Thank you. At this time, I would like to welcome everyone to The Coca Cola Company's First Quarter 2015 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 until the formal question and answer portion of the call.
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 any questions. I would now like to introduce Tim Leveridge, Vice President and Investor Relations Officer. Mr. Leveridge, you may begin.
Good morning and thank you for being with us today. I'm joined by Muhtar Khin, our Chairman and Chief Executive Officer and Kathy Waller, our Chief Financial Officer. Before we begin, I would like to inform you that you can find webcast materials in the Investors section of our company website at www.cococolacompany.com that support the prepared remarks by Muhtar and Kathy this morning. 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. In addition, 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. Following prepared remarks by Muhtar and Kathy this morning, we will turn the call over for your questions. Amit Bozer, Executive Vice President and President of Coca Cola International Sandy Douglas, Senior Vice President and President of Coca Cola North America and Ariel Fine, Executive Vice President and President of Bottling Investments will also be available for our Q and A session. Now I will turn the call over to Muhtar.
Thank you, Tim, and good morning, everyone. First, apologies for the state of my voice. I have a cold, so please bear with me. I'm going to start with some highlights from our Q1 performance and then touch on our outlook for the remainder of the year before I turn the call over to Kathy to take you through more details on the financial results. Let me begin by saying that I'm pleased to report early momentum at the beginning of 2015, a year of transition for the company.
We delivered promising first quarter results, especially in light of the significant macroeconomic volatility in many regions around the world and the productivity and rewiring initiatives and the productivity and rewiring initiatives we are implementing this year. For those of you following our webcast, you can see our quarterly performance scorecard on Slide 4. Our performance was largely driven by the strength of our global brand portfolio and the strong distribution capabilities of our bottling partners as evidenced by our continued global value share gains in NARTD, sparkling beverages as well as still beverages in the quarter. While certain markets faced significant currency devaluation, economic slowdown or political unrest, our focus on improving our execution enabled us to deliver overall solid results. We grew our top line and bottom line due to initial improvements in the underlying business, the timing of Easter and 6 extra days in our fiscal quarter.
Importantly, net revenues grew 8% on an organic basis, driven by the extra selling days and positive 3% pricemix globally. While it's still early in the year, we are pleased with the 3% global pricemix and the 2% pricemix North America, both ahead of full year 2014 results. This price mix is the result of disciplined implementation of to initiatives, benign commodity costs and favorable product mix in key markets drove gross and operating margin improvement. And we continue to invest substantially behind advertising, leading to double digit increase in marketing spend. The bottom line result was double digit growth in comparable currency neutral income before tax.
Now turning to the 5 strategic actions we laid out for this year. 1 of our key strategic initiatives is making disciplined brand and growth investments. As mentioned earlier, we increased our media investments double digits in the quarter as we work towards fully funded brand plans in markets around the world, while at the same time enhancing the quality of our advertising. Great example of this is the new Coca Cola marketing campaign during the Chinese New Year, which helped our China business grow brand Coca Cola volume 9% despite slowing economic conditions. As we said previously, media investments take about 12 to 24 months to initial positive results, we're even more encouraged by the knowledge that it is still early in the process and we have tremendous runway for continued improvement in our top line growth.
We remain resolutely focused on driving cost out of the business and embedding a culture of productivity into our DNA, which is enabling us to fund our brand and growth investments. This change in culture is reflected in incorporating 0 based work processes into all phases of our annual planning cycles. We remain on track across all spend areas to deliver more than $500,000,000 in savings this year and $3,000,000,000 in annualized savings by 20 19. The difficult but necessary changes made during the end of 2014 are now accounted for in our budgets and tied to our objectives and goals. The initial implementation of our new operating model is on track and the previously announced headcount reductions associated with this change are well underway.
We're continuing to work through the rewiring of business processes within the entire organization. So for example, we have eliminated a layer in many of our functions at the group at the group levels in different geographies and linked our corporate center directly to our business units. In R and D, this means connecting our corporate R and D efforts directly to our global development centers and linking both of these to service our business across business units across the world. So this allows us to scale our efforts in innovation, share new developments faster and accelerate development of new products. In addition, we're also rewiring our marketing organization around consumer clusters to drive speed, to drive efficiency and effectiveness.
This will allow us to better leverage learnings from similar markets regardless of the geographic location and improve the quality of our advertising through our networked marketing model. Great example of this is how we are strategically leveraging the 100th anniversary of our Contour Coca Cola bottle to drive our business forward through integrating marketing, commercial and innovation under one umbrella to reach approximately 140 markets. This campaign centers on the magic of drinking a Coke with the emphasis on the experience as much as the bottle. And as such, it's focused on driving profitable immediate consumption packages and purchase transactions. And as part of this campaign, our system is investing in glass bottles all around the world, while introducing the next generation Kontoor PT bottle and expanding the supply of our premium aluminum bottles in key developed markets.
Importantly, this is not simply a global campaign, Rather, it's a new way of networked marketing that has led to the creation of 20 marketing assets that markets can use leverage in a more cost effective modeler manner. Some of our markets will leverage the campaign throughout the year, while others quarter by quarter. As a result, we have significantly been able to to We're seeing initial positive results for the markets that have already launched the campaign such as South deeper market segmentation strategy is also starting to yield early results. Two examples are North America and India here. In North America, we're focused on generating revenue through a greater reliance on price realization.
Increased media investments, coupled with our segmented price pack strategies, drove revenue growth in our Sparkling portfolio through a strong 3% price mix and a 1% increase in transactions. Simply put, more consumers are enjoying our products more often and are increasingly choosing smaller packages including our iconic Kontoor bottle. Whereas in India, where our revenue growth strategies focus on expanding distribution and recruiting new consumers, we drove double digit unit taste volume growth in both our Sparkling as well as still portfolio. Turning to our focus on our core business model. We continue to make progress on our North America refranchising efforts in the quarter.
First, we remain on track with our previously announced territory transfers to existing partners. During the quarter, we transitioned 4 territories to Coca Cola Consolidated and are on track to transfer additional territories in Kentucky and Tennessee to consolidated and current Coca Cola We are slightly ahead of schedule to close the previously announced transactions with new entrants into our network. So territory transfers to both Troy Taylor in Central Florida and Reyes Holdings in Chicago are slated to close in the Q2. Together, the territories pending to transition to these 2 new partners will represent approximately 5% of U. S.
Bottle can volume. Finally, just this morning, we announced the signing of new letters of intent with existing Bakken partners for territories covering more than 5% of bottle can volume. In aggregate, territories transitioned to date and those covered by definite agreements or letters of intent represent a little over 15% of total U. S. Bottle can volume.
Further, as we continue to transition territories, we're getting better and faster, which is why we are confident that our previously stated time line to have 2 thirds of bottle can volume distributed by our independent bottling partners by 2017 is very much on track. Looking outside of North America, we closed our joint venture in Coca Cola, Amatil, Indonesia in early April. I was in Jakarta earlier this year with Indonesian bottler to celebrate this new venture. This investment will help us capture the growth opportunity in 1 of the largest and most dynamic countries in the world as we enable our system to be even more responsive to consumer and customer needs. So we are off to a solid start in 2015 and we are on track to deliver against our full year and we remain confident that we have the right strategies in place to create sustainable shareowner value.
However, there is still much work ahead of us. We continue to expect that the benefits from the announced initiatives will take time to fully materialize. Further, we're operating in a very challenging environment, a cautious recovery in the U. S. Is offset by a relatively sluggish expansion in Europe and Japan as well as weaknesses in emerging markets notably Brazil and Russia as well as China slowing down.
Therefore, we remain cautious our outlook. So we will continue to focus on what we can control and execute against our strategic initiatives to emerge stronger and better positioned to capture growth in the global non alcoholic beverage industry. I will now hand the call over to our Chief Financial Officer, Kathy Waller, who will provide you with a more detailed look at our financial performance as well as update on our outlook on our business for 2015.
Thank you, Mitar, and good morning, everyone. So I am going to spend a few minutes discussing the quarter and then our outlook for 2015, as Mitar just stated. Overall, we are pleased with our performance in the quarter and encouraged by some of the early signs of success. Our positive pricing continues as we focus on driving revenue in the market in revenue growth was driven by 5% growth in concentrate shipments and 3 points of positive price mix. The concentrate shipment growth benefited from the 6 extra days in the period.
These extra days will reverse in the 4th quarter, so you will see a corresponding impact in that cases, primarily due to the timing of shipments in our international markets. For the full year, we expect concentrate shipments to be generally in line with unit cases. Consolidated price mix in the quarter was driven by positive pricing and product mix initiatives across many of our markets. In addition, we benefited from positive geographic mix as markets where shipments lagged reported unit cases were in lower revenue per CSE markets. As we move through the year, I would like to remind you of
a couple of
points. First, we will begin to cycle better underlying pricing. And second, as we catch up from the timing of shipments in international markets, we will see negative pressure from geographic mix at the consolidated level. Therefore, while we remain resolutely focused on driving revenue in our markets, we do expect price mix to moderate from the current level. Our comparable gross margins improved about 75 basis points on a consolidated basis.
This increase was driven primarily by better margins in North America due to positive pricing and business mix as well as moderately lower commodity costs. As you think about the remainder of the year, we would also expect many of these drivers to moderate as we begin to cycle more difficult comparisons. Therefore, our full year outlook on gross margins has not changed from our prior guidance. Comparable currency neutral operating leverage came in better than anticipated in the quarter, primarily due to the stronger growth in gross profit driven by the factors just mentioned. Comparable currency neutral income before tax grew 13%.
The combined impact of structural items and the provision in Venezuela resulted in a 3 point headwind on income before tax, which was consistent with our previous outlook. Our first quarter comparable EPS was $0.48 which included a 6 point currency headwind. On a comparable currency neutral basis, our EPS grew 15% in the quarter. The 6 point currency headwind was slightly less than our original expectations, primarily due to the benefit from foreign exchange gains associated with the euro denominated debt issued during the quarter. Items impacting comparability in the quarter were primarily related to the early extinguishment of certain long term debt costs associated with our previously announced $3,000,000,000 productivity program and charges related to our Venezuelan operations.
As many of you know, the Venezuelan government introduced a new floating exchange rate mechanism called SIMADE in mid February. We remeasured our boulevard denominated net monetary assets at the end of the Q1 using the new SIMADI floating exchange rate of approximately 193 boulevards to the dollar and translated our Venezuelan subsidiaries' local currency income statement into U. S. Dollars using that same rate. We generated $1,100,000,000 in free cash flow, up 72%, primarily due to the efficient management of working capital, the impact of 6 additional days and the timing of capital expenditures, and it's partially offset by an unfavorable impact from currency exchange rates.
We returned $1,800,000,000 to shareowners in the form of dividends and net share repurchases during the quarter, which is reflective of our commitment to return cash to shareowners. In 2015, we increased our annual dividend by 8% to $1.32 per share and it's worth noting that we have increased our dividend every year for more than half a century. Turning to outlook, while we are encouraged by some of the early signs of success, it is still early in the year and global economic growth remains constrained by challenges in many markets as evidenced in regions like Brazil, Russia and China. Therefore, we are maintaining our underlying full year currency neutral growth expectations as previously provided. However, we are updating the expected impact from structural items and currency.
During our last call, we said we expected the transaction with Monster Beverage Corporation to close in early Q2. We now expect closing to happen in the latter half of the second quarter as the parties work to satisfy contractual closing considerations. However, distribution of Monster Products in the U. S. Has already begun transitioning to the Kayo system.
Finally, we are slightly ahead of schedule on on closing the U. S. Territory transfers to Troy Taylor and Reyes Holdings. We now estimate that the net impact of structural items on full year 2015 Therefore, consistent with what we said in February, for the full year 2015, we continue to expect mid single digit comparable currency neutral EPS growth. However, we do see a slight change in the impact from currency exchange rates.
After considering our hedge positions, current spot rates and the cycling of our prior year rates, we now expect an approximate 6 point currency headwind on net revenue and approximate 10 point currency headwind on operating income and an approximate 7 point headwind on income before tax for the full year 2015. The currency impact on income before tax remains roughly the same as our previous outlook as the foreign exchange gains associated with our euro denominated debt issued this quarter is offset by the effects from translating our boulevard denominated profits at the Samadhi exchange rate as well as the continued decline in several emerging and developing market currencies. So when modeling the Q2, there are a couple of phasing items you should consider. The timing of Easter benefited the Q1 this year, while it benefited the Q2 of last year. We expect structural items to be roughly neutral impact on net revenue and a 1 to 2 point headwind on income before tax.
And then finally, we currently expect currency will be an approximate 7 point headwind on net revenue and an approximate 10 point headwind on operating income and a 5 to 6 point headwind on income before tax in the second quarter as we cycle more favorable rates from the prior year. The variance between the currency headwind at operating income and at income before tax is primarily due to the foreign exchange gains associated with our euro debt. In closing, we are cautiously optimistic about the progress we see in the business, which gives us increased confidence that our strategies and actions are working. With that said, it is still early days and a transition year as we implement significant change in our company amidst a volatile and challenging operating environment. But we absolutely believe that The Coca Cola Company is best positioned to capture growth in non alcoholic beverages and to continue to deliver long term value to our shareholders.
Operator, we are now ready for questions.
Our first question comes from Bryan Spillane of Bank of America.
Hey, good morning, everyone.
Good morning. Good morning, Bryan.
So just I guess as we look at this quarter, it just seems like some of the things that you laid out at the beginning of the year that were within your control have tracked in line maybe even a little bit better than expected. It sounds like the refranchising North America is pacing maybe a little faster, closing the Monster transaction is taking a little bit longer. And it sounds like you're sort of tracking pretty well in terms of cost savings and redeploying or spending more in marketing. I guess, if we think about the factors that are outside of your control, which would be, I guess, some of the macro factors, the change in the Venezuela exchange rate, how some of the markets are moving. I'm not sure if we have a great sense for maybe what's worse or what's better.
So if you could maybe just sort of lay out for us versus where you were earlier this year when you initially gave us guidance kind of what's better and what's worse especially focusing on some of the things that are outside of your control?
Sure, Brian. It's Muhtar here. Good morning again. So in North America, I'll start with North America. I'd say that the outlook appears to be trending a little positive raising hopes that potential waste growth and lower fuel prices could translate into consumer spending.
In Latin America, Mexico is the best way I'd say is relatively stable It continues to track closer to the United States because they're so closely linked. Brazil continues to deteriorate faster than we expected, I'd say that. Venezuela continues to increase as a concern given the growing difficulty on maintaining supply in the marketplace. And Argentina just continues to be challenging. And Colombia is again a kind of a star in Latin America in terms of performance and macro conditions.
So in Europe, I think there are also some green shoots on the back of monetary easing, but it's early days that just started. But deflation still remains a concern this year. And overall, consumer spending in Europe, I'd say, is still sluggish as it will take time for, I think, monetary easing to flow to the consumer pockets and translate into increased consumer spending. And then risk to recovery remain a still volatile environment. And then of course, you've got the possible Greece exit issues lingering on.
In Eurasia and Africa, to continue to remain challenging throughout the year this year. Subsara Africa is a strong bright spot and we're seeing that in our results. And then Middle East, we've got some pockets where it's defying the geopolitical environment, but overall, obviously, increased geopolitical risks there. And then in Asia and Pacific, China continues the disposable incomes, consumer spending, CSE in China continues to decelerate. We saw that happening in Q1 versus the stated GDP of 7%.
Japan remains sluggish, I'd say, similar to Europe, although we are starting to see some green shoots in the economy. And finally, in Asia Pacific, India continues to be a bright spot, I'd say, inside the brick in markets, the 4 brick markets. So that's the sort of walk through in terms of and then the commodity environment, again, talking about what we can control and what we can't, remains fairly benign compared to previous years, stable and benign. And so given that value growth for us is highly correlated to PCE growth, I hope I've been able to give you a sort of quick walk through of what's good and what's not so good and what's more stable.
That's very helpful, Muhtar. Thank you. And didn't mean to have you talk so long. Your voice is definitely under some pressure this morning. Kathy, if I could just one follow-up on the commodity piece.
The comparisons were a little bit better in the Q1. Just looking forward, is there anything that we should be looking at that could make it maybe more favorable as the year goes on? Like how much of it is locked in, I guess? And how much of it might move based on commodity movements? Thank you.
Brian, as Richard just said, commodities are for us will be benign this year. As we are worse than this quarter, we were and for first half we're cycling higher prices in the back half in the first half of last year. So and thinking about something like oil, oil doesn't really impact us. So for our commodities, we are hedged. So we basically are not going to see specific benefits there because and they're going to be basically benign.
Operator?
Thank you. Next question is John Fauci of JPMorgan.
Thank you. I wanted to follow-up on two questions related to the price mix number, which is I guess one, if we look at the gallon variances you mentioned, it skews a little bit more towards high revenue per case. So can you give us an idea in the quarter in terms of how much of that benefit in geographic concentrate shipments, how much we'll need to take out over the balance of the year? And then going back to some of the comments that you guys made, I think back in December about sort of a different global pricing strategy in terms of really trying to find the right balance region by region. Can you talk about the outlook for pricing in Europe?
It was obviously price mix was flat this quarter, but that's one where it seems like there's some opportunities going forward. So what's sort of the medium to longer term view on pricing in Europe? Thanks.
Okay, John. So I'll take the first part of that question. So the gallons and the cases, definitely when you make the adjustment for days, gallons are behind cases and we that will moderate and but that will be based on as you just said, that is what we see in the Q1 is the higher revenue per CSE. And so we did benefit from positive geographic mix in our price mix. That will moderate and we will start to see when it catches up more of the geographies that provide the lower revenue per CSCs coming through, which will then give us the negative geographic mix coming through as well in the balance of the year.
And I think the second part of your question on the outlook of pricing, I will or Sandy, do you want to talk about it all North America pricing specifically?
Sure, Kathy. Good morning, John. The North America pricing situation is really the continuation of the strategy that we've been talking about for the last year and a half. Irel and I talked about this I think 6 calls ago that we were going to focus our business on a sustaining strategy of disciplined price and volume mix to maximize revenue with an emphasis on price as a driver in the U. S.
Business. And that's exactly what we've been doing and what we continue to plan to do with a lot of discipline and focus. As you look at the first quarter, if you look at each business by themselves, we met our pricing objectives in the Q1. We saw a little bit faster growth in our fountain business which created a little bit of negative business mix. But net net the year started according to plan and we see the outlook as being rational and our strategy remains very consistent.
Amit, you want to talk about Europe?
Thanks, Sandy. Hey, John. Just a couple of comments in general and then Europe. We're following exactly the same strategy of managing our product mix and price versus volume around markets in international. In fact, we're getting some pretty good results in many of our big markets, specifically in Europe.
One must remember that last year, we've had some fairly aggressive pricing, which resulted in our view somewhat of an imbalanced progression of our business where we have lost some market share, but get got great pricing. So we were saying before that we would be moderating that somewhat this year, so that we have a more balanced growth of volume and revenue. So what you saw in the Q1 is a result of that moderation. But we do believe that we would be achieving reasonable pricemix in Europe in the course of this year.
And John, this is Muhtar. I'll just add one other point, which is related to what I already mentioned that we're reorganizing and have reorganized our reorganized our marketing around the different clusters of developed emerging and developing markets. And I think that's also working beginning to yield some early results. And I think our new marketing leadership is very committed and very much part of this new reorganization of our marketing around the clusters. And I can say very clearly that marketing is playing an important role in how we are generating enhanced revenue in our business.
That's really an important takeaway, I think.
Great. Thank you. I feel better, Muhtar.
Thanks. I feel good. It's just my voice.
Thank you. Next question is Dara Mohsenian of Morgan Stanley.
Hi, guys. So I'll give Mutar's voice a break and maybe start with Kathy. The quarter came in better than expected from a margin perspective clearly versus consensus, but with the extra shipping days and Easter shift, it's kind of tough to judge your margin performance. I was just hoping you could give us some perspective on where margins and profit came in this quarter versus your original expectations and some of the key puts and takes in the quarter again versus those original expectations?
Hi, Dara. The so the price mix, obviously, at 3 points, as I just spoke about. We did benefit from positive geographic mix in the Q1. And as we will get as concentrate shipments and the timing starts to catch up, we will have the impact of negative geographic mix, which for us is not surprising that that is kind of normal run rate for several of our geographies. So we did get the pricing in the quarter and the benefit.
And then the other side of that would be the cost. And when you adjust for structural and you adjust for currencies, cost of goods is really in line with shipments. And then the other issue would then just be commodities. And then as we said, the commodities are basically going to be benign for us. And in the quarter, we are cycling higher costs from last year.
So that was a slight benefit. But for the most part, now and I'm looking into the rest of the year commodities are going to be benign. So it's really basically the pricing that we got this quarter offset by the costs that were better than prior year because we recycled better costs.
Okay. And then net net when you put everything together, would you say from a profit standpoint or margin standpoint, where did the quarter come in versus original expectations at the corporate level?
So I also would add one other thing. In addition, in North America specifically, we had better business mix, which basically was around our Foodservice business. So for the Q1 in a transition year, we are obviously very pleased with our results. And I would say that I would expect pricing to moderate for the back half of the year and continue with the cost commodity the cost of goods sold continue to be in line with the concentrate shipments. So we were basically given the quarter in line with our expectations and we expect to be in line with our full year expectations that we have provided.
Okay. That's helpful. Thanks.
Thank you. Next question is Steve Powers of UBS.
Thanks. Muhtar, feel free to weigh in, but I'll also try to give you a break and direct questions to Sandy and Kathy. So guys on North America, the price realization was solid, but it was actually a little lower than I at least had expected just based on market data. And I know you were lapping some fairly intense retailer promotions, so maybe that played a role. Maybe it was again negative mix from stills.
I know you mentioned fountain dynamics Sandy. But I was hoping you could just expand on the trends there and whether you think 2% is a representative number for the year, at least in terms of kind of the way you're targeting it? And then on a related note, I was wondering if you also dimension for us the profit contribution to this price mix you're getting, because clearly if it was all rates pure rate then it would sort of flow through 100% to profit all else equal. But given a lot of what we're seeing is category mix and the introduction of new package types, I'm wondering how to think about that profit contribution. Should we be assuming 50% as a rule of thumb roughly or are there reasons to be more optimistic or cautious related to extrapolating price mix to profit flow through?
Steve, the comments I'd make about overall pricing are to reiterate what I said earlier, which is that on a business by business basis, our pricing results in the Q1 were solid. You saw in Nielsen very strong price growth. Some of that was driven by wholesale improvement that we were achieving with our customers. Some of it was lapping some really aggressive promotional activity that happened in the end of February early March. And some of it was our customers making more money in the category.
So the net effect of it was a really good start to the year in line with our plan. If you cross our business over into our chilled Minute Maid business, we saw price realization there. We launched some new items that drove some incremental revenue. And then as I mentioned, the fountain business was stronger than we expected at the beginning of the year, which creates a business mix drag overall. What I'd say from a profitability standpoint is that the combination of rate and mix was in line with our expectations.
But I'd also point out that as we get into the second half of the year, you're going to see more difficult pricing comparisons. And we will continue our strategy of rigorous and disciplined and focused price volume management, but we'll be lapping ourselves and we'll be continuing to do so, but against a little bit tougher comparison. So net net off to the start we had hoped to. Ariel any additional dimension?
I'm kind of thinking of repeating what you said. But I'd go back and I've said this for 6 calls. We're being very disciplined and rational about our pricing. And what we achieved in the Q1 is pretty well in line. Sandy has mentioned there's maybe some channel mix impacts in there.
But generally speaking, very much in line. We intend to stay disciplined. And I would use the word nearly be boring in terms of how we approach the business. We want to remain disciplined and focused on doing the right things for the business. And we believe we are on a good track.
We intend to stay on that track. And I think as each quarter goes by, you'll see positive momentum in
the business. Can I just add one more thing, Dara? That what Iryl just said then creates the environment for our small packages to grow. And the consumer is moving strongly to small packages and we're continuing to see lowtomidteens growth in those packages and all of which is supported by the impact of a step up in marketing, which gives the whole thing more sustainability as we work through the more challenging comps.
Okay. Maybe if I could just follow-up sort of related theme different angle and maybe this is for Kathy. But I noticed you changed the reporting of regional profit to profit before tax, so regional operating profit to profit before tax consistent with the incentive changes you made. North American PBT was up like 100 basis points or 180 basis points or so. But I was wondering if you could comment, A, if there's any material benefit from sub bottling payments in the quarter?
And B, if OI margin trends would have been sort of would have mirrored PBT? And then assuming so, how much of that 180 basis points improvement was driven by some of the better pricing realization, the better productivity commodities that can kind of continue as a run rate versus timing benefits in the quarter related to the Easter and the calendar shift. So if 180 is representative of sort of the underlying OI trends and then what's the real run rate that we should be thinking about as sort of expected margin improvement on the year? Thanks.
Okay. So the expected margin improvement over the balance of the year, as Sandy just said, so we got good pricing in the quarter and Ariel said, we are very focused on continuing to rationally price. We are we have higher comps in the back half of the year for pricing that we have to cycle. So as far as the refranchising is concerned, I wouldn't expect to see much benefit at this point from the sub bottling payments. And as you know, if you look at it from an extra structural perspective, we have we structurally adjust those.
We pulled them out. We pulled out the benefit so that we put it back on an apples to apples basis year over year. So there is not a big difference at operating versus PBT in our North American operations at this point. And for the margin expansion, that is basically because we have really good pricing. As we get really good pricing in the 4th quarter of last year, they're very focused on pricing.
That will continue. But we are cycling higher prices in the back half of
this year. Next question is Bill Chappell of SunTrust.
Thanks. Good morning.
Good morning, Bill. Good morning.
I guess two questions, I'll lump them together. 1, on Diet Coke in the U. S, it did look like most recently the Nielsen's looked like actually a positive number and we haven't seen that in a while. I just wanted to see if maybe the trends you feel like you've got behind that where we could see some growth going forward or at least stabilization? And then the second question, on the refranchising, I mean, anything you've seen thus far, I know it's early, where it may be accelerated even further in terms of the bottler network or it's just maybe have more of an update later as we move through the year?
Bill on Diet Coke, I would describe Diet Coke still as a work in progress. We have done a number of things on the basics of marketing, graphics, advertising, packaging. We have some very advanced sort of big data driven customer relationship programs going on with consumers who love Diet Coke. And we are seeing some improvement in the year over year revenue. But we're still very much focused on that as a work in progress and expect to.
But I would say this, the team and I and our whole system believe that in fact we'll return Diet Coke to growth in the long term, but recent improvement, but still work in progress. On refranchising, the refranchising is going according to plan. It is a as we've said before, a massive project. We're putting the entire system in on a common ERP system and refranchising the territories one sales center at a time to make sure that the capability that we build continues to grow and that our customers are well served in the process. And we're pleased with the progress.
We have a plan in place that we expect to meet or beat. And we're always looking for opportunities to accelerate it, but not at the expense of really high quality customer service and capability.
Got it. Thanks for the color.
Thank you. Next question is Ali Dibadj from Bernstein.
Hey, guys.
So throughout the press release and your commentary, we pleasingly had heard and read about kind of marketing increases. So that's a good thing. That's very much on plan. However, we didn't really see or hear much reference to cost cutting benefits offsetting or funding some of those at this point. The only thing you said was, look, we're on track for $500,000,000 of cost savings this year.
But we're not hearing or seeing a lot of that flowing through even offsetting things. I'm not saying all
the way to the
bottom line, but at least offsetting some of your investments. So when can we start hearing more about that savings offsetting your investments?
Well, Ali, this is Muhtar first. If it wasn't for the savings, we would not be able to be to do what you see us doing in terms of generating that increased marketing, generating all the other things that basically are part of our 5 point strategy of focusing on revenue, focusing on productivity, focusing on better and more marketing, rewiring the organization for better impact and focusing we certainly we certainly would not be able to enable our organization to generate the kind of momentum that you see beginning to come back in. That's clear. There's no question about that. And so this is not a 4 or 5 sequential kind of compartments.
These are a very integrated sort of approach to how we bring more momentum into our business. And everything that I mentioned is happening at the same time, better wired organization, better marketing, marketing that works around clusters, more effective marketing linked to social media as well as into a better cost per GRP, all of that funded by incremental productivity. And so I think that's how you need to see of our entire sort of different buckets of our strategy coming to life.
So a follow-up on that and a separate question for Ira. Just a follow-up on that, Mutar, if you could, is particularly in terms of the headcount reduction and the savings thereof, should we see that ramping up throughout the year? And at risk of being cut off, let me turn my second question here on a separate topic is we do keep hearing Germany, India, Vietnam bottlers and BIG continue to do actually quite well. And I always pause whenever I see that and obviously there's been controversy about some of those names, including obviously Germany. But when is the right time and what are you looking for to make sure that happens or potential buyers are looking for at this point to commit to buying them?
First, I mean, I'll just say that I agree with you that those bottlers are doing really well. Germany certainly is starting in Europe. Southeast Asian bottlers are doing well particularly Vietnam the big one that we are running. And I think it's important to keep in mind for you that Germany was not in a position to be refranchised until after 2012, because the consolidation was still taking place. So it's really been ready for the last sort of it feel like 18, 24 months.
And it has been the real bright spot in Europe last couple of years. It's I could be clear with you that, I could be clear with you that Germany is not a long term strategic long term holding and the right home will be found. None of our, if you like, B. I. G.
Operations are in a way long term strategic hold. So that's what I would say about your question. Ariel, do you want to add anything to that?
Yes. I guess the only add I'd give is the 3 markets you mentioned actually are not in hospital or the smuthers' point. Actually they're all performing very well now. And we've been very transparent about refranchising. I've said this many times at conferences, but we will refranchise at the right time.
Germany, we clearly say, is ready for refranchising. In the
meantime, it continues to perform exceptionally well. We have a fantastic group of associates and management in Germany and feel very good about it. But I've also said, we expect to get a fair price, not get overpaid, but get fair price for territories because we owe that to our shareholders. And we take it from there.
Rodney, just to build on what Eero said, we're looking for 3 things in terms of the right partner, description of the right partner. 1, proven management team 2, strong financial capabilities and 3, willing to invest in the business and grow the business. So those are the three things. And I'm confident that we will reach that goal. On your and finally on your question regarding headcount reduction, I think you've heard about our previously announced plans and we are sticking to that plan simply said.
Okay. Thanks very much.
Thank you. Next question is Ian Shackleton of Nomura.
Yeah. Good morning. You announced a deal in China last week. And I was just keen to get a little bit more detail of quite how that fits in. It's obviously a very different structure to what we've seen with the more recent deals, a la Monster or Keurig?
Ian, it's Mutar. It fits right into the strategy of what we said is bolt on acquisitions where they make sense. And we will look at them with and where we believe that they fit into our portfolio, where they actually add value, where we can generate value for our bottling partners through that acquisition and it fits right in there. And so that's all I would say about that, Ian.
Okay. Thank you. And perhaps just
a follow-up for Kathy. I know it can be quite volatile with equity income this time has almost gone to 0. Is there something specific in that that's causing that?
Yes. Our equity income is Yes, our equity income is impacted by currency. So we actually have don't pull out all of the currency that impacts that. Because if you think about some of our locations, they have their geography they have many geographies. So when we report, we take the main currency and translate that into U.
S. Dollars. That means that there is still often a lot of currency impact in those numbers. So I would read into it that it's a very, very difficult currency environment out there at the moment.
Okay. So it's not the case that
there have been some big one offs in some of the equity holdings there?
No. There's nothing one off that I'm aware of in the equity holdings.
Excellent. Thanks for clarifying. Thank you.
Thank you. Next question is Bill Schmitz of Deutsche Bank.
Hi, good morning. Is there any way to sort of strip out what the benefit in the quarter was on the operating profit side from the extra days?
So I guess, Bill, the way I think about it is if you take our UNIQUATE sales of 1 and use that as a surrogate because that doesn't have the extra days in it and you take pricing, 3 points of pricing. And then I would say that did benefit from positive geographic mix that will moderate over the back half of the year. So I guess I would think of it using this price mix and adversary sales unit cases.
Okay. So but there was no fixed cost leverage or anything with the extra days that might have helped the gross and operating margin?
So the days the operating expenses, I would say no, there was nothing specific in operating expenses that would help by the 6 days. And then the sales and distribution expenses are impacted by the 6 days, so they kind of watch out. So I would say there was nothing there.
Okay. That's very helpful. And then just on BIG, I mean, the year over year margin expansion was awesome, I mean, massive. What's driving that? And how sustainable is it?
Well, so again, I hate to keep repeating myself, but then we do have we did benefit from this positive geographic mix. So I think the only thing I would say in terms of it will moderate in the back half of the year as we are we'll get more of our normal run rate of negative geographic mix from concentrate shipments. And then Sandy talked about the impact of the as we are still in a transition year.
Okay, great. And then just lastly very quickly, I mean the delay in the Monster transaction, mean is there any more color you can give us on why it because I think it was supposed to close like maybe late 2014 or early 2015, then you guys said March and now it's kind of towards the end of the quarter. Is there still a high probability that's going to close then?
Yes. So there's no issue there. It was going to close. We always expected it to close in the Q1. Then basically, it's just the regulatory process that we have to go through that is delaying the close.
We fully anticipate that it will close.
Okay, great. That's very helpful. Thanks very much for the time.
Certainly. Thank you. Our final question comes from Judy Hong of Goldman Sachs.
Thank you. Good morning, everyone.
Good morning. Good morning.
So I guess most of my questions were answered. So just a couple of P and L questions, Kathy. 1, in terms of the structural items impact this year, it sounds like a slight negative on revenues now as opposed to the prior call. So just a little bit of clarification on sort of the puts and takes on the revenue impact. It sounds like the impact on bottom line is pretty minimal.
And then on the FX, you had the remeasurement gain in Q1 that was about a little bit more than $0.01 Is that really what's the difference in terms of your full year outlook for PBT impact being at the low end of that 7% to 8% that you had called out last time?
Yes. Hi, Judy. So on the structural, the structural is impacted by the timing of the Monster transaction. And then anytime we accelerate into refranchising, that is also going to impact our numbers. So that's why we gave you different structural guidance structural guidance.
And then on the gain remeasurement gain, yes, that is basically when we remeasured that euro debt that impacted currency positively versus so that is what changed the outlook for currency over the back half of the year. It's also then there's the impact of Venezuela and change using the Samadhi rates going forward.
The timing of the Monster transaction though, I mean the deal itself is delayed, but you are getting the distribution into your bottling in this quarter. So that would be still a positive in terms of the revenue benefit, but is the refranchising pacing really what's striking down in terms of the revenue impact?
So the distribution is starting to transition. It has not fully transitioned. So that transition will take place over the year. And so we at various times and that's not something that's really under our control. That's really under Monster's control as they transition that.
So we can't we put in an estimate of how we think it's going to transition. But so it's not something that's already into our numbers. And that's lower that's what's going up. So it's slower than expected because we expected it to start earlier.
I see. Okay. That's clear. All right. Thank you.
Thank you. I would now like to turn the call back over to Mutar Kent for closing remarks.
Thank you, Kathy, Amit, Sandy, Ariel and Tim. In summary, we're seeing initial progress in our plan to reinvigorate top line growth. However, we still have much to do and the full benefits from the announced initiatives are going to take time to materialize. 2015 is a transition year as we transform our operating model for sustainable growth amidst a challenging global consumer environment. While the macro environment remains challenging in the near term, we're confident in our ability to return to sustainable growth as the long term dynamics of our industry remain promising.
Our brands and our global system are unparalleled and we are fully dedicated to strengthening our position as the world's leading beverage company. As always, thank you for your interest. Thank you for your