At this time, I would like to welcome everyone to The Coca Cola Company's First Quarter 2017 Earnings Results Conference Call. Today's call is being recorded. If you have any objections, please disconnect at this time. All participants will be in a listen only mode participants will be announced by their name and company. I would like to remind everyone that the purpose of this conference is to talk with investors and therefore, questions from the media will not be addressed.
Media participants should contact Coca Cola's Media Relations department if they have questions. I would now like to introduce Tim Leveridge, Vice President Investor Relations Officer. Mr. Leveridge, you may begin, sir.
Good morning, and thank you for being with us today. I'm joined by Muhtar Kent, our Chairman and Chief Executive Officer James Quincy, our President and Chief Operating Officer and Kathy Waller, our Chief Financial Officer. Before we begin, 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 periodic SEC report. In addition, I would also like to note that we have posted schedules under the Financial Reports and Information tab in the Investors section of our company website. These schedules reconcile certain non GAAP financial measures, which may be referred to by our senior executives during this morning's discussion to our results as reported under generally accepted accounting principles.
Please look on our website for this information. Following prepared remarks this morning, we will turn the call over for your pertinent question first and then return to the queue in order to ask additional ones. Now, I'd like to turn the call over to Muntar.
Thank you, Tim, and good morning, everyone. This will be my last earnings call as CEO of this great company. 1st and foremost, I'd like to thank all of you for your support and collaboration. It's been my distinct privilege and pleasure to serve you and all of our shareholders as CEO for almost 9 years now. During this time, we achieved a lot.
We delivered $110,000,000,000 of shareowner value with continued annual dividend increases and growth in our share price. We embarked on the biggest refranchising and bottling restructuring effort in our history transforming our company to a pure and effective consumer and brand business with approximately 50% of our global bottling business in positive motion. With today's announcement, we're on track to achieve almost $5,000,000,000 in savings from 2,008 through 2019 through productivity and reinvestment programs. We completed a net total of around 16,000,000,000 dollars of M and A, bringing in some of our strongest and fastest growing brands, including Smartwater, Santa Clara, Innocent, Jugos del Pugos del Valle, Honesty and Fairlife, just to name a few. We introduced almost 1,000 new products and added $9,000,000,000 brands, bringing our total to 21.
We grew daily servings by nearly $500,000,000 from 1.5 dollars at the end of 2,007 to more than $1,900,000,000 today, and we achieved 39 consecutive quarters of global value share gains. And by focusing on our 3 W's, Woman, Water and Well-being, we created the most progressive, sustainable and connected business cycle, empowering 1,700,000 women in our value chain through the 5x20 initiative to support economic empowerment of 5,000,000 women by 2020, becoming the first Fortune 500 company to announce that it is replenishing 100% of its global water use and supporting the World Health Organization's guidelines of limiting sugar intake. And finally, we expanded our portfolio to become the largest juice company in the world and strengthened our leadership in our brands, our bottling system and our various partnerships are the strongest they have
ever been.
But most importantly, and for which I am the most proud, just a few days, we will be completing the smoothest and most seamless leadership succession. The foundation of our company is as strong as it has been ever been. As we move to the next phase, I have every confidence that our company and our system will accelerate growth under James' new leadership as CEO, and I have I very much look forward to following and supporting him in every way I can. As I've said before, the future is bright. We compete in a fantastic industry with solid growth prospects.
We have the greatest brands. Our strength in bottling system is comprised of partners, and we have a great new CEO and a fabulous leadership team. It is with a great sense of pride, therefore, that I'm passing on the role of CEO to James in a few days, and I have great confidence in our future. Thank you for your support and your trust and confidence over the past 9 years. So with that, I will turn the call over to James, The Coca Cola Company's next Chief Executive Officer.
Good morning, everyone, and thank you, Muhtar. Thank you for your leadership over the last 9 years and for your unwavering partnership. It is truly a privilege to succeed you as Chief Executive Officer and I look forward to your continued support as we take the next steps to further capture the full array of opportunities before us. To do this, for these next steps, we've laid out how our strategies and operating model will evolve and provided guidance as to our expectations for the first steps and through 2017. So, let me turn then to the quarter firstly.
Operating results were in line with our expectations and we are on track to deliver against our full year guidance. As we anticipated, organic revenue was even in the quarter with solid price mix offset by a decline in concentrate shipments. And it's worth noting the 3% decline in concentrate shipments was primarily driven by a few factors that will self correct over the balance of the year. Our Q1 had 2 fewer days this year, impacting growth by about 2% and of course Easter shifted into the 2nd quarter. Additionally, there was a time lag between our unit case sales and concentrate shipments.
Price mix meanwhile was a healthy 3% with good performance across our operating segments. So the way I think about it is we delivered even unit case volume growth and 3 percent price mix. So we're running at around a 3% trajectory in line with our full year organic revenue guidance.
And while revenue growth is
a key objective, we also intend to do this efficiently and so the underlying operating margin expansion in the quarter underscores our commitment to value creation. Now looking around the world, many of our key markets like North America, Europe, Mexico and Japan continued to perform well. We also saw improved performance in China, in part driven by a strong Chinese New Year campaign. And India, while it began the year slowly, performance improved with any remaining impact from the demonetization largely worked through by the end of the quarter. However, consumer demand challenges in Brazil and Venezuela in particular continue to pressure our performance impacting total company volume growth by over a point in the quarter.
Now let's turn to the actions we're taking against the 5 strategic priorities we laid out at CAGNY. These are those that will help us realize our goal of becoming a total beverage company and to deliver our long term financial targets. Namely, 1, accelerate growth the consumer centric brand portfolio 2nd, drive revenue growth 3rd, strengthen the system 4th, digitize the enterprise. And 5th, unlock the power of our people. So as we've made progress, let me give you a few examples.
For our portfolio, we continue to broaden and innovate with new product launches, reformulations of existing products to reduce added sugar, and acquisitions in on trend categories like plant based beverages. During the quarter, we completed the acquisition of Addis, the leading soy based beverage in Latin America and the latest addition to our growing juice, dairy and plant category cluster. This adds to a list of successful acquisitions including Huaz Da Valle, Santa Clara and Tony Corp that are building a strong presence in this nutrition focused portfolio. Within our hydration cluster, we continue to expand our premium Smartwater brand, driving double digit volume growth for this brand in Europe and building off Smartwater In the sparkling soft drink category, we are working to drive top line growth through innovation and reformulation. For example, we've seen excellent results for Coca Cola Zero Sugar.
I told you at CAGNY we'd be expanding this new and improved formula supported by a new visual identity to more markets around the world. In the quarter we rolled this out to 11 of our top markets resulting in double digit volume growth for the brand. By the end of the second quarter we expect to be in 5 more markets with the intent to be in most of our top markets by the end of the year. We're also targeting the adult sparkling mixer categories to create key growth opportunity. We feel Schweppes, our premium tonic water is relevant and appealing to the growing cohort of adult consumers.
So starting in Western Europe we relaunched Schweppes in early April with the intent to roll out to other markets in Latin America, Africa and Asia this year. In the U. S, we're leveraging our digital capabilities by using data captured through our innovative freestyle machines to identify new variants and flavors popular with consumers. As a consequence, during the quarter we began bottling Sprite Cherry and Sprite Cherry 0 as the 1st national launch of new beverages in response to their popularity on Freestyle. Finally, we're looking to add functional benefits where applicable.
In Japan, we have launched a new 0 Sugar products fortified with fiber like Coca Cola Plus and Canada Dry Plus in the fast growing segment where ingredients are added to beverages to address specific dietary needs. So, these actions along with others are part of growing our consumer centric brand portfolio. Of course generating revenue and profits for the whole portfolio, new and existing requires having the right package offering at the right price in the right channel, and that starts with a deep understanding not just of the consumer, but the shoppers' needs. For example, in Brazil we are in the midst of resetting our price pack architecture to hit key price points as consumers purchasing power has decreased during the country's worst economic contraction. While we are still in early days, we expect by the end of the year the actions we are taking will return our Brazil business to growth.
So having the right portfolio is critical, but so is having the best in class market execution to support it. To date this year, we have already achieved several milestones in strengthening our system across Africa, Asia and the U. S. During the quarter, we reached definitive agreement with ABI on its stake in Coca Cola Beverages Africa. We are now working through the necessary regulatory approvals and expect to close these transactions around the end of the year.
As previously announced, we plan to hold these bottling territories temporarily until they can be refranchised to other partners. Also, earlier this month we refranchised the majority of our company owned bottling operations in China to strong local partners and our 2 largest bottlers in Japan completed their merger. Finally, in the U. S. We closed several transactions in the quarter and on the 1st April swapped our Southwest operating unit comprised principally of Texas for a 20% stake in Aker Continental Beverage Business.
I also talked about the need to create a new leaner, more agile operating model to enable this growth strategy going forward which included anticipating the structure of our business post refranchising. And that to capture fully the opportunity before us we need to become more category focused to outweigh resources to innovation, IT and digital. So we've made some changes. We've created one new position in the center and elevated 2 others. Firstly, the new Chief Growth Officer.
He will have a clear leadership mandate for global growth across category clusters with marketing, customer, commercial leadership and strategy all reporting into this position. I've asked Francisco Crespo, previously President of our Mexico business unit to take on this opportunity. Under Francisco's leadership our Mexico business has shown remarkable strength driving growth within our existing portfolio, expanding into new categories like value added dairy and building a healthy direct to consumer route to market. He is the right person to drive greater connectivity across our business, enabling our growth in each of the 5 category clusters. Innovation will be critical to our goal for a consumer centric brand portfolio.
We have a need for 100 of new products and continued evolution of our beverages, packages, ingredients and other areas of our business. To do this we are separating our R and D and making it a direct report to the CEO, calling it the Chief Innovation Officer is reflective of the need for greater impact. Additionally, as part of our work to digitize the enterprise, we elevated the information technology Lastly, we are working through redesigning the organization to be faster and more agile. When we first laid out the new operating model in February, we were clear that this is about a new way of doing business. It's about creating an environment that can enable growth for long term.
We are well on the way to designing the new corporate organization with a clear understanding of what work will stop, what work will shift to other areas, and what that means to our people. As we create a more focused lean corporate center and broadened enabling services, we expect this will result in approximately 1200 job reductions beginning in the second half of twenty seventeen and carrying into 2018. While these necessary changes are always very difficult, they will help us do fewer things better to lead and support our operating units while upholding best in class corporate governance. As a consequence of this new operating model and further productivity opportunities across our entire spend base, we now expect to achieve incremental savings of approximately $800,000,000 This will bring our current program to $3,800,000,000 or $4,300,000,000 including the $500,000,000 dollars of productivity that were transferred to our bottling partners due to the accelerated pace of refranchising. Given the phasing of the initiatives, we expect the majority of the upside to accrue in 2018 2019 as we have already included an estimate of the savings we expect to capture in 2017 in the guidance we provided earlier this year.
To the question of how will we use this increased financial flexibility, Our goal and we're clear on this is long term value creation. So to the extent we see reinvestment opportunities to improve our current revenue run rate through further category expansion, we'll take a disciplined approach to make that happen. But we will make the final determination on reinvestment when we move into the 2018 to 2020 business planning process as this decision will also depend on economic and currency environment. But based on our current expectations of the opportunities we expect to reinvest at least half the savings. So, in summary, we are on track with our strategic transformation plan and as for the remainder of the year I'm confident we will achieve our full year outlook and that the actions we are taking today will enable us to deliver margin expansion and higher EPS growth into 2018 2019.
With that, I'll turn the call over to Kathy to take you through the numbers.
Thank you, James, and good morning, everyone. As James mentioned, organic revenue growth was even in the quarter. We also continued divesting company owned bottling operations, which resulted in a 12% decline in comparable net revenues. Price mix benefited from positive package mix with immediate consumption packages outpacing future consumption packages across all operating groups. Comparable gross margin increased 120 basis points, reflecting strong price mix and the margin benefit from refranchising, partially offset by increased commodity costs and about a 60 basis point currency impact.
And comparable operating margin grew nearly 140 basis points as our productivity initiatives remain on track and we sold off lower margin bottling businesses. Moving to cash flow, we generated $788,000,000 in cash from operations, up 30% driven by the cycling of a pension plan contribution, partially offset by the impact of 2 fewer days in the quarter and our ongoing refranchising efforts. And we received a $1,400,000,000 cash inflow from the sale of certain North American and Chinese bottling assets. For 2017, we increased our annual dividend by 6% to $1.48 per share. Our net share repurchases during the quarter totaled $836,000,000 And for the full year, we expect to achieve the $2,000,000,000 in net repurchases as we communicated during our last earnings call.
We expect to return approximately $8,400,000,000 to share owners in the form of dividends and net share repurchases for the year. Turning to outlook. We continue to expect to deliver 3% organic revenue growth and 7% to 8% underlying profit before tax growth with momentum building throughout the year as our plans gain traction. In addition, we expect our comparable growth and operating margins to expand as we continue to divest lower margin bottling businesses throughout the year. Due to a strengthening in several currencies, including the Mexican peso, we now expect a 3 point currency headwind on profit before tax, which is at the low end of our previously provided range.
However, currencies continue to be extremely volatile. We remain hedged on the hard currencies, so fluctuations in spot rates will not necessarily impact our P and L to the degree that you might expect. Therefore, we will continue to update you as we move through the year. As a result, we are tightening the range of our full year EPS guidance. We now expect comparable EPS to be down 1% to 3% this year as we return to a high margin capital light business model.
As we model the Q2, there are a couple of items to consider. First, we expect the net impact of acquisitions, divestitures and other structural items to be a 17 point to 18 point headwind on net revenue and a 3 to 4 point headwind on profit before tax. And therefore, we expect this to result in greater comparable growth and operating margin expansion than we saw in the Q1. 2nd, we expect that currency will be a 1 to 2 point headwind on net revenue and a 3 point headwind on profit before taxes. In closing, we are on track and fully expect to deliver our commitment for 2017.
Operator, we are now ready for questions.
Operator? Ready for
questions? Yes, we are, sir. We'll now open up the lines for questions. And we have Mr. Nik Modi from RBC Capital Markets.
Thanks. Good morning, everyone, and, muchar, congrats, and James, congrats again on your new rules. I guess a quick clarification, James, and then a broader question. Just on the clarification, just when you talked about the global macros, you sounded a bit more constructive. So I just wanted to get a sense because we're hearing from a lot of companies, yes, January February were tough, but March seemed to have improved, not just in the U.
S, but globally. So just wanted to get a clarification there. And the broader question is, as I'm out in the market and talking to the bottlers, there seems to be some concern regarding the focus outside of CSDs. Not that Coke doesn't need to do it, but there's just too much emphasis outside the CSD business where in fact the bottlers make 85% to 90% of the profit from CSD. So when you speak to them, how do you reconcile that dilemma?
Any context around that would be helpful.
Good morning, Hank. This is Muhtar. Just let me say a few things on the global macros and I'll pass it over to James also to reflect on your particularly second question on and I assume the second question you had was mainly talking to U. S. Bottlers, but you can clarify that.
As far as the world growth based on recent latest numbers from the IMF or take it from any other organization is expected to rise in 2017 versus 2016 by about 0.5 percent point. So like going from 3.1% to about 3.5%, just under 0.5% and further expected to slightly improve in 2018. Based on the latest numbers, always what we have seen in our business is that the industrial production index, IPI, kind of goes a little bit ahead of disposable income growth and that's what we are experiencing once again here. So yes, some countries growth looks better, China for sure. India with the impact of the currency exchange initiative still is moving out of that as James mentioned and as well as Brazil and Venezuela, I think we can term as being in deep recession.
And then geopolitical factors in the Middle East and part of North Africa probably means balance of risks remain still tilted to the downside, if you like. But there was a divergence in terms of the consumer confidence index since 2014 and that's narrowing down between the developing world and
the developed world, which is
a positive. That means developing world is getting a little better from a confidence index point of view. And I think we're seeing that in parts of Africa like particularly big markets in Nigeria. And then again, in our business in China also is reflecting the improved macros. And then we still see growth in Japan, Korea and industrial markets, which is a very positive sign.
Again, as we as the emerging and developing markets get better, we see still growth coming from the developed markets as in Western Europe and Japan and Korea. So that's sort of what I'd like to just stay on the macros. And then James, go ahead
and Sure. Thanks, Muthan. So Nick, I think particularly as your question seemed more U. S. Oriented, I mean, in the end, this is an and answer.
Our objective is not to run from one side of the ship to the other. This is an and on. So we need the company and the bottlers individually and collectively to make both work. And I think the U. S.
Is an example where we have a vibrantly growing revenue line for sparkling improving our execution. So I think it's about growth, it's about expanding and responding to consumer and customer needs. And I think we have demonstrated over the last number of years that we can vibrantly grow both and that is absolutely our strategy going forward. And that will be good for us and it will be good for the bottlers.
Next we have Daryl Mohsenian from Morgan Stanley.
I did down at CAGNY and again today that you're focused on becoming even more of a total beverage company. But it seems like it will be difficult to transform your revenue mix quickly or substantially from an organic standpoint. So, A, I was just hoping for any thoughts on how quickly you can shift the business mix over the next few years, maybe what your ultimate vision is, whether that's percent of sales mix outside of sparkling or mix in low sugar products versus today, however you define it or however you think about the topic, I'll leave that up to you. And then second, how big a part do you think M and A will play because clearly that's a way of more rapidly shifting your portfolio? And then within that M and A theme, Coke staying within beverages, I think has been sacrosanct at the company historically.
How open would you be or what are your thoughts on potentially acquiring outside of beverages? Thanks.
Thanks, Darren. I'll probably go with the M and A and then the portfolio question, I mean obviously we're not going to comment on our outlook on likely M and A. I think we've said 3 things related to M and A in the past and I would re underline them. 1, anything we do needs to fit strategically in where we're trying to go. Secondly, it needs to be financially attractive.
That's not always the case. And third, there is some degree of opportunism because it takes 2 to tango. You need not just a willing acquirer, you need a willing seller. So I think whilst we have a view, an ongoing view of what assets are out there, small, medium and large that are attractive to us, of course that is something that is not predictable in time. So whilst we imagine we will continue to do bolt on acquisitions, everything else is not up.
You can't predicate your strategy necessarily on that. So we focus on driving what we can organically. We have taken the rest of the portfolio outside of Sparkling from a single digit piece of our business, the turn of when 10, 15 years ago to over a quarter of the business. Of course, we would love to increase the run rate at which we broaden our portfolio, and we will certainly seek him to do so. But the law of big numbers is also true.
It's not going to magically change overnight. We need to build winning propositions with the consumers, with the customers and build the physical infrastructure that economically makes that happen in a profitable way. So yes, more acceleration outside of sparkling whilst and I turn to the answer to the previous question, is Sudan continuing to grow the revenue of the Sparkling category, and therefore we will consecutively broaden out where we get to. At some point, will it be more balanced? Absolutely.
Will it be broader? Absolutely. But we will look to do the right things at the right pace.
Next we have Mr. Steve Powers from UBS.
I mean, James, maybe you could just round that out by talking about the this firstly, the cost side of that organic growth push, just sort of we talk a lot about the objective, which I think we all agree with, but what's the cost side? Will structural investments in growth in new categories have to accelerate? And if so, for how long? But my broader question was actually with respect to the leadership appointments and really the new operating model that you've announced over the last few months. Can you talk more about just how the day to day work is to be impacted and improved as a result?
And specifically, what Francisco's role as Chief Growth Officer is going to look like? Maybe how large his organization is going to be, how he's going to interface with the other group presidents, etcetera, because I guess at some level I've always thought of the CEO of Coke as the Chief Growth Officer. So maybe just talk about why separating that function out as a dedicated role, I think at the Group President level, is set up to structurally improve things? Thanks.
Sure. I'm not sure that I base the dynamic one question at a time, but I'll give it a go and cover off some of those pieces. Look, on the categories and balancing on, of course, as we push into new brands or new categories in new countries, there is an investment curve as you build the brand. But this needs to be managed through a portfolio. I mean, the fact that a new brand is being launched in Country doesn't mean it's not already developed in country Y and therefore it's already profitable and generating cash.
So we need to manage the total portfolio effect which is not just across categories but across the life stage development of any one brand and category across the world because they're not equally developed everywhere. So there's a portfolio management thing. Of course, our objective, whatever the category, is to build brands and positions that are inherently profitable once we get to the appropriate scale. So we're not trying to build things that will never arrive. We're trying to build brands and categories, whether it's inherent in the brand or inherent in the package size that can be profitable for us and the bottling system.
In terms of the leadership appointments and how the work will be impacted, I mean we've done a lot of things. I mean a lot of the impacts on the work is it's the nexus of we're about to enter the post refranchising stage. So we're going to go from well over 100 of 1000 employees to under 40,000 employees by some point next year. There's just a physically less stuff that needs to get done at the corporate center to support that organization. Secondly, technology keeps advancing and what is embed that in the new organization.
And then the third thing is the ongoing effort to find new ways of doing the same thing with less resources or getting more bang for the buck because we can be innovative in the way we run our processes. So that goes across each of the corporate functions, including the enabling transaction based services and there's a plan in each place. Now as it relates to Francisco and that organization, I think one of the that there are 2 points that abase the logic to. The first one is, you know, if our principal operating model is local and geographic, because it's a franchise system, I mean you've got to choose one principal avenue to organize against. Anything you organize against will have its blind spots and then you can mitigate against that.
So one of the roles of Francisco's group is to provide the global perspective and the category perspective because it's the invert, it's a thing that the field, the sum of the field might miss. So that's part of why the corporate center exists. The second reason to bring all the pieces together is as brands and experiences are created today and into the future, it's less cleanly delineated between a TV ad or a customer program or anything else. There's a much greater intersection and integration of how to engage with consumers and shoppers and therefore bringing together in one group the classical marketing pieces with the customer piece, with the commercial piece and with the strategy underpinned with a digital engagement is what can allow us to more seamlessly operate in this new environment.
Next we have Lauren Lieberman from Barclays.
Thanks. Good morning.
Good morning.
Great. I was hoping you could talk a little bit more about Brazil. I know you've talked about addressing price pack architecture and trying to hit key price points. But it just looks like the downdraft in Latin America significantly worsened this quarter. And I know again you said better by the end of the year.
But are these kind of tactical changes, longer term strategic changes in Brazil that you're making and any kind of detail would really be helpful? Thanks.
Sure. So I think the changes are structural and strategic. We need to reset the price pack architecture. We're going to use more returnables. That's an infrastructure and investment challenge.
So we're resetting. I mean, it's worth remembering that the contraction the Brazilian economy, it's contracted more in the last few years than it contracted in the last decade of the 80s and more than it contracted in the depression in the 1920s last year last century. So this is Brazil has undergone a major economic contraction. So we're resetting what we're doing in Brazil around pack price architecture, how we go to the market and how we push that forward. So it will take some time to get in place.
And also frankly, the stabilization of the Brazilian economy will continue to take time. Now the other thing impacting the Latin American numbers, there's words underlying, it doesn't always hit everyone's radar screen, is Venezuela. And Venezuela is substantially negative in the about the country is in the state it's in. But the Brazilian thing, just to summarize, the changes are strategic. They'll take some time.
We expect that to play through this year.
Next we have Ali Dibadj from Bernstein. Hey guys.
So I do have 2 questions. One is on the cost savings, excellent that it went up. Want to better understand the drivers of change and also want to better understand the drivers of the increase. But I also want to better understand the long term value creation that you mentioned as well as at this point we expect to reinvest at least half. Is that of the incremental or is that of the $3,800,000,000 total or $4,300,000,000 total, it's just the $3,800,000,000 at least Because you've cut about $2,000,000,000 so far, it sounds like you should be roughly on pace to that in short order at the very least.
And almost all of that I think has been reinvested. So if you take almost 2 on a 3.8, that's already 1.5. So how much of what's going to be on the come, so to speak, what's going forward will be reinvested? Is that going to be a lead half or is that of the total program? So very specific question on that.
And the second thing is around refranchising. And if you can talk a little bit about some of the potential delays that may happen in refranchising, if you see anything going forward that's very much on plan. And importantly, if you see the benefit so far of the refranchised territories from an improvement of performance perspective, volumetrically perhaps, but even just overall top line. And we've heard on the order of one point as you move from company owned to non company owned. So love some inkling of that from your own experiences.
Thanks. Sorry for the 2.
Sure. So starting with the additional $800,000,000 I mean the driver of the change, the principal driver is the reorganization of the corporate center, the 1200 positions I talked about, that's the majority of the 800 or a little over half the 800. Then there are some parts in cost of goods and a little bit in marketing. So the majority is in operating expense and in the reorganization of the corporate organization that I just talked about. So that's what's driving it.
And it's about the three things I said. It's anticipating post refranchising. It's the impact of technology, and it's the choices on what work we do and doing the work differently. That's what's driving the extra $800,000,000 now. The $800,000,000 the comment around reinvesting half was related to the $800,000,000 very specifically.
So that's that one. Now obviously, we've seen some margin expansion. I mean, implicit in our guidance this year already is some dropping of the base productivity program through into margin because you'll calculate that the revenue currency neutral like structural is at the 3% and whether you take operating income is substantially higher than that and then obviously that's offset by some negative financing leverage. So as the 'fourteen, 'fifteen and 'sixteen, I think you're largely right. In 'seventeen, you're seeing much more drop into operating leverage.
And the comment is about the $800,000,000 going forward half, a little over half is reinvested. As it relates to refranchising, you know, we don't we're still set we still believe we can meet the deadline and get the U. S. Refranchised this year. Of course, we're not going to do the wrong deals for the sake of hitting a date.
But we think the right deals are possible. And we think that we're still on track with that plan. And as you say, we're seeing benefits in the refranchised territories. I'm not sure I would give a specific number that can be kind of inserted over the top on everything else, but clearly the idea of reorientating and rebuilding the U. S.
System stronger putting in place the different pieces, the manufacturing, the governance, the IT, the way the system works, support our long term strategy of rational pricing and some growth for continued revenue growth in U. S. Is underpinned by the success of the refranchising in the U. S. And obviously we closed out on the 1st April China and the merger of the Japanese bottlers.
Next we have Laurent Grandet from Credit Suisse.
Yes, good morning everyone.
Good morning.
You specified the sales growth by cluster and that's great to give us some more granularity of where the growth is coming from. If I may, I mean, could you tell us more specifically what's your starting point by revenue by cluster by region? And also what are your goals by cluster and what will be the incentive for the new Chief Growth Officer to achieve those goals?
So firstly Laurent, I hate to disappoint you, but we're not going to be disclosing the starting point of breakdown the geographic groups as well by cluster and have all of that laid out. The goals by cluster, clearly we have gold by cluster. The more they move from sparkling, the more they move from the things we've been building over the last 15 years. The fact that we expect the percentage growth rate, but in terms in absolute, it is worth remembering that sparkling still in absolute terms provides the greatest incremental amount of revenue to the corporation of any one category. And as I said, just let me make a detailed point that growth officer, we're not moving to an operating model where we're having global category P and Ls and running the business through global category P and Ls.
The operating model decision is to run the business locally, to drive local entrepreneurship and empowerment of the operating units, but to use the growth opportunity set up to be strategic to make sure that we stay connected to what's happening when you take a top down perspective or a category perspective and have the rights and some authority on bringing those insights and those needs and those initiatives to the table so that when we as a corporation, we're not going to try and run everything for the operating needs, but we will make a few strategic bets and some of those will be driven from the cluster approach.
Next we have Mr. Brian Spillane from Bank of America. I'm sorry, our next question is from Ms. Jody Hong from Goldman Sachs.
Thank you. Good morning. So one is just a quick follow-up to earlier question about reinvestment, the $800,000,000 half of that going back to reinvestment. Just how would the nature of these reinvestments differ versus sort of the prior reinvestments that Coke has made, whether it's different categories or different activities and just a little of the color there would be great? And then on the price mix in the quarter in North America sparkling up 1%, I think you called out some timing issues.
So can you elaborate on how much of that was a factor? And as it relates to sort of the broader price mix question, if you look at the clusters outside of Sparkling, can you just talk about how much the price mix plays a role in growing that those segments revenues?
Sure. I think the principal difference on the reinvestment of the half of the 800 is up to now, I would say the majority of what we've done has gone into the sparkling category business around the world. I think here the clear intent is that this is more directed to some of the newer categories or some of the other categories to drive growth there. So it's principally oriented around growth of the other categories. That's the headline answer there.
Then in terms of the North American sparkling pricing, as you say, that's as we call that, that's principally timing, and it's really related to the different channels. The price, the average, obviously, we have a large fountain operation, which we run directly in North America. And so the timing of gallon shipments, whether they go to the bottlers or through the fountain business, can move the average price mix by North America. And it's the timing around those gallons that has created that unusually lower 1%. And that's the majority of the difference between what we would expect to happen on sparkling pricing and what actually you see in the Q1 in North America, and that just correct itself.
And next we have Mr. Brian Spillane from Bank of America.
Just one question. And I guess from our perspective, we get a lot of questions about the total beverage company model what it looks like going forward. And it's difficult to see with a lot of the moving parts in the business today. But I guess from our perspective, Western Europe is really the one market or is one of the markets this year where you can really see it sort of in action. So A, James, do you agree with that?
And B, can you maybe talk a little bit more about sort of your planning with the bottlers in Western Europe this year and sort of how it's this beverage total beverage company model has really sort of been a different in the planning process now versus maybe prior years?
Yes, look, I don't think I would say this is a kind of a night and day change for us. Look, we've been on a journey to expand our portfolio. I think this is about making the commitment to press further and faster and might kind of make the full kind of psychological journey to this is about a full set of categories and responding to the consumer, not a central portfolio with some periphery. We're making good progress with Coca Cola European Partners. Obviously, we did a lot of planning last year at the setup of the new bottler and its integration and the plans for the marketplace.
I think you've seen a number of actions, whether it's the rolling out of Smartwater, the launch of Honest Tea, where we've taken some proactive steps with them in different categories. But also, I would underline, we've been very proactive with European partners on Coke, Coca Cola 0 Sugar, which drove a lot of growth in GB in this quarter. So, yes, we've got a great new bottler that's been stood up. We're broadening the portfolio. We're taking action across more categories, and I think that's part of the future.
Now, would I say that's the one place to look at? No. I think if you look at the U. S. Or Japan, even within categories, re segmenting each category for multiple different reasons to drive value growth for ourselves, the bottlers and collectively as a system.
Our next question is from Mr. Kevin Grundy from Jefferies.
Thanks. Good morning, guys. James, I wanted to come back to some of the changes you put in place, specifically with the new growth officer and 5 category clusters. The first question would be, when should investors expect to see tangible benefits from the new structure understanding that the macro is very difficult and the company's skew towards sparkling? Or said differently, would you be disappointed if the company couldn't return to 4% core sales growth looking out to next year, even if the environment doesn't change very much, including the macro?
Or is this just more of an evolution of the strategy to deliver on the company's objectives? And then related to that, James, do you feel like the company has the right incentive structure in place internally for your leadership to balance the growth agenda with profit objectives or do you see any potential conflict that may exist there? Thank you.
Good morning, Kevin. I'll go and reverse all that. I mean the incentive structure is balanced between the top line and the bottom line today. Having said that, we're going to take this year to have a fundamental relook at our total compensation approach. That may result in no changes whatsoever.
We may end up going, you know, there's no perfect solution and the one we've got is the right one or we may make some tweaks. That is yet to be determined. But it is worth noting that the incentives are half top line effectively and half bottom line. In terms of the tangible benefits, I mean, we're obviously not going to provide guidance for 'eighteen and '19 and beyond at this stage. Having said that, we've been pretty clear that we want to be in a long term growth model in terms of the top line and have some leverage within that.
So to the extent that we've guided for 3% this year, we would be disappointed if the opportunities in the marketplace and the macros offered us opportunity to get back into our range and we did not achieve it.
And our next question is from Mark Swartzberg from Stifel
On the larger subject of cost cutting and whether it's $800,000,000 or some added number a year from now or 3 years from now, could you just characterize how far you believe the organization has gone and might yet go in the area of budgeting costs, whether it's on a ZBB basis or some other basis to help us understand how you think about the opportunity to do what you're doing today as a habit, so to speak, versus something you do day 1 so to speak as a new CEO?
Sure. We've been steadily learning and getting better at 0 based work over the last number of years. I think we've been getting better at doing less one off events that then don't necessarily always stick and getting much better at making it part of our discipline of going, how do we use the resources available to the best means possible as we get the results we're after. So I think that's been a steady organizational learning process that's been going on. The latest changes are just another iteration.
The 800 is another iteration of that. Every year we look at it. At the back end of last year, we looked at the strategy evolutions coming up, imagining the post refranchise world, the impact of technology, and we just considered what we could do and how we could do things differently, and that's reflected in the strategy. And as part of the strategy, it's reflected in the organizational changes we are making and the increased productivity savings. We will continue to run the 0 based work process and be clear that the efficient use of resources is one of the ways to drive the top line and to enable long term value creation.
And our next question is from Amit Sharma from BMO.
Hi, good morning everyone.
Good morning. Good morning Amit.
A couple of quick questions. Number 1, James, can you clarify your comments about M and A? You talked about bolt ons are always in play. And then I think you didn't rule out if something larger or bigger came along, you would look at it. That's number 1.
And number 2, from our retailers, you're hitting a lot more focus on pricing and maybe more promotion at private label. Are you hearing anything different from the retailers about price rationality that we have seen in the CSC category? Just rule out that that's not at risk here in North America.
Well, on M and A, I mean, we have a track record of doing bolt on acquisitions over the years. I think there should be a reasonable expectation that they will continue at some sort of similar rate. Larger opportunities, I think, are by the logic of they have to be strategic, they have to be financially viable, and they have to be available. As and when things meet those three criteria, we will look harder at them. And that's as much as I can say
at this
stage. In terms of retailers in the U. S, look, I think they are looking they have their each one has their own strategies. They're all positioned slightly differently. So I don't think one can look at them in an aggregate and say they're all trying to do the same thing.
I think pricing rationalization is certainly our strategy. We're engaged with customers in how it fits their strategies, each one individually. And largely, I would say that we're finding how to create value together. Are there risks that for competitive reasons by customers or competitive reasons by our competitors, You know, something happens in some quarters to knock that off course. Yes, that risk is it has existed and still exists, but we're clear on where we're trying to get to.
And our next question is from Mr. Brett Cooper from Consumer Edge Research.
Thanks guys. Two questions. Within your clusters, can you talk about where you have scale or the ability to lift and shift a subcategory in one country or region to another where you see the most work needed? And then maybe as a reference for us, can you talk about the evolution of profitability in Juice as you built that out to a global leadership position?
Thanks. Sure. I think look we talked at CAGNY, we have about a 50 share of the Sparkling category and of all the other categories with somewhere between a 10% 15% share on a global basis, but even that's a very average number. You can go to some parts of the world and we are clear market leaders at the same sort of share levels that we have in Sparkling and other parts of the world with Opryson. So there's not a short answer except to say that we have we are going through and have gone through and always update the process of looking at where are the next stages of growth, both bottom up, each country going, look, I think I need to grow out this category or that category, and top down both the global view and the category view saying, look, if we want to progress, actually we think we need to push out smart order into more countries or tea, for example, Honest Tea into more countries, and that's the intersection of the global growth perspective and the country perspective.
And then evolution of profitability in Juice, probably depends whether we built the business through bolt on acquisitions or whether we did it from scratch. Either way, the evolution is as you'd expect. As we build a good either leadership position or a close number 2, we tend to come into a much, much more attractive profitability status, which is why if we have small positions in categories, we've either got to get up, have a clear path and leadership were a strong number 2, or not overinvest because being subscale is not a part of profitability.
I would now like to turn the call back to Muthark Kent for the closing remarks.
Thank you. I think James is going to do them this time. So thank you, thank you operator. Thank you Kathy, Tim and thank you, Muhtar for your leadership over the past 9 years, for the solid foundation created under your watch. I look forward to continuing our partnership as the Chairman of the Board.
We've already been on a transformational journey under Muhtar's leadership over the last few years as we completely reshaped our bottling system, jump started growth in our flagship North American market, increased productivity and launched hundreds of new brands and products. Even so, we know there is more we can and must do. We laid out a clear path to transform the company to be bigger than our past, to be a company that is bigger than just the Coca Cola brand, to be a total beverage company that is well positioned across a wide range of beverage categories, and we are successfully beginning to execute that plan. As always, we thank you for your interest, your investment in our company and for joining us
this morning.
And that concludes today's call. Thank you very much for your participation. You may disconnect.