可口可樂 (KO) 2001 Q2 法說會逐字稿

COCA-COLA COMPANY CONFERENCE CALL

Good morning. At this time, I would like to welcome everyone to the Coca-Cola Company conference call. At the request of Coca-Cola the conference is being recorded. All participants will be able to listen only until the formal question and answer portion of the call. If you would like to ask a question during this time, simply press '*' '1' on your touch-tone phone. If you are on a speakerphone, you may need to lift the telephone handset to do so. To withdraw your question press '2'. Participants will be announced by their name and company in the order they are received. I would like to remind everyone that the purpose of this conference call is to talk with investors and therefore questions from the media will not be addressed in this forum. Media participants should contact Coca-Cola's Media Relations Department if they have additional questions. I would now like to introduce Mr. Larry Mark, Director of Investor Relations who will begin the conference. Mr. Mark, you may begin.

[_______________] an executive committee meeting in Atlanta this week, therefore we have an excellent lineup for our conference call this morning. I am pleased to be joined this morning by Gary Fayard our Chief Financial Officer, Sandy Allan the President of our Asia group, Jeff Dunn the President of our Americas group, and Charlie Frenette the President of our operations in Europe, Eurasia, and Africa. Our prepared comments should last about 15 to 20 minutes this morning, and afterwards, we will open up the discussion for questions and answers, so that we can get to as many questions as possible. I would ask you to try to limit yourself to one question during your call, and if you have additional questions please return back into the queue. Before we get started, I would like to remind everyone that this conference call does contain forward-looking statements including statements concerning the long-term volume and earnings objectives, and it should be considered in conjunction with the cautionary statements that are contained in our earnings release and in exhibit 99.1 of our company's most recent Form 10-K. Now I would like to turn things over to Gary Fayard.

Good morning. We are glad you are able to participate with us in the conference call this morning. Our objectives are to provide an update on the strategic initiatives of the company and to briefly summarize and highlight our operating and financial performance. We are very pleased with the results in the quarter as they reflect the actions that we have taken to position our company for sustainable profitable growth. We are focused on growing our carbonated soft drink brands while aggressively seizing opportunities in the non-carbonated beverage areas where we can establish profitable new brands. Our focus on this strategy has led to solid underlying growth as reflected in second quarter unit case volume growth of about 3.5%, earnings per share of 45 cents in the quarter and free cash flow of over $1.6 billion during the first 6 months of the year. Our North American operations were up 3%, which is right in line with our long-term expectations for this very important market. Our international business was up 4%, reflecting very positive performance in most of the world. There are 2 trouble spots which have kept this quarter from being a really great quarter, Turkey and Germany. When I exclude the volume performance of these 2 markets, worldwide volume growth was 5% and international volume growth was 6%. The underlying business fundamentals around the world are very solid and Charlie will talk with you in a few minutes about the aggressive steps that we are taking to get both of these challenging markets back on track. Our approach is to manage our portfolio of business units so that we consistently deliver growth in volume, earnings, and cash flow. We have done this so far this year, and we will continue to do it going

forward. At times, we will be impacted by challenging economic conditions given the fact that we operate in literally every corner of the world. Our approach is to execute locally developed realistic business plans, which allow our local operators to maximize the profit growth of our system in every circumstance. Before, I turn things over to Sandy, I think it is important to step back and realize that the fundamental strengths of the Coca-Cola system around the world has not changed at all. We are the world's most respected brand, an unparalleled worldwide distribution system built by our bottlers, top quality marketing capabilities, and a business model that delivers superior financial results. We are pleased with what we have accomplished to date, but we are not yet satisfied. As I mentioned, we are not yet where we expect to be in every market and we have a few areas to address. Our mindset is to constantly push to improve where we are and enhance our position in the marketplace. In doing so, we are confident that we will deliver sustainable growth in volume, earnings, and cash flow. As was mentioned in our release, our growth was 4% in the first 6 months of this year and we are confident in our ability to deliver worldwide volume growth of 5% to 6% for the full year. This will require 5% to 6% growth for the remainder of the year. As for the reasons we are confident in the volume growth, let me turn the discussion over to our operators. Sandy?

Good morning, a pleasure to have the opportunity to speak with you this morning. The performance of the Asia region in this past quarter, definitively reflects our continuing ability to execute the company's comprehensive strategy of growing both core brands particularly brand Coke as well as aggressively meeting consumer demand for non-carbonated beverages. Volume in Asia grew by 11% for the second quarter, split approximately 50-50 between core brands and non-core brands. Volume was driven by strong growth in Thailand, Philippines, Indonesia, and Australia. Growth in Japan, our largest volume market was up 7%, which was particularly incredible given the deflationary economic conditions existing in that country. In both India and China, the fundamentals of our business remained strong. However, our volume in China was adversely affected in the second quarter by successive typhoons and torrential rainstorms particularly in late June. Nevertheless, our business in China grew 9% in the first half, reflecting growth in brand Coke of 7%. From a marketing and investment standpoint, we focused resources in the second quarter in Japan concentrating on 4 key areas. Consumer promotional activity for the core brands of Coca-Cola, Sokenbicha the market leader in the blended tea section, and Aquarius our sports drink. Second, flavor brand extensions of the key core brands, Georgia Coffee's Café Leche, Fanta's Funky Lemon, and Minute Maid Fruity Vegetable. Third, increase in display and promotions in the key supermarket and CVS channels, and fourthly, launching of new products such as Marocha Green Tea. As part of the strategy to grow both key core brands and launch new products, the incremental marketing investment in Japan is being used to support two key marketing initiatives in 2001.

Firstly, to reposition and aggressively launch entirely new marketing and promotional campaigns for brands Coca-Cola and Georgia Coffee, and secondly launch our new product entry Marocha into the fast growing and highly competitive green tea market. For the remainder of the year, Japan will concentrate on supporting the key core brands with promotional activity and continue to create awareness for the new products which were launched in the second quarter. With an aggressive promotional campaign for Coke, Georgia Coffee, Sokenbicha, and Marocha Teas, we are confident that we can continue to generate growth. However, growth at the 7% level achieved in the second quarter is probably not sustainable. We do, however, expect mid-single digit growth in Japan for the full year, which will continue to outpace both the industry and the economy. In other key markets, carbonated volume growth was driven in Australia by a strong marketing focus on Sprite and Fanta growing 25%, and the most successful consumer promotion ever in Thailand behind brand Coke, and the rollout of the "Life Tastes Good" campaign throughout Asia. For the non-carbonated, we continued to meet consumer demands for quality beverages by expanding distribution of our water brands in China, Indonesia, Australia, and in India as well as other smaller markets. We also launched our Qoo our very successful juice drink in Japan into Korea and Singapore, where in both countries it has become our third largest seller. We think that the Qoo brand has great potential for other markets in Asia. In addition, we expanded our tea brands in China and Singapore to meet increasing consumer demand for packaged tea products. Now, I would like to turn things over to Charlie Frenette, so that he can tell you about Europe, Eurasia, and Africa.

Thank you Sandy. Good morning. Our business in Europe and Africa is performing very well in most markets. But as Gary mentioned earlier, results are tempered by problem areas, Germany and Turkey. In Germany, there are really two main issues, pricing and packaging shifts. Some context, I think, might be important here. Germany is experiencing a period of slowing economic growth, especially in Eastern Germany where unemployment is on the rise in an environment, which has significantly lower GDP per capita than the west. Importantly, the beverage industry is moving past the quota set for nonrefillable packages. As many of you know, the German government's regulation state that over 70% of the industry's sales must come from refillable packages. Our company has had a policy to support the guidelines of the industry quota, and our commercial practices and packaging strategy followed this policy. The consumer demand for convenient nonrefillable packages has increased. Many retailers primarily discounters are a rapidly growing channel in Germany, have taken a decision to focus solely on nonrefillables, delisting returnables to simplify their operation. The government is currently re-evaluating its regulations on packaging and is debating the topic as we speak. Consequently, we made the decision to follow the industry and be competitive in the packaging arena. We will market both returnables and nonrefillables, offering consumers their favorite brands in packaging that meets their needs. We will do so within the parameters of German Laws. The situation is very fluid but our strategy provides the flexibility needed to keep pace with the rapidly changing dynamics in this market. A little bit about pricing, in October, the Coca-Cola system in Germany took a price increase on all brands and packages to get ahead of the euro

conversion. It was the first increase in several years and we expected our competitors to follow. However, most did not. As a result, we were uncompetitive on price throughout the first part of the year. With all that as context, here are the actions taken to remedy this problem area -- The German Coca-Cola system first of all has reduced the feature prices for refillables starting early in the second quarter and we expect to have a critical mass of Coca-Cola company brands sold in returnable bottles featured at more competitive prices by the end of July. Second, retail prices of Coca-Cola nonrefillables, given Coke's ability to command a premium and hold share at the current price gaps. However, we have reduced the feature price of nonrefillable flavors given their higher price elasticity. Third, the system has increased the frequency of features for both refillables and nonrefillables throughout the third quarter, and we have introduced multipack nonrefillable packages, 6 x 1 liter and 4 x 2 liters, and we are expanding the availability and increasing the feature activity of multipack cans. Fourth, we have increased the listings of an expanded portfolio of nonrefillables including multipacks and added flavors. For example, prior to the current quarter, only 42% of the outlets had Fanta available in nonrefillable packages. We are quickly changing this reality and expecting that Fanta and nonreturnables will be available in every account that sells Coca-Coca nonrefillables. Fifth, our summer consumer promotion is now structured to include in-store feature activity on multipack cans, multipack nonrefillables as well as refillables with channel specific features to optimize profitability. Now these actions are focused against the simple 2-part strategy.

The first is to be competitive, be competitive on price and packaging and then manage the brand-price-package channel dynamics to optimize profits, and second - achieve a value-chain cost structure that enables profitable growth in a more open and dynamic market. We are focused on a continued restructuring of value-chain costs and on installing efficient nonrefillable infrastructure. Here is the good news, through all of these challenges, we have come away with some very positive realizations about Germany. Number 1, the brand equity of Coca-Cola is very strong in Germany. We are able to hold our share position at a premium price. Second, we have a refillable infrastructure that is an important tool in meeting consumer needs and while we expect packaging shifts over time, we do have a competitive advantage with our existing refillable system that gives us the needed flexibility to manage the change, strategically. Third, growth is achievable when prices match the value, and consumers are provided an appropriate packaging choice. We are going to be competitive and we are going to price the value, giving consumers a full range of choices within the context of German Laws. In respect to incremental marketing activities, we anticipate spending approximately $75 million this year on activities that are key to continuing to build the equity of Coca-Cola. We currently have the heaviest weighting on media that we have ever had in Germany, and we are going to continue to allocate our resources to increase volume. In summary, we are working hard with a dedicated bottler system to ensure that we are executing a business strategy that delivers volume and profit growth in the back half of the year. Let me be very clear, Germany is a major priority for us right now. I am in Germany at least every fortnight, and I can sense that the momentum is beginning to turn. It will not happen overnight, but we are on our way, I believe.

We have taken steps so that we will not see decline in volume over the next 6 months. As we move forward, Germany will contribute to our growth. On a year-to-date basis, our growth in Western Europe outside of Germany is exactly where we intended it to be. Both Spain and CCE territories are very solid. Although the weather was cool in April, Spain finished the quarter with 10% growth in brand Coca-Cola and over 25% growth in Diet Coke during the month of June. United Kingdom and France are also performing well. The CCE territories up 6%, cycling a 14% underlying growth in the second quarter of the prior year. We are extremely pleased with the way that Coca-Cola Enterprise is executing in these territories. Now what about Turkey, volumes are down over 20%. However, for most other consumer goods companies volumes in Turkey are down well over 50%. I believe the difference is explained by our system's ability to design and implement a strategy appropriate for this crisis environment. Taking learning's from our experience in Indonesia and Mexico and other places throughout the world, we modified our consumer communication, introduced smaller, more affordable packages for our core brands, re-emphasized [________________] such as water and juice drinks. I was in Turkey 3 weeks ago, attending a Coca-Cola Bottlers Turkey Board Meeting. I met with the bottlers, toured the market, met with customers, and our own people. I was very impressed with the level of execution both in the absolute and relative to other fast moving consumer goods companies. Our bottlers are profitable and so are we. As we get through this period, I am confident that we will grow share and be well positioned to recover lost volumes going forward.

Consistent with our strategy, we have launched over 150 brand product combinations with over 450 new SKUs thus far this year. Importantly, Coca-Cola is growing, so are our core [CSTs] and we are profitably competing in selected non-carbonated segments in a very disciplined manner. Africa has posted a solid growth for the quarter. Nigeria is performing very well, we are cycling a price increase a year ago and seeing the benefits of a new 1-liter returnable glass package. Second quarter growth for Coca-Cola in Nigeria is up well over 50% far exceeding the decline caused by the price increase last year. I would like to pass on to Jeff Dunn, so that he can tell you about the positive results that we are seeing across the Americas.

Thanks Charlie. Good morning. I will start with Latin America and then go on and discuss performance in North America. As many of you know the strength of our business in Latin America is based upon our strong carbonated soft drink business, which contributed 3 of our 4-point growth in the quarter. Overall, the group continues to deliver solid performance across all key markets, despite the fact that we are going up against tough cycling comparisons from prior year. Let me walk you down some of those key markets. Starting with Mexico, volume growth in Mexico improved during the second quarter when compared to the first; however, they continue to be impacted by the slowing economy in the United States, especially in the northern parts of Mexico. Official GDP forecasts which began at 7% for 2001, have now been revised down twice to 2.5%. We've moved quickly to adjust our business plan in Mexico in response, and are encouraged by the trends we saw especially in June, and we expect to be successful as the year progresses, working with the bottlers. Brazil performance is solid, even with a very unpredictable economic environment caused by the energy crisis there. In June, we continued to see benefits from our carnival activation of [_____________], our [Guanara] brand, as this brand posted growth of 9% and brand Coca-Cola responded well to the launch of 'Life Tastes Good', posting 6% growth during the month of June. Argentina continues to perform extremely well, growing 16% in the quarter and year-to-date. Our strategy there is to remain close to local consumer dynamics and has included offering diversity in package sizes at key price points across our brand portfolio. Also we're benefiting from strong bottler execution and incremental revenue from new products. During the quarter, core brands such as Coca-Cola, Sprite, Diet Coke and new products such as Crush and [_______________], contributed

14 points of growth. With recently launched non-carb products such as Hi-C and Cappo juice drinks adding another 2 points. As I look to the rest of 2001, we are confident that based on our tailored local strategies, unit-case volume will continue to be very solid across the region. Moving to North America, we finished at the high end of the range of estimates that we gave a couple of weeks ago with volume growing at 3%. During the quarter, we showed sequentially improving volume trends with June being our strongest month of the quarter, demonstrating that our marketing programs are starting to bring attraction in driving growth in a rational pricing environment. During the month of June, all 3 of our core brands being featured under the Pop-Top promotion, Coca-Cola Classic, Diet Coke and Sprite showed positive growth. For the full quarter North America volume growth of 3% was comprised of 1 point from our core [CST] business and 2 points from our noncarb businesses led by Desani and PowerAde, which benefited in the quarter from increased availability, expansion into new packages and solid marketing. Both bottle, can and fountain contributed at the 3% level allowing the North America group to produce strong results despite Minute Maid and supermarkets being down 2% for the quarter. This quarter represents the first time the North America group has posted a growth of 30% since the fourth quarter of 1999. And I believe firmly that our business has started to make the turn that we predicted earlier in the year based on the investments and the focus our bottlers and us are putting into the market. For all of North America we expect solid trends to continue, given the support behind the 'Life Tastes Good' campaign, our regional football activities, the very important and exciting activities around

Harry Potter, then Olympic torch relay and holiday programs which are both hallmarks of our system. Our outlook for the overall [CST] business is by strengthening the performance of our core brands on the downhill and continuing to demonstrate strong growth in our flavor business. [CSTs] will contribute at least 1 point of growth. During the second quarter, we invested over $50 million in incremental marketing behind the launch of "Life Tastes Good." Our media was much heavier than normal as we re-enforced the core message of everyday optimism with Coca-Cola in consumer's minds. Throughout the third and fourth quarters, we will allocate at least an additional $100 million towards building the brand equity of Coca-Cola and in support of PowerAde's re-launch which is just starting to hit the market over the last couple of weeks. We expect our noncarbonated business to be very, very strong in the back half of 2001 as we continue to emphasize Desani, PowerAde, Minute Maid lemonade, and our Minute Maid juices [_______________] products. We will also receive incremental volume from the rollout of new products such as Fanta, Planet Java, and Mad River, into new territories. In addition, activities surrounding the re-launch of PowerAde will accelerate through wider distribution of the new packaging, the new graphics, the new product formulation, and new advertising that will be coming in a few weeks. Let me take a minute and talk about Desani, which is up over 120%, in the quarter. As many of you know, we were slightly late for the water game, but Desani is picking up that gap very, very quickly, and is performing exceptionally well. It is clearly the fastest growing water in the United States and is now the number 2 brand in the single serve segment. A few examples to dimensionalize that based on year-to-date [Neilson data in the C&P channel] ,

Desani's growth is 3 times faster than Aquafina, and we are narrowing the share gap rapidly. In supermarkets our growth is nearly 3 times that of Aquafina, and we are growing share of single serve water faster than any other brand. And lastly in the [drug] channel, Desani overtook Aquafina as the share leader of single serve in May, and we have maintained that lead in June. This brand is exciting and it is a brand, and is a key driver of profitable growth for both us and our bottling system. Overall, in considering these items for the back half of the year in North America we expect we will continue growing our business at a level similar to the current quarter and in line with our long-term business model. I am sure that many of you are aware that Coca-Cola Enterprises gave guidance yesterday that may have been below our outlook for the full year. As you evaluate their statements, keep in mind their key differences when you compare our total buying growth to them. Firstly, our North American business includes fountain, which is roughly 35% of our business, and they are reporting physical case volume growth and we are reporting equivalent case and we get positive conversion there. I say this to emphasize there are no differences in our outlook for the remainder of the year and how CCE views it along with us. John [_______________], and our team are working extremely close together, and I can assure you that our business strategy is aligned. We see the problems and the opportunities in the same fashion and we are working hard against them. We are supportive of the steps that CCE is taking to improve their operations, and we will continue to work hard to develop the right approach to ensure we have the right brands, products, packages and channel strategies, to maximize the returns of our total system in North America. Let me turn it back over to Gary so we can move to your questions.

Thanks Jeff. Let me give you a few financial details for the quarter. Our volume performance is based on the strategy for profitable growth that creates significant free cash flow. Second quarter earnings per share were 45 cents which included 2 cents of incremental marketing investment. Reported operating income for the second quarter of this year increased sharply about 18% due to improving business results in several key markets and the cycling of several non-recurring items in the prior year. The impact of the stronger US dollar reduced our operating income by approximately 4% during the second quarter, led by movements in the Euro and in the Real in Brazil. Considering the marketing investment, nonrecurring charges and inventory reduction in the prior year, second quarter ongoing operating income increased approximately 10% on the currency neutral basis, and this reflected very high quality earnings for the second quarter. With improvements in equity income, interest and taxes, ongoing earnings per share increased approximately 13% on a currency neutral basis. In terms of cash flow, we've generated over $2 billion in cash from operations. After reinvestment in the business, we generated $1.6 billion in free cash flow so far this year. Our annual dividend has increased about 6% in the current year to 72 cents per share and we have spent $117 million on the repurchase of our company stock during the first 6 months of the year. In the second quarter we spent approximately $80 million or 2 cents per share after-tax on incremental investment and marketing. The largest portion of the spending occurred in North America slightly over $50 million as Jeff said, with the remainder spread

fairly evenly between Japan and Germany. As previously announced the company expects to invest $3-4 million of incremental marketing during the current year. Throughout the third and fourth quarters the incremental spending will be allocated toward the US at over $100 billion, the balance will be allocated equally to both Japan and Germany. These amounts should be fairly evenly spread against the remaining two quarters. As we stated in the release, the Company's outlook for 2001 earnings, from underlying operations has not changed. However we do expect equity income to be negatively impacted based on the announcements by Coca-Cola Enterprises. As a large investor in CCE, our equity income will be impacted by the reduced earnings guidance issued yesterday. If you multiply out the reduction in expectation [_______________] our 40% ownership interest in CCE and tax effect results, the impact to the Coca-Cola company is approximately 2 cents per share for the remainder of 2001, and I would expect to see your numbers come down by that 2 cents. Our outlook on currencies has not changed since our volume update release issued at the end of June. We expect foreign currency exchange negatively impact operating income for the year 2001 by approximately 4% to 5%. Our currency outlook was based on those market conditions at the end of June as I said. As always we are watching the foreign currency environment very closely and we will continue to update you in the event of circumstances impacting the strength of the US dollar cause a change in our outlook. In summary, before we open up the call for questions I would like to reemphasize that we are very excited about where we are today and about what we see in front of us. The strength of the Coca-Cola Company are many, and we are optimistic in our outlook to capitalizing on these for the benefit of our shareholders. Thank you for listening and I would like to open the call up to any questions that you may have.

Thank-you. At this time I would like to remind everyone that if you would like to ask a question please press '*' '1' on your touch-tone phone now. If you would like to withdraw your question please press 2. Once again if you would like to ask a question please press '*' '1' on your touch-tone phone now. The first question comes from Mark Greenberg of Deutsche Bank.

Good morning. Just a couple of followup questions, one first on Germany and then North America. Charlie, if you wouldn't mind elaborating, recently the retail laws in Germany changed such that more traditional North American style promotions, rebates and the like are now going to be permitted by German Law. I wonder if you might talk briefly about how that's going to affect how you are going to market in Germany and then secondarily just a question for Jeff. In the release, you talked about rational pricing as one of the drivers of North America, but during yesterday's CCE call, they were more or I should say they were less constructive on the overall pricing environments and I just wonder how we reconcile those two statements? Thanks.

Mark, you are correct. The retail laws have changed in Germany, taking effect in August, and our promotional plans throughout the tail end of the third quarter and importantly moving into the 4th quarter surrounding Harry Porter, which we expect to be a very big event for us in Germany from a commercial standpoint, in terms of getting inventory on the floor retail and the Christmas activities will reflect the new flexibility that this law allows us and we will be quite innovative in that regard.

Just a followup. Do you have anything specific planned in terms of couponing or rebates, that's more kind of traditional American style of retail.

We will be experimenting with a number of different tactics throughout the year beginning in August and then refining those as we go into the 4th quarter.

Thanks.

Mark on the pricing environment, here is how we characterize it. It needs to be taken in context of the last 2 years and this year looking on a 3-year trend. There has been the most aggressive move up in pricing that we have seen in 20 years in the United States and that clearly impacted volume in 1999 and 2000. We are not seeing that level of price realization this year and we have not seen what the bottler had [_______________] into the plan for the first 6 months of the year. But we are also not seeing the return to aggressive declining pricing environments that we saw leading up to 1999. We are in essence holding the price and the category across [CSTs] is showing in both volume and price growth on a balanced fashion. So we might not be getting as much price but I think that has to be taken into context of the very aggressive pricing that took place in the last 2 years.

And just a followup on that, Jeff, with regard to North America plans for Harry Porter and promotion and display, do you think that's going to have any bearing on pricing?

I don't know that Harry Porter per se is going to have an impact on pricing although we think from a consumer standpoint and a retailer standpoint, it's going to be a very, very successful program. We have got good selling against key retailers and this movie is not only going to deliver as a movie but we feel strongly it will deliver as a promotional property.

Thank-you.

Thank-you, the next question comes from Caroline [_______________] UBS Warburg.

Good morning everyone. Two questions, due to the spending in the back half of the year, the incremental spending, am I right that you are talking around $200 million or nearer to $300 million, and do we need to adjust our estimates given that you spent less than expected in the second quarter. And the second question is on the use of your cash, I understand the rating agencies are making it difficult for you to buy back stock. So what do you do? Do you [_______________], and on a low interest rate on that cash, as it [_______________] or when does that shift, and again in the context of, I guess, the Moody's Investors [_______________] are changing, the rating on the outlooks for Coke and CCE yesterday?

Caroline, Gary here. Thank you very much. First, on the incremental marketing it will continue to be in the range of $300 to 400 million that we have talked about, it will be more than $200 million in the downhill, in the remainder of the year. So the guidance continues to be exactly the same as what we have said before. Relative to share repurchase what we have is an agreement with the rating agencies, Moody's did issue a release yesterday, which had a negative outlook on CCE, which then also impacted the Coca-Cola Company, related really to the earning's release that CCE released yesterday, as well as we coupled that with the CCE acquisition of the Herb bottler and increasing debt by about a $1 billion as a result of that acquisition. What we have been seeing this year was, we were spending, repurchasing stock full year at a rate of about $250 million for full year. You can see that it is pretty much what we did in the first half of the year, and actually had been planning to significantly increase the repurchase levels in the second half of the year. What we concluded is the correct strategic move for the company and for the system, in fact, was the acquisition of Herb by CCE, that $1 billion, if you will is the $1 billion, we would have allocated to share repurchase, but we believe long term strategically, that is absolutely the right thing to happen for us in the US for the system. So what you will see is reduced interest expense actually for the remainder of this year.

Next question.

The next question comes from Bill [_______________] of Sanford C. Berstein.

Good morning. Can you talk about your noncarbonated strategy from both an operating and a financial standpoint with over half of your global volume growth coming from noncarbs. Does each division view this as a core competence in terms of product development sales and marketing. And can you find a business model that allows the returns to be as attractive on the noncarbs as on the core carbonated business, be it through joint ventures or 100% ownership, certainly it is to the bottlers, but can it be for the Coca-Cola Company as well.

Bill this is Charlie. In an European context, we have taken a very detailed study of the economics of noncarbonated beverages in each of the 49 countries across Europe, and we are being quite disciplined and selective about which categories we choose to participate in, based on the economics and the opportunity that we see, and the profitability we believe that we can obtain from an entry into those segments for both ourselves and the bottler. So we have embarked upon a very disciplined approach across Europe, and the headline of that is, we believe juice drinks, teas, and sports drinks afford us the most significant profitable growth opportunity in noncarbonated beverages and water in some markets such as Russia, Turkey, and so forth, to fill out our portfolio, but we are consciously not entering the water business at this time in Western Europe, given the economics of that segment and the basis of competition, which is both spring and sourced mineral water.

As far as Asia is concerned, we have a very aggressive strategy for noncarbs. We also have a pretty disciplined process and what we say is that over time and that time, would be 3 years, that any beverage that we get into, particularly for tea, for coffee, or for juice, we must make money after 3 years. I think also with water, what you have to also look at is not just the margin per case, but the volume that you multiply that margin by. To give you an example, in Australia, we have a very growing and successful water business, because many people in Australia think like in the United States. They are dissatisfied with the quality of water that is coming through the municipal taps, and therefore there is a huge market for bottled water in a comparatively developed country like Australia, and in fact on bottled water in Australia, our margins, our system margins are as good as Coke. Now if we take another country like Indonesia, where only 10% of people have access to municipal water. There is a huge business there in bottled water particularly in small packages that also delivered to homes, and we see, perhaps it will be at a lesser margin than Coke, but we think that the volume that we can drive through that channel will be enormous, and that the profitability of bottled water in a place like Indonesia will be very satisfactory.

And Bill, separating Latin and North America, they are very different situations. In Latin America, we are just, I think, getting started. We have got a very strong and growing [CST] business, and they are layering on really Juice drinks brands like Cappo some water business [_______________] in Mexico for example and we just launched PowerAde in Mexico. So, I think that competencies again have to be built, country by country, in Latin America, but the things we have competencies [_______________] today are being rolled out and are adding a layer of growth. For our North American context we have already got a noncarb capability built here that has been built over the last 5 to 10 years, it is about directing that capability and finding efficient ways to grow like we have with Desani and the new Minute Maid [_______________] cold filled product, and fruit punch product, which is doing extremely well and the bottling system is a good example, but the other side is on hot filled products, like PowerAde and Juices to go by putting the right marketing strategy and investment behind [_______________] profitable growth. So, I am comfortable that we are building capabilities across both regions, but they are in very different states of development.

Okay, thank you.

Thank-you. Our next question comes from [_______________].

Hi, Gary can you clarify the 2% gallon sales versus the approximately greater than 3% unit cases because I do believe your guidance coming after first quarter was if the actually 2% greater than cases and then what you think for rest of the year? Thanks.

Right, okay. Well, first on volume what we said in the release was, I think, well over 3, translate that to be 3-1/2, or if you want to be exact 3.47. Okay. On gallons that difference is basically where gallons are a little bit below cases, that's basically timing, and I think, what you will see is gallons be a little above cases in the third quarter, but nothing of significance really related to those 2 numbers.

Thanks.

Thank-you. Our next question comes from John [_______________] of J.P. Morgan.

Thanks. Good morning. Gary, two quick things, one, can you clarify your guidance in terms of saying that number should come down for equity income when you look at the fact that you guys came in 2 cents ahead of consensus. Does that mean that basically we need to account for 4 cents swing in terms of, does the 2 cents equity income offset the 2 cents surprise versus consensus this quarter, and then secondly, as you look at your SG&A number, I was wondering if you could give us a G&A change year-over-year, and then, also, can you articulate sort of the impact of your hedging strategy in Japan obviously, with the yen down dramatically from a top line standpoint, but providing the benefit on the operating profit standpoint, can you sort of go through that impact that that had on your SG&A. Thanks.

Okay. Let me see if I can go through those first relative to the 2 cents in equity income. First, let me be very clear, I think the consensus on earnings for the quarter was 43 cents, but I believe most people had 3 to 4 cents of incremental marketing built in to that. So, if you added that back, so on a recurrent basis, I think, what you would see is most, I think, the consensus will be close to around 47 cents, we are at 45 with 2 cents of incremental marketing, add that back, so 47. So, I would say we are pretty much right on consensuses is a way I would view that, so it is really a timing of the incremental marketing in the year you will see more of that, in the second half of the year. That's No 1, and therefore, because of that being on consensus, I think, the guidance on CCE's equity income, that 2 cent impact [_______________], I think, I will expect to see your numbers come down on that. Relative to G&A expenses. G&A as a percent of revenues etc., those expenses are down sharply. I think, I would say it's good management, we have done what we said we would do, through the restructuring that we went through last year, we are realizing those benefits, and we are coming through with very good cost control, and you are seeing a lot of leverage coming out of those expense lines, and it is an area that we continue to focus on, and as we said in the past, we will not lose control of those lines and relative to Japan and the yen, I think, what we said previously is that we are at 100% cover on the yen for this year. So, it does not have an impact really [_______________] operating impact.

John, you are absolutely right, it is the yen, it is having a significant impact at the revenue line, and that is a part of why you see, revenues are actually down and a lot of that is because of the impact on the yen. But, in the hedging that we have brings that all back at operating, so that you can impact we are even at operating relative to Japan. The impact of currency on G&A is reducing G&A about 4%. So, even if you adjust the G&A lines, SG&A lines would still down on a currency neutral basis.

Okay, thanks.

Thanks.

Thank-you. The next question comes from George [_______________].

Hi. Good morning. Charlie, could you give us a little more quantitative guidance relative to either returnable or non-returnable business in Germany, and specifically, what I mean, are two things. Number one, what is your mix now returnable versus nonreturnable versus the industry's mix, and can you talk a bit about the profitability or the margins on the returnable side versus the nonreturnable side, and secondly, if somebody could just give us a little update on JVs that will be helpful?

Okay. The regulation in Germany on refillable versus nonrefillable is that 72% of the mix is supposed to be in returnable packaging, our mix approximates that, as I said earlier, we had a policy that said we are going to stay within the quotas. The industry moved out a little faster than that, so you would see the industry in total having a little bit higher percentage into nonreturnables, which we expect to correct over the next 6 months or so. As it relates to profitability, the returnable bottle system in Germany has given the fixed investment [_______________] being already in possession and so forth, makes that an extremely profitable package for us. We have spent the last 12 months constructing a nonreturnable system with a value-chain cost structure that allows us to be competitive in nonreturnables, and we would expect that those margins will converge over time in a very near term, quiet frankly, and our strategy basically calls for that. We are going to leverage the investment and infrastructure we have on returnables and continue to evolve the nonreturnable system to ensure that there is no margin degradation as the packaging mix shifts.

What part of the industry volume now is nonreturnable?

I do not have a specific number, but I would say it is perhaps 30 or a little more may be.

It is 30?

Yeah, remember we are 20-28.

Your at 28 and the industry is at 30.

33, I didn't get you that number, [_______________] of the actual number.

That will be great. Thank-you,

George, Gary here, relative to the status of the deal with Procter & Gamble, I think that is what you are probably referring to. We view that the development of a partnership with Procter & Gamble is very important and beneficial to the company. Both companies are in the process of doing due diligence now. We have not received full regulatory approval at this point. So, I really just cannot speculate on the timing at this point.

You do not think it will be in the third quarter, [_______________]?

No. I do not. I think just because of the regulatory approvals that are required, I do not believe that will be in the third quarter.

Right. Thank-you.

Thank-you. The next question comes from Alec Patterson of Dresdner.

Good morning. Just trying to get a better handle on that explanation of the gallons versus cases trends from the earlier question because I guess I somewhat expected that last year's de-stocking would have caused a catch-up of maybe gallons running about 2 or 3 percentage points ahead of cases. And here it is running about a point and a half or two below, so there is a good 3, 4, 5 percentage points difference from expectations on that differential? And, are you suggesting that that entire difference will be made up in the second half of this year? That is we will see gallons run ahead of cases on an order of 2 or 3 hundred basis points per quarter or for the second half in total?

Alec no. Actually, if you go back and I think if you look at the first quarter where unit cases were up 4, I think gallons were up something like 11%. So, you saw some of it there. I think you will see some of it at the time we turn around in the third quarter as well, but I would not expect to see anything of significance, but really just timing looking forward.

Okay.

If you look at the day sales, and inventory and those kinds of things, which we talked a lot about yesterday, or last year when we talked about the de-stocking, we got those day sales down to optimal levels in the bottler system around the world. We are still maintaining those day sales levels and there has been no significant change at all in those inventory levels in the bottler system.

Okay. Just on the discussion point about getting the German bottling system aligned for more one way or nonrefillable packaging, and the cost involved. Obviously, a fair amount of capital expenditure is required to handle that kind of system. Just in a longer-term context, looking at the bottlers, they are relatively starved for cash in general, on their P & L structures. You guys generate a boatload of cash. This ongoing issue about it, there is an imbalance between the two systems. The bottlers need a better return on capital, generating investor enthusiasm so that they can get the consolidation going. Why aren't you applying the excess cash you generate, to fixing the overall debt structure of the system, I mean on the bottlers side by easing up their capital requirements?

Okay. Well Alec. Let me see if I can take that one and then Charlie may want to jump in as well. But I would say a couple of things. When we went through our new long-term earnings model for the year, and talked about pricing assumptions and those kinds of things, number 1, that was really related to looking at the bottler system worldwide and ensuring that we had a very profitable bottler system that was returning their cost of capital overtime. Number 2, I think that there are a couple of things specifically about Germany, #1, it is less capital intensive actually to be in one-way then in returnables. You don't have to battle with the bottles and those kinds of things. Additionally, one of the things our bottlers are starting to do very efficiently, is actually looking at sharing production and those kinds of things, and our bottler system in Germany has in fact had been using some of our excess non-refillable capacity in Eastern Europe to in fact fulfill consumer demand in Germany and therefore avoiding capital at this time until there is critical mass. In fact, that justifies the investment along with the profitability of that package to justify the investment for the bottler. So, I think, overall I think the way it is evolving is working very well.

Okay. Great. I appreciate that.

Thank-you.

Thank-you. Our next question comes from Todd [_______________] of [_______________] Reed and Company.

Yes. Good morning gentlemen. What is the percentage, I am looking for a target percentage of foreign sales to total sales, and is that target intentionally being stalled due to the effects of the strong dollar, even going into 2002?

I would say in terms of, first let me say as you know that the vast majority of our earnings actually come from international operations, 75% from outside the United States. In terms of revenues, when stated in dollars, obviously those revenues are less then what you would normally see, because just the impact of currencies is reducing it, because of the strong dollar we are seeing significant growth internationally, as I said in the first part of the call, [_______________] the German and Turkey situations which Charlie covered. We have got 6% growth internationally. We have got enormous potential internationally. The per capita consumption rates internationally are much, much lower then the US and that's why we continue to be very confident not only in our long term volume growth goals but as well, the long term growth in the carbonated beverage segment of the non-alcoholic beverage market.

And I think also, I mean, there is no sense for us to try and restrict growth internationally because at the end of the day currencies tend to be cyclical, and the strong dollar will not exist forever.

Operator, if we could have chance for one more question please?

Thank-you. The last question comes from Carlos [_______________] of Bear Stearns.

Yes. Good morning. My question is for Jeffrey Dunn. It relates to Brazil. Brazilian bottlers are talking about the difficulty of driving revenues per unit case, so I was hoping you could talk to us a little bit from your perspective how, what are the range of ideas that you see? The possibilities that you see for these bottlers to drive revenues per unit case, and do you think it is a very long-term process or do you think that there is something that could be done over the next couple or 3 years?

Well, [_______________] our division President in Brazil, I think he has done a very good job in the last 2 years in getting the bottlers aligned around a long-term strategy for Brazil. The fact of the matter is in Brazil, and the rest of South Latin America, there has been an ongoing issue with B brands in a deflationary environment relative to a number of our brands and packages and that is what has impacted the revenue per unit case. And there are a number of initiatives underway to ensure that we are continuing to build the brands and drive growth by, for example, looking at varied, tailored packaging strategies by channel, so that where we can get that revenue per case up we are getting it, but we also have packages that meet consumer needs across all the economic stratas and all the channels. The second thing we are doing with the bottlers is looking at different kinds of new product opportunities that can allow them again to stimulate growth, you know [_______________] one of our brands, just 2 years in and has shown very good growth, is something that is very productive, relative to bottler profitability, especially in the cold drink market. And the third thing would be starting to look at the non-carbonated business and opportunities with brands like Cappo which can layer in growth and have, in this case, because they are juice drinks and they are manufactured locally, have pretty good margin structures. It is an ongoing battle though. I think what you are going to find there is, those economies continue to go through their challenges and we learn to better compete against the B brands, that we are going to continue to have to find different tactics to drive that revenue per case up. But I think in Brazil, we are more probably as aligned as we have been in the last 5 or 6 years, around those actions the bottlers are executing extremely well. We have had good growth in the last 18 months in Brazil and we are starting to deal with the profitability issues. I don't think it is by any measure solved, but we are working well together.

Do you feel some level of consolidation has to happen also for some of these things to really take hold?

Well the way I would characterize that is not just in Brazil, but in the rest of Latin America. As we talked earlier about the situation in Eastern Europe, there are huge opportunities to get synergy, whether it is from financial consolidation of ownership or operating consolidation, sharing manufacturing facilities and those kind of things, but our strategy is natural consolidation which is to allow the bottlers to look for those opportunities to facilitate where necessary, and I think there are a lot of discussions going on all over the world about how we can better do that. I am a strong proponent if you want to call it a virtual bottler, which is ensuring that we are as efficient as possible using the assets of the system in a productive way and forging those dialogues between bottlers. That is happening under natural consolidations much more then we saw in the old, if you will, forced consolidation environment. So, again, I think bottlers are driving that with our support and facilitation at a much higher degree then we have seen in the past.

Thanks.

Thank you very much for joining us and if any of you do have any further questions, please feel free to call Larry Mark our director of Investor relations. Thank you again.

Thank you for participating in today's conference call with the Coca-Cola Company. Audio playback is available via the company's website at www.coca-cola.com.