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Coca-Cola Hellenic Bottling Company S.A (NYSE:CCH)

2Q 2010 Earnings Call

July 29, 2010 12:30 pm ET

Executives

George Toulantas – Director, Investor Relations

Doros Constantinou – Chief Executive Officer

Robert Murray – Chief Financial Officer

Analysts

Lauren Torres – HSBC

Andrew Holland - Evolution Securities

Jason DeRise - UBS

Matthew Jordan – Matrix

Lambros Papadopoulos - Citigroup

Nik Katsenos - Alpha Finance

Margaret Kalvar - Harding Loevner

Costas Theodorou – Cheuvreux

Operator

Thank you for standing by ladies and gentlemen and welcome to the Coca-Cola Hellenic conference call on the 2nd quarter 2010 financial results. We have with us Mr. Doros Constantinou, Chief Executive Officer, Mr. Robert Murray, Chief Financial officer and Mr. George Toulantas, Investor Relations Director. At this time all participants are in a listen-only mode. There’ll be a presentation followed by a question-and-answer session. (Operator Instructions)

I must advice you that this conference is being recorded today Thursday, July 29, 2010.

We now pass over the floor to one of your speakers Mr. George Toulantas please go ahead sir.

George Toulantas

Thank you operator and we appreciate each of you for joining us today to discuss our second quarter and first half 2010 results.

Before we get started I would like to remind everyone that this conference call contains forward-looking statements including long-term volume and earnings projections. These should be considered in conjunction with the cautionary statements contained in our related news release and the company’s most recent filings copies of which can be found on our website at coca-colahellenic.com.

With us this morning is Doros Konstantinou our Chief Executive Officer and Rob Murray our Chief Financial Officer. Following their prepared remarks we will then open the call for your questions.

Let me now turn the call over to Doros.

Doros Konstantinou

Thank you George and thank you to every one for joining our call today. I am pleased with our second quarter, first half 2010 results which demonstrate the resilience of our business to withstand continued economic challenges across a large part of our geography.

While volumes declined 2% in the first half the benefit of our already efficient initiatives, higher pricing and a favorable currency effect enabled us to grow comparable profits by 3%.

Our comparable earnings per share of $0.55 in the first half of 2010 was in line with last year although this also includes a $0.06 adverse impact from the source on our tax which has been imposed on great companies for the seventh consecutive year.

Rob will provide further details on this as well as our overall financial performance shortly.

Our results in the second quarter reflect the continuing difficult consumer environment in some of our key markets as well as poor weather conditions in parts of Central and Eastern Europe during April and May.

These led to a volume decline of 2% in the second quarter with solid performances in Switzerland, the Czech Republic and Russia more than offset by volume softness in key markets including Greece, Italy, Romania and Poland.

In addition, the earlier timing of these earnings of 2010 benefited our Q1 results at the expense of Q2. However during the quarter we also witnessed encouraging signs of improved trading conditions in several of our markets including Russia. This gives us grounds for some optimism and demonstrates the benefits of operating across a highly diverse geography.

While stock in beverages declined 3% in the quarter, Coca-Cola trademark products grew slightly supported by successful marketing programs and strong activation of the FIFA World Cup event particularly in future consumption channels.

The resilience of the Coca-Cola brand was evidenced by cog zero which grew 4% with high single digit brand growth in both our established and developing segments. This growth was offset by volume decline of the Fanta brand. However, we expect Fanta to benefit from future investments in sampling programs and the formulation of Fanta Orange and Lemon which have already been successfully introduced in several countries.

Overall the sparkling beverage category continues to remain essential focus of our marketing plans both for the remainder of the year and into 2011.

With rising taxation and high unemployment placing ongoing pressure on households’ disposable incomes in several countries, we continue to witness a first channel mix as consumers will choose spending in immediate consumption channel.

As a result the volume of single served packages declined by 4% in both the second quarter and first half of the year. A shift in marketing mix towards increased activation and promotional activity in larger form at retail stores has resulted in volumes of multi-serve packages declining by only 1% in both periods under review.

Despite ongoing economic concerns, we remain strongly committed to investing in our brands and the market place to deliver long-term sustainable growth for our business. Together with The Coca-Cola Company we are implementing channel-specific promotional programs and new flavor and packaging innovations to ensure our brands and packages remain highly relevant to consumers in the current environment. This enables us to maintain or gain share in the non-alcoholic budget drink category across the majority of our markets in the first half of the year.

The difficult economic conditions are most evident in our established segment where volume declined by 5% in the quarter. The effect of austerity measures in Cyprus and Greece and Ireland continues to negatively impact consumer spending in these markets.

The challenges in Greece are further compounded by pressure on the tourism sector which is contributing to faster volume decline over our more profitable single-serve package in this country.

With consumer confidence at a ten-year low and unemployment rising to 15% in Greece we expect a non-alcoholic ready-to-drink category to remain under considerable pressure for the remainder of 2010.

In response to heightened demand for value by consumers and increasing discounts by competition we have increase the level of promotional activity in Greece. These higher investments combined with limited price in realization is supporting our strong category leadership positions although it is expected to result in a contractual in operating margins in Greece in 2010.

In Italy our volume performance in the quarter was impacted by unfavorable weather conditions in May and early June as well as the earlier timing of Easter this year. We’re also witnessing increasingly challenging conditions in the country resulting in reduced spending by consumers in immediate consumption channels.

Volumes in Switzerland continue to benefit from the listing of our products in Migros the largest grocery retailer in the country and contributed to further volume and share gains in the quarter.

In our developing markets, volume declines in Poland, Hungary, Croatia and [bothy] countries were only partly offset by growth in the Czech Republic and Slovakia.

In the quarter, strong activation of marketing programs supported moderate growth of Coca-Cola branded products with code zero up an impressive 10%. However, our volume performance in this segment was negatively affected by unfavorable weather and in the quarter across several countries as well as the early timing of Easter.

In Poland severe flooding and retail outlet closures for six consecutive weekends in April to mourn the death of the country’s president also waded on volumes in the quarter.

Despite volumes declining 3% in the developing segment in Q2, a return to more normalized trading in June resulted in volume growth across the majority of these countries in the month.

In the quarter we witnessed mixed volume performances across our emerging markets segment. Volume growth in Russia and Nigeria was offset by ongoing economic challenges in Romania and Bulgaria resulting in a volume decline of 1% in the Polar segment.

The deteriorating economic conditions in Romania and Bulgaria are expected to leads to further head winds in the back half of the year as austerity measures continue to erode real disposable incomes and reduce consumer spending.

Encouragingly, volume in Russia grew in the mid single digits in the second quarter representing improved momentum on the first quarter and bringing volume growth to 3% on a year-to-date basis.

As a system we are capitalizing on positive signs of a steady economic recovery in the country. Successful activations of the FIFA World Cup event and an extensive sampling campaign reaching over five million consumers supported sparking category growth of 9% in the quarter. These activities particularly benefited branded Coca-Cola…brand Coca-Cola which increased 19% in the second quarter.

In Russia we also witnessed a return to volume growth in the juice category with the [double] brand up 10% in the quarter.

Now looking ahead we expect trading conditions in several key markets to remain challenging in the second half of the year as high unemployment and country fiscal deficits concerns continue to weigh on consumer sentiment and spending.

However we are encouraged by the improved trends in some markets and the market share gains we have achieved and believe we are executing the right strategies to sustain our strong leadership positions in the marketplace.

At the same time we are also maintaining a tight focus on cost management and have identified additional cost reduction opportunities to support future profitable growth. We expect these actions to further enhance our competitiveness in future years.

Despite taking difficult decisions that have impacted our people over the last couple of years, I am pleased to report that in a recent survey conducted the entire group, our overall level of employee engagement increased. I believe this is a testament to the dedication and ability of our teams to manage our people in what is a difficult environment.

Finally, our strong cash flow generation continued in the first half giving us the confidence to reiterate our earlier guidance of €1.5 billion of free cash flow from 2010 to 2012.

As always we remain committed to optimizing the use of our cash to ensure we’re delivering enhanced value for our shareholders.

And with that let me now turn the call over to Robert.

Robert Murray

Thank you Doros and hello everyone. In line with usual practice as I take you through our results I will refer to comparable financials which exclude any restructuring costs as well as insurance payments received in 2009 related to our Nigerian operations.

For clarity the amount of the extraordinary social contribution tax in Greece approved in Q2 has not been recognized as an exceptional item and so this reduces our comparable figures by €21 million in both the second quarter and the first half of the year.

We consider this prudent treatment to be appropriate given the government has indicated that the tax will apply through the end of 2012. I will discuss the impact this is expected to have on our 2010 and medium term effective tax rate shortly.

Now let me discuss our second quarter financials in more detail. Our business delivered net revenue growth of 2% was a favorable currency translation effect of 4% basically offsetting a 2% volume decline.

Our total price mix for the quarter was increasing pricing offset by negative category in channel mix. On a currency neutral basis revenue per case was stable with our established markets declining by 2%, developing markets down 6% and emerging up 4%.

Our currency neutral cost of goods saw a decline by 2% in the quarter driven by moderately lower commodity costs and productivity improvements in manufacturing. While we have fully hedged our [aluminum] and sugar requirements for the full year, we expect increased moderate pressure in the second half of this year primarily driven by higher resin prices.

However this was largely anticipated at the time of our first quarter results so our guidance for slight increase in commodity costs for the full year remains unchanged.

Looking forward towards 2011 we have broke covered on sugar and aluminum and expect only minimal increases. At this stage we’re expecting increased price on resin and juice but we plan to update you further as we go through the year.

At the gross profit line our margins rose by 30 basis points in the quarter while on a currency-neutral basis gross per case was even. Our APEX per case on a currency-neutral basis was up $0.03 or 4% resulting from increase in sales cost in the quarter. This was primarily driven by higher wages in particular in Russia and Ukraine as we cycle the wage freezes implemented last year.

In addition we have also increased our bad debt provision in Greece and Italy. We continue to maintain a strong cost discipline across the organization to drive long-term profitable growth and competitive advantage for our business.

As a result we’ve identified further significant cost savings and efficiency opportunities across our countries with the total cost of these restructuring activities now expected to range between €25 million and €30 million. Of this amount around €5 million is expected to be non cash.

In the first half of the year we incurred €5.7 million of pretax restructuring costs with €4.6 million in Q1 and €1.1 million in Q2. We expect this initiative to benefit our 2010 operating profits by about 6 million and provide annualized benefits between €20 million and €25 million from 2011 onwards.

Our operating profits for the quarter declined by 2% and was 9% below the prior year on a currency-neutral basis. Around half of this decline comes from higher depreciation which primarily reflects faster depreciating rates…depreciation related to our [SAPF] investments compared with plans and [cougar] equipment.

In fact this is demonstrated by our solid EBITDA growth of 3% in the quarter and EBITDA margin expansion of 20 and six basis points in the quarter and the first half respectively.

Foreign currency movements benefited our operating profit in the second quarter by €25 million. This was split equally between transactional and translational impacts which was broadly in line with the trend we expected for the full year.

Assuming current sport rates we reiterate our earlier guidance per circa €50 million positive impact form currency to our 2010 operating profits.

I would now like to take a minute to update you on our outlook on tax and finance costs. Our tax expense increased by around €19 million in the quarter almost fully reflecting the amount of the extraordinary tax in Greece. This contributed to an effective tax rate for the first half of the 28% compared with 22% in the prior year period.

Looking forward, a separate new tax on distributor profits in Greece will materially burden the profit of Greece companies who pay off dividends. We are evaluating this proposed dividend tax alongside alternative options and plan to update you in due course.

In the meantime an appropriate 2010 effective tax rate including the extraordinary tax but excluding any impact for dividends…tax on dividend will be between 24% and 25%. Under the same assumptions we expect the rate to revert to an approximate level of 21% and 23% for 2011 and 2012.

In the first half our finance costs we lower by around €9 million. Around half of this decrease reflects a one off valuation difference from ineffective hedges which increased our cost in the first quarter of 2009. The other half reflects the benefit of lower short-term interest rates on our viable debt component.

We continue to proactively manage our debt to secure low future finance costs balancing this against maintaining an optimal capital structure. In the quarter we increased our fixed rate exposure by terminating several interest rates world positions. As a result fixed rate debt now represents around 75% of our total debt.

Taking into account the year-to-date expense and higher average costs in the near-term from converting to fix rate debt we expect our finance cost in the second half to be above last year. For the full year we now expect finance cost to increase by approximately 10% versus 2009.

We achieved earnings per share of $0.47 in the second quarter $0.06 below the prior year although this includes the adverse $0.06 impact from the extraordinary tax in Greece.

As for our free cash flow, this increased by €129 million in the first half from higher EBITDA, ongoing working capital benefits, and reduced net capital expenditures. This was only partly offset by higher tax paid of €25 million.

We are pleased with this results which have been achieved amidst ongoing difficult economic conditions. We have solid plans in place for the second half of the year and continue to take actions to strengthen our market position while also improving operating efficiency.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

Thank you very much indeed. We now begin the question-and-answer session. (Operator Instructions).

Thank you. Now your first question from HSBC comes from Lauren Torres, please go ahead.

Lauren Torres – HSBC

Hello everyone. Rob, I was hoping you could talk a little bit more about where these further significant cost savings are coming from? I’m just curious if this is somewhat of a response due to weaker demand or these are ongoing initiatives to try and get a sense of how to think about the benefit of the savings going forward?

Robert Murray

Hi Lauren, as usual we’re always looking for opportunities to improve our cost base. In 2010 we planned to implement initiatives as I said resulting around €25 million to €30 million. And basically as we’re going through initiatives some of them take longer time to mature and come through. There’s different plans that we’re making to achieve this so I think part of it is…these ideas were on the table and we’re working on them and also we have pressure to make them happen quicker with the environment we have in certain countries.

Lauren Torres – HSBC

Any idea you could give us of where they’re coming from? I mean is it more on the production side or the marketing…where is it? If you can.

Robert Murray

Well for us the bulk of them will probably be coming out of operating expenses but there’re also…we’re looking across all areas of the business.

Lauren Torres – HSBC

Okay, and what’s that to…I know you’re increasing some of your marketing investments in certain countries. Also curious with that, is that just because you’re decreasing it in other areas or overall spend is increasing?

Robert Murray

For marketing spend right now obviously it's a country by country situation for us. W believe over the three years that we are going to invest back the money that we saved last year and some of it is priming for us during this year. So we continue to expect that you’re going to see money being invested overall on the marketing line but in markets where we’ve had very difficult conditions continuing on we’re not all over investing in those markets.

Lauren Torres – HSBC

So the overall marketing spend is year-over-year this year?

Robert Murray

Yes. This is…

Lauren Torres – HSBC

Okay, alright thanks.

Operator

Thank you very much. Now from Evolution you have a question from Andrew Holland, please go ahead.

Andrew Holland – Evolution Securities

Yes, a couple of questions, firstly can I just clarify what you’ve done with your Q1…sorry Q2 last year…no sorry, your Q1 this year profits? If I add up your developed markets…sorry established market’s EBTD from the first quarter with the established market’s EBTD for the second quarter I don’t get what you reported for the half. Would I be right in thinking you’ve shifted some costs out of originally stated and into exceptional costs? That is question one.

Robert Murray

Andrew hi. Now what’s happened is that we had restructuring costs in Q1 and Q2 but as this costs…originally we expected to have immaterial overall for the year of restructuring costs and ones that happened in Q1 we expected those benefits to come during the year. We had not planned to break out the restructuring cost so I think the difference that you’re seeing there is the fact that €4.6 million of the restructuring is in Q1 and a big part of that is in the established markets.

Andrew Holland – Evolution Securities

Okay so when you originally stated your first quarter profits and didn’t flag any restructuring costs you’ve now sort of retroactively applied some of the restructuring costs effect to Q1?

Robert Murray

Yeah. That’s correct because overall it's going to be material for our group and when we originally made our plan this year we didn’t expect it to be material.

Andrew Holland – Evolution Securities

Okay, next question; you’ve highlighted some specific issues around Poland, how confident are you that the sort of weakness in Poland in the second quarter is down to those one-off issues? For example what is true what we’re picking up in July since the end of the quarter, does this sort of assure us that the underlying trading position in Poland is not as bad as it might look?

Doros Konstantinou

Hi Andrew, this is Doros. As you correctly said we have specific reasons in Poland for the performance we saw in the country it was flooding weather, it was the mourning of the dead…of the president etc.

Towards the end of the quarter we saw improved trends in the country code zero grows strongly, energy drinks have picked up etc. So we feel confident about the country coming back to growth.

Andrew Holland – Evolution Securities

Okay, one last one if I may I’m just trying to be surprised on your guidance on the tax rate for the full year; it looks a bit lower than I would have thought. If I take the €21 million that you have applied in Q2 that relates to last year, first lets assume that your profits were flat year-on-year there’d be another €21 million this year, that would be €42 million which would be 7.5% of last year’s PBT which if your sort of base tax rate were 22% to 23% would…lets take closer to 29%, 30% what I’m I getting wrong there?

Robert Murray

Andrew I think one of the things to keep in mind is perhaps on this we have attained in the mix of the countries on their different levels of taxation. So we have a country mix change happening and if we are not going to pay out…if we don’t pay out a dividend then we don’t incur the tax on dividends. And in our normal tax rates when we bring back dividends to Greece we also have to recognize that as…from a tax point of view so by changing this or assuming that we’re not going to pay our dividends at all also reduces our overall tax rate.

Andrew Holland – Evolution Securities

I thought I heard you say that that guidance was based on not changed to your dividend tax or to your dividend quality.

Robert Murray

What that assumed is that because of the high tax on dividends that at this stage we’re looking at alternatives and we continue to work with the industry in discussions with the governments around this tax. And we anticipate that if it's not changed that we’re going to look at some other alternatives but we are assuming the guidance we gave you that we don’t pay out to dividends. And that would be the tax rate without paying out the dividend.

Andrew Holland – Evolution Securities

Without you paying an ordinary dividend on your shares?

Robert Murray

That’s correct.

Andrew Holland – Evolution Securities

Right, okay.

Robert Murray

Which means we also don’t have to…I mean that’s exactly right.

Andrew Holland – Evolution Securities

Right, so…and if we’re going to assume that level of tax we should also be assuming zero dividend payment in 2010?

Robert Murray

Andrew as we said we’re looking at alternative ways to reward our shareholders and we’re going to continue to evaluate that and see how things develop here in the market.

Andrew Holland – Evolution Securities

Okay, thank you.

Operator

Thank you, now from UBS you have a question from [Jason D’Reese] please go ahead.

Analyst – UBS

Hi it's [Jason] with UBS, can I take a closer look at what’s happening on the cost side? I tend to be a little bit confused about all the different trends; hopefully you clarify it a bit. We have…and just on the fixed cost side or the OpEx side. So you have sales per case up 17%, flat marketing and then warehouse distribution up 7% and I guess somewhere in there is the step up and depreciation related to SAP. Separately you said in the past that you were going to step up your investment and I know that there’s going to be a timing issue on that but also in the previous quarter it was commented that there was going to be a currency benefit but a lot of that was going to be reinvested. So if you could just kind of help us understand what exactly happened in the period and how the cost savings that you achieved last year affected this year over year OpEx per case and then what we should think about for the rest of the year. Is there going to be a big step up in your investments in MP or sales people et cetera or is that even just further delayed into next year?

Robert Murray

Hi Dave, hopefully I can help a little bit to clarify that for you. I think first of all as a backdrop across our markets we have roughly around 4% inflation for this year and so some of our costs are going to be going up naturally for inflation. What we saw in the quarter here is that the most of our cost savings from last year are going to be benefiting us in the first half of this year most heavily in Q1 and then kind of tailing off towards the end of the year based on the restructuring we did last year.

The restructuring we’re doing this year will – the benefits will happen as we do that restructuring. Regarding sales costs, there is a couple of things there. One is the majority of our people are in sales and we did give some wage increases out as I mentioned particularly in markets like Russia and Ukraine where there is still fairly high competition for labor in those markets and we – so that was one driving force.

We also had some bad debt expense that we recognized which was roughly around €5 million in the quarter and those would be the big drivers and if you back out currency, you have to look at it on a currency neutral basis. I think the numbers are pretty fair from that point of view. The other piece to keep in mind is cost of sales are down in the first half and a good part of our restructuring was also on the production side and we had savings on overheads in the first 6 months.

Jason DeRise – UBS

Okay. On the – part of the savings that you froze some of your employees’ salaries and now if there’s demand for the employees, ae you jumping your employees back to where they would have been had there been no freeze? I mean essentially just reverse – making that kind of a temporary effect?

Robert Murray

No. I think one of the things is the whole market is starting to come back to life and we have to give a salary increase up this year. But last year salary increases has been safe.

Jason DeRise – UBS

Okay but I guess that should just go back to looking like a normal trajectory for your _

Robert Murray

Going forward, correct.

Jason DeRise – UBS

Ok and then I guess that just leaves the marketing where that’s heading or when you think that’s going to start to step up because if we – maybe let’s come at it this way, is it possible that volumes could be up overall in the back half of this year. Are you not even thinking that it could be positive and then if they were up is that when we would expect to see that trigger that you’re comfortable investing behind your brands again?

Robert Murray

What I would say, we have strong programs to invest behind the brands in the back half including also the Christmas season. July and August are also very important and the way we allocate our marketing expense is based on when we actually spend the money, we don’t flat line the expense. So that’s also important. I think we also continued to have some benefits from favorable media rates across the territory which as part of our assumption to spend invest more back was that media rates would normalize going forward. We didn’t know exactly when that would happen and I would say from your other questions, we’re not giving guidance on volume in the back half but across many of our markets we do have an improving trend.

We have a few real challenging markets that we’re having to manage through carefully.

Jason DeRise – UBS

I guess it would be fair – I saw that my models internally consistent if I assume that your volumes start to come back I should start to factor in these increase in A/P and if I don’t think volumes are coming through I should keep it flat, more or less.

Robert Murray

That’s not an unreasonable assumption.

Jason DeRise – UBS

Alright, I have many more questions. I will get back in queue.

Robert Murray

Thank you Jason.

Operator

Now from Matrix you have a question from Matthew Jordan. Please go ahead.

Matthew Jordan – Matrix.

Good afternoon. A couple of questions quickly please. Firstly on import costs, you mentioned input costs a moment ago but looking at 20111 when presumably you are not fully hedged or maybe even not partially hedged I’m not sure, could you comment on what the impact is likely to be from the point of aluminum which is quite a lot higher and also sugar which seems to be getting higher? In the past I think you said that the EU offset has a counterbalanced the higher cost of sugar in the market, but obviously sugar seems to be getting more expensive and that you don’t have any further EU offsets from memory.

So could you perhaps just comment on those and also oil?

Robert Murray

Hi Matthew. Yeah we’re working of course basically on a 12 to 18 month cycle on sugar and aluminum and we do have a fair amount covered in 2011. On that side we’re not expecting significant increases but there will be some increase. We do see though obviously resin costs going up obviously with the weaker Euro for us across many of our markets and also pressure against anti-dumping in the EU. We see that resin is really going to be the more difficult one and we’re not able to hedge that going forward.

So that’s the area where we’re the most concerned. The second area is juice. I can’t give any numbers on juice yet but there is quite it seems that juice prices are going to go up fairly significantly.

Matthew Jordan – Matrix.

Okay and just going back to the resin, now are you able to quantify that at all?

Robert Murray

I’m sorry?

Matthew Jordan – Matrix.

Are you able to quantify the impact of resin that you would expect next year, or putting differently, are you able to quantify what sort of price increases you would need to take to counteract that extra cost?

Robert Murray

Yeah at this stage it’s a bit early for us to do that. We will a little bit later in the year give more clarity on that.

Matthew Jordan – Matrix.

Okay and the other question I had was on the minorities line. I can’t remember whether you mentioned this during the opening part of your presentation, but I was surprised to see the minorities, the negative minority payout as low as it was given that the Nigerian business is doing quite well. I’m I missing something there or do you have other things in there that have minorities which businesses are doing less well? What I’m I misunderstanding?

Robert Murray

Last year there was a couple of things. One is Nigeria, that was a pretty hard hit from a profitability point of view in the first half of the year on sugar and we do see an improvement in that – in the back half of the year and then last year we also had insurance money that we had received particularly in Nigeria for the loss which was also partly recognized in the minority interest side.

Matthew Jordan – Matrix.

Okay, thanks very much.

Robert Murray

You’re welcome.

Operator

Thank you and now from Citi you have a question from Lambros Papadopoulos. Please go ahead.

Lambros Papadopoulos – Citigoup

Good afternoon everyone. My question is with regards to Greece, can you give us an update as to the latest on the excise perks that the government has announced as part of these austerity measures? There’s been some discussion in the Greek press about bringing it forward to the beginning of 2012 and at the same time as to whether you can confirm about the VAT, whether the VAT on beverage is going to increase as well. Thank you.

Doros Constantinou

Lambros, we are engaging the company through the appropriate bodies, the Association of Soft Drinks et cetera and the Industry Association to understand more about what is the intent and some more specifics. We don’t have enough clarity at this stage so there’s not much I can give you on that. But what we hear is about changing the VAT rate from 11 to 23 which is a significant increase in prices and cost to consumers plus excise or either of the two.

We’re trying to understand what is the intent. We don’t have enough clarity yet and I don’t think that the government has made any final decisions yet.

Lambros Papadopoulos – Citigoup

You don’t think t could be a case of it happening in 2012 or you wouldn’t know because they probably haven’t been in touch with you directly to talk about it?

Doros Constantinou

We don’t have that much clarity Lambros. Things change rapidly depending on how the majors have already taken deliver or they don’t deliver and they have to take corrective actions. We’re trying to have some more visibility and we talk to them but we don’t have the details that we’d like and that we could communicate to you.

Lambros Papadopoulos – Citigoup

Thank you and just another question on Russia, obviously you’re seeing the first quarter in five in terms of volumes going up. Is the company in the initial consumption channel? Where are you with regards to the cooler placement program that used to be very aggressive in Russia and then you stopped over the last couple of years? Thank you.

Doros Constantinou

I will start from the last part of your question regarding coolers. We cut down on our cooler placement not only because we wanted to reduce our CapEx, we always continue to invest if we see growth come through. It was only because a number of outlets in Russia because of the economic crisis we’re closing. So we were taking coolers back and place them in new outlets as we needed.

So that was the real reason for cutting down our cooler purchases. Now with the economy slowly but steadily coming back, we are encouraged and a number of those coolers are already out in the market place and we continue to buy coolers and place them in the marketplace in bigger numbers.

Now that we support the growth of immediate consumption packages as you’d expect and it has improved actually in the quarter with single serve and also multi serve packages up in mid single digits. Single serve we’re about 5% up and multi serve 7% up. So overall Russia is steadily coming back and hopefully will continue based on the economic data we read and it’s available to us. Retail sales grew by 5.8% in June Real wages are up and the IMF expects GDP to grow by 4% in this year.

So we have encouraging signs and also we have the challenges in other markets I need to remind you.

Lambros Papadopoulos – Citigoup

Great, thank you for the answers.

Operator

Thank you. Now from Alpha Finance, you have a question from Nick Katsenos. Please go ahead.

Nik Katsenos – Alpha Finance

Yes hello. Just focusing on Greece, could you please tell me the composition of volume between single serve and multi serves and how this has changed year on year?

Doros Constantinou

Hi Nick. Single serve packages in Greece as one would expect, they are higher that multi serve. They are about 55%.

Nik Katsenos – Alpha Finance

And could you please tell me how much resell has changed from last year?

Doros Constantinou

The change from last year? That is about 10% down.

Nik Katsenos – Alpha Finance

Okay, thank you very much.

Operator

Thank you. Now from Harding Loevner you have a question from Margaret Kalvar. Please go ahead.

Margaret Kalvar - Harding Loevner

Yes, good morning. Regarding your marketing investment that you are making and your brand support, are you spending more of it on the Coca-Cola brands which are posting better results? And do you attribute that to the additional investment? Or do they – are they benefiting from the already extremely strong brand? And are you spending to boost the lesser brands, so to speak?

Robert Murray

Hi Margaret. For our spend this year obviously number one we have the FIFA World Cup that we put money behind and of course Coca-Cola is the centerpiece for that. We also have a very strong sampling program behind Coca-Cola and also some of our other Coke Light and Coke Zero. So there’s a big focus behind Coke and you can see in Russia that we grew 19% for brand Coke in the quarter and that’s heavily driven by the focus on marketing and I think it’s a good result and we’re going to continue that focus.

Margaret Kalvar - Harding Loevner

Okay thank you very much.

Operator.

Thank you. Now from Cheuvreux you have a question from Costas Theodorou. Please go ahead.

Costas Theodorou – Cheuvreux

Thank you very much, good afternoon. I have four questions. My first question regards weather conditions in July in certain markets and if you could comment upon that and their impact on volumes; in particular, central Europe and Russia. That's my first question. My second question is if you could give us a guidance beyond 2012 on the effective tax rate assume things are [stone fast] today. My third question regards-- Since you have hit most of your interest costs, what would be the effective cost of debt beyond 2010? And my last question is on-- if you could elaborate on the price initiatives in developing and emerging markets further in the quarter. Thank you.

Doros Constantinou

Hi Costas, this is Doros. Regarding the weather, I will talk to you about July and how we view the second half of the year because I’m sure that the question is in the mind of most people. I would say that the weather in Q2 was pretty challenging in a number of countries and we talked about that. But we are encouraged by the fact that in June it was a little better and it continues to be very good in July.

So the trend is improving and hopefully will continue throughout the summer and of course that impacts our sale. At the same time let me put things into perspective. We continued to experience a difficult consumer environment in certain key markets and we talked about Greece, Bulgaria and Romania.

But the real benefit in theory is the benefit of having the broad geographic spread that we’ve talked about several times and this is a key strength in the environment. We have mixed performance across all territory and we expect the time of the recovery to lag the growth of GDP and be different in the different markets.

Costas Theodorou – Cheuvreux

Okay

Robert Murray

Okay Costas, on your second question the fact that effective tax rate and this is an assumption that we don’t pay out a dividend and that would be between 21 and 23%. Again we haven’t’ made that decision yet but if in fact making the assumption that we don’t and then cost of debt, we expect next year to be roughly around 3½%.

Costas Theodorou – Cheuvreux

Okay.

Robert Murray

And your fourth question?

Costas Theodorou – Cheuvreux

On price initiatives in the emerging and developing markets, if you could elaborate a bit for the second quarter.

Doros Constantinou

Costas this is Doros again. On your fourth question I would say that the challenging economic conditions continue to have a diverse impact on consumer prices and power across our territory. In spite of the early signs of stabilization in some countries and as communicated before, we are looking to price slightly below average inflation across all territory and we will continue to do that for the rest of the year as well and through carefully managing the pricing alongside with planned value added promotion activity, we will continue to offer good value to our consumers and that’s the way of predicting at the same time the value of the category.

Costas Theodorou – Cheuvreux

Okay, this is clear and just one follow-up with the first question, on Greece. Do you see any benefit from the announced tax reforms in the labor market or on the transportation sector, or do you expect any positive from these things in Greece in your cost structure?

Doros Constantinou

Yeah, well let me start by saying that we didn’t have any material impact from the strike of trucks in the last few days and if it’s over in a day or two then there will be minimal or no impact on the business. Now in general I would say yes, a free market should be a free market in all respect and will be benefit in general because competition will push prices down and we will benefit directly and indirectly of course.

Costas Theodorou – Cheuvreux

Thank you very much.

Operator

Thank you and now from UBS you have a follow up question from Jason DeRise. Please go ahead sir.

Jason DeRise – UBS

Thanks for taking the follow up. I wanted to come back on the tax on the dividend and just understand the mechanics of that. I know you're not giving a tax guidance assuming you pay out a dividend. But exactly how does the tax work on the dividend? What percentage would you have to pay out as you understand the ruling? And then, following up on the conversation just a bit before about prices and tying in the input cost outlook for next year, which, obviously, there's no specific items, but it seems like it's going up. Would you try to price to cover your input costs, or do you think that the consumer's not quite ready for that yet and you may have to price a bit below?

Robert Murray

Okay Jason. On the dividend tax, the way things are working right now is we have a statutory tax rate in Greece of 24%. Any dividends that were paid out the way the law is written today is you would be putting an additional 16% on that distributed dividends to take it to 40%. We also have a situation if we repatriate dividends back to Greece which we need to be able to pay off that tax, I mean that dividend, we also have to pay the difference between the Greece statutory rate and the rate that we had in the country where we’re bringing those dividends back in.

So if we don’t pay out a dividend, then we would save up that amount – that would be the impact on the tax.

Jason DeRise – UBS

It's something that we would have to understand the different cash flows from each of your countries and the different tax rates to actually try to figure out? Is that kind of the--?

Robert Murray

I think obviously when I give you an effective tax rate we’re looking at all of those moving parts and coming up with a range that I think is pretty accurate. Obviously we think that this tax is very onerous on companies in Greece and we think that this situation is not a sustainable situation for Greece to develop long term. It’s business and has people invest in the country.

So the industry is working with the government to try to address this and we think that hopefully a more favorable outcome will come apparent soon.

Jason DeRise – UBS

Is there any timeline that you can share on the negotiations and when a final decision would be made?

Doros Constantinou

Jason this is Doros. We expect that the government will eventually and eventually put it towards Q3 over in Q4 will come out with some measures to encourage investments and inject some growth in the economy because they have done so much and there’s so much that can be done in cutting costs et cetera.

But in the business environment we know very well that if you don’t grow the top line there is no future. So the government has to come back with some measures that will boost growth and we know will consider those measures. So we expect that in this process they will reconsider the onerous tax on dividends.

Jason DeRise – UBS

And, then, on-- Thanks for clarifying that. On the whole price and COGS equation for next year-- and I know it's a bit early and commodities can change directions three or four more times in this six months-- but just, in general, how you're thinking about it. If your input costs-- Let's say they went up to mid single digits or something like that, would you try to price that high, or do you think that the consumer impact and the market share impact of that might be – that would be more of your focus rather than the profitability side of the equation?

Robert Murray

Jason I guess there’s a couple of things for us. Number one normally this is a market by market decision. It depends on the size of the input cost increase because it is substantial. Normally the whole industry is in a situation where they would have to take it. So we’re also looking at the inflation at the inflation in the country and other factors.

Right now we definitely see inflation has been coming down across much of our markets and we know that there’s going to be a more difficult environment to take pricing but again it depends on the market and the nature of the type of increase. So at this stage it’s a bit too early for me to give you what we expect the commodity increases to be, but as we get farther in the year we’ll let you know and obviously we try to take pricing where we can and we’ll continue to do that.

Jason DeRise – UBS

And, if I may, one question. We can take it offline if you want. But, when I look at what you-- your guidance that you gave for the coupon at around 3.5% now that you've fixed the rates and I look at – maybe this is something about [indiscernible]. Where I look at your net debt, I have a hard time trying to get to a number that's a 10% increase in your interest expense year over year.

Robert Murray

Well keep in mind we calculate net debt by taking out cash and we’re not getting a very good return on cash at this stage. So remember our total debt is higher than our net debt.

Jason DeRise – UBS

Right.

George Toulantas

But Jason it’s George here. I’m happy to take that on – go into further detail perhaps online.

Jason DeRise – UBS

Alright thank you.

George Toulantas

Operator I think we’re out of time as well. Perhaps we can – Doros you want to say something?

Doros Constantinou

I think we can take one more question.

Operator

Let me pull once more for you for our final question. (Operator instructions). And from Evolution it’s Andrew Holland. Please go ahead sir.

Andrew Holland - Evolution Securities

Yes, thanks. I'll just pop in with the last one. Just looking at your price mix in the first quarter and the first half, it was broadly flat in both of those periods. Is there any reason why that should be any different, do you think, in the second half? Or, put another way, when would you normally take sort of frontline price increases in the year?

Robert Murray

Andrew I think a couple of things to keep in mind. One is that we had a different price mix depending on the segment that we’re in. So we had emerging markets were up, developing were down as well as established and developing was primarily down because of the terrible weather we had and some of the other items that we’d highlighted to you. So we expect to see a situation where we have some improvement in that, but I think it’s more to do with the period that we’re looking at.

Andrew Holland - Evolution Securities

Okay thank you.

Operator.

Thank you and as there are no further questions we now pass the floor back to Mr. Doros Constantinou for closing remarks.

Doros Constantinou

Thank you all for joining us today and we look forward to updating you all soon. Thanks very much.

Operator

And with many thanks to all our speakers today, that does conclude the conference. Thank you for participating, you all may now disconnect. Thank you gentlemen.

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