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Executives

Deniz Can Yücel - IR Manager

Burak Başarır - CEO

Orhun Köstem - CFO

Analysts

Edward Mundy - Nomura

Nick Ashworth - Morgan Stanley

Ali Dhaloomal - Bank of America Merrill Lynch

Chris Ellis - Babson Capital

Ivan Kushch - VTB Capital

Kenan Coşguner - Teb Yatırım

Coca-Cola İçecek AS (COACF) Q2 2014 Earnings Conference Call August 14, 2014 9:00 AM ET

Operator

Good day and welcome to the First Half 2014 Web Cast for Coca-Cola İçecek Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Deniz Yücel. Please go ahead, sir.

Deniz Can Yücel

Good morning and good afternoon, ladies and gentlemen. Welcome to our first half 2014 results conference call. Today our CEO, Burak will briefly talk about our operations; and our CFO, Orhun, will share with you the financial review. Following Burak's closing remarks, we will start a Q&A session.

Before we begin, please kindly be advised of our cautionary statement. This conference call may contain forward-looking management comments, including projections. These should be considered in conjunction with the cautionary language contained in this earnings release. A copy of the earnings release and financials are available on our web site, cci.com.tr.

Now, let me turn the call over to Burak.

Burak Başarır

Thank you, Deniz. Good afternoon everyone. I am very pleased to share with you our first half performance, as both Turkey and international operations continued to post strong growth. While consumer confidence in Turkey compared to previous year was relatively lower in the first half, Turkey volume growth continued in the second quarter, supported by successful campaigns in spite of higher number of rainy days in June, compared to a year ago.

Our second largest operation, Pakistan, maintained strong growth momentum in the second quarter, supported by the strong Sparking growth. Despite the unrest in North Iraq, which impacts the whole country, our volume growth in Iraq was positive in the second quarter. Kazakhstan, our largest operation in Central Asia, posted double digit volume growth in the second quarter, in spite of sharp devaluation and its lingering effects afterwards.

Turning to contribution to growth charts, in the first half, our consolidated volume posted 10% growth, delivering incremental 51 million unit cases, reaching up to 568 million unit cases of volume. Turkey sales volume increased by 5%, adding incremental 50 million unit cases, cycling 5% growth of last year. International operations delivered incremental 36 million unit cases, posting 15%, while cycling a very strong 20% growth of 2014.

If you look at the volume breakdown for the first half, our international operations grew three times faster than Turkey, and its shares within the total portfolio continued to expand in TCI. International sales volume now account for 48% of our total volume compared to 45% of 2013. Currently, Pakistan is 21%, both Kazakhstan and Iraq are about 9% of our total consolidated volume.

Sparkling category posted 8% growth, driven by our all core Sparkling brands, Coca-Cola, Coca-Cola Zero, Fanta and Sprite, particularly in international operations. Stills category, excluding water grew by 13%, with a strong growth in juice and iced tea categories. Water growth was 7% in the first half of the year. As sales portfolio growth was higher than Sparkling in the first half of the year, the share of the Still category in the total mix increased also by 1% in total mix.

Now let's brief the review of operations starting with Turkey. Turkey is still performing in line with our plans so far in 2014. We have started the year with a strong positive momentum in the first quarter with 7% volume growth. In the second quarter, we maintained the momentum with 4%, and ended the period with 5% growth versus prior year. This was achieved in spite of the relatively high base in January and May period, and higher number of [indiscernible] in the month of June itself.

The Sparkling growth was flat in the first half of 2014, while Coca-Cola Zero continued high double digit growth, approximately 45% versus prior year. Our new launch Coca-Cola Zero PET 2.5 expanded to sugar free segment, whereas the Fanta Lemon PET 1 liter later extended -- supported the Fanta portfolio.

The share of immediate consumption packages in the total ISD [ph] -- the Sparkling mix continued to improve in the first half. Still beverages, excluding water, grew at mid-teens, 14% to be precise, in the first half, driven by juice and iced tea category. Cappy brand posted high single volume growth, assisted by new IC pack introductions, such as Cappy Atom in the can and tetra 330ml, and Cappy Pulpy Tangerine in PET 1 liter packages.

Fuze Tea maintained its high growth, thanks to the strong category growth, as well as our new package introductions, such as can 250ml and 500ml, and new tea [ph] sugar free flavor expansion.

The water category grew at low digits in the first half of 2014, despite the contraction in the HOD, Home and Office Delivery package, while the IC packages share in the total category mix increased from 17.8% to 18.5%. The non-ready to drink tea category also grew by almost 30% in the first half of 2014. In order to reenergize the Sparkling category back on to these tracks, we continue to support the category with strong consumer activities in the year.

In the first half, we have executed successful campaigns, such as 'Share A Coke,' which was a very successful campaign in the first quarter of 2014 and 50th year anniversary, which we are celebrating this year in Turkey, was a great success in the first half of the year.

In June, we have started our strong Ramadan campaign. We also believe that these campaigns are very important to drive recruitment, increase consumption frequency, and also household penetration.

Moving on to our international operations, despite the challenges in Kazakhstan and Iraq, our international operations delivered in line with our guidance. As you know in July, Moody's upgraded the outlook of Pakistan's economy to stable from negative. The Moody's decision was preliminarily based on the stabilization in the country's external liquidity position, supported by the government's strong commitment to reforms with the IMF. This is a very good development for the country, while in the second quarter, the growth was 14% and first half volume growth was a very strong 16% in Pakistan.

Sparkling category continued to grow at double digits on the back of strong growth in Coca-Cola brand. In the first quarter of 2014, as the first national promotion in the history of the country, we have launched Sprite and Spicy Food campaign, with PET 1 liter. In the second quarter of this year, the returnable glass bottle 250ml under the cap promo, continued to volume growth, and at the end of June, we have also started the Ramadan campaign in Pakistan.

In Kazakhstan, volume growth in the second quarter was 14% delivering 22% growth in the first half of the year. We have taken pricing initiatives at the end of March, to mitigate the February devaluation impact. Both Sparkling and Iced-tea categories posted double digit volume growth in the first half. Successful New Year, Nowruz and FIFA World Cup campaign supported the strong growth during the first half.

Iraq volume in the second quarter and the first half was 7% and 11% respectively. Nowruz and Copa Coca-Cola campaigns contributed to the volume growth in the first half of the year, in spite of the political tensions, and the unrest in the Northern Iraq, which has started in June, as we all know. While we continue our operations as usual in the country, lack of authority in the conflicted areas restricts our distribution of our products, due to some safety reasons.

Our Southern Iraq operation in Iraq is headquartered in Hillah, and has plants in Hillah, Karbala, and [indiscernible] with 800 employees operating. Our southern operations continued their operations as usual. Our northern subsidiary in [indiscernible] operates with 400 employees, also continues its normal operations.

Now I would like to turn the call to Orhun, for an update on financials. Thank you.

Orhun Köstem

Thank you, Burak. Good morning and good afternoon everyone. As always, before moving on to discuss the financial performance, I'd like to give you [indiscernible] from the macro dynamics point of view; it has been quite a dynamic first half. We have seen, from a Turkish lira point of view, the TL has somewhat appreciated between the end of December to end of June, about 0.5% on a year-end basis. However, on an average basis, we have seen Turkish lira devaluing by close to 20%; and in inflation, again in Turkey from year-end-to-year-end at the end of June was about 6% year-to-date inflation, as I am sure you are all following, has increased.

But in addition to these, I think its worth important to mention that, in Kazakhstan, as you remember in the first quarter, we have seen about a 19% devaluation in tenge. Rupee in Pakistan this year so far has been gaining value to the tune of 2% to 3%. So this was the backdrop, through which we should also read through the first half results.

If you turn to our -- look at our performance, overall, we can say, we were doing, as far as the first half is concerned, in line or a bit better than our expectations so far. Volumes on a consolidated basis grew by 10%, as Burak was explaining, driven by a 5% decrease in Turkey, and about 15% on the international operations. Net revenue grew by 20% ahead of the volume and EBITDA, on a consolidated level grew by about 19%, that's excluding this one-off gain we had for consolidation of Pakistan in 2013 results. Its only about a 10 basis point contraction in EBITDA margin, which is pretty much in line with our annual guidance.

If you look at the numbers in a bit more detail, if you look at Turkey, first of all, the average per unit case prices in Turkey in the first half, only increased by about 1.5%. For those of you who also listened to us at the end of the first quarter's and [indiscernible] guidance earlier, as part of the plan for this year in Turkey, in terms of our pricing metrics. So in the first half of the year, the appreciation that you're seeing, mainly coming from mix effect that Burak was pointing at is, primarily, a function of better immediate consumption package shares in the overall portfolio.

If you look at the international business however, again you will remember, the last time we discussed, especially devaluation in Kazakhstan was an important factor in the first quarter results, and was actually impacting the revenue across the Central Asian operation; and then, we told that, our price increases in Kazakhstan was coming at the end of the first quarter, so had a better impact in the second quarter. This is what you're seeing in the results, after per unit prices contracting by about 2.9% in the first quarter that you see in the second quarter actually, we are looking at about a 0.5% increase. So therefore overall, we've seen the net revenue per case on the international only down by about 0.7%. And again overall, the net revenue grew by about 20% with the net revenue per case growing by about 9%.

Now if you look at the other -- if you move through the P&L -- if you look at the raw material environment in general, we are looking at relatively favorable environment so far. We have seen that the can prices in Turkey for example are down in single digits, the resin prices across is actually down in double digits, which we of course enjoy. If you look at Turkey's cost of goods sold on a per unit case basis, you will see that it increased by about 3.9% in the first half, which I think was a performance that we were expecting, and we said that this increase significantly lower than the lira devaluation in the same period, plus its also lower than the inflation.

Outside of Turkey, again the cost of sales were up by about 12%, which is certainly lower than the overall net sales growth for our international operations, thereby -- although in Turkey we are seeing a contraction in our gross profit margin, of 140 basis points. Outside of Turkey, we are seeing a gross profit margin expansion, by about 160 basis points, and altogether, we are seeing roughly about a small contraction of about 60 basis points in our gross profit margins, at 37.5%.

I think its fair to say in general, our approach to strategic procurement seems to -- continue to pay off quite well. So far, we already know about prices outside of Turkey for sugar, we have hedged almost all of that, and in aluminum we know our prices quite well, as we have hedged about -- a little over 50% of that. Again, you will remember, there has been about a 10% sugar price increase in Turkey, basically, that's a touch higher than inflation, but nevertheless if you look at a full year basis, I think, we should expect that there is a foreseeable increase in the sugar prices.

So moving on to further -- again if you look at the operating expenses item, and excluding the net other operating expenses items. In Turkey, these increased actually lower than the revenue growth in general. This is primarily attributable to -- for the time being, global distribution selling and marketing expenses for the full year, and we don't expect any significant change. Although, as you know from time to time, we draw your attention to the seasonality of the marketing expenses basically.

On the international side though, the operating expenses increased by about 16%. That is also ahead of the net revenue increase for the international operations, which was about 14%. That's not only driven by -- that's not only a function of the sales volume increase that we have seen in international markets, but also the OpEx is somewhat inflated by the rupee appreciation against the dollar in the period.

So overall, if you look at the EBIT level, Turkey's EBIT margin contracted by about 110 basis points, that's primarily a function, as we discuss of lower average pricing or slower increase of the average prices in Turkey, whereas on the international, the EBIT margin was up by about 120 basis points. So altogether, we saw absolute EBIT growing by 20% on a consolidated basis, and we are seeing almost a flat EBIT margin for all practical purposes, in the period.

As far as EBITDA is concerned, again we are seeing only about a 10 basis points contraction on the consolidated EBIT margin. So as we discussed so far, pretty much in line with our guidance for the year.

If we move on to -- look in a bit more detail for the financial expenses, our interest income as you see, first of all, an increase versus the same period last year. As you will remember, we have pre-funded the maturing debt for 2014 in 2013; and as we have discussed the last time, we are holding on to those proceeds until the maturity, some of which has been paid in March, remaining part will be paid in September. So the cash we have at hand, not only increases our interest income so far, versus last year, but it also impacts the FX movement. The foreign exchange loss, [indiscernible] you see in the details of the financial expense, as a function of the -- half currency that we hold at hand, given the movement of the Turkish lira, which was a positive 23 a year earlier.

Interest expense however have increased versus the same period of last year, and again this is a function of us looking at higher average maturities in our debt portfolio versus the first half of the same period last year, is up to now about 4.2 years, versus about 1.5 years. And that going forward, we are going to look on an apple-to-apples basis, as we move forward, and as we pay down the club loans that's currently in our balance sheet.

And our positive unrealized FX gains this period, versus losses last year, so altogether, the net-net financial expense was down to 39 versus 102 in the same period of last year. So therefore our bottom line, our net income was at TRY225 million, a little over TRY200 million in the second quarter, better off than where we were in the first half of 2013.

If we look at the debt metrics, we are looking at a consolidated actually coming off by about TRY256 million, compared to the year-end of 2013. At the same period, our cash has also decreased, because in the period by March, we have paid about $200 million of the maturing club loans.

Net debt at the end of June, was about 1.8 times; that's pretty much in line with what we have achieved in 2013 on a full year and pretty much in line with what it was in the first half of 2013 basically. The majority of the debt, about 88% is in dollars, basically, and as we discussed, the average maturity is now at 4.2 years at the end of June.

And if we finally look at the free cash flow, we are looking at about TRY10 million positive free cash flow at the end of the first half of the year. Now that's on one hand, of course, and primarily a function of our better operating cash growth. Its not a function of double digit increase in, let's say profits and EBITDA, but also our net working capital as a percent of net sales revenue, has been constantly decreasing. On an annualized basis, its down from 15.4 to about 13.7 at the end of June, which positively impacts the operating cash. And after the CapEx versus the minus TRY85 million at the end of June 2013, we are now at plus TRY10 million.

Our outlook for CapEx doesn't necessarily change, we still look to spend about 12 -- max 13% of our net sales revenue to CapEx for the full year 2014.

Now, I'd like to, at this point in time, turn the call over to Burak, to share his views for the outlook for the full year 2014.

Burak Başarır

Well thank you, Orhun. Looking at the guidance for 2014; as you all know, the third quarter is the key for the whole year, especially for the Turkey business. As the number of transactions of immediate consumption improve, overall volume growth decelerates due to declining share of large packs within the total portfolio.

For the future reference, this is just a healthy growth, as we will be able to capitalize on more profitable base on consumer confidence in Turkey, starting to and accordingly, average prices increased.

In international operations, there is still continued risk in Iraq, especially for the security reasons. Iraq currently makes about 9% of our total consolidated volume. As we have communicated before, we continue our operations in Iraq. While in North Iraq, in some regions, we have very limited distribution capability, due to safety reasons, which makes about 10% of total Iraqi volume, that we cannot reach to right now.

Despite the challenges in Kazakhstan and Iraq, our international operations continued to deliver strong performance in the first half, as we have discussed. We maintain our guidance for 2014, in spite of the headwinds in the rest of the year. Accordingly, we still expect Turkey volume to grow at low single digits. International operations at mid-teens and consequently, consolidated volume at high single digits. Additionally, we expect net sales revenue to be ahead of our volume growth, and EBITDA margin to be flat, in comparison to 2013.

Now, we can open the floor for any questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Edward Mundy from Nomura. Please go ahead.

Edward Mundy - Nomura

Good afternoon Orhun. Three questions please. First of all, your guidance on Turkey of [indiscernible] rest of the year, it was like quite conservative, given you printed plus five in the first half, and you got quite easy comparatives in the second. I was wondering if you could provide a bit more commentary around that? Do you expect to take significantly much more pricing? I mean, have you seen a drop-off into the third quarter, or are you just maintaining sort of a very conservative view?

Secondly, on input costs, Orhun, you provided a bit of color on hedging arrangements beyond the second half. Do you expect a broadly similar trajectory with gross profit margin contraction in Turkey and expansion in international into the second half? And third in Iraq, I think you mentioned a 10% of your volumes in Iraq are being directly impacted by the volatility, but are you able to provide some commentary on what's happening in Southern Iraq, is consumer sentiment coming under some pressure there?

Burak Başarır

Thank you, Edward. Let me answer your Turkey and Iraq questions, I am going to let Orhun to answer your hedging question, if I might. We are still conservative about Turkey, in terms of the rest of the year, because when you look at the -- down to some election times. But that did not help us, to be honest with you, in the month of July as well, and in some part of August. As we have discussed in the first call, we were cautious about Turkey's performance in the rest of the year, because we knew that things were not going to be easy, and they are not easy. One, the consumer confidence is not back to its restored levels yet, and we still see some challenges going forward, so we would like to maintain our low single digit growth commitments, both internally and externally. So we don't want to over commit. But obviously, we are going to be doing as much as we can, to deliver our promises, and over deliver our promises.

On the South Iraq -- things are quiet-ish. Right now, as you know that Iraq is trying to establish the government, then the Prime Minister's role is at stake right now. So after the parliament is being established, I think we are going to be seeing a more stabilized Southern Iraq. North Iraq is something else because of the ISIS and all of the activities. But looking at the month-to-date numbers, everything is back on track. The stability is -- looks like being restored again. But its too early to say anything about Iraq for the time being. But South Iraq is much more clear-ish, versus the Northern Iraq.

So let me ask Orhun, to take up the hedging question.

Orhun Köstem

Okay. Thank you. Now of course, I think its basically a referral to the gross profit margin, especially in Turkey, and if you look at the second half of this year, I think a few things that we should expect first. As we discussed, we have a significant clarity on how the raw material prices are going to be, as most of these are hedged. Secondly, the impact that's -- in Turkey's cost base, that's coming from an exposure to FX, should be slower in the second half of the year, if you recall how the currency moved in the second half of 2013 after May, given the [indiscernible] to the tapering etcetera. So arithmetically at least we should expect, if these levels tend to continue, a slower devaluation versus the first half of the year.

And going back, as Burak was discussing, I think, as far as the gross profit margin performance is concerned, we should expect to continue managing our cost base quite effectively. I think the determining factor would be how the top line is going to move, as we have seen in the first half of the year, where the average price growth was low, and at the same time, both the cost and expense base grew quite slow as well. So very limited -- under the circumstances, a limited contraction of the gross profit margin.

Edward Mundy - Nomura

Thank you.

Operator

Our next question comes from Nick Ashworth of Morgan Stanley. Please go ahead.

Nick Ashworth - Morgan Stanley

Hi. Thank you very much, and thank you for taking time to answer the questions. Just a couple for me if I can. Firstly, if I look at the international volumes, whilst they are still growing very well into Q2, I think to meet guidance, there is expectations that volumes have to pick up a little bit -- overall, it has to pick up a little bit into the second half; and given some of the headwinds that you have talked about, I think, the volume growth in Pakistan was a little bit slower in Q2, slower in Kazakhstan, it was slower in Iraq. Is the volume expectation for the full year in international a challenging one, and do you have concerns that you can meet that?

Burak Başarır

Thank you, Nick. I mean, there is obviously concerns, but when you look at the total international volume in a relative slowdown, its mainly coming from the Iraqi operations. I mean, you look at Kazakhstan -- Kazakhstan is selling its capacity right now, so that's why we had to build a greenfield in Astana. All of the Central Asia is doing a tremendous job. And Pakistan was, we have taken price increases because of some of the changes -- or expected changes in tax. So it has slowed down a little bit of our business, but going forward, when we look at the rest of the year, we don't see any deviation from our plants.

Nick Ashworth - Morgan Stanley

So does that mean -- to be clear, does that mean that you expect things to get a little bit better from Q2 from here then?

Burak Başarır

Yes.

Nick Ashworth - Morgan Stanley

Okay. And then secondly, just to go back to this finance cost, and I don't know if that was talked about a little bit upfront, but if I just look at the net interest costs, excluding the FX, just the pure interest costs, it looked lower than I was expecting to be in Q2, and therefore H1 was a little bit lower as well. Should we expect that to increase in the second half?

Orhun Köstem

Hi Nick. Well I think the answer should be somewhat yes, because the reason why it may becoming -- if its better than your expectation, potentially its not because of the interest expense that we are recurring; because we are recurring a bit higher interest income than what you're expecting. And reason for that, is an addition to our operational cash flow generation. We are holding on to some of the proceeds, as coming from the Euro conditions last year. Paid down the debt, part of the debt that's maturing in September this year, because we are still carrying -- well, generate a positive carry on those months.

Now when that cash will be used in September to pay down the debt, then our interest income or our average cash holding let's say, to be reduced, we should have an impact on the interest income, especially for the last quarter of the year.

Nick Ashworth - Morgan Stanley

Okay. Then I was clear. Just wanted to clarify. Thank you very much indeed.

Orhun Köstem

Thank you.

Operator

Our next question comes from Ali Dhaloomal from Bank of America. Please go ahead.

Ali Dhaloomal - Bank of America Merrill Lynch

Hi everyone. Thank you for the call. I have two questions. The first one, could you provide us the second quarter revenue growth for Iraq, Pakistan and Kazakhstan? And my second question is regarding your Turkey EBITDA in the second quarter? I mean, it was contracting by 26% if we take the EBITDA, but excluding net other operating items, its just down 12%. Can you give us a little bit color of what you include in this net other operating item? Thank you.

Orhun Köstem

Yes. The second part is easier, thank you, and this is Orhun speaking. First of all, if you look at Turkey, especially, when you look at Turkey's own P&L in the net operating, other operating items, you should see the dividends that Turkey receives from other operations, subsidiaries, if there are any; which tend to of course, on a consolidated basis, as to net op. So these are the, let's say items, plus any let's say, shared expenses on a corporate level, maybe the difference between the consolidated and Turkey under this net operating items.

Secondly, we don't explicitly, let's say talk about the revenue performance in each of the markets that you ask. But as you know, Kazakhstan in the first half, the volumes grew by 22%. In Iraq, in general, its about 11%, and in Pakistan it was 16%. I think its fair to say, that in each case, the revenues have grown perhaps slower than how the volume growth was.

Ali Dhaloomal - Bank of America Merrill Lynch

Okay. That's clear. And in terms of CapEx, I mean, the CapEx to FX ratio was quite low in the second quarter, but you maintained your guidance of 12% to 13% for the full year. So should we expect a catch-up in your expenditures over the second half?

Orhun Köstem

Yes, because part of the CapEx that you're going to seeing, that causing to spending of this year would be actually to spend for next year and the years to come. And as you'd recall, its not the guidance that we have given for 2014, but for the next couple of years, we expect that level to be maintained. Recall, we need capacity in places like Pakistan and Kazakhstan, where we are seeing a very strong volume of demand growth in the past couple of years. So in these two markets, we are building greenfield facilities, basically. So that level of CapEx, not only for this year, but you should expect more or less to be maintained for the next couple of years as well.

Ali Dhaloomal - Bank of America Merrill Lynch

Okay. That's clear. Thank you.

Orhun Köstem

Thank you.

Operator

(Operator Instructions). Our next question comes from Chris Ellis of Babson Capital. Please go ahead.

Chris Ellis - Babson Capital

Hi guys. Thanks for taking my question. You may have already explained this, but can I just understand the reason behind the EBITDA decline in Turkey in Q2? So revenues are up 4%, what has driven the increase in cost of sales by 8%, is that sugar? And can you also comment on the increase in marketing expenses, and general admin expenses? Thank you.

Orhun Köstem

Well Chris, if you look at Turkey's P&L, the average per unit case prices in the second quarter only moved about 0.4%. So in the first half, actually, the increase was only about 1.5%. So basically, as we try to touch base, that change primarily is driven by mix, not necessarily in a significant price increases, which was the plan by the way, as we have discussed in our earlier calls.

The 3.9% per unit case increase in cost of goods sold, actually comes on the backdrop of about close to 20% devaluation, plus about 6% inflation on a year-on-year basis. So in both cases, we have been lower than -- how normally the cost of goods sold inflation should have been. A; of course, owing to the better raw material cost environment, in general, in the first half, as we discussed is lower in single digits, lower in --let's say, mid-teens levels. That's positively impacting the cost of goods sold. But in any case, as the top line is growing slower, so therefore you see a contraction that's primarily coming out of the gross profit margin contraction.

Secondly, of course the marketing expense, as we need to look at on an annual basis, because especially in the first two quarters of the year, and the season, as the summer season, we had to spend a touch higher in the second half. So you should not only look at normalized levels of marketing spending in the second half of the year, but that's just a seasonality of the business.

Chris Ellis - Babson Capital

Thank you. That's helpful. And can you just post the presentation when you get that [indiscernible] to the web site, to kind of access that?

Orhun Köstem

Sure. We think it should be on the web site, but I will make sure we look at it again.

Chris Ellis - Babson Capital

Okay. Just when I was coming onto the call, it wasn't, but I will check again. Thank you.

Orhun Köstem

Thank you.

Operator

We now have a follow-up question from Edward Mundy from Nomura. Please go ahead.

Edward Mundy - Nomura

Hi, thanks for taking the follow-up. Burak, I think you mentioned in your prepared remarks the outlook for revenue per case in the second half in Turkey. I was wondering whether you could provide a bit more color into that? I think you previously alluded to taking pricing at the end of the summer season. But can you talk about some of the other drivers around product mix, channel mix, pipe mix? And then as a second question, have you got any trends to roll out Coca-Cola Life in the medium term?

Burak Başarır

As you know, when we talk about the revenue per case improvement, usually it comes from the package mix change, towards -- in favor of the IC packages, as you know, and the channel mix change and the pricing obviously. Right now, we are kind of evaluating, whether if we have to take pricing or not, because our topmost focus is right now on the volume pickup. So that's where we are, in terms of trying to understand how the pricing would affect our top line volume growth. Will it be better to take the price increases, and look at the volume effect and etcetera, etcetera, so that's what we have been doing. But usually, as you said, we take the pricing towards end of August or the month of September, so we are in the process of evaluating that. But our plans already in better pricing case [ph] for the month of September onwards. But again, you need to understand the conjoined analysis much more clearer, so we can make a good decision for the overall business.

And what was your second question, can you just repeat again?

Edward Mundy - Nomura

Coca-Cola Life in media?

Burak Başarır

Oh yeah. I mean, we are not in the pipeline for the Coca-Cola Life. We think Coca-Cola Life first started in Argentina, and is now being tested or launched in U.K. as far as I know. We are not in the pipeline yet, so we just want to make sure that Coca-Cola Life is the right solution for the Turkish market or other markets. We just wanted to make sure that first of all, that Coca-Cola Life is missing puzzles in our [indiscernible] right now.

Edward Mundy - Nomura

And, as far as I could ask, how big is Coca-Cola Zero, as a tetra portion of overall brand coke, because its seeing very good growth at the moment?

Burak Başarır

Its pretty small. If I am not mistaken, it shouldn't be any more than like 2% to 3%.

Edward Mundy - Nomura

Thank you.

Burak Başarır

Okay. Thank you.

Operator

There are currently no further questions in queue. (Operator Instructions). We have our next question from Ivan Kushch from VTB. Please go ahead.

Ivan Kushch - VTB Capital

Hello gentlemen. Sorry if I missed it, but my question is regarding the price inflation for Turkish business in second quarter. So what is the reason that net revenue per unit case remained flat year-on-year in the second quarter? Was it some weakness in consumption or was it product mix? And the second part of the question is, what is your -- what will be your pricing policy towards the second half of the year in Turkey? Thank you.

Orhun Köstem

Thank you, Ivan. We have touched base a little bit on pricing just a minute ago, let me start with that. We usually take the pricing at the end of the high season, which is like September or so. We are still in the phase of evaluating the pricing in Turkey. In terms of the second quarter net revenue per case being flat, is because of the increased number of promotions versus the prior year, so that's the only reason. As we have talked about at the beginning of the year, we wanted to restimulate the consumption, the Sparkling consumption back on track in Turkey, so that's why we have planned additional consumer promotions, which has a cost obviously, and that's causing the net revenue per case to be flat on the numbers.

Ivan Kushch - VTB Capital

Thank you very much. That's it from my side.

Orhun Köstem

Thank you.

Operator

Our next question comes from Kenan Coşguner from Teb. Please go ahead.

Kenan Coşguner - Teb Yatırım

Good afternoon gentlemen. Thank you for the presentation. My question is regarding direct volumes. What will be the reasonable assumption for the rest of the year, for volume growth in Iraq? Thank you.

Burak Başarır

Hi Kenan. As I said, currently, almost about 10% of our Iraqi volume is being affected. So I would assume again, double digit growth in Iraq, but anything between mid-teens to low teens would be good place to assume Iraqi volumes in total.

Kenan Coşguner - Teb Yatırım

So you're not expecting a volume contraction for the rest of the year, I guess?

Burak Başarır

No.

Kenan Coşguner - Teb Yatırım

Thank you very much.

Operator

(Operator Instructions). Our next caller is Esin Raufoglu [ph] from Integra. Please go ahead.

Unidentified Analyst

Hi. Thank you for taking the question. Can you please talk a bit more on the source of gross margin expansion in international operations? Was it the general benign environment in raw material, or is there a more specific reason to that?

Orhun Köstem

Thank you, Esin. As you remember, on the international -- on one hand you're right, because raw material prices for the first half and the second quarter of 2014 in general is quite stable to favorable, versus 2013 and that's an important factor. But if you look at the international piece, I think what's great in the business between the first and the second quarters was taking place in Kazakhstan; because given the devaluation in the first quarter, you will remember, we discussed that we were not putting forth any price increase towards -- until towards the end of the first quarter, which by the way, increased the volumes quite significantly in Kazakhstan for the first quarter, but when it took the pricing in place, the second quarter, saw a better average pricing environment, although -- just to give you an example, in the first quarter, the unit case prices were down in the international by about 2.9%.

And if you look at the first half, in total, although very-very let's say small, there has been a 0.5% increase in the second quarter. So overall, were almost flat versus first half of 2014. Of course as Burak was mentioning in other places like Pakistan, we have put in place some price increases, which also, I think, assisted the gross profit margin performance in the second quarter of the year.

Unidentified Analyst

Okay. So it was more the pricing environment in a larger market like Kazakhstan, rather than the direct raw material impact, is that okay?

Orhun Köstem

Yeah, I mean, the raw material impact, that would be correct; because the raw material impact is --

Unidentified Analyst

Was already in place in the first quarter though, right?

Orhun Köstem

Yes, exactly.

Unidentified Analyst

Okay. Thank you.

Orhun Köstem

Thank you.

Operator

Our next question comes from [indiscernible] from Bank of America Merrill Lynch. Please go ahead.

Unidentified Analyst

Hello. Thank you for the call. You mentioned that your -- in relation to timing of price increase in Turkey, considering the margin and trade-off, does it mean that you can't pull forward it from September, or you can postpone or are you considering both? Thank you.

Orhun Köstem

Obviously, well thanks for the question first of all, [indiscernible]. Obviously considering both. So whatever we do. When pricing is basically a mathematical decision, right. So they increased the prices, how much the volume will be hit, and then what would be -- if you don't take the price in case, what would be the sustainable volume growth base that you are going to be able to hold on to. So those are the announcements that we are doing right now.

We might take the decision to postpone the price increase towards the end of the year, rather than do it in September, or we can just take up the price increase in the month of September. So all of those are under study.

Unidentified Analyst

But currently as far as I understand, the volume development in Turkey has not been very strong in July?

Orhun Köstem

I apologize? Can you repeat that, I am sorry? I just missed your question.

Unidentified Analyst

From previous discussions, I understand that volume development in July has not been very strong in Turkey, right?

Orhun Köstem

Correct. Yes.

Unidentified Analyst

Okay. Thank you.

Orhun Köstem

Thank you.

Operator

There are currently no further questions in the phone queue. (Operator Instructions). As there are no further questions in the queue, that will complete today's Q&A session. I would now like to turn the call back to speakers' for any additional remarks.

Burak Başarır

Thank you everybody for attending the conference call and having the time with us. We are all mindful of the fact that, actually there is -- its unique challenges and risk of doing business obviously. Equally this chapter offers a lot of opportunities of growth and value for our shareholders going forward. Last but not least, I would like to thank all of our employees across all of our markets for doing their best everyday, especially our team in Iraq and Syria, who are doing a great job in these difficult days.

So I look forward to reporting solid results during the rest of the year, and thank you once again for your participation in the call, and I wish you all a wonderful day. Thank you very much.

Operator

That will complete today's conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.

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