlers are investing again and are very eager to, and have done fantastic work in normalizing the business in Japan.

So, overall, I think, Gary mentioned the sort of scope of what may be the impact, and we'll try to mitigate everything we can.

I think Gary just wants to add something to that.

Caroline, I would just add a couple of things, and just a little more detail to what Muhtar has told you.

All the plants are back up and running but we have got, the bottlers have a lot of large, automated warehouses and those are not all back up and running.

So we still have supply chain issues in the country.

Additionally, not only do you have channel mix issues, as Muhtar referenced, you have got shifts in product mix as well.

But probably most importantly, and this is where you'll see a lot of the impact come through as well, what would normally be happening today is that the bottlers would be just running plants full bore, kind of building finished stock, inventory for the summer selling season.

We are not able to do that.

So what's going to happen is beginning about third quarter, and this is why I was referencing the impact, it will really be third and fourth quarter, is that we are not going to be able to supply all the demands, we believe, because we are not going to be able to manage and build up inventory stocks ahead of time as you normally would in a normal year.

So that is what, we think we saw an impact in the first quarter.

That will probably rebound a little bit in the second quarter, just around concentrate shipments, and then it's going to reverse back in the third and fourth quarter is kind of what we think is going to happen.

Thank you so much.

And we'll keep updating you as we go along, Caroline.

That is really helpful.

Thank you.

Thank you.

Our next question comes from Dara Mohsenian from Morgan Stanley.

Good morning.

Good morning.

Good morning.

So just one point of clarification, Gary.

The pricing environment potentially improving in North America in the balance of the year, is that more on the sparkling side of the portfolio or more on the still side?

And I assume the more robust expectation is due more to list price increases as opposed to mix?

Is that correct?

Well, a couple of things.

I would say it is going to be, it would be balanced.

And if you, if we took you through our pricing architecture in North America, it's actually not, it is actually pretty complicated.

I was going to say not as simple as you would think it would be because you have basically got different pricing on different packages on different brands, by channel.

And so, you are going to, and what, you have got different elasticities of demand by package.

So you are going to implement different pricing for those different SKUs, kind of by channel.

But we are expecting to see, we had talked about 1% to 2% pricing in North America.

We are now saying that we are going to probably be going for more pricing than that this year and a lot of that is just the environment that we are in.

So that's the way we would see it right now.

Okay.

That is helpful.

Thanks.

And just taking a step back and looking at North American margins longer term, obviously, this year they will be hurt by the bottler consolidation and some of the commodity inflation.

But I was hoping you could highlight for us conceptually the longer term opportunity you have beyond 2011 in terms of expanding your North American margins given they are still below some of your other regions what the key drivers of that would be?

Yes, I mean, look, the key drivers are going to be IC, pushing, really making sure that we win every transaction, growing transactions, growing the immediate consumption channel.

There is so much work to be done still, opportunities to be had in the immediate consumption channel, in the independent stores, in merchandising in making our products much more desired, and making, creating inspiration at the point of sale in those IC channels, just like in a way you saw us do in Philadelphia.

And I think CCR, under Steve's leadership, has got the right organization, we have got the right investments in place and then we have, our brands are healthy.

That all translates if we execute well, which we intend to do, then you will see us expanding margins as the IC business grows, and as our smaller packs take more attraction inside the four walls of our every single customer which we serve.

Okay, thanks so much, and, Gary, just one last clarification.

Did North American profit come in, in line with your own internal expectations in the quarter?

Yes.

In fact, in fact they came in slightly ahead of our internal expectations.

Okay.

Thanks.

Good.

Thank you.

In closing, I would like to thank the many of you who attended our recent presentations at both CAGNY and CAGE conferences this past few months.

Our results as well as our management team's performance track record provide us confidence in our Company today as well as our path forward to 2020.

We will keep generating strong cash flows and redeploy that cash to invest in our brands, grow our business and reward you, our share owners.

We will continue to invest alongside our system and execute flawlessly on our 2020 Vision by working closely with our global bottling partners, our employees, our customers and all our key stakeholders.

We see tremendous opportunity ahead for our Company in all of our markets and remain intensely focused on implementing our strategic priorities to generate long-term sustainable growth.

Most of all, we thank you for your interest and investment in our Company.

There is no greater responsibility than earning and maintaining your trust and confidence.

So rest assured, we are working tirelessly to protect and grow the value of your investment in our Company.

Thank you for joining us this morning.

This concludes today's conference.

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