可口可樂 (KO) 2005 Q3 法說會逐字稿

Good morning, my name is Dennis and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Coca-Cola Company's third quarter and year-to-date 2005 conference call.

All participants will be in a listen-only mode until the formal question-and-answer portion of the call. [OPERATOR INSTRUCTIONS] Due to the interest in this call, we will only allow one question per person.

Your line will be muted after your question is received.

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.

Please go ahead, ma'am.

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 Dominique Reiniche, the head of our European 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'd 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 cautious 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 Investors Section, which reconcile our results as reported under General 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 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, everyone.

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

And just to say similar to last quarter, I'm going to make a few brief remarks on where we stand.

But importantly, I want to turn the call over to Dominique so she can review the results of the newly created European Union Group.

And then Gary's going to follow as usual, with some additional insights on the financials for the quarter.

And then, of course, we look forward to your questions.

I'm certainly pleased to report to you this morning that we have achieved another solid quarter of top line growth.

We are seeing improvements in our execution across the globe and our results benefited from true geographic diversity of our business.

[inaudible] In the early stages of our journey and we still have much work to do in the coming months.

But we are making progress and we continue to focus our actions on laying the foundation for what I insist will be long-term sustainable growth.

This quarter has again displayed the benefits of being the only truly global beverage company and balancing results across our portfolio countries.

I'm going to with the negatives, the positives and the negatives that we highlighted in the release.

We do continue to see unit case volume declines in India, the Philippines, and to a lesser extent in Germany.

In fact, if you exclude just those three, the negative volume impact of those three, we actually would have achieved 3% growth in carbonated soft drinks alone for the quarter globally.

So that's 100 basis point improvement.

Now, that shows the balance but also I would add that we're addressing the issues in these markets and as I've emphasized before, it's going to take time to get these markets to where we want them to be.

However, solid growth in many other markets allowed us to offset this weakness and achieve 5% total unit case volume growth for the quarter.

Latin America had another impressive quarter, driven by Mexico and Brazil, as did Africa, driven by strong double-digit growth in South Africa.

Also, the success of several new product launches, including Hajime green [tea] and Aquarius Active Diet contributed to Japan's results.

We also captured additional growth in our low per capita consumption countries.

The statistic that I gave you last quarter, exactly the same number this quarter.

Countries with per caps of less than 150, we grew 12% for the quarter.

So, that's the same as the prior quarter.

And that doubled what we were doing on a two-year average, the trailing two-year average.

So, where's that coming from?

Well, in particular, China, Russia and Turkey delivered exceptional growth, combined 23%.

And by the way, that excludes the acquired Multon brands in Russia.

Over one-third of the unit case volume growth from these three countries was attributed to non-carbonated beverages before factoring in the Multon acquisition again, so it's a broad-based growth.

I think this is a testament to our ability to simultaneously deliver carbonated soft drink growth and at the same time accelerate our position in non-carbonated beverages.

I've talked about bolt-on acquisitions and Multon being one, which has benefited us in the quarter.

Again, the numbers I've given you have excluded Multon, but that is an integral part of our strategy in order to enhance our portfolio of brands.

North America, they also delivered solid unit case volume growth of 3% in the quarter, which, as you know, is ahead of the long-term target that we've set of 1 to 2%.

We continue to see our efforts in core CSD with the focus on diet and light, which we've [inaudible] that innovation with you before.

So, that focus is still there and you've heard Don Knauss talk about that before.

Great deal of activity in this space during the year.

We've still got Fresca relaunch rolling out and I think I maybe will comment in particular on Coke Zero because I know that there's been a real focus on the performance of Coke Zero.

To date the launch still remains slightly ahead of our internal projections, both volume and share terms, and we do believe that this brand is going to continue to build over time.

The consumer measures remain strong, including a particular trial and very importantly repeat scores.

And we'll be launching the next phase of our marketing campaign behind Coke Zero in the fourth quarter.

In addition, North America continues to accelerate its non-carb beverage portfolio and we're gaining share on the strength of our POWERade, Dasani and Minute Maid brands.

Talking about share, our share position around the world continues to stabilize as we focus both on driving CSDs whilst expanding our participation in non-carbonated categories.

As we move on to market and innovation, Mary Minnick recently discussed our new approach to capturing that whole consumer opportunity in beverages by looking at need states across a whole continuum of enjoyment.

And if you look at what we're, the three filled buckets that we look at is enjoyment today, it's feel good today, and it's be well tomorrow.

So, we're utilizing that opportunity to map as we go through our [inaudible] planning process a prioritization of our investment and a proper allocation of our resources against the key growth paths.

And these are continuing to drive our core brands with a focus on diet and lights and, of course, capturing the health and wellness trend.

Aggressively expanding our product packaging portfolio, you will see more of that as we go ahead, focusing in particular on the immediate consumption opportunity which is also [of] major importance to our bottlers, continuing to nurture system health and that's also linked, of course, to the immediate consumption opportunity, and increasing overall customer value.

In terms of our key growth paths, we're really slowly starting to see some very positive trends.

If you think of it, in supporting our core brands, global trademark Coca-Cola, Sprite and Fanta unit case volume growth grew 2, 6 and 5% respectively in the quarter.

In total, therefore, our core brands contributed almost 40% of the volume growth for the quarter.

In particular, we're pleased with the international growth of trademark Coca-Cola and contributed 26% of our total volume growth for the quarter.

Then in terms of expanding our diet and light portfolio, on a worldwide basis, we grew our diet CSD unit case volume by 3% in the quarter and that's 4% year-to-date.

And if you take our international operation, diet and light CS volume grew by 7%, led by the European Union Group with continued innovations on Diet Coke, but also importantly with the rebranding of the launches of our flavor brands Fanta and Sprite.

We're also profitably expanding our beverage and packaging portfolio and making inroads into balancing our growth across the categories. [In the] third quarter, we reported total non-carbonated beverage unit growth of 17%, with balanced growth both domestically and internationally.

Importantly, if you take water away, excluding water, our remaining non-carbonated beverages grew 13% with a 16% internationally.

On a year-to-date basis, non-carbonated beverages now constitute 90% (ph) of our total volume.

That is a point and a half increase versus last year.

So, year-to-date, we've made good progress but we still recognize there's no substitute for performance and consistent results.

Our ability to achieve growth by managing our portfolio of countries and products has certainly been [apparent] in the last few quarters and we're going to continue to focus against growth powers we've enunciated to ensure that we deliver not short-term growth, but also quality and sustainable growth.

This is why there's fundamentally no change in my point of view that we're on a journey.

I am satisfied with our progress to date and believe that our 18 to 24-month turnaround is on track.

But I'm also realistic and I recognize that there will no doubt be some bumps along the road as we manage our way through to that goal of sustainable growth.

So, with that, I'd like to turn over to Dominique, who is one of the newest members of our executive management team, having joined the Company back on the first of May.

But she's not new in many ways.

She's 13 years experienced in the Coca-Cola system, most recently as President of Coca-Cola Enterprises Europe, where she built a dynamic and successful business and earned the respect of partners, customers and competitors.

With that, over to you, Dominique.

Thank you, Neville and good morning, everyone.

As Neville alluded to in his remarks, the European Union Group has been recently created and it covers countries offering a lot of similarities in markets and trading conditions.

And as such, of course, it's put the spotlight on the underlying structural challenges and opportunities that are specific to these countries.

So, with this in mind, we'll still focus today on the root causes of the challenges and more importantly the opportunities they create for us, along with this [inaudible] being the business solutions that are already producing results in several countries, and which are being transferred throughout the entire EU Group.

First, I turn to the third quarter results.

As you've seen from the release this morning, we grew volume 1% versus prior year which was below our expectations.

I have to say we are pleased with the growth in central Europe of 8%, Spain continues to be a great success story, delivering 4% growth.

And with the tough environment in Germany, as Neville already mentioned in his remarks, volume was down1% for the quarter, which is an early sign of stabilization compared to previous quarters and years.

On the other hand, Northwest Europe had a difficult quarter with unit case volume down 3%, clearly a disappointing performance.

So now, what are the underlying root causes affecting our results?

There are four which are present to varying degrees across the different markets.

First, a very soft economic environment, unfortunately.

Also, overall return [of] inflation and growth of our discounters, an underlying shift in consumer preferences away from regular CSDs and driven by health and wellness trends and the associated public opinion, media and government attention to it.

In many parts of Europe, we are already successfully addressing these root causes using our strategies of number one, driving our core carbonated soft drink brands with specific focus on diets and lights, but not only.

Second, expanding our non-carb beverage portfolio with both new product launches as well as acquisitions.

Number three, accelerating immediate consumption throughout our markets.

And number four, very importantly, using revenue growth management and packaging innovation to create value for customers and consumers.

Let me next take a few minutes to describe how we are putting these strategies into practice across Europe.

And then I'll talk more specifically about Northwest Europe, where these impacts are currently the most intense.

So starting with the overall group, I'm pleased to report, as Neville mentioned already, that we have succeeded in maintaining our share of volume for CSDs, while generally increasing our value share across the group.

Encouragingly, in central Europe, we have grown CSDs by 3% and there are some signs in Germany, France and Nordic, that we are stabilizing CSD trends in Q3.

I'm also glad to say that diets and lights continue to perform well across the group and this quarter they increased again by 4%.

In Nordic countries, we even grew light double-digits, thanks to the successful combination of Fanta Free, Sprite Zero launches together with retargeting our flagship Coke Light toward dual users so both Coke regular and Coke Light users.

Turning now to our non-carbonated beverages, also called NCBs, this portfolio only represents 10% of our total European sales today, including waters.

So not surprisingly, our strategy clearly focuses on accelerating the broadening of our NCB portfolio by expanding the reach of our global brands like POWERade, Aquarius, Nestea and Minute Maid to cover new consumer need states as previously described by Mary Minnick.

In Spain, for instance, improved consumer insights and integrated marketing has enabled us to grow NCBs by nearly a third year-to-date, and a key contributor to this growth has been Aquarius, which capitalizes on no carbonation, low calories and healthy refreshment.

This is, in my view, a good illustration of a sports-oriented drink being transformed into a mainstream lifestyle beverage therefore capturing even more consumer occasions.

Despite these encouraging achievements, we still acknowledge that our NCB presence is not yet satisfactory and that's why in addition to internal growth, we are also pursuing appropriate local bolt-on acquisition opportunities like you've seen Valser in Switzerland or Multivita in Poland.

As regard our deliberate focus on immediate consumption, we continue to strengthen this business through new trade initiatives and tailored consumer promotions.

In Italy, for instance, POWERade has just become immediate consumption leader, driven by the introduction of a new flavor and accelerated cooler placement in parallel.

When it comes now to top end growth rate, we have adapted to the current aggressive competitive landscape causing downward pricing pressures.

Our focus on revenue growth management initiatives and packaging innovation launches is designed to give the right pack and price combinations for the savvy, value-conscious shopper.

[Hard] discounters, too, are an important factor in today's retail landscape and we want to be at the leading edge of these customer relationships.

In Germany, we have already made good progress this year gaining or regaining, sometimes, availability with our large PT packages.

Now, let's talk more specifically about these challenges in Northwest Europe, where their impacts have been intensifying since mid '04 and into '05.

To date, I must say that the implementation of our strategies has not been sufficient to reverse the trends and these quarters reserves were clearly below our expectations, as I previously said.

So although we remain fully committed to executing our strategies, because they are starting to produce good results, we are, at the same time, also accelerating the cascading of learnings and business solutions from other markets.

Some examples and some concrete illustrations, starting with CSDs, we have achieved 5% growth year-to-date in diets and lights through significant innovations.

In Great Britain, we have grown diet CSDs by 9% this year, taking our overall CSD share up almost 3 points.

This has been led by our Diet Coke with Lime, together with the rebranding of diet [inaudible], including Fanta and Sprite, with the Zed campaign, Zed for Zero, which nearly doubled our light share in fruit carbonates.

Minute Maid launches have strengthened our NCB presence in Northwest Europe.

With our fresh mix juice drinks launch we have grown Minute Maid in France significantly and in Great Britain, our not from concentrate new carafe bottle has met with very good early acceptance.

Now to customers.

The program of customer value creation in GB including collaborative planning and promotions, out of stocks and display units, has enabled us, with our bottler, to be ranked number one by the leading independent trade survey and also to be elected SMCG Supplier of the Year by the leading retail magazine, "The Grocer."

As for immediate consumption and taking this time the example France, France is using a more focused approach in a number of high traffic urban areas therefore growing distribution to over 95% for the profitable half liter of Coke and overall volume by plus 15%.

This was done through doubling sales force call frequency in these so-called boost zones and placing more cold drink equipment.

Needless to say, we will be expanding the number of these zones going into '06.

Still in France and turning to revenue growth management, we introduced Fridge Pack in February as part of an overall multi-pack strategy designed to increase volume and system margins.

Through this, we've seen home channel growth of 5% while also in parallel increasing revenues per case.

Going forward, and this applies to Northwest Europe and more generally to Europe as a whole, we need, I'm convinced, to re-double our efforts in rapidly transferring the best available knowledge between markets to capture growth and that is where the processes and structures are being put in place to personalize manifesto for growth, will enable us to quickly leverage existing innovations and to expand the footprint of our global brands.

To this end, we have put in place cross-functional and multi-country teams to transfer innovations and best practices in smarter and more effective ways.

Using an example of these new teams for the juice category, Italy and Central Europe have joined forces to successfully launch healthy and refreshing juice drinks and other Minute Maid Cappy brand and we immediately rolled out this profitable health and wellness proposition across Western Europe, launching new Minute Maid juice drinks, both in G.B. and France with further launches planned for '06.

I hope that this illustrates to you all the efforts we are making and although we are conscious that there are no quick fixes and never lend a line the fact that we are on an 18- to 24-month journey, our confidence that we will gain traction in Europe in '06 and beyond is based on the combination of the formation of the EU Group, which enables us to tackle these issues relentlessly.

Also, a strong and diverse team, closely aligned with our bottlers.

Encouraging progress in Germany with bottler consolidation prospects, and last, but not least, a strong innovation pipeline to capture profitable growth in several beverage categories such as energy and [still] drinks.

So in summary, we continue to be focused on delivering our long-term targets at the same time as executing on clear business priorities for the short-term.

We have the right strategies in place, but we also recognize that we face some challenging conditions, especially for the remainder of '05 and as we kick off 2006.

Thank you very much for your time and attention today and now I'll pass on to Gary.

Gary?

Thanks, Dominique and good morning, everyone.

I'd like to spend a few 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 $0.54 for the third quarter.

There were two items impacting comparability of our results on the year-over-year basis.

The net effect of these items was a reduction to the current quarter's EPS of $0.03 per share.

The items were $0.04 per share reduction for the $89 million non-cash write-down of assets in the Philippines.

That was partially offset by approximately a penny per share benefit from a favorable resolution of tax matters.

Therefore, our EPS after considering these items was approximately $0.57 per share.

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

In the fourth quarter, we expect the growth of gallon sales to lag reported unit case sales by at least 2 points, primarily due to the favorable timing of gallon sales as of the end of the third quarter versus our expectation and the cycling of higher gallon sales in the fourth quarter of 2004.

As you saw in the release, selling, general and administrative expenses increased to 9% in the quarter.

Within that direct marketing expense increased 18%.

So, we're on track with our approximately 400 million of incremental marketing.

As we previously stated, we expect marketing based on a unit case sales curve [inaudible] the year, given the flow of our marketing expense by quarter in 2004, we expect the marketing growth rate in the fourth quarter to accelerate.

Other operating expenses in the quarter benefited from favorable timing such as lower stock based compensation expense and various small gains on land sales, et cetera.

Year-to-date we've benefited about a penny favorable timing of operating expenses which we would expect to spend in the fourth quarter.

There is some upward pressure on input cost, however, we are actively managing these figures for the fourth quarter and expect limited impact.

For 2006, the cost situation is evolving, but is difficult to predict but we're monitoring it closely and are executing strategies to limit and potential impact.

At this point, we expect any cost increases to be in a reasonable range.

With regard to tax, we are lowering our estimate for our full-year underlying effective tax rate from 24% to 23.5%.

In the third quarter, we recorded a year-to-date catch-up which benefited the quarter by about a penny per share, and we expect the fourth quarter's underlying effective tax rate to be 23.5%.

Let me move to currencies.

We saw a benefit from currency at the operating income level for the quarter.

Excluding the items impacting comparability, the currency impact on operating income for the quarter and year-to-date was 4%.

Fourth quarter [from] our hedged position and our mix of currencies, we expect an negligible impact from currencies on operating income.

Currencies as we look in the 2006, we currently have minimal coverage in place and we do expect a negative currency impact on our full-year operating income in 2006, given the relatively high exchange rates we've benefited from throughout most of 2005.

If exchange rates remain at today's level, the negative impact year-on-year would be approximately 5% however, I expect the dollar to weaken somewhat through 2006 and if that happens, the impact would be somewhat less than that.

Relative to share repurchase, we repurchased $525 million of our shares in the quarter, 1.6 billion year-to-date, puts us right in line with our full-year expectation of repurchasing at least 2 billion of the Company's stock.

Turning to repatriation under the American Jobs Creation Act, in addition to the approximately $2.5 billion we announced in the first quarter, the Company, subject to board approval later today, will repatriate the remaining 3.6 billion available during the fourth quarter of 2005.

Therefore, in the fourth quarter, we will record a tax provision for the repatriation of approximately $200 million of [inaudible] with [inaudible] billion repatriation.

In total, we will have then have repatriated 6.1 billion, which is our previously disclosed maximum amount.

Finally, I'd like to reiterate what Neville mentioned in the opening.

I believe the first quarters reflect that we're making very good progress.

We remain focused on our objective of delivering long-term sustainable growth.

And with that, I'd like to turn to your questions.

Operator?

[OPERATOR INSTRUCTIONS ] Your first question comes from the line of John Faucher with JPMorgan.

Yes, good morning, everyone.

Was wondering if you could talk a little bit about the North Asia, Eurasia and Middle East result?

Very strong case volumes but relatively weak revenue and operating income performance and can you maybe break out some of the impacts there, whether it was the juice acquisition or you also mentioned the gallon sales growth in Japan was behind case volume.

Can you sort of walk us through why the variance between volume, revenue and operating income?

Yes, John, it's Gary.

A couple of things there.

We did have a very good quarter in that group.

A lot of the case volume increase obviously were coming from the emerging markets.

China, particularly, had another very good quarter as did Russia.

A large part of the operating income result deals with Japan and the gallons being behind cases was a large impact of that as well as a lot of marketing being put into that part of the world because we see it as one of our key growth areas moving forward.

Okay.

And then we should see a normalization of the gallons versus cases in Japan going forward?

Yes, we should.

Your next question comes from the line of Caroline Levy with UBS.

Good morning, everybody.

I wonder if you could walk us through the same idea in the East South Asia-Pacific rim and also, I think that the, you know, that the growth in the European Union in profits was actually higher than expected given the challenges.

So, in each of those two divisions, if you could do the same thing that you just did in Asia.

Well, if we take the Pacific Rim, just to shorten the acronym, clearly you've got the major, the two major effects, which is the Philippines and India.

And that underperformance is a lower, actually lower margin business.

Really, your overall operating income strength comes from the South, from Australia and there was a, also we didn't talk about some volume weakness in that part of the world, but you've seen that in CCA's results and numbers.

And that clearly was the main driver from a role profitability standpoint.

In the E.U., Gary, you want to just go through those numbers?

Yes, Caroline, one other thing around the Pacific Rim in the operating income results, if you're looking at the segment data, in their results for this quarter versus prior-year quarter, the impairment charge that we took in the Philippines is in the operating income results of the Pacific Rim and so that's $85 million at the operating income line and that's a reason for a lot of the swing there.

Your next question comes from the line of Bill Pecoriello with Morgan Stanley.

Good morning, everyone.

Just, Gary, one clarification.

The SG&A line, we're trying to figure out how to model that into the fourth quarter, how much the stock option expense was down in the quarter because you mentioned there's about a penny of the innovation spend timing we shift into the fourth quarter, market spending was up 18%, but with that line, only up 8 or 9.

How much was stock option expense down?

And then on the raw material environment, while you see minimal impact for the Coca-Cola Company, any other impact though in terms of the global bottlers seeing a lot of inflation on resin and fuel, maybe needing to raise prices and how the system is trying to pull levers to mitigate the pricing required and any related volume impact?

Okay.

Bill, I tell you what, we're looking right now, let me get the exact number on the G&A, but basically what you are seeing is on the 8%, number one, increase, that includes, as I said, 18% on marketing.

The 8% was actually 9% and a point of that was currency, if you will, and the stock option expense savings I think, were about $0.005, if I remember.

And most of that is now in the number.

Let me just pick up the cost inflation issue.

For us, we don't have a lot of product in terms of Coca-Cola [inaudible] pricing, but that does roll through to the bottlers in pricing there.

With regard to PET, there are two factors that you have to look at.

One factor is overall situation with regard to obviously energy costs and the input costs with oil, but also the nature of the overall industry in terms of capacities and we're seeing incremental capacity coming on in Asia and are still negotiating for next year, so it's premature to actually give you a number, but we think that that there will be very tough competition with our suppliers and that that is going to mitigate what you would have normally have factored in because of margin reduction on PET.

So, I think that the costs going forward are going to be really less than some people anticipate.

I am talking about that across the bottler system.

It's still a little bit too early to actually pin that down, as I say, because we haven't negotiated the contracts, but the main factor there, that I think most people have missed, is the incremental capacity coming out of Asia and what's going to happen with regard to that.

Your next question comes from the line of Mark Swartzburg with Legg Mason.

Thanks, Operator.

Good morning, everyone.

Neville, I wonder as you look around the globe, if you could give us an update on your thinking regarding supply chain and route to market initiatives, broadly the opportunity for changes there.

And then specifically if you could update us on what you've been doing in Mexico in this regard, I'd be interested in your thoughts there, as well.

Okay.

Well obviously we've talked to you before about the supply chain that we've put in Japan.

That is better than on track.

In fact, the savings there are well ahead of what we originally anticipated.

And, by the way, the gallon swings that are there with regard to Japan are part of the inventory movements as we pull all of that together.

That's why it's a little jagged.

But if you look at supply chain itself, there's very good success out of what we've done in Japan.

Mexico, the recent announcement of the sales company there, joint sales company, I think is going to be a very important piece of the onward growth of non-carbs in Mexico.

And as you know, we have a significant multi-bottler system in Mexico so I am very pleased that the bottlers have got together to put together an organization that's going to enable us to go to market in a coordinated fashion, which is really very important with regard to non-carbs.

The benefit of that is still to come but having said that, we already have a number of new launches some, you know, 20 new products have been introduced over the last six months or so into the non-carb arena in Mexico and we're starting to see that happen.

So, then if you take it in a broader context, I mean this is somewhat of a journey that we've started some time ago but which we're now accelerating as we meet with our bottlers and [we're], therefore, seeing increased opportunities to put together the type of organizations, and I'm not going to speculate where we would go next, but the type of organizations that you've seen in Japan and that you have seen in Mexico.

Now, then you would go to a Germany where, in fact, there's something different taking place, which is the consolidation of the bottler.

But then that also is having exactly the same opportunity with regard to consolidated supply chain.

And there are a number of other initiatives going on along the same lines, talking to our top bottlers about IT and [degration] IT, there are major savings we believe we can bring about there.

And the highlight is that we have a very significantly increased focus on the supply chain settings and therefore to really focus on that, we have moved the whole supply chain, reporting [relations] across to Ariel [inaudible] the head of Bottling Investments.

And Ariel charged with accelerating, we're doing pretty well right now, but accelerating our efforts in terms of addressing the supply chain issue.

So I think there will be much more to report there in the future and I think it's very important going forward.

So not only as we address the issue of incremental marketing, but we're looking at how we fund some of that growth.

And we fund some of that growth by taking some significant costs that we've identified out of the system, but also when it comes to non-carbs, it's even more important in terms of enabling a coordinated route to market.

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

Hey, good morning and thanks for taking the call.

A question, Neville, on the Philippines.

If you could just talk a little bit more about what you've done so far.

If I remember it correctly, you've introduced a smaller, 200 milliliter glass package to address the affordability issue.

And curious to know if that was in the market in the third quarter and if it was, is there something additional that you're going to need to do there to address that issue?

Okay, the, it was in the market in a very small way and I'll give you some of that in a second.

Just to be broader, you know, the whole issue has been really right to market and availability caused by a new system that was put in place about 18 months, two years ago.

We have agreed with the bottler to zero-base all of our assumptions on the best go to market strategy, so we're relooking at that in totality.

So, one piece of changed the dynamics in the Philippines.

The second, then, is the one that you refer to, which is the new smaller package, the 200ML.

That is only just started rolling out in Manila.

It's level-priced with the new competitor that came in, Royal Crown Cola the 240ML, but in the early days, we've got early limited availability, you know, it's a returnable package.

We have to build up the glass float.

So, we're, you know, we're just seeing the early signs of that but it does, [inaudible] that pack now accounts for 9% of Coke sales off take if you take year-to-date September.

They're about to start rolling it out in the Southern region, that's the other important island around Cebu and that's going to be completed really, by about now, actually.

And that preempts the entry of Royal Crown Cola.

In addition, we're taking another packaging launch, which is a rollout of a 769ML bottle in metro Manila, and that's to combat an 800ML Royal Crown Cola.

So, that's in the early days, but it is part of a revenue growth management approach, looking at competition, again, focused on metro Manila and then rolling out to other key markets.

We're also revitalizing Pop Cola, the 8-ounce, with new commercials, and in particular chasing price compliance because dealer price compliance has been big issue, as well.

And there are other some smaller ones, Sprite Ice and [can], we've got incremental volume.

But [inaudible] the early stages now of turning around.

And as you can imagine, some of you know my history in the business, it's something that I'm very focused on.

Your next question comes from the line of Christine Farkas with Merrill Lynch.

Thank you very much.

Good morning.

I'm wondering if you can address North America?

Specifically, we saw some nice profit growth after two negative quarters.

How much of this was driven by the marketing or cost curve accounting?

Were there additional saving beyond what was put into your press release?

How much of this was the timing of the gallon shipments and of course, adjusting for option expenses, there was still some decent growth, so what's the long-term target in profit for this market?

Thank you.

Christine, it's Gary.

Thanks.

A couple of things, the gallons were slightly ahead in the quarter for North America, as well.

So, that is part of the profit growth.

Additionally, North America marketing, while they had actually a large percentage of relative to the rest of the world of the 400 million of the incremental marketing, it is a function to some extent of how you're cycling marketing year-on-year and North America, in particular, is one of the ones I was talking about, with fourth quarter growth rates, et cetera, on marketing, as well.

But North America's stock option expense did, that was part of that kind of $0.005 that I mentioned previously and they've done a good job of holding their costs, actually, this year.

Their other operating costs, as well.

So, I would say and it's also, to a large extent, brand mix and they had a very good quarter overall.

So, I would just say, North America, very solid quarter in all aspects.

Their, you know, longer term goals that we have for North America are operating income in the 3 to 5% range.

This whole issue of mix, if I can just come in, is important.

We've seen positive variances on mix coming out of the likes of Full Throttle and the likes of POWERade, in particular.

And I think we'll see that continuing as we go forward.

Your next question comes from the line of Carlos Laboy with Bear Stearns.

Yes, good morning.

You've touched upon your new non-carb model for Mexico.

I think you've one in Chile, also, but Brazil is a far more developed modern trade market.

Can you touch on non-carb outlook for Brazil and the prospects of a new non-carb model in Brazil?

I mean we're in the earlier stages in Brazil, but, of course, we have made the acquisition of the juice business there, it's the number two, although the juice process is relatively undeveloped in Brazil.

And that really is the beginning of what we're going to do to build [inaudible] out in Brazil.

But we're looking at that acquisition as core basis for expanding in NCBs and if you talk about how we're going to go right to market, looking at the Mexican model as well and in discussions with regard to that.

I think that's sort of part of my broader comment about expanding that and that being an important piece of enabling us to have a better go to market opportunity.

That's really important.

But we've now started the juice piece and I haven't reviewed the plans for '06 yet.

I would anticipate that as Brazil comes in, we'll see a real buildup in non-carbs in Brazil.

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

Good morning.

I was wondering about the sustainability of the Japan growth.

You had a great quarter with about 4% volume growth lapping, I believe 8% from last year.

Do you see the new products that you've introduced this year as having a fairly long life cycle or will you have to introduce many more new products next year?

First of all, Robert, they'll continue to introduce many new products next year because that's just the nature of Japan, and an awful lot of them have been and always will be toward lifestyle, I think sort of 3% of our volume every year comes from new launches.

And that's sort of the nature of that business.

If we go to the specifics of your question with regard to the launches that we have made recently, Hajime, in particular, the green tea, we actually think is something that is, you know, a one-hit-wonder, has got legs and that is part of the growth that you've seen and really exemplifies where we're trying to go.

Trying to go, you know, fewer, bigger hits, because, frankly, the number of launches and the quick cycling are all very well, but we would rather try and focus on a few new successful launches that have got legs.

The other one that we believe has got significant legs and which has been very successful in the quarter is Aquarius Active Diet and that's 21% of our unit case volume.

If you go back historically, of course, Sokenbicha, when we launched that was again, very sustainable.

There's been somewhat of a cannibalization of Sokenbicha by Hajime.

We anticipated that, but we're also working on turning that around.

So, I, you know, I think we're going to get good, steady growth out of Japan.

I think we're seeing also some, what will be some economic tailwind in Japan.

I think whilst I don't see major changes taking place in terms of consumer spending, I think that that's [going] to will pick up to some degree.

I think the recent elections have indicated that Japan is on the move and I think we'll get some benefit from that, as well.

But one point I did want to make, I missed on Ts.

If you take out you [inaudible] Sokenbicha, [inaudible] by the way I talk about cannibalization, I mean, we've grown share overall so that's also very important.

But our model does require Japan to grow 4%.

We believe that we can, does not, I'm sorry, is not requiring Japan to grow at 4%, we're looking at a modest growth rate down 2 to 3% range and I think that we'll be able to continue to do that but with bigger hits like Hajime and like Aquarius Active Diet.

Your final question comes from the line of Corey Horsch with CSFB.

Good morning, everybody.

I just had a quick question.

A few months into your kind of revamped or restructured management organization in terms of regional responsibility, just curious to hear an update as to whether the changes have met your expectations as far as executing on a manifesto for growth, what still needs to be done, where you think, you know, further work is needed to get the management organization how you need it going forward.

Thank you.

Okay, well, you heard Dominique earlier.

She's still ready for any questions and didn't get any.

But she focused very clear on the fact that the reorganization has allowed a very clear laser like focus on the European Union.

And the fact that to some degree, some of the issues that she highlighted were in fact varied to some degree on to the success of the likes of Turkey and Ukraine and Russia so that clearly is, we believe, the right focus, the right way forward.

I think exactly the same is happening with the Pacific Rim, [inaudible] [Patrick], where again, the issues like the Philippines and also India somewhat varied under the likes of China.

So again, getting a focus on key areas plus, by the way, stimulating some other important markets like Indonesia and Korea, where we've actually got joint plans agreed with Coca-Cola Amatil to regenerate those markets.

So the plans are also aligned to the bottlers, as well, and the rest of the world, of course, remains unchanged.

We talk about the management team overall.

I point out that actually 50% of the management team are either, since I took over in June 1 last year, are either new or, in fact, reassigned or promoted.

So, there's been a major change that's taken place there.

And I see that as pretty stable going forward.

The other one is alignment with our bottlers, which I believe is something which has been enhanced over the last 12 months and it's enhanced by the manifest.

The big thing about the manifesto is the fact that we have a clear and evident path to growth going forward.

Underneath it, and you haven't seen this, and you'll see a little bit more of this in December, underneath this immense body of work, and you hear some of it when we talk about supply chain, you hear some of it we talk about, when Mary talks about the architecture that we have around strategic paths, the, addressing the specific [date], you can see some of it coming about with the launches that we have in Mexico, the acceleration of what we're doing in innovation and marking and what we have in the pipeline.

[That goes] with the sharing that of best practices across all the groups, and frankly, I'm ahead of where I thought I would be in terms of the ability for the overall management team to work together.

In terms of sharing best those are not working in silos, but really working with a totally new culture.

I think we're well ahead of where I expected to be with that.

So we've got some quick wins, you see them coming through in the quarter.

They're on those quick wins are underpinned by a very deliberate, very detailed plan which is rolling out successfully, not just within the Company, but the bottlers as a whole.

So, let me thank you for participating and also thank Dominique and Gary.

As I say, we've got a solid quarter in the books.

Now we're in this, you know, first stages of reviewing 2006, as I just said, we've got a full calendar of innovations and strong, smart marketing support for our brands going forward.

For the remainder of the year, we planned an analyst meeting for early December.

We will take you through a more detailed review.

Some of those more detailed questions [were] around the manifesto, as well, when we meet in December and some focus on some key initiatives as we look forward into 2006.

So, I look forward to speaking to you then.

Thanks for being with us today and have a good day.

Thank you.

This concludes today's Coca-Cola Company's third quarter and year-to-date 2005 conference call.

You may now disconnect.