可口可樂 (KO) 2005 Q1 法說會逐字稿

Good morning.

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

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

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

Good morning, and thank you for joining us.

I am pleased to be joined today by Neville Isdell, our Chairman and Chief Executive Officer, Gary Fayard, our Chief Financial Officer, and Mary Minnick, the current head our Asia 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 one question per turn.

Before we get started, I'd like to remind that you this 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 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 web site at cocacola.com in the Investor section, which reconcile our results as reported under Generally Accepted Accounting Principles to certain non-GAAP measures which may be referred to by our senior executives in our discussion this morning 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 good morning.

I hope you've had a chance to review the release we issued this morning as I won't spend too much time on the details.

Similar to last quarter, I'm going to make a few brief remarks on where we stand, and then I'm going to turn the call over to Mary Minnick so that she can provide some insights on Asia and also her new role, and Gary will then follow with additional insights on the quarter before we move over to your questions.

I'm pleased to report to you this morning that we are making progress towards the objectives that we set and those that we've shared with you in the past.

Our results in the first quarter clearly reflect the benefit of our global operations as the portfolio effect of our operations helped to balance our overall results.

We saw on the one hand upside in markets where we're executing very well.

Markets like Latin America, where we grew CSDs 6% led by Brand Coke.

Africa, 10% unit case growth, with carbonated soft drinks growing at 8% led by South Africa, who put in another great quarter, Trademark Coca-Cola growing 14%.

China also delivered another outstanding quarter which Mary will discuss in a minute.

In addition, other markets like Chile, Turkey, Russia, Central Europe, and other parts of Asia, also put in strong results.

This upside helped to offset some unexpected weaknesses in our Northwest Europe markets, as well as markets that we've already talked about, markets in transition including North America, Germany, and the Philippines.

Our share position around the world is stabilizing as we're starting to see improving trends in most of our key categories from the prior year.

In the total non-alcoholic ready-to-drink category, we either gained value share or improved our trends in 11 of our top 16 markets and we gained volume share or improved our trends in 12 out of the top 16 markets, and if you take that down just to carbonated soft drinks, the trends are essentially the same in value, improved or gaining share in 12 of 16, and in volume improving or gaining in 11 out of 16.

As we've discussed in the past, we've stepped up our investment in brand building and marketing and our goal of clearly re-establishing our marketing leadership around the world.

You've heard some of these plans from Don Knauss on our last call.

One example that's out there now is Coke with Lime, where we've stepped up spending that we normally allowed for a launch, featuring what has now become our famous TV spot which was voted a top ten spot in Ad Age and has seen double the industry's standards in awareness and persuasion.

Mary will touch on what we're doing in Asia where we stepped up spending, and that is driving strong gains in our Minute Maid and Nestea brands in China, for example.

Another area which I'm particularly proud is the reigniting of the Coke trademark.

Back in November, I said this was critical to the success of our Company, and Marc Mathieu, our Global Brand, Coke Brand Manager, shared with you what we're thinking in that respect.

We've now launched our first advertising campaign under the new brand architecture Latin America, under the tagline "Toma Lo Bueno".

We're also wrapping up work on the first round of our iconic advertising and that will begin airing this summer.

Now, don't get me wrong.

We clearly understand that a couple of good ads will not change the game and we don't expect them to, but they are one tangible manifestation of our belief that emphasizing execution across the entire system, including setting objectives and reaching them consistently, will ultimately be the game changer.

We're also making changes in our business to provide a catalyst for our marketing and innovation.

We're very fortunate to be able to leverage Mary's experience and marketing and elevation in Asia for the benefit of the entire company.

We're also realigning our geographies to give them the needed focus, and we brought two new individuals Dominique Reinich and Muhtar Kent into the Company to continue to strengthen our team and also to bring new perspectives, as they bring with them both marketing and bottler experience, they're going to be invaluable in their new positions.

Patrick Siewerts' new expanded role will now provide markets such as India, the Philippines, and our South and West Asia division including the likes of Indonesia, a sustained focus as we develop and expand appropriate infrastructures to serve these countries.

And finally, as you heard yesterday, we've also put behind us the twin investigations by the Securities and Exchange Commission and the Department of Justice.

So while we have lots of work still ahead of us, we are making progress.

As I said at Cagney, we're really at the end of the beginning.

And I'm pleased to report that we're making improvements, and we're investing in our marketing, but, you know, I've said this a number of times, rebuilding brand equity does take time, and I recognize we still have key markets that are in transition, and they're not necessarily easy fixes, but I'm very confident that what we're doing are the right things, and that we're making good progress, and that our continued emphasis on execution will bring about long-term benefit.

So one of those markets where we're focused on execution is Asia, and Mary is here in her current capacity for the last time to talk about this complex but really dynamic part of the world.

Mary.

Thank you, Neville.

As you know, Asia is uniquely complex, immensely diverse, and rapidly changing, yet it also provides tremendous opportunities for our company.

In 2004, we sold over 3.5 billion unit cases in Asia, about 18% of our Company's total volume.

We produced 4.7 billion in revenue, and 1.8 billion in operating income representing 21% and 26% respectively of the Company's total.

The Asia unit's 1.8 billion in operating income last year was more than the entire International Operations of our closest competitor, including their snacks division.

Behind these strong numbers is a multifaceted business which varies from more developed markets such as Australia, with per capital consumption of more than 300 servings per year, to countries such as India where it's a seven.

In China, we also have distinctive markets from modern metros like Beijing and Shanghai where our per caps are over 80, to the hundreds of other cities and towns where we're just starting to build a ready-to-drink culture.

With the product portfolio ranging from teas to soy, to beauty-enhancing water, non-carbs are already a significant part of our business and an important engine for growth.

In 2004 non-carbs represented 34% of Asia's total volume versus the Company's average of 17%, and non-carb growth in Asia for the year was 9%.

Our market in Asia encompasses just about every channel in the beverage universe from mom-and-pop stores to ultramodern convenience stores and hypermarkets.

In terms of share we have 50-plus share in carbonated soft drinks, and the total non-alcoholic ready-to-drink share is 12% overall, but in markets like Australia, it's over 20%, and we've made significant progress in China where we have successfully launched several new non-carb products.

So, as we think about our future and considering our strong position in Asia, it's rapidly growing population and improving macroeconomic conditions, we continue to see enormous opportunities.

Carbonated soft drinks will play a critical role as we continue to grow the category, but over the long-term, I believe our market development will resemble Japan more than some other markets.

As Neville discussed last month, that's a key rationale for our inclusion of Japan, together with China, and some of the other developing countries in the new geographic alignment.

To give us a better idea of our future, let me briefly review where we are today.

Our star is China.

We've delivered double digit growth over the last several years with 22% growth in 2004, on top of 16% in '03, on top of 14% in 2002.

We have aligned bottling partners, an efficient and effective value chain, a strong marketing team, and a great track record in introducing new product successes.

This country is a pocket of excellence in our system.

Likewise, we have strong, stable, and profitable markets like Australia, Thailand, Singapore, and Hong Kong.

Now we do have two work-in-progress countries, Japan and India.

In Japan, we're in year two of a strategy to generate renewed momentum in this very important market.

We're pleased with the progress we've made in reducing costs and aligning our bottler partners, and we are now reversing negative trends in the vending and national supermarket channels.

Where we still have work to do is in the regional supermarkets zeroing in on key categories like tea and juice and rolling out fewer but bigger new product successes.

In India, we had to implement price increases across all of our packages due to higher material and distribution costs.

We are also still dealing with high taxes and skepticism around colas with certain segments of the population.

Despite these challenges, we believe we have the right strategy, long-term perspective, and skills to address them.

Finally, you've heard us talk about the Philippines over the last year.

Volumes were down this quarter, but we know what the issues are: Affordability, availability, and acceptability, and we're addressing each one of them along with our bottling partner.

In terms of acceptability, the Philippines is already one of our most developed markets with some of the highest brand scores in the world and certainly the highest in Asia.

Even with that, we are making strides with the recent improvement in Coke's daily drinker level among teens of 2.5 points in a market where Coca-Cola is already at high levels.

Additionally, Coke's ad awareness level among teens was up 1.3 percentage points in the last couple of months, helped by some great marketing and stepped-up spending.

On affordability, we're working to launch a 200ml returnable glass bottle for Coke at 5 pesos as we try to replicate the tremendous success of China's affordability strategy.

On availability, we're going back to basics with zero-based assumptions on the best go to market strategy for the market.

We're making inroads, but the Philippines will be a continuing challenge as we move through 2004, ensuring that we have a solid foundation for future growth, which leads me to the first quarter results for Asia.

As always, I want to remind that you first quarter, especially January and February, is a low-volume period for Asia and not necessarily indicative of overall growth trends.

Further, the combination of the performance in the Philippines and India, combined with the tsunami impact pulled down the total volume for the group.

Excluding these two countries, our growth would have been 7%.

As I take you through the plans of the few key countries, I think you'll see that we're making progress.

Let's start with Japan since it serves not only the base for funding future investment but also a model of development for other markets.

As you may recall, in 2004, we set out to do four things in Japan: Grow profitably in supermarkets, keep core brands healthy, create new profit generators emphasizing vending and new products and packages, and four, reset the bottlers cost base.

We saw some solid results coming out of these plans last year, with overall volume growth of 4%, the highest we've seen in several years.

We generated over 6% growth in supermarkets driven by our success in national chains, we grew core brands and vending each by 7%.

And finally, through the creation of the supply chain management company, we removed 140 million in costs from our system in 2004 and improved the level of service to national customers.

We're continuing to pursue these same four strategies in 2005.

First quarter growth of 2% cycling over 1.5% in the prior year wasn't a bad start but it was also a bit deceptive.

January and February were slow, reflecting our emphasis on canned coffee, which is highly profitable but not a large volume contributor, as well as weak retail trends overall.

But as trends improved in March, and as we gained share with the successful launch of the new profit generator Hajime, results turned around.

We believe we have a real winner in Hajime, a new green tea product.

In developing this product we focused on how tea growers prepare the tea.

As a result, we believe we have a ready-to-drink green tea that is both refreshing and easy to drink.

Because of solid bottler activation we launched 90 to 100% availability coverage in all key channels in one week of the launch, including supermarkets and convenience stores where it helped increase our non-sugar tea share by approximately 3 points, despite intense initiatives by competition.

This is the highest volume launch ever recorded for us in Japan, and we suspect it may be a first for the industry.

Despite a soft January and February, we grew overall volume in supermarkets by 4% for the quarter and gained six-tenths of a share point thanks to the launch of Hajime, renewal of Aquarius, and the continued expansion of the 1liter PET package launched last year.

Our emphasis on supermarkets in 2004 was on national chains.

This year we're focusing on improving our systems execution in the important growth channel of regional supermarkets.

As I've already mentioned, our core brands which include Coke, Sokenbicha, Georgia Coffee, and our Aquarius sports drink, grew 7% last year which means we have challenging comps in 2005.

In the first quarter overall results were satisfactory but results did vary by brand.

We had good results in key profit categories like sports drinks and coffee with Aquarius and Georgia growing 18% and 2% respectively.

At the same time we have challenges with Trademark Coke and Sokenbicha, where we have plans in place to address them.

In terms of Trademark Coke we'll soon be cycling the successful C2 launch.

We'll continue to provide tactical support for C2, and an emphasis on vending for this product and brand, however, marketing emphasis will shift to the Diet Coke platform this year.

In addition, Brand Coke will continue to get strong support with the new campaign and a marketing, and a brand-new strongly supported marketing calendar.

As the green tea category grows, Sokenbicha will have some cannibalization from Hajime, but we will step up our advertising to remind consumers of this unique brand, blended tea benefits, and its long, long successful heritage.

In the vending channel, we're focused on three things: High volume location acquisition, vending exclusive marketing, and advanced vending machine placement.

Our continuing efforts in these areas, which are very profitable and high margin, for producing positive results with vending sales up 3% in the first quarter.

The final area where we're making great progress in Japan is resetting the bottlers cost base. 2004 marked the first full year of implementation of the new supply chain management company which is providing an entirely new cost base for our bottlers freeing up more capital for reinvestment.

The lower cost base is also making us more cost competitive as overall volume continues to migrate toward large format stores.

Finally, with the supply chain company now handling nationwide manufacturing, bottlers can focus on customer service and distribution.

In summary, we're continuing to make progress toward our four key priorities in Japan: Growing profitably in supermarkets, focusing on our core brands, delivering new profit avenues, and driving costs out of the system.

I'm confident as we execute against those strategies, Japan will continue to support our company in Asia.

Let's move to China.

I couldn't be more enthusiastic or positive about this market.

It's a winner for the Company.

We have the skills, the bottler commitment, and the plans to continue to drive growth.

This year we're going to focus on three areas: Number one is carbonated soft drink growth through stepped-up marketing investment.

Our 50-plus carbonated soft drink share position in China gives us a strong foundation.

What we're doing now is driving preference and increased share through ownership activation of teen and young adult passion points and channels.

We've already seen positive outcome from our programs and the favorite brand measure for Coke in metros among teens is up 2 percentage points and Sprite increased by 3 percentage points.

This is translated into first quarter carbonated soft drink growth of 20% on top of 15% in 2004 and a 1.2 percentage point carbonated soft drink share increase.

We're also increasing cold drink equipment placements with plans for an incremental 100,000 coolers this year.

Finally, we continue to accelerate returnable glass bottle penetration to address affordability in smaller cities and rural areas.

We believe this a key competitive advantage in China as it makes our beverages affordable to a much larger consumer base.

In the current quarter alone, returnable glass growth was 19%.

The second area of non-carbonated beverages, where we will continue to build scale and enhance profitability in teas by building on the very successful 2004 launches of Nestea Ice Rush and Modern Tea Workshop.

In the first quarter Nestea grew 175% versus a year ago where Modern Tea Workshop has captured brand leadership in the non-western tea segments in markets where it's available.

We will do the same within the juice category as we relaunch Qoo with the new mom and child-friendly proprietary bottle and new formula.

We're also expanding the very popular Orange Pulp by Minute Maid.

Our juice volumes were up 51% versus prior year, and we have also gained the leading category share position in markets where Qoo and Orange Pulp are both present.

Finally, we'll enter value-added hydration with the new entrance under the POWERade brand.

The final area's improving capability and system economics, where we agreed to a ten-year vision with our bottlers that will substantially increase cold drink sales, marketing and infrastructure.

We're committed to aggressively expanding and investing in China, building on a strong business foundation and our track record of successes, and we have no doubt it will be a significant contributor for future growth.

The final market I wanted to address this morning is India.

Another market with tremendous opportunity but one requiring a different approach than China.

Over the past two years, we've pursued an affordability strategy that dramatically increased our volume base.

In the second half of 2004, however, we implemented a double digit price increase to cover the continued rise in material and distribution costs.

The price increase was necessary, but it did impact volume.

We're also continuing to look for ways to manage costs throughout this year, such as programs to deseasonalize the business to better leverage our infrastructure.

Along with costs, there are other challenges in India, including a still emerging carbonating soft drink culture, not to mention the residual effects of the unfounded pesticide scare in 2003.

With these challenges we are leveraging our flavored carbonated soft drinks and non-carbs in returnable glass like Maaza fruit drinks to more effectively grow per [caps].

To free up investment for these brands we've also built into our plans a de-emphasis on our unprofitable water and powder products.

In the first quarter we saw the beginnings of some of these strategies unfold, but volumes were down for the quarter, reflecting the de-emphasis on water and powders and, again, the price increase.

However, we're seeing strong growth in Maaza up 15%, and Sprite-flavored carbonated soft drink up 21%.

As we continue to improve our execution of these strategies, I believe we'll build India into improving our market over time.

So that's a few thoughts on Asia, a region that provides great opportunity, a diverse portfolio, and a strong position on which to build.

As Mutar and Patrick bring their own perspectives and strengths to bear on implementation of our strategies for these markets, I'm sure the success will continue.

Further, with the move from two operating units to three in Europe and Asia, we will be able to increase the intensity of our focus on realizing these growth opportunities.

Finally, I believe the insights I've gained from covering such a broad and diverse marketplace will be helpful and will continue to inform my perspective on strategy and execution in my new role.

Speaking of which, I'm sure many of you may be wondering what's on my list of priorities, so I thought I'd give you a few initial thoughts.

I don't officially start the job for a few more weeks, however, given my background in Asia and with the Company in general, it's fair to say do I have a few hypothesis on how to approach this new position, but let me put one qualifier on them.

These are working assumptions that I'll put to the test over the next several months by listening and learning from other markets around the world.

First of all, our road to greater innovation and marketing effectiveness is challenging, but it is certainly not impossible, nor even that long in my mind.

There are known and proven examples of marketing and innovation around our global system that if leveraged in more markets, would give us a pipeline of marketing and innovation excellence that could last us years.

Many of those successes happen outside the U.S. and part of my role is to bring new ideas to this market, as well as broaden your horizons on the work we're doing outside the United States.

The second assumption is that we can expand and push our existing brands to address immediate consumer needs without creating entirely new trademarks which can be a big investment.

Let me give you a simple example.

Fanta can and should play a bigger role in helping us address local competitive threats.

In Australia, milky, fruity beverages are popular so we launched a creamy smooth sub-brand called Fanta Spiders that leveraged the equity of Fanta's fun heritage and brand recognition, but also added new values and interest to the trademark while addressing its local competitive threat.

Likewise, the success of Sprite Zero is just the beginning of adding new product benefits to this brand that leverage its thirst-quenching heritage but take it into whole new areas of functionality.

The next assumption is around is marketing and advertising for Brand Coke.

In terms of marketing and advertising for Brand Coke, you've already seen the revival of an icon work presented by Marc Mathieu and to build on that I believer there are exciting examples of excellent work around the world.

Much of that work is clustering around three general areas of brand values, and I think we've got an opportunity to refine those ideas even further to create a more consistent and meaningful brand communication strategy globally.

My final assumption is that we need to do a better job of breakthrough innovation in the mid and long-term.

By providing an umbrella of integration over marketing, innovation and strategy groups, I believe Danny Strickland, Chuck Fruit, and the head of the strategy group can quickly flush out a strategic growth roadmap that will direct our resources and ensure greater focus on substantially new products, new packages and new avenues for growth.

For example, hot dispensing, warm beverages, at-work channel, new forms of interactive advertising and communication, they're all very rich areas with potential.

Bottom line, I guess, to sum it up is, we don't have a shortage of ideas.

We have a shortage of focus leading to a bit of an inability to prioritize and make hard choices.

We also have a bit of risk aversion, and having lived through four-week product life cycles in Japan, I'm confident we can do a better job of embracing risk, learning as much from our failures as our successes, and simply getting on with leveraging ideas we know work in other parts of the world.

So my priorities are as follows: Initiate quick wins by leveraging products, packages, and marketing ideas from around the world and by expanding the footprint of existing trademarks.

Two, establish priorities for the breakthrough innovation pipeline that is currently being worked on for the mid and longer term.

Three, ensure the executive committee has the business facts and recommendations it needs for developing the strategic roadmap I referenced.

Four, build a world-class marketing organization.

And finally, accelerate our marketing success rates, especially on our lifeblood, Brand Coca-Cola.

I'm looking forward to working with both Chuck Fruit and Danny Strickland as we approach the challenges ahead and sharing with you our progress as we continue to strengthen this great company.

As most of you know, market something my passion, and it's my background, and I'm thrilled and I'm delighted with the new position.

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

Thanks, Mary and good morning.

I'd like to spend just a couple of minutes covering what may be top of mind before we get to your questions.

As you saw in our release this morning, we reported earnings per share of $0.42 on a diluted basis.

That number was reduced by $0.05 of negative impact related to items impacting comparability which included the following: $0.06 per share, which was an accrual for taxes related to the repatriation of foreign earnings and I'll touch on that in more detail in a minute, a non-cash $0.02 per share negative impact related to accelerated amortization of stock-based compensation and I'll also give you a few details on that.

Going the other way was a tax benefit of $0.02 a share for favorable resolution of tax matters, and a $0.01 per share gain on issuance of stock by Coca-Cola Amatil in connection with one of their acquisitions.

Therefore, our earnings per share after considering those items was $0.47 per share.

Within that $0.47 now, let me discuss a few of those items that I think that are worth mentioning as they relate to the balance of the year.

In the quarter, we had a change in the estimate of the service period for retirement eligible associates when the terms of their stock-based compensation awards provide accelerated vesting upon early retirement.

What that means is that for current associates who are eligible for early retirement, we will now be fully expensing their stock-based compensation over the period from the grant date to the date that the associate is legally entitled to the award.

In our case this is generally 12 months.

Previously we expensed stock-based compensation over the expected service period which was generally equal to the original vesting period of the award, generally four years.

Basically, what that means is that in the first quarter, we incurred a $50 million or about $0.02 per share charge.

The full-year impact will be about $55 million and then moving into 2006 and beyond, we expect the normalized level related to these expenses will be closer to about $15 million or so.

So basically, it's timing.

We're accelerating the amortization of the expenses.

Total expense is the same but it's a timing within quarters and within years.

In addition, we benefited about 5% at the operating income line from currency, and therefore, our current outlook for the balance of the year is that we now expect to see a moderate benefit from currency.

The Company will review opportunities to selectively reinvest these currency benefits into additional marketing programs in 2005 if we believe they will drive long-term sustainable growth, and as we review those opportunities, that could include currency benefits derived in the first quarter.

In terms of a tax rate for the full year we now expect our underlying effective tax rate on operations to be 24% for the year.

That's a point lower than what we had told you initially.

In terms of expectations beyond this year, I think it's just a little too early to give a specific rate since there are so many items that impact the tax rate.

Turning to share repurchase, because of our settlement discussions with the Securities and Exchange Commission and the Department of Justice, we were generally not in the market in share repurchase during the first quarter; however, we will re-enter the market now and would still expect to repurchase at least 2 billion of the Company's stock by the end of this year.

And finally, on tax repatriation of foreign earnings, we will be repatriating approximately $2.5 billion under the American Jobs Creation Act that will be used for qualifying purposes.

The maximum amount that we can repatriate under the act is about 6.1 billion, and we will continue to evaluate during the course of the year whether to repatriate the remaining 3.6 billion.

The last thing I want to remind you is that we are really early in the year and as Neville said at the beginning of the call we have a lot of work to do especially in some of our key markets including North America, Germany, India, and the Philippines.

We still look at 2005 as a transition year and the year to put the foundation firmly in place.

While we may have over delivered, I guess, some of your expectations, please remember that operating income was actually down 6% for the quarter versus prior year, and that we will continue to aggressively invest in our brands to build the foundation.

Therefore, as you think about the remainder of the year, I would encourage you to keep the current quarter's results in perspective.

With that, I'd like to turn it over to your questions.

Operator?

[Operator instructions] We will pause for just a moment to compile the Q&A roster.

Your first question comes from Bill Pecoriello with Morgan Stanley.

Good morning, everyone.

First, I was just hoping that Gary could just help us in terms of how much market spending was up in the quarter in terms of actual increased pressure against the market versus it being up because of the sales curve accounting.

And then, Mary, I was hoping that you could help us on, you talked about in marketing innovation, more internal focus, leveraging what you have.

Do you see the need for more external enhanced capability as well, whether it be acquisition, partnership, added bench strength in the area of marketing and innovation?

Thank you.

Hi, Bill, Gary.

First on marketing.

Marketing was up 15% in the quarter, and, in fact most all of that, I'd say 14% to 15%, so substantially all of it, in fact, was actual cash or accrual spend and was not significantly impacted by the sales curve in the quarter.

Now what we have said is a lot of the incremental spend that we'll have will be in the latter part of the year, particularly the fourth quarter so you'll see some pretty significant increases later in the year as we get into the latter part.

But it's 15% in the first quarter.

Mary?

Hi, Bill, it's Mary.

I think, yeah, a couple of points to make on externally looking outside the Company for sources of growth.

First of all, I think one of the biggest external focuses we need to develop is to look outside for ideas.

I mentioned Hajime came from looking at our tea growers.

Bottle can and the emblem technology we used in Japan came with a partnership with our can suppliers.

Diet Coke with Splenda came from one of our customers so we need to do a better job of casting the net externally for source of ideas.

In terms of talent, I believe that we have a combination of both internal and external sources for that, accelerating the development plans for our existing marketing community and building their capabilities, but when needed bringing in external bench strength.

In terms of acquisitions and in those kinds of things, I think Neville's been pretty clear that our minds are open, but right now there's nothing on the horizon.

And more importantly, our focus is getting the core right, right now.

And as I said, I believe there are some quick wins of leveraging other ideas more consistently in more markets that will help us build that core.

Great, thank you.

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

Good morning, everyone.

Gary, can you talk about the currency impact in terms of, you talked about sort of spending some of it back potentially over the balance of the year.

Can you talk about the decision to maybe let some of it flow through the bottom line for this quarter and then how you perceive that decision being made in timing over the balance of the year?

Yeah, John, thanks.

As you saw we did have some positive currency, 5% at the operating income line in the first quarter, and we would expect now to see modest currency benefits for the full year.

But basically, I would say this, we will spend the currency benefits back if we see business opportunities that we can invest behind the brands that we think will drive sustainable long-term growth.

We just really getting into the year one quarter behind us, and really have not seen those opportunities at this point.

As we get into the summer's selling season, I think we'll see more opportunities, but it's really a matter that we will spend prudently and we'll only spend against things that we think will drive long-term sustainable growth, and as we get into the year, I think there'll be some opportunities.

If there are, we will spend it, if they're not, then it will flow really through to the bottom line.

Neville here.

I just wanted to add that in the last call I talked about a discipline review process in terms of the incremental 350 to 400.

We want to be sure that we're delivering against that discipline and only if we are sure of that will we entertain any incremental spend.

So it's too early for me to give you a judgment on that, but clearly, that would be our intent if we felt we were able to productively do that and get a return.

Okay.

And then if I can just follow-up on Bill's question quickly about the sales curve.

Gary previously you had mentioned that the incremental marketing spend would be impacted by sales curve accounting.

Are you saying that's not the case now?

No, what's happening is generally if you think about, just to put everybody kind of on the same base, on the sales curve accounting basically is overexpecting unit case sales for the year and so basically what you're attempting to do is to get the same marketing per case throughout the year, if you will.

And what had happened previously is that much of the marketing in the fourth quarter was actually on a cash basis much lower than what the sales curve would indicate because a lot of the marketing was actually spent earlier in the year, and you had very little left in the fourth quarter, but the sales curve, because you're doing it over the full year at a certain cents per case, was showing a lot of marketing under what GAAP requires in the fourth quarter.

So in the first quarter, there was, you know, maybe 10 or $12 million of difference I think between sales curve and actual cash accrual-type spend, but that's, as Neville had pointed out earlier, in some of our calls, that a lot of the incremental marketing will actually be pressure against consumer in the latter part of the year, particularly in the fourth quarter I think is where you'll see it.

Thanks

Your next question comes from Robert van Brugge with Sanford Bernstein.

Good morning.

A question on Germany.

This is probably the last quarter where you had a somewhat tougher comp and then you're going to start comping the 15% declines last year.

Are you seeing any turn in the business in particular in the soft discounter channels as you're rolling out some of your proprietary packaging there?

Well, obviously there was a little bit of moderation of the trend getting into the end of the quarter.

And certainly, we do start cycling as we get into the second quarter, the impact of the delistings in the discounter channel.

We also have got listings in four discounters right now, Lidl, Penny and two regional chains and we're looking at one other at the moment.

So we do expect some moderate lift with that, but remember it's one package albeit a high-volume package in those channels, and, of course, the level of profitability there is not that high.

You know Germany in general, this is, your question is aimed at the discount channel, but Germany, in general is still a challenge and will continue to be a challenge for the balance of the year.

Okay.

Thanks.

Your next question comes from Christine Farkas with Merrill Lynch.

Good morning.

My question has to do with North America.

Did innovation boost the bottler volumes in the first quarter or was there an innovation included in your results?

And what steps are being taken in the Foodservice division where you're seeing some tougher comps in the second quarter?

Thank you.

Well, obviously the bottlers, particularly as the OCC announced their results on Thursday, so it wouldn't be appropriate for me to talk about bottler sales.

But the big volumetric one is Coke with Lime, which is off to a good start but it was late in the month so too late to have any really appreciable effect.

Full Throttle, although not large from a volumetric standpoint, but important from a profitability standpoint, has had a very strong launch and there's a lot of bottler enthusiasm around that.

And certainly Dasani Flavors, again not volumetrically very important but has got very, very good traction.

So I guess the net of that is that it's all to play for if you're talking volume, because Coke with Lime will be second quarter but we've also got, of course, Diet Coke with Splenda and Coke Zero, which of course is really going to be a third quarter game as we only launch on the 24th of June.

To your broader question about Foodservice, there are a number of factors within what's happening at Foodservice.

You'll see some strength in the category.

If you look at McDonald's results, they have been strong.

Some regional chains are not doing as well.

And we have a major program at some small outlets.

We've got some success of that, but really, there's no big news to report in terms of those two segments.

I think the overriding one you would need to look at is the 100 days of Diet that we're starting in May and that's where we think we're going to get traction for North America as a whole.

Thank you.

Your next question comes from Jeff Kanter with Prudential Securities.

Good morning, everybody.

A quick question for you.

Gary, you have a lot of cash coming in the door from the repatriation, there's currency tailwinds.

What do you plan on doing with that cash?

And also your results, your case sales were really not too bad despite some challenging markets.

But do you think you have to keep on adding this type of marketing pressure to drive, you know, going forward to drive that type of case sale number?

Thank you.

Jeff, thanks.

On the repatriation and the 2.5 billion that we'll be bringing back that we accrued for in the first quarter the cash will actually move in the second quarter.

We'll use that for qualifying purposes, which under the tax law itself is very explicit on what you can use it for, but you can use it, for example, on capital expenditures in the U.S., you can use it for advertising in the U.S.

So we'll use it for the qualifying purposes under the tax law.

Relative to spending, I think I'll let Mary take that one or Neville, but I think we all agree on what the answer is.

Well, I hope we do.

No, I'd like to point out on the marketing that remember the 350 to 400 million, when I first outlined that to you, this was getting us back to where we needed to be.

This was a deep analysis that we'd done about how we were not putting the oxygen behind the brands, if I recall that's what I said.

And we're really putting the oxygen behind the brands.

So this is re-establishing the base.

Not just to generate incremental volume, but to do what we need to do behind the brands.

The next phase, as we look at it is the normal spend you would have that we would see for launches, et cetera, which we have normally been able to accommodate in the budget as a whole.

Okay.

Thank you.

Your next question comes from Marc Greenberg with Deutsche Bank.

Thanks.

Good morning.

My question relates to some of the execution challenges in the U.S. and Northwestern Europe.

First, Neville, can you clarify on the markets specifically that you're referring to in Northwest Europe and the unexpected weakness there, any comments you'd have would be appreciated.

And secondly, how this informs your thinking about future structural change in Europe overall, both as relates to bottler configuration and/or route to market split between DSD and warehouse.

Thank you.

Let me take the last piece first.

I don't think one quarter's results dictate structural change.

So let me deal with the quarter and Northwest Europe.

Northwest Europe really is Benelux, France, and Great Britain.

And the quarter actually is sort of two months then one month, if you want to look at it that way.

And what I mean by that is January, February were weak, and March came in a great deal stronger.

And the weakness in January, February was actually in the general retail trade.

I could go into a lot of detail.

In the U.K. there was a switchover of one chain, Morrisons had taken over Safeway, they closed a lot of stores, we lost volume as a result of that.

There was general weakness in the marketplace, that would refer to France.

If you look at the non-results, you'll see that their quarterly numbers were down 7%.

So there was a general weakness in the trade in that part of the world, a slowdown, but again, that started picking up.

And we've got innovation coming as we go into the second quarter.

We've got, you know, Diet Coke with Lime, we've got Minute Maid being launched in the U.K., we've got have Nestea coming.

So those innovations start flowing into the second quarter.

Let me say that, again, looking at Northwest Europe, that despite the volumetric numbers, we actually gained share, which then, again, reflects that it was a general weakness in the business as a whole.

With regard to North America, I think in large degree, we've covered that.

We certainly have gained some share in North America.

We're getting some traction for, I've dealt with the new brands that we put out there, and you know what's coming for the balance of the year.

So it is not a market where there is large volumetric growth, but I think that we're much, much better positioned with the innovations that we have for the balance of the year than we have been for a number of years, and I think our bottlers would echo that.

Thank you.

Your next question comes from Bonnie Herzog with Smith Barney.

Good morning, everyone.

You're introducing a new energy drink in Japan that claims to assist with weight loss if consumed, I think, after exercising.

I would think that this product might have a great deal of appeal in other markets including the U.S., where clearly health and wellness is a central issue.

What process would you need to go through to get a product like this approved?

I'm curious how long this product approval process would take.

Also are the reasons why you would not want to bring this product to the states.

And finally, I guess, I'm trying to get an understanding of your willingness to bring successful products in existing markets in other markets across the world, and how quickly you can do this.

Do you have the right infrastructure in place?

Wow.

Multifaceted question.

I know.

Let me tackle it.

First of all, let's start with the tactical.

You're probably referring to Active Diet which is a version of POWERade in Japan.

Japan has very different food laws from the rest of the world, and there are different levels of approval that you need to go through, ranging from pseudopharmaceuticals to over-the-counters to whatever.

We have a process in Japan that allows us to quickly produce results and research to meet government laws so we can launch products like that.

It is much more laborious in most other countries and there's an entirely different process.

And in a lot of these cases some of these products would require clinical trials, and clinical trials can take anywhere from one to three years.

So those are what we're going to call the known opportunities that are leverageable in the mid-term and we will put in place processes now to help put research in place so that if we do want to launch those two or three years from now, we can.

Where we're focused right now, however, is what we're calling the known and proven in the short-term, and those don't require clinical trials, but they may have certain benefits that we can leverage.

For example, we have a soy product in Japan that does not have the taste of a soy product but does soy extract.

So you get the benefits of soy but you can put it in a great lemony tasting beverage that would be acceptable to most palates all over the world.

That's really where we are concentrating our efforts.

We believe those are opportunities that can be done in 12 to 24 months.

In terms of the process and our willingness to drive that kind of expansion and leveraging of ideas, I think the first start was integrating marketing strategy and innovation under one structural organization.

The second thing we'll be introducing to support that move is to introduce more of a project management concept in our company, where we will build bridges between functional areas that don't require a complete organizational rejig, but instead, put in a project management focus where cross functional people can work together without reporting to each other to quickly and more effectively pull together new product launches.

I just want to add one thing, which maybe some people have missed, and that is this title "innovation."

Gary Strickland heads up innovation, but it is not a narrow definition of innovation, it's a very broad one, because it encompasses everything that we used to call "technical" so it has got everything to do with quality, it has got everything to do with flavors, but also, all of the area around packaging, new packaging development, everything to do with manufacturing processes, the development of high-speed lines, it's a very, very broad remit.

So if you, you know, think of what we used to call "technical," that's what innovation means.

Yeah, and just to elaborate more on the processes, you've heard about our Manifesto for Growth process.

I think that was the first introduction to the general population in our Company.

That you could put together work streams that could produce tangible results on a project management kind of basis without reporting to each other.

It works.

It's something we're going to leverage in the marketing strategy and innovation groups further so that we can more quickly go to market and commercialize ideas.

Okay.

Very helpful.

Thank you.

Your next question comes from Mark Schwartzberg with Legg Mason.

Thanks, my question's been answered.

Thank you.

Your next question comes from Caroline Levy with UBS.

Good morning, everybody, and that description of Asia was extremely helpful.

Thank you, Mary.

I was wondering if any of you could comment, because I get this question a lot, on whether it's confusing for the consumer in the U.S. to have so many different versions of diet.

I think you've got four variations.

And how you plan to position them so as to make them, you know, non-cannibalistic but to add to growth?

Obviously, Caroline, [inaudible] I don't believe it is confusing, and I think it's your mind-set.

You look at all of the offerings that are there for the consumer in the total carbonated soft drink category or in the total diet soft drink category.

There are a multitude of offerings.

The fact that they all, that a number, or an increased number are going to come from us is really one of execution, not one of confusion to the consumer.

So, you know, the set isn't how many do we have now that the consumer has to look at, it's how much incremental is that in the total set of diet beverages that are out there.

And that changes the way you look at it.

So it's execution with regard to the bottler.

And the other thing is, I think you see this increasing segmentation that's taking place.

Let me take the Splenda and the reason Diet Coke with Splenda, or sweetened with Splenda, the reason that we have been, you know, very specific about branding it that way is so that the consumer knows exactly what we're offering.

There was debate around other brand names, but at the end of the day, we're looking at the Splenda consumer, the people who really value Splenda as a sweetener and, therefore, we are giving them what they want.

And I think that sort of encompasses what we need to do in the future, look at where the profitable niches are, if they are niches or if they're broader, obviously we want to be there too, and make the appropriate offering.

And, therefore, we will have a greater proliferation taking place in the future in terms of the number of offerings that we have for the consumer in the broader non-alcoholic beverage category, and Mary's talked about Japan, where we have that breadth and we're able to manage it and there's no reason a sophisticated market like the United States, that our bottlers shouldn't be able to have that level of sophistication as well.

Just to build on that, Caroline, what we found in Japan is that you can add new values and dimensions to the trademark, enhance the imagery of that trademark, and create new interest in reconsideration among consumers while leveraging, you know, the obvious built-in awareness and brand equities of the trademark.

The challenge is to make sure that you do it within well established parameters.

In other words, it's up to us to do it right.

Because there's a right way and a there's wrong way to do this.

And the right way is to understand your core values, be willing to add new dimensions to that core to evolve it, but never to depart from what the core brand values are.

So frankly, it's up to us to make it clear to the consumer and I believe we've got enough rights and wrongs to help us guide us as we launch into this diet expansion.

Thank you.

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

Hi, good morning.

Just a question on input costs and, I guess, for Gary, have you seen any pressure through the bottling system or your own in terms of higher input costs?

I guess more specifically packaging.

And, also, with gas and oil prices, fuel prices being higher, have you begun to see at all, you know, any effect on consumption around the consumer and are you factoring any of that into your plans for the balance of the year?

Bryan, thanks.

Relative to input costs, for the Company itself, most of what we've seen is the result of gasoline costs and freight costs particularly in our finished product operations both in the U.S. and other parts of the world where we have seen increased costs in freight, some in packaging.

The bottlers are seeing those increased costs as well.

Mary talked about in India where we put through some price increases because of the increased input cost, and you're seeing actually some pricing the U.S. industrywide because of input costs, increases.

I think hopefully we're seeing some of those peak, and hopefully the worse of that is kind of with us or maybe starting to be behind us.

At this point, relative to Foodservice in the U.S., we've seen in many of our customers continue to have very good results, but I think we're starting to have some concern about the impact of fuel cost and whether that will slow traffic in the U.S. to some extent, but I think it's too early to tell at this point.

Operator, I think we've got time for one last question

Okay.

Your final question comes from Timothy Ramey with Bear Stearns.

Yes, good morning.

This is Carlos Laboy.

Neville, you keep highlighting the strengths of South Africa and Latin America.

Some of your key bottlers are doing a lot of work in those regions and exploring the merits of joining elements of beer and soft drink businesses so three questions fall out of that.

One is, what is your role in this process going forward?

The second one is, there was a time when Coke seemed to avoid beer and soft drink businesses coming together, has this changed?

And the third one is, what would worry you or excite you about national beer operations coming closer to regional bottling businesses?

Well, I think what you're referring to is the delisting in South Africa of Amalgamated Beverage Industries and that becoming essentially a division of South African breweries because actually in Latin America there's been no major change at all in the structure of how it operates with Coca-Cola FEMSA.

The real reason for that is the cost of maintaining the float.

We're not perceived to be worthwhile.

And sitting with Graham, that's Graham Mackay of SABMiller that was clearly the case.

On a day-by-day basis, there's actually very little change.

The two businesses are being run entirely separately.

And they will continue to be run entirely separately.

So that really was the reason for that happening, and we don't see any major integration at all with regard to distribution, et cetera, with soft drinks and beer.

You know in individual cases, there may be, we've always done it up the valleys or the fjords of Norway where we put beer and soft drinks together where in instances the economics dictate, but they're very separate businesses.

They require different approaches, and to the broader question that you're asking, I don't see that there's a major integration that will take place with regard to beer and soft drinks.

Let me go back to your, you know, question about beer and soft drinks.

Increased beer, increasing its role with regard to soft drinks, that's not essentially true because there have been areas where the beer people have withdrawn from soft drinks.

Germany would be a major case in point, part of Nordic as well.

So there are some instances where the brewers have extended their reach.

There have been some where, in fact, they have moved aside, but as large brewers who are our bottlers expand and get bigger, I still anticipate that the businesses will be run separately.

So let me just conclude with a few final comments and thanks to each of you for joining us today.

I just wanted to say as we wrap up, that I'm really pleased with what we've accomplished to date, and I'm confident that we are doing the right things, that we are making progress.

But, again, I want to re-emphasize that we have got much work ahead of us and that execution, that word I kept promising I would emphasize, and I will continue to do that is critical to all of us.

So as we move throughout the year and into the second, third, and fourth quarters, I look forward to continuing to apprise you of what's happening and of monitoring the progress which I believe we are starting to make.

Thank you very much indeed.

This concludes today's Coca-Cola Company conference call.

You may now disconnect.