可口可樂 (KO) 2004 Q4 法說會逐字稿

Good morning.

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

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

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

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

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Therefore, questions from the media will not be addressed in the forum.

Media participants should contact Coca-Cola's Media Relations Department if they have additional questions.

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

Ms. Taylor, you may begin.

Good morning and thank you for joining us.

I'm pleased to be joined today by Neville Isdell, our Chairman[ph] and Chief Executive Officer, Gary Fayard, our Chief Financial Officer, and Don Knauss, head of our North American operations.

Following our prepared remarks this morning we will turn the call over for your questions.

So that we can get to as many questions as possible, we request a limit to 1 question per turn.

Before we get started I would like to remind you that this conference call may contain forward-looking statements including statements concerning long-term earnings objectives and should be considered in conjunction[ph] with cautionary statements contained in our earnings release and exhibit 99.1 of the Company's most recent form 10-K.

In addition, I would also like to call your attention to the fact that we have posted schedules on our Company Website, coca-cola.com, the investor section, which reconcile our results as reported under generally accepted accounting principles, certain non-GAAP measures which may be referred to by our senior executives in our discussions this morning and from time to time in discussing our financial performance.

Please look on our Website for this information.

Now let me turn the call over to Neville.

Thank you, Ann, and good morning to each of you.

I'm sure you've had a chance to review the release we issued this morning.

Gary is going to take you through the main components at the end.

So I'm not going to spend too much time covering what is in the release.

What I would like to do this morning is to move to a slightly different format than the one that we've had in previous quarterly conference calls.

Gary and I will be on each call, we'll cover the results at a consolidated level.

But beginning this quarter, we are going to move to highlighting just 1, possibly 2 of the operating groups on each call, so that we can get into more depth on strategies on an individual group basis, on their marketing plans, and on the results for that particular [Inaudible].

We'd also like to continue to provide plenty of time for your questions.

So I'm going to briefly update you from our discussions of November 11 and then Don Knauss is going to give you details on our plans for North[ph] America.

Then, Gary will follow with additional insights for the fourth quarter results and the 2005 outlook before we move to your questions.

Some might view that the Coca-Cola Company did not perform up to its potential in 2004[ph].

We did in fact see some slight improvements late in the fourth quarter, which were indeed encouraging.

But to be frank, these were against very muted expectations coming into the final few months.

While most of you know the issues for 2004, think about our discussions on November 11th, I think we all have a good[ph] view on the things that need to address and we are doing just that.

As part of our discussions in November, I mentioned that 2005 would not be a year in which we would judge ourselves the generation of earnings growth, but rather by the steps that we take to get the foundation right.

To improve our marketing execution and to get our Company back to reaching full potential.

I'm pleased to report to you this morning we are moving in the right direction.

We're acting with a greater sense of urgency to deliver on our promises and I am confident[ph] that we will meet our goals that we have laid out[ph].

You know, you might well ask, why am I confident?

There are a few good reasons.

I am confident that given the strength of our brands around the world, that we are going to be able to re-establish our marketing leadership.

We were clear about that last fall, and the fact we lost a very small amount of volume and value share in 2004, less than in 2003, really primarily driven by our performance in some key products, is simply unacceptable.

However, we still have strong plans globally[ph], and we're going to build on those, and we're going to leverage those as we move forward[ph].

I'm also confident that given the continued improvements in our system health, as evidenced by continuing improvements of our profit returns of[ph] many of our bottlers, and you saw the results for the CHPC this week, that we have a stronger system.

Also have made good progress in building and acting upon a really new spirit to drive our organization, one of confidence, urgency, and importantly accountability, to build a great business for the long-term.

To be sure, we still have a long way to go.

But the operating framework which I mentioned to you last fall, in which we'll focus our entire organization on the task at hand, namely creating sustainable growth, coming together well.

I look forward to being able to share our thinking on this framework to you[ph] the week at CAGNY.

Finally, I'm confident that given the strength of our financial position, we have a very firm base.

Even in a difficult year, our Company generated approximately $6[ph] billion in cash from operations.

We invested over $1 billion of that in the form of PP&E and acquisitions.

And returned over 4 billion of that to share owners in the form of dividends and share repurchase.

We also ended up the year with a very strong balance sheet.

Now, don't get me wrong.

I'm not changing my point of view that 2005 will be about what we're doing as opposed to financial results.

We have some very important[ph] work ahead of us that will take time to develop into tangible financial impact.

But hopefully, what you will see -- what you will sense as we move through 2005 is that the steps that we are taking are the right ones, that they will eventually lead to meeting our objectives as we move past 2005.

One of those areas where we are particularly focused is North America.

And given that emphasis, I've asked Don to share with you some of the insights on the progress that we are making in what is our flagship market.

I'd like to hand it over to Don now.

Thanks, Neville, and good morning to each of you.

As Neville mentioned, I want to share with you this morning some of our plans we have in place for 2005.

You could say I like to stress the words some of our plans, since I want to make sure we don't offer[ph] a head start to our competition even [ph] in the interest of providing our share owners with updates of our plans.

Now with that as a backdrop, in 2005 we have a plan that is centered on 3 areas.

First, accelerated marketing.

Second, more robust innovation.

And third, a balanced revenue growth plan across channels.

Let me start with the first one, accelerated marketing.

I believe it's important to understand our expectations for marketing expense[ph] or DME spend as we call it, for 2005.

There has been quite a bit of discussion on this topic [Inaudible] stepped-up marketing spending was announced last November by Neville.

But we told you we were not going to go into specifics on allocation by geography, by brand, or category.

Now that view has not really changed.

However, I can [Inaudible] we are planning a substantial increase DME spend for North America in 2005 and importantly, that's building off a significant increase that we had in 2004[ph].

I have no doubt that this will be an essential element to [Inaudible] back on the path of re-establishing our marketing leadership in North America.

Further, thanks to some productivity gains, particularly in media buying and reduction nonworking [Inaudible], like leveraging our international advertising.

In fact, if you watched TV at all in December you probably noticed our advertising, our white Christmas spot and our polar bear ads and both of those ads were produced outside the United States.

We are going to do more of that [Inaudible] into 2005.

Now, combine this with stepped-up spending we're going to increase our pressure against the consumer in brand building activities.

The key is making our increased DME work.

It lives and it dies on how we are using those dollars.

And we are going to focus on 3 priorities.

First, an emphasis on diet and light products in our emerging health and wellness platform.

Second, strengthening our communication on core brands.

And third, emphasizing flexible customer[ph] programs regionally.

Let me start with the emphasis on the diet and light products.

There is no doubt that the diet category has been strong the past few years.

Our growth in diets and light [Inaudible] in 2004 alone was 6 percent which plays to our strength given our 50 plus share of the diet cola category.

Even with that kind of growth, our marketing dollars, innovation focus, and resources were not properly matched against the category.

So in 2005, we will start with a major re-emphasis of Diet Coke as we are planning for a doubling of our DME spending on diets behind advertising that really is the best testing the business has had in several years.

We'll also follow-up with a major emphasis on what we are internally referring to as the 100 days of diet, which I will discuss in more detail in a minute.

This is where the stepped-up[ph] marketing really[ph] makes a difference.

We will be able to support the innovation that we have coming in a way it deserves.

Outside of our diet CSDs, we are also planning a double digit increase on POWERADE.

Included in those dollars will be a first ever inclusion in the NCAA tournament media and an overall increase in the national advertising calendar.

In energy drinks, we are also supporting nationwide energy drink advertising campaign, which you may have already seen.

Our second priority around accelerated marketing is enhancing the communication on our core brands, including brand Coke, Fanta, Sprite, Minute Maid and DASANI.

In addition we expect our targeted rating points, or TRPs, to be up substantially.

In the first quarter alone[ph] our TRPs will be double what they were in 2004.

And we are spreading our spend across 7 varied media elements versus 3 last year.

An example, this year a much more significant print program than we had last year.

The third priority for accelerated marketing will be moving more investment towards tailored customer programming at the local level, underneath[ph] key unique national marketing [Inaudible].

Now, last year, customers told us that broad national promotions provide less [Inaudible] they are looking for ways to differentiate themselves in the [Inaudible].

By building flexible and local relevant programs around pillars such as NASCAR, NCAA, and Small Town USA, we can leverage properties but still provide flexibility to our customer.

And although it often doesn't get[ph] top billing, some really great things are happening in the food service hospitality area.

The customer value creation system or really our -- the bundle of goods and services we provide to our customers is showing some really positive results in the marketplace.

For us, those sales efforts starting in January will expose thousands of potential new customers to the system by the summer.

As we move through 2005, we will increase our ability to retain [Inaudible] recruit customers by further enhancing the the components of the system.

That really summarizes that effort around accelerated marketing.

What I would like to do now is move into the second area of our results in 2005, which is building this more robust innovation pipeline.

And I emphasize the word pipeline because while our discussions today focus on 2005, we are developing a multi-year approach to our entire innovation platform.

And as we plan and execute this innovation, we are focused on [Inaudible] trend.

Health and wellness, 40 plus, lifestyle refreshment, and the fourth, convenience.

Now, in focusing on these 4 trends, sourcing ideas from around our global system which we see as a real competitive advantage of our Company.

Much of our innovation [Inaudible]overlaps more than just 1 trend and quite honestly the bull's eye are really products that hit all 4[ph] at once.

The health and wellness and 40 plus certainly go hand in hand and our innovation in diet CSD addresses both of these opportunities.

Now, as I mentioned a little bit ago we are going to kick off a 100 day diet focus starting in May with the introduction of Diet Coke sweetened with Splenda.

To understand our positioning on our diet portfolio, you first need to understand the breakout of consumer preferences for diet products.

Now our testing shows there seems to be 3 distinct low calorie CSD drinkers.

First, of course, are the [Inaudible] core diet drinkers whether it be Diet Coke, Diet Sprite Zero, Fresca or Tab.

And these drinkers make up 70 percent of our current diet volume and see no need to switch.

Now, with that said, we believe there is a lot of opportunity to increase the number of drinkers, with a good example being the updated ethics and renaming of ex Sprite[ph] to Diet Sprite Zero.

Initial results indicate that it is accomplishing exactly what we had hoped in terms of revitalizing the health of that brand.

Now, the second category of low calorie [Inaudible] drinkers is individuals who have a preference for[ph] Splenda sweetened products.

These consumers typically skew female, slightly older than Diet Coke drinkers, it's really getting into the heart of this 40 plus category[ph] I referenced.

That's where Diet Coke sweetened with Splenda comes in and we believe we have white space here.

And then the final category is people who are looking for a great-tasting reduced calorie[ph] alternative but have not transitioned into one of our competitive or existing core diet products.

This consumer typically skews male and younger.

And when you look at the white space here, it is significant.

In fact, in regular colas, for example, a sizable group of users migrate out of this category once they reach the age of 25 to 34 years -- 25 to 34 years old.

Many to our existing products but there is certainly a lot of opportunity for [Inaudible] and we are going after this consumer certainly with Coca-Cola C 2, and Diet Coke with Lime has certainly found a foothold with these consumers and we will continue to approach this category which we believe has great upside.

We believe there is tremendous opportunity to meet the consumer trends on health and wellness in 40 plus within the CSD category.

But this trend is certainly larger than that.

We're also focused on innovation around product and packaging for POWERADE.

We are moving most of our POWERADE line into a new high performance bottle that is preferred 2 to 1 over the current bottle size and provided it [Inaudible] to the consumer.

Although it is a little early to get into details, [Inaudible] also be some upcoming product news on POWERADE as well.

As it relates to water, I want to re-emphasize our continued commitment across the entire portfolio of spring purified flavor and sparkling.

As you know we are in discussions with Danone on our water businesses and we are very close to reaching an agreement in principal.

We will update you certainly at the appropriate time.

However, I can say any agreement will provide us the flexibility we need to drive our water business forward and deliver value to our customers.

We also have some good innovation planned in the water category.

As most of you know, we are in the process of rolling out DASANI flavored water starting in January and then the 2[ph] flavors will be available in 20-ounce plastic bottles in February and in 6 packs of 500 ML plastic bottles in March.

TV advertising, local radio, and point of sale marketing will support that launch.

In juices we will expand our presence of the chilled Minute Maid light orange juice and we have just launched a chilled light lemonade and light limeade with a couple other flavors.

That is just starting this month.

Finally, we are planning a Minute Maid light heart wise version as well on the success of heart wise last year.

The next trend that we are focused on is around lifestyle refreshment.

Here our innovation centers on brand extensions of our Coke Classic and Sprite brands and the launch of our full throttle energy drink.

The goal is simple.

It is really to create[ph] excitement, drive, trial and provide variety to the consumer.

Consumers as we know are becoming every[ph] more variety seeking and we need to adapt to that trend.

We have already announced Coke with Lime, we're rolling it out to the marketplace in about 2 weeks.

Coke with Lime follows the success of January, 2004 rollout of Diet Coke with Lime which has become the number 1 favored diet cola in the United States.

Also preparing for the launch of our third Sprite remix brand, Aruba Jam[ph], which is a tropical flavor, almost a tropical punch flavor.

In energy drinks, getting serious[ph].

We -- certainly, we're not the first entrant but we believe we've got a great look, great advertising play, we have launched a nationwide advertising campaign using outdoor media with, we think, really great copy.

We also have a distinctive target of hard-working men in the convenience channel.

And importantly, in terms of taste, Full Throttle performed very well in trials so sampling will play a key role in this launch as well.

And finally, we have the strength of our bottling partners driving distribution across a myriad of channels.

Now, convenience is the last of the 4 areas of [Inaudible] as consumers are demanding products and packaging that fit into their increasingly on-the-go lifestyle.

We're expanding the presence of our fridge PET packaging across the United States[ph] core brands building off last year's successful DASANI Fridge Pack.

They are currently at about 30 percent of the all commodity volume in these presses[ph], we're rolling this package out for Coke, Diet Coke, Caffeine Free Diet Coke and Sprite[ph].

And so far, our bottling partners have been able to get a premium price on this consumer preferred packaging.

Now, in addition, we're also bringing the popular Fanta Splash Bottle to the United States.

This package, which originated in Ireland, has been very successful in driving immediate consumption.

So we got a solid year of innovation planned, plus a robust pipeline in development, which I talked about today, provides you just a glimpse of some of the plans and this leads to the final area in which we're focused on for 2005 which is to create this balanced revenue growth plan across key channels.

Now, in our retail division, I know there has been certainly some skepticism around pricing and volume assumptions as they relate to 2005, so I would like to talk a bit about how we're approaching balanced revenue growth.

First, a more surgical approach to pricing.

We've worked together as a [Inaudible] to develop the very best process that identifies elasticity by channel and package and we have really used this data to guide our pricing decisions.

For example, our bottlers are moderating price increases in future consumption packaging, where elasticity is higher and are getting more price in inelastic packages such as the single serve 20 ounce. [Inaudible] the innovation is about driving brand and product mix, which will take pressure off of pricing rate.

In 2005, we expect to get a meaningful portion from mix and then build on from there as we move into 2006[ph] and 2007.

Lastly, channel management and driving [Inaudible] across channels is a consideration as well.

We've already mentioned immediate consumption but we're also focused on channels like club stores and supercenters[ph], with differentiated packaging like the 32 pound case that is is now rolling out.

These are ideas that meet the needs of the shoppers who purchase at those stores.

On summary then, North American business in 2005[ph] is focused on those 3 areas.

First, accelerated marketing, second, a more robust innovation platform[ph], and third, balanced revenue growth across key channels.

We have really good plans.

We're aligned with our bottlers and they are telling us this is the best innovation plan they've seen in years and there certainly is an energy and a motivation to get the ship moving in the right direction.

Do we expect 2005 to be a perfect year?

No.

But I believe that it would be unrealistic given that where we're coming from in 2004 and some of the issues such as the cost pressures our system faces in 2005.

Further, our stepped-up spending is exactly what we[ph] need to be doing, reinvesting in brands takes time and payback is not immediate.

Therefore, we're not judging this year on profit growth but on putting the right plans in place and getting our (indiscernible) back on the [Inaudible].

As we move throughout the year[ph], I look forward to being able to share with you some of the positive results that I expected from these [Inaudible].

With that said, I'd like to turn the call over to Gary who will share some final thoughts on the quarter and 2005.

So let me turn over the call to Gary.

Thanks, Don.

Good morning to everybody.

I would like to spend just a few minutes covering what is likely top of mind and then we'll move to your questions.

First, let me start with earnings per share.

Given the numerous items impacting comparability I want to start briefly by going back through the EPS numbers for the full year.

If you remember back in November, we anticipated that earnings per share for 2004 would[ph] be in the range of $1.88 to $1.90.

Now, that included $0.10 of net charges from earlier in the year which impacted comparability.

So our estimate after considering these items is approximately $1.98 to $2.00 and I believe the First Call estimates reflected this with an average of $2.00 per share.

Our actual results came in higher than we originally anticipated.

After considering the items impacting comparability, our actual results for the full year were $2.06 compared to the First Call estimate of $2.00.

So let me explain the $0.06 of upside in our numbers.

Approximately $0.03 of the upside resulted from better performance from our operations late in the quarter and from positive currency benefits.

Another $0.03 of the earnings resulted from a lower than expected tax rate, a settlement with a supplier, and higher than expected gallon sales in North America, items we do not expect to have a [Inaudible] in 2005.

Now, let me turn to my favorite topic which is cash flow.

For the full year, the Company had another strong year in cash from operations, [Inaudible] a record level of approximately $6 billion, 9 percent increase over 2003.

As a matter of fact, over the past 4 years our compounded annual growth in cash from operations has been 14 percent.

Our purchases, our PP&E, totaled $755 million, leaving over 5 billion after we reinvested in our fixed assets, an increase of over 12 percent for[ph] 2003.

For the last 4 years our compounded annual growth rate is very strong 16 percent.

The full year, we returned over 4 billion of that to[ph] our share owners, an increase of 16 percent over the prior year, through 2.4 billion in dividends and 1.7 billion in share repurchase.

We came in slightly below our expectations of approximately 2 billion in share repurchase for the full year, primarily due to the October earnings release than our November presentation, analyst presentation on our long-term growth model.

Because of those items, we've had to be out of the market for a significant period of time, which prevented us from reaching our goal for the year.

Moving on to taxes, our reported tax rate for the quarter was 15.5 percent which reflects 2 things.

First, the benefit from favorable tax matters, resolutions of approximately $98 million in the quarter, including a benefit from the new[ph] legislation, the American Jobs Creation Act, which was passed in 2004.

This benefit's separate and distinct from the potential impact of repatriating accumulated income earned abroad and I will cover a bit more on that in a minute.

Second item impacted our -- impacting our reported tax rate in the quarter is a reduction of the underlying tax rate for the year to 24.5 percent from our anticipated 25 percent.

As a benefit for the full year reduction was booked in the fourth quarter, our underlying effective tax rate for the quarter was 22.7 percent.

Now on the repatriation of earnings, we are continuing to evaluate whether to repatriate earnings in 2005 under the provisions of the American Jobs Creation Act.

We estimate that the maximum amount that can be repatriated under the Act is $6.1 billion.

We also ended 2004 with over 6 billion in cash and cash equivalents which gives us the flexibility as we assess our options.

Finally, let me give you some thoughts on our outlook for 2005.

As you know, we don't provide detailed earnings per share guidance but I do want to remind you of some comments we made last October and update on some additional insights for 2005.

First of all, we do not expect our long-term objectives of high single digit growth in earnings per share to apply to 2005 due to stepped-up marketing[ph] spending and weak performance in certain key markets.

As it relates to the stepped-up[ph] marketing we have finalized [Inaudible] plans and we expect that amount to be approximately 400 million, based on currency exchange rates as of last November.

In addition, these dollars were allocated and will be spent on a local currency basis and therefore will fluctuate based on changes in exchange rates.

That kind of leads me to our currency expectations.

Our current estimate is that we will have normal currency [Inaudible] in 2005 at the operating income line, as you've all seen significant fluctuation in exchange rates over -- in fact, over the last few months.

In terms of quarterly flow, there are a few things to keep in mind.

In the first quarter of 2005, we will have 2 fewer selling days than the first quarter of 2004 and these will be offset in the fourth quarter.

We will also be lapping the toughest comp year especially in Europe and North America.

Some of you have also asked about the timing of the stepped-up marketing spending.

Given that the majority of the dollars are marketing related and are allocated on a sales curve basis, the impact for the quarter will [Inaudible] accordingly.

However, as we've said, building brands takes time and the anticipated impact on the top-line will not [Inaudible].

In fact, the flow across the quarters, because of the sales curve, will in fact put it across all the quarters and allocate it across the quarters, although a lot of the spending will actually, on a total Company basis, actually be in the fourth quarter.

So cash versus accounting.

In terms of taxes, our best estimate today is that the underlying effective tax rate for this year will be approximately 25 percent.

This does not include any impact [Inaudible] potential repatriation of funds that I mentioned previously.

Finally, our best estimate on CapEx, purchases of PP&E for 2005, is that again it will be less than $1 billion and we expect to repurchase at least $2 billion of our stock this year.

That's it for the topics I wanted to cover this morning and I would now turn it over to you for your questions.

Operator?

At this time I would like to remind everyone in order to ask a question, please press star then the number 1 on your telephone keypad.

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

Your first question comes from Marc Cohen with Goldman Sachs.

Good morning.

Neville, you know, in November, you talked about a number of nonfinancial metrics that we should judge you on in 2005 and value share and volume share were 2 of those, bottler health and I think brand health.

Can you speak, at least, you know, in some of the major markets, about some of those indicators?

I guess maybe you've already mentioned that value share was down in '04.

Can you just take, you know, the top 5 or so markets that, you know, either way, where there was significant share gain, significant share loss and talk about that?

Marc, I know that metrics is a hot button for you and I'm going to try and answer your concerns on that as much as we can.

Let me just emphasize it is both volume and value share but it is a modest amount of share that we lost in '04.

But obviously, I'm not happy about that at all.

As for where it came from, really it's where you would expect.

It does fit in with what I talked about in November.

It comes largely from the problem markets.

It is the USA and you do see those [Inaudible] anyway, they come through in various forms so it is the USA.

It is[ph] Germany when you look at Europe, the balance of Europe pretty strong.

But, it is Germany and the problems of Germany which pull us down.

And in Asia, you would look at the Philippines[ph].

Again, an issue which I've highlighted before.

Japan a little bit mixed.

It depends on the categories.

The coffee category was weaker and we're strong in that category, tea was a little soft.

Actually, CSD's were quite strong.

So it's -- it's the major markets that I've always talked about.

You then have to counter that, because obviously, Germany has been fairly dramatic in terms of what's (indiscernible) with sales, with a number of other markets that have been pretty strong.

I mean China has been strong, not just on the volume metrically but in terms of share, you can point to South Africa, you can point to Spain, you can point to a number of other European markets.

Mexico improved for the year, was weak earlier on.

But Brazil was strong.

So, there is that mix.

But the -- it really is no different to -- as I said, in terms of November 11.

With regard to brand health, we're not there yet.

We will have some measures that we (indiscernible) assemble, it is a little more difficult to have those for you.

We're now working on it.

And we will certainly try and roll out something to you, I would say, by mid year we should have -- we should have something.

And I think that more or less covers it.

But you will see, as we go through the year, more and more metrics, but I wouldn't want to go to giving market shares by individual country.

I think that gets into too much of a competitive issue and those details are not something that I'm proposing to share.

But in terms of giving you more metrics, we certainly will be doing that as we go through the year.

Thank you.

I think that more or less -- more or less covers it.

Okay.

Thanks.

Your next question comes from Bill Pecoriello with Morgan Stanley.

Good morning, everyone.

My question on -- when you look out to '05 and since we can't focus necessarily on the bottom-line, we're looking at the top-line, globally your innovation pipeline, where you stand in recruiting talent that you had referred to earlier, the bottler price increases around the globe, trying to recoup some of the raw material increases, where do you see the top-line relative to that 3 to 4 percent long-term goal of volume growth given where you stand on some of those metrics?

Like the innovation, the quality of the marketing programs, recruiting talent, et cetera?

A whole range of questions in there.

With regard to recruiting talent, that is clearly under way.

And particularly in the area of innovation, we have recruited some half a dozen very, very talented people from outside into pretty senior positions.

But remember, when I talk about bench strength I talk about it in 2 ways.

I talk about developing our own people as well as bringing in outside talent.

And what we do have is we have a program, for example, called the leadership experience, and about the top 300 managers[ph] are going to be rolled through that particular [Inaudible] that is ongoing.

I think we're about halfway through that right now.

And so I -- I don't want you to focus only on bringing people in from outside.

Job 1 is to skill our own people and that's what we're doing.

We do have a good base.

When you talk about innovation, I think Don was saying with regard to North America, we have got an absolutely full palate.

If you talk to the bottlers[ph], they -- I was up with one of our bottlers with Don, we spent a day and a half with our second largest bottler last week, and they said to us, this is the strongest pipeline that we have had of innovation in years.

And the same applies obviously in terms of the support we're putting behind the brands.

In fact, you know, it is about all bottlers are going to be able to handle right now.

We've got them with quote-unquote pedal to the metal.

And that's why you see the bottlers in terms of their own comments saying that, you know, they think we're lined up for a good year.

So then you take that outside the United States and you're seeing the same sort of pull out taking place.

And remember Don in his comments was talking about innovation broadly.

Not just in terms of product, but also in terms of packaging.

He mentioned the splash bottle.

He mentioned the fridge pack.

And we know that the packaging is just as much of a growth innovation as product itself.

So you got to look at that in 2 ways.

So a number of these, I'm not going to go through and itemize, but, you know, you see Coke with Lime coming out in the U.K..

There are a number of innovations coming out and I'm going have more on that in my speech at CAGNY as to what we're doing around the world.

I would say again to position 2005, that as you look at the innovation, it is within the current frame.

They are flavor extensions, brand extensions, I mean if you look at Diet Coke sweetened with Splenda, I mean, that's like launching Diet Coke with Lime.

It is a different variant of Diet Coke.

But we know, in fact as Don touched on it, I mean the lime has been extremely successful.

That's a very, very strong brand and with some other sleepers out there, like Minute Maid, that are growing very strongly, that's the first stage.

And you will see more coming through in 2006.

But the summary on innovation is we have a good strong pipeline within conventional thinking for '05.

What we're working on really is '06 as being an inflection point and of course Japan is one of the pockets of excellence that we're going to be leveraging as well.

In terms of the new growth, I think we just go back to where we were with the original guidance in terms of the model, and then what you've got to factor in is the reinvestments that we're making that we've announced already [Inaudible].

And, now I just -- I want to reiterate one thing[ph] here, because we -- there is some confusion about whether we return guidance when we made the announcements regarding September and also when we came out with the new guidelines in November.

We felt in September, we had a need to come out and, you know, just tell the street exactly where we were.

That was a onetime situation, really driven by the circumstances.

So our policy of not giving guidance in the future is still intact and we will maintain that as we go forward.

Thank you.

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

Yes, good morning, everyone. 2 very quick questions here.

First, Neville, I've gotten a couple of comments from investors today who are hoping that some of the incremental marketing spend can be spent to get at least one extra song on the hold pattern while we're holding for the conference call.

And than a question, Gary, on the gross margin number.

It came in much better than I had anticipated.

Can you talk about what's driving that and how much of that is potentially lower case volumes in the German business where you have the consolidation of the bottler.

Yes, Don, and we will attempt to get some new music, first.

But on margins, there are actually a couple things.

You're absolutely right, a lot of that[ph] was the German bottler and -- because it is a high cost business.

And there was a margin benefit, counter-intuitive, but there is a margin benefit from that.

The other benefit that was coming through is remember the Japan supply chain company as well, and you've had a structural change in both reducing revenues and cost of goods.

So that also helped the margins a little bit for the full year.

Okay.

But for the fourth quarter, yes, that's a full year thing, though.

That was a full year.

It actually happened in the fourth quarter of '03, so there is no fourth quarter benefit.

There was full-year benefit.

But it is primarily Germany and India, actually.

Okay.

So some of the other company-owned bottlers then helped as well?

Yes.

Exactly.

Okay.

Thank you very much.

Your next question comes from Jeff Kanter with Prudential.

Good morning, everyone.

Gary, gallons were down 1, is that correct on a reported basis?

Yes.

Okay, so when I look at gallons down 1, reported case sales down -- down 3, in the quarter, where -- and then you talk about increased or better performance in North America and North America operating income was up 15 percent, is that where the bulk of the extra gallons shipments were in the quarter?

Yes, in the quarter -- well, first, let me go back to full year and then let me focus on the quarter.

If you look at full year, gallons and cases are right in line, up 2 and 2.

Right.

But in the quarter itself, there were some -- the gallons were in fact higher than we had anticipated late in the year, that was primarily in North America, and there was some benefit coming through in the quarter from that.

And that's part of what I was trying to breakout as part of that -- part of the $0.06, if you will, that we were over was actually because gallons were higher than we had anticipated in North America.

Number 1.

The second thing that we saw coming through, though, and particularly in North[ph] America, is that we have talked about we've been doing a lot of work trying to get ops down and in fact our run rates in OpEx, we started seeing that reduction reflected in North America and so we had some improvement in OpEx savings as well.

So just all things being equal, I know you have a lot of innovation in North America slated for 2005, but we should kind of think about that benefit that you got in the fourth quarter kind of take it away out of the first quarter, is that -- ?

Yes, well I think you have to make the decision.

I'm not going to give you the guidance.

But, we wanted to point it out to you so you could make that decision, so yes.

Okay.

And how are you thinking --

I think it's fair to say we have a lower cost base going forward for North America.

We have a lower cost base but the gallons, because they were ahead, you would probably expect some of that to turn around.

And are you going to -- is that $400 million in incremental spending -- you know, if currencies continue to be favorable, I know you figure that it's going to be relatively flat, but the dollar is all over the place.

Would you -- could that go higher if currency -- if currencies give you a greater than expected tail wind in 2005?

Thank you.

Yes, and in fact, that's what I was trying to say in the prepared remarks, because we will be [Inaudible] all that marketing locally and we have allocated now, we've completed all the planning, we've allocated the amounts by market, and in fact, because it is now allocated and will be spent locally, it will fluctuate with currency.

So, you know, if I'm right that there is minimal currency benefit, then it will be about 400.

If in fact their currencies do move, the 400 million will also move relative, if you will, to currencies.

Okay.

Thank you.

Can I just add one thing on that incremental marketing which is very important?

Some of it is capability building but -- in market and innovation, but most of it is[ph].

We have put in a very disciplined approach to this expenditure.

Chuck Fruit has [Inaudible] metrics to measure market by market, that has allocated the money, how they spend it, what the return is over time.

Because, you know, what tends -- what could happen is that when people are given a nice increment in terms of their marketing, that they spend it unwisely.

We have no intent in doing that.

That would be absolutely against what we're doing in the operating framework.

And therefore, I have worked with Chuck and I have actually presented to the board, and I will keep reporting to the board, not because they've asked for it but because I believe it is appropriate, metrics against how we're spending it and what return we get for[ph] that 400 million.

It is going to be very, very well disciplined, I want to assure you of that.

Jeff, Don.

One last comment on North America in terms of efficiencies.

Just in addition to the OpEx efficiencies, you will recall in 2003 we combined really the 3 supply chains of North[ph] America, the Minute Maid Company, Food Service and then Bottled Can into one and we're seeing efficiencies because of that.

So we had -- we saw the benefit of that in the fourth quarter and the full year as well.

Okay.

Well, thank you very much.

Your next question comes from Bonnie Herzog with Smith Barney.

Good morning, everyone.

Good morning, Bonnie.

Neville, I guess I have a question for you.

I was wondering if you could touch on your thoughts surrounding potential acquisitions, be it big or small, especially in light in the recent merger announcement between P&G and Gillette.

Do you expect that this merger will spark more consolidation among consumer staple companies?

And if so, what role do you play?

In other words are you more open now to diversifying your portfolio?

Well, that is the big question everyone is asking and I have a very clear view about this.

First of all, you have to think about the industry that we're in, Bonnie.

We're in a great industry, the beverage industry not only satisfies a basic human need, but it is a good high margin business.

And it's the business where we have the skills, the knowledge, and the expertise going forward.

I have said I like to do job 1, which is, you know, first of all stabilize our beverage business, and then regenerate growth within it.

And I don't see that this happened with regard to what is obviously a very good move in terms of Gillette and Procter & Gamble getting together.

I don't see that as changing that view.

We have a 8 percent share of the total commercial beverage market in the world.

We have, you know, a host of opportunities out there to exploit.

Now, next thing is that I am very clear about the fact that acquisitions are there to build share owner value.

I'm not interested in building size.

I'm interested in building share owner value.

And if you read all the column inches that are being spewed out since the announcement of P&G and Gillette deal, you know, there are a few themes there.

There is that there is a great deal more of consolidation that is going to take place.

The other is a note of caution, and that is that the track record in terms of acquisitions has not been very good for the majority of companies.

So it is not high on my agenda.

What is high on my agenda, though, is the type of fill-in acquisitions that we've been doing around the world over the last couple of years, and you've seen those in terms of some of the things we've done with juices, but primarily with the water business.

You've seen them in Europe in terms of what we're doing there, to build where we don't have the brands and where it is a shortcut to growth.

So that is really investing in the business for growth in the way that we have done it in the past.

To me, I'm still absolutely focused on getting my own house in order, and ensuring that we've got the skill set to add value to any business that we might acquire.

Nothing is forever.

You never know what may come up and what may come up.

But I have -- we are not focusing on M&A at the moment.

To be able to kick up the revenue line without being sure that we can add value back to the share owners.

And I think that what we're doing right now in terms of really getting the base business right, kicking growth along for our core business, that's beverages, is the right thing to do for our share owner, that's the focus.

All right.

Thank you.

That was helpful.

Your next question comes from Caroline Levy with UBS.

Good morning, everybody.

Actually, Don, I was wondering if you could talk about shelf space and as you roll out the multiple innovations, when you go in with diet coke with Splenda, does it get you incremental display time and shelf space?

Or, you know, is it going in where Diet Coke already is?

Do you have to split that?

If you could just walk us through that with some of the innovation.

Yes.

Caroline, on all the innovation we have, space is obviously one of the key questions on everybody's mind in the system and with the customers and we're really taking a 3 pronged approach to this.

First, much more of a category management sale to our customers, focusing on the GMROI, if you will, the gross margin return on inventory investment that the retailers have, we think we have some of the fastest moving SKUs.

And based on the modeling we've done on our innovation, we think there is significant volume upside.

So we're going into customers selling for more space.

Not only in the traditional gondola but in other parts of the store particularly around the perimeter.

Last year we started Treat Yourself Light racking program and that's gaining[ph] momentum.

So, I think the category management approach is certainly alive and we're getting more sophisticated with how we sell that to customers and again, it is not[ph] looking just at the traditional sections of the store but throughout the center of the store where there is really a need for some revitalization as well as the perimeter.

Second, I think the system is getting much more disciplined about eliminating SKUs that do not add significant value.

And we clearly know as we bring on new items we are going to have to be more disciplined about that as we move[ph] forward.

Diet Coke sweetened with Splenda will go into the traditional location[ph] but it will also be peppered around the store in perimeter locations as well.

And we will also continue to add those types of perimeter locations across different panels from the convenience store trade, you know, across the supermarket trade, et cetera.

So, a much more disciplined approach to category management and a much more disciplined approach to where those SKUs that aren't pulling their weight need to go.

Thank you so much.

Gary, I would just like some clarification on the reported earnings of $0.50 and then when you showed the onetime adjustments you get down to $0.46.

I just want to be clear, is the 15 percent tax rate in that $0.46?

Yes.

It is?

So if were you to have a normal tax rate that would take you down to 44 if you were at a 25 percent tax rate?

Right.

That's right, Caroline.

And let me say on tax, we actually broke taxes in the release into 2 kind of buckets, if you will.

In the table that's on page 2 of -- 2 of the release, you will see some tax items.

And those are kind of the unusual tax settlements from where we have had some favorable settlement tax products in various countries around the world, et cetera.

As well as the impact from the new tax law.

So we broke those out separately.

In addition to those items, our underlying tax rate came in at 24.5 percent versus the 25 percent that we had expected.

And that half point, full year, all then flows into the fourth quarter so it's all reflected in the fourth quarter which is driving the rate down significantly for the quarter only.

So it is --

Right.

They're both buckets.

Gary, if I could further clarify, then your $0.03 or $0.04 above consensus on that basis, is that where the currency and the extra shipments and so on come in?

Yes.

Exactly right.

But there were no -- actually there was one other thing that was a little unclear, the donation to the Coke Foundation was done in the fourth quarter, it affects the fourth quarter earnings or it was done afterwards?

It was done in the fourth quarter and there were 2 items, actually.

We received a settlement from an insurance companies relative to a lawsuit that we had had in prior years and we -- that settlement was $75 million that we received and then we turned around and donated $75 million then to the Foundation.

Okay.

That so much.

Both of those are in the fourth quarter.

Great, thank you.

Thank you.

Your next question comes from Bryan Spillane with Banc of America Securities.

Good morning.

Just a question on revenue management and I'm not sure if it is Don or Neville, who'll want to take it, but you had talked about in November training a significant number of people, I guess, globally on revenue management and I was just curious to know where you are in that process and sounds like you're applying some of that in North America but will we see some other action of that front outside of North America?

Yes, the answer to that is yes.

I mean revenue management is probably in the mainstream on all of our plans, country by country.

I would say almost around the world, there are some smaller markets where it probably doesn't apply.

And of course, it is something we're doing with our bottlers[ph] and this is not something that we're able to do on our own.

This effect is a very good example of transferring best practices, of taking some significant new thinking and then working with our bottlers and implementing that in the marketplace.

Let' see, we talked about Brazil and Argentina but it is a key part of the plan for North America for '05.

It's already being implemented but it is certainly a key part of '05.

Don, do you want to add to that at all?

Yes, thanks, Neville.

Brian, as you know, CCE in particular, and our other bottlers, but CCE last year created a much more robust revenue management group under Terry Marks who is now heading up their North American business unit and we are working hand in glove with them providing support to them but also, as Neville [Inaudible] urging best practices, for example we have a number of people from North America, both from the bottling community and from the Company side, going to Argentina, for example, to look at those best practices.

So, I think we're starting to get much more leverage off those best practices from around the world and people are much more open-minded to building that capability.

And now we have the infrastructure in place to build off of.

Okay.

Operator, we have time for 1 more question.

Your final question is from mark Schwartzberg with Legg Mason.

Thanks, operator.

Good morning, everyone.

Neville, I guess 2 questions, relating to marketing.

One a clarification regarding your ability to actually track returns.

To be clear, are you saying those mechanisms are now established region by region?

And then secondly, as you think about R&D for the Company going forward, you've obviously got a tiger by the tail with Diet here in North America, something you want to aggressively follow.

But, in terms of identifying the next Red Bull, the next Starbucks, those, you know, those important new segments, do you continue to think it's better to be an early follower, if you will, rather than trying to be the one to identify or create those new segments looking out?

Okay, let me clarify on the metrics on the marketing spend.

When you say return, you're looking at media, you're going to be looking at softer measures than that, because you know, you can't separate buckets of money, what you can do is look at your brand scores.

Your favorite brand and all the other measures that we do.

So it is the upticks that we are looking to see in those areas that are important.

And again, it is an art, not a science.

Because we're looking at better quality of advertising and that's going to affect the brand scores positively as well.

But it is actually that type of monitoring that we're doing in terms of media spend.

But we're also making sure that it's spent on media, by the way, because that hasn't always been the case.

Some simple [Inaudible] as well.

Tiger by the tail with Diet, yes, not just in North America but also in Europe.

Big diet market in Europe.

U.K., if you look at the gross trade, Diet was bigger -- is bigger than regular.

So it is not just North America.

And it is becoming increasingly important even in markets in Asia and Latin America.

Not that [Inaudible] yet.

To your question about innovation.

I think the answer is both.

Short answer is both.

If you look at what we have with Full Throttle, Don mentioned Full Throttle, we think we[ph] have a winner with Full Throttle.

We have a winner with Burn in Spain, for example.

We have -- we are getting pretty good[ph] leadership there.

So those are internally generated.

And I think that we have to look at both.

We are going to do internally what we got to be able to bring in externally.

And [Inaudible] for '06 will start to demonstrate some of the new research that we are doing in order to broaden the view of the category that we're in.

Thank you.

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

I will now turn the call over for closing remarks.

So I just want to reiterate that I don't believe that we performed to our full potential in 2004.

And I think with 2 percent volume growth, it is hard to deny that.

Not only is it behind us, but more importantly, I think we have a little bit of momentum going forward, but we have a lot of momentum in terms of what we're doing in terms of the day to day running of the business. 2005 is still not going to be a year though where we're going to judge ourselves by our generation of earnings growth, but really by ensuring that we take the steps that are the right steps to get the foundation in the right place so that we are able to exploit our true potential in the future.

I hope that with Don's discussion of North America this morning that you see that we're doing just that.

And as we move through into the rest of the year, I look forward to keeping you updated on the progress that we're making.

I think you will, as we go through the year, see some new initiatives that we haven't [Inaudible] yet for competitive reasons.

You will see some things coming out and of course I will be talking in some more detail next week at CAGNY.

So, thank you very much for joining us this morning.

This concludes today's conference call.

You may disconnect at this time.