可口可樂 (KO) 2004 Q2 法說會逐字稿

Good afternoon.

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

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

All participants will be in a listen-only mode until the formal questions and answer portion of the call.

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

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Participants will be announced by their name and company name 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 call.

Mr. Mark, you may begin.

Thank you very much.

Good afternoon, everybody.

Thank you very much for joining us today.

I am pleased to be joined today by several members of our senior leadership team.

Specifically, I am here with Neville Isdell, our Chairman and Chief Executive Officer, Gary Fayard, our Chief Financial Officer, Sandy Allan, President of Europe, Eurasia and the Middle East, Alex Cummings, the President of our Africa group, Don Knauss, the President of our North America group, and Mary Minnick, the president of Asia, and Jose Octavio Reyes, the president of Latin America.

Each of our executives will make a few brief comments this afternoon.

However, we plan to use most of our time for your questions and answers.

So that we can get to as many of your question as possible we could ask that you be considerate of others and limit yourself to one question during your time.

Please be respective of these guidelines.

Before we get started I would like to remind earn that this conference call may contain forward-looking statements including statements concerning the long term earnings objectives and they should be considered in conjunction with the cautionary statement 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 to your attention the fact that we posted schedules to our Company website at Coca-Cola.com in the Investor section which reconcile our results as they are reported under generally accepted accounting principals to certain nonGAAP measures which may be referenced by our senior executives in our discussions this afternoon and from time to time in discussing our financial performance.

We ask you to please look at our website for this information.

With that I would like to turn the call over to Neville.

Thank you, Larry.

It really as a great pleasure for me to join you today.

I've stated many times over the last several weeks that it really is the honor of a lifetime to be working as Chairman and CEO of Coca-Cola Company.

Particularly I am really thrilled at the warm welcome that I received as I returned from retirement Company that I love.

It's a great Company with a great history but I think most importantly a very bright future.

In my new role I look forward to many conversations with you as I plan to take an active dialogue -- take up an active dialogue with the investment commune in the in the near future.

Let me just tell you over the last six weeks that my priority has been to really totally immerse myself that the details of our business.

Getting up to date on our opportunities, on our challenges, our strengths, and also the areas where we need to do better.

Some of you may know when I began on June 1, I said I was going to take 120 days to do this, to listen and to understand.

I'm still isn't the process of doing this.

I am going to be doing the listening over the 120 days of listening to employees, to customers, consumers, and, of course, to our bottling partners.

At this juncture I want to tell you that my initial review it's pretty clear to me that our system remains appropriately focused on enhancing it's revenue growth capabilities.

In some markets we are doing an excellent job of capturing the value of our brand in a way that really does maximize profitability for both our system and our customers.

And in other markets as you would expect, there's still some work to be done.

Our system is also committed quite rightly to having the strongest beverage brands in the world.

We currently do have the best brands.

But to keep them strong we recognize that we have to continuously challenge ourselves and to find new and innovative ways of satisfying more consumers, most importantly in today's environment, maintaining the relevance of our brand.

I do believe that we have begun to build a solid foundation that will deliver sustainable, profitable growth.

But as would you expect, we do have opportunities for improvement.

Today's results really reflect the fact that we are delivering solid results in many markets, but also, and you will see this from people runs the businesses, we do have challenging conditions in several key countries.

Today you are going to here from our operators and how we are really focused on not only improving our short term performance but also doing the right things for the long-term, strengthening the long-term capabilities of our system in all the key markets around the world.

Before I turn the discussions over to our operators I am going to ask a special request because I told you earlier about my 120 days and the fact that I was going to listen and learn from all our key constituencies over that time.

I want to hold to that.

What I wanted to today is actually to sit in and listen to you, our investors.

So consistent with this approach, and I'm taking this with all the communities in which I am listening to, I do not intend to answer any questions today.

I am here to listen to you and see what you are most interested in, in terms of our operating results and our future going forward.

I know that we are going to have many opportunities in the future for good conversation.

A number of you there are people that I know well.

To talk about our strategies and what I think is a great future ahead for Coca-Cola Company.

So I appreciate your respect with regard to this request and with that said, I want to turn the call over to our senior officers for further comments and they, of course, are going to handle the Q&A.

So I'd like to start with the operators and be followed by a financial overview.

Let me first turn it over to the head of Europe, Sandy Allan.

Thank you, Neville, and good afternoon, everybody.

Within the Europe, Eurasia and Middle East group, we had a very challenging quarter that came in softer than our internal business plan both in terms of profit and especially in terms of volume.

Even though below plan, we remain committed to our strategy of system revenue growth, of focusing on our core brands with an emphasis on profitable, immediate consumption and especially on lite products as well as our continued expansion new profitable new beverages.

In terms of the second quarter, unit case volumes declined by 2%, cycling prior year growth of 7%, and this can be attributed to 3 primary factors: First, poor weather condition across Europe, both northern and southern, but particular in northern Europe through out the second quarter.

Secondly, the revival of hard discounters in Germany for carbonated soft drinks and, third, pricing initiatives taken in Great Britain and France.

First let me address the weather.

Western Europe, where we make 80% of our profit, is a relatively small geographical area.

If it rains, and there is no sun in one area, it typically rains and there is no sun everywhere.

We had budgeted for reasonable weather this year, knowing that the record-setting hot temperatures from last year would be a challenge to cycle.

However, we did not budget for weather that has been consistently rainy and on average 8 degrees Celsius, or around 14 degrees Fahrenheit cooler than last year.

Given that away from home beverage sales in Europe are strongly impacted by weather patterns this has adversely affected our performance.

Second, the group's performance was very much impacted by Germany where our volumes declined 15% in the quarter.

The entire beverage industry was negatively impacted by poor weather conditions within an already challenging economic environment.

However, the most important factor impacting us was the strong growth in the hard discounted channel.

Within this channel our brands have had almost no availability since the imposition last year of mandated redeposit legislation.

Let me put the hard discounted and mandated deposits into perspective.

Last year, 2003, the first year of mandated redeposit legislation, we lost 60 million unit cases, or 10% of our total German volume when cans and half leader nonrefillable PTE bottles essentially went away.

Yet when you look at our total volume for the last year, we finished flat for the full year.

This would you achieved because are consumers shifted to buying from carbonated beverages in refillable packages from us from nondiscounted channels.

They did this because hard discounters discontinued offering nonrefillable packaging because their logistics did not allow them to economically provide consumers with a convenient way to receive a refund for their mandated redeposit they had paid.

In 2004 discounters have in fact come up with a solution to dealing with the logistics and refund issues caused by the legislation.

Each hard discounter introduced their own individual island solution.

That means the contract build their own private label brands in their own shaped PET bolts and these consumers can return these bottles for deposit refund at any branch of that discounter.

The islands solution is anti-competitive and illegal under EU law.

We do not believe it is right for our brands to allow them to be contract filled in someone else's bottle shape.

In contrast to our strategy, our primary multinational competitor has entered into the deep discounted channel by allowing their products to be sold in the discounters own private label bottles.

In many of these instances they are shipping concentrate to a third party for manufacturing and distribution.

As I said, this is not an acceptable solution for our brand.

So far our strategy has been to focus on all the other retail channels which have stronger profit characteristics.

In all these channels our carbonated soft drink share has increased.

However, because discounters are increasing in significance, representing approximately 38% of the carbonated soft drink market at the end of the second quarter, we continue to look for a solution which would allow our brands to be present in these outlets.

We are currently negotiating ways of reentering discounters without using their bottles and, very importantly, without compromising our profitability in the other channels.

The good news in Germany is that our profits both at the division and the bottling operations, are growing on a year to date basis.

This is true even as the benefits of currency are excluded.

As we have seen positive results from the streamlining initiatives completed in 2003.

Obviously we would like to see higher growth in Germany so that the success we are seeing in other regions comes through even more strongly at the group level.

And the third factor negatively impacting the group's volume was the pricing initiatives of our bottling partner in Great Britain and France.

As pricing initiatives were implemented, we found that the pricing and promotional practices of our primary competitors led to a volume share decline in the quarter.

This is a matter we are currently reviewing together with our bottling partner, and we will make appropriate adjustments in the back half of the year.

Our fundamental strategy is to progressively improve the profitability of the entire Coca-Cola system, and this will be done buy balancing price and volume.

As we look to the third quarter we are well aware of the difficult comparisons for both volume and profit which we face in cycling the record-setting temperatures from last summer. [INAUDIBLE] indicators have recently improved based on our involvement in Euro 2004 soccer.

Euro 2004 was the first of two major marketing events for us in Europe this summer.

We are now activating the Olympics across all major markets.

We had some short term challenges in the quarter, but the fundamentals of our business in Europe are very strong as we have consistently demonstrated by our ability to deliver double-digit profit growth over the last several years.

These fundamentals have not changed and they will continue to drive our results going forward.

I would like to turn thing over to Mary to discuss Asia.

Thank you, Sandy, and good afternoon, everyone.

In Asia we remain on track in the implementation of our 2004 strategic plan with quarterly volume growth of 4% and year to date volume growth of 2%.

Reported profit is up double digits in both the current quarter and year to date.

In the second quarter, Asia generated strong profitable volume growth in strategically important markets such as Japan, China and Australia, while simultaneously implementing important price increases that are temporarily impacting unit case volumes in markets such as the Philippines and Thailand, and we also reduced our focus on less profitable packages such as bulk water in Indonesia.

We are especially pleased to see our strategies working in Japan with 4% volume growth in the quarter and strong profit growth.

We remain committed to the four key strategies in Japan.

One, enhance our performance in supermarkets with the new packages, prices and merchandising we talked about; creating new profit generators by revitalizing vending and launching high margin new product; three, accelerating procurement and manufacturing savings through the new supply chain management company; and, finally, keeping core brands healthy.

Against each of these core strategies we made good progress in the second quarter.

Our volume in supermarkets grew by 8%, driven by 500 MLPT multipacks and the new one liter expansion, while system gross profit per case on large PET packages improved.

Full service vending volumes increased 7% behind the introduction of new product, resealable package expansion and enhanced machine placement.

The Coca-Cola National Sales Beverage Company is holding to its upward estimate revisions in cost savings of 110 million in 2004, and volume growth in Japan was driven by 6% growth in trademark Coke and double-digit increases in SOKABECHA, MAROCHA and Aquarius, partially offset by volume softness in COU and an industry slow down in the coffee sector particularly in PET packages.

Our introduction of Coca-Cola C2 on June 7th was our largest ever brand launch in Japan and was extremely successful in revitalizing trademark Coke sales and growing our cola category share.

Sales were particularly strong in the highly profitable vending channels with trademark Coke growth of 21% in the quarter.

Looking ahead early indications are that C2 will continue to help drive business results with strong consumer awareness and repeat purchase scores.

All of these initiatives are part of a strong investment commitment which is being shared equally by our Company and our bottling partners.

We are jointly investing in key price, package and channel initiatives to strengthen our system in Japan and lay the groundwork for our future competitiveness in this critical market.

Year to date, we are growing volume share in the highly profitable category of carbonated soft drinks, canned coffee and sports drinks.

Having said that our emphasis will remain on profitable volume growth.

Across the rest of Asia we are also driving profitable growth through innovation, price realization, pure top line CSE growth and by selectively accelerating our expansion into profitable non-carbonated beverage categories.

Specifically we are investing in China to deliver both short term results and to strengthen our position for the long-term.

Total unit case volume increased 37% in the second quarter with carbonated soft drinks growing at 31%.

To significantly increase our CSD share position.

Our affordability strategy on Coke continues to pay out with packages sold at one R. and B. driving almost one quarter of incremental immediate consumption transactions in China.

Non-carbonated beverages grew at 60 percent, driven by continued strong performance on COO and launchings Nestea Ice Rush and MinuteMaid Pulpy Orange.

Another of our strategies across Asia is accelerate total system profitability through disciplined implementation of the right revenue growth management strategies for each local market.

In the Philippines our objectives are aligned with our bottler strategy of driving profit growth through margin expansion.

Second quarter volume declines of 15% reflect the impact of the price increases taken late last year, which was the first price increase in three years.

Once we cycle this price increase we are expecting volume growth to return driven by marketing and improvement in dealer credit terms and continued strengthening of our sales and distribution systems.

Indonesia is another market where we are having a short term impact on volume growth as we reemphasize various large format package within the water category to accomplish supply chain savings.

However, CSD's in Indonesia are growing 15% and our Fresh Tea brands is growing 75%.

Briefly, the only other market which I would like to comment on specifically is India.

We experienced single-digit volume growth in the second quarter as the onset of early monsoons in June limited our ability to cycle the strong 33% growth from the prior year.

Consumers continue to respond positively, however, to our affordability strategy with strong growth in immediate consumption packages resulting in CSD share gains of 2 points year to date through May.

In conclusion we are pleased with our performance in Asia and encouraged by the trends which we saw in the second quarter.

Now I'd like to turn things over to Don Knauss for a discussion on North America.

Thanks, Mary, good afternoon, everyone.

The year so far North America is really progressing well.

We are on track to deliver our plan for the year which is really based on the four premises driving system profitability through a focus on profitable growth in both carbonated and non-carbonated beverages and creating more value for our customers as well.

During the quarter our overall profits remained solid, our total unit cases grew 2%.

This unit case growth was led by 4% growth in the foodservice and hospitality division and benefitting from really strong customized customer programs but improving restaurant traffic as well.

Unit cases in our retail business units grew over 1%, cycling a strong 5% growth in the from the second quarter of last year.

First I'd like to discuss our bottler delivered CSD brands which had their hardest comps in the first half.

CSD volumes were affected in the second quarter by the strong pricing that I think you've all seen out in the market and rainy market cross many heart land markets in June.

That weather really impacted us across the southern corridor as well as the state of Texas.

From a strategic standpoint, we fully agree with the focus on value and we are closely aligned with our bottling partners as they focus on growing retail dollar share.

In fact so far the system is achieving very strong revenue growth based on both package and pricing initiatives.

Standard data through May is indicating that about 15% of the price realization is occurring through improvements and package and channel mix and the remaining 85% is occurring through rate increases.

Now, even though these rate increases affect short term volumes and share, these initiatives are making our system and our industry much stronger as we continue to shift the focus towards maximizing total retail dollars and as Sandy said, trying to get a better balance between pricing and volume.

In the second half of this year, we expect to improve our share position as we balance volume price realization and package mix.

Some of the highlights of the CSD category include excellent growth in Diet Coke, trademark grew by 7% in the quarter, we are also benefitting from new brands such as C2, Diet Coke with lime and Sprite Berry Remix, and packages such as the smaller single serve PET bottles and the 12-ounce PET fridge pack.

Before I move off of CSD's I would like to give you an initial read on Coca-Cola C2.

Now the launch of Coca-Cola C2 is delivering against our objective of meeting what we believe is a fundamental consumer need while enhancing system margins, not to mention our customer's margins.

From both a consumer standpoint and from a customer standpoint we have some favorable measures to report.

Now, we've been in this launch not quite six weeks and after only a few weeks in the market here's what's happening with the consumer.

At least we consider these brand health metrics to be very strong.

We've achieved over 80% awareness.

Trial is running close to 30% and that's ahead of our plan.

And the repeat is running above 40%, and is on plan.

We've also gotten some very favorable feedback from our customers on execution.

I'd like to share some of those comments from one of our largest customers.

In this customer we achieved 99% all commodity volume distribution in one day.

Over 200,500 stores sampled pulled Coca-Cola C2 within the first 36 hours of availability covering almost 1.3 million shoppers in the first weekend.

And a very well-balanced mix across three package types with all three profitable at profitable margins for the customer.

This customer is quoted as saying to their field force, Coca-Cola C2 is living up to its promise of being a profitable revenue enhancer with the CSD category.

Those are the kind of comments we expect to here from more customers as we move this launch forward.

Now that's some of the good news.

I also would like to say that we see some opportunities for improvement.

In many retailers, we had the opportunity to enhance the execution of our pricing strategy.

As the price premium for Coca-Cola C2 has been well above the 15% target range, that was a 15% target range per can.

As was particularly true during the recent holiday period when we went out and launched the unique 8 pack while retailers were investing behind 12 packs behind the 4th of July holiday to drive traffic, we had plans in place right now to increase the velocity crosses all packages.

Based on a very large customer data we've seen that when Coca-Cola C2 is priced correctly the velocity can be very favorable.

In fact, in the customers where we've seen the premium in the 15 to 20% range, we are doubling our velocity target that we sent.

We expect to get 10% of the velocity of Classic, and in those customers we are getting 20% of the mix of Classic.

So very successful there.

So that's where we stand with Coca-Cola C2.

We are going to be watching the actions of our competitor very closely, but let me assure you that we are not going to get pulled into a volume only game.

Our intension is to profitably enhance revenue within the CSD category and we feel that Coca-Cola C2 will be a strong contributor to that strategy.

With that let me move on to a few other highlights for the quarter.

Our hydration duration brands are performing very well.

Power Ade grew 24% in the second quarter and gained almost a share point on a year to date basis.

Dasani grew 12% in the second quarter while maintaining its 36% price premium to the water category in supermarkets.

The [INAUDIBLE] brands despite aggressive discounting by competitors.

And we are remaining disciplined in our pricing architecture such that Denone is appropriately positioned within the category.

Moving to juices, our warehouse delivered juices grew by 4%, gaining share despite continued weakness in the category.

Brands which outperformed the category included Simply Orange, MinuteMaid Premium Heart wise and Hi-C Blast.

Also the bottler delivered minimum brands of refreshment brand grew by 18% in the quarter helped by introduction of new lite flavors.

To wrap up in North America I would reiterate we are on plan to deliver results for the year and to remain focused on pursuing a system value strategy.

All of our actions are aligned to make that happen.

With that let me turn thing over to upon Poncho to review Latin America.

Thank you, Don, and good afternoon again.

This quarter in Latin America we continued delivering on our profit plan with high single-digit operating income growth.

Per unit case sales are less than what we were planning.

Operating income by the way has been impacted by negative currency trends but overall very, very solid numbers on the profit side.

Throughout the region, and this is true in every geography, we continue to execute our long-term investment strategy with an emphasis on brand building, new package alternatives and close coordinations with our bottlers to drive superior local marketplace execution.

As I said in terms of unit case volume, it was not as strong as we would liked it.

We had good growth in Brazil, Argentina, Chile, Venezuela, almost everywhere but we had a decline of 3% in Mexico.

So let me tell you a little bit about what went on in Mexico.

In a tough second quarter in Mexico really not from a competitive perspective.

The problem for us there was the terrible weather in the month of May, specifically.

Overall volumes for May were down double digits and didn't really return to normal levels until we are two weeks into June.

Furthermore for us the competitors versus a year ago were affected by our strategic decision to deemphasize large format packages in the water category, the 20 liter jugs.

Having said all that our business remains strong.

In fact during the quarter we saw increases in our share of the carbonated soft drink market with our share position in May better than April and April better than March so the trends is moving in the right direction.

From a strategic point of view our focus is in four initiatives, number one, maintaining the price architecture, number two, accelerate personal consumption packages, number three, sharpening our competitive plan and, finally, enhancing innovation to strengthen preference for our brand.

Overall, the Mexican market remains dynamic, but I am confident we are doing the right thing, the right thing to secure the long-term volume and profit base we have in Mexica .

Let's move over to Brazil where we are seeing a real turnaround story.

Last year you may recall this, we started taking significant steps to enhance our business model.

Specifically we improved our relationship with our bottlers.

We deployed a consumer led brand package price channel architecture.

And we began to systematically upgrade our execution in the marketplace.

We are now seeing the benefits, the results of that work.

Specifically in the second quarter overall unit case volume growth was 7%, led by trademark Coca-Cola growing 9%.

The single serve refillable packages because the [INAUDIBLE--STRONG ACCENT] channel to grow by 20% and as you know those packages and those channels are most profitable in their and therefore the revenues increased by over 30% and operating income increased by over 100%.

Very importantly our system profitability is also more than doubled in the quarter.

So by emphasizing packages and channels with higher profitability we are improving our system economics.

While at the same time increasing or share of CSDs carbonated soft drinks in both volume and value, both volume and in retail dollar terms.

We are also reducing our dependence on the 2 liter package and large format channels which in Brazil has less favorable profitable activities.

Within the hyper and supermarket channel our mix of [INAUDIBLE--STRONG ACCENT] packages has grown to 21% year to date.

That compares to about only 10% last year.

This package price and channel strategy explains the large part of the significant profit growing our system experienced.

We are very pleased with the results that we are seeing in Brazil and are optimistic that we will see continued success in creating value for our system.

Argentina, another example of how our focus on building brand for the long term pays off, [INAUDIBLE--STRONG ACCENT] in Argentina are growing 14%, cycling 18% growth from the prior year.

And the growth is coming from one [INAUDIBLE--STRONG ACCENT] with trademark Coca-Cola increasing 11% and core brands driving over 80% of the growth.

We are pleased with the execution in Argentina, however, we continue to see opportunities to enhance our revenue growth management and segmentation capability.

There are always opportunities to better meet the needs of our consumers.

So in summary we continue to be on the right track in Latin America. [INAUDIBLE--STRONG ACCENT] in place and sometimes when forcing the right strategies for long-term value creation.

With that and my thanks let me turn things over to Alex

Thanks and good afternoon.

The Africa group delivered strong double-digit operating profit growth in the second quarter, led by a combination of selective price increases and by focusing on higher profit products and packages.

Unit case volume in the quarter increased 2% led by solid results in South Africa, Morocco, Kenya and Tunisia , This success was partially offset by continued weakness in Zimbabwe and emphasis on less profitable water packages in Nigeria.

Core brands performed well with trademark Coke up 4 percent, Fanta up 6% and Sprite up 5% in the quarter.

Trademark Coke was driven by double-digit growth in Morocco and Kenya as well as strong performance in South Africa where we took a planned price increase.

By increases prices in South Africa slightly ahead of inflation we managed to grow system revenue by balancing price and volume.

In South Africa we had unit case growth of 3% in the second quarter.

And 4% year to date.

Initiatives of this type are leading to steadily increasing system profits across Africa.

Egypt is another market where system profitability is increasing due to price increases and cost savings initiatives.

Additionally we continue to effectively execute our strategy to selectively broaden into other beverage categories.

For example, we've introduced two new [INAUDIBLE--STRONG ACCENT] brands in Morocco [INAUDIBLE--STRONG ACCENT] and we continue to roll-out Dasani in Kenya and Ghana.

Further indications from consumers are very positive.

Zimbabwe continues to report volume declines due to major socio economic issues.

Maintain visibility within this market while awaiting improved economic.

Performance in Nigeria, our second largest market was impacted by a national strike and civil unrest as well as decline in less profitable water packages.

However, our share position within carbonated soft drinks remains stable.

In Africa we continue to focus on the fundamentals of our business which include product availability and cold outlet creation, affordability and revenue growth management and brand preference.

With consistent execution of these fundamentals we will show sustainable profitable growth over time.

Now I would like to turn the call over to Gary.

Thanks, Alex.

I would like to spend a few minutes going through the highlights from our release before going to your questions.

Reported earnings per share increased to 65 cents in the quarter, 18% higher than the prior year first quarter earnings of 55 cents.

On a year to date basis we increased earnings per share 25% to $1.11.

If we exclude some unusual items from the current year and last year, earnings per share increased 12% in the quarter and 17% on a year to date basis.

Reported operating income for the quarter increased 13% to $1.8 billion and on a year to date basis we grew operating income to 3.3 billion, an increase of 22%.

Again if you exclude unusual items from this year and last year, operating income increased 13% and 17% year to date.

As you heard from our operators this growth in the quarter reflected solid performance in many key markets around the world including North America and Japan.

Partially offset by difficult operating environment in Germany, poor weather in Europe and Mexico and higher corporate expenses.

Currency also positively impacted operating income by approximately 6% in the quarter and on a year to date basis our ongoing operating income increased 17% which included approximately nine points of currency benefit, thus reflecting a currency neutral operating income growth rate of 8%.

On a currency neutral basis these operating income trends are below our long-term expectations and as you heard from our operators we're clearly focused on taking steps that will strengthen our ability to deliver more sustainable and profitable volume growth.

Regarding our reported earnings per share there are several items that impacted the comparability of our results on a year over year basis.

The net effect of these items was a benefit in the current quarter result in the amount of 1.5 cents per share.

Individual items included first a $41 million tax benefit related to the reversal of previously accrued taxes because of a favorable agreement with tax authorities.

Second, equity income benefited by $37 million pretax in the quarter because of a favorable tax settlement at Coca-Cola [INAUDIBLE] .

Third we had a gain of 39 million pretax that resulted from there issuance of stock by Coca-Cola Enterprises because the stock issuance of CCE resulted in a slight decline in our ownership of CCE to 36 percent, we are required to record a non-cash gain.

Lastly offsetting these gains was a charge of 88 million pretax related primarily to the write down of various manufacturing investments.

So that you can clearly see the impact of these items on our financials we posted a reconciliation schedule on our website.

Let me summarize cash-flow.

During the first six months of the year our cash from operations increased 39% to $3 billion, as compared to 2.1 billion in the first 6 months of last year.

Our cash flows remain extremely strong and I expect them to continue well into the future.

As a partial use of this cash we expect to continue with our strong dividends and we expect to be aggressive buyers of our shares.

So far this year we have bought $966 million worth of our stock and we still plan to repurchase at least $2 billion of stock for the full year.

Before we move to Q&A I want to mention a few other factors related to the back half of the year.

First on gallon shipments, in the first six-month of this year gallon shipments have increased 5% which is consistent with the reported unit case growth during the same period.

As we had previously discussed this amount benefited from increased shipping days in the first quarter and this will be offset by fewer shipping days in the fourth quarter of this year.

These fewer shipping days in the fourth quarter mean that we expect gallons to grow at a slower rate in the second half of the year.

Second, currencies, as I've already mentioned we had a very nice currency benefit in the first half of the year.

Based on our current projections and based on the timing of the currency trends last year, I expect that our currency benefits will be substantially less than in the second half of the year as compared to what we saw in the first half.

In addition with the strong currency benefits we received so far this year, we will be investing back at least 2 cents per share of this upside in the market behind the launch of Coca-Cola C2 and in selected markets where the competitive landscape is very challenging.

Third, taxes, I expect that our effective tax rate of underlying operations will be approximately 25% for the remainder of the year.

So to sum up, we had a solid performance in many key markets during the quarter.

We also had a number of challenges that caused our results to be a little weaker than we prefer.

In all of these situations we are diligently modifying our plans and strategies to strengthen our ability to deliver more sustainable and profitable volume growth.

As we move to your questions I would like to reiterate the request that Neville made earlier and ask you to please direct your questions to me, or the operators here with me.

And with that said, operator, if we can move to the first question.

Operator?

[OPERATOR INSTRUCTIONS] Our first question comes from Andrew Conway with Credit Suisse First Boston.

Kind of a strategic question on your price value strategy globally.

First in focusing a little bit on North America, let's say as one market, and the U.K. as another, maybe North America bottle/can, do you think that in focusing with your system on price mix that perhaps there is a little bit more elasticity creep into these markets as you've employed the strategy and you begin to learn how to balance price and volume going forward?

And then a second part of that has to do with the need to fine-tune your strategy with either incremental DME.

And then if you could also share your comments on the incremental two cents in the back half in terms of is it in addition to your existing plan and roughly how you will spend it.

Andrew, it's Don for North America.

I don't think that it's elasticity creep.

I think we understand our elasticities well.

I think what's going on in the first half we had a plan to drive about a 2.5% increase in debt net N. S. I. We are getting a little bit north of that and I think the volume impact of that is precisely where we thought it would be without elasticity modeling.

I also think part of it is the tougher comps we had in the first half as well as the weather.

It's not simply one thing that does this, that does anything to volume.

It's always a combination of events.

Sure.

I do think we understand the he will last elasticities fine and I think we are a limit north on pricing and we are not through with summer yet and as we move through Labor Day holiday we intend to get more investment in pricing and it will get back to closer to equilibrium and get closer to plan.

As far as the U.K. is concerned it's a very similar situation to North America.

I think our bottler in the U.K. got a little bit ahead of themselves as far as pricing was concerned and we ended up by raising prices effectively at the retail level by almost 6%.

And that's had an adverse volume effect.

So to your point, we do understand the elasticity and our bottler as well, and that's why I said that we will be making adjustments in the second half year to correct that situation.

Andrew, it's Gary, addressing the 2 cent currency that we are reinvesting in the market, it actually part of that is actually reflected in the second quarter and will be reflected through second, third and fourth quarter, so the remainder of the year and it really is around marketing that we put in behind the C2 launch as well as in some other markets where there were competitive or other situations that put some into Mexico as well.

But we will be spending that across the remainder of the year.

You can see probably in our P&L this quarter that we in fact had a very nice investment behind our brands even in this quarter which is one of the reasons you are not seeing probably quite as much leverage that you would have expected to see.

And, Gary, in terms of that leverage as we move second half of the year and into '05, how would you characterize the levels of leverage the back half of the year?

We are continuing to stay focused, very focused in fact on the challenges that we are seeing and getting the leverage.

But at the same time investment behind the brands long-term.

And then you are also seeing some of the challenges that we've had in Germany as well.

But I'd say, Andrew, when we got a really good opportunity of a great new brand and we also have the opportunity of some of the currency benefits that came through stronger than we had planned, we did the right thing long-term for the brand and the brand trust.

Thank you.

Our next question comes from Jeff Kanter with Prudential.

Good afternoon and evening, gentlemen.

Gary, quick question for you, can you just bridge for us, please,?

Thanks for taking my call.

Can you bridge for us, please, the gallon shipments to the net revenue line?

I know there's a lot of moving parts there.

Yeah, Jeff, I'd be happy to.

Let me give it a shot and then come back if I don't answer it totally.

But if you take the 5% gallon increase and then add to that there were probably about four points of positive currency as well, that gets you up to nine.

Then there was five points negative of structural and that structural is really the Japan tea company and when we franchise tea in the fourth quarter of last year, it's a negative five points at revenue but takes an equivalent dollar amount out of cost of sales as well.

And then you've got about a point positive in pricing and country mix.

Probably more than that in pricing but there's a negative mix really because of the issues in Germany.

And that gets you to the five reported of revenue.

Okay.

You can see the impact of the structural when you look at, then look at gross profit, the structure impacting gross profit and it comes back.

You said that corporate expenses were up.

I know we are a little early for the 10(Q) but can you give us a sense of what segment operating income was up here in the quarter?

Really we can't go into the segment information right now.

We will be filing the Q next week and can get that but on the corporate expenses there were a couple of thing that were up there.

One of those is insurance is just up and that's your general product liability, D. and O. And all of the insurance lines were up.

And that's going to be a full year kind of thing and something I think all companies are having to deal with.

As well as we had about $10 million of higher legal expenses than we expected just from several different areas in corporate legal.

Just last question, marketing expenses you said were up nicely in the quarter.

Was that greater than gallon shipments?

What does nicely mean?

Yes, yes, marketing was up significantly more than gallon shipments.

I will take the hard numbers on that, Jeff, and give you a call later?

Wonderful, thank you very much.

Our next question comes from John Faucher with JP Morgan.

Good afternoon and evening, everyone.

And Mary.

I was wondering, Sandy, could you give me a bit of an idea as we look to the balance of the year what the rate of change would be in Europe?

Should Europe get better in the third quarter or given the tougher comps you are expecting it to remain approximately the same?

Thank you.

Well, John, as I said earlier we are very conscious of the recycling from the third quarter last year.

And I think the other unknown is the weather.

And what I need mean to say is that the weather in July in northern Europe has not improved.

And as I tried to explain before, weather is very important to us that we get our summer.

So we are cycling 9% growth last year.

So it is a heavy challenge for us.

We have some very excellent and aggressive marketing programs.

We do expect to be more competitive on price.

So at the end of the day it's really down to, if the weather is going to be a little bit kinder to us then I think we will do quite well.

If it isn't, then I think we will have a little bit more of the same.

Specifically in looking at Germany and that situation, is this something where you have to look at the negative next couple of quarters?

How long will it take to get your hand around it do you think?

Could you repeat the question?

It's hard to heard you.

If we heard you right it was specifically on Germany, how long it will take to cycle through the comps?

Or does that include the discounters?

Yes.

I mean, it's, it will be next year before we cycle through the comps for the hard discounters.

Okay.

Thank you very much.

Our next comes from Bill Pecoriello with Morgan Stanley.

My question is on the revenue management strategies that you've been executing is there any, as you look at it you are not getting leverage in the P&L.

Year to date, the bottlers are getting nice pricing around the world, but your price excluding the mix is up two points or so and if you look at a market like North America, CC is experimenting with different package sizes, you mentioned tweaking the prices on C2, you have the value strategy in water, are you still a trying to get the right balance in the overall system and try to get some leverage in your P&L while the system executes this revenue strategy?

Yeah, Bill, it's Sandy.

We certainly in Europe we continue to get leverage.

Even though we are negative in volume for the second quarter we are still significantly positive in operating income.

We are still significantly positive in operating income.

So and that's the same situation as we've had for the last two years.

So certain until Europe we are getting leverage.

And Bill, I guess year to date as well if you look at gallons up five, our currency neutral operating income above eight, so we are getting three points leverage so I think we are getting that as we continue to refine and work closely with the bottlers around the world.

But on the revenue line because you are getting some pricing on that so the spread between the revenue and the operating profit?

Bill, on a year to date basis I think we are getting about two-point spread on price mix.

Keep in mind there is a structural change.

The year to date basis, we are getting about two points of price and mix on a revenue for year to date.

And just in North America on the revenue management as CC is experimenting with some new package sizes in the C2 and you are looking at your water business where you are pursuing the value strategy but losing share, are there any tweak that you are looking in any of those aspects of revenue management North America?

I think we are planning on staying the course, Bill.

If you look at our P&L we are getting leverage from the net revenue line to gross profit certainly on marketing investment is up versus prior year.

If you look at the translation into operating income.

But the primary thing we will look at in the back half of the year is getting C2 right.

And getting the pricing right there.

If we get the pricing right in C2 it looks to us like we will hit or exceed the volume we are expecting from C2 and we will get leverage out of that.

Thank you.

Our next question comes from Caroline Levy with UBS.

Your line is open, you may ask your question.

It's Caroline.

I want to clarify two things, shipments were up, were your gallon shipments in the quarter up five or just year to date.

Caroline, it's Gary, the cases were up one, gallons were up five in the quarter.

On a year to date basis reported unit cases are up five and gallons are up five.

And perhaps the confusing part is that as reported our actual unit cases versus average daily sales, average cases, is the difference.

But on a reported basis, actual numbers of cases year to date is up five and gallons are up five, right in line.

So there should be no adjustments in the third quarter?

Correct, correct.

The only adjustment comes in the fourth quarter where there's few days to ship from quarter one to quarter four.

Okay.

And can we talk a little bit about Latin America?

And Mexico in particular, and just I would love to hear your view on what the outlook is for tea brands, market share and where the whether Pepsi has changed the case of the face of the competitive environment at all?

What is the outlook for tea brands?

The outlook for the competitive landscape in the tea brands changed the competitive landscape in Mexico, Caroline?

Yes, that's it.

Okay.

The landscape, the competitive landscape isn't Mexico as we have discussed before has always been very dynamic and very competitive.

The situation in this year in particular would be with the tea brands is not different from what we have experienced in the previous year.

In fact we see their share as being at around 2 to 3% and that hasn't changed in this year.

The case of Pepsi, they have been following a strategy of upsizing and low price of 2.5-liters -- 2.5 liters at a significant discount and that coupled with a , not necessarily the most profitable volume but doesn't give them volume in [INAUDIBLE--STRONG ACCENT.] So our position in Mexico in terms of physical cases, in terms of transactions, continues to be very strong and we continue to be that way, that's what we are seeing as an outlook for the remainder of the year.

We have done, as you know, several things in terms of packaging with 400 M. L.s, 710 M. L., 2.5-liter, and a number of packaging initiatives to have a consumer proposal at every price point that is principal for the consumer from three to ten .

We are very, very confident of the outlook in Mexico and we continue to believe that we will remain in a very strong competitive position.

Thank you.

Thank you, Caroline.

Our next question comes from Mark Greenburg with Deutsche Bank.

Mr. Greenburg, your line is open.

You may ask your question at this time.

Our next question comes from Kristen Marcus with Merrill Lynch.

Thank you very much, good afternoon.

My question is for Don, firstly your C2 volumes are they included in diet trademark volumes and secondly we heard profit growth in all regions except for North America, can you comment what margin list and I would like your comments on mix with the exception of America in the quarter?

Thank you.

On the first part of the question, we are including C2 volumes in the sugar side, not the diet side.

I can't quite get the second part of the question.

With respect to the profit growth in North America, what kind of growth did you experience in the second quarter within that region and what did mix contribute to that?

The profit growth was in the upper middle single digits which was consistent with our plan.

Okay.

And with respect to mix, can you comment on water contributions of shift to noncarbs.

Well, our noncarbs were growing at 9% in the quarter, the CSDs were flat, flat tissue, so that continues to be, flattish, basically on plan with where we had forecasted for the quarter.

So the mix is basically right where we thought it would be.

Great.

Thanks a lot.

Our next question comes from Alec Patterson with RCM.

Good afternoon.

I know that, Neville, you are in a listen-only mode and all that, but I think as this is really an opportunity for you to here points of view from the buy side as well as the sell-side and the sell-side sometimes finds some issues a little delicate but I want you to understand that we find the recent history with Coca-Cola and the board kind of a trying experience, and we hope in the future he you will be able to a at least address some emphasis how we are going to have a re-established dialogue with the investment community and you as the spokesperson and not have a feeling that there's a secondary management team behind closed doors.

So forgive me but I felt like you you are in a listen-only mode and I thought this is something you should here.

Secondly, if I could ask Gary, on the SG&A, up 8 percent, that would be excluding hedge gains up 10%?

Okay, Alec, well, first, on the first comment I will speak for Neville this one and only time and say that he is very committed as we all are to continue a very active dialogue with the investment community and later this fall would expect to start doing that after he's completed the his review.

With that said the SG&A up 8% does have some currency impact inside of it, about three-point of the increase in SG&A is because of currency.

And that's kind of the impact on the expense line.

I'm sorry, you are saying the 8% reported, if you were to back out currency it would be 5%.

It would be 5%.

Okay.

So we are thinking about how much spending was done per case sold at retail while your marketing dollars follow the retail case sales, there was quite a bit of spending increase per case, is that a fair read?

Yes, that is a fair read.

Is that sort of a new base to work from or --

No, you also had in the quarter two very significant brands launchings in -- of C2 in Japan and in the U.S.

Which were the two largest brands launchings this company has ever done in either country.

Okay.

That's helpful.

Thanks a lot.

Our next question comes from Bryan Spillane with Bank of America Securities.

Just quick, what's your outlook for cap ex for the full year?

Hi, Bryan.

We would expect to continue about where we've been over the last few years.

The budget, I think I told you the budget over the last few years has been about $1 billion.

I would expect to come in at about 1 billion or less for this year.

Okay.

Great.

Thank you.

Thanks, Bryan.

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

Our final question comes from Bonnie Herzog with Smith Barney.

Good a evening, everyone.

I have a question for Don.

I was hoping you could update us on the status of your new economic model CP?

I heard you mention this in your remarks and I'm really not hearing a lot about you from this.

I'm wondering whether this is a priority for your company and for CC and if so has the strategy changed in any way that we should know about?

Thank you.

No, the strategy has not changed.

We are still engaged in those discussions with CCE and as you probably know we implemented phase one of that strategy by netting our, the significant portion of our funding into the price of concentrate May first.

So that phase is done.

Phase II is then moving to the next level where we start to look at several options.

We are looking at options, for example, like the Latin American model which is more incidence price by package.

We are looking at the European model.

The guiding principles that we are in discussions with CCE around that model are is the same that the model has to be simple, has to be equitable and flexible and we are certainly planning on having that laid out over the next 3 to 4 months so as we go into the next year we are in a different place than we are today.

But phase one has been completed and that was a significant I think turning point for you in the model.

So we are still committed to that.

Good to hear.

Thank you.

I'd like to thank each of you for joining us this afternoon and we really do appreciate your interest in the Coca-Cola Company.

We wish you well until we meet again and we will look forward to talking with you in the future.

Thank you very much.

This concludes today's conference call.

At this time you may disconnect your line.