可口可樂 (KO) 2003 Q4 法說會逐字稿

Good morning, at this time I would like to welcome everyone to the Coca-Cola Company conference call.

At the request of Coca-Cola, the conference is being recorded.

All participants will be in a listen-only mode until the formal question and answer portion of the call. If you would like to ask a question during this time, simply press star, then the number one on your touch-tone phone. If you are on a speaker phone, please pick up your the telephone handset before asking your question. To withdraw your question, press star, then the number 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 the conference call is to talk with investors, and therefore questions from the media will not be addressed in this forum. Media participants, please contact Coca-Cola's Media Relations Department if they have additional questions.

I would now like to introduce Mr. Larry Mark, Assistant Vice President and Director of Investor Relations who will begin the conference.

Mr. Mark, you may begin.

Thank you.

Good morning, everyone. Thanks for joining us this morning.

I'm pleased to be joined by Doug Daft, our Chairman and Chief Executive Officer; Steve Heyer, our President and Chief Operating Officer; and Gary Fayard, our Chief Financial Officer. In addition, several of our other senior officers are with us today to participate in the question and answer portion of the call. Specifically we are joined by "Sandy" Allan, who heads up our Europe operations; Alex Cummings, who heads up Africa; Mary Minnick, the head of our Asia group; and Jose' Octavio Reyes, who heads up our Latin America group.

Our prepared comments will be brief so that we can use most of our time for your questions and answers. So that we can get to as many questions as possible, we ask that you be considerate of others and limit yourself to one question during your turn.

Before we get started, I would like to remind everybody that this conference call may contain forward-looking statements, including statements concerning our long-term earnings objectives and should be considered in conjunction with the cautionary statements that are contained in our earnings release and in Exhibit 99.1 of the Company's most recent form 10-K. In addition, I would also like to call your attention to the fact that we have posted a schedule on our company's web site at Coca-Cola.com, in the investor section, which reconciles our results as reported under GAAP to certain non-GAAP measures which may be referenced by our senior executives in our discussion this morning, and from time to time in discussing our financial performance. Please look at our web site for this information.

Now, I would like to turn the call over to Mr. Daft.

Thanks, Larry and good morning to everybody.

In a moment, obviously I will hand it over to Steve who will take us through our operational activities. Gary will take us through the financial performance. As always, I am here to hear what is on your minds. But before passing it over to Steve, let me just highlight a couple of items from 2003 which are certainly areas of focus for us in 2004.

For the first of these, we refer to as system alignment. It is about ourselves and our bottlers. Our key bottlers are seeing improved economics compared to prior years. Their returns on invested capital, their earnings per share and operating profits have all improved during the course of 2003. And I should point out at the same time our three-year recurring compound earnings per share growth rate was 10%. Of course on a -- on a reported basis, it is much, much higher than that, 26 I think, Larry? The second item I want to comment on is our progress from what we call a volume model to a volume and value business model.

Now, all through 2003, we put in place a new strategy focused on creating value for us and our bottling partners, through a disciplined brand, price, pack, and channel strategy. And I must say the business model itself has been extremely, extremely well received and implemented within our organization, and it does signal in our mind a more rational and sustained approach to growing our business for the long term.

Our business as a whole is performing well across brands, and across countries. We're focused on offering the consumer the choices they want ,for a wide variety of beverages, to meet their needs, and as our core brands continue to grow, we will obviously and definitely benefit from the nearly 400 brands which we offer throughout the world.

Now, in the same way, we are continuing to round out our country portfolio. We are less reliant than ever before on just a few countries. An we have a great portfolio of diverse countries around the world. If you look at our top 25 markets, you see markets coming in to the key -- key markets for us, but in terms of volume and profits like China, France, Chile, Nigeria, Thailand, South Africa, Spain, and Great Britain. And I really would expect that this diverse portfolio of brands, and countries, will continue to be a key strength for us in the future.

Now, I am looking forward to 2004. And you've heard me say a thousand times before that our system is absolutely unbeatable when we are aligned with our bottling partners. Well, we are aligned. And I'm looking forward to continuing what we started. We're on the right track to long-term sustainable growth of our brands and our business.

And on that note, let me turn it over to Steve to discuss our operating activities.

Thanks, Doug. And thanks to everybody joining us today.

By now, most all of you have likely read our earnings release so I won't repeat what's there. I will focus on some key themes and be brief to allow maximum time for questions.

2003 has been a year of many record achievements, and we feel good about the records. Record levels of unit case sales, revenues, net income, cash from operations, and equity income. Specifically, unit case volume grew almost 700 million unit cases, reaching 19.4 billion unit cases last year. Carbonated soft drinks grew 2% and represent 83% of our business today. Noncarbs grew 14% and now account for 17% of our business, up from 15% last year. Revenues grew to $21 billion, increasing 8% over the prior year.

Our international operations generated revenues of $14.4 billion. And our operating income from outside the United States is now over 80%. The strength of our international business is one of the key competitive advantages of the Coca-Cola Company. Also reported EPS increased from $1.23 to $1.77, which is a 44% increase, and excluding certain items that impact comparability, our earnings per share increased 17% from $1.66 to $1.95.

Cash from operations increased 15% to $5.5 billion. Of which we returned $3.7 billion dollars to our share owners through dividends and share repurchase. Underlying equity income grew by 29%. And Gary is going to go into more detail on this in a few minutes. But please keep in mind that we were able to deliver these record results despite a pretty tough year that really tested us in some ways, because of unexpected challenges that came along.

I think this illustrates the reliability and the strength of the Coke system, and I think also it really proves out the enduring appeal of our brands; the power of our marketing and innovation capabilities; the strength of our management team; and our strong relationships with consumers and customers. However, as we discussed in December, our underlying operating income growth was not, was not , where we wanted it to be.

With that said, we took aggressive actions in 2003 that were necessary to deliver our earnings per share growth. And even though we were hit by a whole series of unexpected challenges across our operating groups, I believe we demonstrated our ability to deliver against our business strategies, and our financial commitments. In Asia, as an example, we were hit hard by SARS, false pesticide allegations in India, and an unusually weak industry performance in Japan. However, we were able to adjust to these issues. We are now seeing a recovery and are balancing and delivering growth across our countries, our brands, and our packages.

In North America, our system remained focused on maximizing value through a balanced price and volume approach, even as we went about the task of integrating our operations into a single unit focused on reaching customers and consumers with greater efficiency and effectiveness. That work is largely behind us. North America, at the same time, going through that process, cemented its innovation and marketing leadership position this past year.

In Europe, we had an outstanding year driven by sound business fundamentals, aggressive innovation, strong marketing strategies, and very rigorous cost management. Also, a little hot weather and the strong euro helped drive our results.

Throughout Africa, we continued to invest and focus on the essentials such as: growing trademark Coke; creating new cold drink outlets; improving our market execution and availability; expanding affordable packaging options; and this together led to double digit operating income growth in Africa while we also strengthened our market position.

In Latin America, we battled some tough economic challenges, but our performance was solid once again proving that we can drive value for our system, even in difficult circumstances. This resulted in strong growth in local currency ROI, in the key countries within Latin America.

When we look to 2004, we're confident that the steps we took in '03 and the plans we have for 2004 will noticeably improve our ability to deliver sustainable profit growth. With 2004, our primary focus is to invest in our core brands.

We believe we have substantial upside in our CSD business, as we execute tailored brand price, tack and channel strategies. This means we are going to continue to differentiate our brands and segment our marketplace efforts to increase more value for our system. We are going to work diligently to continue to innovate for value, as Doug mentioned, and we are going to work even more closely with our bottling partners, and as we do that, we will continue to get expense leverage through disciplined management of overhead, and more efficient use of marketing dollars. We also believe we will see strong growth in our NCB portfolio, much of which will also benefit from continued innovation in product and package execution. We are addressing each of these aspects throughout the company.

As we said in December, in most of our markets we're well long in moving in the right direction. But let me walk you through a couple of examples of key initiatives that I think symbolize and specify the work that we're doing against our key strategies. First, with regard to investing in our core brands. We are focused on those brands and also on new brand growth engines. Vanilla Coke continues to attract new consumers in North America, as an example, and is now in over 50 international markets. In 2004, we expect Vanilla Coke to continue as a key growth contributor.

In China, now our sixth largest volume market, trademark Coca-Cola is up 13% for the year, and Fanta is up 17%, while at the same time our very profitable Crude Juice drink grew over 70%. So the message is focusing on right brands helps to deliver strong double digit profit increases in China and will continue to drive our results in the coming year.

In Western Europe, we've increased our focus on lighter lo-cal variants of our core brands of Coke, Sprite, and Fanta. In these markets, our profitability on light products is 65% higher than on regular carbonated soft drinks. So, as we look at our mix, we see profit growth, as we continue to focus on the right brand pack, channel mix.

In our highest per capita consumption country, Mexico, we continue to grow Coca-Cola while enhancing our other very profitable CSD offerings like Fanta, Sprite, Lift and Fresca. And together they grew double digits in 2003, and they are going to continue to benefit in 2004 from new flavor extensions, and packaging initiatives. In our 10th biggest volume market, South Africa, trademark Coca-Cola brands grew 11% during the year, and more importantly, our profits in South Africa increased double digits. The solid local execution of our bottling partners drove these results and we have every reason to believe that that will continue to be our advantage in 2004.

Second key point. We're creating more value through tailored brand package, price, and channel strategies. A great example of this is Brazil. In Brazil we focused on price realization and profitable case sales which resulted in system operating profit growth, almost 50% on a local currency basis. This increase was due to strong profit growth for both Coke and our bottling partners, and our continued execution is going to drive profit growth again in 2004.

France, Great Britain, Spain, and Italy remain focused on profitable immediate consumption packages where we saw double digit increases in '03 volume which clearly helped each of these operations deliver double digit increases in operating income. In Argentina, we've expanded our use of returnable packages for Coke, allowing us to offer more affordable options. The result, full year growth of 19% for trademark Coca-Cola. And our expansion of refillables to Sprite has resulted in growth of 25% in the fourth quarter, and will continue to provide a strong lift to our 2004 performance.

In Japan, our brands sold through the highly profitable full vending channel are up 5% in the fourth quarter, as a result of actions the team took to enhance our execution. Within this channel, we reported fourth quarter growth of 16% for one of our most profitable products, Georgia Coffee, in the 190 ml can. We're optimistic about our vending channel opportunities in 2004. A lot of work has been done and it's beginning to pay off.

Within North America, its early days, but we are already receiving a favorable response from our future consumption channel customers, as they think about our dual can promotion strategy. By ad featuring a 20 or 24 pack can package in combination with fridge pack, we are able to provide value to strong usage households and at the same time provide a preferred package to a broader range of consumers. The combination is leading to improved gross margins for our bottlers and retailers.

Moving on to the third initiative, we are, as Doug said, innovating for value, not just volume. In North America, we're testing the fridge pack for 12 ounce PET bottles by combining the fridge pack, which is loved by consumers, with convenient resealable PET bottles, we're meeting a consumer need that nobody else in the beverage industry is addressing, while at the same time, increasing revenue category growth for our customers and gross margins for our bottlers.

Across most of Europe, both Powerade and Nestea are successful brands which deliver higher than average margins because of their skew towards immediate consumption packages. In 2004 we will reinvest and revitalize our juice drink business under the trademarks of Minute Maid and Cappy with the intent of duplicating this economic model. We're also innovating for value in our marketing programs, leveraging our powerful Coke brand to build associations in other strong brands in ways that are very cost effective for us and exciting for consumers.

Our fourth initiative. We've made tremendous improvements in our relationships with our bottlers around the world. As Doug said, restoring the financial and operating health of our bottling partners has been one of our highest priorities.

Throughout '03, the earnings and returns on invested capital for our bottlers continued to improve. The Coca-Cola system is now more closely aligned than ever. We're continuing the joint strategic planning process we established with our bottling partners, as well as our regular series of top to top leadership meetings. We are running the system as one. By improving our ability to execute these initiatives help us to grow the system's economic pie.

And lastly, we're improving our expense leverage. The steps that we've taken to integrate our food service, bottle, can, and Minute Maid operations in North America have created a leaner, more efficient, more effective and maybe most importantly, more accountable organization. Other operating groups also took steps in '03 to streamline their operations to be more efficient.

As we look to '04, we are going to remain very focused on driving out costs in all of our groups. Each of these examples indicates our heightened focus on building value with volume. And we are setting in place this refinement in our strategy, while we are maintaining our gaining share within the industry. Our 4% growth in '04 is consistent with the growth rate of the worldwide nonalcoholic, ready to drink beverage segment, but in key categories, such as CSDs and water, we increased our share position.

We remain very conscious of our position relative to the industry in terms of volume, but even more importantly, we look at our position in terms of value. Value share represents our portion of the retail dollars which are spent on nonalcoholic, ready to drink beverages. And I am delighted to report that we estimate that we have gained value share in at least 11 of our top 15 markets.

In our key markets, the United States, Mexico, Brazil, China, Great Britain, Spain, South Africa, Argentina, India, France, and Italy, we grew retail dollar share. That's 11 of the top 15. I can't be more definitive on some of the others because of data availability. These stats are further evidence that our revenue management strategies are already showing clear results. In most of the world, we're getting it done. We have a very balanced portfolio of country operations driving our results. We are poised for a strong year in '04.

As we balance the performance of all of our markets around the world with an especially strong focus on profitable volume growth. As we begin to see positive economic reports in many of the countries in which we operate, I am optimistic. We have a winning combination when you consider our system, our strategies, our brands, our people, and our financial strength.

Now, let me turn things over to Gary. Gary?

Thanks, Steve.

I would like to continue this morning by highlighting some additional financial achievements this past year. As Steve mentioned, our reported earnings per share increased from $1.23 to $1.77, a 44% increase. As we highlighted in the release, several factors impacted comparability of amounts when analyzing this year and last year, excluding these items, our earnings per share increased 17% from $1.66 to $1.95.

The strong earnings growth led to a strong growth in our cash flows. Cash from operations increased 15% to $5.5 billion. This is the highest amount of cash from operations that our company has ever reported. Of this amount, we returned $3.7 billion to our share owners through dividends and share repurchase. We paid dividends of approximately $2.2 billion with per share amounts of dividends increasing by 10% over the prior year. And we have purchased $1.5 billion of our company stock. We also continued to reinvest in our business. We invested $812 million in capital expenditures. And we spent $359 million to acquire brands and/or bottling operations.

Looking forward, we also expect strong cash flows to continue. And in 2004, we expect to allocate at least $2 billion to share repurchase. With such strong cash flows, we are also focused on maintaining a very efficient capital structure. As of the end of the year, our net debt to net capital ratio was 12.1%, a level well below our historical average. In addition, our return on capital is a healthy 24.5% and our return on equity was about 34% for the year. Looking forward, we expect our capital structure and our returns to remain very strong.

Now, let me make a few comments about several of the factors that impacted our results this past year, and the outlook for these items for 2004 as well. First, let me start with taxes. Our earnings per share benefited this past year from a reduction in our tax rate. The reported effective tax rate for the year was 20.9%. And this includes the tax effect of a variety of items, including the streamlining initiatives; benefits associated with various tax resolutions during the year; and benefits from strong profit contributions from lower tax locations, where currencies also had a favorable impact.

Overall, we are very pleased that this rate came in lower than we had originally anticipated at the beginning of the year because this had a real economic benefit to our company and shareholders, as lower tax payments directly improves cash flows, and returns.

To give you a little background, our underlying effective tax rate in the year 2002 was a little over 27%. As 2003 progressed, we were able to continue to bring the rate down, based on a variety of tax planning strategies, and a resolution of various tax disputes. Several of the factors that benefited our tax rate are sustainable and will continue to benefit us in the future, and several other items cannot be counted on to recur every year. I am confident that nearly two points of our rate reduction from 2002 are sustainable for the foreseeable future, as they are based on our outlook for country profitability growth and equity income, and exchange rates.

However, as we look into 2004, we are not anticipating that we will have the same level of tax resolutions and benefits as we did this past year. As such, the underlying effective tax rate on operations is expected to be approximately 25.5% in 2004. As of right now, this is our best estimate for the rate for the coming year.

As I know you can appreciate, as a company that does business in 200 countries, our taxes can be quite complex, and there are many variables that can move the rate. But just to reiterate, for modeling purposes, if you do detailed modeling, my best estimate for a sustainable effective tax rate for 2004 is 25.5%. If I believe it will be different from that during the year, I will tell you.

Lastly, we recognize that this is a higher rate than 2003 and it will negatively impact the company's earnings per share growth rate in 2004. We're okay with that. Since we're making a lot more money and the long term economic benefits associated with our improved tax position are very positive for the shareholders.

Now, let me turn to currency trends. Keep in mind that over 80% 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 are our major drag on our results during the years from 1996 through 2002. Fortunately, the trends have started to change and we're now getting a bit of a benefit.

In 2003, currencies benefited our operating income for the year by approximately 2%. This has been driven by the strength in the euro, partially offset by less attractive year over year hedge rates on the yen and weakness in Latin America currencies.

Looking to 2004, if exchange rates on major currencies remain at similar levels as they are today, we should also get benefits in 2004 that will help our bottom line. However, with regard to the price -- the precise amount of the currency benefit in 2004, I think it is premature to quantify an amount.

Several factors could impact the amount of currency benefit we receive in the current year. First, we will not get the full benefit of the spot rate movement of the Japanese yen since we were protected in 2003 at rates better than spot. Second, we're in the process of putting option coverage in place for the current year to protect the downside risk of the yen, the euro, and sterling. Remember, there is a cost of these options, making our effective rate lower than the spot rates you're seeing in the market. Third, we operate all over the world, and therefore, all currency moves must be considered, not just the euro and the yen. For example, the 20% devaluation in Venezuela last week.

Now, let me turn to equity income. Equity income increased 6% on a reported basis. Excluding the charge by Latin America equity investing in the third quarter, equity income increased 28% during the year. This strong growth demonstrates a result of strategies that are leading to improved health of all of the key bottlers throughout the worldwide Coca-Cola system. We have made significant progress in terms of improving our relationships and implementing numerous joint initiatives to make our system even more efficient and improve both of our returns. We would expect equity income to continue to be a strong contributor in 2004. Just as our bottling system is becoming more efficient, we are also very focused on cost management and driving inefficiencies out of our company.

Before I wrap up, let me discuss one item that impacts those of you who keep detailed quarterly models on our company. First, just to remind you, we have a policy of not providing specific earnings per share guidance for quarters, or for the full year and we are going to continue adhering to that policy. However, I think it is important for you to recognize items that could impact our quarterly estimates, specifically as they relate to how the flow of gallon shipments is expected to occur in 2004.

On a full-year basis in 2004, I expect that unit cases and gallons will have similar growth rates. This is consistent with what I would expect in any year. However, on a quarterly basis, because of the way our quarterly calendar works, gallons will be impacted by a shift in the number of shipping days in the first quarter versus the fourth quarter of 2004. When comparing to last year, the first quarter of '04 will have more shipping days and the fourth quarter of '04 will have less than the same period for last year.

Just to be clear. This shift in shipping days will only impact gallon shipments or revenues, but it will not impact unit case sales. Unit case sales are reported on an average daily sales basis and therefore are not affected by the shift in shipping days. So let me cut to the chase on what this means.

Gallon shipments are expected to be slightly ahead of unit cases in the first quarter. Gallon shipments are expected to be slightly behind unit cases in the fourth quarter. Therefore, if you are building quarterly models, you should expect earnings growth to be a little stronger in the first quarter and a little weaker in the fourth quarter.

To sum up, our success in 2003 reflects the enduring strength of the Coca-Cola Company. We have continued to reach new heights when it comes to financial performance. We are sharing our success across the entire system as evidenced by the improving financial strength of our bottling partners. We have a broad portfolio of brands to satisfy all of our consumers beverage needs, and we continue to strengthen our leadership position in key beverage categories worldwide. We expect 2004 to be a strong year as we continue to execute our six strategic priorities, and as we continue to focus on profitable growth, aggressive cost management, and strong financial fundamentals.

With that, we'd love to move to your questions. Operator?

At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number one on your telephone key pad. We will pause for just a moment to compile the Q&A roster.

Your first question comes from Andrew Conway of CSFB.

Good morning, gentlemen.

Steve and Doug, a question on North America profit growth and Japan profit growth for '04. North America profits were down 1% for the year. Asia was down 6, largely -- partly driven by Japan. Strategically, as you look at the North America retail business, and food service business, what changes in your mind from category, your own brands driving revenue or cost structure, to get improved profit performance? And from the Japanese standpoint on the market, what is driving some of the category stabilization? And talk a little bit about what are some of the real brand focuses that will lead some of the unit growth in Japan this year?

Andrew, hi, this is Steve.

Let me take the North America part of that first. A big piece of what's different year on year is that we're seeing a food service -- on the food service side, we're seeing the business strengthen. The underlying business strengthen. We are very, very optimistic that in food service, we have the right set of services and the right service structure for us to continue to efficiently deliver quality service that is frankly unmatched in the industry. We think that our performance in North America was dragged down by water profitability, and lack of demand for juice that we're not seeing at present and don't believe will continue throughout the year.

We have made adjustments in our economic model in water, which give me confidence that it won't be a drag going forward. The brand price pack channel work that we've engaged with CCEN is already paying dividends and as our package portfolio expands, our margins will improve and we will get both price and volume, not just price, which was a piece of the story last year in North America. You know, I don't know if Doug, you have anything you want to add to that?

The concentrate price would be a little higher.

Thanks.

With respect to Japan profit growth, we described in December that we had taken aggressive steps to make the supply company work, at the same time we have taken aggressive steps to drive incremental demand, and the market is coming back in a bunch of places. We're seeing supermarket sales improve. We're seeing mix improve. We're seeing vending up. We have programs in place that we think will cause that to continue. So it is underlying demand, it is cost management, and it is mix, both by channel and by key brand set that I think will give us some lift in Japan. Mary, you want to add to that?

Yeah, Andrew, I think you said what did -- why are categories stabilizing.

As you know our fourth quarter improved in particularly in December significantly in Japan, that was driven by vending and in particular Georgia Coffee. Most notable was the fact that we launched a premium price coffee for 130 yen instead of the traditional 120. So not only was it a higher margin because it was coffee but because of a higher retail price point.

We didn't choose to participate in some of the dramatic large PET pricing that occurred in the fourth quarter in Japan. We saw PET prices go as low as 138, 148 yen.

Moving forward, as I've said consistently, we will launch new packages, and new price points in supermarkets to deal with the supermarket channel. So we think we've got vending back on track and by the first two weeks in March, you will see an entirely new package set in the supermarkets, with new merchandising, and new price points to deal with that channel as well. Which should accelerate the stabilization of the channels in Japan.

Andrew, we also have dedicated packages and product offerings in vending, which is part of the reason why vending is up and we've done a lot of redesign of what machines themselves look like, which I've got a lot of heart for, and as you know, if we can just stay the erosion and get a little bit of growth in terms of channel mix, it is an enormous boost to profits.

Steve and Mary, thank you.

Your next question comes from Bill Pecoriello with Morgan Stanley.

Good morning, everybody.

Good morning.

Trying to get comfortable, in the fourth quarter, the currency neutral operating profit is up around 2% and you've done a lot of talking especially in December about the focus on improving operating profit and margin expansion. I just want to try to get some comfort on -- in the quarter you have the 2% price, the 1% to 2% mix in the revenue line. Is it that in '04, a lot of the value strategies being put in place, and the supply chain savings are going to flow more through the Coca-Cola company's P&L, than we're seeing? Even though you're in the early innings of the starting and the bottlers have been working on this value strategy that it really begins to flow into the Coke's P&L versus in '02? And in the fourth quarter, is there some, with the volume came in below plan, so the spending levels were locked in for higher volume levels and that's why we only see the 2% profit growth and accelerates so much looking at the '04?

Bill, this is Gary. Let me see if I can address that.

As Steve said, in the prepared remarks, we weren't happy for -- in the full year on operating income growth, but we're feeling better during the year, and so specifically, if I go to the fourth quarter, if you look at the segment data, what you will see in the fourth quarter, if you adjust for comparability factors, you would see that operating income growth, of the operating units is actually up 10%. Now granted, that is helped by currency as well, but it is up 10, you will see a large increase in SG&A in corporate, which is actually a timing of expenses between years, and it is really an '02, and not an '03 issue. But I would expect to not have those kinds of increases going forward in '04 because it is really the comparability of '02 where the difference was. So we're starting to see operating income growth in the operating units and we would expect to see that continue.

You mentioned margins. I think -- let me address margins as well. You will see a couple of things on margins. There are some factors that are impacting margins, starting first, part -- a large part of it is the German bottler. As the German bottler continues to increase and we would expect to see the German bottling operations actually improve in '04, significantly from the deposit law change that impacted them in '03, that will have an impact on profit margins, although profits themselves will increase from that. And we also had some impact of dollar-based expenses in Latin America, in cost of goods in Latin America, as some of those currencies devalued last year that put some pressure on margins. But I guess we are very confident that the steps we've put in place in '03 will continue to improve operating income going forward into '04.

Thank you.

Thanks.

Your next question comes from Marc Greenberg with Deutsche Banc.

Good morning. Just a quick follow-up question on the gross margin and then a shareholder value question.

Is some of the underlying improvement in gross margin that you're talking about in 2004 to some extent benefiting from dollar-based goods that are going to get a currency boost, if you will, in terms of procurement in local markets?

Marc, this is Gary. Can you give me a little bit more so I can --

Well, you know, some commodity goods, aluminum, PET, some other goods, and certain local markets in Europe and Japan are dollar-based. And you know the extent to which your company-owned bottling operations procured those locally, or you're getting them at a relatively cost advantage basis, is that something that we can look at from a gross margin basis as beneficial in 2004?

Yeah, I think Marc, there will probably be some of that. I mean you're right, some of the commodities, if you will, packaging, PET, and some of those things are dollar-based and there could be some impact, but that's not the real big impacts.

Some of the other impacts that hit us, a couple of other things that have put some pressure on the margins, but I think you will see less of it going forward as we continue to improve the steps we've taken. For example, is the German bottler, I was talk about the German bottler, the German bottler is also doing a lot of co-packing right now, for the other bottlers in Germany. And as it does that, basically does it on a cost, you know, a neutral basis, so it is hitting revenues and cost of goods at the same amounts, so it is impacting margins, with a little return just for the capital employed.

In Japan, actually, in the supply chain management company, same kind of thing. When we formed it, as you know, there is a large structural impact from that, both in revenues and cost of goods, but in addition to that, most of -- all of the lines from the tea company, we've actually now leased to the supply chain management company, and so there is some amounts going through again, revenues, and cost of goods, with very little margin in there. So it has put some pressure, as the other operating units around the world continue to improve, as we saw them starting to improve in the fourth quarter, we would anticipate seeing margins expand.

Thanks.

Gary, just with regards to shareholder initiative. You've talked about lower cap ex, increased bottler profitability, and relatively low company leverage. And you've also talked about increasing share repurchase to $2 billion but with a debt to total cap so low, couldn't we start thinking about more significant levels of share repurchase as we start moving through '04 and '05?

Yeah, Marc, the reason I said -- I think I used the words at least $2 billion, that is, and I've talked with you about this before, I think, but it is really around the debt ratings of the system, the Coca-Cola Company, and the system.

And as part of our commitment to the Coca-Cola system around the world, part of that is to maintain the debt ratings because it has a large impact on their costs of doing business. And so as we progressed through the year, and as we actually show you and the rating agencies the progress that we believe we we'll be making in '04 that we're very confident of, then we will be re-evaluating our capital structure, our share repurchase amounts, and those kinds of things. But it's one that I would continue to update you as we go forward during the year, but I would continue to believe that as our cash flows improve, that we would accelerate even more in 2005 in share repurchase.

Thanks, Gary.

Just follow on that, with regards to currency, potential currency benefit in 2004. Are you assuming can kind of a currency neutral outcome in '04 to get to that $2 billion number? And if currency is a positive variance, would that be incremental share repurchase?

Marc, it is too early to tell quite honestly. I think it is fair to say that probably a little bit of currency impact in my $2 billion number. I think it's, we wait and see how currency is actually come out during the year and then I will continue to update you each quarter as we move forward, as to kind of -- what it looked like, and then what we expect the share repurchase to be during the year.

Thank you, Gary.

Thanks.

Our next question comes from John Faucher with J.P. Morgan.

Good morning, everyone. A quick question.

Steve, you had commented in your remarks, I believe it was your remarks, about the focus on investing in core brands, and I hate to sort of harp on this margin issue. Can you talk about where you think you are in terms of the investment cycle? Obviously over the past couple of years, a little bit less operating profit growth on a currency neutral basis than we would have liked to have seen.

Do you feel you've gotten the investment level up to where it needs to be? Or do you think, are we still in investment mode as opposed to, let's say, harvesting mode and harvesting is probably too strong a term there.

I think we constructed business plans this year that give proper weight to our core brands. So if that means we have reached steady state, I guess that would be the way I would tell it. I mean our first commitment, John, as you know, is to ensure that we have a strong a business as we can and we don't want to do anything to starve our core brands.

One of the reasons we have shifted dollars from operating expenses aggressively as we have this past year, was to free up money for our DME. We've also been working very hard to get our working DME numbers up and our nonworking DME numbers down. Said another way, productivity for the system in marketing. I believe those actions taken together put us in a place where we have the funds we need, steady state, to deliver against the kind of long-term expectations we describe, and at the same time grow the strength of our brands and both our volume and value share. And so I think we're there there.

So you think DME is roughly at the right levels but that the productivity can be improved going forward?

Yes, that's right. And obviously, you know, there's -- if there are opportunities for more, we will not starve the brands. We have committed as a leadership team to ensure that our core business is robust, and we have made adjustments year on year in our plan, so as you see the year unfold, I think you will see in key markets for key brands that our DME is up but not at the expense of our profitability.

Okay. Can you give us a -- one last follow-up. Can you give us a quick idea in terms of what DME was up year over year in '03?

John, I think it was up --Ill check for sure but I think it was up around 7% and there is some currency benefit in there as well.

Okay. Great. Thank you.

You bet.

Our next question comes from Caroline Levy with UBS.

Good morning, everybody.

I'm just wondering if you could dig a little bit into Europe, given that you are going to be mapping a very hot summer, as well as some very successful product innovations in Europe. As well as currency. So if you could just talk about some programs and what your outlook is for particularly the second and third quarter challenges there.

Sandy, why don't you handle it?

Hello, Caroline.

I mean it is true that we had a good summer in -- not all of Europe but in Western Europe, less so in Eastern Europe and in Russia, so our business did benefit for that. But throughout the year, we have been investing in immediate consumption, we've been investing in light brands, we've been investing in Powerade which has a very high profit contribution. But the way that we structured our business plan for 2004, I feel confident that we will be able to cycle the benefit that we did get from the weather in 2003, on the basis that we will have an average summer as opposed to hot summer.

And as I say, I'm confident that the programs that we have, and particularly for example with Euro 2004, which you may or may not know, is a premiere soccer tournament that the whole of the Europe will be involved in. And for the first time, we will have a pan European promotion, in other words every country will be doing it in the same way, using the same mechanics and technique, so I'm excited about what we will be able to do in Europe in 2004. And feel confident we will be able to cycle the so-called hot summer this year.

If I just may ask for an update on Mexico, just, you know, obviously the competitive (INAUDIBLE)-- changed a little bit with key brands and Pepsi is making a much stronger effort to, you know, regain share and grow there. If you could just update us on the fourth quarter look there, and what the outlook is?

Caroline, hi, this is Patcho.

The fourth quarter outlook for Mexico, we had a good fourth quarter. We continue with our strong performance in Mexico. When you look at the absolute number, you see the decline because of the risk of transaction that occurred in 2002 and the comparison therefore was on the fourth quarter of '03 versus the fourth quarter of '02.

You saw that decline in the way of the business had been growing in the first three quarters. Now, the business environment in Mexico, of course, is more competitive than what it has been in the past, but we have seen that we have a very strong brand equity in Mexico. We have done very, very tailored and very clear packaging, price, and brands strategy. Would he have been very successful with our other brands, with our CSDs, we continue to gain and maintain our share and we're very confident with the outlook of Mexico in 2004 as we go forward.

Thank you.

Our next question comes from Christine Marcus with Merrill Lynch.

Thank you very much.

Just to get into the regions a little bit and to make sure I understood Mexico. Were volumes actually down on a year over year basis, or did the growth rates simply come down from the first three quarters of the year? And can you comment at all about the acquired growth or what acquisitions contributed to your volumes in Europe and the company as a whole for the year?

Christine, this is Larry. Actually Patcho was talking about the trend line decline but the gross was actually positive 2% in the fourth quarter in Mexico.

Okay.

And then acquired growth actually had a minimal benefit to the company in the fourth quarter, and for the full year, as you may recall early in the year, there was both the risk of transaction and also the Denoen transaction, so it was a little more than a point on a full year basis.

Okay. Great. And Gary, could you tell us what the currency impact was on your top line or break it apart from your pricing mix growth?

Yes, as I have said for the full year, currency on net income was about two points, on revenues, it was about -- I would say about -- I would think it was about five points.

On a full year basis.

On a full year basis.

Okay. And in the fourth quarter?

In the fourth quarter, a little bit, it was seven on revenue and five at operating income.

Okay. Great.

And a final question, perhaps for Steve, can you -- you touched on this a little bit, can you comment on the profit trends in your non-carbonated businesses, especially in North America but also around the world? Given the investment, are you seeing the kind of profit improvements that you had planned for by now?

Well, subject to market movement, I will have to give you the answer, because of the demand swing that we saw in juice. So let me kind of take it in pieces.

Powerade is doing everything that we had expected from a profitability point of view and more. The same would be true of Dasani. Given what happened at the low end of the water market, we were a little disappointed with the profits associated with our Dannon business.

And given under performance of the entire juice category, we didn't have a pricing problem so much as we had a general demand problem. We've made some adjustments in our pricing. We have reset ourselves and our margins look good going forward for really all the noncarbs in North America. When you look at the rest of the world, it is a very mixed situation.

Japan noncarb business is, from a profit point of view; fantastic. Same would be true across most of Western Europe. Noncarbs don't mean very much as a percent of our business in Latin America or in Africa. And I don't know if there is any more to that story, you want me to tell you, I'm happy to, but what I tried to do is just paint an overarching picture.

That's terrific. Thank you very much.

You bet.

Your next question comes from Marc Cohen with Goldman Sachs.

Good morning. This is a question for Mary. Most of my other questions are answered.

Mary, I understand that tonight or you know, Thursday in Japan, that CCJC is going to do a briefing, and talk about some of the market initiatives and how the supply chain management company is working. Can you just give us a sense of exactly what, you know, what will be talked about there? What are the key messages for that briefing?

Yeah, a couple of key messages. Key message number one is of course clarification on the supply chain management company and what we expect.

We've gone on record as saying that we actually believe the benefits to supply chain this year are ahead of what we initially projected and we are predicting $100 million in cost savings this year alone which has accelerated. We are very very pleased with the progress the supply management company has made and we believe those benefits will accelerate even more as the carbonated soft drink side of it comes into play next year.

The second thing we are going to talk about is our focus on doing the doable in the last quarter, which was to turn the business around, we concentrated on vending. And we did that through innovation, and specific product initiatives and that was successful.

We want to talk about how we plan to extend that innovation to other channels that have been problematic for us, like supermarket. And again, we will be talking about our new price pack strategy in supermarkets that we started to reveal to retailers but has not yet hit the market. We will also talk about core brands. We are relaunching almost every single core brand this year in terms of a new campaign for Coke, Sokenbicha, and we're supporting that with a whole new merchandising strategy in, not only national supermarkets but regional supermarkets, so the look of our products and our shelves will be different. So all-in-all, it's a combined package focusing on cost management, accelerating what we've already been able to do in vending, addressing the supermarket issue.

And on the accelerated timing of these cost savings, and the scope of them, how will that be presented as affecting the bottler profitability? Because I think my perception has been there has been a subdued optimism about how bottler profitability will be enhanced by -- through these cost savings. Do you have a message on that as well?

Yeah, well, I guess, you know, 100 million cost savings in a 12-month period is fairly significant for our system and of course the majority of that benefit flows through to our bottlers. So we're rather enthusiastic about that. So that's about as positive as I can get on it. The fact that we are significantly ahead of trend.

Importantly, our bottlers have taken the initiative to make hard decisions about what lines go into the supply chain management company, and which lines don't. And that will significantly and positively and ultimately affect their cost structure.

We also continue to see accelerated advantages through the pool procurement effort. For example, on IT, you know, we are investing in IT, so that all the bottling systems can talk to each other, to make supply chain more effective. And they've agreed on a cost efficient but highly effective IT strategy.

Great. Thanks.

Operator, we have time for just one more question, please.

Your final question comes from Carlos Laboy with Bear Stearns.

Good morning. Brazil, the market that is being very profoundly transformed, could you rank for us what you think have been the most important changes there? How far along you are in fixing this market? And what are some of the top changes that we might see in 2004? Lastly, by what benchmarks should we measure progress in Brazil as we go forward?

Carlos, Patcho again.

Yes, you're right, in Brazil, our system is enhancing our business model and we're trying to focus more on balancing volume growth with margin expansion and create value actually for the whole system. Volumes have not been up to where we wanted it to be this year but our operating income has benefited greatly from this new approach, of grade and value in Brazil.

Actually, the entire system profits have increased by close to 50% this past year in local currency basis, that is on real basis. We are working very hard, very diligently with our bottlers to roll out an aligned package and pricing strategy, a strategy that emphasizes differentiating our brand, more consistent prices, and working even harder on that.

We have new portable packages, both refillable and one way presentations. These packages are being introduced to provide greater choice to consumers and allow our system to structurally tailor our customer options based on the channel strategy with the clear intent of rising revenue growth.

What the basis for measuring this? I think that the alignment in our system, bottlers and company working together, the customer capability, our ability to deliver that strategy at the point of sales. The movement of certain packages, of certain prices, being less reliable - or reliant in certain channels, and lastly, I think that we have to, one of our best bottlers working in Brazil, now Coca-Cola Femsa and Andina are there and we are very confident that we will continue growing in this new model as we build it in 2004.

Thank you.

Thank you, everyone for joining us this morning. If you have any follow-up questions, feel free to call Investor Relations and we will get to all your questions today. Thanks very much.

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