可口可樂 (KO) 2005 Q2 法說會逐字稿

At this time I would like to welcome everyone to the Coca-Cola Company's second quarter and year-to-date 2005 conference call. [OPERATOR INSTRUCTIONS] I would like to remind everyone that the purpose of this conference is to talk with investors and therefore questions from the media will not be addressed.

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

I would now like to introduce Ann Taylor, Director of Investor Relations.

Ms. Taylor, you may begin your conference.

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;

Pancho Reyes, the Head of our Latin American Operating Group; and Alex Cummings, the Head of our Africa Operating Group.

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 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 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 website at Coca-Cola.com in the investors section which reconcile our results as posted under generally accepted accounting principals to certain non-GAAP measures which may be referred to by our senior executives in our discussion this morning and from time to time 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 everyone.

I'm sure you have all had a chance to review the release that we issued this morning and I'm not going to spend too much time on those details.

Obviously you can Q&A later on any details you want to probe on.

Also similar to last quarter I am going to make a few brief remarks on where we stand and then we are going to repeat the exercise which I know you gave us positive feedback on in terms of a deeper look at some areas of the business.

So then Pancho and Alex are going to provide you with some insights on Latin America and on Africa and, of course, Gary is going to follow with some additional insights on the quarter before we move to questions.

So I am pleased this morning to report to you that we are making progress towards the objectives that we set and which we've shared with you in the past, improving execution through the first half of the year assisted by some good weather in June drove the results.

I want to be clear.

One quarter does not guarantee sustainable results.

We still have considerable work ahead of us in the U.S. in and in markets like Germany, the Philippines, and in particular India, where we experienced weaker than expected results in the quarter.

We are addressing the issue in India by providing better oversight on refocus to the business through our reorganization there to separate and concentrate on the bottling operations.

We've also brought in experienced bottling management to provide best in class bottling expertise to drive the execution in the marketplace.

However, India along with these other markets are going to take time to get back to stainable growth.

In terms of marketing and innovation we have seen some tangible results of improvement.

The fact of the matter is that many of our key brand metrics are not where we want them to be and that as I've said in the past takes time to change.

With that said, though, our results did continue to reflect benefits from the geographic effect of our operations which helped to balance our overall results.

We've had upside in markets which are executing very well.

Markets like Latin America and Africa which we are going to talk about a bit more in a minute.

China delivered another outstanding quarter with volume growth of 22%.

In addition other markets such as Chile, Turkey, Russia, central Europe and other parts of Asia, also produced strong results.

In fact if you look at a fairly simple metric of volume growth and you take the markets with caps with less than 150, in those markets in aggregate we grew 12% in the quarter.

Our share position around the world continues to stabilize and we are starting to see improving trends in most of our key categories from the prior year.

If you take total non alcoholic ready to drink for the quarter we gained value share or improved our trends in 15 of our top 16 markets.

We gained volume share or improved our trends in 14 our top 16 markets.

If you take carbonated soft drinks specifically we either gained value at volume share or improved our trends in 10 of our top 16 markets.

Also want to just talk about the manifesto for growth because this is the platform off which we are rebuilding the business and I'm very pleased to report that we've now rolled this out to every single employee around the world through a whole series of collaborative meetings which for the first time ever has engaged the total organization in this strategic type of platform.

Now I've attended many meetings through this process.

And the reports that I've received back is that the overall impact on the morale of the organization has literally been very good.

I've been very positively surprised at the reception of the people overall.

So what we are doing now is we are now in the process of rolling this out with our bottlers.

We've already had meetings with the leadership of the top five bottlers.

We've rolled it out.

I've been involved in rolling it out in Europe and the U.S.

It's been rolled out in Africa and in fact just last week I was down in Latin America rolling it out with Pancho to the Latin American bottlers.

If we look at our key business imperatives there's no question that we are slowly starting to see some positive trends against the imperatives that are contained in that manifesto.

Let me give you a couple of specifics.

In supporting trademark Coke and core brands global trademark Coke, Sprite and Fanta, volume grew 3, 5, and 7% respectively in the quarter and in fact that is the fastest growth rate for Coke in the past five years.

The stepped up media which is starting to click in, together with strong campaigns like "Toma lo bueno", which is the Latin American campaign but actually, which we are now adapting for the growing Hispanic population in the U.S., are helping to improve our trends in key brand health scores.

We also have some increased innovation coming and it's beginning to take hold, but we do need to ensure that the base is very firmly established, more firmly established than it is now, to ensure that we are creating sustainable results.

If we look at expanding our diet and light portfolio, one of our imperatives, on a worldwide basis we grew diet CSD volumes over 7% in the quarter and that's 5% year-to-date.

If you take out international operations, diet and light CSD volumes grow by 11%.

So that increased our overall mix of diet CSDs within the total CSD mix by 60 basis points from the prior year and that's a key measure that we use to assess how we are doing in achieving that specific goal.

The Diet Coke sweetened with Splenda and Coke Zero here in the U.S. are both off to a solid start.

And the ZED campaign, seeing as we're sitting this side of the pond, the ZED campaign in the UK which I've highlighted in the past has helped drive low calorie CSDs in that market by 15% in the quarter.

We're also profitably expanding our beverage and packaged portfolio.

In the quarter we reported total non-carbonated beverage volume growth of 14% with 19% growth internationally, and if you take water out of that our remaining non-carbs grew by 11% with 18% growth internationally.

And driving that growth are key brands like Powerade, Aquarius sports drinks, Minute Maid and Nestea.

If you take Powerade and Aquarius alone we've either launched or we grew the brand double-digit in over 40 countries this quarter, so real traction coming in here.

Beyond the volume results I want to touch on one event that took place this quarter that I believe demonstrates the true power that we still have to unlock in this business.

In May we brought all of our top marketing managers, marketing people, some 200 people from around the world to Buenos Aires to collaborate and to share ideas.

As part of that process they were exposed to a range of innovative products and packages and equipment which largely exists around the system by what was essentially you'd call a trade show, trade show style format, and that's the first time that we've done anything of this nature.

Our goal was very clear.

We said it to each marketing manager.

They were given the express goal to come back with at least three significant new ideas to incorporate into the business plan for 2006.

Some like Brazil actually came back with about eight.

And I've talked about this before but I just want to re-emphasize.

This is where the power of our global business is really hard to match.

Leveraging the proven, what we have out there, the proven wins around the system in the 200 countries where we serve consumers.

Frankly, in the past we did not have the processes in place to capture it and while we still have many opportunities to improve this was a very good step in the right direction and it does fit in with what Mary told you when she talked to you last quarter.

This process also highlights the long-term nature of building sustainability.

Many of the shared ideas are being developed now in the marketplace ready for next year.

This is why there is fundamentally no change in my point of view that 2005 is still a transition year.

Yes, we've had some positive volume results in the quarter.

We are still focused on building the base for the long-term.

But sustainable growth is something that I believe we will accomplish but which we still have to build the base for in 2005.

Two groups are certainly well on their way to building sustainable growth and those are Latin America and Africa.

Given that positive feedback I mentioned earlier about, at least focuses on specific geographic areas.

We wanted to highlight them on this particular call.

So I've asked Pancho Reyes and Alex Cummings to share with you what they are doing in their respective groups.

So at this juncture I would like to turn the call over to Pancho.

Pancho.

Thanks, Neville.

I would like to spend much of our time this morning putting Latin America into context.

I would like to talk about our strategies rather than focus heavily on results for the quarter.

I'm sure you've read that we had a very solid quarter, actually a very solid first half of the year.

When you look at Latin America, always look at the homogeneous market but it's actually quite complex, quite diverse, quite dynamic and very importantly it's a market that provides tremendous opportunities for our system.

Last year we sold over 4.5 billion unit cases; about 25% of our company's volume.

Given the stage of economic development in the region revenue and profit contribution are closer to 10 and 16% respectively.

We do manage a portfolio of countries of all shapes and sizes.

The first and most important is Mexico.

If you think about it in terms of a pyramid Mexico is our base.

It represents close to half of our volume and an even larger percentage of our profits.

It has one of the strongest CSD businesses in our system with per capita consumption of more than 500; 517 to be precise of company products.

Following Mexico in that pyramid is a huge opportunity, a huge opportunity, the huge opportunity of Brazil which has a population that is roughly twice the size of Mexico and per capita consumption about one-third of Mexico at 142.

Brazil is a turnaround opportunity.

One we've talked about in the past and one we are acting upon.

We see no reason why, no reason why Brazil should not develop into a market as strong as Mexico is today.

The remaining 38 countries within the group are at different phases of economic development.

You find countries like Chile, with relatively high GDP per capita and greater economic stability and a CSD per capita of 350.

You also find emerging and volatile markets like Venezuela or small Caribbean Islands like Martinique.

All of these countries tend to balance each other with a long-term trend towards growth.

Looking at categories in Latin America you find three leading categories.

Water being the largest.

Talking about volume.

But represents about 40% of the total non alcoholic ready to drink segment in Latin America.

It has relatively low volume given that 75% is all water and you know that that part of the business is not much value-added.

You also know that because of that we have largely chosen not to compete in that segment in the whole water segment.

The second category is CSDs which is about 35% of non alcoholic ready to drink and the third one is milk which also tends to be low in value, represented about 22% of that same industry.

Other categories that are quite popular in other places like the U.S. such as sports drinks and tea are really just emerging across Latin America.

So because of that our volume make-up is very CSD centric.

We built on this Heritage in Latin America.

Last year, in '04, CSD volumes represented approximately 90% of our total Latin America volume.

Most of it actually is regular CSDs, diet and light represents only about 6% of our volume and that compares to a country like North America where it's over 30%.

In terms of channel we find just about every channel in the universe from mom and pops to ultramodern convenience stores and hybrid markets.

As most of you know traditional mom and pops which is the high-value added channel it's very important for our business.

It represents close to 58% of our group volume.

Sharewise, close to 60% share in CSDs, certainly one of the highest of any of our operating groups, but the opportunity is still very, very high since in the total non alcoholic ready to drink segment share is closer to 23%.

In some of the emerging categories that I mentioned it is below 10%.

So with this background it is clear that the key business imperatives outlined in the manifesto for growth are very, very relevant to what we are doing in Latin America.

We are leveraging the power of our trademark Coca-Cola through our Pan Latin America campaign, (INAUDIBLE) that has been hugely successful and actually won several awards.

Now I do realize that our words do not drive volume, they are reflective of our ability to create marketing that reaches consumers.

In this case trademark Coca-Cola unit case volume in Latin America grew 8% for the quarter.

Clearly supported by this campaign.

We are also driving other core CSD brands like Sprite and Fanta which are up 6 and 13% respectively for the quarter.

We're accelerating diets and lights in line with the manifesto beyond the 6% that they do represent in our portfolio today, mainly with Coca-Cola Light and Sprite Zero.

And although very small we are already expanding our beverage and package portfolios in emerging categories across all of our countries in Latin America with Powerade, Nestea and Burn, Burn is our energy drink, which helped drive second quarter not carb volume growth of about 20%.

Also in line with the manifesto we are stepping up our commitment to immediate consumption, 53,000 coolers have already been placed this year throughout Latin America.

And then, finally, we are making commitments in customer development in markets like Mexico where we have created a noncarb system sales organization jointly with our bottlers.

What I would like to do now is share with you details on Mexico, Brazil, and Argentina to provide an update on progress and thoughts about the future.

I understand that each of these data points and examples are unlikely to be individually significant but what I hope you see is that each represents the many small steps we are making to drive a significant impact to the business.

So let me start with Mexico.

You may recall last year we ran into some strong competition.

As a result of that the full year last year we saw flat volume.

To address that situation beginning in the second half of last year we refocused our business to leverage our strength and most importantly our brand equities.

I'm pleased to report that we are certainly making progress as evidenced by the growth this year in this quarter with volume growth of 8% driven by 6% CSD growth and double-digit growth in packaged water, the profitable side of the segment, and non-carbonated beverages.

The first thing we set out to do is increase personal consumption choices under and integrated on the goal program to drive teen recruitment.

This has been supplemented by expanded single serve packaging and increased cooler placement.

Since the beginning of '04 we have close to 40 new packages and volume through packages less than 1.5 liter has grown by 6% in the quarter.

Further, the system has already placed 37,000 coolers year-to-date with the single objective to drive availability in our brand.

Secondly we focus on driving brand value with meals at home which is a key consumer occasion, it represents around 57% of category points.

Here the focus has been on moms with a promotion future in dishes and cutlery that has helped to drive volume in multi-serve home packages by 6% in the quarter.

Supporting both these initiatives, Dom Alagueno (ph) campaign, we just mentioned that, it has increased favorite brands for some young teens by 3 points to reach 55%, leading to overall trademark Coca-Cola growth of 6%.

Final approach on Mexico, lead new beverage trends including the consolidating support of our current portfolio brands and expanding into juices under the Minute Maid trademark.

We have seen success with Powerade and Nestea.

Volumes are up 53 and 40% respectively for the quarter, we've also launched a flavored water under the seal name, it's early but it's doing very, very well, flavored water also a profitable side of the water segment.

And we've established a dedicated sales and distribution team focusing specifically on non-carb opportunities.

This new organization which will be operational in August is supported by all of our bottlers with the single goal of providing the focus, the scale needed on growing these emerging categories.

Brazil.

Brazil, a country where hard work and a good plan have reaped rewards.

Many of you know, we talked about this, we took several hard steps in '03 to right the ship.

First thing we did, we took back control of the point-of-sale by our bottling system which in too many instances had been given to distributors to manage.

Secondly, very importantly, we significantly increased package and channel diversification to reduce our dependence on two liters.

As a result of that our non two liter packages have grown 20% since the end of '02 which is when we actually started with this process.

Further, we are continuing the expansion of our available packaging which is critically important in an emerging market like Brazil where socioeconomic factors and local B-brand competition affect pricing as you all well know.

We grew returnables 26% in the quarter and will continue to place emphasis here.

Then finally we stepped up our market investment and we are certainly continuing adding to this year as well.

The result of all these changes we are now in our fourth consecutive quarter of double-digit volume grains alone with, and very importantly enhanced value for the entire system.

In this quarter alone we grew volumes 17% lapping 7% growth in the prior year and we've increased our shares of CSDs by 2.5 points year-to-date.

Trademark Coca-Cola grew 16%, Flavor CSDs grew 21%, noncarbs we focus our priority on key revenue generating segments where brands like Nestea, Snapple, which is a juice drink, and Burn, the energy drink that I talked about, are all growing 20% plus.

Finally I would like to touch briefly on Argentina.

Argentina in many ways is similar to Brazil.

A market where a long-term perspective has produced solid results for the entire system.

You may recall that during the economic crisis in '02 we made the decision to stay invested in the marketplace and tried to become even more relevant to the consumer.

We changed our approach in terms of pricing, in terms of packaging.

Went heavily back into returnable packaging and substantially increased our capabilities in revenue growth management to deliver as much value as possible.

As a result of that we've grown volume double digits in '03 and '04 and grown our share in the total non alcoholic ready to drink market from 21.5 in '01 to 24.1 at the end of '04.

As we move back to a more normalized growth in the mid single digits we are leveraging our momentum and expertise in revenue and growth management to drive personal consumption and accelerate growth in our noncarb business.

Year to date we are seeing positive results.

We have achieved good, balanced growth across CSD especially in our core brands.

Just to give that a point.

Immediate consumption, the highest revenue system strength, grew more than 12% in the second quarter.

That's Latin America in a nutshell.

Now I would love to promise 9% growth in volume and 20% growth in operating income on a long-term basis but I believe that may be a little aggressive.

As it usually happens when you are doing the right thing you often get lucky with things like the weather and stable economies which has helped our results this year.

However, I am very, very confident based on the great work that our system is doing, that we can meet our fair share of volume and profit growth for the Company.

Let me now turn this over to Alex.

Thanks, Pancho.

Pancho is a tough act to follow.

But it's good to be with all of you this morning.

I would like to briefly touch on our business in Africa.

With a population over 2.5 times that of North America, with volumes and revenue contribution about one-fifth and one-sixth the size respectively Africa is a medium to long-term opportunity for the Coca-Cola Company.

There is significant opportunity to increase carbonated soft drink consumption in Africa.

To that end our focus in Africa is on driving profitable unit case volume growth.

Distribution expansion, the creation of new cold outlets, the improvement in market execution, effective and increased marketing, and keeping our products affordable remain at the forefront of our strategy to drive consumption of our core brands led by brand Coca-Cola.

This is why when you look at the elements of the manifesto for growth you shall see six imperatives and three key enablers are essential for our business in Africa.

In addition to the imperatives we are also implementing a strategy to broaden our geographic focus.

Although we have presence in every country on the continent we are somewhat dependent on South Africa for our results in the region.

We will certainly continue to focus on South Africa.

However, in addition to Nigeria, the most populous country on the continent, we have identified nine other countries to step up and increase resources against.

These are countries characterized by relatively stable economies and moderate per capita incomes.

Morocco, Ghana, and Uganda are just a few examples of these markets.

To provide the appropriate focus on the fundamentals I mentioned at the start we reorganized our operations late last year from four -- from two to four divisions.

Two divisions focus on two key markets of South Africa and Nigeria, and two multi-country divisions, North and West Africa division, and East and Central Africa division.

Although early, that focus appears to be paying off.

Volume growth in South Africa and Nigeria are up 7% and 12% respectively in the quarter.

In addition, volume growth in the remaining nine countries grew 18% this quarter and 12% year-to-date.

I could give you numerous examples of how that focus is driving results but I think these numbers speak for themselves.

In the short to medium term we will continue to be focused on carbonated soft drinks in Africa.

However, in addition to driving carbonated soft drink growth we are also selectively expanding our product portfolio focusing on water, juice, and juice drinks.

To that end our total non-carbonated beverage volume growth year-to-date has been 32%.

We have much work -- much work to do in Africa.

I believe that we have just begun to tap into Africa's opportunities and I am very confident that we are well-positioned to grow our business and deliver our share of the Company's long-term targets.

Thanks and I will hand you over to Gary.

Thanks, Alex, and morning, everyone.

I would like to spend just a few minutes covering a few items before we get to your questions.

As you saw in the release we reported EPS of $0.72 in the quarter.

That number includes a benefit of about $0.04 for the following items.

About a $0.01 related to a gain that we had on a settlement on the high fructose corn syrup, another $0.01 related to a favorable resolution of a tax matter during the quarter.

In addition because of a change in the tax law related to the repatriation of foreign earnings, we reduced our tax provision estimate for the, that from the first quarter which also benefited us by about a $0.01 this quarter.

We have not changed the amount that's being repatriated, the 2.5 billion that we announced last quarter.

This is just a change in the tax law itself and just reflects a change in the estimated tax provision.

And finally we benefited from some one time gains at the equity income line, flowing in from (INAUDIBLE) and that was another $0.01.

Therefore, our EPS after considering those items was about $0.68 per share.

I want to discuss a few additional items that are worth mentioning as they relate to the balance of the year.

We estimate that we benefited by about a $0.01 per share related to the timing of gallons in Japan.

We would expect that benefit to reverse in the second half of 2005.

In addition we also estimate that we benefited by another $0.01 per share from the timing of some corporate expenses that we expect to incur but they are going to move into the back half of the year.

Now let me move to currencies.

We saw a benefit from currency of about 3% at the revenue line and 4% at the operating income line for the quarter and 4% at operating income year-to-date.

Given the currency benefits we've locked into date and our outlook for the remainder of the year we are reviewing a series of projects to determine whether to reinvest any of this currency gain back into the back half of the year.

If we determine that we should move forward on any of those projects that will have an impact on the results in the second half of this year.

In terms of our outlook for the remainder of the year on currency as most of you know we actively hedge our key currencies.

Currently we are covered in the third quarter at rates above the prior year.

For the fourth quarter we are substantially covered but at rates below last year.

Therefore as we look at the second half given current rates in our currency positions we expect a slight positive benefit.

However, we expect that benefit to come entirely in the third quarter and then somewhat offset by negative currency impact in the fourth quarter.

Further as we look into 2006 we have minimal coverage in place and we expect negative currency impact through most of next year, again, due to the relatively high exchange rates we've benefited from most of 2005.

Our reported effective tax rate in the quarter was 22.2%, which was impacted by those items that I mentioned earlier.

Our underlying effective rate was 24% in the quarter which we currently estimate is the rate for the full year.

As you saw from the release we repurchased over $1 billion of our shares in the quarter, effectively catching us up from the first quarter.

And for the full year we still expect to repurchase at least 2 billion of the Company's stock.

Finally as we announced last quarter we will be repatriating 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 6.1 billion and we will continue to evaluate during the course of the year whether or not to repatriate the remaining 3.6 billion.

The last thing I want to remind you is that as Neville noted we still look at 2005 as a transition year and the year to put the foundation in place.

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

That's it for the topics I wanted to cover and now let's turn it over, operator, please, to the questions.

[OPERATOR INSTRUCTIONS] Bill Pecoriello, Morgan Stanley.

My question is what specific metrics are you using to get comfortable when eventually meeting and sustaining that 6 to 8% long-term operating profit goal you laid out given there's factors such as weather that you mentioned and also the benefits of the stepped up market spending benefiting the top line this year?

And as you look out into '06 and you are launching new products, trying to improve the brand health metrics to levels that you find acceptable and also continuing the support on the core brands as well as the products that were launched in '05 that you want to continue to support, so just trying to get a feeling of what you are looking at on these metrics?

Bill, there's a whole range of metrics.

I've given you some of those volume share, value share and as I have emphasized in the past, it's a mix of those two keeping the pendulum somewhere in the middle in terms of that.

I have given you some, talked about brand health indicators, that's a fundamental driver.

I think it's one of the drivers of the Latin America growth in terms of the success of that campaign.

So that linkage is something that's there.

So brand health is fundamentally important.

Then we are also looking as I mentioned at the proportion of lights that we have within the overall category particularly in our developed markets and that 60 basis points improvement that I noted in my earlier remarks is indicative of that.

And then there's a whole range of metrics which are in the whole manifesto for growth.

Because everything that we have in the manifesto is something that's measurable.

So let me go down to another specific.

We are going to be monitoring, for example, the number of ideas out of the Buenos Aires meeting that we had, the trade show.

There is a charge to each person to transfer these ideas.

Those are examples.

But you will see within the manifesto one of the 14 work streams is actually metrics and there are a lot of detailed metrics below this level which are fundamental to running the business effectively and efficiently.

In other words, there are some large words that we use about what we are trying to do but each one of those has got a whole series of measures, some of which I've given you to ensure that we are delivering against them.

And they are not just high level statements.

Your next question is from John Faucher of JP Morgan.

Yes, I was wondering if you could follow up on some of the promotional efforts you have put in place in North America, particularly the couponing, if you can talk about, A., where the funding is coming from the couponing, for the couponing, excuse me, and then also are you pleased with the results?

If you look at your CSD results down 1% for the quarter, is this where you thought they would be and does this mean that your promotional efforts in terms of the extra couponing paid off?

Well, first of all, it was the source of the funding.

You recall, Don Knauss had said to you that we had looked at the whole promotional budget, the sort of promotions that we've done nationally year on year on year.

And with the consolidation of the trade and also the sophistication of the trade they are basically saying that they want differentiating promotions for their individual chains.

So these promotions were becoming less and less effective.

And that money therefore was redirected this year towards couponing.

Let me just be very clear about that.

The 400 million that we are talking about had nothing to do with the coupon.

That's, that is media money.

Some of it was in innovation, it's exactly as I defined it before.

This is a reallocation within existing budgets, actually from promotions to couponing which we believe is giving us more traction than the promotional efforts.

And therefore you see that in the results and you can see that in the share.

If you look at value overall you really need to look at the fact that we have actually grown value in the category overall.

So this is not about an effort to really fundamentally change the overall pricing mix.

We are again and I will bore you with this stopping the pendulum in the middle analogy over the years ahead.

I've probably bored you enough already.

But it's this very, very good balance between the two and we believe couponing falls within that.

When you then look at the comparative -- remember we are cycling C2, a very major effort in terms of launching C2 last year and that was in the second quarter.

So it's in the base there and therefore I think that it has been an effective mechanism.

We will just keep monitoring it because nothing is forever and we will keep seeing whether or not that gives us better returns at doing promotions.

But clearly we all know building home inventory is extremely important.

That was part of doing it for the holidays.

And also it helped promote our innovation, our launch of Coke Zero, our launches of diet Coke with Splenda, et cetera.

The next question is from Bonnie Herzog of Smith Barney.

I actually have a follow on question to John.

Just broadly speaking in terms of your increased marketing spending that will be primarily spent now during the second half of the year, I am very curious in you could give us a better idea of how and where you will spend this money other than of course what you just discussed in terms of the couponing.

For instance, is there a way that you can break it down in terms of the buckets of the 350 to 400 million between print ads, TV, Internet, advertising, et cetera?

I mean, is there a bigger focus on one area versus another?

Also should we assume that the higher marketing spending amount includes all of the costs associated with all of your new products and package launches?

And then finally I would love to hear an update on where you are with your iconic brand advertising behind your core brand Coke.

Thank you.

Okay, Bonnie, about three questions but let me try and take them.

First of all I just want to clarify again, as I talk about the 400 million, the couponing has got nothing to do with the 400 million U.S.

I just want to reiterate that.

I thought there might have been some confusion on that.

In terms of the 400, it does encompass all of the launches that we are doing around the world.

That's all part of that; that 400.

It's primarily aimed at carbonated soft drinks, though, because that is, if you go back to the exercise that we did, that is where the media money had been taken out in the past and we are rebalancing that to get the base re-established going forward.

I did say that in terms of one break out I gave was about 125 million of that was going to be in the U.S.

I have given that to you before.

And the balance of that is for the rest of the world.

I mean buckets of, buckets of spending in terms of Internet, et cetera, I frankly don't have the number with me.

I think the issue here is that we will be using all media that are relevant in our market because it's difficult to answer that question where in some markets television still -- the thirty-second spot is still the most effective way, in fact it's still the most effective way in the U.S. but you will see us obviously with some Internet advertising as we start probing into that area.

Diet Coke is something that we are, I've talked before about our portals in Spain, et cetera, and the successes there.

All of that is going to be part of the overall mix.

But I just don't have the split on that.

I want to also emphasize that, and I did this when I made the announcement, we have a regular review with regard to that spending that it is going against media.

Aside from, I know the number I gave you, 33 million that was going into innovation and some people spend but the rest is against media globally.

So then the iconic advertising.

We are -- really got two pieces of work that we are working with in parallel.

We have a process on developing single iconic spots that are designed to supplement some of the very good local work.

And you've heard Pancho talk about the campaign in Latin America so there's good local work underway.

You also will note that some of the new ads in the United States have scored extremely well.

We are talking about the Coke with lime, Coke it up ad, we are getting very, very good scores on the new chilled top around Coke Zero.

So it isn't just the iconic ads that drive brand Coke, it's what we are doing holistically behind brand Coke.

And then I mentioned two streams.

We've also asked a second group of agency partners to work on some larger ideas that may possibly form the basis of an integrated global campaign in the future because the amount that we spend behind Coke we want to be absolutely sure we have got the creative right, but the iconic is the tip of the iceberg, what is below it are a number of local campaigns behind Coca-Cola as well and that really has to be looked at in its entirety, to say referencing Latin America in particular.

Our next question comes from Mark Swartzberg of Legg Mason.

Neville, a two-part question for you on this priority you laid out about a year ago on getting a better return on your bottler investment and obviously that's kind of an area of top priority.

But part one, can you give us a bit of a report card there.

Part two at least here in North America we've seen CCE sign this Rock Star deal and this smaller Bravo deal, so could you give us a sense about how if at all Coke's thinking is changing in terms of bottlers themselves expanding in essence the system's product offerings?

Well, first of all, I would like to give you a number which probably would answer the first part of the question pretty well and that's year-to-date equity income has grown 21% and that then defines really what's happening with regard to overall bottling health.

That excludes unusual items.

As we've rolled-out the manifesto we've been having really detailed discussions with our bottlers around how they perceive the system and system health.

And I have spent considerable amount of time even with, actually with Boards of Directors as well of a number of our large bottlers but also with a whole range of bottlers around the world, and in fact I will be leaving next week to go and meet all the Asian bottlers as well as the final piece of the manifesto roll-out.

And I would characterize that dialogue as extremely productive because they are not focusing now to any major degree on issues around the health of the system.

They feel that the system is much healthier.

And this goes back to work started in '99.

In fact I was on the other side of the bottling side when we started doing that.

So I think the major rebalancing is over and I said this on the last call, last quarter.

And that we have got by and large in the aggregate good healthy bottlers now around the world.

Rock Star and Bravo, two different situations, really, Rock Star, we were very much a part of doing that.

We have got Full Throttle which by the way is extremely successful.

It has been a major profit contributor to North America for the quarter.

And Rock Star was the recognition that in that category choice is very important.

And having other brands out there.

So we are part of that deal.

And we now from almost nothing are number two in the category.

We've run about 20% share.

So that fits into normal collaborative working that we have.

Bravo, out of staters really speak for themselves.

CT is talking about initial discussions.

We were obviously clearly aware of what was going on.

We had looked at -- we had looked at whether or not we would get involved in the agreement that they have struck.

We are quite happy for them to have done what they've done and -- but as I've said it's very preliminary and we will see what comes out of that and it's also very small.

The broader question that you asked is how does that actually, these things affect our policy with regard to the bottlers and really there's no fundamental change.

It remains exactly as I've outlined it in the past.

Our next question comes from Christine Farkas of Merrill Lynch.

Good morning, Neville.

In the first quarter -- on the first quarter conference call you indicated some executional challenges in northwest Europe and this quarter your press release indicates that volumes were favorable.

Can you just speak to the trends, what you are seeing in the retail there and also speak to, given your focus on diet, if the diet soft drinks contributed in the quarter and what the growth looks like.

Thank you.

Diets did contribute.

I will give you some numbers on that.

The reason that we are relatively silent about northwest Europe is that northwest Europe is largely CCE territory and they have not announced their results yet.

So I have to be very careful in those comments.

So I really don't want to focus on that to too great a degree.

But there has been good growth with regard to lites, I can say that.

But overall the category has been relatively soft.

We've had some good weather late in the quarter.

You will have seen that in the press.

And we expect the trends that we talked about to continue for a period of time.

And I think that is all that I can really legitimately say given the situation with regard to CCE.

But one other thing I could add, we launched Minute Maid in the U.K.

You know about that.

We are focusing on Nestea and the sort of programs that we talked about are Latin America, U.S. in terms of reinvigorating CSDs are rolling out in northwest Europe but I think that's all I can say at this juncture.

The next question is from Carlos Laboy of Bear Stearns.

Good morning, Neville.

I was hoping that you could expand on what's wrong in India, is it price, is it brand house, is it distribution issues, if you could expand on the competitive landscape?

And what are your top priorities in India?

On a related basis you mentioned the water issue last year in India.

What measures are you taking in India and on a global basis to associate the Company with being a custodian of water quality?

Well, let me start with India at large, we are talking about a 14% decline in the quarter and it is with CSDs generally.

So it's not actually a share issue.

Clearly the pesticide issue has affected the whole atmosphere around carbonated soft drinks and we've got some rebuilding to do.

Now, we have rebuilt markets under crises before.

We have experience of that, there were health perception issues, not real issues which is the case in India, in Belgium a number of years ago and Belgium is a very successful market at the moment.

So we clearly have a major public relations campaign behind that.

It's also an industry issue but we still go through the courts as well in terms of what the labeling should be, et cetera.

The other issue is, I guess is sticker shock at the lower end of the market in terms of price increases that we've had to take.

As you know a lot of the volume was stimulated by returnables; at a low price which brought in a number of poorer consumers into the franchise and effectively we've lost those consumers with the price increase.

And I believe that we can come up with new affordability strategy.

That's what we are working on right now to try and re-engage those consumers.

But that will take time because the price points have moved.

There are executional issues in terms of the degree to which pricing has been taken by some of the retail trade.

In other words, ahead of the price points that we were looking for and there is some control and discipline required in that.

So that's, why not talk about executional issues and then come back to a broader issue which is what are we doing with regard structurally?

And there the splitting of the bottling operations and the concentrate operations I think is fundamentally important.

You've heard me really say this when Ariel came on board and that is that we are talking about a business system that works very well where we have a franchise or franchisee relationship and we did not have that in India.

The two were consolidated.

And I think the skill sets are very different and now we are applying those skill sets to the bottling side of the business and to the execution, the pricing in the marketplace being the -- one of the key issues.

And we brought in experienced bottling executive from outside to lead that.

So that's going to take some time to show some fruit.

But I think it's the most important initiative in terms of turning around the Indian business.

Also within those numbers by the way we have de-emphasized powder, that's probably about 3 points of the decline.

So it's probably on CSDs it's closer to around 11.

The question with regard to water is, again, I want to highlight that the Carol Accord has continued to rule in our favor and they have found that we are not responsible in any way for the -- because we were closed down for a year, for the continuing depletion of the aquifer.

So it's entirely false.

We have got a number of major initiatives in, however, in India and in other stressed water areas around the world to harvest rain water, for example.

We have also got initiatives in replenishing aquifers.

And we are engaged with a number of NGOs that we are talking to who feel that we have got state-of-the-art in terms of what we are doing in this particular area.

We also have a major focus on water usage per se and I'm just trying to think of the statistic but certainly it's, I think our water use is down something around 6% year on year, 2004, 2003.

And 2003 and 2002 was similar and I would expect 2005 to do the same.

So we are focusing on our own usage even though in these water stressed areas the main issue in terms of water waste it is actually agricultural usage and irrigation.

Our final question comes from Bryan Spillane of Banc of America.

Good morning.

Neville, just a follow up I guess on Carlos' question.

If you look at the operating margins in that East, South Asia, Pacific Rim region, they are below the corporate average and curious, in terms of your plan to boost margins there, how much of it is improving mix and price points I guess especially in the Philippines and India and how much of it is structural, meaning improving the bottling profits in the region?

I am going to let Gary take one question, seeing it's the last one.

I will add something if I need to.

Gary you take the margin issues.

Hello, Bryan, I thought I was going to get through this one without having to say anything.

Actually it's a combination of a couple of things but, and the markets in that group are different and the answers are different somewhat.

I think Neville has given you a pretty good answer on India.

A lot there will really be around the bottling side and really improving the bottling results and I think that's where you will see it and you will see the improvement starting in India in the bottling side.

In the Philippines obviously it's -- we've had availablity and affordability issues both.

We are working on affordability rolling out 200 ml returnable glass that we think is going to help reinvigorate brand Coke and as we do that it will help the margins as well.

So I think each of these markets is slightly different but the Philippines we think are starting to save a lot and we are taking the right actions there.

South Korea is also in that group and Neville was there with the leadership of Coca-Cola Ameritool a couple of months ago and putting a whole plan to really reinvigorate the Korean market.

So I think there are different answers but each of them we've got very good steps already in place that are already taking place that improve the margins back to where they should be.

I would just add one piece to that and particularly with regard to Korea and the Philippines.

There is quite an increase in terms of spending behind the brands in those two.

And just to clarify something else I recall from an earlier question in terms of the spend in the second half of the year, that is in terms of cash spend directionally correct but remember that from an accounting standpoint we charge-off our advertising on the sales curve.

So you've got to divide between the cash spend and how we account for it in that particular instance.

That being the last question I want to thank you for joining us this morning.

I will say that, to wrap up, we are pleased with what we've accomplished to date.

I am confident that we are doing the right things and that we are making progress.

But, and I say this internally all the time we still have much work to do.

We've got an awful lot still ahead of us and execution is still critical to all of this.

But as we move throughout the year I look forward to staying in touch with you, keep you apprised of what we are doing, and keeping you apprised of our progress.

Thanks for joining us today.

Ladies and gentlemen, that concludes The Coca-Cola Company's second quarter and year-to-date 2005 conference call.

You may disconnect at this time.