可口可樂 (KO) 2004 Q3 法說會逐字稿

Welcome to the Coca-Cola company conference call.

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

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

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

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

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

I would now like to introduce Miss Ann Taylor, Director of Investor Relations, who will begin the conference.

Miss Taylor, you may begin your conference.

Good afternoon and thank you for joining us.

I am pleased to be joined today by Neville Isdell, our Chairman and Chief Executive Officer, and Gary Fayard, our Chief Financial Officer.

We will make a few 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 questions as possible, we ask that you be considerate of others and limit yourselves to one question during your turn.

Please be respectful of these guidelines.

Before we get started, I'd like to remind you that conference call may contain forward-looking statements including statements concerning long-term earnings objectives and should be considered in conjunction with cautionary statements 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 have posted schedules on our company Web site at CocaCola.com in the Investors Section which reconcile our results as reported under generally accepted accounting principals to certain non-GAAP measures which may be referred to by our senior executives in our discussion this afternoon and from time to time in discussing our financial performance.

Please look on our Web site for this information.

Now let me turn the call over to Neville.

Thank you, Ann, and thanks to each of you for joining us today.

I hope you've already had a chance to review the release we issued this afternoon, as we're not going to spend really too much time covering what's in the release given the discussions of September 15th.

So I'll briefly cover the third quarter results and I want to really spend some time today as a continuation of that September 15th call to discuss areas which we need to address to enable the company to get back on the proper growth path.

I'm also going to touch on three markets which really exemplify the power of our system.

And finally, I do want to make a few brief comments about our November 11th meeting.

After that, Gary's going to follow with a few more details on the third quarter results and our 2004 outlook, and then we want to pretty quickly to move to your questions.

You've probably seen from today's release that we came in slightly ahead of what we forecasted from our update on September 15th.

Although we did see a few markets improve late in the quarter, almost all of the positive upside is really timing related.

Gary's going to address this in more detail in a moment.

Overall, Europe certainly had the biggest single impact on our third quarter earnings, where our highly profitable Northern European countries were impacted by poor weather, which was further compounded in Germany by the lack of availability of our brands in the high discounters.

North America's performance was also weak reflecting the difficult retail environment and weather situation which we encountered in the quarter.

Results from our other business units show an ability to balance performance across their portfolio countries.

As we move forward, I'd like us to be even better at this balancing act, balancing our performance in these ways.

Overall, I'm not pleased with the results for this quarter, as I believe they are symptoms of key issues our company needs to address.

During our September 15th conference call, I spent a good deal of time outlining the things that I believe we need to focus on to get us back on the right path to growth.

Now, I don't intend to discuss these again today, but I do, however, want to talk to you about how I see them playing out over the next several months as I know that's been on many of your minds.

As I think about the issues that we currently face, I see them in a couple of different categories.

First are those concerns and opportunities that can and will receive immediate resolution.

We are addressing our packaging and pricing architecture on Coca-Cola C2 in North America right now, and we expect to see benefits in the fourth quarter.

We have also implemented several initiatives with our bottlers in Northern Europe that are gaining traction.

In addition, the European Commission investigation into our system's commercial practices in Europe, following successful negotiations between our systems, into our systems commercial practices in Europe, and following successful negotiations between our system and the Commission, I was able to personally meet with European Competition Commissioner Mario Monte in Brussels on Tuesday, and to present an undertaking on behalf of our system, which he confirmed will be sufficient to achieve a settlement decision.

I believe that this undertaking, while more restrictive than the previous environment, provides a clarity to the application of competition rules to our practices in Europe which we've not had before.

Further, the undertaking will still allow our system to vigorously compete while adhering to the provisions.

The second category of issues and opportunities are ones that will require a longer timeframe to resolve.

These are what I call getting the basics right.

Markets such as Germany clearly fall into this category.

Enhancing our revenue growth management capabilities is another example, and we and our bottling partners in North America are working together to address this.

Instead of going into each one of the long-term issues, let me just touch on two of what I view as the most important ones.

The first deals with the biggest surprise that I've encountered as I've come back into the Company.

The degree to which the restructurings have impacted the organization.

While downsizing was necessary to reflect the consolidation that occurred within our system, the impact of the layoffs was a loss of trust that had previously existed within our organization.

This has had an immense impact on people in the Company, especially here in North America and in corporate, because trust is what allows people to take risks, to look for opportunities, and to literally see the things that others don't.

Most importantly, it allows them to focus on the future, not to be scared of it.

So what I'm trying to do now is rebuild that trust.

But as you know, you don't rebuild it overnight.

It takes time.

The other impact from the layoffs was the unintended consequence of hurting our bench strength.

Now, remember, the classic definition of bench strength is the reserves, and therefore, this is not a criticism of our people.

It is simply a recognition that many people have only been in their jobs 12 to 18 months, and in other cases the people that would be eligible to take on additional responsibilities do not have a ready replacement.

A primary way that I intend to build that bench strength back up is the training and development of our own people.

Secondly, I will bring in selective skills from outside as appropriate.

This is the biggest charge I have given to Cynthia McKay, who I brought in from outside to run HR.

Having the right people with the right skills focused on the right opportunities is a key building block for moving the Company forward.

The second area of getting the basics right I would define more as an opportunity.

We have the world's greatest brand, which deserves the very best marketing, and I know that we are not there yet in producing it.

However, I will say that I have been pleasantly surprised by the resurgence of some of the work that's in progress, particularly around brand Coca-Cola.

Some outstanding ideas are coming in, especially in new and emerging areas of reaching consumers.

This was a key reason that I asked Chuck Fruit to lead the marketing effort for the company.

He has really been at the forefront, he understands media, a media world that's changing.

He understands advertising and how to reach the consumer.

He's also very well connected with our marking talent around the world to facilitate idea sharing.

I couldn't have asked literally for a better skill set to lead our marking organization into the future.

What we have to do now is accelerate the work we've started and expand its base.

I've absolutely no doubt that Chuck will succeed, but of course, as always, this will take time.

So these, then, are the building blocks that need, absolutely need to be put in place.

They're not ones that are going to happen overnight.

It's going to take discipline and a long-term focus on the part of everyone in this Company.

But understand, that even though these initiatives will take longer to pay off, we are already aggressively focused on them.

Now, I spent time talking about just some of the issues and opportunities that we face, and while we're going into the rest, I want to now highlight three markets that are truly making progress.

In Brazil, we saw 14% growth and increase in both volume and value share along with equally impressive operating profits in a market that less than 18 month ago was dealing with double-digit volume declines and dragging profits.

If you remember, our system there embarked on a fully integrated approach to drive our business forward with a comprehensive marking and revenue growth management strategy.

We also have aggressive leaders there, making it happen.

We're disciplined and patient with our strategies.

We're delivering results for us, and just as importantly, which they told me when I was in Brazil, for our bottling partners.

Impressive results in Brazil.

In South Africa we're seeing performance that, again, is nothing short of outstanding.

Almost two points of share gain along with double-digit volume and profit growth, and they are a direct result of strong execution from both the bottlers and the Company.

That's coming from marketing programs and it's coming from system leadership, from both sides of the equation, by really executing a comprehensive revenue growth management plan.

By working together we're delivering strong profits for our entire organization.

And with some real pride I want to just say it's very important to us that Coca-Cola was once again named the most admired company in South Africa.

And when you look at the research, which was for South African brands, we actually of the top ten soft drinks, we had eight of the ten.

Finally, I want to mention China, which had another great quarter with 20% growth, cycling a 24% growth in the prior year.

Results were driven by strong carbonated soft drink growth where we're outpacing our nearest competitor with a three point share gain this year.

Increasingly important are the innovations with products like Nestea Ice Rush, and [Popi] by Minute Maid, which also added to our results.

Keep in mind that it was just in 2001 where we only grew 7% in China. 20% growth was just not a given.

The important thing about China is that it's still not a given.

But we've made good decisions, we have a great team in place, and a bottling system that is focused on seizing the vast opportunities that China offers.

So what I want to do is just highlight these three countries for a couple of reasons.

First, these markets are proof points that we can and do grow CSDs when we do the right things for the business.

Taken together these three countries grew CSDs 14% this quarter.

Just by itself, trademark Coke grew 15%.

Had we not been focused on CSDs, we would have left 67 million cases on the table and considerable profits as well.

Second, these markets are a perfect example of what takes place when a winning culture permeates every level of the Company and the bottlers.

Momentum literally builds.

Challenges are seen as opportunities.

Setbacks are temporary.

And ultimately there's no doubt in the system that we will succeed.

I want our entire Company to get to this place and I have no doubt that we will.

Before I head over to Gary then, I'd like to briefly comment on the November 11 meeting.

As we said before, November 11 will be about sharing perspectives on our future strategies.

But we've also stated, and I want to reiterate this, there's going to be no grand pronouncements, no rosy promises, but rather an update on what we're doing, why we're doing it, and how we expect to achieve it.

Now, I do intend to share our expectations on future growth opportunities and the long-term growth model for the Company with you at that time.

We'll expand further on the areas that I've touched on today, and a few others as well.

I intend to provide insights about our expectations for 2005 and beyond.

Finally, I will lay out tangible benchmarks for progress that will allow you to monitor our progress moving forward.

However, I'm sure there will be some questions that we will not fully address due to competitive sensitivity.

But I do commit to you, that we will maintain open communication, and we'll share our plans with you when it is appropriate.

So now let me turn the call over to Gary.

Thanks, Neville, and good afternoon everyone.

I'd like to spend a few minutes going through the highlights from the release that we put out this afternoon at 4:00.

Reported earnings per share for the quarter were 39 cents, versus a reported earnings per share of 50 cents in the prior year third quarter.

Excluding unusual items from this year and last year, earnings per share were 50 cents, a 9% decrease from the prior year.

The decline reflects a 1% decrease in ongoing operating income and the cycling of an underlying tax rate of 17.5% in the prior year.

These results came in ahead of our previously stated range for the third quarter, but as Neville mentioned, it's primarily due to the timing of gallon sales and some positive upside out of certain markets.

However, we do expect to benefit to reverse based on the timing of the sales, and in addition, we've lowered our outlook for Germany for the fourth quarter based on continuing difficulties in that market.

Regarding our reported earnings per share for third quarter, 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 reduction to the current quarter results in the amount of 11 cents per share.

The individual items included a 392 million pretax charge in the quarter related primarily to the impairment of intangible assets in Germany.

And second, a net reduction of a penny per share related to a provision against German deferred tax assets, partially offset by a favorable resolution of other tax matters.

On a year-to-date basis, reported earnings per share were $1.50 or the current year, versus $1.39 in the prior year.

Excluding unusual items, earnings per share for year-to-date 2004 were $1.60, an increase of 7%.

In looking at operating income for the quarter, if you exclude the unusual items, operating income decreased 1% in the quarter to 1.5 billion, reflecting the impact of poor performance in North America, Northern Europe, and Germany, continued investments in marketing activities, offset by solid results in certain markets such as Brazil, South Africa, and China, and a positive currency benefit of 6%.

On a year-to-date basis, excluding unusual items, we've grown operating income to $4.8 billion, an 11% increase, primarily reflecting positive currencies of 8%, and the benefit of increased shipping days in the first quarter.

So that you can clearly see the impact of the unusual items on the financial statements, we have posted a reconciliation schedule on our Web site as Ann discussed.

Now let me address taxes more specifically.

The reported tax rate for the third quarter was 24%.

This reflects the underlying effective tax rate on operations of 25%.

However, the underlying rate was reduced by the tax benefit on the German impairment charges which were recorded at a 36% tax rate, or a U.S. statutory rate.

It was also reduced by a 39 million benefit from favorable resolution of tax matters.

Finally, the underlying rate was increased by a 75 million provision against deferred tax assets in Germany.

Turning to cash flows, during the first nine months of the year, our cash from operations increased to $4.6 billion, an 11% increase over the first nine months of last year.

So far we've bought 1.4 billion worth of our stock.

We still plan to repurchase at least 2 billion of stock for the full year.

We've also paid out 1.8 billion in dividends.

Now let me turn to the outlook for the remainder of the year.

On September 15th we provided an update on key trends impacting the business.

At that time we indicated that prior to the consideration of any impairment charges, we expected earnings per share for the third quarter to be in a range of 46 to 48 cents.

Although we came in ahead of our forecast for the quarter, we expect this benefit to reverse in the fourth quarter as I previously mentioned.

Because we've provided full-year guidance on September 15th, we're obligated to update this outlook today.

We now expect earnings per share for the full year 2004 to be in the range of $1.88 to $1.90.

This estimate includes impact of the net charge of 10 cents related to items previously recorded in the second and third quarters.

Also included in these assumptions are the following, that gallon sales will be impacted by the shift in shipping days to the first quarter from the fourth quarter of this year.

These fewer shipping days in the fourth quarter means that we expect gallons to trend behind where they've been year-to-date.

For currencies, based on our current projections and based on the timing of currency trends last year, I would expect the currency benefit will be substantially less in the fourth quarter than what we've seen in the third quarter.

On taxes, the Company estimates its ongoing effective tax rate to continue to be approximately 25% for the remainder of the year, excluding the impact of any significant or unusual items which are recognized separately in the quarter in which they occur.

This leads me to the recently passed legislation mentioned in the release.

As we stated in the release, new U.S. tax legislation has passed Congress and is awaiting Presidential approval.

If approved, the legislation could have an impact on the Company in the fourth quarter.

However, the bill is very complex, and we're currently evaluating and going through the fine print.

Therefore, it's too early to know exactly what our course of action will be.

However, we are closely examining the matter, and if the bill does become law, we'll come back to with you more details on the impact to the business.

That said, operator we'd like to move to the first question.

Thank you.

Ladies and gentlemen, if you would like to ask a question at this time, please press star then the number one on your telephone keypad.

If you would like to withdraw your question press star then the number two.

Please remember to pick up your handset before asking your question and our first question comes from Caroline Levy with UBS.

Good afternoon.

I was wondering, Neville and Gary, if you could comment year-over-year on what media and advertising spending has done this year?

Has it been cut back?

There's been some talk of, you know, looking at media data that looks as if you've spent less.

Is this a situation where you may need to ramp it back up, or have you been spending at appropriate levels?

Which media data have you been looking at, Caroline?

I can't remember the name of the source but traditional one that picks up probably just TV, it certainly wouldn't pick up all avenues of marketing.

But basically if you could just address whether there's been a reduction in marketing and advertising.

For this year?

Year-to-date, yes, over a year ago.

Caroline, Gary.

No.

Actually, marketing, total marketing expense for the year, is up fairly significantly and we're continuing to invest behind the brands this year relative to what might happen next year.

We are just now going into the business plan reviews for the company.

Actually, starting next week, and we'll be, Neville will be reviewing each of the divisions plans so it's really just, it's too early to tell.

We will discuss that with you on the 11th of November when we're together.

In North America, specifically there was the incremental money that was spent behind C2, for example.

I'm surprised at the data you've picked up.

It might have been specifically to brand Coke or one of your particular brands, but there's certainly been that idea floating around that there has been less than adequate spending and you would just say that that's not the case?

We're saying that the spend has not been reduced against prior year.

Okay.

Thanks very much.

Your next question comes from John Faucher with JP Morgan.

Yes.

Good afternoon, everyone.

Was wondering if you could give us a sort of, one, the revenue breakdown in terms of the gallon impact on the quarter?

And then two, if you could discuss, particularly as you look at Europe, you talked about the downgraded thoughts on Germany, sort of impact on that from an operating profit standpoint and go through what your plans are to look at the packaging situation that's there with the hard discounters and the returnable packages.

John, Gary.

Let me first on the revenue reconciliation, basically in the quarter, with gallons down one, it would it go something like this.

And then you would see revenues basically flat with prior year.

You've got a negative four points on the revenue line of structural change, and that's from the Japan Tea Company.

Remember, we franchised tea in the fourth quarter of last year, and so it's the same amount on both the revenue and cost of goods line, but it's a 4 point impact to the revenue line from that structural change.

Currency was a positive 4 points at the revenue line, and then pricing and country mix were a positive one to bring you to flat.

Thanks.

On the Germany issue, first thing is really on the regulatory side of that and some of the actions of the European Commission which have just been announced.

The Commission's given them actually three months, the German government three months to revise their plans with regard to packaging and cans.

And there were some new legislation that went through the Upper House, actually extending some of the deposits, although they leveled them out at 25 cents EU for all packages.

Extending it to teas, et cetera.

So it's a very volatile situation in terms of the legislative side.

The EU is challenging the German legislation.

And the outcome of that is pretty difficult to predict.

That makes it a little difficult in terms of responses.

But within the current context with the discounters, which is where we have suffered the largest single decline, we have one initiative which is working and that is with one discounter [Plus] and we've gone with the contoured Coca-Cola bottle.

I just want to touch on that in a second from the competitive standpoint.

It's specific to packages, the one and a quarter liter size.

We have put on that the [Plus] identifiable logo for recycling, but it looks really like a Coca-Cola bottle and therefore represents the brand.

This is a very different strategy to the one that Pepsi's followed where they are in the retailers own brand bottles, all of which are clearly differentiated with just the Pepsi label on, manufactured in the contract packers facilities for the discounters.

So we're trying to keep the integrity of the brand intact and the long-term interest of the brand intact whilst finding the type of solutions.

We have one with [Plus].

We're looking to, well we're actively discussing with other retailers what we might be able to do along those lines with them.

But, again, I sort of paint this against an uncertain legislative background which I think is clearly going to evolve in a different direction to the one that's in place right now.

Okay.

I guess the question, then, would be what is it about this one retailer's policy that's different that you've been able to crack the code with them?

Is it something they're willing to do, or is it something you're willing to do in that regard?

No, they're the first one that we've worked with that was completely open.

So they were the first one, yes, that was willing to operate.

But there's nothing special.

We can work with the others, Bar One, and that is Aldi, who would never worked with in the whole existence of Aldi.

Aldi has always been a private label supplier.

So, I mean, that goes back 30 years.

It's a matter of their policy and we've lived with that, we've done extremely well in Germany with that, so that would be the one exception, the Aldi chain.

Okay.

Thank you.

Your next question comes from Mark Swartzberg with Legg Mason.

Thanks, operator.

Good afternoon, everyone.

Neville, on Japan, I don't know that it was a deliberate omission or the sheer shortage of time, but it was not noted as an example of success.

Obviously had a good quarter, but we start heading into tougher compares with the fourth quarter.

I wonder if could you give us a little bit of a report card on Japan given the sheer importance of that business to your overall performance as a Company.

You're right, I mean, they had a very strong quarter.

There's no question about that.

I think we have noted that one thing, where we need to talk about when the weather is good as well as when the weather is bad, and they had a very good period particularly in July, early August.

But they had very solid CSD growth, they've certainly done well with C2.

C2 is really outselling all the Pepsi brands together.

Teas did pretty well and we didn't lose any share there at all with new product introductions from many others.

And our system is starting to pull together very strongly.

I've met on a couple of occasions with the Japanese bottlers, and as we look at taking costs out of that system, with the new company that we're putting in place, I think we can look forward to good strong results out of Japan, but whilst we're performing solidly in Japan, you have to take into account some of the benefit that we've from a very good summer, cycling a weak one last year which is why I didn't focus on it even though we're very pleased with the top-line number.

So the business is healthier, it's headed in the right direction.

But obviously, as you mentioned, there are some tougher comparisons which are ahead of us.

Mark, it's Gary.

If I can brag on Japan one thing, some have talked about C2 and the success of C2.

Well, one thing about C2 in Japan, it now is at penetration level equal to Diet Coke, and C2 outsells entire Pepsi trademark volume combined in that country.

What are you seeing in the way of repeat purchase there?

Actually well above the norms we would have expected to see.

So it's still early, but we're seeing very good repeat purchases on C2 in Japan.

Repeat is ahead of plan.

Okay.

And if I could, just a little bit, Neville, in terms of driving the top-line, driving the mix, obviously things that are happening in terms of the system margins, if you will, and streamlining are good things, but driving the top-line and mix over the long-term are obviously key.

You're seeing some encouraging things.

Can you give us a little bit incrementally there, beyond C2, is there anything you would note here that you think is important?

Because obviously there are some secular challenges in the way of channel shifts, if you will, that are noteworthy there.

I absolutely agree with you with regard to driving the top-line.

We've had some good results with Aquarius there in Japan.

We're focusing back on the vending channel.

That is very important.

It's important to the bottlers as well.

And if you go through this whole linkage of taking cost out of the system, that's allowing us as well to be more aggressive in supermarkets.

We're also getting a better mix of packaging there which again comes back to what we're doing with brand packaging and price analysis there.

The overview would be, as I said, I've been with the Japanese bottlers twice, the Japanese team twice, is that the situation is more than stabilized.

I think there's an air of confidence about them moving forward, but, again, we didn't highlight it because we went for some of the bigger double-digit ones.

I think if you look at the growth, though, it's pretty well across the board.

Thank you.

Your next question is from Carlos Laboy with Bear Stearns.

Good afternoon, everyone.

Neville, I was hoping could you give us more detail on the German write-offs, the items that have been written off?

And with so much uncertainty about the regulatory framework with the bottle deposit law, how comfortable are you that more meaningful German write-offs won't be necessary?

And on a related basis, is it your sense that the European Commission is going after the Island solution, or are they going after a major change in the entire deposit law?

Let me answer the last piece first, then I'll hand over to Gary.

My sense is that they are after the deposit law, per se, and the degree to which that is a restraint of cross-border trade, not specifically against the Island solution.

There is also debate against the Island solution even in the German Parliament and about the legality of that.

Where that's going to come out, I don't know.

But that is more of an in-Germany discussion.

The EC is focused on the broader issue.

Carlos, on the impairment, the impairment in Germany on the bottler was in entirely related to franchise intangibles that were on the balance sheet of the German bottler.

You have to, under the new accounting rules, go through a lot of modeling to model out to determine the value of those intangibles.

We essentially wrote almost all of it off as a non-cash charge, but there's, I think there's like $20 million of franchise intangible left on the balance sheet, so there's very little left that could even be written off.

Thank you.

Your next question is from Andrew Conway with Credit Suisse First Boston.

Neville, just a question thinking about your total Company revenue management and revenue per unit expansion strategically, how are you thinking about managing the revenue per unit of the Company over a period of time in analyzing your promotional expense growth, your country mix, and some of the bottling funding?

How important is it to ensure going forward greater consistency?

I'd value if you could share your thoughts on how important it will be in your future revenue stream to manage these points.

Well, Andrew, we could spend the rest of the call trying to pull all of that together.

And as usual, you hit on a number of very important issues.

It is market by market thing, and I've said this before, there really is no solution for one market.

It's related to manufacturers.

I suppose the most dramatic would be the Japan and the United States in terms of just the sheer mix in terms of brands and the channel structures and everything.

So you go about it market by market.

There isn't one solution.

Now, does that mean that there's transferability of ideas?

Absolutely there's transferability of ideas.

That's why I've talked before about the likes of Argentina, I've not talked about Brazil in terms of the whole brand package price equation.

It doesn't actually just vary within the country, it varies between regions of the country.

I mean, it will be very different outside Rio de Janerio and Sao Paulo to some of the more outlying areas for example because you'll have different packages.

India is a good example where, the 5 rupee effort, which we've now increased the price, but that was returnables out in the rural areas, was an answer to driving growth.

So, it's going to be mix and match all the time.

The way I can best encapsulate it, and this may be too simplistic an answer for you, but it is to do with building this whole knowledge skill base and the intellectual capital.

To me there is real competitive advantage in understanding this mix in every country thoroughly and applying it thoroughly, because, as I say what I saw in Argentina was just state-of-the-art, and if we can do that, we're able to address the consumer needs in the right way and also get the right margin mix with regard to packages and also grow share.

I mean, that's the key.

It is all about also growing the top-line.

So there's another piece of the mix in there, and that is what are we going to do with the marketing.

Again there's a quality issue.

There's clearly the issue hanging out there with spend, and before someone asks me that question, we'll talk about that on the 11th.

So let me just cover that one.

And it's total system effort with the bottler as well.

Your question really encompasses all the details of what we need to do in the business country by country.

And Neville, these steps as you take to build that foundation, is it fair to say they will become more rigorous in the operating budget process over time?

Yes, that's very fair to say that.

Thank you.

Because, let me just amplify on that.

I think you mentioned something else about consistency.

I think, you know, flexibility and consistency to me go together.

Flexibility is in the implementation, being clever and finding the gaps.

But consistency is in terms of the process that you use, and what we're trying to do is to define those processes, I talked about that earlier, so that people know what they should be doing from a process standpoint, but then you need smart people out there, and you need to give them the flexibility to be able to operate those systems.

And that's where the intellectual capital comes in, and that's where building trust with people comes in, that's where building morale comes in.

There's a complete linking within this.

Thank you.

Your next question comes from Christina Farkas with Merrill Lynch.

Thank you very much.

Good afternoon.

Neville, you spent some time going through CSD growth in three key markets which may be considered more emerging markets rather than mature, of course leaving Japan aside.

But perhaps in the interest of time, you did not talk about the non-carbonated beverages and either your near-term concerns or your long-term initiatives in getting it right.

In looking at North America, how would you balance your focus on getting the revenue management growth right with the bottlers and perhaps aligning or better aligning your portfolio with what consumers appear to be drinking?

Thank you.

Well, I don't think it's an either/or, I mean, I think it 's a both.

You have to have effective revenue growth management for all categories including non-carbs and carbs.

And I have said before that as a total beverage company, we're going to be focused on both.

To put it simply, we're going to walk and chew gum at the same time.

But there has to be profitable entries.

Some of the, this is not necessarily a North American comment.

It's partly some markets like Indonesia, et cetera, even Mexico where we've exited both water because it hasn't been profitable.

So they have to be profitable categories.

But on the North American side of the equation, I really believe you're going to see us coming forward in '05, '06, probably more in '06 with a rejuvenation growth in carbs.

But at the same time, you're going to see good strong growth, stronger growth, in non-carbs.

And part of that is channel exploitation, we've had gaps in terms of channels, where we can, you know, go to market better, and this is not a criticism of the bottlers, it's just the areas we've identified that we can exploit.

And also looking at new categories, we have a whole innovation initiative which we've brought in new leadership to just 18 months ago.

I've been reviewing what they've been doing and I think we have some very interesting ideas coming.

Some of them will be niches which have high margins.

And we announced just the other day, Full Throttle, as a launch in the United States to try and capture that high-margin business.

So it's not a big volume gainer, but it's high margin.

And then you've heard Don Knauss say at the last time, the meeting about bringing in ideas from overseas, like Japan, we have not been very good at doing that, and I think that you will see us being hopefully a little more successful in the future, bringing those ideas across the Pacific and into the U.S.

Are these the kind of initiatives that you're implementing with the bottlers in Northern Europe, or are those more pricing related?

Yeah, if you take, the architecture broadly is the same, and even if you take Germany, where we've got the structured impediments, I mean, we've launched an adult soft drink very recently, and we'll see how that fares in the market, and also we've seen a very good growth in non-carbs from about 10 to 18% over the last three years of our total volume.

So Europe is moving very effectively in terms of growing our overall non-carb business.

Thank you.

Your next question comes from Bill Pecoriello of Morgan Stanley.

Good afternoon.

Question to focus a little bit more on North America.

Neville, would you put North America in that bucket of the longer term, 18 to 24 months turnaround when you're separating out the two buckets?

And can you talk some more specific actions that you see the Company taking in North America in order to return the U.S. to volume and profit growth addressing issues on the water strategy?

Obviously raw materials are moving up for the bottlers and you talked about needing some more balance in the revenue management, but the bottlers are passing on those increases, private labels.

There's a list of challenges.

I just wanted to know more, are these going to require more of an 18 to 24 month view?

I think unquestionably you'll see more in 24 months than you'll see in 6 months but I believe you'll see things in six months.

It's not that we have to address the sort of issues that we've been talking about in Germany before being able to be more effective in the marketplace.

You've seen rapidly what we've done with C2, which we've adjusted pricing and packaging, giving that brand some more shelf space, some more air in terms of getting into the large size packages, and I think that shows some quick reaction.

I'll have some more for you on the 11th of November about some of the ideas that we have going forward for next year.

I won't have them all for competitive reasons, but I think there are a number of things that we can do next year to certainly pick up from the growth rate of 2004.

On the issue of the raw materials, which obviously the whole industry is facing 4%-type increase that the bottlers needing to recover at a time when ICSE prices are moving up and the consumers, with the health and wellness trend.

Do you see being able to moderate that as well?

Well, of course most of the packaging prices are going to, you know, hit all beverages, it's not just carbonated soft drinks, so that's sort of a level playing field.

Obviously we know what those input costs are.

Part of the adjustment was the one that you saw in 20-ounce, which we'd worked with the bottlers on, but also we're looking for savings, to be able to try and ameliorate that.

But growing the top-line, growing the revenue line, also helps as well and at the moment we are doing our budgets.

One of the reasons Don Pinales is not with us today is Don's out doing just that at the moment.

So you catch us in the middle of getting the 2005 plans to ameliorate the increases and be sure that we're able to get volume growth even with having to cover some of those costs.

And as you know, we're making a lot of efforts on central purchasing to drive out those costs.

We're using our buying power worldwide because this is not just you're focused on North America, but obviously these costs, we're you're talking about PET resin driven by the costs of the raw material, of oil, are clearly global.

Thank you.

But I want to emphasize, in terms of the competitive set, it's pretty much a level playing field.

In fact, we could probably be advantaged given our buying power.

Your next question comes from Jeff Kanter with Prudential.

Good evening, everyone, and thank you for taking my call.

Gary, you plan on buying back a fair amount of stock, a little over 500 million, I think, in the fourth quarter.

You said that your goal is over 2 billion, or at least 2 billion.

Why not accelerate it more or are you still concerned with the credit policy of the system?

That's question number one.

And, Neville, I guess we'll have some answers on November 11th, but it does sound like you're leaning more towards better marketing pull to jump-start system-wide volumes in the key markets of North America rather than just giving the bottler more funding to allow them to go for volumes.

Is that fair?

Let me take it first and hand over to Gary.

Jeff, you're leading me.

That's one question I'm just going to say, I'm ducking that.

We'll talk about that in a good bit of detail on November 11th, because remember between now and then I'm going through the budget plans.

That really is premature for me to talk about that.

We're in this, this gap period where I have not fully reviewed the plans, what's being proposed, and for me to pre-empt that would be wrong and I'm just not prepared to do it.

Sorry.

Sure.

No, fair enough.

Gary?

Well, Jeff, I guess I will not be able to do the same thing and say wait until the 11th, so, no, we are going to buy back at least 2 billion, that's why we had in the release, of the Company's stock this year.

So that is a little over 500 million in the fourth quarter.

It really is around the rating agencies.

I talk to them routinely.

This is kind of the agreement we have right now, and if we decided to change that it'd be something I'd talk with them about.

We've not changed it.

And I would say we'll stick with that probably for the rest of this year.

Okay.

See you in a couple of weeks.

Thank you.

Your next question comes from Bonnie Herzog with Smith Barney.

Good afternoon.

Neville, I guess I have a question about Coke's innovation track record.

I'd like to get your opinion on whether or not you feel comfortable with the level of innovation that your company has in terms of innovation.

Do you basically believe you need to increase the number of products or packages that you have in your pipeline, or do you think it needs to decrease going forward?

Well, the short answer to the first part of the question is no.

I'm not satisfied that we have enough in the pipeline globally.

However, if you were to ask me then to address Japan, am I happy that we have enough in the pipeline in Japan, I am absolutely satisfied.

I think that is an innovation machine, and they compete against some pretty tough Japanese companies, and we continue to be able to be the leader in that market.

Every year we're launching a large number of new offerings, and we do continue to be successful.

I think there are, we're doing better now than we used to do.

If you look at what we've done with juice in China, with Qoo, what we've been able to do with certain line extensions, and that is innovation itself in Europe despite all the weather we've had some success with that.

So there are green shoots out there but there's clearly more that's needed.

Now, will there be more packages and will there be more products out there?

Yes, there probably will be but we also need to be disciplined as well and not overload the system because there are costs involved in that.

As you go out with more innovation your risk of failure is higher.

We mustn't be afraid of failure, and we must have the courage when something doesn't work to admit it and take it off quickly.

And that's part of the new equation.

Okay.

Thank you.

Your next question comes from Ann Gurkin with Davenport.

Good afternoon.

Neville, I was just wondering, you made a statement in '05/'06 you look for rejuvenation of carbs.

I guess, what gives you that confidence given we've seen several years of relatively flatter, you could even argue maybe modest growth in the market in the U.S., and I just was wondering what gives you the confidence behind that statement?

Well, I'm going to talk about that more on September 11th, but remember that your comment is more North American-oriented than globally-oriented.

If you go back to some of the examples I was giving in the earlier introduction, the main engine in terms of the actual incremental volume that you're getting, not just percentage terms, is carbonated soft drinks, there's a whole world out there for growth of carbonated soft drinks.

So exploiting those opportunities in the developed markets is clearly in focus and something that we've demonstrated, that we've been able to do before.

Now, if we're going to develop markets, where, take North America, the health and wellness considerations, I think there are opportunities, I think the opportunities, you know, are in with diets.

I don't think we've exploited that fully.

And frankly, it's very interesting to me that we have this press cry against CSDs in terms of an obesity debate when we have a very significant, very successful brand in Diet Coca-Cola which has nothing to do with the obesity debate.

Now, it's for us to point that out and to exploit it, and I believe we can do that.

Neville, I'd just be interested in your perspective since rejoining the system, kind of what has changed the most on a global, or in the global landscape just for the industry and then what's changed the most in the Coca-Cola system since you were last part of it?

Well, on the global landscape, of course, it is the growth of, put it this way, other offerings.

But you've got to remember that this is not a zero sum game.

There is growth, good strong growth world-wide in the beverage industry overall so what's happening?

I mean, people are moving away from tap water and they're going to beverages.

So we're in a great industry.

It is true that the growth rates have been certainly higher in non-carbs, and I've mentioned earlier that we need to do more in that area.

But when you're talking about an industry that can grow non-alcoholic ready-to-drinks in the range of 4 to 5% range, we're in a great industry.

There's not a problem.

We just to have get the offerings right.

So, that's one part of the overview is the move to other offerings.

But remember that there's a lot of failure out there, too, and we have been still been successful in growing share in a large number of markets.

And that's been reflected, again, in the third quarter.

I mean, our Chinese numbers would reflect that and China is a very interesting market where non-carbs are very strong.

I mean, there's a very broad offering in China.

It has not developed like most developing markets where it starts out with CSDs and then moves on, after a 10,15 year gap to other competition.

It's out there.

And we're growing CSDs in that environment.

Second question about what surprised me most, I'll try and keep it short because a lot of people have heard this before.

It's basically what the layoffs, what the street's strategic organization alignments, two of them, which took place in, well, worldwide but were focused more on corporate North America, what's that done to trust and morale in the organization as a whole.

And that's what I'm trying to rebuild.

Operator, we have time for one last question.

Okay.

Then your final question comes from Bryan Spillane with Banc of America Securities.

Good afternoon.

Gary, you touched on, I guess, the repatriation of foreign earnings and if I've got it right, is that number about $8 billion?

No, it's a few billion less than that.

And how much of it is cash?

None.

Okay.

It's really just earnings, but there is no cash really to repatriate, if you will.

Or very little cash.

So it's really taxable earnings but I think, I'm glad you asked the question because there's not several billion dollars of cash sitting offshore.

It's more in terms of taxable earnings, and when those are brought back.

Right now, prior to the law, new law, you'd have to pay U.S. tax at the statutory rate, so it would be more of, for example, we have an investment in India, for example, in the bottler in India, or Germany.

If one day we sold one of those investments and we brought those earnings home, it's a matter of what tax rate are you going to pay on that, but it's really more of investments that we have, and not cash.

Thank you.

Ladies and gentlemen we have reached the end of the allotted time for questions and answers.

I will now turn it back to management for any closing remarks.

What I'd like to do is just thank you for joining us today.

And I really look forward to seeing you all on November 11th.

Thank you.

Ladies and gentlemen, this concludes the Coca-Cola Company conference call.

We thank you for your participation.

You may now disconnect.