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The Coca-Cola Company (NYSE:KO)

Q2 2008 Earnings Call

July 17, 2008 8:30 am ET

Executives

Ann Taylor - Vice President and Director of Investor Relations

Neville Isdell - Chairman of the Board, Chief Executive Officer

Muhtar Kent - President, Chief Operating Officer

Gary P. Fayard - Chief Financial Officer, Executive Vice President

Sandy Douglas - North America Group President

Analysts

Judy Hong - Goldman Sachs

Bill Pecoriello - Morgan Stanley

Marc Greenberg - Deutsche Bank

John Faucher - J.P. Morgan

Christine Farkas - Merrill Lynch

Bryan Spillane - Bank of America

Kaumil Gajrawala - UBS

Mark Swartzberg - Stifel Nicolaus

Lauren Torres - HSBC

Carlos Laboy - Credit Suisse

Todd Divek - Banc of America

Karen Lamarc - Federated Investors

Operator

Good morning. My name is Dennis and I will be your conference facilitator. At this time, I would like to welcome everyone to The Coca-Cola Company’s second quarter 2008 earnings results conference call. (Operator Instructions) I would like to now introduce Ann Taylor, Vice President and Director of Investor Relations.

Ann Taylor

Good morning and thank you for being with us today. I am joined by Neville Isdell, our Chairman; Muhtar Kent, our President and Chief Executive Officer; Gary Fayard, our Chief Financial Officer; and Sandy Douglas, our North America Group President. Following prepared remarks this morning by Neville, Muhtar, and Gary, we will turn the call over for your questions.

Before we get started, I would like to remind you that this conference call may contain forward-looking statements, including statements concerning long-term earnings objectives and should be considered in conjunction with cautionary statements contained in our earnings release and in the company’s most recent SEC report.

In addition, I would also like to note that we have posted schedules on our company website at www.thecocacolacompany.com under the financial information tab in the investors section, which reconcile certain non-GAAP financial measures that may be referred to by our senior executives in our discussion this morning and from time to time in discussing our financial performance to our results as reported under generally accepted accounting principles. Please look on our website for this information.

Now let me turn the call over to Neville.

Neville Isdell

Thank you, Ann and good morning, everyone. As you all know, this has been my final quarter as CEO of this outstanding company and before I turn the call over to Muhtar, who will provide context around the results of the second quarter and the outlook going forward, and to Gary who will give you an overview of the financials and some additional perspective on 2008, I want to make a few opening comments.

The Coca-Cola Company has made significant progress since our turnaround began in 2004. We have revitalized the sparkling beverage category globally and continue to grow trademark Coca-Cola. We’ve addressed key issue markets and taken decisive actions. We have reconnected with our customers and consumers through effective marketing and innovation strategies, and we have reengaged our associates, who are absolutely key to our winning in the marketplace.

And importantly, we have successfully implemented a seamless CEO transition plan for the next leg of our journey. Clearly our strategies are working as we continue to expand our volume and value share leadership position in the non-alcoholic ready-to-drink beverage industry, as well as in sparkling and key still beverage categories.

And our financial performance continues to be strong, as we deliver our seventh consecutive quarter of double-digit comparable earnings per share growth.

As I depart as CEO, I am pleased with our accomplishments and solid performance. We have put in place a strong foundation and I remain confident in our outlook for 2008 as we continue to invest and build share. Our balanced geographic mix and broad portfolio, along with the talent and experience of our people across the system, positions us well to continue to be successful, delivering growth and value for our shareowners for the long-term.

And now, I’d like to turn the call over to our new CEO, my good friend, Muhtar. Muhtar Kent, please.

Muhtar Kent

Thank you, Neville and good morning, everyone. First, I’d like to take this opportunity to thank Neville for his extraordinary leadership and the support that he has provided to me for the past two decades. I am truly honored by the confidence both he and our board of directors have shown in my ability to lead this great company.

Before I get into the specifics of our operating performance, I’d like to reiterate that our business is a true great business to be in. The non-alcoholic beverage industry is the fastest growing segment of the consumer products industry and we have leading positions in almost all categories we compete in. The Coca-Cola Company offers an affordable luxury, connecting with our consumers 1.5 billion times every day.

But I know what is top of mind for all of you; the current macroeconomic environment and its impact on our results. Based on our volume performance of 3% in the quarter, it is clear we were faced with some challenges around the globe. Our results in the quarter were impacted primarily by a number of one-time events, including strikes in Europe and natural disasters in Asia, as well as unfavorable weather in a number of our markets.

Moreover, we are certainly operating in a more challenging environment, particularly as rising food and energy costs way on consumer confidence. Internationally, GDP forecasts are coming down; however, growth is still expected to remain at healthy levels, and it is no surprise that we continue to face challenges also in North America due to the U.S. economy.

We continue to invest aggressively in our portfolio with new products, marketing platforms, and a consistent strategy in very close coordination with our bottling partners to offer our customers the best beverage choices for consumers.

Our second quarter performance demonstrates our ability to leverage the strengths of our system to achieve balanced growth. Our results were once again led by our international operations, which delivered 5% unit case volume growth, cycling 9% growth in the prior year, despite some one-off events and a more challenging macroeconomic environment.

For the past few years, we have been rebuilding our foundation and solidifying our position as the leading global non-alcoholic ready-to-drink beverage company. We believe that our broad and balanced geographic mix positions us very well to navigate through any headwind as we continue to focus on operating efficiencies and execution strategies.

Our actions are allowing us to win in the market. Globally, we accelerated our volume and value share gains in total non-alcoholic beverages. Importantly, we gained share in most of our key markets as well as key categories, and this illustrates the strength of our brand and the strength of our system to operate successfully in tough environments. By continuing to invest in difficult economic times, our system is seeking to build a stronger bond with consumers and a stronger share position for the long-term. We clearly recognize that there are short-term challenges in the marketplace related to economic trends and we will maintain our disciplined approach of analyzing and understanding the impact of these challenges to our business and adjust our plans accordingly.

Now let me turn to our operating performance for the quarter. We increased our unit case volume by 3% in the quarter and 4% year-to-date, successfully cycling 6% growth in the prior year quarter and year-to-date period. While the growth was not where we would have liked it to be, it is not unexpected given the headwinds we faced from natural disasters, including earthquakes and floods, as well as unseasonably cold weather -- cold and wet weather in certain markets.

Additionally, we were challenged, as I said, with strikes in key European markets and continued softness in consumer trends in North America. In the quarter, our financial results remained strong. We achieved double-digit comparable earnings per share growth of 19%, now our seventh consecutive quarter of double-digit EPS growth.

Revenue growth was solid, increasing 17% with the acquisition of bottlers contributing two points of growth. This performance illustrates that our strategies to drive top line growth are working.

Ongoing operating income increased 20% with currency contributing 11 points of growth, so our currency neutral operating income was 9% even as we have continued to make solid, strategic investments for long-term sustainable growth.

Moving now onto our geographies, Latin America continues to be a bright spot for our system, once again achieving solid results. Unit case volume increased 7% with all business units delivering growth and the group also continued to achieve share gains in key countries. Additionally, the successful integration Jugos del Valle into our system is contributing to still beverage growth and share gains.

In Mexico, unit case volume increased 10%, led by the continued strong performance of brand Coca-Cola, up 3% and the benefit of Jugos del Valle also contributing three points to growth, all leading to volume and value share gains in sparkling as well as still beverages.

Brazil increased 1% in the quarter, reflecting the slowdown in industry growth, particularly in April as consumer spending shifted to durable goods as a result of continued credit expansion. Despite challenges in the marketplace, Brazil gained volume and value share in total non-alcoholic ready-to-drink beverages, also as well as with sparkling and still beverages.

In Africa, we achieved unit case volume growth of 5%. South Africa’s unit case volume was even with last year, cycling 12% growth in the prior year quarter and reflecting the continued effects of CO2 shortages. We expect to have the CO2 shortages in our business resolved during the second half of this year.

Eurasia delivered unit case volume growth of 7%, led by solid results in India, Turkey, Eastern Europe, Southern Eurasia, and the Middle East. Growth was solid across sparkling and still beverages, with sparkling beverages growing 3% and still beverages, led by the expansion of Minute Maid in India and [Molten] Juice in Russia growing 24%.

In Russia, unit case volume growth was 2%, primarily reflecting the impact from poor weather conditions, particularly in the second half of the quarter. Despite the slowdown of volume growth in Russia, our volume and value share in non-alcoholic beverages in the quarter reached an all-time high.

The Pacific group grew unit case volume 4% in the quarter, led by China, which continued to delivered double-digit growth despite being negatively impacted by significant flooding and earthquakes in certain regions of the country. We continue to drive growth by leveraging our Olympic activation programs centered around brand Coca-Cola, expanding Minute Maid Pulpy and successfully launching our new original Leaf Tea brand.

In Japan, volume declined 1% in the quarter; however, we achieved share gains in non-alcoholic ready-to-drink beverages. Sparkling beverages continued to grow, led by trademark Coca-Cola as we continue to invest behind our three cola strategy and the introduction of a new Fanta product, [Fofuru], a unique innovative sparkling jelly fusion shaker. Additionally, Georgia Coffee grew 4%, the highest growth rate for Georgia in more than five years. Core Georgia flavors contributed to more than 50% of the growth, proving our strategies to innovate the brand through marketing initiatives, new packaging, and new flavors are working well. Georgia is now in its third consecutive quarter of growth and gaining category share. Adverse weather conditions resulted in volume declines for Sokenbicha and Aquarius.

Together with our bottling partners, our outlook for Japan remains positive with an expectation of low-single-digit unit case volume growth over time. In Japan, we have a clear formula for success and we’ll continue executing against our strategies.

In the Philippines, results were impacted by severe typhoons in the early part of the quarter. Additionally, we saw a slowdown in overall consumer spending in all staple goods, including beverages, due to inflationary pressures. Unit case volume grew 3%, cycling 11% growth from prior years.

We continued to gain sparkling and total volume and value share during the quarter. We remain committed to investing in the marketplace, focused on affordability and availability initiatives to drive future growth.

In the European Union group, our volume declined 1%, cycling 5% growth from the prior year. Our operations were impacted by strikes in several of our key markets and the shift of the Easter holiday into the first quarter. Volume declined in April but returned to growth in May and June. Despite these challenges, we are winning in the marketplace, gaining overall volume share and value share across the group, as well as share gains in sparkling and still beverage categories.

Coca-Cola Zero remains strong with presence in 26 countries now in the group and growing double-digits in the quarter. We continue to expand our still beverage offerings to generate more balanced growth and launched Vitamin Water in Great Britain with early signs showing good progress.

We are consistently making solid strategic investments behind our brands with marketing initiatives around Euro 2008 and the Olympics, focusing on revitalizing the sparkling category with the expansion of our Zero range portfolio and broadening our footprint in still beverages.

In Europe, we have a solid foundation in place and remain committed to executing against our strategies.

In North America, results were clearly impacted by the worsening economic environment, which as we know may continue for some time. The economic environment is reflected in the non-alcoholic beverage industry declining 2% in the quarter. However, we remain confident we have the right strategies in place to deliver long-term sustainable growth, working alongside closely with our bottling partners and customers.

Our unit case volume growth was even in the quarter, despite the challenging environment. Importantly, we’ve continued to gain total beverage volume and value share. Sparkling beverages declined 4% in the quarter, reflecting the continued weakness in our food service business and other on-premise channels.

However, our red, black, and silver portfolio -- Coca-Cola Classic, Coca-Cola Zero, and Diet Coke -- continued to gain volume and value share. Coca-Cola Zero delivered strong results, growing more than 40% in the quarter, cycling double-digit growth.

Our still beverages portfolio performed strongly as unit case volume increased 9% in the quarter. Warehouse juices grew double-digits, led by trademark Simply Juices, and continued to gain volume and value share. Importantly for Glaceau, performance remained solid, up strong double-digits with strong performance in immediate consumption and non-measured channels. Additionally, Fuse continues to perform very well and for the still beverage category, we continued to gain total volume and value share.

In this difficult economic environment looking forward, we have a strong marketing calendar and our bottling system and customers across sparkling and still brands, but we expect the back half of 2008 to remain challenging in North America. We are accelerating productivity initiatives to focus investment in consumer and customer-facing programs and remain committed to winning in this important market.

Now let me cover productivity; driving effectiveness and efficiency across our entire system continues to be a key lever in our ability to consistently deliver long-term sustainable results. Recognizing the challenges we are facing, in my first two weeks as CEO I have accelerated several initiatives which were already underway focusing the system on three primary areas.

First, supply chain optimization, where we are working within our own supply chain and with our bottling partners to improve operating efficiencies to drive margin-enhancing opportunities.

Second, marketing and innovation effectiveness -- we are aggressively reviewing marketing spend to reduce non-consumer facing programs through greater use of global campaigns, leveraging best practices on creative designs and execution as well as optimizing our use of agencies and other third-party providers. As an example, we recently negotiated a global marketing research agreement that will generate savings versus the numerous local agreements in place, as well as provide additional services. These are just a few of the many steps we are taking to optimize investments behind our brands and leverage global best practices. Our objective is to reinvest marketing efficiencies we realize into -- marketing efficiencies that we realize into additional brand-building activities to drive the long-term health of our business.

And third, operating effectiveness and efficiency, which will provide us with ongoing flexibility to invest in additional initiatives to drive top line growth and also to support the foundation for future performance as well as drive more streamlined decision-making.

I’ve talked to you about these opportunities before. We are now ready to share with you a range of expected monetary benefits. Our target is to generate annualized operating savings in the range of $400 million to $500 million by the end of 2011. We have already begun to implement several initiatives to realize these savings, including first by aggressively managing operating expense budgets and concentrate supply chain operations to eliminate inefficiency and waste supported by lean techniques across our operations; second, by redesigning processes to drive standardization and effectiveness; and third, by identifying opportunities to leverage our size and scale, including shared service operations.

And also, last but not least, driving savings in our indirect spend areas through the implementation of a new procure-to-pay purchasing program first in North America and Europe, which is really going to cover approximately 80% of our total indirect spend globally.

So overall, while our volume growth in the quarter was weaker than we would like, I am pleased that we successfully managed the numerous one-off factors, as well as the more challenging economic environment by delivering solid financial results and winning in the market, as evidenced by our share gains globally in key categories and also across all our markets.

Our system has proven that it is taking the right actions to be successful in the market and we will continue to do that. Going forward, we will remain relentless in becoming more efficient, leaner, and more adaptive to the changing market conditions while continuing to invest behind our brands, building a strong position for the future.

Both the fundamentals of our business and the strength of our brands continue to be solid. Through our focus on superior system execution and driving productivity, I remain confident we are building a stronger Coca-Cola system for the future.

With that, let me turn the call over to Gary.

Gary P. Fayard

Thanks, Muhtar and good morning, everyone. As Neville and Muhtar have indicated, we once again delivered strong financial results. As you saw in the release, we reported earnings per share of $0.61 per share on a diluted basis in the quarter. However, this included a net charge of $0.40 per share; $0.38 of the net charge was related to our proportionate share of the non-cash impairment charge recorded by Coca-Cola Enterprises. The remaining $0.02 of the net charge was related to restructuring charges and some tax matters, partially offset by gains from the sale of assets, primarily the sale of our [Ramill] bottler in Brazil to Coca-Cola FEMSA. Therefore, our adjusted earnings per share was $1.01 per share, an increase of 19% after considering items impacting comparability in both the current and prior year quarter, as Muhtar side, our seventh consecutive quarter of double-digit comparable earnings per share growth.

Net revenue in the quarter increased 17%, which included a 2% benefit from structural changes primarily related to our acquisitions of certain bottlers. The growth was driven by a 3% increase in concentrate sales, a 9% increase from currency, and a 3% favorable impact from price and mix.

In the quarter, unit case volume increased 3%, cycling 6% growth in the prior year quarter. Additionally, unit cases and concentrate sales are in line for the quarter and year-to-date.

We grew operating income by 18% on a reported basis. After considering items impacting comparability in the current and prior year quarters, operating income increased 20%, which includes an 11% benefit from currency.

Total SG&A on an ongoing basis increased 16% in the quarter. About 14 points of the increase was due to bottler and brand acquisitions, increased sales and service expenses, as we invested for growth in our bottling operations and because of currency. The remaining two points reflected continued investment behind our brands at a rate approximating gross profit growth while tightly controlling general and administrative expenses as we focus on expense management and productivity initiatives.

We are maintaining a disciplined approach to marketing our brands, particularly in the current environment. As Muhtar mentioned earlier, we are continuing to support our brands, building a stronger share position for the future. We’re achieving this through a slight step-up in our total direct marketing spend versus our original plans, while at the same time reinvesting marketing productivity savings. We’re also strategically reallocating resources against geographies and initiatives to drive sustained growth.

Additionally, we continue to see margins improve in both our core business and in our bottling investment group. Our continued focus on driving efficiencies and effectiveness throughout our organization generated four points of expense leverage on our core business in the quarter.

For the remainder of the year, we would expect to continue to achieve expense leverage but at a more moderate rate as we start to cycle some of the programs put in place late last year.

Our interest expense decreased in the quarter, reflecting the impact of a $17 million gain from terminating interest rate locks put into place in anticipation of a long-term debt issuance later this year, which is now being deferred given the current market environment, as well as lower interest rates.

We repurchased approximately $1 billion of our stock year-to-date and we continue to expect to repurchase between $1.75 billion and $2 billion for the full year 2008.

Now let me address some of the factors that we see impacting us in the remainder of this year. We remain confident in our ability to achieve long-term sustainable growth, despite a more challenging short-term environment, given our balanced geographic mix and brand portfolio. We will continue to portfolio manage globally as we expect solid performance in most of our markets, with softness in North America, as our business in North America will continue to be impacted by the difficult economic environment in the near-term.

Globally, we have strong plans in place with our bottling partners and customers for the remainder of the year, which reflects the realities of each market’s economic conditions. From a commodity cost perspective, given the continued rise in oil prices and the impact on PET, we would expect a slight increase for the company for this year.

From a capital expenditure standpoint, we purchased $850 million in net property, plant, and equipment year-to-date. For 2008, the full year, we expect total company net capital expenditures will be approximately $1.8 billion to $1.9 billion. That’s versus our prior estimate of 1.6 to 1.7. About half of the increase is due to currency movements since the time we set our budgets and the remainder is to support the growth in our bottling investments group.

With regard to taxes, we ended up the quarter with an underlying effective tax rate of 22% and we expect to remain at that underlying effective tax rate for the remainder of the year.

Moving now to currency, as I mentioned we saw a positive impact from currency in the quarter on operating income of 11%. We are effectively covered for the full year on the YEN and the Euro, and based on current market rate expectations for the remainder of the year and benefits of coverage in place, we would expect currency benefits on operating income for the full year to be at least mid-single-digits, with most of the benefit occurring in the first three quarters of this year.

And finally, let me turn to productivity; as you saw from our release and as Muhtar mentioned, we expect to achieve $400 million to $500 million of annualized operating savings from our productivity initiatives by the end of 2011. In realizing the savings, the company expects to incur total non-recurring costs by 2011 approximately equal to the annualized savings. Starting in 2008, we expect the phasing of the savings and cost to be approximately 25% per year through 2011.

That’s it for the topics I wanted to cover, so Operator, now for the questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will come from the line of Judy Hong with Goldman Sachs.

Judy Hong - Goldman Sachs

Good morning, everyone. Muhtar, I was just wondering, if we looked at your volume growth of 3% in the quarter, I’m wondering if there’s a way to quantify how much of that was really one-off factors, like the labor strike, et cetera, versus the more challenging macro conditions that you’ve cited.

And related to that issue, if you look at markets around the world, can you compare and contrast markets where you are seeing more negative impact from challenging macroeconomic conditions versus markets where you are not? And whether going forward, you are looking for a broader slowdown in markets where you haven’t really seen the weakness in some of these markets at this point.

Muhtar Kent

Good morning, Judy. I think as I said, I talked about the one-off events; again, just to reiterate them, China certainly experienced earthquakes, flooding, also unseasonable weather -- that certainly had an impact early in the quarter. Philippines experienced typhoons, Europe experienced unseasonable weather, very unseasonable weather in April and also we experienced labor strikes in both France, Greece, and Spain, and Japan and Russia were again impacted very significantly in terms of the unseasonable weather.

Now, it is again very difficult to quantify. We do know that these had an impact on our business, no question. And then you see countries like the Philippines where the food inflation is having an impact on consumer sentiment and we are going to see that continuing. But I think overall, we know that had these one-off events not had taken place that our volume growth would have been higher in certain markets like Russia, certainly in markets like China and also for sure in Europe, where we have a very solid foundation of our business.

So I think you can isolate some of those things into the quarter and then Brazil, where the economy is very, very robust, we saw again a significant expansion of credit endurables that had an impact on our business early in the quarter but again, that was also a one-off because that, we don’t see that continuing going into the balance of the year.

So those are sort of the comments that I would give you. I think we see that although at a slightly slower rate, the macro economies in the BRIC countries are going to continue to grow and the emerging markets are going to continue to grow. The difference between what you see today in the economic environment versus what you saw perhaps a decade ago in the crisis is that the current macroeconomic -- the current economies of the emerging countries are much better positioned from a fiscal discipline, monetary discipline point of view to weather some of these current challenges and again, we will all see it and live through but I want to reiterate that certainly the business that we are in is the business that -- where we sell essentially a very affordable luxury, billions of times every day, is one where we are very confident that we can continue to grow going forward.

Judy Hong - Goldman Sachs

Okay, and just a clarification on this year’s outlook, because I think Gary mentioned that you guys are confident in achieving the long-term growth targets this year. Does that mean -- are you backing off on your comment before about the picture of success this year exceeding those long-term targets?

Muhtar Kent

We have reiterated that our long-term targets of 3% to 4% volume growth, 6% to 8% operating income growth and high-single-digit earnings growth and the picture of success for us is to exceed those and I think we currently will be disappointed if that is not the case.

Judy Hong - Goldman Sachs

That’s still the case this year?

Muhtar Kent

We would be disappointed if that would be not the case.

Judy Hong - Goldman Sachs

Okay, yeah, thank you.

Operator

Your next question will come from the line of Bill Pecoriello with Morgan Stanley.

Bill Pecoriello - Morgan Stanley

Good morning, everybody. A question on -- as the bottlers are beginning to raise price further in the second half of ’08 due to commodity increases, maybe as high as mid- to high-single-digit in the U.S., I think [Helenica] talked about mid-single-digit, will you be raising concentrate prices more than historically to offset any of the volume impact that you might suffer? Would you wait for January to raise the concentrate again? And are you trying to evaluate more incident-based pricing type models in these developed markets due to the inflationary outlook versus past practice? Thanks.

Muhtar Kent

I don’t think I want to go into the details of our concentrate arrangements with our bottlers but you can rest assured that -- I think firstly, please -- you know, it’s important to understand that our bottlers’ financial architecture today is much stronger than it used to be three, four years ago in terms of their ROICs, in terms of their cash positions, in terms of their willingness and appetite to invest in the marketplace, and again the commodity increases are impacting our bottlers in very different ways in different geographies, so it’s wrong to assume that it’s all going to be looking like the U.S. picture across the world in terms of its relationship to the revenue that the bottlers are generating out of the cases that they are selling.

But we have very good equitable arrangements in place with our bottlers to ensure that we remain very disciplined in the way we continue to invest in the marketplace, to continue to ensure that our brands are healthy, and continue to ensure that we gain volume and value share as we move forward in this environment.

Bill Pecoriello - Morgan Stanley

But in certain regions where the bottlers might have to take higher pricing, if you look at what we are seeing with the Procter & Gambles and other companies that are all raising prices, in your case as the bottlers would be raising, you might take more of the impact in your P&L but you obviously have levers, whether it be market support in concentrate, but you would be working with the bottlers on adjusting those levers, so you didn’t suffer any harder impact from those increases.

Muhtar Kent

Absolutely. The key word is to optimize volume and value and also the key word is equitable.

Bill Pecoriello - Morgan Stanley

Thank you.

Operator

Your next question will come from the line of Marc Greenberg with Deutsche Bank.

Marc Greenberg - Deutsche Bank

Thanks. Good morning, Muhtar. Today’s results at CCE, weak volumes, $5 billion impairment, indication of another comprehensive business review, bear all the markings of a bottler that belongs in the hospital ward. Does Coke still believe the best go-to-market approach in the U.S. is with an independent bottler? And what might cause your point of view to change there?

Muhtar Kent

Well firstly, I think we are continuing to work with CCE and all our bottlers to optimize our value and price to the consumer and customer in this challenging -- it is a challenging cost environment and that going forward, to grow value in a sustainable way to balance volume and share, as well as operating income. And we are relying on many aspects. Of course, I want to just reiterate that we are working very closely with CCE and all our bottlers. There is no question that we feel that this market has tremendous potential and that we will realize that potential. We have a much stronger portfolio. We have a very close working relationship and we have -- you know, I want to just reiterate, if your question is going that, that we have no plans in place to -- I’ve said it before, any intention in acquiring the bottler that you talked about.

Operator

Your next question will come from the line of John Faucher with J.P. Morgan.

John Faucher - J.P. Morgan

Good morning. Thank you. You know, as you talked about all these one-time items, I guess the question would be as you’ve cycled through some of them, it seems as though those should dissipate. And can you give us a clue -- have you seen any acceleration as we sort of cycled some of these? Again, talk as you went through the second quarter but also give us an idea, I realize it’s only a couple of weeks into the third quarter, would you say the run-rate is improving as you move past some of these factors?

Muhtar Kent

Well, John, first we don’t provide mid-quarter updates, but I just want to say that we remain confident in the long-term prospects of the business, recognize that we are facing uncertain economic conditions but remain fully committed to delivering on our commitments. We do closely monitor the economic environment, market by market and I can tell you that we had very flexible plans in place to adjust our plans where appropriate in terms of packaging, price points, and as I reiterate, our picture of success continues to meet or exceed our long-term targets.

And in terms of -- I believe in statistics and probability and I do believe that the one-offs should not continue going forward. We may have other one-offs but I don’t think that all of those will come together all in one quarter in that intensity.

Gary, you want to add to that?

Gary P. Fayard

John, let me see if I can add a little bit of context to it, in two different ways; one is you really have to talk about different countries, because there’s a lot of volatility in the macroeconomic environment today. But let me give you a couple of examples -- Brazil, if I told you about Brazil for a minute and focus on it, it was 1% growth in the quarter. But it was a really bad April but actually returned to nice growth in May and June. If I look at in Europe at Germany or Great Britain, very bad April, return to growth in May and June.

But I can give you some examples that go the other way. It really depends on the country, so we think a lot of it is telling us it’s kind of these one-off items but sure there’s some macroeconomic environmental factors as well. But to try to quantify any of those would be kind of speculation on our part, so that’s why we feel comfortable.

I guess the other point I would make though is we have a management team that’s seen this before. We’ve been through this before. In the late ‘90s, if you’ll remember when it was much worse and the emerging markets were so tied to the U.S., and thank God they’re not any longer. We’ve been through this before and we know what to do and I think that’s why we feel very confident with where we are and why we’re gaining share. And we would expect in this kind of environment with our system and with our brands, we plan to come out of this much stronger, actually, than other companies in the industry.

John Faucher - J.P. Morgan

Thanks.

Operator

Your next question will come from the line of Christine Farkas with Merrill Lynch.

Christine Farkas - Merrill Lynch

Thank you very much. Good morning. Muhtar and Gary, I have just a housekeeping question; I’m wondering if you can tell us how much Glaceau added to your North American volumes and were there any other ongoing or lingering issues with your large format water?

And then I want to understand with your SG&A growth in the quarter, you’ve talked about the bottler and brand acquisitions impacting that a lot. As we are cycling through this, if your acquisitions of bottlers slow, what kind of leverage could we hope to see there, or would you continue to expect the same kind of leverage once we cycle that impact?

Muhtar Kent

I’ll ask Gary to comment on the second piece of the question but in terms of Glaceau, it added two percentage points in the quarter for our North American business going forward, so that’s the number that I think you were looking for. And then Gary, do you want to just take the piece on the SG&A?

Gary P. Fayard

On SG&A, what you would -- basically for the quarter, let me go through that again first, SG&A was up 16%. About eight points of that was currency, four points of it was structural, and about two points for brand acquisitions. So if you strip all that stuff out, apples-to-apples, OpEx was up about 2%; within that, marketing up in line, pretty much in line with gross profit, so you are seeing some pretty good leverage coming from tight control on G&A spend within that.

Now related to that, we put some of those programs into place late last year, so we’ll start cycling those. We’ll continue to see leverage but it will be less than what we’ve seen in the first half of this year, which was about four points of leverage in the quarter.

Christine Farkas - Merrill Lynch

Okay, great. And then on your currency, Gary, have you indicated what you plan to spend that back on, or is that embedded into your plans of what you’ve discussed?

Gary P. Fayard

It’s embedded in the plans. We actually are aggressively managing, portfolio managing, and we have increased spend in some areas but at the same time, we’re being very disciplined on spending back, that it needs to have a long-term return for us and so we’re very disciplined in what we are spending. So that’s why you see a lot of the currency benefit coming through, dropping right to the bottom line because we are continuing to spend in line with our plans. We’ve increased that somewhat as we portfolio manage as well, but you know our plans already have significant marketing spend behind the Olympics and Euro 2008, so I think we are very well-positioned in marketing. When we see opportunities, we’ll jump on it but at the same time, if it’s not a good financial -- long-term financial decision, we’ll be very disciplined and it will flow through, as it did this quarter.

Christine Farkas - Merrill Lynch

Thank you.

Operator

Your next question will come from the line of Bryan Spillane with Bank of America Securities.

Bryan Spillane - Bank of America

Good morning. Gary, a question on the restructuring charges and savings, a couple of questions; first, just all the spending will be all cash? Were there any write-downs or is the amount you are going to spend to generate the charges going to be all cash?

Gary P. Fayard

Bryan, I would say that most of it will be cash. There will be some write-downs on facilities, et cetera, that we closed. The example -- the current example would be that we just closed one of our concentrate plants in Ireland. We announced that last fall. It actually closed in June, so last month, and in that you had cash restructuring charges as well as a write-down of the plant itself, all within that restructuring. So you will have some of both but I would say probably tend more toward the cash side, both on the savings and on the restructuring charges to achieve those savings.

Bryan Spillane - Bank of America

Okay, and then will there be any capitalized spending associated with this as well?

Gary P. Fayard

Not really anything of any significance, no.

Bryan Spillane - Bank of America

Okay, and then in terms of just how we flow what you’re spending versus the savings, is the 25% per year the way we should think about the spending, or are you going to spend more up-front and the savings come through more gradually?

Gary P. Fayard

You know, we’re going to do this one the way you would really like it to be done. It’s almost we’re trying to achieve a kind of 25% per year on both sides, so it’s going to be fairly well matched.

Bryan Spillane - Bank of America

Okay, great. Thank you.

Operator

Your next question will come from the line of Kaumil Gajrawala with UBS.

Kaumil Gajrawala - UBS

Good morning, everyone. First, if we could talk about marketing a bit, can you comment if, given what’s happening to the economy, if you are shifting some of your marketing strategies potentially maybe from advertising over to promotions in areas like the United States? And then also, as it relates to the economy, as we think about Western and Eastern Europe where private label is a little stronger, can you talk about if you are seeing any trading down?

Muhtar Kent

I think not just in the United States or Europe, but everywhere we remain very flexible and in fact, you see us shifting some of our emphasis in our marketing programs but not just in marketing programs but also in the area of packaging, ensuring that we remain affordable and ensure that we can continue to capture all beverage opportunities around the world. And I think that what you see us doing is to make sure that we remain relevant to the consumer and also that our key partnerships with all our key customers, small or large, continue around the world.

I think that we will do whatever is necessary to ensure that we can keep maximizing our growth and also gaining volume and value share in all our markets.

In Europe, specific to your question about discounters, what you see us actually is that we are gaining availability in discounters quarter by quarter in Europe, including not just in legal but all key discounters. So you see us being more relevant now with our different formats across east as well as across Western Europe. What we see is that in these times, consumers find it easier to make decisions to buy affordable luxuries, like our products. And I think that our strategies are working because we are gaining market share across all our key markets. In 17 of our top markets, we’ve gained both volume and value share and I think that you will see that continuing as we move into the balance of the year.

Kaumil Gajrawala - UBS

Great. Thank you.

Operator

Your next question will come from the line of Mark Swartzberg with Stifel Nicolaus.

Mark Swartzberg - Stifel Nicolaus

Good morning, thanks. Gary, just a clarification; I didn’t understand your comment about the productivity savings in the Q&A with Bryan. When you said on both sides matching, were you saying you plan to spend back those savings pretty much at a 125 per annum, or 100 per annum depending on the total number between now and 2011?

Gary P. Fayard

Yes, Mark. Basically as the savings com through, the costs will come through at about the same amount, so --

Mark Swartzberg - Stifel Nicolaus

Oh, that was a reference to the charge, but what about where those savings actually -- you know, to the extent to which they hit the bottom line?

Muhtar Kent

Let me just reflect on that. I mean, what you will see us doing is -- you know, because we’re realizing some of those savings as we speak and what you see us doing is ensuring that we spend some of it against our brands to keep our brands healthy and relevant, and then some of it will go into leverage on our P&L. So you will see us spending some of it and then using to ensure that we continue our leverage on our P&L. But what Gary was explaining was the costs to realize those savings as opposed to how we were going to spend the money.

Mark Swartzberg - Stifel Nicolaus

Thank you, guys.

Operator

Your next question will come from the line of Lauren Torres with HSBC.

Lauren Torres - HSBC

Good morning. You updated us on your commodity cost guidance for the Coca-Cola Company for this year. I was just wondering if you wanted to make some comments just with respect to the Coke system. Obviously costs are getting that much tougher. What’s your expectation for the system? And just also if you could be a bit more specific about what you are doing with your bottlers really just to manage these cost pressures? Thanks.

Muhtar Kent

I think there’s a -- we see a fairly big difference between how the outlook looks in the United States and how the outlook looks around the world. I think I made a brief comment on that earlier when I was answering an earlier question, but what you see is that in the United States, clearly we see a much higher number than we’ve experienced in the past, maybe around 5%, 6%, this year and then double-digits next year. But certainly in terms of the international environment, I think you see a very different -- huge differences in different countries but certainly a much smaller amount in terms of how we see it in 2008 and also how we see it going forward. Both what you see in Eastern Europe or Western Europe, it is much, much lower than the numbers in the United States.

So as a system, what we see is low-single-digits in 2008 and it is still difficult to assess exactly where it’s going to land in 2009.

Lauren Torres - HSBC

But with that in mind, thinking about your relationship and how you are working with your U.S. bottlers this year, what initiatives would support -- you know, how do we think about your relationship and support with respect to these cost increases and how you can help offset that in partnership with your bottlers?

Muhtar Kent

As I said, we are continuing to work very, very closely with CCE and our bottlers to optimize value and price to the consumer and customer. It is a challenging environment and I think we are basically aligned in how we go forward on the importance of immediate consumption to build our brands, on the importance of investments in packaging differentiation and capabilities, and on the continued investment in customer capabilities. So you see us having a significant number of initiatives, also on supply chain optimization. And I’d like to turn to Sandy to give you a little more detail on that.

Sandy Douglas

Good morning, everyone. The principal focus of our plan this year with our bottlers has continued to move aggressively on productivity initiatives and to bring support forward to support both packaging and marketing programs to drive growth. We expect the system to look for pricing improvement in the balance of the year in a balanced way to try to begin to recover margins while at the same time protecting consumer and customer value, and all of our investment is focused on helping the system achieve that in a balance way while at the same time growing the health of the brands.

Muhtar Kent

I just want to reiterate, in the United States we have a much richer portfolio, a much better architecture in our portfolio and brands in our stable in the still beverage category. Our three cola strategy is gaining traction and I think that we certainly will continue to build on our rich still beverage portfolio, growing -- the fastest growing still beverage -- to remain the fastest growing still beverage portfolio, led by Glaceau and Fuse and Simply Juices but also to ensure that we continue to drive relevance to our consumer base with our three cola strategy in the sparkling category.

Lauren Torres - HSBC

Thank you.

Operator

Your next question will come from the line of Carlos Laboy with Credit Suisse.

Carlos Laboy - Credit Suisse

Good morning, everyone. Muhtar, I was hoping you could give us a more detailed update on your company-owned bottlers. Who’s the best performing bottler of these this past quarter, what’s working there, and similarly, who is still in deep trouble?

And for Gary, is this macro environment risk putting those company-owned bottling earnings advances back into reverse, or for those growth rates to stall out on us here?

Muhtar Kent

I think that all our actual company bottling operations are gaining traction. They are enhancing margin, they are growing, they are gaining market share in their territories and both China, Philippines, improving distribution, gaining market share in both those environments, as well as in Germany, I think we are gaining very good traction and leveraging the current architecture as a single bottling system, working much closer with customers. Germany is an area where we’ve gained tremendous traction with all retailers, including discounters, where we are very successful with our different packaging and formats and portfolio.

You know, across Latin America, the CBO is doing very well. Scandinavia again, we’re gaining traction and doing very well. And across the financial performance continues to improve and our volumes are very much in line or better than the general market in all the territories.

Gary P. Fayard

And relative to those, let me just echo basically what Muhtar just said as well, Carlos. The volume within the bottling investments group, in fact, organic volume was up 6%, so they are performing really well in this environment. Income is up significant and ongoing operating income margins increased 120 basis points, kind of ongoing, so these bottlers, while they were in the hospital ward, I think the BIG group is doing a very good job of managing them across the world, and in fact we’re seeing improving results pretty much everywhere.

So I don’t anticipate any big issues there.

Carlos Laboy - Credit Suisse

Thank you.

Operator

Your next question will come from the line of Todd Divek with Banc of America Securities.

Todd Divek - Banc of America

Good morning. Gary, I guess this question is primarily for you; the financial markets have been very difficult and some of the financial firms have had to raise additional capital and Suntrust has been one of those that’s been speculated. Given that they own a significant number of shares, can you just refresh our memory in terms of what the policy is towards buying back shares directly from Suntrust? Is there an agreement in place?

Gary P. Fayard

Thanks, Todd, for the question. Suntrust does own directly about 44 million shares of the company stock, going back to the original IPO of the company. They have announced plans during this quarter that they are looking at ways to enhance their capital position, and one of the ways to do that could involve either the sale of or some kind of other type transaction involving the Coke shares that they directly own.

They have not announced what if anything they’ve done at this point. I believe their earnings release and quarterly call is on I think Tuesday of next week, so I would expect -- I think they have said that they expected to have something in place by the end of this quarter, so I would expect all of us to learn on Tuesday exactly where they are.

Todd Divek - Banc of America

Okay, that’s helpful, and just a follow-up; with respect to your comments in the prepared remarks about deferring long-term debt issuance that you had planned for this fall, is that primarily to pre-finance some long-term debt that matures next spring? Or are you planning to term out additional debt that is currently in short-term debt?

Gary P. Fayard

We were actually looking at terming out some of the acquisition debt from the Glaceau transaction. It’s just we have a commercial paper program in place that we’re in the market basically every day. We have not had a single issue at all in our commercial paper program. We probably are paying lower than almost anybody else in the world. I mean, we’ve got a great program there.

As we look at, as interest rates have come down but as we look at the spreads on longer term debt, we just have concluded that it’s really just not worth paying those kinds of spreads and we are going to stay short, as we have for the last year or so. And because of that, we have put this interest rate lock in in anticipation of probably issuing some debt. This summer, we’re not going to do that. As I said, we’ll defer that as we continue to watch the spreads over treasuries, and we made $17 million on the deal.

Todd Divek - Banc of America

Okay, fair enough. Thank you very much.

Ann Taylor

Operator, we have time for one last question.

Operator

Thank you. This morning’s final question will come from the line of Karen [Lamarc] with Federated Investors.

Karen Lamarc - Federated Investors

Good morning. I wonder if you can give us a little bit more color on the step-up in the non-currency related CapEx, as maybe what changed or what made you realize that you wanted to step up the investment [side]? Thanks.

Gary P. Fayard

Thanks, Karen. Of the about $200 million step-up, as I said about half of that -- about $100 million of that is really just due to currency. The other 100 is really about the timing around our bottling investment group. If you think about it, they are growing nicely, as I said a few minutes ago when I was talking to Carlos, they are growing nicely, we continue to invest in the bottling investments group. Because of the planning cycle, we are going ahead and spending some money now in orders so that we’ve got equipment, lines, et cetera in place for the summer selling season next year. So we’re just accelerating some plans really from placing orders in January to now.

And additionally, we are starting to build a new concentrate type facility as well, and that’s going to add a little bit of cost in this fall.

Karen Lamarc - Federated Investors

Great, thanks very much.

Muhtar Kent

Thank you, Neville, Gary, and Sandy, and thanks to each of you for joining us this morning. I’m excited to lead this great company and I am confident our strategies are working. The fundamentals of our business and the strength of our brands remain strong. We are focused on the initiatives that will drive our results, execution in the marketplace, and outward focus on our customers and consumers, and diligence with capital and expense allocation. I am very excited about the next phase of our journey to create a true, sustainable growth company. Thank you very much.

Operator

Ladies and gentlemen, this concludes the Coca-Cola Company’s second quarter 2008 earnings results conference call. You may now disconnect.

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