Jul 17, 2007
TRANSCRIPT SPONSOR
Executives
Ann Taylor - Vice President and Director of Investor Relations Neville Isdell - Chairman of the Board, Chief Executive Officer Muhtar Kent - President, Chief Operating Officer Gary P. Fayard - Chief Financial Officer, Executive Vice President
Analysts
Mark Swartzberg - Stifel Nicolaus Bill Pecoriello - Morgan Stanley Bryan Spillane - Bank of America John Faucher - J.P. Morgan Christine Farkas - Merrill Lynch Matthew Reilly - Morningstar Judy Hong - Goldman Sachs Bonnie Herzog - Citigroup Robert Van Brugge - Sanford Bernstein
Operator
Good morning. My name is Dennis and I will be your conference facilitator.
At this time, I would like to welcome everyone to The Coca-Cola Company’s second 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 President and 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 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 SEC report.
In addition, I would also like to note that we have posted schedules on our company website at thecocacolacompany.com under the financial information tab in the investors 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 discussions 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.
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Neville Isdell
Thank you, Ann and good morning, everyone. I’m going to start this morning with a few brief observations about the second quarter results and Muhtar will the provide details on operational achievements and Gary will then follow with an overview of the financials.
Today, we report another quarter of strong business results. We continue to gain traction no our journey to delivering sustainable growth.
Our strong results today demonstrate our ability to meet our commitments generating balanced consistent performance across our global operations and our product portfolio. They also provide further evidence that our resolute focus on our manifesto for growth, including a clear agenda and disciplined operational execution is paying dividends and moving us forward.
For the second quarter in a row, we have achieved 6% global unit case volume growth. Importantly, this is our ninth consecutive quarter of delivering at least 4% volume growth.
Top line growth continues to be strong, reflecting our ability to capture the opportunities in this dynamic and expanding beverage industry and capitalizing on an overall favorable global environment. Revenues increased 19% in the quarter.
The acquisition of bottlers contributed about seven points of this growth so if you exclude this impact, revenues grew a very strong 12%, reflecting the successful implementation of our brand and channel strategies. We delivered our third consecutive quarter of double-digit comparable EPS growth, up 15% versus prior year and following a 14% increase in the first quarter.
Ongoing currency-neutral operating income increased 9% in the quarter and 10% year-to-date. Importantly, cash from operations increased 19%, reflecting a solid underlying business performance.
Also, I am pleased that our focus on productivity is resulting in margin improvements in our core business. These strong results were once again led by our international operations, which reported a second consecutive quarter of 9% unit case volume growth.
Notably, this performance continues to be broad-based, as nearly all of our top 22 markets again delivered solid growth and all international groups delivered mid single-digit growth or better. In terms of our portfolio, we achieved continued volume growth in sparkling beverages while expanding our footprint and enhancing our offerings in still beverages.
Today, we are reporting an increase of 4% in sparkling beverages led by 3% growth in trademark Coca-Cola. Coca-Cola Zero, which is now in 47 markets, continues its strong performance as we begin to cycle 2006 launches and employ our three cola strategy; Coca-Cola, Diet or Light Coca-Cola, and Coca-Cola Zero.
Coke Zero continues to grow the sparkling category and gain share by sourcing approximately 50% to 85% of its volume from our competition. In still beverages, strong performance from our water portfolio, Powerade and Minute Maid led to a 12% increase.
This solid growth across the portfolio resulted in our improving our non-alcoholic, ready-to-drink volume and value share trends globally. Driven by volume and value share gains in both sparkling and still internationally and improvements across most categories in North America.
Importantly, I really want to note that value share is growing faster than volume share, as we continue to focus on the highest value opportunities. Now, before I turn the call over to Muhtar, let me just touch on North America.
On our last call, we reiterated our commitment to winning again in our home market and during the quarter, we took a significant step forward by acquiring glacéau, the leading marketer of active lifestyle beverages. Sandy Douglas and the team in North America are hard at work ensuring that this acquisition delivers significant value to our shareholders, under an operating model that leverages the strengths of our system.
As Muhtar will describe, our focus on our ongoing performance in North America will effectively complement our acquisitions. As we move through the second-half of the year and continue to execute against our key goals, we do expect to begin seeing sequential improvement in North America, which will demonstrate greater balanced growth by group.
I am very pleased with the strong performance in the quarter and the year-to-date and clearly we are starting to see a trend of balanced consistency in our results and we remain undeterred in our execution of our strategic agenda as we take our manifesto into action. Let me now turn the call over to Muhtar to provide you with some more details.
Muhtar Kent
Thank you, Neville and good morning to everyone. Today I would like to provide you with an update on our progress as it relates to the quarter’s performance and add some perspective for the remainder of the year.
I would like to do so within the framework of the four priorities that I had outlined last quarter for myself; sustain and drive momentum in our international business; two, stabilize North America and return it to growth; third, increase productivity across the organization and drive leverage on our P&L; and lastly, complete and accelerate the commercialization rate of our innovation and best practice sharing across the world. Let me say first overall, I am very pleased with the results of the quarter and in particular how our field operators are executing our plans with specific focus around core capabilities.
Last month, we spent a week meeting with all our operators around the world, discussing our agenda for the next three years. While we agreed that we have a lot of work to do, I was extremely encouraged with the thought process coming out of these meetings.
This quarter, like the last one, shows the renewed confidence and commitment to delivering results today but also ensuring a foundation is in place for achieving long-term sustainable growth. So let’s take a few moments to review these four priorities I outlined above.
It’s important to remember that while we’ve made some progress, these priorities are ongoing and will continue to solidify the foundation for sustainable growth. The first priority is to sustain and drive progress in our international business.
For our international operations, we are maintaining our focus where we are winning and constantly making improvements in markets that are not meeting our expectations. Our success was evident in the quarter with volume growth at its highest level since 2000 for the second quarter in a row, validating our ability to execute across the system.
We continue to see broad-based growth across most of our top markets. Unit case volume growth was again led by our key emerging markets, including China, Russia, Turkey, Eastern Europe, Central Europe, and Southern Eurasia, as well as across Latin America and Africa.
India continued its progress, delivering double-digit growth in the quarter. While it’s clear we are maintaining our focus and winning in these markets, I want to discuss our progress in markets where we have taken a number of actions to rebuild sustainable growth.
Performance in the Philippines improved significantly as initial results are exceeding our original expectations. Our actions have led to unit case volume up 11%.
While this growth had an easy comparison versus last year, it also is a direct reflection of a well-prepared integration plan carried out by our bottling investment group. However, the fundamentals of the business required continuous stewardship and development.
With the acquisition of the bottling operations complete, we are rebuilding key account teams and focusing on improving the route to market and execution in the trade, both of which are critical, absolutely critical to our future success. At this stage, our goal is to deliver slightly positive volume growth for the full year 2007 and we are focused on restoring consistent top line growth for the business.
The second quarter marked the 50th anniversary of our business in Japan, a critical market that has contributed significantly to our success in the past and will continue to do so in the future. With this in mind, the company made a strategic investment in the Tokyo Coca-Cola Bottling Company which will enable us to be more actively involved in the future in the significant Tokyo market.
The investment will be used in developing new routes to market, strengthening the vending channel, and acquiring sales and distribution assets. As strategic partners, we will collaborate in tackling new initiatives in the region and will leverage the many synergies across the system in order to achieve sustainable growth.
Unit case volume in Japan increased by 4% in the second quarter, the fourth consecutive quarter of improvement. Overall results were led by double-digit growth in trademark Coca-Cola.
Following the launch of the Coke Side of Life campaign earlier in the year, Japan continued to leverage global best practices and launch Coca-Cola Zero at the beginning of June. Overall, I am encouraged by the actions we have taken to stabilize the business in Japan but also recognize we still have more work to do.
In the European Union, unit case volume increased by 5% in the quarter as we continue to make steady progress and build a solid foundation for sustainable growth. Germany and Western Europe successfully cycled the 2006 World Cup and are continuing to make progress against their key initiatives.
Whilst the fundamentals are in place, we do have a big hurdle to stifle in the third quarter with last year’s results benefiting from the launch of Coke Zero in several key markets and favorable weather. From a portfolio perspective, our strategic initiatives also continued to deliver results.
Internationally, we achieved 6% organic unit case volume growth in sparkling beverages, led by 6% growth in trademark Coca-Cola. The Coke Side of Life campaign is being leveraged across the world and was recently awarded a Gold and Silver Lion at the Cannes Advertising Awards.
Beyond trademark Coca-Cola, we launched two new initiative behind trademark Fanta, which achieved 7% volume growth in the quarter. Fanta Play is the new global marketing campaign for the brand.
We expect it to reach 45 markets in 2007 and expand to over 80 next year. Similar to the Coke Side of Life, this campaign raises the standard for creative excellence and drives economies of scale whilst reducing production costs.
The second initiative, which Neville highlighted at [Cagney], is the Fanta World of Flavors campaign. This exciting campaign features nine country and flavor combinations that will reach an estimated 36 markets in 2007 and will expand to over 50 next year.
Again, it provides economies of scale in production and marketing and allows business units to develop a multi-year plan for Fanta flavor innovation. The continued success of these and our other leading sparkling beverages further validates our belief that the core of our business is healthy and it’s poised to capture significant growth over the coming years.
Additionally, we continue to improve our offerings to our customers and ultimately to our consumers via the expansion of our still beverage footprint. Internationally, our unit case volume of still brands increased 20% in the quarter.
This leads me to my second priority, which is reestablishing consistent growth in our home market of North America. As you know, we made significant progress this quarter with the acquisition of glacéau.
This was an important step in demonstrating our commitment to restoring growth in our home market. This acquisition is strategically, operationally, and financially compelling as it complements every part of our business.
It has now been about six weeks since the deal was closed and glacéau is performing ahead of our expectation. The glacéau team continues to demonstrate a commitment and passion for driving the growth of the brand, and having recently moved brand management for Powerade to this team, we are confident they will take its growth to a higher lever also.
We remain committed to the three principles of the deal that we outlined initially. First, the deal must drive incremental value for the shareholders of the Coca-Cola Company.
Second, while we have not finalized any specific decisions on this, we are going to build an operating model that is flexible and takes advantage of the strengths of the Coca-Cola system and leverages existing routes to market. The final distribution model will likely be a hybrid, which will include a mix of current distributors and bottlers with certain channels handled directly.
We are working with our bottlers and these distributors to determine the specific details for this. The distribution that we decide to transfer to our system, we would expect our bottlers to invest in both the glacéau brand and our core brand and business.
Again, it’s a strategy that drives growth across our entire portfolio. Third, we expect the acquisition to be a catalyst for driving growth across the entire North American business.
At the same time we are moving forward with our ongoing actions in our business. In sparkling beverages, we continue to execute on our goal of leading sparkling beverage growth driven by trademark Coke.
Our strategy is built upon a three cola focus; red, black and silver. Coca-Cola, Coke Zero and Diet Coke all outperformed their nearest competitors and gained share in a challenging retail environment.
Coke Zero unit case volume grew 37%, an acceleration versus last quarter and continues to gain share, achieving over one share point during the quarter in Nielsen. Integrated media campaigns also continue to target the core male consumer to retain core drinkers and also act as a recruitment brand.
Also in the quarter, Diet Coke Plus launched and achieved 97% availability in the supermarket channel. We grew awareness using a multimedia approach and received point-of-sale support by some of our key customers, including Wal-mart, Kroger and Safeway.
In total, our sparkling beverages gained share led by our Diet and light brands. In still beverages in North America, we continue to make progress in our areas of focus.
Trademark Powerade gained both volume and value share in the sports drinks and our chilled juice and juice drinks portfolio gave value share on the strength of Trademark Simply and Odwalla. In teas and coffees, our actions resulted in increased in volume and value share.
Overall, second quarter results in North America were as expected, as unit case volume declined by 2%, factoring 2% growth in the prior year quarter. Of course, I am not satisfied with these results and continue to work closely with Sandy and the North America team and all our bosses to address these issues.
Our actions in the quarter clearly reflect our commitment to the North America business. We understand the challenges and are actively addressing our portfolio’s performance and working with our bottlers to develop a system that’s geared to execute and win with our consumers, customers, partners and suppliers.
In the second-half of 2007, we expect to see sequential improvement and evidence of progress as we execute against our key goals. My third priority is productivity.
Our strategy is simple. First, organize around critical capabilities that drive our top line growth.
Those are consumer marketing, commercial leadership, and franchise leadership. We’ve begun to delayer the organization to drive speed to market and clearly defined roles that drive results.
Our international operations have already been successfully realigned, reducing 80-plus fully functional offices into 42 business units. North America realignment and functional operations are set to support the field operations.
We’ve also initiated programmatic management of spending areas to drive effectiveness and efficiency. We are leveraging our scale across several areas, including supply chain, IT, marketing, travel, policies and telecommunications, just to name a few.
As we reinvigorate the organization and as we realize the productivity gains, we will selectively reinvest behind our three pillars to drive further top line growth. My fourth and last priority is compressing the innovation pipeline.
One exciting example is our Coke side of on-the-go initiatives. Our innovation here is intended to drive occasion incidents, recruit consumers with value added and unique packaging while improving our revenue mix.
The Coca-Cola contoured grip bottle has hit the marketplace with launches in China, Korea, Brazil, Mexico, Argentina, Chile and Turkey, among other countries. It will reach an additional seven countries by the end of the year.
In markets such as China and Korea, the package is driving growth in single serve and improving brand health scores across the board. In the coming months, we’ll be adding other equipment and package innovations to drive on-the-go consumption, such as the super chill cooler, which is testing on three continents and a unique resealable cap for our offerings.
We continue to innovate in marketing also. Earlier, we discussed innovation in efficiency we’ve developed around Trademark Fanta.
We also launched this quarter Sprite Yard, a leading edge digital community that gives consumers access to social connection and downloadable content via their mobile phones. Initially introduced in China, you can now access it in the United States.
We continue to drive innovation in our product portfolio. In Germany, we launched Vio, a still water leveraging the Apollinaris plant equity and in Turkey, we launched the Damla Spring Water brand.
In Turkey, we are now competing across the range of beverage occasions with a robust portfolio brand. In Japan, we successfully introduced Aqua Therapy MINAQUA, a line of natural mineral in flavored and functional offerings in order to increase consumption opportunities.
This launch led to value share gains in the water category for the quarter. Also in Japan, we launched Patissiolle, a premium chilled coffee in a proprietary aluminum package.
We will continue to strengthen our pipeline of products and packages while maintaining a broad and deep definition for innovation. In summary, Neville and I are both very pleased with these results and we’ve made significant progress against our 2007 priorities.
Our strategic agenda, built on the manifesto for growth, is focused and the year-to-date performance is the proof of that. The third quarter is critical as we experience the heat of this summer season.
Every day, each employee around the globe is tasked with winning in the marketplace and we are doing so. We know there will be bumps and there is much work to do but I am really certain our work will create long-term sustainable growth and value for our shareholders.
Now let me turn the call over to Gary. Thank you.
Gary P. Fayard
Thanks, Muhtar and good morning. As Neville and Muhtar indicated, we delivered another quarter of very strong financial results.
As you saw in the release, we reported earnings per share of $0.80 per share on a diluted basis for the second quarter, an increase of 3%. This included a net charge of $0.05 per share.
Approximately $0.02 was related to restructuring charges and an additional $0.03 was related primarily to a non-cash adjustment related to Coca-Cola Amatil in their Korean bottling operations, which they are in the final stages of selling. Our adjustment will differ from any adjustment made by Coca-Cola Amatil due to differences in U.S.
GAAP and international accounting standards. But clearly this adjustment was accounting related and in no way impacts on the value of our investment in Amatil.
Therefore, our adjusted earnings per share was $0.85, an increase of 15% after considering items impacting comparability in both the current and prior year. In addition, we lowered our expected underlying effective tax rate on operations for 2007 and for 2008 to 22.5% from the previous estimate of 23%.
To bring the effective tax rate for the year in line with the current estimate, we recorded income tax expense at a rate of approximately 22.2% in the second quarter, which resulted in a tax benefit of $0.01 for the quarter. Additionally, the quarter included a timing benefit as year-to-date concentrate sales are slightly ahead of reported unit case sales.
We would expect this benefit to reverse as we move through the second-half of the year. Net revenue in the quarter increased 19%, which included a 7% benefit from structural changes related to our acquisitions of certain bottlers.
Excluding the impact of structural change, revenue growth was 12%, driven by a 7% increase in concentrate sales, a 3% increase from currency, and a 2% increase from price and mix benefits. We grew operating income by 12% on a reported basis.
After considering factors impacting comparability in the current and prior year, operating increased 12%, which includes a 3% benefit from currency. On an ongoing currency-neutral basis, we grew operating income 9%.
SG&A increased 17% in the quarter, so let me take a minute and walk you through the increase. About 10 points of those 17 points of the increased was due to bottler acquisitions, increased selling and service expenses in our consolidated bottling operations and behind acquired brands as we invested for growth and as well as currency.
For the remaining seven points, we are cycling favorable timing of G&A expenses from the prior year and the remaining increase reflects continued solid investments behind our brands, as well as controlled G&A expenses as we continue to focus on productivity and expense management. So while reported operating margins are 29.4%, they are reflecting a significant impact due to the bottling investment group and bottling acquisitions.
Underlying margins on the core business remain healthy and are improving as we drive top line growth and operating expense leverage. We repurchased approximately $1 billion of our stock year-to-date and we still expect to repurchase between $1.75 billion and $2 billion in 2007.
As Neville said, cash from operations year-to-date increased 19% on a strong underlying business performance and a decrease in working capital, primarily as a result of cycling accruals related to higher net taxes paid last year related to tax repatriation. Now, let me address some of the factors that we see impacting the company for the remainder of 2007.
We remain relatively positive on the macro economic outlook for the remainder of the year, especially in many of our emerging markets. We will continue to manage our portfolio globally as we expect solid performance in most of our markets.
While we feel confident in our progress, as Muhtar indicated Europe does have a tough hurtle in the third quarter given the favorable weather, Coke Zero rollout, acquisitions and the residual World Cup benefits, but we’re very happy with the performance of Europe that we’ve seen thus far in the second quarter. Additionally, we’ll have the impact of the reversal of the first-half timing benefit of concentrate sales.
As with the first-half results, 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, as Muhtar noted the quarter’s results were ahead of our expectations due to solid integration planning and we now expect volume to be slightly positive for the second-half.
However, from a profitability standpoint, we would still expect a $0.02 per share reduction for 2007 as we invest to return the business to health and growth. As for items below the operating income line, I would like to remind you that we still expect net interest costs to increase primarily due to lower cash balances and higher debt balances due to share repurchase, dividends, capital spending and acquisitions.
As we previously disclosed, in the fourth quarter we will pay for the remaining approximately 30% of glacéau, which will further increase interest expense. We still expect the transaction to be $0.01 to $0.02 dilutive for earnings per share in 2007.
From a CapEx standpoint, as we stated last quarter, we expect the total company’s net capital expenditures for 2007 will be about $1.6 billion as we make investments in recently acquired bottling operations. Now let me move to currency.
As I mentioned, we saw a positive impact from currencies for the quarter on operating income of 3%, as benefits from the Euro and the Pound are being partially offset by weakness in the Yen. We are effectively covered for the full year on the Yen and the Europe.
Based on current spot rates and the expected impact of the coverage in place, we expect a low single-digit benefit from currency for the full year 2007 results. That’s it for the topics I wanted to cover.
Operator, we’ll turn it over for questions.
Operator
(Operator Instructions) Our first question will come from the line of Mark Swartzberg with Stifel Nicolaus.
Mark Swartzberg - Stifel Nicolaus
Thanks, Operator. Good morning, everyone.
A couple of questions, two related questions on Europe; firstly, Gary, I’m not sure I heard right -- did you say you’re pleased with performance thus far in the current quarter or year-to-date through second quarter? And then a more fundamental question.
Gary P. Fayard
Yes, year-to-date through the second quarter. If you look at the second quarter, they had good growth and they were cycling world cup, Coke Zero launches and some great weather last year, so Europe actually had a very good second quarter.
Mark Swartzberg - Stifel Nicolaus
And then, Muhtar, or any of you, really; looking out, at what level is it a disappointment? By that I mean am I correct in assuming that you guys think you are going to see a small decline in your European volumes in the second-half, or at least the third quarter?
Muhtar Kent
First, as Gary said, we are pleased. All the programs that were put into place, both in sparkling and still beverages, are working.
We’ve maintained volume and gained value in sparkling beverages in the second quarter, gained slight volume and value share in the still beverages. I think we are executing across big bets all around across the whole continent in Europe and we’ve, as Gary said also, we’ve cycled the World Cup.
We now have a hurtle also in the third quarter. As you know, we’ve launched Coke Zero very successfully last year in some key markets in the third quarter, which we will be hurtling, but that doesn’t necessarily mean that we are expecting a decline.
There is no issue in terms of us having a decline just because we are recycling some tough programs from last year. As we showed in the second quarter, we’ve recycled both warm weather and we’ve recycled the World Cup, very successful World Cup promotions across many, many markets in the EU.
Neville Isdell
Mark, I’d just like to add a repeat of the comment I made; as we see the sequential growth in North America and you’ve seen this consistently over nine quarters, how you have to look at the balance as you get good weather, one area you get maybe it changes another, and it’s balanced growth that we’re talking about and we see that balance is going to continue. But I agree with all of Muhtar’s comments, specifically about Europe.
Mark Swartzberg - Stifel Nicolaus
Thank you, gentlemen.
Operator
Your next question will come from the line of Bill Pecoriello with Morgan Stanley.
Bill Pecoriello - Morgan Stanley
Good morning, everybody. I wanted to get a little more detail on the productivity savings.
Last quarter you had spoken about three buckets and in your comments today, you mentioned that you had already begun international delayering and you are in the planning stage on North America. So if you could put any numbers behind that in terms of the savings potential and then update us on the timing, the status on the other two buckets that you had been talking about last quarter.
Thanks.
Muhtar Kent
Bill, good morning. I think what you need to do is look at these in terms of short-term, what these efforts are in -- and then really how we organize against the three pillars, both in the short-term and also in the medium-term and the long-term.
The alignment work across our organization initiated last fall was to bring all our resources, people, time and financial into line with our marketplace strategic plans. We’ve moved the percentage of our organization facing the value creating functions of consumer marketing franchise and commercial leadership from the very low 30s to over 40% and sharpened our focus on placing our capabilities, so it’s not just around saving money in terms of the re-architecture but also around how we go to market, how we can execute, and how we can also take decisions faster with more effectiveness, and that’s the result of -- has been that we’ve also gone from a fully functional 80-plus offices to 42 business units.
What that means is that as before where all our functions were represented in more than 80 offices, now the three key functions are represented in those offices and then 42 business units have all the other support functions. So that’s really absolutely creating effectiveness.
And then also, in the short-term supply chain, we had programs to reduce the number of package variations, product formulations, ingredient variations and now I referred to some of those effectiveness programs around the Fanta campaign, around the Coke Side of Life campaign. For example, our Fanta brand alone has over 150 formulas around the world.
We see lots of opportunities there. Again, in the short-term, looking at telecommunications, travel and entertainment and then next are the medium-term, company-specific initiatives that Neville and I have asked Gary [Inirio] to unlock value within our indirect cost systems.
There are many work streams going around in this area. Lastly, more longer term, system initiatives that will benefit both our bottling system as well as the company, is really looking holistically at the $60 billion supply chain system around the world and the bottlers, our bottlers across the world have done really an excellent job in many, many respects.
It can be seen as an improvement in their returns and we’ve already experienced success in global procurement of key inputs, as well as in Japan with the supply chain management company. We’re using those lessons to build similar models in China and Mexico and other markets as we gain scale in still beverages.
But there’s still significant room for improvement across the system. There is an opportunity to leverage the common IT platform, which will leverage our system and create effectiveness.
With most of the system on SAP, we now must identify best modules, standardize definitions and this really has a longer term horizon. So that’s really what I wanted to say on the productivity initiatives.
There’s a number of initiatives both on the short-, medium-, and long-term and it’s too early for us to put an exact number on the savings but as you know and as I’ve outlined, there are savings coming through.
Neville Isdell
Bill, I just want to go very broad on this. Two years ago we were talking and taking questions on the manifesto.
What did that mean and everyone’s looking for a number about how that is going to change the top line and how that is going to give us some operating leverage, et cetera. One of the key elements within that, everything’s been sequenced, one of the key elements is this whole issue of productivity and that’s now where we’re focused but as Muhtar said, it’s too early to give you a number but again, the emphasis is not just on what we can save.
The emphasis is how we can take the bureaucracy out, how we can be much faster in terms of execution. I think you are seeing that.
We are not where we need to be with that but what that does is drives the top line growth. That’s what you are seeing.
So you have to look at all of this in a very broad context and seeing all these little pieces starting to fall into place.
Bill Pecoriello - Morgan Stanley
Thank you very much.
Operator
Your next question comes from the line of Bryan Spillane with Bank of America Securities.
Bryan Spillane - Bank of America
Good morning. I guess a follow-up to Bill’s question; in thinking about the delayering, just two points I would like to get some comments on.
First, over time, Coke as a company has gone back and forth in terms of being very centralized and then moving to be very decentralized, so I guess do you see decision-making being more decentralized at this point, given where the organization structure is going? The second is in terms of your relationship with the bottlers, do you see yourself now having a more active involvement with the decisions that the bottlers are making day to day or are you, will you be stepping back and will the bottlers be more active in their decision-making?
Neville Isdell
Bryan, first of all, in terms of whether we’re centralized or decentralized, and I answered this question I guess two-and-a-half years ago and I said we want to stop the pendulum somewhere in the middle and that’s exactly what we’re doing -- stopping the pendulum somewhere in the middle. But what we have done, and this doesn’t take us one way or the other, is we’ve taken out layers that actually didn’t add significant value.
There were too many fingerprints on decisions. So the focus, what Muhtar has done is he’s taken the organization and the focus on execution -- you hear him talking about execution -- into each of these individual units.
Therefore, when you go then to the centralized services that are provided, they are provided at a higher level and that takes cost out but also makes it more efficient. That is really a balance between centralized and decentralized and that’s where we are going to remain.
The pendulum is not going to swing from one side to the other. I understand your concern because that tends to throw the organization into a state of flux and I think you’ve seen us undertake this with an acceleration of growth at the same time, and that’s because it’s been very well-managed and very deliberate in terms of the way that we’ve done it.
Full credit to Muhtar and his group presidents in terms of how they’ve managed to do that. The second piece is with regard to the bottlers.
Again, we are talking about the balance in the middle. You remember the time when the view was that there was a division between what the bottler did and what the company did and basically the bottlers would be the people who did the execution and we’d be the people who do the strategy and that conflict would be minimized by less direct engagement.
Equally, there’s been a time when we try to manager the bottlers in -- and I’m talking about the franchise bottlers because obviously we’ve got our own large bottling unit today -- in excruciating detail. That’s not the way to do it.
Again, it’s the sort of passing on of the executional side that you see in our operations with regard to the bottling system. Again, it is somewhere in the middle but clearly we run half the business, they run half the business.
If we are not sitting down around the table deeply involved about how we put each of our programs into action and doing it in a coordinated, integrated way, then we won’t be successful in the marketplace. And that’s what you see again, that’s what you see us doing.
Muhtar Kent
I would just like to add one comment on each of those areas, Bryan. I think in terms of how we work inside the organization, this will help you maybe think about it in more granular terms.
It’s like a freedom within an agreed framework. All the business units and all the groups around the world we have worked within an agreed framework, which is really a result of intense discussions with final agreements and how that is structured, and then there is freedom inside that framework.
And that really has created a very good operating framework for us to move fast, with effectiveness, with speed in terms of how we take decisions and how we work with bottlers. And that comes with the second point, franchise leadership is identified as one of the key pillars in how we work and as bottlers financials are improving, as volume is accelerating across the sparkling core category, there is an increased appetite for bottlers to also invest for growth, for sustainable growth and that really brings joint planning and the long-term approach to the business, is the sustainability of the growth.
I think there’s no issue in terms of who takes the decisions. The decisions are really taken jointly out of an agreed plan with our bottlers.
Bryan Spillane - Bank of America
Thank you.
Operator
Your next question will come from the line of John Faucher with J.P. Morgan.
John Faucher - J.P. Morgan
Good morning, everyone. A quick question on glacéau; it seems as though we are seeing a ramp-up on the ad spend here, so a couple of quick questions in terms of it looks as though the distribution has been gaining pretty rapidly in large format storage.
You’ve still got some bigger holes there. Are you seeing this move to more of a marketing base strategy?
If so, where are you in terms of ramping up the investment there? What do you have built into your forecast and how does that change how you look at the overall split of system profit?
Muhtar Kent
Firstly, John, good morning. This is not really a plan that has changed in any way or form after glacéau has been acquired.
The plan to start advertising was already in place inside the glacéau plan and the management of glacéau, led by Darius Bikoff, had already made all the plans, had already put all the plans together to start ramping up advertising because they believe that they were not getting the scale and they were not getting the distribution across the country and that it would make sense for them to start some consumer marketing before because it was mainly very localized marketing up to now, up to this year. So that’s not in any way a plan that has really been changed as a result of the acquisition and everything is proceeding according to the original plan.
As I said in my earlier comments, glacéau is performing better than expectations and distribution continues to ramp up across the country, horizontal gains and improvements in both geographic expansion, channel expansion and also the velocity is growing where the distribution exists. So I don’t see any -- we just see the continued progress in that respect.
John Faucher - J.P. Morgan
Okay, thanks.
Operator
Your next question will come from the line of Christine Farkas with Merrill Lynch.
Christine Farkas - Merrill Lynch
Thank you very much and good morning. I’m wondering if I could dive a little bit into North America and Latin America -- specifically, the top line growth at North America, can you tell us with respect to the contributions from price and mix and acquisition and also if the slower water growth is actually helping your top line mix?
And then, in Latin America you’ve talked about reinvesting there and we saw margins contract. Is this a near-term program or do you expect this kind of spend to go on for the rest of this year?
Thank you.
Muhtar Kent
As far as North America is concerned, there hasn’t been much impact from acquisitions. Obviously glacéau has been really -- therefore -- three, four weeks, three-and-a-half weeks.
There’s the acquisition of Fuse was completed at the beginning of the quarter so the revenues are up mainly from also our success in the juice business. So we don’t really see a very big impact from the acquisitions but there has been, of course, price mix benefit in how the pricing has gone up as a result of the increases in raw materials.
So essentially, we don’t really see too much of an impact from the acquisitions inside the quarter. As far as Latin America is concerned, it has really had again very, very good solid performance across the whole market and we have completed the acquisition of Matte Leao and basically we’ve had very, very good mix in Latin America and expect to really continue the momentum in Latin America, as you’ve seen in the first two quarters of this year and also across the board in 2006.
Christine Farkas - Merrill Lynch
And the margins in Latin America, they were off or contracted versus a year ago. Is that because of the mix of product in terms of juice versus soft drinks, or there was some reinvestment program to boost the top line?
Muhtar Kent
I think you’ve seen us launch many still beverages. There’s been an investment in the Coke Side of Life and also launches of Coke Zero, but also launches of still beverages across many markets, launches of enhanced water and, as you know, when you have launches of new products initially there is some investment up front but we don’t see that as any sort of dislocation on our general margin structure in Latin America at all.
Christine Farkas - Merrill Lynch
Okay, great. Thanks a lot.
Gary P. Fayard
Let me go back on North America on revenue and let me just -- I’ve got a reconciliation so let me just give it to you. Gallons were down 1, our concentrate sales were down 1, pricing was a positive 2, acquisitions were a positive 3, and then mix was a positive 5.
That gets you to a 9% reported net revenue growth rate.
Christine Farkas - Merrill Lynch
That’s very helpful.
Neville Isdell
Christine, just one follow-up; you mentioned water and we are with water looking at water as more of a value proposition than a volume proposition. I think you will see in the quarter for North America that in fact, as we dial down on Danone Water, the low margin end of it, that that effective volume, they are going to bleed by about almost one percentage point in North America, but it has increased margins.
Globally, I think you’ll see that as well as we start trading up with water and also as we roll out glacéau internationally as well.
Christine Farkas - Merrill Lynch
Thanks a lot, Neville.
Operator
Your next question will come from the line of Matthew Reilly with Morningstar.
Matthew Reilly - Morningstar
Good morning. Given that you’ve almost doubled long-term volume growth guidance through the first-half of the year, I think you said it was the highest level since 2000, should we expect a significant deceleration going forward as some of these comps are lapped?
Or is the current pace of growth, especially internationally, sustainable?
Neville Isdell
The emphasis I’ve always had is on sustainable growth. We believe we are showing sustainable growth.
At the same time, I’ve always said don’t judge us by one quarter, that you hit bumps along the road. What you are really asking, I know -- in fact, I want to challenge you; we haven’t actually changed our model.
What you are really asking is are we going to change our model overall? The model is something we review on an annual basis.
We don’t review it quarter to quarter and therefore, the model that we have in place that we’ve given to you, the growth targets, we’re not going to revise them at this point in time. We do it annually with the board.
It’s at the end of the year and we’ll do that in the normal way as we look at our three-year plan going forward. So I’ve really got no update with regard to you on that but I think we’ve got momentum and I think you are going to see that that momentum is going to continue.
The long-term -- are not a limit on performance. I have given up consistently saying our goal is to exceed our targets.
That’s what out-performers do and that’s what we are continuing to do and that’s what we are going to continue to do. We don’t make onward projections.
I am not going to tell you to what degree that’s going to happen but I would not run straight arithmetic over it. Thanks.
Operator
Your next question will come from the line of Judy Hong with Goldman Sachs.
Judy Hong - Goldman Sachs
Good morning, everyone. I actually had a couple of follow-up questions on glacéau.
Firstly, I recognize that you haven’t come to a final determination of what the appropriate distribution model would look like but I’m wondering if you could provide any additional color as far as how you think about the hybrid model, sort of the mix of current versus the Coke bottlers, and then how you think about splitting up the system pool that could benefit the Coke shareholders? Secondly, you comment about the glacéau acquisition acting as a catalyst to drive better growth in North America.
Can you just elaborate on that comment in terms of whether you envision some of your non-premium, the premium non-carb brands actually benefiting as a result of the acquisition going forward?
Neville Isdell
Judy, let me give you a headline comment and I’ll hand over to Muhtar to give you a little more granularity. You heard in my introductory comments that I was very clear about the fact that we believe we are going to get significant returns on our glacéau investment.
That’s why we bought it for the shareholders of The Coca-Cola Company. I think you are going to see that as we go forward.
We also put in a very clear structure in terms of keeping the management of glacéau, who have handled it so very well in the past, in place. We emphasized that on all of the calls that we made at the time of the acquisition, to the degree that we transferred Powerade to them.
Therefore, they are going to help work together with Muhtar on finding the best route to market as we go into the future. The distributors have built the business.
They’ve done a great job and therefore we expect a hybrid system in the future. How that’s going to unfold, I’ll let Muhtar give you a little more granularity but it’s not there in complete detail.
But I just want to emphasize that we had a really clear view that we were acquiring great management together with this acquisition and we are leaving that management to work with us in terms of fulfilling the goals that they have, which are obviously aligned with ours, in terms of extracting significant value for our shareholders. Muhtar.
Muhtar Kent
In fact, just to build on from where Neville left, in fact, we made the decision also to move Powerade under that management, to take advantage of the speeds, entrepreneurial spirit, the focus that that glacéau team will bring. Of course, we are pleased with the performance of Powerade.
But going back to distribution, we have a team I place dedicated to managing the transition into the Coca-Cola System. The team will be focused on making sure that the essence and the culture of glacéau is preserved while leveraging the capabilities and the strength of the Coca-Cola system.
As I said, the final result will probably be a hybrid. We are discussing with current glacéau distributors and our bottling partners.
There’s tremendous enthusiasm from our bottling system and basically, we continue to work with current distributors and bottlers to develop the right route to market channel by channel and market by market. I think distributors have contracts in place that are offering a fair return to glacéau and the distributor and we expect that any volume that actually is transferred to our bottlers will be under similar terms.
Gary P. Fayard
Let me add one thing to that as well, because to follow-up on something Muhtar said earlier, he was referring to the international business but as part of that is just with the growth we are seeing in the international business, we saw the bottlers are enthusiastic, they are making more money and therefore, they are investing behind their brands and we are all benefiting from that and growing. What you see with glacéau is an opportunity for our U.S.
bottlers who are very excited, as Muhtar said, to be able to, to the extent that we transfer, to take that and invest behind not only glacéau but continue to invest behind our other brands and really drive the entire portfolio of brands for the benefit of the entire system.
Judy Hong - Goldman Sachs
Thank you.
Operator
Your next question will come from the line of Bonnie Herzog with Citigroup.
Bonnie Herzog - Citigroup
Good morning, everyone. I just actually have a big picture question for all of you, and that is you certainly sound quite confident, given your impressive performance over the past few quarters, which is great.
But as you think about it going forward, can you share with us what concerns you the most about your strategy? In other words, what do you believe are the greatest potential risks that you face?
Neville Isdell
Bonnie, that’s a good question and I would say that there is nothing major that we are concerned about. But it really is to do with continuing to get faster to market, continuing to do what Muhtar mentioned about getting the innovation pipeline moving quicker and our own, ramping up our own internal abilities as an overall system.
So it’s an impatience with regard to speed rather than anything that we see that’s major in the external environment. Now, the external environment is one which will always, always deal us a bad card now and again and some of them are small.
You saw the write-offs that we had to take in Zimbabwe, for example. That’s going to happen.
You are going to have a quarter where the weather is bad. You are going to have a quarter where the weather is really superb.
That’s all that we are signaling. Don’t judge us quarter by quarter but look back over the last nine, 10 quarters and look at how we’ve been consistent and you’re going to see that going forward.
There is nothing that I can highlight that’s major, that we have a large concern about but we’ve got to watch to see what comes from the left or the right-hand side, which is totally unexpected and that will be something none of us have seen, I’m sure. So that’s really the answer.
Bonnie Herzog - Citigroup
Thank you.
Operator
Your next question will come from the line of Robert Van Brugge with Sanford Bernstein.
Robert Van Brugge - Sanford Bernstein
Good morning. Your year-to-date margins in your company-owned bottling group are down slightly from last year.
Do you still believe you can get these margins up to worldwide bottling standards over a multi-year period?
Gary P. Fayard
Thanks for the question. We were having an internal debate before the call on whether I added this into the script or not, and Ann said no, someone surely will ask you about Bottling Investment Group margins, so let me give you a couple of data points on their margins, and the answer is yes, we still have very high expectations for the bottling investment group.
But there’s a big impact within the bottling investment group around Zimbabwe and some -- a bottler that we own in Zimbabwe, everyone knows the economic and political environment within that country, and we took a restructuring or an impairment charge there but we also took some charges that actually hit the P&L that is not broken out as restructuring or impairment or a non-recurring type item that are inside the P&L. They are one-time.
It is 10 points of growth on operating income within Bottling Investments, all related to Zimbabwe, all related to this quarter and this quarter only and in fact, our investment now is zero so there’s no further exposure. So I would say if you look at year-to-date results and if you look at full year, we still have very high expectations for bottling investments.
Robert Van Brugge - Sanford Bernstein
Great, thanks.
Operator
Ladies and gentlemen, this concludes the question-and-answer portion of today’s call. Are there any closing remarks?
Neville Isdell
Yes, I would just like to thank you for joining us this morning. I want to reemphasize that we are confident that our strategies are working and as you’ve heard from Muhtar, that leadership is focused on the fundamentals that are going to drive our results, execution in the marketplace, and an outward focus on our customers and our consumers, and of course ongoing diligence with capital allocation.
We remain committed to creating sustainable growth. That’s a word you are going to keep hearing me say, and creating incremental value for our shareholders.
Thank you very much indeed.
Operator
Ladies and gentlemen, this concludes The Coca-Cola Company’s second quarter 2007 earnings results conference call. You may now disconnect.
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