可口可樂 (KO) 2004 Q1 法說會逐字稿

Good morning.

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

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

All participants will be able to listen-only until the formal question and answer portion of the call.

If you would like to ask a question during this time, simply press star one on your touch-tone phone.

If you're on a speaker phone, please pick up the telephone handset.

To withdraw your question, press star two.

Participants will be announced by their name and company names in the order they are received.

I would like to remind everyone that the purpose of this conference call is to talk with investors and therefore questions from the media will not be addressed in this forum.

Media participants should contact Coca-Cola's media relations department if they have additional questions.

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

Mr. Mark, you may begin.

Thank you very much.

Good morning, everybody.

Thanks for joining us today.

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

In addition, our Senior Operating Officers are with us today to participate in the question and answer portion of the call.

Specifically we are joined by Sandy Allan, the President of Europe, Alex Cummings, the President of the Africa Group, Don Knauss, President of North America, Mary Minnick, the President of the Asia Group and Jose Octavio Reyes, the President of the Latin America Group.

Our prepared comments will be brief so that we can use most of the time for your questions and answers this morning.

So that we can get to as many questions as possible, we would ask that you would be considerate of others and limit yourself to one question during your turn.

Please be respectful of these guidelines.

Before we get started, I'd like to remind you that this conference call may contain forward-looking statements, including statements concerning the 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've posted schedules on our company Web site at CocaCola.com in the Investor Section which reconciles our results as reported under GAAP to certain non-GAAP measures which may be referred to by our senior executives during the discussion this morning and from time to time as we are having discussions with investors.

Now, please look at our Web site for this information.

With that said, I'd like to turn the call over to Steve.

Thanks, Larry and good morning, everyone.

Thanks for joining us.

Doug asked me to send his apologies for not being able to join the call, but our annual share owners meeting later this morning is keeping him very busy.

Our meeting starts at 9:30 this morning so we wanted to get an early start and I'll keep my comments brief so we have plenty of time for your questions.

As you saw in the release this morning, our business as a whole is performing very well.

Our reported earnings of 46 cents per share were up 35% over the prior year.

Excluding prior year charges in gains, earnings per share grew by 24%.

The key reason for our EPS growth was our strong operating income.

If you strip away all the charges, gains and currency impact, we delivered operating income growth that is above our long-term target of 10%.

I'm most pleased to report that our growth was driven by excellent performance from all, each and every one of our strategic business units.

And as a result, our country mix has improved markedly.

In addition, we generated our strongest growth in our most profitable brands with trademark Coca-Cola growing 2% globally and 3% internationally.

Also trademarked Sprite grew 4%, Dasani grew 23% and POWERade grew 28% globally.

Our strategy to remain focused on profitable volume growth is leading to strong profits for us, our bottling partners and our customers.

Many of you should remember that in our December meeting we discussed the things that we're doing to improve our operating income growth and we're doing them well.

Specifically, we're focused on improving gross profit and tightly controlling our expenses.

We told you that our plan was to improve gross profit by increasing our emphasis on revenue growth management by tailoring our brand package price and channel strategies.

We also told you that improving bottler health would allow us to invest, execute flawlessly and share in the revenue growth of our system.

We also said that focusing on our supply chain efficiencies was critical to drive down our cost of goods sold and that creating innovative and powerful marketing programs was necessary to drive the right kind of volume growth.

We also said that we would enhance our expense leverage as we drive system efficiencies, manage our G&A, increase efficiencies in our marketing spending and incur less start-up expenses associated with the rollout of noncarbs.

Our first quarter results reflect solid improvement in both these areas.

Our reported gross profit grew by 15%.

If we were to strip out last year's litigation gain and the impact of foreign exchange, gross profit grew by 9%.

This also is above our long-term objectives for gross profit growth.

In addition, we had 2 points of growth through tough expense management which is in line with our long-term expectations.

Expense leverage results from the tight management of our G&A expenses and the system operating efficiencies that we've begun delivering.

Importantly, our results were achieved while we continued to aggressively invest in our brands.

Our direct marketing spending in the first quarter increased double digits on a currency neutral basis, reflecting our commitment to enhance our brand equity and make the most of our marketing dollars.

Now, we're continuing to find ways to shift our marketing expenditures from nonworking to working dollars that directly touch the consumer.

As an example in North America, we've been able to significantly enhance the on-air time for trademark Coke because of the savings from combining our media buying under one agency.

We're taking similar steps around the world.

In short, the first quarter trends reflect an organization fully focused on executing our core strategies.

Now let me turn to operating highlights around the world.

Overall, we had excellent performance across all operating groups.

In fact, in the first quarter, every one of our operating groups is delivering either in line or above their current year business plan objectives.

Specifically, in Europe our business performed very well with 4% volume growth and very strong double-digit profit growth due to favorable pricing and mix realization, tight expense control, strong recovery in our German business, profit margins and strong equity income growth.

In Asia, we are also reporting very strong profit growth due to higher gross profits. [ loss of audio ]

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The conference will resume momentarily.

Sir, you may begin.

Thank you very much.

Sorry, everybody, it looks like we got cut off.

So I think we got cut off right at the beginning of the operating section.

So, Steve's going to be, continue his comments at the overview of the operating groups and then we will move to your Q&A.

Sorry for any inconvenience.

Steve?

Thanks.

I was saying that overall, we had an excellent performance across all of our operating groups and that, in fact, in the first quarter, each and every one of our operating groups is delivering either in line or above our current year business plan objectives.

And then I began to talk about Europe.

I don't know how many of you heard but let me just do it again in the spirit of making sure there's no space here.

In Europe, our business performance was very strong with 4% volume growth and very strong double-digit profit growth which was due to favorable pricing and mix realization, tight expense control, a terrific recovery in our German business profit margins and strong equity income growth.

In Asia, we were also reporting very strong profit growth due to higher gross profits, strong investments in our brands and lower operating expenses.

Japan had a strong quarter with 1.5% volume growth and double digit operating income growth, which was driven in part by Georgia coffee growth of 8% in our highly profitable 190 ML can package, 4% full service vending growth, 6% growth in our carbonated soft drink brands and 14%, sorry, 17% growth in our Marocha nonsugar tea brand.

Vending is up thanks to the design and innovation initiatives that we put in place last year and supermarket sales growth are robust as marketing and merchandising programs are creating real consumer interest.

China and Australia were also very strong contributors to Asia profit growth.

In Latin America, we had strong volume growth, in Argentina and Venezuela thanks to a more stable environment.

In Brazil, our strategy is producing results and system profitability continues to improve dramatically.

In Mexico, we delivered against our objective of value tailoring our brands, package, price and channel strategies to increase profitable CSP volume.

Overall, our portfolio in Latin America delivered solid PBT growth.

In Africa, profit growth was driven largely by increases in revenue due to strategic price increases, most notably in South Africa, Nigeria and Egypt.

Across Africa, we continue to balance our availability and affordability strategies with our revenue growth management objectives to achieve optimal profits and selectively grow our noncarb business as well.

Finally, I'm delighted that North America posted solid profit growth as promised.

This reflects our system's ability to achieve a favorable balance of volume and pricing growth combined with expense leverage.

Our success in executing tailored customer programs within our foodservice and hospitality division, which grew volume by 3% and our retail division's unit case volume growth of 1% while cycling 6% growth from the prior year and operating in an environment of strong pricing increases across our system and within the industry.

In addition, diet CSDs have had a very favorable mix impact to our results and were a strong contributor to our North America results growing at 10% on top of 3% growth last year.

Overall results reflect our activities to make our business and our system more profitable.

During the first quarter, we also made strategic decisions to stop doing things that make our system less effective.

In several markets around the world, we're improving and/or eliminating products and packages which have less favorable profit characteristics.

We are de-emphasizing jugged water in Mexico and Indonesia, water packets in Nigeria and one of our regional source water brands in Germany.

Within our core CSD business, we are also making conscious decisions to modify our pricing architecture to capture greater value.

Our volume in a few markets around the world was impacted by pricing increases to capture value, most notably in the Philippines, Egypt and Brazil.

Now, although certain of these actions may have impacted short-term volume, these are well thought out strategies that will only have a short-term impact on volume as we reset the business but will have long-term benefit for the company and the bottlers.

As we've said in the past, when faced with a decision to drive either volume or profits, we are consistently choosing strategies which result in sustainable, long-term system profitability.

Because we're focused on selling the right kind of volume, both pricing and mix favorably impacted revenue and gross profit growth in the quarter.

We are also seeing the benefits of our productivity initiatives.

Finally, the quarter reflects a healthy bottling system as we continue to see improvements in our equity income.

When looking through the rest of 2004 and even beyond, we're not going to change what we're doing except to get better at it.

Our plans are working and we are getting better every quarter as the system comes together, committed to delivering what we promised.

As we did throughout Q1, we are going to continue to invest in our core brands, execute tailored brand pact price and channel strategies in each market, innovate for value, work even more closely with our bottling partners and continue to get expense leverage through disciplined management of overhead and more efficient use of marketing dollars.

Most especially, we have a great team who are focused as our results show and we work together building an execution culture.

Now let me turn things over to Gary.

Thanks, Steve.

I'd like to start off this morning by pointing out that the results which we reported today mark the first time in the history of the Coca-Cola Company that we have ever reported net income of over $1 billion in the first quarter of a year.

I think that shows that we are off to a very good start in 2004.

Highlights from the release this morning reported earnings per share of 46 cents, a 35% increase from the prior year first quarter earnings of 34 cents.

If you exclude unusual items from last year, the 46 cents compares to 37, which is a 24% increase in earnings per share in the quarter.

Net operating revenues increased 13% during the quarter to $5.1 billion, which was driven by an increase in gallon sales of 6%, improved pricing of concentrate, improved country mix, positive currency trends, then partially offset by the impact of creating a supply chain management company in Japan.

Reported operating income for the quarter increased 35% to right at $1.5 billion.

If you exclude unusual items from last year, operating income increased 23%.

This was driven by strong performance in key markets throughout the world and positive currency.

Currencies positively impacted operating income by about 12% percentage points in the quarter.

Thus, currency neutral operating income increased 11% in the quarter and this is something I am especially pleased with.

Our equity income increased 94% in the quarter, demonstrating that our current business strategies are leading to overall improving health of the Coca-Cola bottling system around the world.

Cash from operations for the quarter was nearly $1.2 billion as compared to about $600 million in the prior year first quarter.

Overall, I'd say a great start for the year.

Now, I'd like to continue this morning by expanding on a few items which impacted our results in the quarter.

First, let me start with currency trends.

As I've already mentioned, we're now starting to see a benefit from the fact that more than 80% of our profits come from outside of the United States.

As a reminder, currencies were a major drag on our results during the years from '96 to 2002 and I'm happy to see that the trends have changed and we're now seeing a benefit.

In the first quarter, we received a currency benefit due to year-over-year strength in most key currencies versus the U.S. dollar, especially the euro and the yen.

As we look to the rest of 2004, we're expecting substantially less benefit from currencies in each subsequent quarter as we cycle through the currency moves which occurred in 2003.

In fact, at current spot rates, our view would be that there'd probably be very little currency if any benefit in the fourth quarter of this year.

In addition, the currency markets remain very volatile as we've seen in recent weeks.

Therefore I'm not willing to quantify for a [size] foreign impact for the rest of the year because of this increased volatility.

But based on our projections, I do expect some benefits but not nearly at the level we saw in the first quarter.

Now let me move to shipping days and how this impacted our results.

As many of you know, unit case volume is the amount shipped from bottlers into the trade and it's provided as a measure of consumer demand for our products.

In our release this morning, we have included the reported growth in unit cases in the quarter and the growth in unit case volume computed on an average daily sales basis.

We did this so that you would have all the information necessary to understand our strong performance.

As we discussed in our last conference call, because of the way our quarterly calendar works, we experienced a shift in the number of shipping days between the first quarter and the fourth quarter when comparing to prior year periods.

We had four more shipping days in the first quarter of this year than we did in the first quarter of last year.

This impacted first quarter revenues and expenses in 2004 as compared to the first quarter of 2003.

Remember that marketing expenses are based on the 9% reported unit case sales, which led to much higher marketing growth in the quarter.

The growth in gallon shipments of 6% in the quarter trailed the growth in reported unit case shipments of 9%, primarily due to amounts being cycled from the previous year.

As you may recall in the first quarter of last year, gallons were well ahead of unit cases.

To summarize, the shift in shipping days provided a slight benefit to earnings per share in the quarter.

This benefit relates to timing and as we've previously disclosed, the fourth quarter will have three fewer shipping days.

For the full year, we expect unit cases and gallons to grow at similar rates.

Just to be clear, the extra gallons only provided a slight benefit to the first quarter results.

The growth in our operating income and earnings per share was primarily driven by strong operating performance in key markets throughout the world.

Now let me move to an accounting topic, FIN 46.

As we've mentioned in the past, FASB interpretation Number 46 impacts our accounting for certain bottling investments.

In the past, our ownership interest in several Middle East bottlers and a China bottler were accounted for under the equity method of accounting.

However, due to the application of this new interpretation, the balance sheet accounts for these operations were recorded or consolidated in our books as of March 31st of this year, resulting in an increase to assets and liabilities of about $380 million.

Under these accounting rules, the P&L accounts related to these operations will be included in our consolidated results beginning April 1st.

We expect the consolidation of these entities will not impact our net income and will have an immaterial effect on various income statement line items.

Before I wrap up, let me highlight the strong growth in our cash flows during the quarter.

As I said a moment ago, cash from operations nearly doubled to 1.2 billion in the quarter, up from about 600 million last year.

We expect to return a significant portion of our cash to our share owners through dividends and share repurchases.

During the first quarter, we announced our 42nd consecutive annual increase in our dividend.

A 14% increase of the quarterly dividend from 22 cents to 25 cents per common share.

This is equivalent to an annual dividend of a dollar per share, up from 88 cents per share in 2003.

We also repurchased 486 million of our company's stock.

Looking forward, we expect strong cash flows to continue and we remain committed to repurchasing at least 2 billion of our stock during 2004.

To sum up my remarks, we are very pleased with our first quarter results.

Each of our operating units performed very well.

We expect 2004 to be a strong year as we continue to focus on profitable growth, aggressive cost management and strong financial fundamentals.

Before we move to your questions, I'd like to make a brief comment on the topic of the CEO succession.

We do not have any additional information to communicate at this time.

The board of directors is actively managing the succession process and when additional information is available, we will provide it to you.

Therefore, we would ask that your questions this morning be focused on our business and the strategies that each of us in the room is committed to implementing.

With that said, Operator, we'd like to move to the questions please.

If you would like to ask a question during this time, simply press star one on your touch-tone phone.

If you're on a speaker phone, please pick up the telephone handset.

To withdraw your question, press star two.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Andrew Conway of CSFB.

Morning, Steve and the operators.

Question on assessing, you know, volume and profit trade-off.

If you could share with us your thoughts in two countries, Mexico and the Philippines in terms of how your brand packaged channel strategies will lead you to an improved competitive position in those marketplaces.

Andrew, hi.

Pacho.

Hi Pacho.

Mexico first.

If we can put that volume in perspective first.

We're facing in Mexico tough comparisons.

That's a 14% increase in 2003 versus 2000 in the first quarter.

Economy, it is not helping us.

The economic analysts see very modest GDP growth rate and unemployment in the first quarter.

Also, yes, a challenging pricing environment, but within that, within that, Mexico's total volume was down 1%.

Right.

That's total volume.

But see as this volume was up, water in personal sizes was up and it is water in jugs, large format water, that is driving the volume down.

So, our most profitable volumes is up and our least profitable volume is down, so, we're staying true to our value strategy.

Great.

Andrew, on the Philippines, hi, it's Mary.

Hi, Mary.

As you know, our bottler has undergone a fundamental restructuring of their going to market strategy significantly reducing the number of wholesalers, taking costs out of the system, finding synergies between the Coca-Cola brands and pop color, for example.

After a couple of years of that and no price increases in the past three years, we have strategically agreed with our bottler that now it is time to work towards margin improvement in the Philippines.

And given that we have a very high share of sales already in the Philippines and given that we have restructured going to market, it makes sense to go after price realization.

And that price realization is twofold, one is an increase in wholesale prices on pop cola and an increase in both wholesale pricing and consumer pricing for brand Coke.

So, from a competitive standpoint, I think we're in pretty good shape in the Philippines, have been as you know, historically.

And from a margin standpoint, now is the time for our bottlers to start realizing some of the profitability from revamping going to market.

Andrew, this is Steve.

The only other thing I'd add is that in both examples, brand health indicators are at all-time highs, which gives us confidence when we ask questions like favorite brands and brand worth the money, the numbers have frankly strengthened, which is a tribute to the marketing that we've done and the relationships we've created with consumers.

And so that gives us the flexibility to extract value and we are mindful as we do this of what our relative share position looks like and we haven't seen any kind of share erosion to give us any concern that we've pushed too hard.

So, we will continue to do that unless and until we discover brand health declines or we discover that our relative share position is in any way threatened.

But doing this this way, we believe, is absolutely consistent with the messages we sent in December and the commitments we've made to one another, that our business is about profitable volume growth.

Thank you.

The next question comes from Marc Cohen of Goldman Sachs.

Good morning.

Gary, I think it was Gary, took us through this algorithm of 6% gallon growth to 9% gross profit growth to 11% operating profit growth.

I wonder if you could just give us a little bit of a sense of a road map as the year now goes forward?

Because I understand you're excited about that 11% number.

It just seems to me that the gallon number, you know, may fade as the year goes on, just, you know, in light of the fact that BCS is up 2%.

So how does this play out as the year goes on?

Can you give us any sensitive direction of the components and how they'll go?

Yes, Marc.

I guess the thing I would say and I tried to hit it a little bit in the remarks earlier is that marketing expenses, remember, are those expenses are recorded based on unit case sales.

And there are two aspects here.

Number one, not only were the gallons up on a percentage increase basis in the first quarter, primarily a lot of that due from the shipping days, but the reported unit cases were up 9% because of those extra shipping days, as well.

And because of marketing expenses being recorded based on that 9% increase in unit cases you saw a significant increase in the quarter in marketing expenses.

That's why you're seeing total SG&A up about 14%, I think, on a reported basis.

So, marketing up significantly more than that in the quarter.

But for the full year, I would, marketing will not be up anything close to what it is in the first quarter.

So, those are kind of somewhat offsetting each other, as well.

The other thing about marketing, I would say, is that last year, when we started the year, we knew going into 2003 that it was going to be a pretty tough year and we were pretty conservative with our marketing spend in the early part of the year and as we saw that our strategies were really gaining traction throughout the year, we started ramping marketing up and you saw the result of that, that all of our strategic business units showed solid, I think 10% operating income growth in the fourth quarter of last year.

This year we are very confident in where we are.

We know the strategies are working and we had marketing at a much higher level in the first quarter.

So, as marketing goes through the year, on a quarter-on-quarter cycling basis, much higher in the first and the percentage increases will be declining through the year.

So just reinforce, I think we had a really great start to the year in this first quarter.

So, what we see, just so I make sure I understand this, so, what we'd see is gross profit growth moderate to something more in line with kind of, more sustainable unit and price behavior and you're just going to get tremendous marketing expense leverage as you get into the second half of the year?

That's right.

That's what I would expect to see.

Okay, thanks.

Thanks.

Your next question comes from Bill Pecoriello of Morgan Stanley.

Good morning, everyone.

My question is on you had about 4 points of price mix in the quarter.

And as we're seeing the bottlers focus on improved price mix, also de-emphasizing some of those less profitable packages like large format water, are we going to see this kind of 4 points of price mix sustained going forward versus what we saw more in the 1 to 2 range the last couple of years?

And then, Gary, just one quick follow-up on the last point you were making on the operating profit growth.

Given that the marketing expense went on sales curve accounting, is it a very small percentage of expenses that were more fixed in the quarter, things like amortization?

Is that why you got that slight benefit in the quarter on the extra selling days?

Bill, let me give you a kind of a top line and then we can do once around the world discussing the different approaches that are necessary.

I don't want to give you a precise forecast, but let me say that as our brand price packed channel mix strategy continues to evolve and the package diversity in key markets around the world continues to expand and our ability to do store by store, street by street segmentation improves, we expect to see much more growth coming from package and channel mix and much less coming from rate.

That's a big piece of what the downstream strategy's about.

We're going to continue to drive supply chain efficiencies and in certain markets we expect to take rate as the consumers and our trade can adjust and accept it.

And that's a very different story around the world.

So, you know, where it's relatively easy for us to get price in the trade and through to the consumer, I think you'll continue to see price increases in addition to mix improvements and in other places it's going to be driven substantially more by mix, substantially less by blunt instrument price increases, if you will.

Anybody want to jump in on that?

I would just say in North America, Bill, it's Don.

Hi, Don.

In the first trimester of last year we had our lowest pricing realization, so, the price realization you're seeing this year in the first quarter is probably our highest rate increases that you will see for the balance of the year.

I think we in the bottling system are managing that pricing fairly well.

As we go into the summer season, we'll, in fact, see some lower pricing than we're seeing in the first quarter because we're cycling a more reasonable level of pricing.

Last year we just didn't get much in the first quarter.

Bill, Gary.

On the second point of your question on operating expenses, our nonmarketing expenses of SG&A, as Steve and I both said in our remarks, we're very focused on keeping expenses down, a real cost focus.

Those expenses, in fact, came in right on our plan for the quarter, were down versus prior year.

Now, granted there were, you know, some restructuring expenses in the first quarter of last year, as well.

But we would expect to see very small, if any, kind of increases in the nonmarketing G&A.

Thank you.

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

Yes, good morning, everyone.

I wanted to talk a little bit about Europe in terms of how you're viewing the situation as we lap against much more difficult comparisons over the next couple of quarters from a currency standpoint, volume, weather, the whole nine yards.

Was wondering if you could give us a little bit of an outlook on how things should look in Europe over the next couple of quarters?

John, this is Sandy.

How are you?

Good, how are you doing?

I'm fine, thanks.

John, I think in Europe, it's true that last year we had an excellent summer in the third quarter.

But as you see from our volume growth in the first, we started off very well with 4% growth and we're confident that we're going to get reasonable volume growth certainly in the second quarter.

As we move into the third quarter, we've got some great activities coming up, for example, we've got the Euro 2004 soccer.

We've got the Olympics.

And you put all that together, we have a very, very strong marketing program.

I think in addition to that, throughout Europe, we are very focused on driving net revenue, particularly the bottlers net revenue.

And last year and this year we're putting a tremendous investment along with our bottlers into single serve packaging, which, as you know, will be very profitable for our bottlers which in turn allows to us increase concentrate prices.

So, we expect to get concentrate price increase.

We also expect to get the benefit of brand mix.

In Europe there is a tremendous movement towards diet product and our Diet Coke and Fanta Light products are growing double digits and they have been for the last two years and we expect that to continue.

Now, Diet Coke has got about double the profitability for us compared to sugar Coke.

So you put all of that together and we are confident that we are going to have a, certainly a strong second quarter and we'll [recycle] it that summer, we expect to be positive in the third quarter.

And one follow-up.

Obviously the German market is probably still struggling from a volume standpoint.

Can you just highlight your market share trends there?

Let me just deal with Germany so that we're clear.

When the mandatory deposit was introduced in January of 2003, consumers, all consumers just about, left the single serve CSD category.

To give you an idea, we sold in 2003 about 100 million cases less of cans and half liter nonreturnables because consumers just simply couldn't get their deposit back so they left the CSD category to other categories which didn't attract the mandatory deposit like juice and tea and coffee.

So what's happened in Germany is that the whole CSD industry came down by about 7% in 2003.

And that situation will remain until there is a change in the mandatory deposit legislation, which we don't expect to happen in 2004.

We do expect some change in 2005 because we believe that the European Union's going to interfere.

So, if you take that loss of single serve volume, the fact that we ended up flat last year in Germany, was in my view a great achievement, and it showed that we are taking share in the multi-serve refillable category.

So, overall last year we actually gained a point of share.

This year for the first quarter, reading February, we're actually down about half a percent.

Thanks.

Your next question comes from Christine Farkus with Merrill Lynch.

Thank you very much.

Good morning.

I'm wondering if you could address the profitability of the water business in Mexico?

We're lapping now the structural change with the brands a year ago and I'm wondering, perhaps ignoring jugs, if you can give us a sense of the profit trends?

And on the back of that, similarly, if you could comment on the profitability in your North American water business and how the three tier strategy is looking this year versus a year ago?

Thank you.

Hi, Christine.

Profitability of water in Mexico.

Water is profitable in Mexico.

The small size is what we call personal sizes are very profitable, less profitable, as other categories, similar categories.

What is not as profitable is the large format, the jugs.

Those are not unprofitable, but not as profitable as the small packages.

And the lapping that you talk about, I have already mentioned that it was a 14% increase in the first quarter a year ago versus '02.

Does that answer your question?

A little bit more specifically on profit growth in your single serve water, how are those trends looking now once we're cycling the structural change?

Well, as you know in Mexico and actually throughout Latin America, we offer different packages for different channels at different price points.

This price and package in architecture is continuously bold and continuously evolving to satisfy consumer needs and to stay true to market realities.

So, as such at any given point in time, some prices are up and some prices are down, but that strategy, that price impact strategy at the end of the day, the idea is to increase revenues.

And that strategy has proven to be successful in doing just that and I believe that it will prove it again as we go along this year in Mexico.

Would you say those comments are true, as well, on the soft drink side given the competitive nature of what you're seeing there?

Absolutely.

Don do you want to comment on North America?

Yes, good morning, Christine.

Good morning.

I'd say on the three tier strategy, we are getting traction.

As you know, Dasani is obviously the profit engine in North America and Dasani is growing at 17% in the first quarter.

I think important to note that Dasani's pricing relative to the category averages a 138 index, versus Aquafina at a 115, Nestle at an 80 and Danone at a 73.

Now, one of reasons we're happy with the three tier strategy is to help Dasani.

Using these three brands with major retailers, we're getting a lot more merchandising support behind Dasani and Evian as we group these three brands together.

One of the things that's resonated with the trade is we're trying to optimize profitability for the retailers in this and footballing low priced water is not in the best interest of anybody and the retailers I think are coming on side with that point of view.

So, we are seeing in the first half of the year much more commitment from retailers on incremental merchandising support behind all three brands.

We have moderated the pricing on Danone in February and March.

We've changed our trade approach.

You can see some slowing in volume in Danone because of it.

But we're focused on optimizing profitability in the category and that seems to be resonating with the retailers.

Terrific.

Thank you.

And I'm just wondering if I can follow-up quickly to get your global and North American CSD and non-CSD volume growth?

Thank you.

Christine, this is Larry.

The carbonated soft drinks on a global basis were up 2%, noncarbs were up 4%, and as we said that was offset by some of the choices to de-emphasize some of the water in different markets.

And in North America, carbs were up 1 and noncarbs were up 6%.

Thank you.

Thank you.

Your next question comes from Carlos Laboy with Bear Stearns.

Yes, good morning.

On Brazil, I was hoping you could give us a progress report.

You're almost a near into your new model.

Can you expand on both your profit trends in Brazil, system profit trends and where you are on returnable bottle initiatives in Brazil, as not all bottlers have taken them up yet?

And second of all on Germany, you said you're taking share in the multi-serve returnable category, but what happens in 2005 if the deposit law is reversed?

Is there life after this law for returnable bottles?

Or are your investments in refillable bottles likely to become obsolete?

Carlos, hi.

Pacho.

Brazil, we're very pleased with the trend in Brazil.

We're clearly following the right strategy.

Profits are up, double-digit up and not only for us, but for the total system.

Coca-Cola brand, Coca-Cola is gaining share.

It actually grew 3% in the quarter.

And although total volume is still down, the trend is in the right direction and as we continue to trend down the unprofitable volume it would increase even more.

So, we remain focused on the strategy as we have discussed it.

It's paying off, we're getting there.

If I could just add, Pacho, this is Steve, everybody.

We went to a good deal of trouble to take apart our operating costs in Brazil and to basically recast the business such that our Op Ex has been reset and substantially lower on the one hand, but we've also went to a good deal of work to build back capability that had eroded with regard to customer management, connections to the trade and our ability to really have control over where our packages went and which packages went to which customers.

And as that continues to come online and as the bottlers build back some infrastructure with us, we believe that our ability to actually execute a revenue management strategy will further accelerate the profits in that market.

Carlos, Sandy.

On Germany, and the mandatory deposit, what I indicated was that there's going to be a change to the mandatory deposit in 2005, but I do not believe that there will be an elimination of the deposit.

I think it will be modified.

The problem in Germany, as I said before, is that consumers can't get their deposit which is 25 euro cents which is about 30 U.S., they can't get it back easily.

I think there will be changes in the legislation that will introduce what I would call a fee on nonreturnable packaging and that fee will be of sufficient magnitude to protect the refillable packaging because after all, what the government is looking for is an improvement in the environment.

So, they want to, if you like discourage the use of nonreturnable packaging or if consumers want nonreturnable packaging, then you must be prepared to pay a fee for that convenience.

So, I don't see that refillable packaging is going to disappear when the mandatory redeposit legislation is modified.

Thank you.

The next question comes from Bryan Spillane with Banc of America.

Hey, good morning, everybody.

Just a question on raw material and commodity costs.

Just curious to hear, you know, certainly we've seen an increase in commodity costs as the year has begun and where that stands relative to where you were planning at the beginning of the year and kind of how that affects, you know, the plans that you had with the system and whether or not that's creating an opportunity to actually go in and ask for more price increases in certain markets?

Well, this is Steve.

Let me just take a second and top line this and then anybody else that wants to jump in can.

Many of you know we've been working closely with our largest bottlers around the world to basically create a procurement capability that leverages the strength, the scope, the scale of the system.

That has done a lot of good for the bottlers and for the company with respect to our ability to manage costs and really take advantage of what we mean to many of our suppliers, both from an R&D and development point of view, but also from an absolute cost point of view.

Those programs are picking up a lot of traction.

Bottlers are enthusiastic.

We're working together as never before and it's showing up in P&Ls of everybody.

So, with that as some kind of an overarching answer to your question, I think it puts us in a position where we're confident that our underlying economics can be managed as commodity prices and raw materials move, that we can find ourselves in an enviable position relative to competition.

Anybody else want to...

Nope, I don't think there are any other takers.

I hope that answered your question, Brian.

Yeah, that does.

Your next question comes from Alec Patterson with RCM.

Yeah, really a direct one for Gary.

Just, Gary, the FX impact, top line, could you break that out?

And also, what sort of impact hedging had on delivering the FX, the operating income and how that's going to play out for the rest of the year?

Okay, Alec, as I said it was about 12 points on operating income on the net revenue line, currencies impacted revenues about 8 points positive.

Relative to hedging results, the hedging actually did not come into play in the first quarter.

The rates were, the actual rates that came through were above anything that we had lost, which is what you’d want to happen, obviously.

That's why we used the option strategy to have the upside but protect the downside, which is what happened in the first quarter.

Relative to the remainder of the year, we do have hedge coverage in place for most of the remainder of the year but the benefit, as I said, because we're starting to cycle some of the positive moves of the euro and the yen and last year, the benefits are going to start coming down and be substantially less, based on spot rates as of now versus last year.

So, Gary, the 8% on sales that turned into 12 on operating income is due to country mix?

Yes.

It's on country mix.

That's exactly right.

Okay.

Great.

Thank you.

Thanks, Alec.

Operator, we've got time for one more question, please.

Okay, your final question comes from Marc Greenberg of Deutsche Banc.

Thanks, good morning.

A follow-up with Gary on your comment of consolidation of bottlers.

Can you briefly outline the criterion you applied to consolidate the new bottlers and discuss if it has any impact on your intention to ultimately reduce ownership in bottling operations?

And coupled with that, some comment would be helpful about whether Coke is willing to add additional leverage to the balance sheet at this time?

Okay, thanks, Marc.

A couple of things.

I received from one of the large accounting firms recently, their booklet or analysis of FIN 46, now, remember this is an interpretation to the FASB issue.

And it's something like 200 and something pages long just to try to interpret this thing, so, going through the rules is mind-boggling, shall we say.

But basically under those rules there are some bottlers that while we do not own a majority of, we do not have majority voting control, we are required because of some guarantees or other things to consolidate them.

They're minor and as I said and do not expect any significant impacts on our balance sheet or our P&L.

In fact, the P&L is basically the same either way, it's just within line items, a full consolidation versus equity accounting.

With that said, what we've said previously that many of our bottlers that we own, we would expect to sell over the next few years.

We have sold our bottlers recently in Vietnam, Nepal and Sri Lanka.

We are engaged in some discussions to sell some other small bottling interests that we have.

Nothing of any significance.

The major strategic stakes that we have, be that in Helenic or Amatyl, CCE, Simms, etc., we would expect to maintain those positions.

Well, thanks, everybody.

I'd like to thank everybody for joining us on the call this morning.

We look forward to discussing strong results with you again soon.

We feel confident about the year and we appreciate you taking the time to talk with us this morning.

Thanks.

This concludes today's conference call, you may disconnect at this time.