可口可樂 (KO) 2014 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Coca-Cola Company's second-quarter 2014 earnings results conference call.

Today's call is being recorded.

If you have any objections, please disconnect at this time.

(Operator Instructions)

Due to the interest in this call, 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 the investors, and therefore, questions from the media will not be addressed.

Media participants should contact Coca-Cola's Media Relations Department if they have any questions.

I would now like to introduce Jackson Kelly, Vice President and Investor Relations Officer.

Mr. Kelly, you may begin.

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

I am joined by Muhtar Kent, our Chairman and Chief Executive Officer; and Kathy Waller, our Chief Financial Officer.

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

Ahmet Bozer, Executive Vice President, and President of Coca-Cola International; Sandy Douglas, Senior Vice President, Global Chief Customer Officer, and President of Coca-Cola North America; and Irial Finan, Executive Vice President, and President of Bottling Investments, will also be available for our Q&A session.

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 under the Financial Reports and Information tab in the Investor section of our Company website at www.coca-colacompany.com.

These schedules reconcile certain non-GAAP financial measures, which may be referred to by our senior executives during this morning's discussion, 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.

Earlier this year, we established five global strategic priorities to restore our global growth momentum.

Halfway through the year, I am pleased to report that we've delivered another quarter of sequentially improving performance results.

While I am pleased with this year-to-date progress, we're conscious of the fact that we still have more work to do.

In spite of continued sluggish global economic growth, the beverage industry remains vibrant.

Consumers today have a wider array of beverages to choose from than ever before, and our system is responding by evolving the way we operate, leveraging our strengths to create new competitive advantages.

Our second-quarter and year-to-date performance results reflect the steady progress that we are making and that we expect to continue as we further solidify the foundation for long-term sustainable growth.

We closed out the second quarter with 3% global volume growth, including global sparkling growth of 2%.

Importantly, price mix increased 2% on a consolidated basis, as we strive to deliver balanced volume and revenue growth.

We are seeing a number of encouraging signs across our global operating system.

In the second quarter, brand Coca-Cola grew 1% in North America, along with solid 3% sparkling price mix.

We saw improving volume growth across several key markets in Europe.

Eurasia and Africa continue to deliver balanced volume growth.

Key markets in our Asia-Pacific operations delivered strong performance, including 9% growth in China, double-digit growth in India, and 1% growth in Japan.

And we saw steady execution in the face of a challenging macro environment in Latin America.

As mentioned, this progress is built on the implementation and execution of our five global strategic priorities, priorities that emerged from a disciplined, fact-based look at what drives results and long-term sustainable growth.

We know, for example, that great marketing combined with great in-market execution are fundamental building blocks of our formula for long-term sustainable growth.

When we conducted a comprehensive review of our Business last year, we identified areas where we could improve and put a focus plan in place to address them.

With that in mind, I will now provide an update on our progress against each of our five strategic priorities.

Our first strategic priority is to accelerate global sparkling growth led by brand Coca-Cola.

We grew global brand Coca-Cola 1%, a sequential improvement from the first quarter of 2014.

As noted earlier, our global sparkling brands grew 2% in the second quarter, thanks to solid performance across our portfolio of billion-dollar sparkling brands including Sprite, Fanta, Coca-Cola Zero and Schweppes.

This led our 19th consecutive quarter of core sparkling value share gains.

Diet Coke and Coca-Cola Light declined mid-single digits.

While this was a sequential improvement from the first quarter, we do recognize that we have more work to do here.

Progress in growing our global sparkling beverages is built on proven strategies that include delivering best-in-class marketing, driving immediate consumption transactions and leading industry innovation.

While I could point to multiple examples of each, I would particularly like to highlight our Share-a-Coke campaign, as it successfully combines all three strategies, and it is being rolled out in more than 80 markets this year.

The viral impact of this campaign and the engagement among teens has been more than encouraging.

We are excited about the campaign's expansion not only to new markets, but also its return for an encore in many markets.

For example, this year in our northwest Europe and Nordics business unit, we are extending the program to include all Coca-Cola trademark immediate consumption and future consumption packs, and increasing the number of names from 250 to 1,000 per market.

This is a tremendous logistical feat and marketing achievement befitting the world's most loved beverage brand.

The growth of brand Coca-Cola in North America in the second quarter gives us confidence that our focus on driving incidents, delivering best-in-class marketing and evolving our price pack architecture is setting the foundation for well-balanced growth in our flagship market.

Through these efforts, we are reviving the romance of brand Coca-Cola, driving household penetration and increasing consumption frequency, all of which contributed to growth in the second quarter.

Our smaller-size packs contributed significantly to brand Coca-Cola growth in the second quarter and year to date.

Over 60% of the volume growth in brand Coca-Cola in the second quarter was driven by double-digit growth in our mini-can and 16-ounce immediate consumption packages, reflecting strong consumer demand for smaller packages of ice-cold Coca-Cola.

So we remain optimistic about our sparkling business in North America and around the world, and we are committed to supporting our brands, committed to driving execution and staying at the forefront of evolving consumer needs.

Our second global priority is to strategically expand our profitable still beverage portfolio.

We have delivered 5% still beverage volume growth in the second quarter, and 6% growth year to date.

Sports drinks, tea, energy, coffee and water all contributed to global growth, and enabled us to gain volume and value share in still beverages year to date.

Juice and juice drinks growth slowed year to date due to price adjustments, primarily to offset cost of goods increases in North America.

However, we gained volume in value share in North America and also on a global basis.

Overall, the global juice growth story remains very robust.

We are strengthening our leading brands, as demonstrated by the double-digit growth of Maaza and Rani year to date, along with high single-digit growth for Simply and mid-single-digit growth for Del Valle.

Our tea volume increased 4% in the quarter, growing volume and value share in the second quarter and year to date.

Importantly, our tea brands within the US and Japan, our two largest tea markets, performed very well.

Tea volume grew 6% in North America, driven by double-digit Gold Peak and Honest Tea growth; while in Japan, tea volume grew 5%, led by 8% growth of Ayataka, the 21st consecutive quarter of strong growth for this dynamic brand.

As a system, we are enhancing our premium water brands to drive revenue while investing in our value chains to improve profitability.

Examples of premium water brands growing double digits in both the quarter and year to date include Smartwater in North America, I Lohas in Japan, and Vio in Germany.

As we focus on building great brands, we are pleased to share that Smartwater will soon be available in Great Britain, and that addition of DASANI sparkling and DASANI drops is enhancing our brand margins in North America.

Our water portfolio grew 7% in the second quarter and 10% year to date.

In the sports drinks category, we grew volume 6% in the quarter, fueled by our FIFA World Cup POWERADE activation.

As the global value leader in still beverages, and with 11 billion-dollar brands and many more in the pipeline, we are diligently working to enhance the value of our still portfolio.

And as exemplified by our recent partnership with Keurig Green Mountain, we will continue to strategically target opportunities to strengthen our position and build our breadth across new categories while building category beverage depth.

Moving now on to our third strategic priority, which is to increase brand investments by maximizing productivity, our productivity initiatives are on track, as is our commitment to increase media investments in key markets.

We are delivering more and better-quality marketing by focusing on increased efficiency and effectiveness.

Our global marketing campaign charters are fueling productivity and efficiency, while at the same time driving media effectiveness through higher-quality communication.

An example of the power of this approach is the full-scale activation of our FIFA World Cup campaign where a single creative idea, This Is The World's Cup, was executed across more than 170 markets in the second quarter.

The success of our Coca-Cola music anthem for the 2014 FIFA World Cup reinforces the engaging nature of this campaign, as the anthem reached over 2 billion impressions, charting in the top-10 songs in 40 countries, and was ranked as the number-one song in Brazil at the start of the World Cup.

The full impact of our enhanced marketing and productivity initiatives will clearly build over time.

Our fourth priority is to win at the point of sale by unlocking the power of our system.

Our global system is committed to investing in new plants, investing in new distribution capabilities, investing in coolers and marketing, enhancing our immediate consumption capabilities while optimizing in-store activations and advancing our customers' business strategies, and finally, putting more feet on the street to service these accounts.

To that end, you may have read last week that, together with our bottling partners, we will be investing an additional $8.2 billion by 2020 to support our long-term business plan and vision in Mexico.

Since 2010, our total system investments globally have exceeded $60 billion.

Our fifth priority is to invest in our next generation of leaders.

We are doing this by inspiring our people to live our values of focusing on the market, working smart, acting like owners, and being passionate ambassadors for our Company and for our brands.

We are harnessing the potential of our millennial associates.

Their optimism, their global mindedness, entrepreneurialism and social awareness drive them to build sustainable practices into every aspect of what they do, including right here at the Coca-Cola Company.

We, therefore, established an internal group of millennial voices, and we are working with the World Economic Forum's Global Shapers to provide our leaders with insights on how to continue to evolve to meet the needs of this and also future generations.

We continue to focus on strengthening the core front-facing capabilities of franchise leadership, commercial leadership and marketing leadership, while also embracing emerging capabilities in the digital, mobile and social media arena.

We are working with our global bottling partners to encourage more cross-system experience, having Company associates join bottlers, and bottling associates join the Company, to instill a one-team mentality across our global system ranks.

And another terrific example of how we're living our fifth priority is the Woodruff Cup, our most prestigious internal award named after our legendary Chairman, Robert Woodruff, whose tenure with the Company spanned from 1923 to 1985.

Each year, our business unit Presidents select one of their peers as winner of this award, and people leadership is a key criteria.

Our most recent winner of the South Latin business unit exemplifies what it means to inspire our next generation of leaders, as demonstrated by the fact that women make up more than half of their workforce, and that they've consistently been ranked among the top-three best places to work in that whole geography.

Our focus on our five strategic priorities enables us to execute the fundamentals while simultaneously transforming and advancing our Business.

An important example of this is our North American refranchising effort to build a 21st-Century beverage partnership model.

Our ongoing work is underpinned by our full commitment to create a modern, agile, consumer- and customer-focused operating model and system which balances national scale and local capability.

As we continue to roll out an evolved business model in North America, we expect to franchise the large portion of North America territories into a handful of proven regional bottlers that can best serve every local community within their contiguous operating territories.

These larger bottling partners will be complemented by a select group of local bottling partners, enabling us to benefit from the passion and local touch of a franchise model, and to grow our Business faster and more profitably over time.

We are making progress, and we're implementing this work by executing smaller-scale transitions today so that we can seamlessly transfer larger portions of territory in the future.

It is important for us to follow this deliberate process as we establish a structure to maximize long-term value for our shareowners while ensuring that there is no business disruption to our customers and consumers.

We will provide you with additional details regarding this transformational initiative before the end of the year.

In summary, and as mentioned at the beginning of the year, we are committed to executing strategies that will deliver stronger growth.

Notwithstanding the volatile environment in which we are operating, we are making steady and sequential progress as we invest in our brands together with our bottling partners, and we expect to fall within the corridors of our long-term growth algorithm in the second half of the year.

Indeed, our second-quarter and year-to-date performance results reflect the steady progress that we are making to restore our global growth momentum, and I look forward to providing you with further updates later in the year.

Now I am happy to hand the call over to our new Chief Financial Officer, Kathy Waller, who will provide you with an update on our financial performance, as well as an outlook on our Business for the balance of the year.

Following Kathy's prepared remarks, Irial Finan, Sandy Douglas, Ahmet Bozer and I will participate in our Q&A session to address any market-specific questions that you may have today.

Kathy?

Thank you, Muhtar, and good morning, everyone.

I would like to start by saying that it is an honor to serve as the CFO of The Coca-Cola Company.

In my more than 25 years with the Company, I have seen our Business evolve and grow over time, while remaining strategically focused on doing the right things to drive long-term sustainable growth.

That is why I am confident about our Business, and I look forward to working with each of you.

As Muhtar mentioned, we have continued to execute the five strategic priorities we laid out at the beginning of the year.

We achieved 3% volume growth in the quarter and delivered sound financial results over the first half of 2014.

Let's start by reviewing a few key drivers of our financial performance.

Unit case growth was ahead of concentrate sales growth in the quarter, primarily due to timing of shipments.

Importantly, after considering the impact of one less selling day, unit cases and concentrate sales were in line year to date, and we expect them to be in line for the full year.

Comparable currency-neutral net revenue growth was 3% for both the quarter and year to date, after excluding the impact of structural items.

Our top-line growth included 2 points of positive price mix in both the quarter and year to date.

Comparable currency-neutral operating income was up 5% in the quarter and 6% year to date, after excluding the impact of structural items.

Operating leverage was even in the quarter, as we continued to make the necessary investments behind our brands to accelerate growth, including a mid-single-digit increase in DME as we invest in the growth of our brands together with our global system partners.

On a comparable basis, currency unfavorably impacted this quarter's operating income by 4%, which was 3 points better than the outlook we provided during our last earnings call.

The difference between the outlook we provided and the actual currency impact was primarily due to a new provision in Venezuela that imposed a maximum threshold for profit margins, and decreased our bolivar-denominated revenue and profit.

The new provision resulted in an approximate $0.01 drag on comparable EPS in the second quarter, which was partially offset by the impact of slight improvement in other currencies compared to our previous expectations.

Despite a difficult operating environment in Venezuela, the Coca-Cola system remains committed to the market, and will continue producing and selling our products that Venezuelan consumers enjoy on a daily basis.

We also benefited in the quarter from lowering our underlying effective tax rate from 23% to 22.5% for the full year.

Cash generated from operating activities was a strong $4.5 billion in the first half of the year, and we continue to make capital deployment decisions based on a consistent and disciplined framework, as we have outlined before.

First, we reinvest in the Business, which includes making the necessary investments to strengthen our brand, and includes capital investments, which we expect to be roughly $2.5 billion for the year.

Second, we reward our shareowners by paying a healthy dividend, which we have increased annually for more than half a century.

Next, we evaluate opportunities to grow through acquisitions, partnerships and joint ventures.

We view these as enablers to help accelerate growth and create value in a capital-efficient manner.

Lastly, we repurchase shares.

Year to date, our net share repurchases totaled $1.3 billion, and we are on track for net share repurchases in the $2.5 billion to $3 billion range for the full year.

As we look ahead to the second half of 2014, let me take a minute to update you on a few outlook items as you model our Business.

We previously communicated that we expected structural items to unfavorably impact the first half of the year as we cycle the deconsolidation of certain bottling operations in 2013.

However, we now expect structural items, including Venezuela, to be a 1- to 2-point drag on net revenue growth, and an approximate 3-point drag on operating income growth during the second half of 2014.

The refranchise territories in North America had a nominal impact on our comparable results in the second quarter, and are not expected to have a meaningful impact over the balance of the year.

After considering our hedge positions, current spot rates and the cycling of our prior-year rates, we expect a 3-point currency headwind at operating income during the second half of 2014, with a relatively similar impact on both the third and fourth quarters.

And we now expect a currency headwind in the 5- to 6-point range at operating income for the full year.

This is an improvement compared to the previous outlook we provided, primarily due to the decrease in bolivar-denominated revenue and profit.

After taking into consideration all of these factors, we expect the impact of structural items, net of the benefit from the change in our underlying effective tax rate, to be a $0.02 drag on comparable EPS during the second half of the year.

Finally, we continue to expect operating leverage on a currency-neutral basis to be even to slightly positive for the full year.

In closing, we delivered sound financial performance in the first half of 2014, and we expect to continue our sound financial performance over the remainder of the year.

And I believe our Company and our global system are well positioned to capitalize on the opportunities within our great industry.

Operator, we are now ready for questions.

(Operator Instructions)

Judy Hong, Goldman Sachs.

Muhtar, if I look at your second-quarter performance buying growth of 3%, sequential improvement versus Q1, global price mix held steady at 2%.

I guess second quarter also though benefited in part because of easy comp, and you had the Easter benefit.

So can you talk about your ability to sustain the top line momentum as you look at the back half of the year and be mindful of some of the macroeconomic conditions that you see in the marketplace?

Thanks, Judy.

Again, just to quickly go through the quarter, as you said, volume was up 3%, sparkling volume really importantly was up 2%, and brand Coca-Cola up globally in North America.

Those are really three important points.

Also, another quarter of value market share gains, I think more than 25 consecutive -- 28 to be exact -- consecutive quarters of gaining value share.

You see us having at, with our system, very clear focus on priorities.

We had our entire global bottling system get together with us a couple -- a few months ago, and again a recommitment to the focus on our priorities.

Sequential improvement in a lot of large markets, particularly Europe, France, Germany, Great Britain, Italy, Spain.

And good results, very strong results out of Eurasia and Africa and improving in Nigeria, South Africa, Turkey, improvement again if you take Asia-Pacific.

Again very strong quarter in China as well as in India, double-digit growth in India, Thailand again saw --.

So if you take all of those margins that are improving, gross margin has improved in the quarter compared to the prior year.

Clear path on North America franchising.

Strong belief that what we're doing is working in our system, is really important.

Good bottler alignment.

Yes, there are a few exceptions, but there always have been and will be, and more work to be done.

I am the first to say we operate in a very volatile global environment, both politically and economically.

China is slowing down is impacting many commodity exporting countries and from Africa to Latin America.

But overall, what we're doing is working: more marketing through productivity gains, better marketing.

We mentioned Share a Coke program in over 80 markets, tremendous leverage on our World Cup program in more than 170 markets with probably the biggest activation that we have ever had.

And all this will not generally have an impact on the quarter that you spend in.

It comes in after with better incidence, better brand loyalty, better purchasing time that we're all seeing.

What is happening in North America in terms of sparkling price mix also, you can see that we have a very disciplined approach both in the United States and globally where we have been able to achieve a 2% price mix on a global basis.

And yes, there was Easter shift, but at the same time, our gallon shipments were below our unit case volume for the quarter.

And if you say that would be a -- neutralize the benefit that we may have got from Easter, then I think overall we feel pretty confident with, again, the caveat that we need to do a lot more work and continue to do a lot more work, more focus, better execution.

But the five priorities are working, and early shoots, green shoots.

And we expect that the balance of the year, as I mentioned in my script, that we should be able to fall within the corridor of the long-term growth targets.

And again, there may be issues along the way, bumps along the way.

But the most important thing is that we are resolutely focused on continuing to build momentum here.

Okay, that is helpful.

If I can just quickly follow up on North American pricing, particularly in the sparkling side, where you've got the 3% in the quarter.

Maybe a little bit more details around the drivers of that, whether it was -- how much was mixed versus rate -- and your views on whether you can sustain that pricing and maybe even see acceleration if you look up the next --

I will say a few things and pass it over to Sandy, but all I will say is take note of the fact that a very big portion, percentage, 60% to be exact, of the growth came from smaller packages.

That is obviously an enhancement of the mix driving revenue, but also rate.

So, I will ask Sandy and then maybe Irial if he has any commentary on North America, but we are operating with tremendous diligence and the discipline in the marketplace.

And success for us is a combination of both the growth that we have on the volume, but importantly also growth in transactions which is a really good litmus test of the success of the business that is coming more into play each day as we progress.

Sandy?

Thanks, Muhtar; hello, Judy.

We said at the beginning of the year that our focus in North America was going to be a disciplined combination of volume and price and that we would see that as a strategic priority.

And the second quarter really reflects that; 3% price mix on sparkling while achieving volume growth on Coke.

And Muhtar mentioned the importance of smaller packages in driving that outcome.

It is also important in driving growth because consumers want more smaller packages, and we've been working on developing that as a part of our overall strategy.

So lots of discipline.

As we look ahead, we are lapping some very promotional activity in the third quarter of last year, and our discipline will remain.

And the bottlers in the Company around the country are focusing on marketing and selling our way through and maintaining an extraordinary amount of discipline on pricing, and we are optimistic that we will be able to hold that strategy.

Yes, it is Irial.

All I can add is really repeat what Sandy said, and I have said in the last three calls now, which is we really are focused on building a long-term sustainable business.

That is mixing pricing and volume and transactions in a very balanced way and coming up with a great result for our Company.

And we will do that, and we continue to do it.

Yes, the only thing I would add here also, Judy, is that I think we see a path forward to being able to build more romance with the brand through smaller packages.

And that is really an important element in what is also being discussed.

Okay, great.

Thank you.

John Faucher, JPMorgan Chase & Co.

Thank you, good morning.

Just wanted to get a clarification if I could, when you talk about the $0.02 impact, you mentioned it was comparable EPS, but it sounds like that is reported EPS, as well.

Is that correct?

Yes, Kathy?

Hi John, and thanks for the question.

The Venezuela impact, yes, that is a two penny drag on a comparable EPS, as well as reported EPS.

So if you look at Venezuela, you take it in two pieces; there is currency impact as well as impact of the provision.

The provision is less bolivar nominated revenue because of capital margins, and it is gone straight to the bottom line.

And then the FX is, the impact is because, as well, we do not have as much bolivar-denominated revenue in income.

So you could split those two pieces, and yes, it is comparable, as well as as reported.

Okay great, thank you.

Kathy, if I could just follow-up, we are continuing to see weaker volumes in some of the higher-margin regions, like Latin America or Europe, what have you.

So can you talk a little bit in terms of how you're going to look at--how should we think about margins going forward if these types of -- this type of relative weakness in some of these higher margin market continues, particularly Latin America which is your highest market region, and it's been a little bit softer over the last couple of quarters.

So I would split the question into two, and Ahmet will help answer with it, but the margins in Latin America have been impacted this quarter by the Venezuela provision.

And then when you look at ongoing buying growth in contribution into the Company, I will let Ahmet --

John, a couple of points.

The rest of Latin America, the margin and the growth in profitability overall is in a good direction.

No important issues there.

Also keep in mind that we've been able to realize positive price mix in high-margin places like Europe, and we have been able to grow in Japan, so we are able to balance across the international territory to have positive price mix and margins.

Yes, okay, great.

John, just to add, I think yes, you are right in saying that Latin America has slowed down to where it traditionally has been.

And we have seen these cyclical slowdowns in Latin America.

And as some parts will get better, I think, starting towards the end of the year, we also see some other volatility, continued volatility in like Argentina and other markets.

But overall, I think for most of what we are cycling as well, we expect major markets in Latin America to have some sequential improvement in the second half of this year.

And then overall longer-term, we feel very confident also about what is lying ahead in Latin America.

Okay great, thank you.

Bryan Spillane, BofA Merrill Lynch.

Good morning.

Kathy, I wanted to follow up on John's question relative to leverage and I have two parts to it.

One, I think I caught in the prepared comments that you mentioned that on a comparable currency neutral basis, you would expect some leverage in the second half.

So I am just trying to make sure I heard that correctly in that we should be thinking about ex the Venezuela impact and ex the structural change in currencies, there would be currency neutral operating profit growth.

And then second question, if I have done the calculations correctly, it looks like on a comparable basis currency neutral gross margins in the quarter were up.

So if you could just talk a little bit A, is that true?

And B, if you could talk a little bit about how you would expect gross margin to evolve going forward, what type of inflation you are seeing and just how what factors you might see driving gross margins in the second half.

Okay, hi Brian, thanks for your question.

Our outlook for leverage in the currency neutral basis remains flat to slightly positive.

When you think about gross margins, so gross margins have improved for the second quarter and year-to-date.

And when we look at -- when we look at our margins for the back half of the year, we delivered sound financial results, and we anticipate that we will continue to deliver sound financial results for the rest of the quarter -- for the back half of the year.

And we do anticipate that margins will continue to in the same way they have been in the first half of the year.

So there was nothing unusual about the gross margins in the first half?

We could potentially see more progress on gross margins and we're just spending more money back which is what is getting the leverage to slightly flat.

Is that a good way to think about it?

Yes, we are continuing to invest behind our brands.

So yes, that is part of the leverage story.

But that is causing the North America from negative -- slight negative leverage in North America because we are spending behind our brand.

So, we are getting pricing and we are committed to rational pricing, so we're getting pricing which is helping us with the margins the gross margin, but we are continuing to invest behind our brands.

Thank you.

Just add to that, Bryan, if you look at the second quarter compared to the first quarter, marketing is substantially higher in the second quarter than it is in the first quarter, and particularly towards the back end of the second quarter, substantially higher.

So, that explains some of the things again, what Kathy was saying, but also our productivity is on target.

It has been on target for the first half of the year and will be on target for the second half.

Michael Steib, Credit Suisse.

Good morning.

Can I ask a couple of questions, couple of specific questions on Latin America?

First on Brazil, given all of the investments you made in the market and the World Cup, I was just wondering why volume performance was not stronger in the quarter.

You mentioned in the release a tough macro environment and some competitive activity, but I was hoping you could give us a bit more detail.

And second, with regards to Mexico, I know you've taken all of the pricing related to the tax increase early in the year, but have you also passed on pricing now for general inflation in the country?

Thanks.

Yes Michael, it is Muhtar here, and I will ask Ahmet to provide additional commentary.

Think of Brazil as having a very tough macro environment in the first half.

So if you look at the entire consumer disposable and non-disposable consumer goods sectors, we are under tremendous duress in the first half of the year, particularly leading up to -- particularly -- more so in the second quarter.

Think of it this way -- had it not been, the result would not have been what it would've been had we not done all that activity.

So from that perspective, I think we see brand getting stronger, incidents and purchase intent getting stronger in Brazil as a result of all the activity, and I think that should benefit us going forward in Brazil.

So certainly the macro environment in Brazil, as you can read, as we can all see, has been very challenging.

And so given that backdrop, I think, our results -- we're content with where we are, and we believe that what we have done will benefit us in the second half and going forward.

In terms of Mexico, I think both times prices were adjusted, they included a certain portion for also inflation, so take it as that.

But again, I will ask Ahmet to provide any further commentary for both Brazil and Mexico.

Thanks Muhtar.

On Brazil, the only thing I would add Michael is that we had a pricing packaging architecture which allows us to have different tax both for immediate and future consumption at different price points, and we are executing those with great discipline.

And that in fact is helping us navigate this challenging external environment.

And we expect that to continue to bear fruits in the third and fourth quarters along with the strong marketing programs we have.

With respect to Mexico, the only other thing I would add is that we do have a not just passing the tax and the inflation, but a consumer-driven pricing approach which has been very carefully calculated, and the elasticity that we have calculated in reality are happening better than that we have expected.

So in other words, our Mexican business is showing more resilience in this area.

Mark Swartzberg, Stifel Nicolaus

Thanks, good morning gentlemen, hello Kathy.

Muhtar, as you think about the sparkling global outlook and your efforts to build on where you are here in the second quarter, is it fair to think your emphasis will continue to be on volume share gains more so than dollar share gains, or do you think there is potential for more dollar share growth in spite of the volumes being a little below what you were hoping for?

I think success for us is certainly continuing our value share gains.

You cannot obviously -- only value share gains without volume is not sustainable over the long term, but we have a very disciplined approach just like in North America, also for our international business related to more smaller packaging.

So the mix will benefit us, but also very importantly it is critical for us to achieve price mix on a global scale.

Different geographies will again price differently into the picture.

We have such disparate pricing per case depending on the geography we're talking about, so geographic mix is an important piece of this, as is package mix, as is rate.

Obviously, a lot of markets to talk about, and this call is not useful for going into many of them, but when you look at North America specifically and you see the 3% price mix on the carbonated and a bit of growth there on the stills, but you also have the flat volumes.

And then data we look at is CPI for the larger carbonated space, which continues to be down, so retailers continue to promote the carbonated component of your business.

How are you thinking about the opportunity for better value share performance in North America, given the volume share situation you are facing?

I will just say that once again, smaller size packs contributed significantly to, say, brand Coca-Cola volume and revenue growth into Q2 and year-to-date as a matter fact.

So, if you take over 60% of the growth in brand Coca-Cola in Q2 was driven by double-digit growth in our mini can and 16-ounce immediate consumption packages, I think that is how I would like to leave you with -- that is what I would like to leave you with as an opportunity.

Got it, okay, thank you.

Ali Dibadj, Bernstein.

Hello.

If you would've predicted back in December that price mix in North America was going to be up as much and your volumes would've remained flat.

And Latin America, you indicated volumes would've been flat even with all the Mexico tax issues, I think I would've said you are being optimistic, but that is what you are delivering, which is good.

But it does raise two questions for me.

One is, it is concentrated your volume growth in only two of your six reporting segments.

I want to get a better sense of how comfortable you are with those two currently and your expansion of volume growth in the other segments, like what gives you confidence that the others can grow, as well?

And then secondly, a question about the mix between volume and price mix, which if you look over the past 10 years, it is mainly driven by volume, obviously pricing now much more balanced.

Some try to understand how much of that is actually a change in strategic intensity that you described versus just FX driving you to raise more pricing?

If you can help those two, that would be great in the broader volume context.

Yes I will take the last first.

The strategy is driven by what consumers want, and that is not just a phenomenon for the United States but smaller packages are a key focus.

So that helps the mix.

That helps the revenue.

That helps also the price mix.

Then, couple that with a very disciplined approach towards also having the right balance between value and volume share gains.

And so it is really important.

In terms of concentration of volume growth, I think the important thing is for you to focus on the improvements from quarter to quarter.

If you take key geographies like Europe, France had an improvement, Germany had an improvement, Great Britain had a significant improvement.

Italy had a significant improvement, Spain had a significant improvement, and Europe overall had a huge improvement when you look at total.

And again, this is just pure simply for volume, and if you look at pricing earnings, you will get also a similar picture.

So I think focus on the sequential improvements.

Focus on us delivering on our focused priorities.

And so what I see is that we will strive, and diligently strive to continue with sequential improvement, building momentum as we go forward.

And I also mentioned as an answer to a previous question that I thought that in Latin America, we would also see sequential improvement.

Okay, thanks.

And one other things you've been asked a bunch on this conference call is about margin and margin mix.

And one of the things obviously that can offset margin pressures is incremental cost cutting.

And you talk a little bit more about how you view incremental cost cutting versus what you've announced so far, what you think the potential is, and when you think we might hear more about more cost-cutting at the Company?

Well we announced significant cost cuts over the last four or five years, different programs.

And as I mentioned earlier, again we are on target with our productivity.

And that productivity is being reinvested to drive growth.

Okay thanks.

Steve Powers, UBS.

Thanks.

Maybe building on that and focusing back on North America, as you talked about, you had good price mix realization in sparkling, 3%, and you did see margin grow in the quarter which is great.

But overall, we only saw 1% price mix, and year-to-date margins remained slightly below last year's level in the US based on my math.

So as I think about the path towards refranchisement and smoothing that path, it seems a greater profitability is a great enabler of that.

What needs to be done?

Is there a way to get even more aggressive on price mix realization or to Ali's point pushing on productivity more to get the North American profit pool to expand to facilitate entry of new partners?

Thanks.

I will talk about a couple of levers, and then ask Irial to join me.

The growth and profitability in North America, the major opportunity exists in pricing and the overall effectiveness and efficiency of the system.

We talked about price as a lever and an area of discipline and focused, and price is achieved through rate as you know, and also mix.

And a whole lot of innovation is going on inside of packaging to give consumers what they want and to earn a return as a result of that.

Couple that with our overall system architecture work, which Muhtar described earlier which is on track as we overhaul IT, product supply, as we overhaul customer management and shared services.

And the refranchising progress which is on track with our bottlers, will create a system that is on one hand more effective and grows faster and on another level is more efficient at generating better margins.

But at the end of the day, that combination needs to be built on accelerating growth.

And the focus of the near-term has been to reinvest the proceeds into marketing to rebuild brand momentum and brand momentum at price point.

We're optimistic about the progress, but we have a lot more work to do.

Yes, the only add I would give is [we're in] to the bottling houses, we remain absolutely committed to deliver one of our core priorities, which is excellence and execution in the marketplace.

And as every day goes by, I get more comfortable that we are starting to do things better every day, every time we go to an outlet.

And fundamentally that is the other piece that gives us the capability to get extra price and mix in the marketplace, and we will continue to do that.

And it is a journey.

It is not turning the light switch on.

It happens day by day, weak by weak, month by month.

I feel pretty good that over the next number of years, our capability in the marketplace, married with great marketing, is going to deliver the price mix we all desire.

And that is why the discipline in remaining focused on price mix married with transaction growth and married with volume is why we feel confident about the North American business over the long-term.

Great, thanks.

Bill Schmitz, Deutsche Bank.

Good morning.

Can you just comment about some of the market share losses in Mexico, Brazil, and then a much smaller market in the UK?

So what do you think is driving that?

And then when you think some of those trends will reverse.

Because some of these losses are substantial.

I think it was a little over a point of value share and scan channels loss in Brazil, about a point in Mexico and then similar trends in the UK.

Yes Bill, I think in the UK most of that loss was in Q1.

If you look at Q2, we have had sequential improvement in the UK.

And we expect that going forward in both Mexico and in Brazil that more minor losses to the B brands and local players will reverse themselves in the course of the year.

And we already see that happening in both markets.

I think that was the difficult operating environment in Brazil in terms of also us having discipline in our pricing, and the same goes for also Mexico.

Got you.

So you think your losses are really a function of maybe the more aggressive pricing you took and maybe as that stabilizes this year --.

And very transitory.

Okay great, I appreciate that.

Thanks so much.

Nik Modi, RBC Capital Markets.

Good morning, everyone.

Quick question I had is, if you think about the quarter and how trends move through the quarter, I am just curious if you actually saw correlation with the higher level of spending as the quarter progressed and your volume growth.

Just again trying to understand if the spending is actually working.

And when you think about the ROI in that spend, what discrete things and specific things is Coke doing to make sure there is a glide path to getting a better return out of that spend.

Thanks.

Yes, two things.

Spending increased as we moved through the quarter, and there was much more spending at the end of the quarter than there was at the beginning of the quarter.

And therefore you would expect that not all of that benefit is going to flow, obviously, into the quarter.

And this is again about generating long-term sustainable momentum, which we believe is happening.

Again I want to remind everyone that I am pleased with these results in a difficult operating environment.

And to get growth back into sparkling is a significant achievement, to get growth back into Coca-Cola in the world globally and in the United States is a significant achievement, and we will continue to focus on where we need to be quarter after quarter, one quarter at a time.

I just want to say that I believe our approach is working.

Kevin Grundy, Jefferies.

Thanks for the question.

First Muhtar, you talked about increasing or broadening your product portfolio.

So, maybe without tipping your hand too much, what would be the top of your wish list by product and geography, and do you still feel comfortable with your energy drink strategy?

And then separately, Kathy, now that you bring a fresh look here, do you plan on doing anything differently from a capital structure perspective?

And I say that within the context that there is an argument to be made that Coke is under leveraging and could potentially add leverage, or by adding leverage could add value to shareholders.

And we have seen a number of companies in the CPG space that have been rewarded by the market for such action, so any thoughts there would be appreciated.

Yes, Kevin.

Obviously, I cannot walk you through a wish list; that would be too much information to the whole market and everyone that plays in the market.

But I would say our portfolio is really very rich, as you saw as from our $17 billion brand and so many more in the pipeline.

And again, our sparkling brands have really performed well on a global basis.

Sprite and Fanta and Schweppes in addition to Coca-Cola.

So, all of that tells me that what we're doing in different brands and creating more incidents, more transactions is working.

And you heard the numbers that I mentioned in tea both in the US and globally, in premium waters, in juice and juice drinks, in sports drinks, all of that.

We are pleased with a much richer portfolio than we had, say, three years ago.

And that portfolio is again yielding very good results, particularly, also, Simply in the juice category, [Dasani], Innocent, all those different brands.

Del Valle across the world yielding very good results, and also in China too, and southeast Asia with new innovations that are really working well for us in both the fusion of dairy and juice, as well as pulpy drinks and also juice and juice drinks.

And on the second part of your question, yes, I believe the Company has always been very focused on driving long-term sustainable growth.

And we have done that in a very consistent and disciplined way.

We are very focused on reinvesting in the business and to accelerate growth and create value.

I believe we focus on making sure we have share repurchase and we do give a healthy dividend back, but we will continue basically like we've been going with focusing on driving long-term growth.

So no real change on that front?

Okay, very good, thank you.

Thank you Kathy, Ahmet, Sandy, Irial and Jackson.

The performance year to date, progress against each of our strategic priorities and the positive signs that we are seeing in many global markets all illustrate our view that the 2020 vision and strategic plans are solid.

Proof points are out there.

3% growth in the quarter, global price mix of 2%, increased global media spending reflecting our confidence in building on the strength of our brands and also in our ability to engage our consumers and customers effectively, and global year-to-date value share growth in our categories.

And so we are winning in the vibrant beverage industry and also coupled with sound financial performance during the first half of the year.

So we're making steady progress.

And we are where we are expected to be at this stage in the year.

I look forward to providing all of you with additional updates as we continue to restore our global momentum in the months ahead.

Thank you for your time this morning and for your continued interest and trust in the Coca-Cola Company.

Thank you, and this does conclude today's conference.

You may disconnect at this time.