可口可樂 (KO) 2002 Q2 法說會逐字稿

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 star 1 on your touch tone phone.

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Participants are 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 therefor 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, Assistant Vice President and Director of Investor Relations, who will begin the conference.

Mr. Mark, you may begin.

Thank you very much.

Good morning, everybody.

Thanks for joining us today.

This morning I am pleased to be joined by Gary Fayard, our Senior Vice President and Chief Financial Officer and well as our Senior Operating Officer.

Today Gary and I are joined by Sandy Allan, who is our Executive Vice President and President, Chief Operating Officer for Europe, Eurasia and the Middle East.

Alex Cummings, who heads up our Africa group.

Jeff Dunn who heads up North America.

Steve Heyer, who's President and Chief Operating Officer of Coca Cola Ventures and is also responsible for Latin America.

Mary Minnick who is responsible for the Asia Group.

Our prepared comments will last about 30 minutes this morning and then we will allocate time to all your questions.

So that we could get to as many questions as possible, we would ask that you please limit yourself to one question during the turn.

If you have more than one question, please return to the queue.

Before we get started, I'd like to remind everybody that this conference call does contain forward-looking statements, including statements concerning long-term volume and earnings objectives and it should be considered in conjunction with the cautionary statements contained in our earnings release and in exhibit 99.1 of the Company's most recent form 10-K.

Now I'd like to turn things over to Gary.

Thanks, Larry.

And thanks to each of you for participating in our call this morning, we appreciate your interest in The Coca-Cola Company.

Our confidence in our execution of our business strategies is increasing.

Consumers continue to increase their consumption of commercial beverages throughout the world.

We believe that The Coca-Cola Company as the leader in the ready to drink, non-alcoholic beverage industry, is best positioned to capture this growth.

The share gains that we have experienced in many of our major markets including the United States, Mexico, Brazil and Japan illustrate our capabilities.

The results we announced this morning reflect our focus on our six strategic priorities.

Our year to date earnings per share growth, free cash flow generation and volume results demonstrate solid performance across the Coca Cola system.

In a moment you'll hear numerous examples from our senior operators of how we are doing this.

In addition, I want each of you to know that The Coca-Cola Company strives to be a leader and assess the quality standards in all key areas including corporate governance and financial reporting.

We have very stringent corporate governance practices and we take a conservative and straight forward approach in recording our financial results.

Therefore, earlier this week we announced that we have chosen to change our method of accounting for stock options.

Our management and Board of Directors agree that stock options are a form of employee compensation expense, and therefore it is appropriate for these stocks to be reflected in our financial results.

We expect the impact of this change in accounting methodology to have a minimal financial impact on the current year results.

In a few minutes, I'll spend some more time with you discussing our financial results and walking you through the new method of stock option accounting.

But first allow me to pass the microphone to Jeff Dunn to discuss our strategic approach in North America.

Jeff?

Thanks, Gary.

It's my pleasure to be here this morning representing our three North American operating units and to be reporting total North American volume growth of over 4% on a year to date basis.

We said in the past that our long-term objective for North America is 3% plus volume growth, thus we are pleased with the year to date results, driven from the efforts of all our people and those of our bottling partners.

Our growth in the quarter is comprised of solid 3% growth from both bottle can operations and our fountain business and double digit growth by Minute Maid North America.

On a year to date basis, both our bottle can and fountain business' are up 4% in North America.

Our priorities continue to be core and flavored CSD's, water, juice and juice drinks and sports drinks.

All channel data measured and nonmeasured indicates we continue to post show share gains across all of these four major categories.

We said coming into 2002, we remain confident in our Coca-Cola business.

We are convinced that marketing innovation derives growth in CSD.

Our persistence is paying off with Coca-Cola.

It's up 2% in the quarter and over 2% on a year to date basis, led by a strong start for Vanilla Coke and continued strength in Diet Coke and Diet Coke with lemon.

You isolate the month of June when Vanilla Coke was really hitting the market, total Coca-Cola volume was up over 4% for the month.

As you'll hear from Coca Cola Enterprises a little later this morning, our strategy of offering Vanilla Coke in immediate consumption package for one month prior to its general distribution paid positive dividends from both volume and profit perspective.

The next step is to widen distribution of Vanilla Coke through future consumption channels and you'll also begin to see Vanilla Frozen Coke in selected fountain outlets.

In addition to our strong performance with Coca Cola, our growth in flavored CSD's continues.

Historically we've been under-developed in flavors, but Fanta and Minute Maid are changing this.

Combined, they're up over 3% on a year to date basis and getting stronger as the reposition Minute Maid sodas with real juice hits the market.

Sprite continues to be soft.

Some exciting new brand work is nearing completion.

Sprite continues to rank as a favorite brand among urban use now we're looking to grow frequency within this base while adding new consumers.

The next key and priority is water.

This category continues to grow strongly, but volume for volume sake is not our strategy.

Since Dasani was first introduced in 1999, we've implemented a pricing and packaging strategy to drive profitable growth.

Our goal for Dasani is to maintain price points, which bring real value to the category for the customers.

We believe that by focusing on marketing innovation and superior customer service, made possible through DSD, we'll continue succeeding in growing this Dasani brand profitable.

There's been a great deal of attention on the pricing dynamics in the water category understandably so.

Given the fact that the brand which currently holds the number one share position has lowered their average price point in super markets by 13% year to date.

I'd like to state clearly price is not our strategy for Dasani.

Our aim is to build a brand that creates value for all participants.

We are doing just that with Dasani, in the most recent Neilsen period, outpacing industry and all other competitors in retail dollar sales growth.

With the completion of the recently announced agreements with Evian, and [INAUDIBLE] brand, we now have a comprehensive water strategy that provides great flexibility to better capture the total water opportunity in North America.

Our next priority is juice and juice drinks.

Where we are very proud of the results.

Minute Maid lemonade and fruit punch which were extremely successful brand launches in 2001. have now been joined by Pink Lemonade and Minute Maid Light.

During the past year, we gained nearly 7 share points in the single-serve juice drink category.

We recently added Minute Maid Light Lemonade to our fountain lineup and you should begin to see this in casual dining restaurants, starting in the third quarter.

Not only has Minute Maid helped our system create these outstanding refreshment brands, which are driving growth to our bottler network, but also growing their own direct warehouse broker and shell DSD businesses at double digit rates.

Simply Orange is growing so fast, we just announced we'll be adding more capacity.

It continues to hold a share position in the Northeast, which when combined with Minute Maid premium share, gives us an overall juice share which is 3 points higher than our share position prior to Simply Orange's introduction, in May of 2001.

Although there's been slight [INAUDIBLE], we believe by broadening our consumer offering, we are in a much better position to capture changes in consumer trends and to expand value in this category for our customers.

In addition, our Disney brands are growing in spite of intense competition within this category.

New advertising that communicates the benefit of 25% less sugar of these brands to moms has just begun and we believe will expand trial.

Our innovative use of the Disney characters on our packaging combined with the reduced sugar content, makes this a unique offering in the category.

When you look at our total juice and juice drink business, we continue to outpace industry trends.

Neilson's six-month supermarket data indicates that the total juice and juice drink category is down almost 2%.

However, Minute Maid brands grew volume over 11% posting a share grain of almost 2 full points.

During the 2nd quarter, volume growth for Minute Maid brands in the supermarket channel was up 17%.

Delivering substantial growth despite relatively weak category are very well-positioned as we go go forward.

Moving on to the next priority, Powerade, which continues to post share gains.

In the [INAUDIBLE] channel where consumers have the most choice, and are not as easily influenced by aggressive trade spending, we saw a share swing of 2 points in the most recent quarter.

In supermarkets where trade spending by our competitor has been most apparent, Powerade continues to achieve a balance between volume and profit.

Based on standard data, we posted year to date growth of 20% with a 4% price increase.

While Gatorade growth of 21% is driven with pricing down 5%.

Our strategy on Powerade has been clear from the beginning.

Early in '01, we adjusted the price points and in mid '01 we repositioned the brand and since then have been focussed on building the brand through some truly creative marketing efforts, which are paying off.

Let me talk about the next six months.

We'll continue to emphasize Coca-Cola through executing a strong summer program around music cash and the continued roll-out of Vanilla Coke.

Moving into the fall, we'll be executing local and customer specific back to school and football programs for our CSD business', that will be followed by strong programming behind "Harry Potter Two" and the the traditionally strong holiday focus.

We'll also be intently focused on the integration of the new water brands into our system and to continue to build out our water strategy.

We are optimistic about continuing to deliver on our long-term objectives as we look to the rest of 2002.

Now I'd like to turn it over to Sandy Allan to talk about Europe.

Thanks, Jeff and good morning. [INAUDIBLE] the business in Europe, Eurasia and the Middle East grew year to date in volume terms by 6%.

Of that 6% growth, 5 points were attributable to carbonated soft drink growth, and one point to non-carb's.

A strong first quarter of 8%, kick-started the year and set us up well to weather a few storms in the second quarter.

Notably, cool weather across northern Europe in April and in June.

Also you will recall that Easter this year occurred in the first quarter and was a benefit to our results and would naturally impact the second.

Taking all of the above into account, our total business in the second quarter grew in volume terms by a solid 3% plus, giving 6% year to date as I said.

What is also encouraging is that our solid business performance for the first half was spread across the whole of the region with good performance in Great Britain, Spain, Germany, Turkey and Russia.

Let me say something specifically about Germany.

Their volume grew by 5% in the first half with brand Coke up 3%.

The management control agreement the Company has had in place with CCEAG which accounts for close to 70% of the volume since the beginning of the year is starting to have a positive effect on the business.

We are stabilizing our business in Germany.

We continue to drive forward to restructure all aspects of the business, from pricing to packaging and many others.

There remains much to do, but the signs are encouraging.

On marketing, let me talk about core and new brands.

More in terms of the last quarter and the coming six months.

Firstly core brands which grew plus 2% in the second quarter.

Our brand, Coke Activation, at the soccer World Cup, the biggest sporting event in the world in June, was very successful.

Our marketing platform for this global property included strong local advertising, packaging, promotions and customer activities.

Of particular note were the ads produced in Turkey, Spain and Great Britain, all of which had significant impact with our consumers and the press.

With the Turkish ad winning a prestigious [INAUDIBLE] award.

In virtually all markets we activated the event with collectable can multipacks, prizes to attend the games or win interactive limited addition computer games or in some cases, coveted footballs from the event itself.

The very recent launch of Diet Coke with lemon in Great Britain has been very successful with strong acceptance in the trade and positive initial product [INAUDIBLE].

We feel confident that we will see the same success in the upcoming roll-outs in France, Belgium, the Netherlands and Austria.

Fanta has been a strong performer as we continue the momentum with a new proprietary bottle rolling out in Great Britain.

New flavors based on local preferences and new key oriented local advertising.

Looking forward to the next six months, on brand Coke, we have summer programs keyed into the teen passion for music followed by a major Christmas initiative.

On Diet Coke, Coca-Cola light, we are rolling out with successful lemon variant, as I've said, and we continue to evolve the silver concept with a new silver bottle label's eye-catching [INAUDIBLE] and the restaurant point of sale and integrated consumer promotions.

On Fanta, we expect to continue the strong positive momentum we have seen in the first half summer programs such as the seasonal flavors in Spain.

Now let me talk about new beverages which are increasingly complimenting our CSD's in meaningful ways.

During the second quarter, we had 17 new product launches or significant non-carbonated brand relaunches across the ten countries.

We would expect the same level of activity in the third and fourth quarters.

We have an organization, set of processes, linked information system and marketing resources to deliver this.

In water, we will be in the water business in a significant way and in every major European country by the end of the year, with the potential exception of Italy.

For example, in Germany, we relaunched Bonaqua in the second quarter and saw positive results in June.

We are also in the midst of launching of Bonaqua in Spain and are looking for volume results as we go forward.

We've also relaunched Bonaqua in Russia with new packaging, new communications and a new distribution focus and we continue to drive [INAUDIBLE] in Turkey.

We have also very recently acquired a major premium water called Valsar (ph), in Switzerland.

On juice, we are also continuing to accelerate the launch of our global Disney juice drink proposition.

We launched Mickey Adventures juice drinks in France and in the Netherlands in the second quarter, and are in the midst of a launch of Winnie the Pooh juice in Great Britain.

We expect to be in at least five other markets in Western Europe, with these propositions, by the end of the year.

We are also experiencing strong momentum behind the Powerade roll out across Europe, to the point that we are struggling to meet demand.

The trade loves this new brand.

It has been voted by the German and Irish trade as the most successful new beverage product, and in Sweden, we have achieved share leadership in just seven months.

This is a brand we are really excited about and we are looking forward to further strong growth in the foreseeable future.

On teas which we see as an increasing growth opportunity in Europe, we have relaunched our Nestea brand in the second quarter, with new packaging and advertising in major countries including France, Spain and Italy.

At the same time we are examining new ready to drink tea and coffee propositions which will meet consumer's needs, and we will aggressively pursue these.

So that's where we are with the European business.

Solid first half and on track for the remainder of the year.

I now would like to turn things over to Alexander Cummings.

Thanks Sandy.

Our business in Africa continues to positively grow. [INAUDIBLE] volumes were up 9% on a year to date basis with CSD's, the primary driver of our growth, up 5% on a year to date basis.

Our south and east Africa division continues to perform well, growing at 16% year to date.

This performance is led by [INAUDIBLE] Zimbabwe and South Africa.

In South Africa, which as you know is our largest market, [INAUDIBLE] per capita [INAUDIBLE] is 183.

Volumes have grown over 6% year to date, driven by both carbonated brands such as Coca-Cola and Fanta, and non-carbonated beverages such as [INAUDIBLE] fruit drinks for kids, and the recently introduced Nestea.

In the north and west Africa division, Nigeria continues to perform well, driven by CSD's and water.

Given low per capita incomes in Africa, our system continues to focus on affordability through price and package strategies and improving system efficiencies.

This translates into our actions around introduction and expansion of multiserve value packs such as the [INAUDIBLE] glass package in markets like Nigeria and Guinea.

As well as an affordable single serve entry level package, such as [INAUDIBLE] package in [INAUDIBLE] Morocco and Egypt.

Returnable packages are typically the lowest cost to produce, and therefore the most affordable.

In addition, we are finding ways to introduce not ready to drink beverages such as cordials.

In order to bring new consumers into commercial beverages and to generate incremental operating income.

It is important to point out that there are many consumers in Africa who do not participate in the commercial beverage industry.

By offering not ready to drink beverages, we are able to present affordable alternatives to these consumers.

With the expectation that as economies continue to develop, consumers will migrate to the wide range of ready to drink beverages offered by The Coca-Cola Company.

As we continue to leverage and stressing our already very strong system, we will continue to profitably grow our business in Africa.

I'd now like to turn things over to Steve.

Thanks, Alex.

Good morning, everybody.

As you saw in the numbers this morning, we are in the midst of some real economic challenges in Latin America.

So I'd like to start with a few over-arching points about our system's performance in Latin America and how we are approaching the business to provide some context and maybe even a glimpse into how we're managing through things.

First, the economy is very tough, so therefor we're committed to actions which will allow us to come out of this economic downturn stronger.

Let me give you examples of some things that give me confidence.

First, our franchises in Latin America are strong.

Second our market share is growing and we remain focused on our core brands.

We are managing our pricing, our packaging and our channel mix very aggressively and we're focused on affordability.

We are working hand in glove with our bottlers.

We have very crisp accountability between us, and that eliminates any duplication and this continues to be inspected.

We are also working diligently to reduce all costs that we deem to be nonessential.

It's difficult to be upbeat in the short-term, but in such a challenging environment, we think we've got some opportunity and that we are doing the right things.

We've shifted our marketing spending to support returnable glass and refillable PET.

When economics are tough, affordability is key.

Our pricing and packaging actions reflect this reality so in addition, we're executing the Company strategy for profitably expanding our brand offererings but we are doing it with a focus on affordability rather than through premium-priced products.

This has been our approach throughout all of Latin America and especially in one of the most challenging areas: Argentina.

Our volumes have declined 22% on a year to date basis.

But even with these declines, we are increasing share.

We continue to connect with consumers through our marketing and in particular our World Cup activities and through communication relative to family values.

One of our recent ads, [INAUDIBLE] was recognized with an award at Caan and more importantly, we believe it is receiving very positive response from consumers in Argentina.

Tactically, we are focused on providing affordable packages.

In 2000, to give you an example, refillables represented between 5-10% of our package mix.

Now refillables are over 30%.

We expect our mix to go to 50% refillables as is currently the case in areas in the north and in the countryside.

We've even brought refillable packages to Buenos Aires which was previously considered to [INAUDIBLE] and area to warrant this kind of package.

In May we launched a 1.25 meter returnable glass bottle which is already become 9% of the product mix and this we think is an indication that we are giving consumers what they want.

Plus our system has the capability to shift quickly to refillable packages, our brands are now more affordable and certainly more available than other brands which only offer consumers one way PET packages and have become much more expensive to produce as import costs have increased.

We're now moving our efforts behind returnable packages for our other core brands, Fanta and Sprite.

Our outlook for Argentina is the same given the economic situation.

The steps we are taking is designed to impact current results and position us favorably for the time when economic strength returns to Argentina.

Based on our most recent Neilson ratings for June, we've gained almost 3 share points year to date within CSD's.

Brand preference for Coca-Cola is up from 50% in January to 54%.

These are the data points that we are focused on.

Moving on to Brazil, there's also political uncertainty giving the upcoming elections, but fortunately, many consumers are not directly influenced by the political news and they're still excited about winning the World Cup.

On a consumer standpoint, we haven't seen any indication of real pessimism.

The Coca-Cola system is continuing to execute its strategy to recovering bottling margins that were lost during recent periods of devaluation and in 2002 we are managing our product and package mix to increase our profitability.

I'm pleased to report that in the second quarter, Brazil volume is up well over 4% with positive pricing gains, which you'll hear more about when some of our public bottlers report their quarterly results.

This balance results in an optimum profitability for our system.

Throughout 2002, it's our objective to maintain this balance of volume and price in Brazil.

Our World Cup activities became particularly meaningful to our consumers not only for the quality of the marketing, but interestingly our jingle turned into the almost the official song of the 2002 World Cup for Brazilians, and also didn't hurt that Brazil won it.

This strength in the meaningfulness of the event returned the value of our sponsorship.

Coca-Cola performed very well during the quarter. [INAUDIBLE] continues to be an area of focus and is delivering 13% growth year to date.

Fanta is growing at 19% behind the introduction of two new flavors coupled with new package design. [INAUDIBLE] Nestea and [INAUDIBLE], our new product launches, are also performing well.

Mexico is the only economy in Latin America which is still showing some strength and management in Mexico understands that it is covering the rest of Latin America as best it can without stripping away what it needs to do to compete going forward.

Mexico is the Company's largest market in terms of per capita consumption and it continues to be the star performer of the group, growing at 5% in the quarter and on a year to date basis.

Coca-Cola continues to be the driver of that growth contributing more incremental unit cases both in the quarter and year to date than any other brand in Mexico.

Share of sales data indicates that brand Coca-Cola has gained 1.7 points on a year to date basis.

Also in Mexico, our fastest growing water brand was a large contributor to growth as volume and personal sized packages grew at 34% reflecting the packaging innovation such as the new 1 liter sports cap bottle.

Powerade which was only introduced in Mexico late last year, was also a driver of growth during the quarter.

In summery, times are hard in many parts of Latin America, but our system is performing well, due to our focus on our strategic priorities.

And we are confident that we will come out the other side of this crisis stronger.

When you can't manage the business for volume and profits, you manage for share and brand strength.

This is how in the short-term we are defining success.

Now I'd like to turn things over to Mary Minnick.

Thank you, Steve.

The headline for Asia is healthy, balanced growth across our portfolio of markets.

In the second quarter we recorded very strong growth of 14%.

Cycling growth of 11% last year, and in all our markets, our local operators are playing their strategic role to deliver on volume, revenue and operating income growth for the group and for the Company.

In Japan we continue to see gains in share sales, delivering second quarter volume growth of 3% while cycling a strong 7% growth from prior year.

On a year to date basis Japan has grown volume over 4%.

We successfully leveraged our sponsorship of the World Cup in Japan's role as co-host, to draw Coca-Cola growth of 6% in June.

We were overwhelmed by the response to an innovative, onpac promotion where 23 million figurines of famous soccer athletes sold out in only three days.

Aquarius was also activated through the world cup, and grew 15% in June and over 7% for the quarter.

Solid Georgia Coffee sales continued in Japan, with new flavors and small PET packages, continue to bring new consumers, particularly women into the Georgia franchise.

And as the tomorrow is another day campaign continues to be successful.

Our tea business in Japan continues to perform solidly in line with industry growth.

Overall we are now well positioned in this intensely competitive category with strong brand offerings in all tea segments.

Over 30 new brands have been launched since the beginning of the year, but most of these new brands are disappearing rapidly as consumers revert back to traditional teas.

This is good news for Coca-Cola because we are strongly positioned in traditional teas with [INAUDIBLE].

The green tea category continues to grow as well especially in super markets, and our brand Marocha is holding steady in this competitive category.

Love Body, launched in April is doing well and we are confident its growth will accelerate as we expand this brand into more package offerings.

Cool also continued to perform well in Japan as the new summer flavor, passion fruit combined with Disney Pooh honey lemon, resulted in very strong sales growth over 40% in the second quarter and share of sales gains of over 8%.

The introduction of resealable bottle cans through the vending channel, was strongly embraced by the consumer and we are confident this will further accelerate favorable trends in this important channel.

In China, we achieved unit case volume of 18% in the quarter and over 15% year to date with both our core CSD and non-carb brands performing strongly.

The cola brands of Coca Cola, Sprite and Fanta collectively grew 9% in the quarter, and AC Neilsen information shows that we have consistently outgrown the industry for the past 18 months, reaching a record high share of CSD market in China of over 50%.

These positive results were due to our successful World Cup Activation which allowed consumers to have a once-in-a-lifetime experience of attending a World Cup match in Korea and 2.7 million consumers to win prizes.

Strong momentum on non-carb brands continued in the second quarter in China, with Ku (ph) continuing to be a runaway success, not only in China but also Korea, Taiwan and Singapore.

We have made solid progress in developing our water business in China, growing share of sales in this competitive segment using a combination of national and local branded waters sold at multiple price points.

Our business in the Philippines experienced a healthy acceleration of growth in Q2, with volume growing strong double digits driven mainly by the Cosmos brands, but also by improving trends in our core business.

As I mentioned in our last conference call, together with Sam McGel, we are in the process of implementing a number of programs to build overall system capabilities.

The most important initiative under this umbrella, the restructuring of the bottler distribution and logistics systems in order to expand the number of outlets served and take costs out of the system, is proceeding according to plan.

So far we've converted over half of the targeted wholesale partners covering more than 300,000 outlets to the new structure, and we're confident that the major part of the disruptions that effected our volume in the first quarter, now are behind us.

However, the rebuild of the route to market system will continue for the remainder of the year.

In India we are aggressively pursuing our business strategies resulting in excellent growth across all categories.

CSD's which account for the majority of our volume in India, grew 25% for the quarter, and we continue to outpace the competition.

These strong results were driven by an aggressive expansion of the 200 ML single serve affordable packs which have reignited the market, particularly in rural areas where 70% of the population lives, and a successful cold drink means Coke, or as we call it Tanda (ph) campaign, that has increased purchase intent among teens.

Our non-carb business continues to grow dramatically as well and we're rapidly building Kinley into the number one water brand in India, with market share now over 30%.

In fact, in three of the six regions where it is available, Kinley is already the number one brand.

Quickly wrapping up with other activities within the group, we successfully launched Diet Coke with lemon in Australia, driving incredibly strong growth in our Diet Coke brand in June.

In Indonesia, we completed a successful launch of Frestea, our new ready to drink Jasmine flavored tea.

Frestea provides a superior consumer proposition in a country of more than 200 million people where tea, in fact, is the third largest segment.

As I mentioned at the outset, we are delivering healthy, balanced growth across the Asia portfolio and our outlook for the rest of the year does remain positive.

Now I'll turn things over to Gary.

Thanks, Mary.

There are still four topics that I'd like to cover before we move to your questions.

The first are some questions I've received recently about brand acquisitions.

Secondly, a little more detail about stock option accounting.

Third, I'd like to talk a little bit about consolidation and consolidation accounting and fourth, and most importantly, our financial results.

As you've heard from our operators, our unit case growth has been driven by solid performance in key markets such as in U.S., Japan, Mexico, China and western Europe.

Carbonated beverages continue to be our key drivers of growth.

In addition, we have expanded our leadership position in non-carbonated beverages.

As we have articulated through our strategic priorities, we are expanding into new beverage categories where there are strong growth and profit opportunities.

Our approach in this expansion will sometimes be to introduce new brands, sometimes it will be to acquire local or regional brands that we believe will strengthen our beverage offerings in each market.

We have a very diligent and deliberate process of evaluating brand opportunities and we will only consider brands that, one, improve our strategic position in a market, two, have attractive and predictable earnings growth potential, and, three, are beneficial to the economics of the entire Coca-Cola system.

These transactions are about creating significant future value for our shareholders.

We only enter into transactions which will strategically improve our position in the overall nonalcoholic beverage category.

In all of these situations our objective is to expand and grow these brands through the focus and resources of the entire Coca-Cola system.

Now let me discuss how these brands will be handled in our earnings releases.

Our policies will be very clear and consistent.

We intend to provide you with a size of any brand when they join the Coca-Cola family so that you will have a basis for understanding our strategic rationale for the acquisition.

We do not plan on individually reporting each of the brands on a quarter over quarter basis.

Our objective is to bring them into our system and then accelerate their growth.

In the current quarter, the only large brand acquisition that impacted the Company's volume was the Cosmos transaction in the Philippines that occurred in late 2001.

As we previously communicated, the volume of the Cosmos brands was slightly over 100 million cases in the year prior to joining the Coca-Cola system.

Other small items that benefited results in the quarter were the Adwala brands, which we also acquired in late 2001, the Segrams brands for which the deal closed in June, and several small, regional water brands in Germany.

At the same time we are focused on our business we are also focused on insuring that our investors have the upmost confidence in the integrity of our financial segments.

With that said, let me address accounting for stock options.

As I previously stated, the Company will expense the cost of stock options that the Company grants beginning with options granted this year.

We are adopting the fair value base method of recording stock options, contained in [INAUDIBLE] statement number 123, which is considered the preferable accounting method for stock based employee compensation.

All future employee stock option grants will be expensed over the stock option vesting period, based on the fair value at the date the options are granted.

The company expects minimal financial impact in the current year from the adoption of this accounting methodology, we expect the impact to be approximately 1 cent per share for 2002.

As options are granted to employees in the future, those grants will also be expensed over their vesting period.

Therefore, the full effect of implementing this new statement will layer in over the vesting period's option program, the numbers that we presented to our board reflect the best estimate of the amount of expense over the next several years as a penny in 2002, about 3 cents in 2003, 5 cents in 2004, 7 cents in 2005 and leveling off at around 9 or 10 cent level in 2006.

To wrap up on options, I'd like to state that an important advantage of expensing policy is that it puts the various forms of options and other compensation on an equal accounting footing, eliminating any bias that may have existed to issue the kind of options that do not need to be expensed.

This new policy will allow us to design compensation packages that make optimum sense and continue to drive behaviors that maximize value for our shareholders.

Now I'd like to spend just a minute on consolidation and consolidation policy.

I've received several questions recently and in fact, there's an article in the "Wallstreet Journal" this morning that I would like to address.

Number one, we do not control Coca-Cola Enterprises and do not have a choice.

The accounting rules do not allow consolidation; however, we do provide all the relevant information in our financial statements so that investors can have a clear understanding of the financial impact and the relationship of the companies.

But most importantly, and if I could, if we could get some accountants to start writing some articles in periodicals, there is no impact to reported earnings per share or net income whether we consolidate bottlers or not.

The earnings per share and net income of The Coca-Cola Company is unaffected by the consolidation policy because we already include our share of the earnings of those bottlers in our consolidated earnings.

Now I would like to turn our discussion to financial highlights.

As you saw in today's release, our earnings per share were 52 cents in the second quarter which included a 2 cent negative impact of currency.

This performance is right in line with the Company's long-term expectations for earning's growth.

If you were to adjust for the adoption of FAS-142 on good will, and incremental marketing investment in 2001, our second quarter earnings would have grown approximately 11% on a currency neutral basis.

On a year to date basis earnings per share grew at 11% when you also exclude the one-time items and the negative impact of currencies.

Cash flow characteristics of our business remain strong as net cash from operating activities was $2.2 billion in the first six months of the year.

Reflecting the improving cash flow trend, the company spent approximately $300 million to repurchase 5.9 million shares of common stock during the first six months of the year.

As we look to the second half of 2002, we remain comfortable with the range of analyst's earnings estimates for the full year and our outlook for full year volume remains unchanged.

We're still facing difficult economic environments in many regions.

However, our business operators are adjusting well in these situations, as you saw in today's release, our outlook for full year volume remains unchanged.

What we said at the beginning of the year still stands, however, we have consistently said that this does not take into account volume on new transactions.

Relative to currency, we are encouraged by the recent moves in currency as a weaker dollar will result in growth benefits for us moving forward.

We will see more benefits as we look out past 2002 for when we look at the total baskets of currencies, the countries in which we do business, the negative trends in Latin America continue to offset some of the positive trends in the Euro.

As many of you know, we have locked in coverage on the Yen.

We have not changed our outlook for the impact of currencies for the current year.

We still expect negative currency impact in 2002 in the range of 8-10 cents.

Specifically for 2003, it is too early to set a specific estimate.

However, if the U.S. dollar remains at current levels and no there are no major de-evaluations, our key emerging markets, the negative impact next year will be substantially less than in the current year.

Now to close and move on to Q&A, let me say our strategy is clear.

Our management team is in place and our entire system is focused on execution.

Because of the strength of our brands, our system and our people, we are extremely well-positioned to manage through the current environment and to deliver growth in 2002 and well into the future.

With that I'd like to open the call to any questions and answers and we'll give answers to any questions you may have.

Thank you.

Operator.

At this time I would like to remind everyone that if you would like to ask a question, please press star one on your touch tone phone.

If you would like to withdraw your question, please push 2.

Once again, if you would like to ask a question, please press star one now.

The first question comes from Andrew Conway Credit Suisse First Boston.

Thank you, operator.

Two brief questions this morning.

One of them for Jeff Dunn, the other for Sandy Allan, please.

First on the U.S. business, Jeff.

Could you talk a little bit about what your consumer research shows in light of our economy, in the ability for the system to take up pricing in the bottle-can side of the carbonated business, recognizing that CCE and your bottlers control that at a retail price.

Talk a little bit about what your consumer research shows in the ability of the system to move forward and take price at take home.

And if there isn't that capability, would you over time reassess your ability to take up concentrate pricing 1-1.5 to 2% in the U.S?

My second question to Sandy is if he could compare and contrast how his prior officer, the German strategy, talk a little bit about how he's going to move forward on improving the profitability of a very strong German business, and what are the key drivers to improve brand preference, please.

Thanks, Andy this is Jeff.

You've got some consumer confidence issues out there, certainly the market environments contributing to that.

At the end of the day, we don't see a huge consumer barrier to us being able to get price realization over time for our brands.

As you know pricing is complicated.

We define the marketplace in terms of pricing beyond our largest competitor.

We look at what customers want to do with our products in their stores and their own strategies.

What consumers are willing to pay, what our competitors are doing, and it's a very complicated mix as we look at pricing strategy.

But I don't believe there's any inherent barriers to us getting price realization.

If you look at Neilsen CSD data for all major channels, retail pricing has been rational.

Year over year comparisons show pricing for our system down in only two of the last nine weeks, where as retail pricing by our primary competitor is down seven of those nine weeks.

But, we know everyone is committed to a rational pricing environment.

And again, I think it is a function of marketing, our brand-package-channel strategies and our ability to continue to look for opportunities to move price up and the bottom line is we are committed to that, CC is committed to that and we see opportunities in the second half to continue to push out on that.

Great.

Andrew.

This is the position in Germany.

Germany is, in fact, currently our number four profit market in Europe.

So it is not number one and I think there's always been an impression that, you know, Germany is the number one profit center for the Company in Europe, but, in fact, it's not, it's number four.

Specifically to your question, when we took the management agreement of CCEAG which accounts for about 70% of the volume, we did that because in our view, our system in Germany is pretty inefficient.

It's high cost and low productivity.

So, as we move forward with the management agreement, as a change of policy, if you like, we will be driven to take cost out of business and become the low-cost producer because that's the only way that we believe that we can be competitive in the marketplace.

The marketplace in Germany is very competitive.

There's strong growth in what we call discount channels.

So in order to be able to compete profitability, we have to take cost out of the system.

I think on brand preference as you may be aware, there is a change in packaging in Germany and that the market is progressively moving from returnable packaging to nonreturnable packaging and quite frankly, we have been slow in the past to adjust to that change.

So in addition to the normal, aggressive and exciting consumer marketing that we will do in Germany, what is equally important is to have the right package in the right channel at the right price.

And that is what we are currently doing and it's because of that that we are now stabilizing Germany and getting volume growth.

Sandy, is it reasonable to anticipate as Germany its profits have eroded as a percentage of the European base, that going forward over the next several years, it can deliver perhaps volume and profit ahead of your total group average?

Absolutely.

That's obviously what we do and you are perfectly correct.

The fact that Germany is now number four has been a combination of other major countries in Europe doing very well and the decline in our German profitability.

So, in the future, absolutely.

We expect that Germany over the next two, three, four years will produce profits higher than the average.

Thank you.

Thank you.

The next question comes from Carolyn Levy, UBS Warburg.

Good morning everybody.

Two questions.

In talking about currency, Gary, Europe represents about 30% of your profits as I understand it and Latin America about 18% of operating profit.

So I'm wondering why weakness there would fully offset any benefits in the Euro and also just make the point that I think most estimates were assuming downside in the yen next year and that could easily be a wash.

So isn't there some reasonable possibility that there would be upsides to earnings next year because of currency?

The second question, Jeff, perhaps you could address or, maybe Steve would like to talk about this, but Sprite seems to be a real, real problem and I think we are all holding our breath for some good news.

If you could get more specific as to why Sprite volume should turn around, I think would be very helpful.

Okay.

Carolyn, perhaps I could start on currency first.

Europe is about 25% of the Company's operating income.

Latin America was about 18%.

Both those percentages as of full year 2001.

So they are not that far apart.

What you are seeing is we are seeing strength in the Euro, obviously [INAUDIBLE] this week.

And I guess I would say a couple of things.

Number one, that strength has been very recent.

Only in the last few weeks we saw a little bit of benefit for a week or two in June but that's all.

So it's recent number one, you've got quite a bit of currency going the other way, particularly in Latin America.

You've also -- Turkey is a major weakness in their currency as well.

So you've got weakness in several currencies around the world.

Relative to the Yen, even with the recent weakness, in the dollar vs. the yen, and even at its current levels, we were successful in actually hedging our position that we are still in a better position than even at the place where the Yen is today.

So we'll just -- I think it's just too early to tell at this point to see exactly what currency might do for next year.

Hey Carolyn, Jeff, how are you doing?

Sprite, we are literally in the midst of launching a new campaign for Sprite, as we sit here. "What's your thirst" is the central line.

We believe that this will start to put back the advertising energy behind the brand which was so essential to its growth.

We are looking at two or three other initiatives.

Because, what's happened this year and really going back to the middle of last year, is innovation is clearly driving the CSD's that are leading category growth.

We've seen that with Diet Coke with lemon and Vanilla Coke.

We need that same kind of innovation behind Sprite.

The last piece is quite frankly, causals.

We've seen some erosions in visual inventory for Sprite and we're working very hard with bottling systems to get that visual inventory back to where it needs to be because that, quite frankly, is an issue with the brand.

So we need one, this[INAUDIBLE] to take hold.

We have great confidence, we've got the right strategy there.

Number two, drive more innovation into the brand and, three, get the causals back.

With those three things, we have confidence we'll get Sprite back on a growth protectory.

Thank you, Jeff.

Thank you.

The next question comes from Mark Greenburg, Deutsche Bank.

Thanks.

Gary, my question relates to the May [INAUDIBLE] draft for accounting guarantees.

Specifically as it relates to indebtedness of others, would you please elaborate on your bottler relationships in that regard and how, if at all, you expect these changes may impact Coke's balance sheet, thank you.

Yes, Mark.

Do not expect any impact at all.

We do not guarantee any of the debt of the bottlers and there will be no impact.

It's that simple.

Great, and, Steve, if I could just follow up quickly with you on Brazil.

Can you elaborate a little more on the pricing strategy between yourselves and the bottlers for the remainder of the year and how you expect the bottlers to approach profitability in the near term, the next couple of quarters?

Yeah, Mark.

I'd be glad to do that.

I think Stu Cross has done a fantastic job getting everybody lined up and the bottlers are enthusiastic that we have a winning strategy going forward and that strategy tries to find the right balance between how we grow volume and how we realize price.

Basically, the system profitability in Brazil is a lot more complicated a question as you know than just taking prices up or down.

And so we are managing the mix of brands, packages and channels so that we can really take advantage of the most effective range of choices.

And through that management we believe we can realize price without really giving up any or certainly not very much volume.

In the past, I think, we were perhaps a little too focused on one package, one channel, and we're leveraging the strength of the system now and we're really focused on the up and down the street business where we can make our brands both available and affordable.

In the second quarter, as I said, we achieved volume growth of 4% in the pricing environment that was pretty favorable for all of our bottlers.

Some of the results are not yet in.

But really returns are promising that price realization is occurring.

Our expectation is that we are going to keep finding that right balance to optimize the returns on behalf of the system.

Thank you.

Thank you.

The next question comes from Mark Cohen, Goldman Sachs.

Yeah, Hi.

Just to stay in the element.

It seems that you are excelerating your water strategy in Europe and the profitability of the water business in Europe has, historically has different dynamics than the profitability of the water business here which of course is a less mature business.

Can you sort of bring some focus around the profitability of the category in Europe in what is unique about your strategy as you go into a deeper penetration of that category to not only grow the business but grow it profitably?

Yeah.

The first thing you have to understand about the European water business.

One, is it's very old.

It's been established for in some countries literally for hundreds of years.

And the second fact is that about 95% of water -- packaged water in Europe currently is source water.

In other words, it comes out of the ground.

Many regulations inside Europe, labeling regulations that really prohibit the expansion of processed water.

There are also about 600-700 different brands in Europe.

So, it is a very, very fragmented business.

Having said that, there are different types of water in Europe.

There is what we call premium water like Evian, Vital, Perrier and then you have middle waters which sell at a little less price and then you have what I would call the commodity waters which are very regional, local brands.

I think, you know, when you look at water, you got to keep in mind it isn't necessarily the margin per case that's the real issue.

It's what you multiple that margin by.

And we believe that with our water strategy in Europe, we are going to participate in all three categories of water, that's the premium, middle level and, if you like, commodity.

And obviously with commodity water, the margins are significantly less, but the volumes are significantly more, so we believe that going forward on a revenue basis, we can, in fact, drive significant profitability from the water category.

Okay.

Once again, if there are any further questions, please press star one now.

Thank you.

We have one question from Bill Tikalala (ph) of Morgan Stanley.

Okay.

Thank You.

And that will be the last question, please.

Gary, my question is trying to understand your underlying operating income growth. [INAUDIBLE] back to FAS-142 adjustment, on one time market spending, we get around 6% currency neutral operating profit growth in the quarter, can you talk about going forward, the key drivers of accelerating that toward the 10% currency neutral operating profit growth, in terms of product mix and efficiencies, market stem leverage, I know it's a complex issue, but just some of the broader themes that will drive that improvement over time.

Thanks for the question.

First just to kind of give a reconciliation, reported operating income growth was 9%.

We said that that was impacted by about 3 points of currency.

So on a currency neutral basis that would get you to 12.

There's about a point from the goodwill FAS change so that would get you down to 11% growth.

Then for those that last year agreed with the Company that the incremental marketing was, in fact, incremental, you should take 5 points off and that would show 6%.

For those of you that put in your analyst reports that it was not incremental marketing, then it's a true 11% growth.

So, I just want to be clear that it's one or the other but you can't have it both ways.

With that said, we are very focused on brand, package and channel in every country in which we operate, and that's where we are really growing.

You can hear Sandy talking about the water and opportunities for water in Europe, but he's being very careful about the brands and the packages and what channels, particularly package and channel that he's going with water in.

You can see what Jeff is doing around Vanilla Coke and the introduction for a full month ahead because it's a very high profitability package.

And really we would go through each of the six strategic priorities that we are driving, both around enhancing our brands, continuing our growth both in CSD and non-carbs where we've got leadership position now, in both of those major categories and continuing driving efficiency at the same time.

In addition to that, I think you are starting to really see now how the strategy's truly working.

Because you are seeing significant improvement in the operating results of our bottlers where that strategy is really taking hold as well.

So we are delivering results and our bottlers are really delivering results and so you're seeing a double effect, if you will, as we move forward.

Great.

Go ahead, Bill.

And market spending allocation, you've talked about that in the past as being an important driver going forward of increased efficiencies.

Yes, and we are looking very carefully at how we prioritize our spending across all markets.

In each of our divisions, I mean, it goes from a country to a region to a division to a group level and then total consolidated company as we prioritize spending.

It's very much, if you will, the example would be Argentina, which Steve talked about where it is not a lot about marketing and media right now in Argentina.

It's really about affordability and getting into refillable because affordability is what will drive our business in Argentina and ensure that when Argentina comes out of the current crisis that they are in, that we come out as a much stronger player in that market.

I want to thank all of you for joining us today on this call.

And if you should, any of you should have questions, please feel free to call our investor relations department.

Thank you very much.

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.

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