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Coca Cola Hellenic Bottling S.A. (CCH)

Q2 2007 Earnings Call

August 09, 2007, 9:00 AM ET

Executives

Melina Androutsopoulou - IR Director

Doros Constantinou - Managing Director and Chairman

Manik Jhangiani - CFO

Analysts

Lauren Torres - HSBC

Jonathan Fell - Deutsche Bank

Swetha Ramachandran - Credit Suisse

Andrew Holland - Dresdner Kleinwort

Presentation

Operator

Thank you for standing by, ladies and gentlemen, and welcome to the Coca-Cola HBC Conference Call on the Second Quarter 2007 Financial Results.

We have with us Mr. Doros Constantinou, Managing Director and Mr. Nik Jhangiani, Chief Financial Officer with Ms. Melina Androutsopoulou, Investor Relations Director. [Operator Instructions]. I must advise you that this conference is being recorded today Thursday, August 9th, 2007.

I'll now pass the floor to one of your speakers today, Ms. Melina Androutsopoulou. Please go ahead.

Melina Androutsopoulou - Director, Investor Relations

Thank you, operator. Good afternoon to Europe and good morning to US, and thank you for joining our second quarter results call. I am pleased to be joined by Doros Constantinou, our Managing Director and Nik Jhangiani, our Chief Financial Officer.

Before we get started, I would like to remind everyone that this conference call contains forward-looking statement including long-term volume and earnings projections and should be considered in conjunction with the cautionary statements contained in the earnings release and the Company's most recent filings. In addition, I would also like to point out that our first half financials are available on our website at coca-colahbc.com.

I will now turn the call over to Doros, Doros?

Doros Constantinou - Managing Director and Chairman

Thank you, Melina. And welcome everyone. I am pleased to report a strong performance in the first half of the year with comparable earnings per share growing by 15% versus last year to €0.92. This marked the 18th consecutive quarter of double digit EPS growth. Further demonstrating the strength of Coca-Cola Hellenic's business model are offerings [ph] across a well balanced portfolio of countries, offering a diverse and expanding range of products and delivering superior marketplace execution.

During the first half, top line growth of 17% was driven by strong organic volume growth momentum across all of our markets, effective revenue growth management initiatives, the successful launch of Coca-Cola Zero, as well as favorable weather conditions across some of our markets. This strong top line performance drove comparable operating growth of 19% in the first half, well ahead of our plans. Based on the strength of our first half results and the confidence we have in our plans for the balance of the year, we are significantly raising our 2007 financial targets. We now expect operating profit to grow between 18% and 20% and earnings per share growth of 17% to 19% over the full year. Nik will take you through the details of our revised guidance shortly.

During the quarter, core CSD brands grew by 8% with high double digit growth of the low calorie CSD category, supported by the further rollout of Coca-Cola Zero in three of our markets Italy, Austria and Romania. Coca-Cola Zero now has been launched in eight of our countries with early success contributing to growing trademark Coca-Cola in the first half by 10%, while strengthening our CSD leadership positions as we attract new consumers in the category. Although it is still early days, Coca-Cola Zero is performing ahead of our plans, giving us confidence in the successful execution of our three collar strategy.

Our new CSD portfolio continued to perform strongly in both the second quarter, quarter and the first half, lead by double digit growth in the tea, juice, water, energy and sports drink categories. During the quarter, we expanded our presence in the high value wellness category, with product and packaging innovations in both fruit and water-based offering across a number of our markets. In Australia, we launched a berry-based flavor variant of Römerquelle emotion brand, which after only… after only four months has already developed into the number two near water flavor gaining 11% share of the category.

In Russia, we launched Rich Fruit Mix, an innovative snack fruit puree offered in eight flavors under our premium Rich brand as we continued to drive value into this category.

Another satisfactory aspect of our results was the expansion of our operating margins. These reflect the benefit of operating efficiencies from restructuring programs, planned price and mix initiatives and improved operating leverage. We expect to see further margin enhancement in the second half as raw material costs moderate and we execute on planned revenue growth management and supply change initiatives.

Now, turning to the performance on each of our reporting segments. Excluding the front of Italian water acquisition, Fonti del Vulture, volume in our established market grew by 5% in the first half, with positive volume growth achieved in each market. This represents the third consecutive quarter of mid single digit organic volume growth in this segment, primarily driven by two key initiatives. First, ongoing new product and packaging innovation across both our CSD and non-CSD product portfolio. Second, our route-to-market investments, driving increased distribution of our full product range and high quality in-store merchandising standards.

Greece led performance in this segment with mid single digit growth in the first half. This was supported by the launch of Coca-Cola Zero, strong innovation around package and product offerings in the juice category and growth in water which was partly aided by favorable weather conditions. Despite this rolling [ph] topline performance in the established segment, profitability was flat, as a result of increased marketing spend to support the launch of Coca-Cola Zero, as well as higher raw material costs and upfront sales investment.

The developing segment delivered strong volume growth of 16% in the first half, cycling 12% volume growth from the prior year period. All products grew strongly in the first half led by high double digit growth in the juice, water, tea, sport and energy drink categories. This performance reflects the system's sustained investment in brand building, new Cooler placement and strong distribution capabilities, which continued to support the expansion of our full product portfolio into profitable channels. Profitability in this segment almost doubled in the first half with significant operating margin expansion primarily driven by effective revenue growth management initiatives and strong operational leverage, as we realized efficiencies by utilizing production capacity on a regional basis.

Poland, the Czech Republic, Hungary and the Slovakia were the key contributors to profit growth. As we benefited from earlier pricing initiatives, first new product and package mix benefits and operational cost efficiencies. The strong momentum in our emerging market continued with volume up 18% and operating profit up 31% in the first half.

In the second quarter, Romania, Ukraine, Russia, Bulgaria and Serbia were the key contributors to volume and profit growth. Volume growth in Russia moderated in the second quarter to high single digits, cycling exceptional growth of over 20% from the comparable prior year quarter. Our strong focus on driving value through revenue growth management initiatives and operational cost efficiencies resulted in a revenue and operating profit in Russia, both growing in excess of 20% in the second quarter.

In July, we agreed to acquire Aquavision, a new production facility offering significant installed capacity including two aseptic lines to support our growing non-CSD portfolio. As part of the transaction, we also acquired the Botaniq brand, a range of high quality juices and other beverages recently launched in the marketplace.

This investment will enable us to accelerate our growth plans in Russia, while supporting our goal of further extending our share leadership to our nearest competitor in ready to drink beverages, currently spanning at around 1.7:1 on volume and approximately 2:1 on value.

In Nigeria, an increase in the value added tax rate in June resulted in a nationwide strike action that’s lasted four days and disrupted our normal operations. Despite this, volume in the first half grew in the high single digits. We continue to expect a significantly improved operating performance in Nigeria over the full year, supported by new product and packaging innovation, increased cooler placement in a growing retail asset base.

The recent accession of Romanian and Bulgaria to the EU is fueling economic growth and creating a supporting environment for our business. While we are navigating through some short term cost challenges arising from EU entry, we have successfully applied prior earnings from other EU accession countries to mitigate the increased raw material and labor cost pressures.

Further, we are competing from the position of strength in both markets with a diverse product portfolio and strong category share leadership. As a result, we expect to achieve solid profit growth over the full year.

I would now hand over to Nik, who will take you though some more of the details of our first half results. Nik?

Manik Jhangiani - Chief Financial Officer

Thanks, Doros, good morning and good afternoon to all. As Doros indicated,, we are very pleased with the group's strong operating performance in the first half of 2007 and result of it we have significantly upgrading our full year guidance, which I will cover in more detail in a few moments.

Let me provide you with some highlights of our first half performance on a comparable basis for 2006. 13% volume growth during the first six months of the year excluding the contribution of Fonti del Vulture, our water business in Italy. Including FDV volume grew at 16%.

During the quarter, in the first six months, we achieved balanced volume growth across all beverage categories. We are particular pleased with the growth in CSDs which were up a solid 9% for the half year with Coke Zero representing approximately 1 percentage point of growth.

Value CSDs declined mid-single digit during the first six months as a result of our focus on driving improved profitability from this category across all of our developing and emerging markets as well as the reallocation of our production capacity to the more profitable premium brands during the peak summer selling months, very much in line with our strategy.

Net sales revenue for the group, up 17%, both for the first half and the second quarter of 2007, ahead of our volume growth of 16% and 14% respectively. On a currency neutral per unit case basis, comparable net sales revenue grew 4% for the first six months of the year and 5% for the second quarter excluding the dilutive impact from FDV. This being driven by healthy revenue growth initiatives across each of our market segments.

Cost of goods was up 17% for the first half and on a per case basis, excluding FDV grew 2% with the main increase as a result of raw material cost pressures. The great news though is that we expanded our gross profit margins by approximately 60 basis points to 41% in the first half excluding the impact from FDV. We believe that this margin improvement is a significant achievement driven by better price mix variance and our continued focus on production and supply chain efficiencies as benefits from our restructuring initiatives start to kick in.

If we look below gross profits down to the EBIT line, comparable operating expenses per case for the half year, up about $0.02 with $0.01 from additional marketing expenses as we continue the launch of Coke Zero and an additional spend in admin expenses as we roll out our programs under our 'excellence across the board' strategic initiative.

All in all then, very solid progress in our comparable EBIT performance, plus 19% for the first half and plus 21% for the second quarter, well ahead of our plans. Clearly, this impressive growth is driven by robust top line performance and effective asset utilizations, which mitigated the effects of our continued strategic route-to-market investments necessary for the long-term sustainability of our business.

Our comparable EBIT margins improved by approximately 30 basis points for the first half of the year excluding FDV led by significant margin expansion in the developing markets of over 200 basis points. A continuation of what a number of you witnessed during our field trip in Poland and Hungary earlier this year.

Additionally, we had strong margin expansion in the emerging markets led primarily by Russia where our strategy had been very much in line with our group strategy of driving profitable growth. This is driven by our aggressive Cooler rollout program. In fact, in 2006, we placed approximately 75,000 Cooler door equivalents and placed an additional 55,000 Cooler door equivalents year-to-date which have improved performance of our various consumption packages, up by about approximately 18%.

In addition, we have been implementing pricing initiatives, and of course a disciplined cost approach, all this resulting in high double digit EBIT growth and significant operating expansion of over a 100 basis points in the first half of the year.

Below the EBIT line, finance costs for the first half were approximately €2 million up as a result of essentially higher interest rates. On taxes, the effective tax rate for the first half is 22% versus 19% for the comparable period last year. The effective rate was low in 2006 as we had full recognition of accumulated post-ac tax losses in Russia for which we will continue to realize cash tax benefits.

The increase in our minority interest for the first half, up about €5 million is the result of the improved performance in Nigeria as anticipated.

All this leading to a comparable net profit increase of 16% and an EPS increase of 15% for the first half, driven solely by our solid operating performance which was partially offset by higher taxes and higher minorities.

Now let me touch upon an accounting issue related to the recognition of FDV's results in our financial statements. The recent finalization of the agreement between Coke Hellenic and the Coca Cola Company in relation to FDV has resulted in our accounting for this acquisition as a joint venture, and thus subject to the equity method of accounting. This effectively means that we will now recognize FDV's results below the EBIT line as a part of the results of equity method investments line. However given that we have in place a distribution agreement between Coca Cola Hellenic and FDV, we recognize 100% of FDV's volume and the related revenue, cost of goods sold and distribution expenses in our P&L, leading to a minimal impact on the group's operating income.

Couple of words on Aquavision, our recently acquired production facility in Russia. With the acquisition still pending regulatory approval, we expect to be able to provide an update on the financial impact to our 2008 earnings together with our Q3 results in November. We do expect a slightly dilutive impact on our 2007 profitability driven by the marketing support of the recently launched Botaniq brand, together with disproportionately higher fixed costs per unit case before the plant becomes fully operational.

Turning to our outlook for the full year 2007, we now expect solid volume performance of 11% to 13% versus previous guidance of 7% to 8%. This compares to our organic volume growth of approximately 13% for the first half of the year.

On cost of goods sold, while we essentially hedged across all our key commodities for the balance of 2007, we will continue to monitor the oil prices and the dynamics of the PET markets due to the tightness in the pyroxylene supply as well as the unusually strong demand for resin being driven by weather. However at this point, we remain comfortable with our overall guidance of COGS increase of about 1% to 1.5% on a per case basis, with some moderation in the balance of the year versus the first half.

As indicated earlier, we are very pleased with our gross margin expansion. And with our continued focus on revenue growth management as well as continuing operating efficiencies, we expect to grow our full year gross profit margin by approximately 70 basis points on a comparable basis. On EBIT, we are confident on being able to achieve operating income growth of 18% to 20% versus our previously guided range of 11% to 13% with EBIT margin expansion of at least 50 basis points.

We continue to expect our full year effective tax rate to be approximately 22%, and looking forward we remain comfortable with our group effective tax rate to be in the range of 22% to 23% for the medium-term period.

With the continued strong operating performance being partly offset by higher finance cost and minorities, we now expect our full year EPS to be in the range of €1.85 to €1.88, a 17% to 19% increase versus 2006, a significant increase of approximately €0.08 at the mid-point.

As we continue to invest in the growth of our business, we now expect our net CapEx expenditure to be approximately €525 million for 2007. This is in line with our strategy of supporting investments in the high growth areas such immediate consumption, the expected capabilities and PET capacity to meet growing consumer demand for our products.

To sum it all up, we feel good about the strength of our business, which gives us confidence in our ability to continue to drive value creation for our share owners with further work improvement of approximately a 100 basis points in 2007 versus 2006.

With that, Doros and I would be glad to take any questions you might have. Operator, we can open up the floor for questions, please.

Question and Answer

Operator

We will now begin our question and answer session. [Operator Instructions].

The first question comes from Lauren Torres of HSBC. Please ask your question.

Lauren Torres - HSBC

Great. Thank you. I was hoping you could talk a little bit more about your recent efforts in Russia. And Doros, you mentioned that with this acquisition you should accelerate your growth plans there. I was just hoping if you could be a little bit more specific. I know that it's not closed yet, but your thoughts there as far as where you are in this market and what your expectations that would be helpful.

Doros Constantinou - Managing Director and Chairman

Yes, hi, Lauren. We are at this stage… we are in an early stage of integrating Aquavision to our Russian operations. It's still pending regulatory approval and we will update on the progress and the impact on 2008 during the Q3 results. However, the Aquavision acquisition is in line with our existing plans, it's an investment into one of the largest state of the art soft drink production plant in Russia, which has a capacity of approximately 600 million liters, per annum. And the investment is expected to accelerate our growth plans in Russia. It's having an incremental production capacity including aseptic capacity, which is currently… and then we have another plant in the south of Russia being built, but this one comes readily on stream; it's ready, we can use it immediately. And it can help us with capacity shortfalls over the peak summer period. And, production operators are on sites, so the whole plant is, it's ready to be used.

Lauren Torres - HSBC

And if I could also ask if related to that, and thinking taking longer term, you updated your '07 financial targets. Previously you talked about some of your longer term targets be it from volume or EBIT or EPS perspective. Any comments there or updates with regard to your longer term growth goals.

Doros Constantinou - Managing Director and Chairman

Lauren, are you talking about the overall group or Russia in particular?

Lauren Torres - HSBC

Actually, overall if you could talk about that, that would be great.

Manik Jhangiani - Chief Financial Officer

Lauren, hi, it's Nik. We're just about entering our business plan cycle, as you are probably aware. So it's a little early to talk about specifically our 2008 plan. So I think if we just look at the strength of our business model and the growth prospects that we have across the group, we continue to feel positive about the good trading momentum across most of our markets and the strong marketplace execution we have in place. And I think in a number of our markets, the developing market segment in some of the emerging markets, we're generally seeing improving macroeconomics as well.

Doros just talked a little bit about the Aquavision acquisition and how that will help us in Russia where we might have some capacity issues in the next few years, particularly in the peak selling months, as well as the fact that we're using controlled fillers [ph] right now, particularly for our Multon business there, which should come off and help from a profitability perspective. You have got the EU sugar regime benefits coming up as well. And we feel good about the early signs of what we're seeing the established markets from some of the upfront investments that we've made.

So I think a combination of strong topline growth, cost driven programs, gives us good comfort at this stage in terms of the outlook of our business for the mid-term. So, I can't give any specifics but nothing that I can alert you to change what we have talked about in the past.

Lauren Torres - HSBC

Okay. Thank you.

Operator

Your next question comes from Jonathan Fell of Deutsche Bank. Please ask your question.

Jonathan Fell - Deutsche Bank

Hi everybody. I've got a few bits and pieces actually. First of all, just on Russia again, I think you said… you talked about a slowing of your volume growth of high single digits during the second quarter. Is there anything going on there fundamentally in the market that would lead to a slowdown, or are we just looking here at changes in all movements in your shipment patterns? And I wondered as well, if you could give us some idea of how the growth in the first half of the split between CSDs and the other products you have in Russia given you talk about low double digit growth in juices and waters from that market?

Doros Constantinou - Managing Director and Chairman

Hi, Jonathan. In Russia, there was some duration in the volume growth during the second quarter. But let's bear in mind that we were cycling a very strong second quarter last year. We were plus 20% and we experienced some colder weather in the second half of June. However, our value ratio versus the next competitor remains unchanged approximately 2:1 in value, and as I said 1.7:1 in volume. And in Russia we… our key focus remains on driving profit up or volume growth. And we will do that through implementing planned pricing actions, focusing on profitable package mix. IC packages in Russia grew 14% during the second quarter and our IC packages grew 18% year-to-date for the six months. And we have also implemented a very disciplined approach to controlling costs.

So, as a result in second quarter, in Russia we achieved high double digit net sales revenue and EBIT growth. We have EBIT margin expanding [audio gap]. So, we are very optimistic about Russia. There is nothing that would make us change our view on Russia.

Jonathan Fell - Deutsche Bank

Thanks, okay, thanks very much. I wondered if I could also ask about the margin progression in the established markets. I think the margin there has been held back a little bit by the route to market initiatives you started in Austria and Switzerland in the second half of ’06. Would I be right in thinking that the comps from that investment start to get easier as move into the second half of this year?

Manik Jhangiani - Chief Financial Officer

Yes, absolutely Jonathan. I mean I think while we did have some margin effects in the first half, we do expect that investment rates to kind of moderate over the second half. And hopefully be able to look at flattish margins for the full year in the established market segment.

Jonathan Fell - Deutsche Bank

Okay. Thanks very much.

Operator

Your next question comes from Swetha Ramachandran. Please ask a question.

Swetha Ramachandran - Credit Suisse

Hi, there. This is Swetha from Credit Suisse. I just had quick questions. Firstly, on the slight increase that you have to your full year ’07 CapEx projections from say, €500 million a year ago to €525 million, is that a number maybe that we should extrapolate into outer years going forward as well? And also, what coupon rate, given higher interest rate that you're now factoring into your full year earnings guidance?

Secondly, in terms of trading days that you estimated to have lost in Nigeria as a result of the strike, would that just be the four days that the strike lasted or perhaps a few more in and around that?

Thirdly, if you would maybe discuss what percentage of the second quarter volume growth could have been attributed to the Coke Zero alone as well as totally in the first half, that would be great. What sort of cannibalization are you now seeing in the markets where it was launched earlier in the first quarter such as Greece and Ireland? And obviously, given the success it's had in the first eight markets that you have launched it in, where do you think you might launch it next in?

And fourthly, on the Russian acquisition investment in July that I guess is much more longer… with much longer-term view, but I was just maybe wondering if there were any significant near-term capacity constraints that you had been facing in Russia that maybe expedited this investment or do you still have a fair amount of that capacity before this investment comes on-stream? Thank you very much.

Doros Constantinou - Managing Director and Chairman

Swetha hi. I will start from your last question about acquisition and take it one after the other.

We have plans for building extra capacity in Russia. Actually, we have initiated greenfield project in the South of Russia, Rostov. But we saw the opportunity when Aquavision was up for sale, to accelerate those plans. So we are part of the process and we are really very excited to being able to acquire Aquavision. It shortens the time by which we could increase our capacity to be able to cope with increased volume requirements during the peak season, which sometimes spikes because of weather because of other reasons. So that accelerates our plants by a year and a half or two and that’s very exciting.

At the same time we continue with the Rostov greenfield because we still believe that during those two years, we will grow the business in a way that the Rostov plant will be required to serve Russia and Ukraine.

Now going to Nigeria, I will say that in Nigeria, yes, in second half we had some disruptions, the nationwide strike over VAT and we lost some days. But despite this fact, our performance in Nigeria remained strong in the first half. And the growth was in the high single-digits.

We expect significantly improved volume and profit performance over the full year in Nigeria. And this is supported by specific actions. We have increased our marketing investments behind the core brands, and we are restoring the growth in CSD category. We have launched the Coca-Cola campaign that we have in the rest of our markets which is Coke Side of Life. We continue to increase our coverage in the country and at the same time we are all out more Coolers, especially in the growing segment of fast food chains. And the competitiveness… our competitiveness in the country is improving following the restructuring that… initiative that we did last year. And this year as of the beginning of the year, we have available a new plant in Abuja, which is the capital of the country. So we are very well positioned in Nigeria to capture growth, and we are very comfortable about the future in the country.

Now going to the Coke Zero, we say that we are very pleased with the initial results we will have from Coke Zero. We cannot separate 100% what the performance of Coke brand would be excluding Coke Zero. You understand there is some cannibalization to a certain extent. But what is more important is that the whole category is growing at a healthy rate. It has grown about 5% in our established market and between 9% and 10% overall Coke Brand… Brand Coke. So that’s very encouraging.

Our focus regarding Coke Zero has been on achieving prominent in-store placement of product where we have promotional and merchandising material trying to drive impulse purchase in trial, which is important. And that’s it about Coke Zero. We are very excited about this product and across the eight countries that we have launched it and we see positive trends in the overall CSD category.

Swetha Ramachandran - Credit Suisse

And any new markets you might think about launching it in the future?

Doros Constantinou - Managing Director and Chairman

Yes. But not in remaining of the year. It would be part of our business plan process for next year, where there is opportunity and where it is appropriate to launch it in 2008.

Swetha Ramachandran - Credit Suisse

Just a follow-up, maybe what percentage point of the total core Coke Brand growth do you think was contributed to by Coke Zero alone?

Manik Jhangiani - Chief Financial Officer

As I said in my prepared remarks we think it's about 1 percentage point of the total growth of about 9% in core CSDs.

Swetha Ramachandran - Credit Suisse

Okay, sorry, I missed that, apologies.

Manik Jhangiani - Chief Financial Officer

And, just on your other two questions, since you got a lot of questions in to us, let's see if we can answer those. On your CapEx, I think the increase in CapEx is really more around some pre-spending based on the way the business has been performing for 2008 into 2007. So at this point, pre, having completed our next round of business plans, I can't give you some precise guidance on going forward, but I think I wouldn’t at this stage, extrapolate that across.

And on the coupon rates, most of our fixed rate debt has been swapped into floating rate debt, and we are probably looking at between a 4% and 4.25% at this point based on the forward curve. So, keep in mind though that we do have some interest rate cap protection that kicks in at 4% for about one third of our debt portfolio.

Swetha Ramachandran - Credit Suisse

Okay, that’s great. Thank you very much.

Operator

[Operator Instructions].

The next question comes from Andrew Holland at Dresdner Kleinwort, please ask your question.

Andrew Holland - Dresdner Kleinwort

Yes, hi everybody. You have previously guided that you are expecting raw material cost increases this year to an amount of about €25 million. We have heard a lot from other companies recently about input cost pressure, are you still comfortable with that guidance for the full year?

Manik Jhangiani - Chief Financial Officer

Andrew hi, it's Nik. As we indicated in our press release, we remain comfortable with the 1% to 1.5% COGS per unit case increase for the full year. So I think the raw material exposure has been appropriately factored into our guidance and we feel comfortable at this stage, bar with anything happening again with oil prices and some other stuff on the value chain, as I said. But most of our stuff is pretty much hedged in terms of sugar and aluminum and with resin. We do have a variety of different types of contract in place that are based on indices that move up or down based on pyroxylene moves or oil price moves et cetera. But generally, we feel comfortable with where we are today.

Andrew Holland - Dresdner Kleinwort

Okay, is there any sort of particular price, just thinking of the way the oil price in particular has moved just in the last few weeks, is there any price at which we should be looking out for that it starts to get, starts to damage your current thinking.

Manik Jhangiani - Chief Financial Officer

I wouldn't give you specifics on that today. But I think we are appropriately covered for where we need to be for the full year unless something goes completely haywire.

Andrew Holland - Dresdner Kleinwort

Okay, Thank you.

Operator

[Operator instruction].

You have a follow up question from Jonathan Fell of Deutsche Bank. Please ask your question.

Jonathan Fell - Deutsche Bank

Oh, Hi folks, sorry, just a follow up question about the accounting on the Italian Water thing, FDV. I didn't quite catch what you said about how the accounting was going to change going forward. Just, do you mind running through that again?

Manik Jhangiani - Chief Financial Officer

Sure Jonathan. Two things really happening. One, we are accounting for this as a joint venture now. So in effect it will just be reported in as equity income below the EBIT line.

Jonathan Fell - Deutsche Bank

Yes.

Manik Jhangiani - Chief Financial Officer

So that's the first part of it. However, having said that given that FDV has a distribution agreement with CCH BC Italia in place, we would be selling all their volumes, so 100% of the volume and the revenue and the related costs at which that joint venture sells to CCH BCI and the distribution expenses, for a net impact of pretty much minimal on EBIT line will…

Jonathan Fell - Deutsche Bank

So you would not really be making any EBIT?

Manik Jhangiani - Chief Financial Officer

Exactly. Because your 50-50 piece of it has really been picked up in the equity income.

Jonathan Fell - Deutsche Bank

Yes.

Manik Jhangiani - Chief Financial Officer

Okay?

Jonathan Fell - Deutsche Bank

I get it. Perfect, thank you.

Operator

[Operator Instructions].

We have no further questions at this time. Please continue.

Doros Constantinou - Managing Director and Chairman

Thank you, everyone, for joining us today. We are pleased to have been able to share with you today another set of strong results and we look forward to updating you on our third quarter performance in the coming months. Thank you very much.

Operator

That does conclude our conference for today. For those of you wishing to review this conference the replay facility can be accessed by dialing within the U.K. on 805-245-5205 or alternatively on country code +44-1452-55-0000. The reservation number is 1602505 followed by the hash key. Thank you for participating. You may all disconnect.

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