可口可樂 (KO) 2003 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.(operator instructions) 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.

Good morning, everybody.

Appreciate you joining us this morning.

I'm pleased to be joined this morning by Steve Heyer, our President and Chief Operating Officer and Gary Fayard, our Chief Financial Officer.

In addition, our Senior Operating Officer, Sandy Allan, Alex Cummings, Jeff Dunn and Mary Minnick, our President would be available for the Q & A session.

Unfortunately, (inaudible) is not able to join us this morning.

Our prepared comments will provide a brief overview on the high level aspects that are going on in the quarter.

We intend to leave plenty of room for your Q & A, (inaudible) Q & A, which we will be able to dig into more topics in greater detail.

During the Q & A, please be considerate about others and limit yourself to one question during your turn.

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

In addition, I will also like to call to your attention the fact that we have posted a schedule on our Web site at "http://www.cocacolacompany.com" www.cocacolacompany.com "http://www.cocacola.com" www.cocacola.com in the investor section which will reconcile our results reported under GAAP to certain non-GAAP measures which may be referred to by our senior executives in our discussions this morning and from time to time when we're discussing our financial performance.

So, please take a look at our web site.

Now let me turn things over to Steve.

Thanks a lot, Larry.

And thanks to all of you for joining us this morning.

I'm only going to talk for about 15 minutes.

I think, to set the stage, and that will leave maximum time to take the questions.

But in the past, you've heard me use the words please, but not satisfied, to characterize our results.

That continues to be my perspective as I look at our third quarter results.

We're pleased but, we are not satisfied.

I'm pleased with the earnings, we have reported and I'm pleased with our performance in many of our markets, however we still have opportunities for improvement and those opportunities we want to discuss with you today.

Overall, our growth continues to outpace the industry, in key beverage categories in many markets around the world.

We're very focused on driving profitable volume growth through excellent marketing and brand building activities and we're concentrating on strengthening our relationships with consumers and customers while also improving the efficiency of the system and taking costs out of the business.

That's really fundamental to what we think our opportunity is going forward to improve our overall results.

We continued to focus on accelerating the growth of our carbonated soft drinks led by coke.

In the quarter, trademark Coca-Cola was up 3% internationally which was driven by China, up 21%, Argentina, up 15%, Great Britain up 9%, France up 8%, Spain up 6%.

This along with solid contributions from our other brands resulted in worldwide volume increases of 4% in both the quarter and year to date.

So, our reported earnings per share for the quarter were 50 cents which included a 1 cent reduction related to streamlining and a 4 cents 9 (inaudible) for latest to the right down of assets in Latin America by Spencer, as a result of their merger with Pan Amco (ph).

For the purpose of comparing the last year, if these items are excluded, our earnings would be 55 cents versus an adjusted 45 cents for the prior year, which is an increase in EPS of 22%.

Increase in earnings by 22%, an accomplishment that we are satisfied with.

As we get our economics reset, and our infrastructure resized, we're expecting to see recurring operating leverage that we're all committed to.

So, looking at the third quarter, our financial performance reflects 4% growth in both unit case volume and gallon shipments, solid, very solid growth in revenues, strong on drawing equity income growth and a favorable variance in our tax expense.

Gary is going to talk about these items in a moment, but before he does, I'd like to make a couple of comments about our operating income growth and the contributions from below the line items.

Our underlying operating income in the third quarter and year to date are at record levels.

But we need to get them even greater growth in operating income for us to be satisfied.

We have had several unusual items that have affected our operating income in the quarter, and this year, and I'm confident that we are on track to deliver consistent, solid operating income growth.

Now, with regard to growth and equity income in savings and tax expenses, these are both had real economic benefits for us and we're pleased with the trends in these areas.

Healthy equity income from our bottling partners is a direct consequence, a direct consequence of the actions that we've taken to grow system profits, working in partnership with our bottlers.

Lower tax payments are also a direct result of our business strategies.

We're going to continue to pursue tax-planning strategies which have a favorable impact on our earnings.

Now, overall, we've been able to manage the balance of our business by looking at a portfolio of countries and an expectation that when one zigs, another zags, and that on a total basis, it gives us the opportunity to consistently deliver solid results.

Our top 15 markets really have been driving our performance in both volume terms, and operating income terms.

We aren't overly reliant, and this is important, on any one or two markets.

We're managing and balancing our portfolio.

On the profit side, we've send turn-arounds in markets such as Germany and Brazil as we promised last year.

But in a few of the other markets, we still face some challenges.

What I'd like to do this morning is talk about several specific operations.

Some of these are performing very well, and some have had a more difficult year than we anticipated back in January.

First, let's talk about Japan, one of our challenges this year.

Monthly volume trends in Japan fluctuated significantly during the quarter, with July and August down approximately 11%, due to unusually cool and wet weather in July and August, and continued weakness in consumer confidence in Japan.

Those together contributed to a very tough economic climate.

In September, much to our pleasure, our sales have rebounded with growth of 4% while cycling 7% growth from the prior year.

And key categories grew in excess of 5%.

We also re-launched Georgia Coffee in September, with the new campaign and extensive line of new products and multiple consumer promotions and since the start of that re-launch, average weekly count sales have increased sharply and our share of sales in the coffee category has increased by three points.

Looking forward, I know some of you have some fear about the future of Japan's economics.

Let me be very clear.

Japan is not imploding, and we are implementing a long-term plan that will assure profitable growth for our system in Japan.

The plan is very straightforward and it has four legs.

First, to enhance consumer excitement in the critical vending channel with new man machines, new technologies, new products, new creative and better service.

Second, to improve profitability in supermarkets by leveraging our worldwide expertise to increase our share of value through packaging and merchandising innovation.

Third, to accelerate the rollout of innovative high margin new products such as premium functional beverages, and fourth, to make our entire bottling system more efficient in Japan.

Now, related to this last point, as of October 1, we began the first phase of the integrated supply chain management company to centralize procurement, production and logistics operations for the entire Coca-Cola system in Japan.

By 2007, this will deliver over $250 million in annual savings to the system in Japan.

As we captured these gains in productivity, we will invest in top line programs to drive growth.

Moving to an area that's performed exceptionally well in this quarter, Europe, the European SBU grew unit basis 9% in the third quarter continuing to improve trend.

Thanks to strong growth in France, Spain, Great Britain and Italy, as well as I'm delighted to report solid growth in Germany.

Europe has done well.

The German results are a function of a huge amount of work to reset the business that is now paying dividends.

The group's strong performance was led by 7% growth in carbonated beverages led by trademark Coca-Cola growth of 5% and trademark sprite growth of 8%.

Non-carbonated beverages grew by 45%, fueled by strong growth in power aide, juice drinks and energy drinks.

Our brand, packed and channel strategies are focused on profitable, immediate consumption and that's really benefited with the favorable weather in July and August.

For example, in France, we saw 28% growth in the profitable 500 MLPET package and 9% growth in overall immediate consumption packages.

In Spain, another interesting example, we had growth of 19% in 500 MLPET and 10% growth in overall immediate consumption packages.

Looking ahead for Europe, we may not have the same temperature levels, but we will have the same solid execution, and the same accurate, and committed team and strategy to drive away from home occasions while effectively managing our costs.

We see tremendous opportunities to expand our business in Europe and Sandy and the team are doing a great job in capturing them.

But, I'd be remiss if I didn't big a little deeper into our position in Germany where I said we've returned this business to positive territory in the third quarter.

This quarter volume increased 4% compared to flat performance in Q2 and a sharp decline in Q1, which was the result of the mandatory deposit law change.

Growth was driven by trademark coke increasing 2% and 15% growth in sprite.

Non-carbs grew 86% since most of the products were not subject to deposit.

Although the environment is been difficult, we feel good about where we are now, focusing on returnable, refillable packages, which have increased their share of package mix to merely 95%.

We are working very closely with our customers and regulators in Germany, and we're very pleased with our system's ability to offer flexible alternatives while not losing sight of our primary goal which is to build and to continue to build strong equity in our brands with consumers.

We feel good about the fourth quarter as well.

Now, let me switch gears again, This time to India, which has had unexpected and I might add inaccurate challenges in the third quarter.

Unit case volume declined this quarter following several consecutive quarters of strong double digit growth.

Beginning in August, the entire beverage industry in India was rocked by false accusations that soft drinks in India contained high levels of pesticides.

Following the accusations, we moved very quickly providing facts to the Indian government with the consumers to reassure them that our products were in fact safe.

We worked closely with our primary competitor, Indian politicians and our customers to ensure that the facts are clear and communicated very much widely throughout India.

Looking forward, even though our unit case volume trends have stabilized over the past couple of weeks.

We continue to monitor this situation very carefully.

While sales of our 200 ML returnable glass bottles are solid, reinforcing the merits of our affordability strategy, our sales of larger packages remain weak due to confusion and concern among moms.

We have done a lot of market research and we know we still have an issue to ensure that people have a sense of confidence and trust in the category and we've developed multimedia consumer campaigns to address these concerns by reinforcing the safety and benefits of our products.

Now I'll talk about China, which has rebounded quickly from a crisis.

In China, we had strong volume growth, 24% during the third quarter, cycling 13% growth from the prior year.

Our business experience does a very swift post-SARS recovery because of vigorous execution because of vigorous sales and marketing programs across the entire portfolio.

Coca-Cola and sprite were both up 22%, and above average 18% growth continued for Fanta.

China's affordability strategy is working, and has driven returnable bottle growth to approximately 30% in the towns and rural areas where it's been launched.

So, we're very optimistic in comfortable planning on continued strong performance in China.

And now, North America.

In the quarter, the group delivered 1% volume growth while cycling 9% volume growth from prior year, as a result of this successful launch of vanilla coke.

A CCE suggested yesterday, our system remains focused on maximizing value for the entire category with a balanced price and volume approach, and we're enthusiastic about this approach to the business, with our bottling partners recognizing consistent increases in retail price, which we believe is critical to system health.

Our retail customers are also benefiting as we have had significant role to play in driving retail dollar increases in the carbonated soft drink category this year.

Alignment is key to our success together.

We're working very closely as we develop the best approach for creating value in North America today, and going forward.

In the quarter, our retail division grew 1%, cycling 13% growth in the prior year.

In 2003, we've been able to lead growth in the beverage category by focusing on the health of all of our brands, especially the big ones.

Our core CSD brands continue to advance with Coca-Cola Classic showing an improving trend with Diet Coke Trademark growing 8% in the quarter.

Vanilla Coke and Diet Vanilla Coke continue to hold their share position, as increased activity has led to expansion of the Vanilla flavor category.

In addition, the Sprite Trademark has been reinvigorated by the successful rollout of Sprite Remix, leading to 7% growth in share increase revenues in CSD category.

Non-carb growth in the quarter was led by the acceleration of both the Sun and PowerAde, increasing by 16% and 21% respectively.

We are very pleased with the share gains we see in the both water and sports drinks.

In the water category, we are fine-tuning our three-tier water strategy, which has been well received by our customers.

We're working to create a clear distinction in our packaging channel strategy across these tiers and we're seeing it pay off.

These strong results were offset by continued softness in our warehouse delivered juice brands due to overall category weakness.

Despite the strong performance of Simply Orange which is reaching consumers in over 90% of the country, we were not able to overcome industry declines across the chilled and shelf stable categories.

In the food service and hospitality advice, you know it is fountain.

We continue to see improvement quarter to quarter with Q3 growth of 1%, thanks to accelerating trends during the quarter in the restaurant business.

We're looking forward here, and we're confident that we can improve system profits through volume growth, bolstering an already strong marketing calendar for the core brands, innovation, package mix and price realization will be the key.

We also continue to streamline our operations to ensure that we have the most efficient organization.

Before I wrap up, let me touch on Mexico.

This is a market that we have great brand equity and a superior business model that has continued to deliver strong results.

While Mexico has the highest per capita consumption of Colas in the world, trademark Coke continues to grow.

That reflects strong marketing, overall channel pricing strategy and the continued expansion of affordable packages.

In fact, despite the competitive activity in this market, we have been successful in holding and strengthening our Cola share position.

Carbonated beverages in Mexico were up 4%, our flavored carbonated soft drink brands grew by double digits as a result of flavor extensions and package initiatives.

In the fast growing water category, we're benefiting from our national marketing programs behind CL, which reported 52% growth in single serve water packages.

We will continue to focus our efforts on building connections with consumers through our brands in the ways that builds profits for our customers and our bottling partners.

We have got a success formula in Mexico and we're continuing to work it.

So, in summary the results in the third quarter are the result of the markets that had some very real strong performances and a few that had some very significant challenges that we don't expect to occur.

Europe and Latin America were standout strengths.

We had few challenges in Asia.

We are clear, we're pleased with our system value creation strategy in North America while cycling tough comparisons and importantly, in many sizable markets, we have been strong, and performance in those markets remains strong, such as Mexico, China, Great Britain, Spain, France and South Africa.

Overall, we're managing all aspects of our business to deliver profitable growth and strong earnings per share growth.

I'm confident that these strategies and capabilities will continue outpacing the industry, and deliver the results, we all want.

Now, let me turn things over to Gary.

Thanks, Steve.

I'd like to take a few minutes and continue with the discussion of our financial performance in the quarter.

As Steve mentioned, our results were driven by solid growth in unit cases, gallon shipments and revenue.

In addition, underlying equity income growth, and a lower tax rate resulted in very strong earnings per share growth.

In addition to strong earnings, our cash from operations continues to significantly improve.

During the first nine months of this year, we generated over $4.1 billion in cash from operations, an increase of 21% when compared to the same period last year.

We are very pleased with these trends, and expect strong cash flows to continue well into the future.

Ever use for some of this cash, we repurchased $915 million of our stock during the first nine months of the year and still intend to spend approximately $1.5 billion during the current year.

Because our cash remains so strong, I would anticipate accelerating our share repurchase levels even further next year.

Also, as Steve mentioned, we have a keen focus on growing operating income.

I'd like to spend a moment this morning discussing several items that impacted our operating income growth.

On a reported basis operating income was similar to that of the prior year third quarter.

This amount included the negative impact of costs associated with our streamlining initiatives that are recorded in other operating charges.

If you were to exclude this, comparable operating income growth was 4%.

This amount was held down by approximately one point due to increased stock option expense, and by approximately two points as a result of increased costs associated with a recently resolved legal issue and key customer matter.

In addition, selling, general and administrative expenses were higher in the quarter versus the nine month trend due to the timing of marketing expenses.

On a year to date basis, reported operating income declined by 1%.

After considering the streamlining initiatives and increased stock option expenses as well as a litigation gain we had in the first quarter, comparable operating income grew 6% during the first nine months of the year.

This amount is below the level of growth that we expect to deliver on a long term, sustainable basis.

Unfortunately, this year had a number of fairly unique items that have had some impact on our results, but as Steve pointed out, we are focused on accelerating our growth in this area, and we are confident that we have the strategies and plans in place, to deliver consistent, strong operating profit growth.

Now, let me expand on a couple of the items that impacted our reported results in the quarter.

First, during the quarter, we took a four cent per share non-cash charge related to a write-down of certain assets in Latin America by one of our equity investees.

The background behind this charge relates to the merger of Coca-Cola FEMSA and Panamco earlier this year.

In connection with the merger, Coca-Cola FEMSA is doing an outstanding job and they have taken strong steps to improve the overall operations, including streamlining and integrating the operations.

This has led to the closing of several distribution centers and manufacturing plants.

This along with the challenging economic conditions and uncertain political situations in Venezuela, led to a determination that certain intangible assets were impaired and needed to be written down to their fair market value.

As a result, we reflected a non-cash charge of $107 million in the quarter, primarily impacting the equity income line.

Excluding this item, underlying equity income trends continue to demonstrate overall improving health of the Coca-Cola bottling system around the world.

Also during the quarter, we had a 1cent per share charge resulting from the streamlining initiatives that we initiated earlier this year on a full year basis, we are anticipating that the streamlining initiatives will result in a charge of approximately $500 million on a pre-tax basis.

This amount is slightly higher than the amount we previously communicated as we continue to take steps to improve our overall efficiency and effectiveness.

As the charge is higher, we also expect to have increased savings next year associated with these initiatives.

Now, let me turn to taxes.

Our third quarter results benefited from an effective tax-rate that was lower than what we had previously anticipated.

During the July conference call, I commented that I thought that the underlying effective tax-rate for the third and fourth quarter would be approximately 22.8%, thus making our full year rate less than 24%.

Because of country mix and continued strong profit contributions from lower tax locations, where currencies are also having a favorable impact, we now anticipate that the underlying effective tax rate for the full year 2003 will be even lower than we had previously expected, and now expect the rate to be approximately 22% for the full year.

With that said, we're required to record income tax expense for the first nine months based on the estimated effective tax rate for the full year, therefore to achieve this result, our rate in the third quarter had to be even lower, and the underlying effective tax rate in the quarter was less than 18%.

This decline in the tax rate as compared to the rate that I communicated to you in the second quarter resulted in an earnings benefit of approximately 3 cents per share in the third quarter.

Now, let's look at the expected rate for the fourth quarter and next year.

The underlying effective rate for the fourth quarter, will be approximately 22%.

This is only slightly lower than what I told you in July, and the additional benefit in the fourth quarter will be pretty minimal.

I computed, as about half a penny on an earnings per share basis.

Looking into next year, and the foreseeable future, based on current tax laws, the company's effective tax rate on operations is expected to be no more than 25.5%, which is consistent with what I communicated previously.

Now, let me move to currencies.

With the recent volatility in major currency, let me make a few comments about how those currencies impact our business.

Keep in mind that over 75% of our profits come from outside the United States, and therefore we are clearly impacted by currency trends.

In fact, as many of you know, currencies were a major drag on our results during the years from 1996 through 2002.

Fortunately, those trends have started to change and it looks like we're now starting to get a bit of a benefit.

So far this year, currencies have benefited our operating results by approximately 2%.

This has been driven by the strength of the Euro, partially offset by less attractive year over year hedge rates on the Japanese yen and weakness in Latin American currencies.

Looking at next year, if trends continue as we have seen them in recent weeks with regard to the Japanese yen and the Euro, this would benefit our earnings next year.

Before we move to your questions, I want to cover one more topic to ensure that everyone understands the accounting treatment for the Japan supply chain management company.

As Steve mentioned, the purpose of the initiative in Japan is just centralize procurement, production and logistics operations for the entire Coca-Cola system in Japan, and to generate cost savings that can be re invested in the business.

The creation of the entity is not about shifting any profit from the Coca-Cola company to our bottling partners.

However, the structure of the entity does shift a portion of our business from a finished product business model to a concentrate business model.

Therefore, beginning October 1 of this year, net operating revenues and cost of goods sold are both expected to decrease by approximately $1 billion on an annualized basis.

Both line items will go down by the same amount, and this will not impact our underlying operating income.

Just by doing the math, you will see that our margins will improve, but it will have no impact on our, on our absolute gross profit or operating profit levels.

Over time, this new entity will improve the overall profitability of our entire system in Japan.

To wrap up, our industry continues to show strong growth characteristics.

We continue to outpace the industry in key beverage categories in many markets around the world.

We are very focused on driving profitable volume growth through excellent marketing and brand building activities.

The health of our bottling partners continues to improve.

We are improving the efficiency of our entire system, and driving costs out of our company and we're extremely focused on strengthening our relationships with consumers and customers.

Our overall financial fundamentals remain very good, earnings are strong, currencies are moving in the right direction, we're generating record cash flows, our net debt to net capital levels are very low and returns are continuing to improve.

Overall, I like what we're doing and we are well positioned to continue to deliver strong earnings growth and create value for our share holders.

Now, let's move to your questions.

(operator instructions).

Your first question comes from Andrew Conway with CSFB.

Good morning.

Hello, Steve and Gary.

Steve, I just wanted to start off about more of a macro question to gauge your strategic thinking, in terms of what in your mind do you think needs to happen to meet or exceed your annual operating profit expectations?

Given inclusive of currency, 6% revenue growth, similar rate of underlying our operating income growth granted you handled the adversity of the margin pressure in Japan are very well, but as you look at organizational capability, bottling system, as you talked about, economic reset what do you, what needs to change, how do you see that changing both from kind of a revenue price volume mix and also managing your DME to achieve desired results?

How should we look at how you think about that scorecard?

I'm glad you called that a macro question, Andrew, because, basically what you are asking is what are we going to do from now on, forever and I think that it's actually an easy question to answer.

We have to drive our gross profit.

We have to insure that we're getting both volume and price, and we have to do it in as cost efficient way as possible.

We're going to drive gross profits through revenue management around the world.

That's a theme that we find over and over again, as I move from market to market.

The most critical thing for the system to do is figure out how to manage mix and at the same time manage rate, such that we get a balanced delivery of volume and profit.

A key to doing that is package diversity and channel management.

And I think, you can expect to see most of our markets around the world moving very aggressively, continuing to move aggressively, because we've made a lot of progress to give us the tools in the tool kit that allow us to do more than take price up in a blunt instrument way but rather surgically manage price volume by channel by brand, by package, so that we can maximize the system profitability and if we do that, our split of it will more than take care of the Coca-Cola Company.

At the same time, we are aggressively working to make our DME more productive.

We've created a hub structure of where the company which allows us to make advertising in key markets for the world rather than making advertising all over the world.

That will allow us to shift dollars either to the bottom line, or to the media costs that you see as against media costs that roll up into DME that are more the result of production expense, and infra structure costs.

And if you take all that together, it creates the demand in the right way for us to deliver against our goals.

The only other piece of the puzzle is supply chain effectiveness and we continue to work with the bottlers around the world to take costs out of the system.

You know we have a top to top meeting a couple of times a year where the big six bottlers which represent call it 65%, 70% of the system sit with us for a couple of days, and we have initiatives that are pretty far down the road on procurement, on supply chain issues as relates to sharing of capability, and that is starting to pay a dividend.

We're also sharing expertise and software, where we can to take our costs out of I.T.

You put all that together, and you continue to look at the discreet work we're doing on the supply chain in virtually every market around the world, and that's how we get there.

Last piece of the puzzle, we are continuing to be as aggressive as we can in taking all non-mission critical expenses out of our business.

We only want to invest in what generates growth.

So, as you broaden your portfolio, you're confident that your granularly in understanding that the DME to marketing expense against the broad portfolio and the consumer response rate, your volume versus price and mix allows you to greater flexibility in managing your largest discretionary costs.

I wish I said that.

That's exactly right.

Thank you.

Thank you.

Your next question comes from Bill Pecoriello(ph) of Morgan Stanley.

Good morning, everyone.

On the topic of innovation, can you talk about how you are thinking about incremental innovation versus breakthrough, whether it be package or new product and as part of that, playing the health and wellness trend around the world and what's different about the process of building the pipeline and improving the success rate versus the past?

Would you like me to take that question on a macro basis, bill, or would you like to hear different points of view from around the world?

First on the macro basis, just in terms of the overall processes (ph) that are changing at the gross level and then some of the specifics around the world.

Well.

As I hope all of you know, we have a gentleman here now named Danny Strickland who runs innovation, the chief innovation officer.

He joined us may be six months ago from General Mills and he is really helping us get much more rigorous around how we run, how we run an innovation pipeline.

I went back and looked at the history of where we were spending our money in our innovation centers, and a lot of what we were doing was worthwhile, but it was largely incremental.

There's always a role for incremental, but there needs to be much more focus on breakthrough in my opinion.

What we're doing is we are allowing the innovation centers to continue to do what they do best, which is to tailor the breakthrough work.

But the breakthrough work needs to happen not at the center, but across the world in a consolidated way.

So, that we get the most leverage out of our innovation spending.

Danny is running the pipeline for us.

He's identified against major initiatives whether they're in packaging or equipment or in new formulations.

What we think is going to drive profitable growth that's meaningful and then he's building teams from all of the innovation centers from around the world so we don't duplicate any expense, and focusing them against a timeline.

It would be our expectation and our hope that a couple of points of growth every year, once we have this up and running will come from innovation broadly defined, and then couple that with the organic growth that we expect to see in our core brands, we kind of like what our future looks like.

Danny has been working on a variety of products around adult refreshment, around health and wellness and the innovation recently with heart health, Minute Maid is an example of that.

We're looking at a whole litany of other products that we think speak to opportunity in that space.

Whether it's new formulations that are somewhat fortified or in the case of Japan and all of that, I'll let Mary speak to it, something that gets closer than neutrociticals(ph).

But as we looked at the winnowing down process, we put more discipline into the process so that we are satisfying ourselves, that there's big case lift and big profit lift associated with a handful of big bets and we're managing the calendar for their implementation.

Thank you.

Your next question comes from Marc Cohen with Goldman Sachs and Company.

Good morning.

This kind of builds on Andrew's question, but obviously out in the investment community, there's a concern that as you continue to grow carbonates in the low single digits and a non-carbonates in the high single digit, there's a secular pressure or challenge that you face as the margin mix changes towards the non-carbs.

And, Steve, I think you touched on this with brand package and channel.

I wonder if you could bring better perspective to how --just how and maybe you have to go regionally, how you can bring up the margin structure of these non-carbs, you know, both through scale and both through that mixed management and may be you can just give us, your better insight about that by example.

Yes.

The best way to do that, I think is to kind of wander around the world, because we're not unhappy with our margins in Japan.

In non-carbs.

Matter fact, we're delighted.

We're not unhappy with our margins against a lot of our products in North America.

As a matter of fact, we're pleased, and I think in Europe, you'll hear a similar story, but let's start with Sandy, because I think he's made the most progress here and then we'll, we can do our once around the world.

Good morning.

Good morning.

Let me go back to 2001, 95% of our business in Europe was carbonated soft drinks.

This year, 2003, it will be about 88%.

So, in Europe over the past two, two-and-a-half years, we have had a focus on becoming or moving towards becoming a total beverage business.

Now, like any very dramatic move of that nature, there is an investment cost in doing that.

But what we have seen now, if I compare 2003 to 2001, is that 80%, 85% of all of the initiatives that we have taken in the last two years, are the gross profit level earn at, earn margins at least as good as CSD's.

The issue then becomes at grand contribution level where we have had to invest in the market.

Now, our view is that establishing a new beverage can take up to three years before that new beverage will yield the same profit results as carbonated soft drinks.

And in Europe, I'm very pleased to say that that is exactly where we are and if you look at Europe's volume growth over the last three years, about 5% growth, including the mix between CSD's and NCB's.

But on a profit basis, compound annual growth rate, operating income is 15%.

So, I'm very happy with where we are going in Europe.

Mark.

Hello, it's Mary.

In Japan and in elsewhere in Asia, ditto what Sandy says in terms of the gross profit level.

Most of our non-carbs are at or in many cases higher than carbonated soft drinks.

Again, because a lot of these non-carbs are sold in single serve packages through channels such as convenience stores or on premise.

So, the revenue realization to pricing on non-carbs is very favorable for non-carbs.

To Sandy's point, though, DME investment sometimes takes one or two years.

But, in a lot of cases, we are seeing, for example, Coo in China had a break-even in year one and delivered significant profit in year two.

Japan because alternatively, because we can get critical mass right away because of the vending system, most of our non-carb products are profitable the minute they go out the door itself.

I'd just like to emphasize that the revenue realization from non-carbs is very favorable.

I think the mythology of non-carbs is being left profitable probably comes from the heyday of water when it was a larger part of the non-carb growth, but as we expand into juices and cools of the world and PowerAde's and sports drinks.

Marc, Jeff, also relative to the U.S., I think one of the things we're doing is to start to address this, is to scale up brands.

Minute Maid is probably one of the best examples where we have got multiple platform across chilled and now the bottled brands and by creating more focus here, we get more leverage out of the DME.

We are spending, so instead of trying to do it across seven or eight brands, we are focussed now in the core CSD brands, DASANI, Minute Maid in the new segment and then powered.

And that is going to allow us to continue to get more leverage as we drive those brands.

Gary or Steve, there's obviously some sense, and I think you guys were just talking on a per unit basis, if I can make that clear, but there's some sense that, you know that, on a percent margin basis, there's still this negative mix shift.

Can you just bring this into perspective, as you manage brand and package and channel, I mean, can we -- do you expect this to add 100 or 200 or 300 basis points at the gross margin line?

You know, or at least enough to overcome the -- you know, the switch between the two categories?

Let me take that, Marc, and let me add to what's been said.

I think there's another item that we want to consider, because I think what Sandy and Mary and Jeff have been talking about is really about profitability, and it's about, if you will, pennies or dollars per case and not necessarily margin percentages.

And in fact, if you look at the non-carbonated beverage categories, and in many cases, your costs of goods is in fact higher, and the margin percentage is lower, but the absolute profit per case, dollars per case is actually higher.

For every case we sell, we make more money.

So, I guess what -- what we're talking about here is really not about the margin percentage, but in absolute dollars how much are you -- how much are you keeping and taking to the bottom line?

So, we think we will continue to make those investments because as we get scale, the margins will actually improve, even while -- even from kind of day one, the dollars profit per case is higher.

Yes, but you can put some numbers around that, Gary?

Is this something -- are you talking about a revenue mix upgrade?

Can you put some numbers around that, because there is a perception that as the mix shift this is a downward margin pressure.

I guess, Marc, without putting numbers around it, it's more about, I would say that as what Steve said, I think in his remarks earlier, this is one of the items that we are balancing within a portfolio of countries, channels, packaging and products.

So, it's really a matter of this is one aspect of many aspects of the business that we're balancing within the overall portfolio.

All right.

Thanks.

Your next question comes from Mike Rocca of Lehman Brothers.

Thank you.

Good morning.

If I may focus on North America, clearly, the balance price volume approach certainly is encouraging, and there's been increasing discussion of incidents based pricing.

But my question regards CMA's and specifically, Jeff, we all know that customer marketing agreements have been a way of doing business in the U.S. for a long time.

But, given the evolving category growth dynamics and changes in the retail landscape, I'm wondering how should we be thinking differently about CMA's going forward?

Yes, Mike.

It plays right into what is going on with revenue management.

You may have seen yesterday that CC in Terry Marks, the chief revenue officer is very encouraging.

Terry is a good executive and understands this.

It's a combination of that brand pack channel pricing and CMA's together that will drive this.

And, so, what I think you're going to see here and it's going to evolve over in the next couple of years is us being much more precise about how we array those brands and packages inside channels to get as Steve said, better realization on mix.

We will continue to look at rate, but balancing those two, and the CMA's are the customer structures we put in place to drive that.

So, in the past where those would have been more about just gross volume growth, which is still an important component, they will need to balance and insure that we get the merchandising activities that allow us to execute against those brand pack channel strategies.

Now, that's not going to be flipping a switch.

Its going to be an evolution.

We have got to test our way into it, with these new packages and these merchandising schemes with customers.

But what we're very encouraged by, the customers want to work with us, on that too, because they're looking to expand the value of the category.

So, as, we go through the next 12 months and Terry gets in place and continues to work with Dan mar and the CNG team, I think we can look at how we drive the total management approach in the U.S.

And, is it fair to say that as we look beyond this year and over the next couple of years that the CMA changes will play into your concentrate pricing architecture, and is it too early for us to kind of gauge how much of an impact CMA's will have in terms of concentrate pricing, or is that 12 months down the road?

Yes.

I think it's too early to gauge exactly that relationship because it's not just CMA's, it's how do we deal with the concentrate pricing issues in light of what we're doing in partnership with the bottler, how much value is created, in essence, how the pie it created, and then how we share that between us, the bottlers and the customers.

Then the key here and we revolve very focused on this , and we talk about where in New York is, we are focused on growing that pie faster.

If that happens, will be a much easier exercise for us to share that pie, against the value that's created for each one of the partners in the process.

Mike, I'll even take it a step further in terms of definitiveness.

Our goal, is to grow profit for us in North America for that system.

We will do whatever we need to do, whatever we need to do to optimize that profit for the system.

And, then any structure we need to adjust in order to support that commitment, we are willing to adjust, and it is, being under split is being driven by the opportunity, not the reverse.

OK.

Thank you very much.

Your next question comes from Caroline levy of UBS.

Good morning, everybody.

Good morning, Caroline.

I just wanted to touch base with Gary on share repurchase.

If you could explain what the restrictions are given how enormous your free cash flow is, and your bottlers appeared to be increasing their on financial health, although (inaudible) take on some incremental leverage.

Can you just talk about what it would take for the rating agencies to get much more aggressive, say to go to a $3 billion number in repurchases next year?

Yes, thanks, Caroline.

Basically, with the only constraint is with the rating agencies, and I meet with them several times a year.

To go through our plans and our actual results, etc.

We're focused on continuing to repurchase shares, but also focused on continuing to maintain the credit ratings of the Coca-Cola Company and the system because, the ratings of many of our bottlers are in fact contingent on the rating that we maintain with those rating agencies.

As, what you are starting to see, actually, is in fact as you're implying, a compound effect, because as we continue to increase cash flows, and cash from operations and our earnings and as the bottlers continue to improve their earnings and in fact pay down debt levels as well, it gives us much more financial flexibility.

The one-and-a-half billion is a number that I actually discussed with the rating agencies at the beginning of this year, as a share repurchase goal for this year, and I would still intend to hit that about the $1.5 billion as I said earlier.

As, we continue and finalize our business planning process for 2004, and we do that in conjunction with our bottlers around the world, then we'll be looking at our expectations around cash flows, debt levels, earnings at ourselves and our bottlers and then would make a determination as to what the appropriate levels of share repurchase for the company are next year.

I think it's too early for me to speculate other than to say that it will increase over the $1.5 billion that we have talked about this year.

Thanks.

If I may for Mary, just on Japan, does it require volume growth for you to grow profit in Japan?

I think, what is requires is revenue management as Steve talked to earlier.

Volume growth in key packages, yes, is important, to maintain that revenue management and I believe we've got the plans in place to manage that particularly in the supermarkets, supermarket channel and I think September was a good example of how when we aren't faced with the head winds of dreadful weather, we can make that happen.

Thanks, Mary.

Your next question comes from Christine Marcus(ph) of Merrill Lynch.

Thank you very much.

I just to get back to the non-carb business in North America.

Despite the higher marketing expense in the quarter, it's difficult to tell how that's allocated, but can you comment on the underlying on scale and margin trends in the non-carb business in North America, and then on the back of that, you indicated some effects of timing in the SG&A expenses or marketing expenses, what should be normalized growth here and can you comment on what returns or benefits you're seeing from your marketing campaigns?

Well, as you think about North America and non-carbs, break it into three pieces.

One would be the juice or especially the chilled juice business is under pressure.

The volume has not been good for the category.

We talk about that, and that's also given that soft volume and the very competitive nature of that business, put them under lying pressure on the margins in that business.

If you look the water business, you've got some pricing pressure.

In that business, it's starting to lighten up.

It was very aggressive in the summer and as we go about implementing the three tier strategy, it has been very clear about starting to move towards value in the category.

You have to think about our portfolio there with Evian, Dasani and them having a role in each place.

Dasani continues to hold about a 125% index to the category, and it's showing very good growth in the quarter.

Last would be isotonics and PowerAde, which had a very good quarter and a very good year.

Margins on power aid are actually doing well.

We're getting very good leverage out of the marketing investment there in share, especially in the key seen (inaudible), has been very, very strong for the year.

And, again, there, where we made an investment into the brand to reposition it, we're now seeing the benefits in growth and in pricing leverage.

OK.

Great, and SG&A growth?

Let me take that one, if I could, Christine.

To (inaudible) SG&A, I think some of their, because there was, there were some timing issues with marketing expenses in the quarter, I think it's better probably to explain it to look at on a year to date basis, what kind of leverage are we getting out of SG&A, and here's how I would think about it.

If you look at SG&A on a year to date basis on a reported basis, it's SG&A is up about 7%, and about 2 points of that increase is due to currency where currency is helping us on the revenue line, it actually works against us when you look at just the expense lines.

So, that two points in currency, and there's about one point of increase related to stock options just year on year because of the ramping up that we think will even out pretty much next year.

And then there's about 2 points of SG&A related to structural items such as Evian and Denon in Germany.

So, if you consider those items SG&A on a year to date basis is up about 2%.

So, we are getting some leverage there, in the overall P & L.

OK.

Quite in the question follow up, you indicated that the savings related to these streamline initiatives in '04 are expected to now be greater than previously indicated.

Can you comment on what you think the number is, and if you have already experienced some savings in the system in the third quarter.

Yes.

We anticipate that the overall streamlining cost that would be incurred in this year we have previously talked about, about $400 million, and we now think that it will be about $500 million for the year.

So, about $100 million increase in the year.

No benefit flowing through this year and there will be some, some benefit if you will, flowing through starting next year.

And has that expectation, it was I believe $100 million in savings for '04, has that now been increased in your plan?

Yes.

It would increase somewhat.

Do you quantify beyond that at all?

You know, if you took it proportionately, it would be about 125.

It might be 115.

It might be 135.

It's some --.

Some kind of number like that.

Thank you very much.

Thank you.

Operator, we have time for two more questions, please.

Your next question comes from Marc Greenberg of Deutsch Banc.

Hello, good morning.

I just wanted to follow up on the streamlining a little bit with you, Gary.

Can you give us a little more color on what caused those dollars to go up a $100 million relative to earlier expectations, and may be, if you could just help us understand, what the benefits are on a sustainable profit basis, that would be helpful as well.

Thank you.

Yes, Marc.

I'd be happy to do that.

The increases first of the $100 million increase in overall charges, about $40 million of that is related to North America and it's closing one manufacturing plant that we own.

And we would expect to see some benefits from the closure of that plant start next year.

In addition to that, we went through all of the operators that are here with me this morning, and Steve and I have all went through a very concerted and detailed review just during the summer of all of our operations around the world, and challenged the infrastructure in every operating division that we had around the world.

In fact, we've continued to look for and found additional places that we could become more efficient which does increase some of the streamlining costs this year, but then we would expect to see some of those benefits, those from that flowing through next year.

So, it's really past the North America, most of it is small amounts, but in, in most of the operating divisions around the world.

Thank you.

Final question, please.

Your final question comes from Robert Stamberg of Sanford and Bernstein.

Good morning, everyone.

Question about the difference between concentrate shipments and bottler case sales.

You would expect that concentrate shipments would start catching up with bottler case sales towards the second half of the year.

Do you still expect that for the fourth quarter?

Yes, Robert.

Good morning.

Yes, we would in still anticipator for full year gallon sales, and unit case sales should be in about, about in line with each other.

You know, they were behind slightly for the first half of the year for our third quarter, and they were right in line for, and for and we would anticipate a little bit higher in the fourth quarter on gallons to kind of catch it up.

Great.

Thank you.

Thank you very much.

Well, thanks, everybody.

Really appreciate you taking the time to chat with us this morning.

We feel pretty confident that we're on the right track and we feel good about the results.

We really do appreciate your time today and have a great day.

This concludes today's Coca-Cola Company conference call.

You may now disconnect.