The Coca-Cola Company
Q1 2007 Earnings Call Transcript

Published: 17 Apr 2007

[Operator:]

At this time I would like to welcome everyone to the Coca-Cola Company's first quarter 2007 earnings results conference call. (Operator Instructions) I would now like to introduce Ann Taylor, Vice President and Director of Investor Relations.

[Ann Taylor:]

Good morning, and thank you for being with us today. I am pleased to be joined by Neville Isdell, our Chairman and Chief Executive Officer; Muhtar Kent, our Chief Operating Officer; and Gary Fayard, our Chief Financial Officer. Following prepared remarks this morning we will turn the call over for your questions. Before we get started, I'd 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 SEC report. In addition, I would also like to call your attention to the fact that we have posted schedules on our company website at thecocacolacompany.com in the investor section which reconcile our results as reported under generally accepted accounting principles, to certain non-GAAP measures which may be referred to by our senior executives in our discussion this morning, and from time to time in discussing our financial performance. Please look on our website for this information. Now let me turn the call over to Neville.

[Neville Isdell:]

Thank you, Ann and good morning, everyone. I am going to start this morning with a few brief observations about the quarterly results, and Muhtar will then provide details on operational achievements, and Gary will follow with an overview of the financials and he’s going to give you some additional perspective on the Philippines as well. What you see today is a very strong quarter, delivered by a company and a system that has found its footing, regained its focus and come a long way in retooling its operations. While there is much more that we can and will do, the Coca-Cola Company is today proving that we can meet the commitments that we make. We said that we would drive growth and profitable brands in packs and channels, and today we are reporting revenue growth of 17% on worldwide unit case volume growth of 6%, our highest quarterly volume growth rate since 2002, while cycling 5% volume growth for the first quarter of last year. We also said that we would maximize our local brand footprint to leverage our sweet spot in the industry. Today we are reporting international growth of 9%, which is our highest quarterly international growth rate since 2000. We also said that we would grow our core sparkling beverages whilst expanding the footprint of our still portfolio. Today, we are reporting an increase of 5% in sparkling beverages, led by 4% growth in trademark Coca-Cola. That growth includes the rollout of Coca-Cola Zero to 20 additional markets including Mexico, Brazil, Argentina, and France amongst others. Still beverages increased 9%. The solid growth resulted in share being gained or maintained in key nonalcoholic ready to drink categories, including sparkling, bottled water, juice and juice drinks, sports drinks, and ready to drink tea. So, for the quarter, we've delivered on our commitments. Now I'd like to give you a new commitment. We will win again in our home market. It will not come quickly and we continue to expect 2007 to be weak, but we do expect to begin seeing sequential improvement in the second half of the year as we execute against our key goals. Muhtar will address this topic in more detail in a moment, but I want to underscore my absolute focus on North America. We delivered strong financial results this quarter, even with this decline in North America. Strong top line growth resulted in ongoing currency neutral operating income growth of 11%, which is ahead of our long-term growth targets. The geographic sources of profit growth were, in fact, more balanced as well. Additionally, we delivered solid operating expense leverage, even as we continued to invest to support our brands and build capabilities within our own company-owned bottling operations. Certainly a strong performance to start the year. So now, let me turn the call over to our Chief Operating Officer, Muhtar Kent, who will provide you with more details.

[Muhtar Kent:]

Thank you, Neville and good morning, everyone. It has been just over 120 days since I assumed my new role. What I would like to cover this morning are my key priorities for 2007 and relate those to our performance in the quarter, as well as expectations for the remainder of this year. These priorities are designed around a simple strategy

[Gary Fayard:]

Thanks, Muhtar and good morning, everyone. As Neville and Muhtar indicated, we are starting the year with a strong financial performance. As you saw in the release, we reported EPS at $0.54 for the first quarter, an increase of 15%. This included a net charge primarily related to an asset write-off in the Philippines from the Philippines bottler, partially offset by gains from the sale of an ownership interest in one of our Brazilian bottlers and from real estate in Spain. Therefore, our adjusted EPS was $0.56 per share, an increase of 14% after considering items impacting comparability in both 2007 and in 2006. We attribute about a penny of the EPS to timing of concentrate shipments, as concentrate sales growth was slightly ahead of reported unit case growth in the quarter, primarily due to Easter being a little earlier this year. Net revenue in the quarter increased 17%, that included a 5 point benefit from structural change related to our acquisitions of some bottlers. The growth was also driven by a 6 point increase in concentrate sales, 3 points from currency and 3 points from price and mix benefits. We grew operating income by 17% on a reported basis, after considering items impacting comparability in the current and prior year quarter, operating income increase 14%, which includes a 3 point benefit from currency. So on an ongoing currency neutral basis, we grew operating income at 11%. SG&A increased 13% in the quarter, so let me take a moment and walk you through that increase. About 8 points of that 13 point increase were due to the bottler acquisitions, and that is from increased selling and service expenses as we invested for growth in bottling operations, and due to currency. The remaining 5 points we continued to invest solidly behind our brands, and control G&A expenses as we continue to focus on productivity and expense management. In the quarter, we repurchased approximately $676 million of our stock; as a result, our average shares outstanding in the first quarter of 2007 were approximately 45 million shares lower than the average in 2006. We still anticipate that a range of share repurchase in 2007 will be between $2.5 billion and $3 billion. In terms of dividends, the board raised the quarterly dividend for the 45th consecutive year by 10% to $0.34 per common share, which is an equivalent $1.36 per share on an annual basis. Now let me address some of the factors that we see impacting the remainder of 2007. We remain relatively positive on the macroeconomic outlook for the remainder of the year, especially in many of our emerging markets. We will continue to portfolio manage globally, as we expect solid performance in most of our markets with weak performance in North America, particularly in the second quarter as we cycle stronger volume and profit results. As with the first quarter, we would again expect our consolidated bottling operations to be a positive contributor, as we continue to build world-class operations. As for the acquisition of the Philippines bottler, you should think about it really in two buckets. First, we took a charge this quarter for the write-off of bottles and cases in the Philippines bottler. Second, we expect full year EPS results to be reduced by $0.02 as we invest to return the Philippines bottler operations to growth. Most of this impact will be reflected in the bottling investments group. Capital expenditure requirements will be slightly less than $100 million and will take the total company capital expenditures for 2007 up to about $1.6 billion. For 2008, we do not expect the Philippines to have any impact on consolidated results. In 2009, the operations should start contributing to growth. That and the impact on 2008 would include covering the interest cost from the acquisition. As for items below operating income in the P&L, I'd like to remind everyone that we still expect net interest costs to increase primarily due to lower cash balances and higher debt balances due to share repurchase, acquisitions such as the Philippines bottler, dividends, and capital spending. Also keep in mind that equity income will be negatively impacted by our reduced ownership position in Coca-Cola Fimsa and our Turkish bottler as well as selling our equity interest in one of our Brazilian bottlers this quarter. With regard to taxes, we ended the quarter with an underlying effective tax rate of 23%, and we would expect to remain at that underlying effective rate for the remainder of the year. Let me move to currency. As I mentioned, we saw a positive impact from currencies for the quarter on operating income of 3%. That was in line with our expectations. We continue to put coverage in place and are now effectively covered for the full year on both the yen and the euro. Based on current spot rates and the expected impact of coverage in place, we expect a small positive impact from currencies on full year 2007 results. Before I close, I wanted to remind everyone about the 8-K we filed with SEC 2 weeks ago containing the additional segment detail for the two new operating groups, Eurasia and Pacific. Please go to our website and pull the information down to assist in your modeling. Those are the topics I wanted to cover this morning, now we can turn the call over to your questions.

[Operator:]

(Operator Instructions) Our first question will come from the line of John Faucher – JP Morgan.

[John Faucher:]

Good morning, everyone. I wanted to follow-up a little bit on the price mix line, which came in very nice this quarter. Can you give us a little guidance in terms of with the change in concentrate pricing from what we can see from a CCE standpoint in terms of looking at plus 4 and then net it down to zero, can you talk a little bit about how that's going to work out financially and what goals you have in place for CCE in that regard? Can you also give us an idea on the mix side in terms of how we're seeing some of the bottler case mix, is that a positive which is offsetting some of the negative country mix? How should we map that out over the balance of the year? Thanks.

[Gary Fayard:]

Thanks for the question. Let me take price mix first. What you're seeing is 3 points of price mix. About 2 points of that is coming from the core, and 1 point is an impact from bottling operations. That price mix is really from I'd say the quality of our growth with very strong sparkling beverage growth as well as very balanced growth across the world, particularly EU, Latin America, Japan. You're seeing positive mix come through, country mix come through even with an offset from North America, as well as the quality of that growth with a strong sparkling beverage growth.

[Muhtar Kent:]

Yes, essentially in those numbers, the U.S. concentrate price is already included embedded in those numbers and, essentially we've also had very good benefits in Latin America from pricing as we drive revenue growth management across all of the markets, as well as in the EU.

[John Faucher:]

CCE had talked about meeting certain goals to get the concentrate pricing netted down to zero. Is that showing up in the price mix line, or is that showing up in the SG&A line if you are in fact netting the concentrate pricing down?

[Gary Fayard:]

John, it's showing up in the price mix line.

[John Faucher:]

Even with that, assuming that CCE's meeting their targets, even with that you're still putting up high quality growth there on the price mix line?

[Gary Fayard:]

That's correct.

[Operator:]

Your next question comes from Bill Pecoriello - Morgan Stanley.

[Bill Pecoriello:]

Good morning, everybody. Muhtar, you had mentioned some productivity benefits as one of your goals. You mentioned delayering, indirect procurement, supply chain. Can you quantify any of this or talk about the timing in terms of what kind of funds would be available for reinvestment? Also with the recent meeting you had with the bottlers in China, I guess supply chain was one of the topics. Can you help us all understand what was discussed with the bottlers at that meeting?

[Muhtar Kent:]

You need to think of this activity this ongoing activity, Bill, in various buckets. The first is the architecture of our organization, with the primary purpose of that being really delayering and ensuring that we have speed, better focus, less bureaucracy, much more improved time in terms of our execution. That, of course, will yield some savings. We're in the process of analyzing what we do with those savings and how we reinvest, how much we reinvest, and how much we actually put to our bottom line in terms of leverage. I can't quantify any further. The international piece of that work is completed. We're completing some further work on that in North America. The second bucket is some of the other productivity work that is going on at the moment in the Company that is related to our indirect cost inside the total Coca-Cola Company. Gary and his team are leading that work stream. The third piece is the whole area of longer term supply chain initiatives for the entire system, which is a much bigger number and there's different buckets of work going on across the world in that area. If you look at it in three groups, that's as much as I'd like to say on that right now.

[Neville Isdell:]

If I could just build on that, you'll see that there is operating leverage coming through in this quarter. We believe you'll continue to see that. If you go back to when we did not appear to have operating leverage, really it was the 2005 $400 million reinvestment back into marketing. If you look at our top line growth, you can see that clearly has worked, adding the fuel to the brands. So, just echoing what Muhtar has said, you can create operating leverage in two different ways

[Bill Pecoriello:]

The recent meetings in China with the bottlers, how would you characterize them?

[Neville Isdell:]

First of all, the headlines very positive. Muhtar was talking about improved bottler relations in his earlier comments. Obviously their numbers -- if you look at the international bottlers -- are improving. They have a strong belief in how we're moving forward. We spent quite a lot of time sharing some of the innovations for the future. I think we're bringing the bottling system in line with us. Obviously, we are focusing on execution, which is their side of the bargain and something that clearly they agreed they have to improve upon. The other piece of the other bucket that Muhtar talked about -- we spent a lot of time on that -- which is what we can do systemically in order to improve the overall health of the system as a whole.

[Operator:]

Your next question comes from the line of Robert van Brugge - Sanford Bernstein.

[Robert van Brugge:]

In connection with your increased incidence rate in Mexico, you had agreed with your bottlers increased marketing spending this year. So far in the first quarter, the margin trends are still pretty much consistent with last year. Are we starting to see this increased marketing spending in the P&L at this point?

[Gary Fayard:]

Yes, and you're right. When we increased the incidence rate in Mexico, we also agreed that we would increase or spend back some of that incidence increase in marketing as well as the creation and exploitation, if you will, of the still portfolio in Mexico. You are seeing us do that; that is happening. The marketing, remember, is on a sales curve. So it's curved over the full year, but there is an increase in marketing in Latin America. That includes the impact from the increased incidence.

[Operator:]

Your next question comes from the line of Bryan Spillane - Banc of America Securities.

[Bryan Spillane:]

Muhtar, a couple of questions relative to North America. Going into this year, pretty high expectations in terms of retail pricing. I'm just curious to know your assessment so far in terms of price elasticity. Has volume responded more or less in line with where you thought it would be? Looking forward, what are your expectations on how you'll monitor that and whether or not there's going to be a need to maybe act in terms of moderating price increases?

[Muhtar Kent:]

Although we have not been happy at all with the results for the first quarter for our North American operations, essentially they are actually slightly better than our expectations and what we had in our budget. What we see is generally, of course -- and particularly the sparkling category overall as well as in segments like orange juice and juice-containing beverages – are very large price increases, but we see also in the retail environment the actual elasticity and actual demand elasticity for our products based on individual packages has been generally in line with expectations; what we've expected based on those price increases.

[Operator:]

Your next question comes from the line of Mark Swartzberg - Stifel Nicolaus.

[Mark Swartzberg:]

Muhtar, a question for you regarding Japan, nice to see another quarter of positive volumes there. Georgia seems, relatively speaking, a little better positioned than it was a year ago. Nonetheless, it looks like margins are going down in that market for you. You're spending more there. Is that a fair assessment? How would you characterize the competitive environment and the retail environment across your portfolio, not only for the ready-to-drink coffee, but your total portfolio?

[Muhtar Kent:]

Well, I think what I'd like to say is on Japan, six of our core brands grew double-digits in Q1, and we've strengthened the core by refocusing our commitment. Sokenbicha tea remains a strong brand, delivered good volume growth; and trademark Coca-Cola has shown stabilization and has actually grown now with The Coke Side of Life campaign, and more to come in that area. In general, I think we're happy with where we are with our stabilization and return to growth in Japan. As far as coffee is concerned, the core brands of coffee grew. What is also very encouraging in Japan is that in the entire quarter our vending machines and our entire vending segment has grew, which is also very important for our margins. Essentially we are focused, we are spending in the market, and we believe that our sequential improvement in Japan is going to continue.

[Mark Swartzberg:]

Great, that's helpful. Just to close that thought on the spending side. When you think about the level of spend today, perhaps on a per case basis versus a year ago, 18 months ago versus looking forward, how do you feel about that number? There's been a step up investment. Do you see it stepping up further?

[Muhtar Kent:]

I don't see any significant changes compared to 12 or 18 months ago, overall. There may be some timing in there, but I don't see anything materially changing there. And I think we're at the reasonable rate right now. I don't see it going up any further. I think the critical thing is that our entire bottling system is in a much different place, it's energized and everything else we're doing for productivity in the market is working; and the growth, of course, is the key to everything.

[Operator:]

Your next question comes from the line of Judy Hong - Goldman Sachs.

[Judy Hong:]

Good morning. I'm wondering if you can update us further on your tea strategy going forward, both in U.S. and outside the U.S. given the changes to the BPW joint venture? Particularly North America, if you look at your tea portfolio, whether this is a category where you may need to be more aggressive on the acquisition front?

[Muhtar Kent:]

First, just two sentences on the BPW. As you know the BPW arrangement has been recast and now essentially it's for all teas across the world with the exception of Japan and now North America; and also coffee, both sides are free to do what they want in the area of coffee. Now, let me focus on tea. BPW arrangement with the Nestea brand has been successful in many, many markets and will continue to be successful in many, many markets around the world. USA was one market where we believed we were not winning in tea, we needed more flexibility, and we are intent on winning in tea in the U.S. market. The results so far in the last two years have not been acceptable, are not acceptable and we are going to win in tea. We cannot afford not to win share in tea and we cannot afford not to grow ahead of the market in a very big category that is growing in the United States. That's the objective of all of the exercise that we've gone through. You will see us refocusing what we have in our portfolio with Nestea, with Gold Peak, with Enviga, with other brands as well as looking at new opportunities in the market in rapid fashion.

[Operator:]

Your next question comes from the line of Christine Farkas - Merrill Lynch.

[Christine Farkas:]

Thank you very much. Good morning. Muhtar, you talked about brand, pack and price architecture internationally and how that's successful. In looking at North America, can you point to what the real efforts are here in North America? Is it squarely focused on go to market strategy? Or is the brand pack price architecture something that has to be aligned more quickly? Thank you.

[Muhtar Kent:]

Both. Go to market strategy is critical as well as the BPPC architecture is critical as we move forward in order to ensure that we have revenue growth activities, management in the marketplace, and that we align consumer needs and the consumer better to our brand price pack and channel architecture in the United States. There's going to be a lot of activity in that area, including simple things like redesigning some of our labels to look more attractive. Looking at the entire merchandising sets by channel from convenience stores all the way into retail and different parts of retail and how we can generate further impulse in the marketplace, which has all worked and continues to work very favorably for us in Latin America, across Eurasia, and across parts of the EU. The test in Denver that we've had, we're doing some tests in Denver with CC and successive tests are actually showing that it's a simple architecture, but it works. It works very effectively.

[Christine Farkas:]

Your corporate expenses, is there any investment in that line for overall system productivity at this stage, or is that a good run rate in terms of year-over-year growth?

[Gary Fayard:]

Within the Corporate expense line, there's slight investment in productivity, investments for system initiatives, but it's primarily just kind of year-on-year growth. Underlying the G&A expenses, underlying in corporate, in fact, we're below our budgeted rate so we're really focused on holding those expenses.

[Operator:]

Your next question comes from the line of Bonnie Herzog - Citigroup.

[Bonnie Herzog:]

Good morning, everyone. My question is for Muhtar and Neville. It's quite clear you're not satisfied with the business in North America. I'm curious, when you look out over the next several years, is there some concern that this could be a leading indicator in any way, shape or form? Either the consumer here in North America, the way you go to market, the products? If so, because I know we're different all around the world, how do you try to prevent that? Or is it the reverse? Are you really trying to, again, incorporate the best practices that you mentioned, Muhtar, in trying to fix North America?

[Neville Isdell:]

Let the non-American here start first. I don't think there's any fundamental difference. After all, it's what happened in America that built the business around the world. There are a number of issues facing us at the moment. The headwinds of the pricing are clearly the major headwind that we have with regard to sparkling beverages. There's also this whole issue of commitment and belief. And you heard me say, you heard me at CAGNY about around the world people looking at me when I came back, when I said we'll get sparkling beverages growing again, with a level of disbelief. Obviously the pricing headwinds have held back North America. But I and Muhtar were with a number of bottlers over the last week. They have a belief that what we have coming along the pipeline, Diet Coke Plus now, what's happening with Coke Zero, et cetera that we now have the tools to actually replicate what we've done in the rest of the world in North America, whilst building out our still beverage portfolio. So I don't think there's anything exceptional about the United States. Remembering that you'll see the same sort of sticker shock in the Hispanic community, a lot of them who were immigrants who were consuming the product in other parts of the world. So the headline for us is that there is sticker shock here, but number two, that we have the consumer marketing which is working. We also have the bottler commitment in terms of franchise leadership. I think if you talked to the bottlers you'll feel a whole new level of confidence and a commitment in terms of the operational side of what is needed. John Brock has said that one of the things that he's picked up is there are lessons from around the world that we need to pick up in North America and I think that's a very good sign. Muhtar, do you want to build off that?

[Muhtar Kent:]

Yes, just to refocus again on the consumer, connecting with our core consumers and industry with well received creative and highly rated messaging. You saw examples of that in the Super Bowl, NCAA, Oscars, improving the performance of Coke Zero and Diet Coke which are actually significantly, significantly outperforming the sparkling category. My Coke Rewards program, now over 4 million members. Again, connecting with our chief consumer target base. On the commercial leadership, we are aligned. I repeat, we are aligned with CCE on segmented merchandising, which is part of the BPPC architecture and a rollout of that. It's going to cover about a fourth to maybe even a third of our large source supermarkets by the end of this year. Agreement also with CCE to build total beverage account team, again a very important, significant area in commercial leadership. Then also on franchise leadership, the third pillar, again, aligned beverage growth agenda with all of our top to top bottlers. So again, with specifics on product innovation, we've mentioned Diet Coke Plus, but there are many others in the area of packaging, in the area of how we create impulse at the point of sale. Then we've reorganized our United States business along the lines of our international business to focus on the three core pillars, focusing on sparkling, focusing on stills, and focusing on new and emerging markets; we have put very experienced people against all those three areas. The other important thing is you walk around the U.S. market, Bonnie, you walk around the U.S. market and we've lost the drive to create impulse. That's what we're bringing back. No signage. The whole signage program for the world started right here in the United States 30, 40 years ago. Now you walk around Latin America, you walk around Europe, you walk around Asia, you walk around Africa everywhere you have signs that say ice cold Coca-Cola served here, not in the United States. That's creating the impulse, again back to basics and we know we can do it. So it's both. Bringing best practices from outside and then leveraging the power of the category, which is bigger than anywhere else in the world here in the United States. Doing both at the same time.

[Bonnie Herzog:]

That was very helpful. So in terms of timing, you're thinking by the end of this year, will it take you maybe until early next year to do a lot of what you said? Because it all sounds great.

[Muhtar Kent:]

I don't want to comment any more on the timing. I think you see our sense of urgency.

[Operator:]

Your next question comes from the line of Kaumil Gajrawala - UBS.

[Kaumil Gajrawala:]

Good morning, everyone. To the extent that you beat your top line growth algorithms, what impact could this have on your future CapEx? Potentially does it limit any increase in your cash return to shareholders? Also can you talk about the macro economic backdrop in some of the developed markets like Western Europe and Japan and how this may have helped results?

[Gary Fayard:]

Relative to CapEx, it should not have any real impact on CapEx, actually, because most of our CapEx is in some of the finished products businesses in North America, some of the bottling and bottling investments, which are really kind of not permanent investments for us. No change in business model. I don't see much change in CapEx. Relative to dividends, we've been very consistent and have been increasing dividends at a pretty good clip over the last few years. So we would expect to continue to see dividend increases. Again, an annual decision that we'd be looking at the end of this year, but have a dividend policy in place for this year. Relative to macro economic trends, Muhtar, do you want to comment on that one or Neville?

[Neville Isdell:]

I'll pick that up. There is a broad optimism you've seen what the OECD is saying, what the World Bank is saying. I think that global growth is going to continue at the rate that we've seen over the past couple of years for '07 and through into '08. That's really reflected in our plans. The one that you still would query, I suppose, would be Japan. I think we're cautiously optimistic about that country coming out of stagnation and given the importance of Japan, together with the actions that we're taking in the Japanese business which are becoming apparent in terms of being successful, we are becoming more bullish but cautiously optimistic, I would put it, about Japan.

[Operator:]

Your next question comes from the line of Lauren Torres - HSBC.

[Lauren Torres:]

I was hoping you could talk a bit more about product build outs, maybe even more importantly the potential for acquisitions in North America. Obviously we heard about your acquisition of Fuse. I was just thinking about if we should expect similar deals in the works. Basically, how are you thinking about internally developing brands in the U.S. versus acquiring brands?

[Neville Isdell:]

Developing brands let me pass that to Muhtar in a second, but we really don't comment on acquisitions. I still stay with what we've said all along that we're going to do both. That would be largely bolt-on. But opportunities come up, and we evaluate every opportunity and look to see whether that is the right way to build our portfolio. Muhtar made the comments in his remarks that that's what we would do. Buying is sometimes the right way. What we have is an innovation pipeline coming along where we are building and building at a rate that we have not been building in the past. Even if you look at patents that we're getting registered in terms of new benefits that we could add to our own beverages, you'll see that in the innovation pipeline. Muhtar, would you like to talk about just about what's coming down to the pipe from the build side for North America?

[Muhtar Kent:]

There's no question, we have some clear winners. We've mentioned Coke Zero, the Simply trademark is really a great winner. We're excited about Vault, the recent launch of Vault Red Blitz, with a huge immediate consumption focus. Energy continues to gain share in this competitive category against our principal competitor as well as against the market, the flavored waters. You'll see us doing a lot of critical extensions. You'll see us being more active in the area of ready to drink coffee. As we said, we launched Coca-Cola Cherry Zero in the quarter. You'll see more extensions around Coke Zero, the success of Coke Zero leveraged to more extensions. Diet Coke Plus and what the implications that has for some of the other products. You'll see us again developing and leveraging Fuse. We feel it's a huge opportunity. So those are just some of the ideas that I want to share with you in terms of how we feel about building internally. Enviga is another one. You'll see us again being active in the area of tea, Gold Peak. Those are just some of the things that I can highlight to you what we feel in terms of both what's in our innovation pipeline and how we intend to quickly commercialize and build internally as well as strategically add on any bolt-on acquisitions.

[Lauren Torres:]

I guess it would be fair to say that your bottlers are encouraged by the pipeline coming through?

[Muhtar Kent:]

If you talked to them, I believe that's what they would say.

[Operator:]

Your next question comes from the line of Matthew Riley - Morningstar.

[Matthew Riley:]

I was hoping you could address the labor issues the Coke system seems to be facing in North America. Whether this could lead to trouble executing the turnaround you anticipate in the North American market?

[Neville Isdell:]

Well, the issue is one that is with CCE. We don't want to comment on what our bottlers are doing in terms of a potential labor dispute. I think the evidence that you've seen in the past is that we have a very capable bottler that is certainly able to handle these type of issues very effectively with their unions. Clearly there is some discussion around issues at the moment as they restructure. I would anticipate that sensible people will be able to come to sensible solutions.

[Operator:]

Your final question will come from the line of Ann Gurkin -Davenport.

[Ann Gurkin:]

Good morning. Two things. One, can you talk about the strategy for Powerade in the U.S. in terms of pricing and marketing? Secondly, I believe at CAGNY you talked about pushing into or developing volumes in emerging markets and your strategies in terms of using existing bottlers, acquiring bottlers, or using JVs in terms of distribution?

[Muhtar Kent:]

Yes, let me take the one on Powerade. Essentially, we've gained volume as well as value in Powerade and we continue to be cautiously optimistic in terms of the category and also the competitive position of Powerade. You will see us accelerating Powerade in retail channels this year. The Powerade option expansion is an example of that, the NCAA commercials and so forth. So certainly we feel that there's runway ahead of Powerade and that it will gain, continue to gain traction as well as competitive advantage. As far as the question you asked about international. Basically, I've said it before. As we expand our portfolio across the world, whether it's Latin America, Europe, Asia, the traditional models that we have worked with for the last 100 years, 120 years may not always be best uses for developing fast, quickly our business in these noncarbonated and particularly juice and juice-containing beverage categories. And in those areas where we are trying out some new models with our bottling partners that are more close to what we call JV models and based on sharing of the opportunities and sharing of the investments as well as equitably sharing the value created rapidly in those segments. That's basically what I'd like to say. Does that sufficiently answer your question?

[Ann Gurkin:]

Yes. Are you raising prices on Powerade in the U.S.?

[Muhtar Kent:]

I don't really want to comment on that right now. But if you looked at the Nielsen numbers, you won't see that happening.

[Neville Isdell:]

Thank you, everyone. Thanks Muhtar and Gary. I want to just emphasize to all of you who joined us this morning, that this one quarter is a strong start to the year. We are continuing to build off the successes that we saw in 2006. So we do have consistency, we do have momentum. I am confident that our strategies are working. As I've mentioned in every quarter since my return, execution and maintaining an outward focus on our customers and consumers are critical for our success. That consistency you're going to see continuing. We continue to remain focused on the long-term health of the business. Again, I've said that since day one, everything we're doing is looking at building this business for long term, sustainable growth and therefore building value for our share owners. Thank you very much, everyone. Good-bye.