可口可樂 (KO) 2002 Q3 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 touchtone phone. If you are on a speakerphone, you may need to lift the telephone handset.

To withdraw your question press star "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, 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. I appreciate you joining us this morning. I am pleased to be joined by Gary Fayard, our Chief Financial Officer and our senior operating officers. Today Gary and I are joined by Sandy Allen who is responsible for Europe, Eurasia and the Middle East,

Alex Cummings who heads up the Africa group, Jeff Dunn who heads up North America, Steve Heyer who is responsible for Latin America and Mary Minnick who heads up our Asia group. Our prepared comments will last approximately 25 minutes and then we will allocate time to your questions. So that we can get to as many questions as possible, we ask you to please try to limit yourself to one question during your turn and if you have more questions, please return to the queue.

Before we get started, I'd like to remind you that this conference call does contain forward-looking statements including statements concerning long-term volume and earnings objectives and should be considered in conjunction with the cautionary statements that are contained in our earnings release and in Exhibit 99.1 of the Company's most recent Form 10-K. And now I'd like to turn things over to Gary.

Good morning and thank you for joining us this morning and we appreciate your interest in the Coca-Cola Company.

I'd like to start the call this morning just to say that we are managing this business for the long-term with very clear strategies. Those strategies include things such as improving overall system economics and bottler economics and I believe you will see from the results not only from the equity income that we reported this quarter but also the results of many of our public bottlers that that strategy is clearly working and clearly presenting a much stronger system globally.

Another of our strategies was to become a total nonalcoholic beverages business. And within that, in three years, the Coca-Cola Company has become the largest non-carbonated beverages company in the world. The next was that we needed, quite candidly, to fix the U.S. business.

I think our results this quarter show that with innovation, excitement, we have fixed the U.S. business and have, in fact, shown that cola fatigue is a myth, because, in fact, colas have grown very well during the quarter.

As we look around the world, we have improved our share position in substantially all markets globally, all of that in the face of significant economic headwinds. But to be clear, we have a strategic direction and we will continue to adhere to that strategy and are not changing course from it.

But stepping back, we do have to recognize that from a macroeconomic sense times are tough. Conditions are weaker than we expected at the start of the year and the recovery that we and others anticipated in the second half of this year has not materialized.

Growth in North America was very strong; however bad weather in key markets impacted our business in the third quarter, such that our worldwide results were below our internal expectations. Specifically, our earnings per share in the third quarter were in line with consensus of analyst expectations however our internal projections were higher than our results.

We delivered earnings per share of 48 cents in the third quarter when you exclude from equity income the one penny per share negative impact which resulted from nonrecurring charges by equity investees in Latin America. Earnings per share on a reported basis increased 9% in the quarter and if you were to adjust earnings per share in both years for one-time items you would see a 7% increase on the currency neutral basis in the third quarter and a 9% increase year-to-date. Importantly, operating income showed positive trends in the quarter, increasing 9% when both years are adjusted for one-time items and 10% on a currency neutral basis. Cash flow characteristics of our business remain very strong as net cash from operating activities was $3.4 billion in the first nine months of the year, and we expect cash flows to remain very strong. Reflecting the improving cash flow trends the Company has spent approximately $464 million to repurchase 9.3 million shares of common stock during the first nine months of the year, and we're still on track to repurchase approximately 750 million in the current year and expect this amount to accelerate in the coming year. Our carbonated brands have grown 2% on a year-to-date basis and our non-carbonated brands have grown 27%. Within these numbers there's some benefit from brands that we have acquired as part of our strategy to expand into new beverage categories that present strong growth and profit opportunities. As I mentioned in the last quarter our policy is to provide you with the size of any brand when they enter the Coca-Cola family so that you'll have a basis for understanding our strategic rationale for the acquisition. We will not individually report each of the brands on a quarter-over-quarter basis as our objective is to bring each brand into our system and then accelerate its growth. In the current quarter we received a little more than one point of growth from recent acquisitions or licensing agreements, namely Evian, the Dannon Waters, Seagram's Mixers and Risco in Mexico. We have a very diligent and deliberate process of evaluating brand opportunities. We will likely continue to make strategic acquisitions as a means to enhance our family of beverage brands and as we do so we will continue to make clear to you the size of the brands when they enter our system. As for our outlook, we expect that the economic environment will remain tough throughout the remainder of this year. I don't need to tell any of you that GDP growth rates are well below what we anticipated coming into the year. Worldwide GDP estimates for the fourth quarter have been revised downward by one full point from where they were at the beginning of the year. Because economic conditions are not expected to improve in the fourth quarter we may not recoup the earnings impact of factors beyond our control that affected our business in the third quarter. As a result we believe that there is a possibility that the Company's full year earnings may be 1 to 2 cents per share below the current consensus expectations of $1.78. We remain focused and committed to exceeding worldwide industry trends in all major beverage categories. I'd now like to turn things over to our operators, they will provide highlights on our performance in the third quarter as a means to illustrate what I've said earlier about our solid execution of our business strategies despite challenging conditions. Jeff?

Thanks, Gary. I'm happy to report that our North American business had an outstanding quarter. On a reported basis our volume grew 9% benefiting from growth in both our carbonated and non-carbonated businesses as well as layering in our recently acquired or licensed brands such as Seagram's, Dannon Waters and Evian. Excluding these strategic acquisitions our underlying organic growth was 5%, driven by very strong performance in Bottle/Can of 7, Minute Maid Company growth of over 12 and Fountain growth of just 1%. Because of our solid performance our business continues to reflect share gains within total beverages across all measured channels.

Nielson data as of the end of September indicates that our share increased in total scanning channels by .9 points year-to-date, which is the largest increase in any company in the beverage category. Much of this success is being driven by trademark Coca-Cola. We've seen tremendous performance in trademark Coca-Cola due to innovation with growth over 4% in the third quarter for the total North America. but importantly, 6% in the bottle and can business.

Vanilla Coke has clearly exceeded our expectations and we're especially pleased with the 42% growth rates that our bottle and can business has experienced with Cherry Coke which was relaunched at the same time as Vanilla. Diet Coke with Lemon continues to be a strong incremental contributor bringing over 5 million new consumers into the Diet Coke franchise since its launch. We'll continue innovating within the diet franchise most notably with Diet Vanilla Coke which began hitting stores just yesterday.

In water, we continue to believe that sustained profits and value will be earned by those who build superior brands and provide great customer service. Retailers have just as much interest as we do in growing the profits and value of this category. Dasani continues to gain share within the category with volume growth year-to-date of over 40%. Again, September 28, year-to-date Nielson shows that Dasani is maintaining a price premium of approximately 16% above our primary competitor. We plan to maintain disciplined pricing especially as our line of water brands now includes Evian and Dannon Waters which help to best position us to maximize potential within this fast-growing segment for ourselves, our bottling partners and, importantly, our customer base.

Moving to juice and juice drinks we've seen solid growth across our entire juice portfolio. Minute Maid Lemonade continues to grow at strong double-digits even as it [lapsed] the prior year launch. I'm very excited about our accomplishments here.

We moved from 0 to 25 million unit cases in 2001 and we expect to be close to 80 million unit cases this year as Minute Maid Lemonade is joined by Pink Lemonade and Light Lemonade. We see much room for growth in this emerging category if you consider that household penetration is just 14% for these brands. If you look at our total juice business we continue to outpace all other competitors and industry trends year-to-date. Nielson supermarket information indicates we've gained 2.2 share points year-to-date through September. In sports drinks, regarding Powerade, we're encouraged by its continued strong double-digit performance, 13% growth year-to-date and we remain optimistic in our outlook for this category.

We are approaching sports drinks as a long-term play and as such have some additional innovation behind Powerade planned for 2003 which we believe will continue our momentum into next year. I'm sure you realize that this outstanding performance in bottle/can and Minute Maid has been offset somewhat by slower results in the fountain business. External traffic, restaurant traffic information, clearly shows a slowdown in the third quarter and this has reflected the fountain business given its relatively high share position. This is not what we expected given the results in the first half of the year and given the slowdown that occurred after 9/11 but it's understandable given the protracted sluggishness in the economy. Consumers are feeling the pinch and they're just not going to restaurants as much but we believe that's short-term in nature and is really related to the economy.

Looking forward we'll remain very focused on our customer service capabilities and bringing programs that allow us to grow faster than traffic which has been the historical norm. Our North American business continues to perform very solidly due to strong marketing activities, innovation and excellent execution by our bottling partners and as we look forward to 2003, we're supportive of bottler's efforts to get 2003 pricing initiatives in place in the fourth quarter, I believe C.C. talked about that in their conference call this morning, and we've got a strong fourth quarter lineup. So we look forward to continued performance in the fourth quarter. Now I'd like to hand over the discussion to Sandy Allan to talk about Europe.

Thanks, Jeff. Let me update you briefly in the performance of Europe, Eurasia, and the Middle East for the quarter three. As we budget ourselves in any given year, we estimate for average summer weather, but as you know the weather in Europe, especially in July and August, was very poor indeed. In addition floods dramatically interrupted sales and distribution in many markets; Germany, Austria and the Czech Republic to name just a few.

We ended up the quarter with a growth rate of 2% which given the poor summer combined with the adverse effects of the on going boycott in the Middle East of U.S. brands was a credible performance. What was encouraging and expected in light of reasonable weather was the month of September where volume grew strongly for the month across all key markets including Germany. The September result bodes well for quarter four and the full year results for the Europe SBU. In addition versus a year ago our CSB market share in our two key profit countries of Spain and Great Britain grew 3 points and 3.5 points respectively. Overall we have grown CSB share in almost all markets throughout Europe, both East and West.

As we head into the last three months of the year, we have a number of exciting marketing initiatives planned both on our core brands and new brands. First let me talk a little bit about the key activities on core brands. I spoke last quarter about the pending roll-out of Diet Coke/Coke Light with Lemon. This very profitable line extension launched to date in the U.K., France, Belgium and Austria has exceeded our expectations. In fact in Belgium, Coke light with Lemon has already reached 6.5 share points of the total CSD market. It's significant to note that we are seeing a positive halo effect across the entire Coke Light franchise indicating to us that our consumers are eager to see the Coca-Cola Company bring innovation and excitement to core brands.

We are accelerating this launch across the major markets through the balance of this year and early in 2003. On brand Coke our clear focus is on Christmas where we have always had enormous equity in Sun Bloom Santa. As in previous years we'll be activating this property through the line with consumer promotions advertising and experiential programs. For example in Germany as part of our Christmas Caravan efforts, decorated 18-wheeler Coke trucks will be visiting 230 towns across Germany, culminating with a the big event in Dresden, the city at the Elbe River that was worst hit by the summer floods. Learning from our experience on Diet Coke/Coke Light with Lemon, we are rapidly progressing with testing of another very profitable line extension, Vanilla Coke, with some very positive results already seen in France and Germany where a taste resonates well with teenagers. You'll be seeing this rolling out in certain markets over the first half of next year.

The performance and strong volume growth of Fanta continues. The recent launch of a Halloween flavor made from red oranges in Germany and a consumer promotion linked to it are looking very promising. We're having great success with this brand but as we look further match our flavor test profiles to different consumer age groups in different countries. Two recent launches are good examples of this. Pumello, a grapefruit in Belgium targeting adults and Twist, an intense kind of fruit punch taste in the U.K.

Now let me talk briefly about new beverages which are building on our solid CSD business in Europe. For 2002 we are driving almost 30% growth in our non-carbonated business. Many of our activities this year were in quarter two and quarter three such that you expect non-carbonated growth to accelerate in 2003. During quarter three, we had ten new product launches or significant brand relaunches across the top ten countries. We would expect a similar level of initiatives in the next few quarters.

We have the economic model, the organization, set of processes and linked information systems in place to deliver strong profitable volume growth. In the water category we continue to move forward towards our goal of becoming a major profitable water player in the European market. For example in quarter three we announced along with Hellenic bottling, the acquisition of the leading mineral water company in Switzerland, Valsa, which is expected to close in the fourth quarter. We also continued to push our relaunched Bonaqua in Russia with new packaging, new advertising and a new distribution focus which is expected to produce a growth of over 50% on this brand in 2002 and put us in position to be market leader by 2003.

At the end of quarter three we also relaunched our English mineral water brand, Marvel, and we are looking very closely at potentially launching the Dasani brand from the U.S. as a premium water brand in two or three major European countries. On Powerade, another very profitable new beverage for us, we are experiencing increasing momentum behind the roll-out. We'll be in more than ten major European markets by the end of this year and are tracking well ahead of budget. These are just a sample of the many activities we have planned for the remainder of the year and I am confident that we will deliver our contribution to the company. Thanks. And now I'd like to turn things over to Alex Cummings.

Thanks, Sandy. Our business in Africa remains healthy and continues to profitably grow. Volumes were up 7% on a year-to-date basis, with CSDs growing at 2% and non comp growing over 150%. The fundamentals of our business remain strong. However our performance in North and West Africa in the third quarter was impacted by the Middle East situation which continues to effect our performance in countries such as Morocco and Egypt.

Our business in these markets has been hurt by boycotting of American brands. This has had the most impact on our brand Coca-Cola and as a result we've placed emphasis on other brands such as Fanta, Sprite and Schweppes which are not as impacted by these actions. In addition we have moved into new products such as Central Powders and are aggressively expanding value priced single-serve returnable glass bottles for many of our CSD flavor-brands. Early signs are encouraging with growth returning in September.

We continue to have solid performance in South and East Africa led by our Central African region. Specifically in South Africa, our largest market, we continue to grow Coca-Cola, Sprite and Fanta year-to-date. However we did see slower growth in the third quarter as the high inflationary environment necessitated price increases to support the profitability of both our company and our bottling partners.

Across Africa, we continue to focus on core CSDs and specifically brand Coca-Cola, the engine of our business. We are also profitably broadening our range of beverage offerings in selected markets. As a result the outlook is positive with continued expansion of Coca-Cola affordable single-serve returnable glass bottles in South Africa and a strong new products pipeline, we will be entering three new products in South Africa and two in Kenya in the fourth quarter.

Africa continues to be a region where we do well by doing good. Given Africa's socio-economic development, our community activities positively impact the performance of our business. Together with our bottlers, Coca-Cola is a major contributor to many local economies. We take this responsibility seriously and will continue to invest in our people, our business and our communities for the long-term. And now I'd like to turn things over to Steve Heyer.

Thanks, Alex. Our key messages in Latin America are really three. First, we're managing through very tough economic times flexibly as circumstances change. Second, our actions today reflect our objective to emerge from this situation with a business that's stronger than it was prior to the crisis. And third, in relative terms, we are stronger now than maybe we've ever been. We are performing well against our market adjusted definition of success.

In this climate, performance against key operating metrics like brand health and shared sales and bottler profitability are meaningful indicator of overall system strength and strong relative position and doing better on all fronts. The health of our brands continues to increase with trademark Coca-Cola showing positive growth in Latin America for the quarter. In Mexico, for example, favorite brand scores for brand Coke increased four points versus last year and frequency scores are 2 points higher than a year ago.

But maybe most important, our share is improving. In Mexico our carbonated soft drink volumes are growing three times as fast as the category. And in Argentina where the category had seen dramatic declines, our share of revenue in the most recent monthly data is at a record high and we're working very closely with our bottlers to maximize their profitability and protect our own operating income as best as we can through the crisis. We're doing this primarily by managing package and channel mix and by eliminating all non-mission critical costs from the system. Investments will continue as we see investment opportunity for the long-term in the region.

As the crisis hit, our local operators quickly revised plans and have been clearly focused on executing in the marketplace. We're moving quickly to play the hand that we're dealt and our management team in the region is really terrific. In Argentina, for example, when other companies have run from the crisis, we've remained committed to consumers and our system is extremely aligned behind the plan that's focused on affordability. As we mentioned refillable packaging has gone from less than 10% of our package mix to approximately 30%. It sounds like a simple step to shift to returnable packages but please recognize that this is more challenging than it sounds and it takes a little time.

The good news is that perhaps this system in Argentina is best equipped to do just that. By offering affordable packages, we make the entry price accessible so that Coca-Cola remains an important part of everyday life among our daily drinkers. Once again brand Coca-Cola has shown an improvement in brand health and significantly better performance in the third quarter, reporting a decline of only 4% versus a 14% decline year-to-date. For our total business in Argentina, we saw a volume decline of 14% in the third quarter which is an improvement when compared to earlier in the year. In Brazil, we've also had to revise our plans based on political and economic uncertainty.

In the last couple of months we've seen consumer spending contract. Increased prices of rice, sugar and beans and other consumer staples have really impacted the disposable income of consumers causing us to, once again, shift our focus to an affordability strategy. We were already offering returnable glass packages in selected channels. However, this package type is increasing in importance as P.E.T. and aluminum costs are rising. We are adjusting quickly to do this, recognizing the new reality.

In the quarter we continued to manage or product and package mix to increase profitability. Volumes increased 2% and on average for the country pricing was up over 8%. Our objective in Brazil throughout 2002 and into 2003 will be to improve profitability through a balance of volume and pricing.

Mexico continues to manage through a weakening economic environment because of its link to the U.S. economy. In Mexico we reported 5% growth driven by brand Coca-Cola, Ciel and Risco. Brand Coca-Cola continues to be a growth driver as daily consumption of Coca-Cola in Mexico is today five times higher than its nearest CSD competitor. In addition, we receive benefits from the inclusion of Risco volumes in September and this contributed a little more than 2 points to our growth in Mexico. The Risco transaction with Panamco is key to our strategy to have a nationally available brand in the water segment behind which we can execute national advertising and promotional programs. This move has significantly strengthened our position in the water category in Mexico by making the the Coca-Cola Company the market leader in the personal size water segment and the number two player in the overall water categories in Mexico. Our objective is to emphasize the profitable personal package sizes within this category.

We are also pleased with the continued strong performance of Ciel as we continue to experience share gains in a very fragmented category and with the opportunities that we now have to expand Ciel in partnership with Panamco. But before I wrap up, let me tackle a question that I've received often in the last couple of weeks that relates to what's really going on in Mexico. I think it's very important to understand that the business in Mexico is very different than the United States.

Approximately 75% of soft drink sales go through small format stores and on-premise outlets. This requires a large and very difficult, maybe even impossible, infrastructure to replicate and that gives the Coca-Cola Company a substantial advantage and it's an infrastructure that we've spent decades developing. Relationships with retailers are also critical and, again, we've spent decades developing these relationships by providing excellent service.

Of course we always take competition seriously and taken steps in the fourth quarter that will make our system stronger as new competitors enter the very attractive CSD market in Mexico. And so we're optimistic in our outlook for Mexico despite the economic challenges.

In summary, times are hard in many parts of Latin America but our system is performing well due to our focus on our strategic priorities. The position of the system in the marketplace is important because when these economies recover and grow and history shows that they will, we'll be in a position to capture tremendous value. Now let me turn the mike over to Mary.

Thank you, Steve. The highlights for Asia are that solid volume growth of over 9% was recorded in Asia in the third quarter despite historic levels of flooding and bad weather in many markets including Korea, Japan, Indochina and Thailand and continuing economic softness, most notably in Japan. However several key markets performed strongly, most notably China and India, again demonstrating the benefits of the diversity of our Asian markets.

Japan volumes were flat in Q3 and year-to-date have recorded growth of 3%. Performance in the third quarter, however, can be broken down into two significantly different periods. July volumes in Japan were particularly soft as a result of a long and cool rainy season with two typhoons hitting Tokyo and the main urban centers, only the third time this has happened in 50 years. This particularly impacted our sales in the large and important vending channel. Compounding these difficulties was the decline in half-yearly bonus payments from Japanese employers, the first time bonuses have declined in decades. Performance, however, recovered in August and September with volume growth well above 5% for both months. Importantly for the full quarter we estimate we gained share and our business in Japan has now grown share consecutively for five quarters.

Share growth was solid for CSDs, coffee, teas, juices and sports drinks. Georgia coffee was again strong with growth well over 2% for the quarter even though it was cycling strong growth of over 4% from prior year. Georgia's growth was driven by the release of a special movie edition can to coincide with the national release of a premier movie which is based on our Georgia advertising campaign, stong sales of the European blend flavor, as well as package innovations including small P.E.T. and contour cans.

In the extremely competitive tea category we continued to perform well with growth well above 2% for the quarter cycling strong growth of 5% from previous year.

The diet segment is especially growing. In this segment our brand, which roughly translates into the English words "love body," has performed well becoming the diet tea brand in Japan. Importantly 75% of Love Body's volume is in the highly profitable 500ml pack and in vending machines. This brand is now turning as fast as Sokenbicha.

Looking forward we expect the shifts in brands, packages and channels as well as the difficult macroeconomic and deflationary situation in Japan to continue. We recognize that to address the impact that these conditions inevitably have on our system certainly requires change, and that is, of course, the purpose of our ongoing supply chain initiatives. These initiatives are fundamentally changing everything we do in Japan from procurement to manufacturing and they're modeled on our highly efficient, proven and effective approach to new products. In Japan we centralize procurement, manufacturing and forecasting for most new products and we have decades of leading-edge experience managing the logistic sides of new products. Therefore our new product process is actually a model for how we can continue to take costs out of the core brand side of our business.

In addition, we continue to demonstrate our ability to exceed industry growth levels and drive incremental profit and volume both through strong marketing programs on core brands like Georgia and through launches of profitable new products. So despite the challenges in Japan we remain very confident about this market. As I mentioned earlier, both India and China performed strongly recording double-digit growth in third quarter. Sales in China were up 13% on previous year and year-to-date volume has grown 15%. Our core CSD brands grew solidly behind a combination of successful summer campaigns. All core brands recorded share gains and now we have consistently outgrown the industry for the past 20 quarters in China.

Strong growth continues for our non-carbonated brands in China as well. [Koo,] our profitable juice entry in particular continues to be an outstanding success with media and distribution coverage expanded to 57 cities and all 21 bottlers in nine months. In less than a year [Koo] has captured over 12% of the juice market and we are confident of further volume and share gains as its geographic expansion continues. In India CSDs grew over 30% with strong growth across all brands, share gains of 2% and brand preference scores reaching an all-time high.

Our non-carb business in India continues to grow rapidly with Maaza juices, Sunfill powders and Kinley Water all making large share gains. After its launch only two years ago, in Q3 Kinley Water became the largest packaged water brand in India reaching a market share of 35%, up 15 percentage points versus a year ago. Our business in the Philippines maintained its solid momentum in third quarter with strong double-digit volume growth for both CSDs and non-carb businesses and as we have discussed with you previously, the restructuring of our bottler distribution and logistic system is proceeding according to plan. We now have put in place close to 90% of the targeted wholesaler partners covering 450,000 outlets. In closing, as I mentioned at the outset despite challenging times in Japan, our business in Asia continues to perform solidly. Now I'll turn things back over to Gary.

Thanks, Mary. Just a couple of other items that we wanted to cover before we opening it to your questions. First I'd like to point out a change in the timing of company's stock options to employees, we had expected to issue stock options for 2002 in October, we now expect those to be granted in December. So we are still planning for some expense in the current year related to these options; however, not quite as much as we had originally anticipated. The reason for the change relates to a broad review which is under way of all aspects of employee compensation programs.

Secondly on currency, since this is usually a topic of interest, we have not changed our outlook on currency. We still expect currency to negatively impact our earnings per share for 2002 in the range of 8-10 cents, most likely at the upper end of that range given recent weakness in Brazil. Year-to-date currency has had a negative impact of 6 cents, one penny of that in the third quarter but year-to-date 6 cents, so a much greater impact in the fourth quarter from currency because of the timing of our year end option contracts and Brazil.

As for currency impact in 2003, if the U.S. dollar stays at current levels and there are no major devaluations, we would expect exchange on next year to have a neutral to slightly negative impact on operating income and earnings per share which is significantly better than what we've experienced over the last seven years where we've seen 3-10 points of negative impact each year.

As for 2003 earnings, it is too early for us to make any specific statements because we are in the midst of the 2003 business planning process and we plan to update you later in the fall once the business plan is complete. With that I would like to open it up to any questions that you may have. Operator?

At this time I would like to remind everyone that in order to ask a question, please press star then the number "1" on the telephone key pad. We'll pause a moment to compile the Q&A roster. Your first question comes from Andrew Conway of CSFB.

Gary, I know, as you mentioned, it's early to talk about 2003 but in the context of a continuing difficult global macro environment and in the context of your CSD business is globally growing perhaps around 2% and bottlers becoming more profitable, is it reasonable to think that management would widen the range of expectations for global volume for '03 closer to perhaps a 4 to 5 or 4 to 6 range. How do you triangulate your long-term views when we have a period of short-term macro effect.

Andrew, thanks for the question. It's a very good question. I guess, to be candid, I'm going to dodge the question, however, only because truly we are in the midst in the process and premature to give guidance on it. Let me say that we are still committed to the long-term growth of this business and believe in the future. We do have significant economic headwinds obviously as we all know but continue to be committed for the long-term. We'll continue to manage the business for the long-term and as we go through the business planning process, as we complete that, we'll give you a full update on the expectations for next year later this fall.

As a follow-up, is there any way that Sandy can talk a little bit about, beyond his comments on German brand strategy, of how the distribution and bottler structure and "go to market" strategy will assist the business in the coming year, please?

Andrew, on Germany specifically, through the management control agreement which happened in January of this year, what we've been doing in the implementation of that agreement is to start to restructure the business in Germany. 70% of our volume in Germany goes through what we call a national sales company, which has been run as a separate entity in the past. What we are doing at the moment is we are integrating that entity into CCAG which is the main bottler in Germany. And from that we expect to get some very substantial benefits not least of which is substantial cost savings. But more importantly it means that we will go to market in a far better way, I mean what we see is that the way we promote our products will improve, our merchandising of our products will improve, the way that we get efficiencies out of promotions will improve. So we see major opportunities to maximize the profitability of our German system particularly in 2003.

Thank you.

Your next question is from Caroline Levy of UBS Warburg.

Good morning, everybody. I'm trying to understand how you managed to achieve your third quarter estimates in the face of all the economic challenges that exist and yet will not or do not expect to achieve your fourth quarter and I'm wondering to what extent that has to do with the currency have 3 cents not 1 cent as a hit, or the seasonality, where Latin America is more important in the fourth quarter than in the summer months, but any guidance you could give on that, because I think that's what everybody is confused about.

Okay, thanks, Carolyn, this is Gary. Let me give a shot at that one. First the following, if we step back and look at the full year first and let me address it that way first. Because as you know, we give guidance on full year but not, we do not give any quarterly guidance. And so what's happened as we went into the year and I think we clearly stated that our expectations were built off of improving macroeconomics in the second half of the year and obviously, that's not happened and, in fact they've gotten worse. But with that said, let me go through some of the things that have happened and I think it will give you some clarity of where we are.

The first thing that happened early in the year was Argentina and basically the entire economy melted down. Second thing that happened was Venezuela with economic and political issues. Brazil has not improved any and, in fact, is getting worse as we speak. With that said, Europe, as Sandy talked about our view and our plans would have been based on an average summer. Quite candidly, there was no summer in Europe this year with the weather and then all of the flooding in Central and Eastern Europe as and -- I think Coca-Cola Hellenic has referred to not being able to even get their route trucks out to deliver products during the flooding period. The next thing that happened was Japan was hit by three typhoons, the worst weather in Japan in 50 years. At the same time Korea was experiencing the same kinds of flooding.

With all of that said, basically as we step back and we look at it, our internal estimates were that the third quarter would have been actually much better than where your expectations were. And even with those things and the macroeconomic situation not improving, we think we'll going to come in pretty close to what the full year estimate was. But as I look forward, and now let me just focus in on the fourth quarter for a little bit, As I look forward the fourth quarter, currencies will be worse in the quarter. But if I just step quickly through the rest of the world Europe is going to be okay. Europe is having a good year absent what happened this summer. So Europe will be okay. Asia x Japan will be fine. Japan -- there's severe economic conditions in Japan. We've been doing very well gaining share but I think Japan will kind of go sideways on us a little bit.

If you look at the U.S., bottle/can, Minute Maid doing extremely well. Fountain is suffering from traffic, if you will, in restaurants. Latin America I've pretty well covered, however Mexico is doing just fine. Mexico is fine, it's kind of south of Mexico that we've got the issues. And Africa, the southern part of Africa is doing fine, Northern Africa is suffering somewhat from the boycott.

So I think if you take all of that together, we were actually expecting a much better third quarter than we had but overall full year with everything that happened, we believe that the strategy is right, we keep doing as we've done and we still believe that it was prudent to tell you where we think we are, but we keep executing strategy as we've done.

Thank you, Gary.

Your next question comes from Marc Greenberg of Deutsche Banc.

Hi, Gary. Just a follow on Caroline's question, with regards to the local impact in some of the weakness, I wonder if the operating heads might talk about what the Coca-Cola Company can do to ease the bottler impact specifically in Japan with CCHBC and, obviously, if we could spend a little time on Brazil.

Yeah, let's start first with Japan. You know conditions are not worsening in Japan and this is not a new phenomenon. It's been going on for years now and that's why a while back we started working on the supply change initiatives with the bottling system. We are waist deep in an intense collaboration with them on how we reengineer the system. And I believe we will start to see the benefits of that in 2003, we will start. And those benefits will accelerate in 2004 and, of course, 2005. As I said that means a complete reengineering of everything from manufacturing to procurement and ultimately some of the sales and distribution side of our business. And our bottler partners are well aligned with us on that. It's just a question right now of continuing to roll it out. So, there is a light at the end of the tunnel of this kind of economic pressure and we'll get there.

Mark, I think, also on Hellenic, I think you should keep in mind that two years ago Hellenic went through a merger with Central Bottling. They now run the franchises in 26 countries throughout Europe. So they are going through a process of consolidation. But, having said that, if you look at their EBITDA results for this year, you'll see that there's been a major improvement compared to 2001. So they're on track to substantially improve the returns on investments, specifically returns on invested capital. I'd also like to say that if you take Italy, for example, we, the Coca-Cola Company, and Hellenic have a joint, what I call Marshall Plan, for Italy to regenerate that business. So we are in alignment with Hellenic. I think that their returns will improve dramatically, I'm very confident of that. Thanks.

Mark, this is Steve, with respect to Brazil, first thing we are doing is we're focusing the portfolio. We are committed to a limited number of new product launches next year and a very heavy focus on CSDs and our core brands. The other thing we are doing is focusing on affordable packaging and creating a richer portfolio of packages to make it easier for us to catch incremental share but do it profitably for the bottler. We are also focusing whatever innovation we do in terms of new products on bottler compatible products so that their economics are further enhanced and we are studying shared services and other infrastructure adjustments and the goal there is to really free up money so we can keep the DME investment high so we can accelerate the affordable and returnable package structure that we discussed so that bottlers can really enjoy as much profitable growth as we can find.

Thank you. Gary, just a follow on that, with regards to the three markets discussed, impact on the Coca-Cola Company, do you anticipate that any of the major bottlers are going to need kind of a more direct support in the form of lower concentrate pricing or higher marketing support? Thank you.

Thanks. No. I do not. As you look at all of the major bottlers around the world, you are seeing improving economics and improving returns on invested capital of substantially all the bottlers. So I think as part of our strategy we've been very deliberate in ensuring we've got the strongest system around the world. We are seeing results of that and would not anticipate any significant changes in funding levels.

Thank you.

Your next question comes from Jeff Canter of Prudential Securities.

Thanks for taking my call, good morning, everybody. Gary, on the second quarter conference call you helped bridge the year-over-year changes in operating income growth, currency neutral, good will, the incremental marketing structural changes, I was hopeful you could do the same again for this quarter.

Sure, Jeff, I'd be happy to. In this quarter reported earnings per share were 47 cents. There was a penny of equity income charges from Latin America equity investees and a penny of currency impact versus 2001. So, 47 cents reported, 49 cents currency neutral ongoing. Third quarter of '01 reported earnings per share were 43 cents. then if you had adopted FAS142 on good will, retroactively that was 2 cents, about 2 cents a share, not quite 2 cents, but 2 cents a share. So, reported adjusted for 142 if you will, 45 cents. There was a 2 cent gain from Coca-Cola Enterprises and their accusation of the herb territories in Chicago and there was about 3 cents of incremental marketing. So EPS for third quarter of '01 on a currency neutral recurring basis, 46 cents. So reported, 47 versus 43, a 9% increase. Recurring currency neutral, 49 versus 46, about a 7% increase.

Okay, fair enough. So just looking at the operating income line, the 17.8% improvement, operating income was negatively impacted by one point so currency neutral operating income growth year-over-year would have been up 19%. Then you take out -- I guess what I'm trying to find is what the internal operating income growth was excluding the marketing...

Jeff, this is Larry. The incremental marketing last year was a little less than $100 million. So if you back off just a little less than $100 million at the operating line you'd get about -- adjust off for FAS142, you get about 9% on the operating and then currency was 1 if the operating is combined.

Perfect. And then was there any structural change benefit on the operating income line as well?

Slight positive. but not significant.

Some of that gets offset, Jeff, by increases in other expenses below the line which is minority interests. So we can talk about that later if you want.

Fair enough. And you said that internal case sales would have been more than a point lower with all the water deals. I didn't hear you mention Cosmos, was that included in that number or was that excluded in that adjustment to get to an internal case sale number.

It was not in the number that Gary made reference to, Gary was talking about the recent acquisitions. When we talked about Cosmos at the beginning of the year, we talked about that as about 100 million cases when we acquired that on an annualized basis.

Okay, I just wanted to make sure that I understood it correctly. All right, thank you very much.

Thanks, Jeff.

Your next question comes from John Faucher from J.P. Morgan.

Good morning, everyone, this question is for Steve. Steve, you talked a lot about trying to keep your brand in front of the consumers by using returnable packages and some other affordable packages there. Can you talk about the strategy you have in place for a transition when the economy has picked up in terms of how you get the consumers off of the sort of lower priced, lower profit packages and back to the more traditional packages that they've been doing and realizing it's kind of up in the air in terms of when that's going to happen.

First of all these package adjustments are not necessarily lower profit. In many cases they are higher profit. What we're doing is managing the relative price to the number of ounces so that for people who are really economically stressed, they can still have a relationship with our brand in a manner that's affordable to them and attractive to us. With respect to what we're going to do in the future, I don't think we will ever pull out of this much more robust and rich package structure because I think we ought to be mindful of the fact that markets move and even in the terms of a recovery, I would like the product to be available to everybody on their terms. In certain markets b-brands are still an issue. And being able to bite the b-brands effectively with a broader array of packages profitably and grow our core business is a going forward attractive position for us. So frankly I think this economic climate has done nothing but accelerate the right strategy for us in the long-term in Latin America and what the infrastructure we are building, I wouldn't pull. The infrastructure we are building even as the market comes back, I would see as a go-forward substantial advantage to us as we connect with more consumers on terms that work for them.

Okay. Thanks.

Your next question comes from Anna DeKappa of Bear Stearns.

Yes, good morning, this is Carlos Laboy. Gary, I was wondering if you could expand on how you're accounting for the purchase of water brands. The purchase of Risco Water in Mexico accounted for I think you said, two out of the five points of growth in Mexico in the third quarter. But Panamco indicates that the purchase agreement wasn't reached until October 7th and that the incidence payment is not really being attributed to Coke until '03. So are the volume comps unfair or are we misunderstanding the timing of the transaction?

Carlos, thanks for the question. In fact, we reached agreement for a licensing agreement on the Risco brands in September and have included the volume in September but that's why I was trying to be very clear that Risco is included in the numbers and that's why we are clear on what the impact was on Mexico and included that in the worldwide volume as well. And there is some profit in the licensing agreement that's attributed to the Coca-Cola Company this year in the third and fourth quarter. So based on our accounting policies we had to include it but we wanted to be very transparent and make sure you knew it was in there and what it was contributing.

And on a related issue on Brazil you mentioned that you were moving to more affordable packages in Brazil, does this mean more returnables and do the bottlers have the fixed assets in place, the plants in place and the lines to move more aggressively to returnables?

Yeah, it does mean more returnables and certain of the bottlers are ahead of the curve and certain are a little behind it and the system is committed and very excited about what they see as potential opportunity. The entire bottler population in Brazil sees the market the way we do. They're excited about investing into this, and they are, frankly, very optimistic and upbeat about what they think they can achieve and so are we, again, within the constraints of what the market will allow us to take. So it's a relative story, not an absolute story in the short run and will be an absolute story as the economy comes back.

Thank you.

Your final question from Marc Cohen, Goldman Sachs.

Hi, guys. One of the big issues that people, I think, have on mind is how the whole venture into water as it ramps up ends up being a profitable endeavor for the Coca-Cola Company and the bottlers. You may have to deal with this regionally but can you give us a vision of how you see the penetration of the water business on really an international basis developing and what it's implications are in terms of both margins and returns on capital for both levels of the system.

Hey, Mark, this is Jeff. Let me take it from a U.S. standpoint and then the other folks can talk about outside the U.S. But in the U.S., I think there's two levels to the discussion. One is system profitability and the second is the profitability of Coca-Cola, the Company. From the system standpoint clearly water is going to be a very important incremental contributor to growth and profitability. We've ramped up our strategy in order to help there. That's not only going to make the system stronger but it's also going to allow us to reinvest back in growth across the whole portfolio because it's clear that water will be the fastest growing category. For the Coca-Cola Company, we've now got a portfolio of brands and source and distilled waters so that we can meet the needs of consumers, innovate and, we think, the way to profitability is to accelerate volume but bring more value added to the category in terms of packages, brands and value-added elements to the water. And if we do that, we think we can grow profitability in line with the growth of volume. Dasani's profitable today and we believe we can continue to grow that and protect it through deploying the portfolio we've acquired through the Evian and Danone acquisitions. So that's our perspective for the the U.S.

Mark, on Europe, I think I commented about this on the last conference call, the biggest beverage category in Europe, in packaged goods is water, but it's a very fragmented market. In Europe there's probably upwards of 600 different brand names. So it's a very regional business. But within that you can divide it into three segments what I call a high premium water category packaged and we have entered that with our acquisition of Valsa in Switzerland. In fact, the returns on Valsa for the system are superior to carbonated soft drinks. And we will progress in Europe by looking for strategic acquisitions on a regional basis and we believe they will be highly profitable. Then you come on to the medium category which is, it's a category which is very regulated because all water in Europe essentially comes from a source. But there are ways in which we can use a source water but then brand it, that's why I said earlier that we are looking to launch Dasani in two or three markets in Europe. And what we would do is take a source water, which allows us to comply with regulations, and then add minerals so you get a balanced water and we believe that that will have a great market potential in Europe and will be highly profitable. Then you have the other water which is the lower margin. When I say lower margins, these are probably about 50 to 60% of the margin of CSD's and the issue there is a volume issue because we believe that water is the fastest growing category in Europe, and although you may make less per case on these lower margin waters, the real issue is what you multiply that margin by so that we believe in absolute terms that these lower margin waters will in fact be significantly profitable for us.

Yeah, just to elaborate on that, there are three things that effect the profitability of water in most markets. Number one is price. And as Sandy and Jeff have mentioned, in many markets, even Asia, we have three pricing tiers for our waters, Philippines, China, Australia, three water brands. premium, medium and value. The second factor is cost. And as you gain economies of scale and efficiencies, you increase capacity utilization and you go to creative levels like light weighting of P.E.T. which can have significant cost savings of up to 20 to 30%. So you start to take costs out. That's the second factor. The third is what you spend in DME. In the last few years we've been launching a lot of these brands. Now we've moved from launch DME levels to maintenance DME levels. That dramatically effects profitability. And as time goes on, like I say, you don't have launch levels of DME. So you combine those three things together and the water business starts to look improved from a margin and profit standpoint.

As far as Latin America is concerned, pretty much what you heard holds true. Except for us it's less about tiers and more about differences in pack size. The pack size play for us is really around a core strategy that's focused on single-serve packages that go through very highly profitable channels. That's our primary focus.

Secondarily there's a bulk business which works for the bottlers. And so from a system strength point of view it's a good thing, but from, frankly, a Coca-Cola Company point of view, there's marginal return associated with that. The third element is that as we build national brands, and our Risco transaction gives us the opportunity to do that, we get all kinds of leverage in the trade and all kinds against advertising expenses which allow us to take operating costs down as we grow volume. So it's a profitable strategy for the system and it's a profitable strategy for us by virtue of the way we do our consolidations around core brands and the way we focus service to the retailer and emphasis single-serve.

Go ahead, Mark.

Gary, I'm just wondering if you can roll that up on an international basis for us and give us a sense of today is this move into water more or less profitable for you than your base business and do you envision coming up to that kind of level of profitability over time and how does that play out?

Thanks, Mark. Here's how I would answer that question. As we've moved into the non-carbonated beverage segment, so it's more than just water, but it's all of the other brands that we're focused on. And as we become the largest player in the non-carbonated arena, our goal and objective is that the margin characteristics as, on whole, of all of the non-carbonated brands should equal to about what carbonated beverages are yielding and with the kind of foot print that we have then and with the entire beverage portfolio and the strength with retail trade and the improvement in overall system economics as we get that margin characteristic to a CSD level on average, and that's on average because some will be below but some, as Sandy said, are higher, we think it's a very profitable model on which to continue to grow the business.

Okay, thanks.

Thank you, and I want to thank each of you for joining us today and we will look forward to continuing the dialogue with you in the future. Thank you, very much.

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