可口可樂 (KO) 2003 Q1 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 Company, this 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 one on your touch tone phone. If you're on a speakerphone, you may need to lift the telephone hand set. To withdraw your question, press star two. 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 form. 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. You may begin.

Good morning. Thanks for joining us. This morning I'm joined by Steve Heyer, our President and chief operating officer and Gary Fayard, our Chief Financial officer, in addition we have our senior operating officer Sandy Allan, Jose Octavio Reyes, Mary Minnick and they'll be present for the Q&A session. They will provide a high level of overview of performance in the quarter. We intend to leave plenty of time for Q&A at which time we can dive into topics in greater detail. During the Q&A please try to limit yourself to one question before if you need to return to the queue. Before we get started, I'd like to remind everybody that the conference call does contain forward-looking statements, including statements concerning our long-term volume and earnings objectives and they should be considered in conjunction with our cautionary statements that are contained in our earnings release and exhibit 99.1 of our company's most recent form 10-K. In addition, I'd like to also call your attention to the fact that we've posted a schedule on our company's web site at Coca-Cola.com in the investor's section which reconciles our results on an as reported basis under U.S. generally accepted accounting principals to a few non-GAAP measures which may be referenced by our senior executives in the conversation this morning. Please look at our web site for this information. I'd now like to turn the call over to Steve.

Thanks, Larry, and thanks to each of you joining us today. Let me take a minute and start by saying that we're pleased with the results that we announced this morning, but not satisfied. The first quarter was certainly a time of volatility, and we believe we've responded well. We continue to deliver solid volume and earnings growth. We continue to gain share in key markets, and we've become even more nimble and flexible from our day-to-day operations as situations and economical political shifts require. As we mentioned in our release this morning, we've seen weak economic conditions. We've seen declining condition summer confidence and slowdowns in the restaurant hospitality and away from home channels. In addition, we've experienced a lengthy national strike in Venezuela that basically shut down our bus control, gives us additional confidence. In addition, our continued focus on aggressive and cost control gives us additional confidence. With that said, we've outperformed our competitors, making gains in share of sells, in measured channels in most key markets, including the United States, Mexico, China, Spain, France, and Great Britain. We're focused on gaining both volume and value share of sales, as these are important indicators of the health of our business and our brand health indicators are strong, and they're improving in every major market, including Japan, Venezuela, and Germany. Our success against these measures bodes well for our future performance once economic conditions strengthen and highlights strengths of our brands and our franchise on a relative basis. For the period as Gary will outline, our worldwide unit case volume grew 4%. Keep in mind that growth rates in the first quarter were impacted by the ship to the Easter holiday, especially in North America, western Europe and Latin America. Our results also reflect the Coca-Cola system that's working very collaboratively to ensure that both the company and its bottling partners are improving the economics of the entire system. We expect the health of the bottling system to continue to improve, and there is work going on in procurement, information systems, supply chain, innovation and product development that are driving the effectiveness of our local execution and leading the cost savings for all parties involved. Let me take a few minutes to talk about certain factors that impacted on the quarter, picking up on some questions that Larry tells me you may have top of mind. First, in North America, what factors really did impact our results in North America during the quarter? Overall, North America results were solid, with 3% growth for the quarter. Our growth really can be broken into two component, our retail business, which was up over 6%, and our food service business, which was down 4%. We consider this performance very sound, considering the challenging weather, the Easter shift, and the impact of the war on the away from home channel. In the retail division, trademark Coca-Cola grew by over 2%, benefiting from Vanilla Coke, Diet Vanilla Coke , strong diet Coke performance and packaging innovation for our premiere brand Coke. In the food service sector it was sluggish trends in the hospitality and leader channels. There's a very strong co relation between food service business and restaurant traffic. The restaurant industry was hit as people stayed home in the quarter when the weather was extremely bad, and then especially is so once the war started. We believe these are temporary factor, which will present less of a challenge as we move through the year. Second, Germany. What are we doing to address the impact of the deposit law change? Europe's unit case volume overall in the quarter was down slightly, while cycling growth of over 8% in the first quarter of last year, with the exception of Germany, Europe's performance is both strong and on track. In Germany, our business has been negatively impacted by a change in the deposit laws. The mandatory deposit law on non-refillable packages in mineral water and CSDs went into effect January 1st, 2003, and it has been disruptive. Consumers have shifted away from cans. They are moving to refillable packages and selecting beverages that are not subject to the deposit laws, like sports drinks juices and tea. The Coca-Cola system has been able to accommodate the shifting preferences of retailers and consumers to refillable packages. However, we were down in the quarter, as we could not offset the early consumer retreat from cans and the destalking of the inventory in the trade by certain retailers. Our refillable package volume is up sharply, causing our package mix to shift from. 60% refillable to 80% refillable during the quarter. Our infrastructure in Germany has responded quickly to the market conditions. We're proud of what they've been able to do, which has led to improving trends as we progress throughout the quarter and into the second quarter. As we move into the second quarter, we have four major initiatives that will help our business, our approach is first to focus on marketing efforts on refillable packages. Second, to introduce new packages which can capture away from home consumption. Third, to place vendor and cooler emphasis on products which do not currently require a deposit, such as PowerAde, Coo and Nestea, and fourth, work with the government to rich a viewable and lasting solution for the industry. Overall, we believe we've seen the worst of the impact from the change in deposit laws in Germany. We're confident that we're taking the necessary actions to see growth in Germany for the remainder of the year, and we have an infrastructure advantage in refillable returnable packaging on a go-forward basis. We're quickly responding to the new environment and we're optimistic in our ability to turn this situation to a positive advantage for our system. The third question we think you want us to speak to is how much impact did the strike in Venezuela have on our results? Well, as you'd expect, Venezuela was a significant negative in the first quarter, affecting Latin America overall. The Venezuela crisis brought down total Latin America volume by more than one point and it negatively affected operating and equity income as well. In the month of March, we restored full distribution, much faster than our competitors did. We feel good about the fast and flexible way in which the system was able to respond to the situation and frankly, we don't expect Venezuela to negatively impact our results for the rest of the year. Fourth, what's happening in Japan, and will trends improve? Volume in the quarter declined 2%. We experienced solid growth of over 2% in January and February, cycling 7% growth from last year. However, March sales were very soft. The negative volume performance in March was driven by general weakness across the entire consumer goods industry due to unusually cold weather, general uncertainty and consumer security concerns. But even with declining volume, we continue to grow share during the quarter in highly profitable teas, coffee and CSD categories. What's our plan? It's to continue our strong marketing and channel management initiatives, focus on reenergizing the vending channel manage revenue and margin mix, and drive costs out of the supply chain. In addition, we announced during the quarter the formation of a supply chain management company with our bottlers in Japan. The benefits of supply chain management are primarily four-fold. One, more efficient production. Two, lower capital investment. Three, savings and distribution costs, and four, savings and procurement. As we look ahead, we're very confident that the savings from this initiative will be significant. The purpose behind the creation of this entity is to increase value for the entire Coca-Cola system. It will strengthen our financial model and the value of the Coca-Cola system in Japan to the benefit of both the company and our bottlers. Fifth, as the war in Iraq impacted our business, and specifically as negative consumer sentiment toward U.S. companies impacted our results. Short answer, yes, and no. The broader issue, and I've already talked about it, is the uncertainty around consumer confidence caused by the war and the resulting economic conditions. This did have some impact. You'll hear from our leadership team in a moment. We're taking steps in each market to manage through uncertain economic times. Specifically, though, regarding anti-American sentiment, this is a subject that's gotten a lot of media attention in recent weeks and it's something that we're watching very closely. At this time, we do not feel that there's been a reportable impact from this issue on our results. However, we continue to monitor the situation closely. It's premature to say if there are any real changes in consumer habits. We're continuing to follow our operating success formula that has worked for decades across the world. We run local businesses. We rely on local talent. We support local communities. We make local marketing decisions, and we tailor our approach based on local consumer preferences. We're confident that this approach will guide our business well into the future. Last question, are we confident about our future? We're effectively executing our six strategic priorities. We are leading the growth in the beverage industry, both in carbonated soft drinks and non-carbonated beverages. Trademark Coca-Cola has been performing very well in key markets like China, Brazil, South Africa, Philippines, North America and western Europe. As our marketing and product information continues to drive preference, the health of trademark Coca-Cola will continue to be strengthened. We continue to extend our position as the lead being marketeering of noncarb. Our focus on a system is to be about achieving the best price, package and channel mix to drive our profit, while also effectively managing our cost structure. We are very well aligned with our bottlers, probably as well aligned with our bottlers today as any time in our history. And we have great momentum around the world from initiatives such as the real campaign, Vanilla Coke, Diet Coke with lemon, PowerAde, fridge pack, Sprite remix and Sprite Ice. In summary, our efforts have been focused on strengthening our brands and making the entire Coca-Cola system more effective. Now, let me turn things over to Gary.

Thanks, Steve. I'd like to highlight our financial performance in the first quarter. Our reported earnings per share for the quarter were 34 cents, and this is after a net reduction of 3 cents per share, resulting from a charge associated with our previously announced stream lining initiatives, and again, relate told a litigation settlement. If one were to consider these two items, earnings per share amount, which we feel is comparable to prior periods, would be 37 cents. Let me address these two specific items and then I'll talk about the remaining results for the quarter. First, on the streamlining initiatives, as we previously announced, we initiated steps to streamline and simplify our operations primarily in North America and Germany. These initiatives are proceeding exactly as planned, and resulted in a first quarter pre-tax charge of $159 million, or 4 cents per share after tax. When calculating the per share amount, I think it's important to recognize that this charge has a slightly higher tax rate, since both the U.S. and Germany have higher tax rates than our corporate average. Consistent with previous comments, the streamlining initiatives are expected to result in a full year 2003 pre-tax charge to earnings of. $400 million. Separate from the stream lining charge, we expect that our financial results will benefit by at least $50 million in the latter part of 2003, and at least 100 million on an annualized basis beginning 2004. Now, let me talk a little bit about the gain on the litigation settlement. During the first quarter, we reached a settlement with certain defendants in a vitamin anti-trust litigation suit. In that litigation, our company alleged that certain manufacturers participated in a global conspiracy to fix the price of vitamins used in the manufacture of some of our products. As a result of the settlement, we received approximately $52 million in cash during the first quarter, which benefited our results by 1 cent per share on an after tax basis. This amount was recorded in the first quarter as a reduction in cost of goods sold. Now, putting these two items aside, as I mentioned, we had comparable earnings per share of 37 cents in the first quarter. In addition, if you consider specific items recorded last year in the first quarter, you would arrive at comparable earnings per share of 34 cents in the first quarter of last year. As mentioned at the start of the call, the specific reconciliation of our reported results and comparable amounts may be found on our company's web site. We are pleased but not fully satisfied with absolute growth, and Steve mentioned our results were delivered with the backdrop of very challenging macro economic conditions, and several short term external factors. Reported operating income declined 7% in the quarter, primarily driven by the negative impact of the streamlining initiatives, partially offset by the positive effect of the litigation settlement. After the impact of these two items, operating income increased 2%, when compared to the prior year's first quarter. This remaining operating income was affected by weak results and our German bottling operation, resulting from the deposit law change, softer than expected food service and hospitality trends in North America, the strike in Venezuela, the weak trends in Japan during March, and increase stock based compensation expense on a year over year basis. As I look forward to the rest of the year, the impact of several of these short term factors should be much less, and we are expecting stronger operating income growth throughout the remainder of the year. In addition, currencies are expected to have a slightly positive impact on results as we move throughout the remainder of this year. Cash from operations for the quarter remain very strong at. $600 million, and this is after making a $145 million contribution to our U.S. pension plan in January, which essentially fully funded the plan. In February, we also increased our annual dividend to shareholders by 10%, reflecting the 41st consecutive annual increase of dividends. During the quarter, we also repurchased 8.3 million shares of common stock for approximately $319 million, and we still intend to repurchase. 1.5 billion of stock this year. Although we are not commenting on specific earnings guidance, hopefully the comments that I've given and the perspective from the operators as we go into Q&A today will provide helpful insights into how we're thinking about our business and why we're confident that the continued execution of our strategic priorities will lead to strong financial results in 2003 and beyond. To sum it up, as we look to the factors impacting our first quarter results, we're confident that we will see improving trends in the remainder of the year, specifically, we do not expect another strike in Venezuela. We will not have another month in Germany like January, where consumers and customers were adjusting to a significant deposit change. We will not have a negative impact of the Easter shift remainder of the year. We do not expect that food service and hospitality channels will be as weak, now that the war is ending. We expect that worldwide economic conditions will be stable to possibly start improving, and we expect to get some slight positive benefit from currencies. Considering these factors and the they strong business plan that we have in place, we are confident that our results will improve and be strong for this year and looking forward. Now, we'd love to go to your questions.

At this time, I would like to remind everyone that if you would like to ask a question, please press star and then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Andrew Conway of CSFB.

Good morning, Steve and Gary. One part question is, as you move through the year, can you talk a little bit about your confidence level of achieving positive country mix and the associated operating leverage needed to accelerate your operating income growth, and secondly, I don't know if Mary would be willing to talk about whether she is reassessing the rate of category growth in Japan for the non-alcoholic beverage industry just in light of the monthly performances we've seen from the back half of '02, and in that environment, despite your relative share gains, would you expect to see a more challenging category result lead to more diminished EBIT growth in injure Japanese business over time.

Andrew, this is Steve. With respect to the first part of your question, positive country mix, it's our expectation that's exactly what we will see through the remainder of the year. As we said, western Europe is strong. We think it will continue to be strong, as Germany stabilizes, resets itself, restocks its business and gets focused on returnables in the market, effectively executing, we think western Europe, which is a positive contribution cluster of countries from a profit per case point of view, should do very well. Latin America, we think, is going to be strong across the board. And I will let Mary speak to the second part of your question. North America, we think, we're doing very well. We don't expect we'll have a weather problem for the remainder of the year. There were thousands of store days closed for QSR restaurants this year. The rest of the year that shouldn't happen, due to weather. We're hoping that food services start to rebound. There's reason to believe that, based on the way they are now competing and rethinking their menu and their pricing strategies, and we so we think north America bottlers is well positioned and should continue its momentum and this leaves really Japan and I'll let Mary speak to Japan.

Andrew, yes, let me put this all into context, because it's not a simple issue. You know, you referred to the last several months of trends in Japan. What we've really got are a couple of weeks of softness in key months like December and March. Should we extrapolate those trends to the entire industry and in general for the remainder of the year is a fair enough yes but let me put it in perspective. In the first quarter of 2002, which we're cycling, we were benefiting from euphoric T growth in the category. A record number of new product launches in the history of Japan in March, and we, in particular, had an aggressive supermarket program in place. Despite that cycling in January and February, as we've already said a couple of times, you know we had strong growth in Japan of 2%, cycling 7%. In a couple of weeks in March, what we had was a major crisis of confidence among consumers between the SARS and the war concerns. We had 4% traffic declines in some of our key supermarkets and declines in fountain, combine that with several weeks of poor weather which impacted vending and the fact that we're focusing on share of value in supermarkets, not share of volume. That resulted in some of the numbers that you saw in first quarter, but your question is fair enough. In light of those growth trends, are we evaluating our strategies? It's worth reminding people that we've got about 700 SKUs in Japan with high degrees of margin variability. We can manage our provability at 1%, 2% or 4% growth, based on a constant re-planning of our mix which we do every week in Japan. Fortunately, our system is accustomed to innovation there. We're a very flexible system. We can re-plan on a dime. We can launch new products, we can pull back on new products and question change the mix. So regardless of what the overall category trends are, we believe we can manage the mix for profitability.

Great, and so your view would be, it's too early to reassess your operating plan set forth last fall early in the year for a secular change, but it's something you're going to continue to vigorously watch?

Absolutely. You know, we have about four business plans in Japan, and we can press the button on do we do Plan 1, 2, 3 or 4 in a 24-hour period. We do a lot of contingency planning in Japan. It's just the nature of our business there. It always has been. We have key points in time where we know when we need to push the button on which plan to sell or emphasize which products and we're doing that. We've done that already in the last couple of weeks, and we will continue to do that for the remainder of the year.

Andrew, this is Steve again. We went through a rather re-exhaustive re-planning process, just as a prudent exercise over the last month, and we've looked at all major markets, and we made some adjustments. We looked at our cost structures. We looked at our marketing investments. We looked at our product mix and innovation. We isolated all the sources of growth. We asked questions about where we were cycling big gains, and whether we had a pipeline we had confidence in to do what we've committed to do, and as a result of that exercise, I think we all walked away with a sense of confidence about what the rest of the year looks like.

And that, in spite of the perceived to be greater volatility of performance in that market?

We're managing the volatility as best we can. In some case, Andrew, all we can manage is what we can directly control, which is our expense base. And so we're hard at-bat. In other places we're managing mix. In other places we're managing channel or price, or level of innovation, and taken together, we think we have a recipe that gets us home.

Thank you very much.

Your next question comes from Bill Pecoriello with Morgan Stanley.

Good morning everyone. I have a question about How you are thinking about the marketing investments behind the new vanilla Coca-Cola, Sprite remix, Diet coke with lemon to various markets where you think about the year long investment versus the longer term investment to sustain growth in those brands over time, what type of investment do you make in the outer years in terms of the goals, when those brands will hit a margin similar to the core business? We've seen a lot of these brands get a lot of trial in year one, so naturally, they're down sometimes 40, 50% in year two, and how do you think about investment in those outer years?

Bill, Jeff. Let me take it relative to the U.S. experience. Two things. One, obviously in the launch year, because you're trying to drive trial you're going to have incremental investment, you know. Vanilla Coke is a good example of that. We spent aggressively to launch the brand. After 40 weeks now, we have the strongest trial we've ever seen and repurchase is holding up well. We were able to slip Diet Vanilla Coke efficiently because we didn't put the media behind it and it's generating the strongest repeat on record. You put those two things together and it's very efficient and as we cycle through year one the margins come in line with core CSDs. I think the answer is for CSDs, we're seeing a very efficient kind of launch and then recapture rate as long as they stick. Obviously, as you cycle through them, you're not going to recapture all that trial. So I think from a CSD standpoint and we would expect the same with Sprite remix in the second year, we start getting to levels of profitability we're seeing on the core brands. And in terms of the level of investment, it's going to be specific relative to the individual brand and how it's doing and what we see as the requirement on driving continued trial or holding up repurchase.

Bill, this is Steve. I think what Jeff said is dead-on. If you look at the U.S. strategy it's about launching brands, we hope not products. So it's less about that which moves in and out and more about getting traction and seeing some consistent performance over the longer term.

Great, thank you.

Your next question comes from Mark Greenburg with Deutsche Banc.

Good morning. My question relates to the spread between concentrate shipments at seven and volumes of four. I'm wondering if we effectively normalized Germany for the transition to returnables. Firstly, what would this type of gap look like, in other words, how much of an inventory build effectively happened because of that transition?

Mark, Gary. First, on the gallons versus cases of four and seven, that's really a function of the prior year. If you go back and look at first quarter of last year, you'll see the gallons were trailing pretty far behind cases. In absolute numbers, gallons and cases are right in line for the quarter. So it's really just what you're cycling in timing pretty much. Some of it was also around Argentina, because if you remember the crisis in Argentina was first quarter of last year, but really, very little impact, I think, around gallons and cases in Germany.

Great. And then secondarily, I guess a lot of us look at a top line growth of 10% year on year and a gross margin decline of almost 2%, and I was wondering, I know you talked about this a little bit in the preamble and some of the timing factors, but the contributing factors there, specifically Japan as it relates to that gross margin and EBIT margin, and then the incremental new product contribution from water in Mexico here is pretty significant. How should we think about in long-term the margin, you know, moving one way or another both with regards to water in Mexico and Japan?

Most of the margin change was in fact, due to structural change primarily around the known waters in Mexico, et cetera. If you take the structural change out, you would find that margins are pretty much level with last year, maybe slightly down, and that slightly down is because our country mix, Germany Japan, but margins are holding in there.

Okay, great. Thank you.

We've got one more on Mexico.

On Mexico, you mentioned the water in Mexico. We have the conversion of RISCO to RANSIEL included in those numbers that you've seen and that's the big numbers in terms of water but very importantly, you may recall that the strategy in the RISCO transaction was to have a nationally available, nationally advertised brand something that will compete effectively in the grow in water category and we're doing that. 75% of the RISCO water volume has been already converted this year. The CL numbers that we're seeing now are above the trend of what RISCO used to have, and importantly, 52% of the growth in sales is on personal-sized categories or packages, which are, you know, as profitable as soft drinks.

Thank you.

The other motivation -- this is Steve -- as you guys will recall when we did this deal was to make sure that we were totally aligned with our bottlers, and taking this brand and allowing us to do that has given us, I think, a system effect, and a system benefit of common focus at a common interest that is also accelerated the success of the brand in the market.

Thanks, Steve.

Sure.

Your next question comes from Jeff Kanter of Prudential Securities.

Good morning, gentlemen. Gary, with respect to cash flows I was surprised to see working capital be such a big drain on year over year cash flows and I was also surprised to see depreciation and amortization essentially flat with year ago levels, although as a percentage of sales it's declined. Can you explain those two changes and why cash flows declined so much year over year?

Yes, Jeff.

Thank you.

First, on working capital, in the first quarter of last year, we received a refund for taxes related to a tax issue that we had had in Japan. We received $279 million, which actually saw a decrease in working capital use last year. So if you normalize that, I think you'll find that working capital is right on. We're okay in the working capital area. Relative to depreciation and amortization, I would just say it's very consistent trends that as you know, we've been working very hard over the last several years to control our CAPEX expenditures, our goal had been to keep CAPEX at $1 billion or less. We've been able to do that for a couple of years so you're seeing leveling out of depreciation and amortization.

A quick follow-up question. Steve, as we go through the year, is 5% to 6% still the goal as we go into the second and third quarter year over year volume growth? Because you've been coming up light. Is that still the goal?

Well, we never said volume targets or profit targets on a per-year basis. We have a long-term operating model. The long-term operating model we have confidence in.

Thank you very much.

Your next question comes from Christine Farkus of Merrill Lynch.

Just a quick question on volume growth. If we can break that down to organic versus acquired, specifically in North America and Latin America in the quarter.

Yes, let me take North America. With overall 3% growth organic underneath that was down slightly and that was really a function of our bottle and can. Bottle and can was up very good performance there. Our warehouse business primarily 100% juice business was down, and then fountain, as we've said with the food service business was down, so slightly down on organic growth, but solid growth in our bottle and can business.

Okay, and is there a way perhaps to comment on the profitability of your water ventures, specifically with the Dannon. Has that changed at all given the change in the market environment?

We're right on our conformant on the Dannon Business. We set that plan with Dannon as we came into the year. Evian has been a little soft but the Dannon side of the business has been very strong and the strategy of maintaining three tiers of Dannon Dasani and Evian is holding up, as well as especially Dasani, which continues to carry a 25% premium to its major competitor as contained to grow at 40%. We feel comfortable about the three-tier water strategy working.

In Latin America, the full effect of acquired volume is in Mexico, as you know, Mexico grew 14%. Nine to ten points of that 14% comes from the RISCO transaction and the strategy is working. The conversion from RISCO to CLS advances were 75% there and CLS has performed extremely well. It's now the leader in personal sizes in Mexico.

Terrific, thanks a lot.

Your next question comes from John Faucher of JP Morgan.

Yes, good morning, everyone. Quick question on sort of the regional data, and I guess the question is, I'm not sure, was the inclusion of the regional data last quarter sort of a one-shot deal, is that an end of the year thing, or -- I've been under the impression we're going to get that every quarter. If you could follow up in terms of giving us highlights from the regions from an operating profit standpoint in terms of where you felt your strength was from an operating standpoint on a regional basis, since that data wasn't included in the press release.

Hi John. Gary. Relative to the segment data, we did include it at year-end. We did not include it at this release, only because of timing, the way the calendar fell. We were just not able to get that done, and get it into the release, because we were about a week earlier than we normally would be. We are planning to accelerate our 10-Q filing so that we can get the segment data to you as quickly as possible. Relative to operating performance by segment, what you will see basically is what we talked about today. It will be a little -- the impact of food service, Germany, Japan and Venezuela, and that's basically the impacts you'll see.

Okay, and Gary, if I can do one sort of quick further question, which is, in the annual report, it talks a little bit about, it says the reasonably possible that the company may be required to consolidate some bottlers based on FASB interpretations in number 46. Given FASB, can you give us color on that?

Yes, the FAS-B issued some new rules called variable interest accounting. I think we and many companies are still trying to understand them and exactly how you apply them, but basically, we think there's a reasonable possibility or it's probable we may have to consolidate a couple of bottlers in the Middle East, where we own less than a majority, but under these new rules we might have to consolidate them. They will be very small. It will be an immaterial impact. At the same time, as an offset to that, I will tell you that we've completed the transaction on COSMOS. We've taken control of the brands and San Miguel, our bottling partner in the Philippines has trean control of the bottling assets. During the second quarter we will be deconsolidating the Cosmos bottler. The net results will be a wash to a slight decrease in assets that are consolidated I think.

Any meaningful profit impact from that?

No, don't expect any real impact at all.

Thanks.

Thanks, John.

Your next question Carlos Laboy of Bear Stearns.

Good morning. I was hoping, if you could walk us through on how you think Brazil is evolving. It sounds like you've got an option to takeover some of the Coke's Brazilian operations and what are some of the conditions that might prompt you to perhaps take over those operations, and on a related matter, there's a lot of talk of tax reform in Brazil. Are the type of reforms on the table the type of reforms that are likely to make a major improvement to your Brazilian business?

Hi, it's Jose Octavio Reyes. No, we are not contemplating any in terms of transactions in Brazil. We do not have that as part of our horizon. The ideas of types reforms in Brazil, hopefully would lead to a more stable and a level playing field with all of the players involved, and in that sense, I think it would be beneficial. Now, having said that, you and I know that those discussions about tax reforms in Brazil has been there forever. I wouldn't hold my prayers on the outcome of that discussion.

Anything you can give us in terms of color and consolidation in Brazil?

Well, we do have a policy, a stated policy of free association, and that is our policy, and it has worked well as the ApanAmcoFEMSA deal has shown, and we believe that will continue to work well in the future.

Carlos, this is Steve. A part of your question that you didn't specifically ask you but it's probably worth noting and he wouldn't mention it because he's too modest. Pacho and Glen and Brian Smith, over the last couple of months have been working very hard to streamline and simplify how we work with bottlers and how we create infrastructure in Brazil and we're very enthusiastic that we've made a lot of progress in Brazil. We are working diligently to get prices up, and that seems to be moving in the right direction. We're also working to get the bottler system properly aligned in Brazil so that we can focus on the kinds of products that will generate the greatest profit for the system. The system's coming together very nicely. There's much more collaboration between the bottlers in the market, and a very high level of trust, and so whether there's literal consolidation or not, what we think we're seeing is substantially more collaboration which is resulting in our ability to better execute in the market, and we're optimistic.

Thank you.

We're going to take one more question this morning. We've got our shareholders meeting this morning and I think these guys are going to have to get to our shareholders meeting in a minute. We've got time for one more question this morning.

Your final question comes from Bryan Spillane of Banc of America Securities.

Hi, good morning. I just wanted to ask a question about the streamlining initiative. First was there any benefit in the first quarter, you know, in terms of cost savings and in the second, just in terms of kind of where you stand, what you've done so far, there's been some concern there'd be some disruption going into the summer selling season, and if you can just talk about what you've done so far and how you feel about that as you move into the summer.

This is Jeff. On the North American streamlining efforts, we're right on schedule. We executed against the restructuring effort at the end of March on the 27th. Most people found out their destiny. Obviously the layoffs happened. There was no benefits in the first quarter. The benefits will start accruing and we've got meetings planned with all of our associates as we go through the next couple of weeks to get them refocused. We feel very comfortable there's going to be little disruption as a result of this because of how it was planned, and implemented, and there were certainly none in the first quarter and I would not expect any in the remainder of the year.

Does it impact any people directly facing with customers?

Yes. It impacted. What we tried to do in terms of the customer basing organizations is limit that. In fact, the account executive kind of people we limited it as much as possible. A lot of this was back shop, and when we have the two new organizations up with a retail and a food service organization, the feedback from most customers and we've talked to the top hundred customers in the U.S. in the last 30 days, they are excited about this customer basing organization, because the retail and food service organization also represent all the different brands and packages. So I think that the response has been very positive, and again, I wouldn't think that we're going to have a lot of disruption going into the summer selling season.

That's great. Thank you.

Well, thank you, everybody. We appreciate your participation. If have you any additional questions, Larry will be around. We have an annual meeting of shareholders now, and over the next couple of days, should anybody want to talk to Larry, Gary, or me or any of the operators, we'll figure occupant how to make that happen.

Thank you.

Thank you.

This concludes today's Coca-Cola conference call. You may disconnect at this time.--- 0