可口可樂 (KO) 2005 Q4 法說會逐字稿

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

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

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

Good morning and thank you for joining us.

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

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

Before we get started, I'd like to remind you that this conference 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 SEC report.

In addition, I would like to call your attention to the fact that we have posted schedules on our company website at CocaCola.com, in the investor section, which reconcile our results as reported under Generally Accepted Accounting Principles to certain non-GAAP measures, which may be referred to by our senior executives this morning and in time to time when discussing our financial performance.

Please look on our website for this information.

Now let me turn the call over to Neville.

Thank you, Ann, and good morning, everyone.

I hope you had a chance to review the release that we issued this morning.

I'm not going to spend too much time on those details.

Also given that we spent a good deal of time with you about the state of the business and the overall strategy and our detailed plans on Semper Seven at the investor meeting, I am going to make a few observations on the quarter and the full year this morning.

And not go into those details again.

And then Gary is going to follow-up with an overview of the financials and some additional perspective on 2006.

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

We continue to see improvements in our execution across the globe and our results once again benefited from the geographic diversity of our business.

Unit case volume growth in the quarter and full year were led by continued strong growth in key emerging markets, including China, Russia, Turkey, and Brazil.

But in addition to that, both North America and Latin America delivered another solid quarter of unit case volume growth.

In Germany, reported mid-single digit growth for the first time since 2003.

As availability in this cart has helped to stabilize the business there.

So, I am quite pleased about how the quarter has turned out.

Most importantly, it brings to an end our transition year. 2005 was a year in which we made tremendous progress against the pre -- the key priorities that we laid out a year ago.

As a result, the Company reached its internal budget for both volume and profit for the first time in more than five years.

And I believe that's a further sign that the business is now on a solid base heading into 2006.

As I mentioned earlier, I shared many of the accomplishments with you on December 7 and I'm not going to reprise them now, but now that we close out the year, I want to highlight four areas that deserve your attention.

Carbonated soft drink trends, number one.

Number two, progress on noncarbs.

Three, accelerating growth in key markets and finally, our marketing and innovation pipeline.

Firstly, with regard to carbonated soft drink trends.

We are turning around our CSD brands.

In 2005, we grew unit case volume for carbonated soft drinks over 2% for the first time since 2000.

With our core brands leading the way.

Trademark Coca-Cola grew 2% for the year and Sprite and Fanta each grew by mid-single digits.

In addition, we were able to stabilize share trends.

We essentially held share for the year.

Now, that's not something that I'm entirely satisfied with, as you would imagine, but it does reflect a turn-around in trend compared to the overall share loss that we had in 2004 of almost a full percentage point.

So we've arrested the decline and we are making progress.

On noncarbs, we're accelerating our marketing and distribution capabilities to strengthen the overall portfolio.

During 2005, our non-carbonated beverage business on a unit case basis grew by about 13%.

And that means it accounted for a little over half of our total growth for the year.

With very strong results from our core noncarb brands.

POWERade was up over 20%.

DASANI, with its international expansion and its flavor launches in the U.S. were close to 30% for the year.

And Minute Maid grew by double digits.

We also made very solid noncarb acquisitions in 2005, including Molton, which immediately gave us number one juice brand in Russia.

Because of the progress we've made in these categories our non-CSD beverages approached 20% of our total beverage portfolio in 2005.

Now, if you add in our diet CSDs to the more general health and wellness category, which I believe is where they belong, the overall percentage is approaching a third of our total portfolio brands and that's probably a number that will surprise a number of people.

In package quarter juice and juice drinks and also in sports drinks.

Not only did we gain share in the year, but we actually accelerated those share gains from the prior year.

There is one category in which we lagged behind and that was tea and coffee and we will be addressing that this year through some of the initiatives that we talked to you about in December.

The third item, accelerating the growth in key markets.

We also made considerable progress in accelerating growth in our low per capita countries around the world.

For the full year, unit case volume in our countries with per capita consumption below 150 grew approximately 10%.

These countries now represent close to one-third of our total volume for the Company.

And continue to grow in both importance and relevance to our operations.

In particular, as I mentioned earlier, China, Russia, Turkey, and Brazil, each grew double-digits during the year.

And importantly, it was balanced growth.

Growth for both carbonated and non-carbonated beverages.

And, therefore, we increased our nonalcoholic ready-to-drink share in each of these markets.

As we look ahead and assist 2006, global economic trends for many of these countries remain favorable and combined with solid and improving marketing and new product plans, we are optimistic that the positive trends in '05 are going to continue through to '06.

Here in our home market of North America, we've stepped up marketing, innovation, and just as importantly, execution.

As you read in the release, North America had another solid quarter, delivering unit case volume growth of 3% in the quarter and 2% for the full year.

Up from flat performance in the prior year.

We've improved trends on carbonated soft drinks from the prior year, supported by the successful launch of Coke Zero, which has now achieved nine-tenths of 1 share point in the latest Nielsen data and we have a very positive outlook about Coke Zero.

We've stepped up on energy drinks with strong performance of full throttle and with the national advertising we're putting behind the brand, we believe that we will continue to see improving trends in 2006.

Finally, both DASANI and POWERade had an excellent year with double-digit volume growth and increased share.

So as a result of this strength, North America is now very close to reaching an important milestone.

With the combination of our diet CSDs and non-carbonated beverages representing about [49%] of our total beverage portfolio for North America in 2005.

Further, the innovation pipeline is strong heading into 2006 and we've got several new product launches and very strong marketing support in place.

Which leads me, in fact, to my final point.

The marketing and innovation pipeline.

We've made very good strides in developing our marketing and innovation capabilities some of that step-up was reflected in our solid 2005 results.

But I want to emphasize, too, that in 2006, and unlike 2005, we're heading to the beginning of the year with a strong pipeline of marketing and innovation in place, not just in our home market North America, but also around the world.

Mary Minnick shared some of that with you in the December meeting and many of those early initiatives are in the pipeline.

Some of them are already up and running.

The advertising that we've launched in December in North America has had a very positive feedback, not just in terms of anecdotal reports, but also in terms of our tracking of the data.

Coke Black has now been launched in France and it will be rolled out to several markets in Europe and North America in the next few months.

And Coke Zero has now launched on Australia Day, the 26th of January.

And although it's early to tell at the moment, the early indications are that we have got a very strong brand in Coke Zero in Australia and it's going to be a highly successful rollout for that system.

And finally, as you may read in our press release this week, we are launching the first phase of a long-term communication platform called "Make every drop count."

It's part of a multiyear strategy to build awareness around who we are and what we sell.

The campaign will initially launch in the U.S., communicating the benefits of the Coca-Cola Company's broad portfolio of products, to meet consumer needs as well as educating consumers by sharing expertise and information about the role that beverages play in their lives.

Finally, we've taken an important additional step in building our organization with the appointment of Muhtar Kent as P[resident of our International business.

As President and CEO of north Asia, Muhtar, in a short period of time, has accomplished a great deal, leading a critical geographical region with great skill and accelerating our growth in some of those key markets.

We've already heard those results in China and Russia and a good stabilization in Japan.

Muhtar has a great dearth of experience in our own industry but also in the beer industry and his record of accomplishment make him the clear choice for this important position.

As we accelerate our focus on execution, I want to emphasize, accelerate our focus on execution. 2006.

It is critical that we have a structure that is going to evolve.

And to ensure that our international operations receive a very high level of full-time attention.

Under Muhtar's leadership, I know that's going to happen and you will see him in the not-too-distant future, in fact, very soon, make some announcements about how he will manage and change that organization.

The emphasis and execution, then, leads me to my last point.

With the progress that we've made in 2005 and a very well developed pipeline of innovation and marketing, we will be assessing ourselves against our long-term growth targets beginning in 2006 and beyond.

But I'm also realistic.

I recognize that accelerating execution will be critical in achieving those targets going forward.

That is exactly what we will be doing.

Let me now turn the call over to Gary.

Gary?

Thanks, Neville and good morning.

I'd like to spend just a few minutes covering the financial highlights of the release for the year and then we can get to your questions.

As you saw in the release, we reported earnings per share of $0.36 on a diluted basis for the fourth quarter.

There were two items primarily impacting comparability in our results on a year-over-year basis.

The effect of these items was a reduction to the current quarter's earnings per share of $0.10.

Those items were $0.08 per share reduction for the tax accrual related to the final piece of the repatriation of foreign earnings and additional $0.02 per share reduction related to charges at one of our equity investees.

Therefore, our earnings per share after considering these items was $0.46 per share.

For the full year, our reported earnings per share of $2.04, if you consider items impacting comparability, we reached $2.17, that's compared to $2.06 on a comparable basis in 2004.

An increase of 5%.

From a cash flow standpoint, we finished the year with another strong delivery of cash from operations, reaching a record $6.4 billion, a growth rate of 8%.

I know it's easy to miss, but I just wanted to point out that that means that where we ended the year, our five-year CAGR on cash from operations has been about 12%.

For the year, we paid out 2.7 billion in dividends, a 12% increase over the prior year on a per-share basis and additionally repurchased 2 billion of our stock at 15% increase versus the prior year.

I'd like to address a few items and factors impacting our outlook for 2006.

As Neville stated and as we outlined in the release, with the progress to date and the pipeline we have in place, we're comfortable being assessed against our long-term growth targets beginning in 2006 and beyond.

In addition, our initial read on the macroeconomic outlook for the year is relatively positive, especially in many of the emerging markets.

The notable exception to the outlook would continue to be Western Europe, which we believe will have relatively muted growth for the year.

In terms of SG&A for 2005, it increased 11% as the planned increases and marketing and innovation expenses impacted results.

As we have previously stated the 400 million of stepped-up expense is now built into the base level spend and we would expect SG&A to grow at a rate more in line with our longer-term view.

In terms of input costs, there's certainly upward pressure, however, we're actively managing those pressures and executing strategies to limit the potential impact, although we do expect to see some increase, we believe it will be in a reasonable range.

With regard to taxes, we ended the year with an underlying effective tax rate of 23.5% and our best estimate today for 2006 is that the underlying rate will be 24%.

Now let me move to currencies.

We saw a benefit from currencies for the full year on operating income up 3% after excluding those items that impact comparability.

As we look at 2006, we expect currencies to have a negative impact.

We have begun to put coverage into place and are effectively now covered through the first half of this year on the euro and the yen, based on current spot rates and the expected impact of the coverage in place, the negative impact on operating income would be approximately 4% for the full year 2006.

I'm happy to report that that is significantly better than the 6% that I predicted in December.

So rates are going as we predicted.

However, we largely expect the impact -- the negative impact on currencies to occur during the first half of 2006 as we cycle very favorable rates from 2005.

From a capital expenditure standpoint, we purchased approximately 900 million in capital during 2005, as I noted in our December analyst meeting, we expect that amount to increase to about $1.3 billion in 2006, primarily to build production capacity in North America.

Finally, we repurchased 2 billion of the Company's stock in 2005 and anticipate that our range for share repurchase in 2006 to be between 2 and 2.5 billion.

Before I close, I wanted to touch on the comment in the release about the new reporting segment for our consolidated bottling operations and unconsolidated bottling investments.

Beginning in the first quarter of this year, we will begin to report these results as a separate segment under the leadership of Ariel Finnin.

As we get closer to the first quarter earnings release, we will provide you with historical data for the new segment.

That's it for the topics I wanted to cover.

Now, operator, if we could turn to the questions.

Thank you.

[OPERATOR INSTRUCTIONS] Your first question comes from Bryan Spillane with Banc of America.

Hi, good morning.

I guess, Gary, in the fourth quarter, corporate expenses were up much higher than we were expecting.

Can you talk a little bit about what happened on that line in the fourth quarter and also if you can make some comments about inventories, I think we were expecting that you'd be shipping behind consumption in the first quarter and it's not clear to me that you did that here.

Okay.

Well, good morning, Bryan.

First of all, on corporate expenses, that was actually in line with what we expected, particularly if you look at it on a full-year basis and as we ramped up our spending in marketing and innovation, a lot of it was actually the time.

And I think if you remember back during last year, I said that a lot of -- particularly in the marketing space, the way the cycling would work because a lot of the marketing that's being restored was actually in the second half of the year, particularly in the fourth quarter, that's a lot of what you're seeing.

Additionally, some of the ramping up in the innovation area actually was weighted toward the second half of the year, as well.

And particularly in the fourth quarter.

So I -- but if you look at the full year it was pretty much exactly what we expected.

So actually no surprises there.

And we would expect then next year, as I say -- or this year, 2006, to be more in line with our longer term models that we have talked about.

Relative to gallons versus cases, this one, I need to give a little bit of detail so that I think the explanation would then be understandable.

As you know, when we report on a quarterly basis on unit case sales, we report on average daily sales.

Basically, if you will, think about it's the same as same-store sales.

So we adjust for the number of days within a quarter and there were different numbers of days in 2005, in the first and the fourth quarters.

And based on average daily sales, our unit cases in the fourth quarter were 4% growth over fourth quarter of 2004.

On a reported basis, which is the actual -- actual absolute numbers of cases sold, which is what we report for the full year, the unit case growth in the fourth quarter was actually 5%.

So our growth actually on reported basis, because there was one more day in the fourth quarter 2005, was actually 5% with gallons at 4.

So, it was one behind.

We had said that we expected it to be 2% behind.

It came in a little bit better than we expected but there's no significant, I think, implications there and do not see significant implications on 2006, either.

Okay, great, thank you.

Thank you.

Your next question comes from Christine Farkas with Merrill Lynch.

Thank you very much.

Just want to delve into Europe a little bit more if I can.

Given the progress in Germany, 4% growth and there were some comments that Coke is now available in a greater number of hard discounters and you're seeing progress there, why -- how can this -- or how would this strategy differ from what you're trying to do in northwest Europe?

And how long will the progress take to get into the hard discounters in the U.K. and northwest Europe to turn around the volumes there?

Thank you.

Well, we are in a number of discounters in northwest Europe.

It was -- the exclusion was really Germany, that's where we started out.

Because of the deposit laws and the island solution that the discounters came up with and a decision, not to participate in that island solution.

As we reversed that decision, we have then been gaining availability and we're now available in all of the discounters that are available to us.

The -- now, let me define available to us.

There is one discounter ally that does not stock any brands.

They're starting to -- to talk to people about doing that, but they don't and never have done.

So that's no change over -- in fact, 25 years.

So all of those that are -- do stock brands, now have our brands available in Germany.

So that's part of it.

We've also had -- we have plans in place to really accelerate where we are with regard to diets and lights.

And we are moving out with the expanded noncarb portfolio.

I talked at the last meeting about our Minute Maid launch, a great effort behind POWERade in the U.K. and there is more to come.

So that's part of the innovation pipeline in terms of turning around northwest Europe, but it is not a discounter dependent issue.

It really is a marketplace issue.

So the two are not comparable in terms of the range of issues.

The German issues were, let's say German-specific.

There were also issues around the bottling system as well, as you know.

And, of course, issues around the German economy.

The deposit legislation is going to change, by the way, that's the third piece, sometime in the middle of the year.

We believe it will be middle of '06.

It's still going to be challenging because Germany is only turning around moderately, but, we've certainly turned the corner in Germany.

Northwest Europe is going to be a year of turning that one around.

I think you've seen us do it successfully in Germany.

I believe we can do it in northwest Europe.

And just as a clarification, Neville, I think in the third quarter you reported volumes down 3% in northwest Europe and down mid-single in the fourth.

So moderately worse in the fourth quarter.

And this then you're saying is not a channel issue, just more of an overall market consumption issue?

That's correct.

And you will see it actually reflected -- I mean there is a general consumer trend.

You will see it reflected in, for example, beer results and the rest.

And we factored all of that into our outlook for 2006.

I mean that is in our plans for 2006, the softening part of the economy.

U.K. in particular.

Thank you very much.

Your next question comes from Bill Pecoriello with Morgan Stanley.

Good morning.

Gary, you had mentioned that in '06 you'd increase market spending more in line with the longer term goals.

So given the big innovation pipeline for '06 and the supporting of the '05 products and some of these challenge markets, like northwest Europe, how will you be changing any allocation in the spending against that agenda to keep the spending in line with the long-term?

And then also, if you can clarify for us the improved price mix in the quarter, up 3 versus up 1 year to date, the improvement in the Company on operation to Germany and India, how much of that drives the swing?

Thanks.

Okay, thanks, Bill.

A couple of things, relative to the marketing, I think as I -- a marketing and innovation, as I had said, would be more in line this year with our longer term models since the 400 million is now in the base.

As we're looking at the marketing allocation and the spend and as well as innovation, one of the things that I think Mary has done a very good job with is -- in a very collaborative manner with each of the groups and the divisions around the world, looking at how we can be much more effective in our marketing, using our scale, but at the same time, making sure that there's local relevance, where we're using the marketing that we've developed across many markets.

So, what we're actually seeing is not only an increase in marketing, if you will, off of the larger base for 2006, but also looking at -- continuing to look at ways to increase the efficiency of that spend as well as we use the cross market.

So I think we're going to see kind of a double benefit from that in 2006.

Relative to price mix benefit in it the quarter, it's -- it was 3% in the quarter.

It's 1% full year, but 3% in the quarter.

Which is pretty much in line, I think, with what the bottlers have been getting, a lot of that, though, was an increase because of better results in our finished product business for the top line, particularly Germany and North America.

Now, you will also see, though, because we're not declaring victory on this one with the 3%, because you will see that cost of goods also increased because it was coming from the finished product business.

So it actually -- it did not all come through at the gross profit line.

So we're still committed to our model that we should be able on a long-term basis to get about 2%.

We're starting to see some of that come through, but we're not declaring victory at this point.

Can I just add on the marketing -- because I think this is important.

And it's part of what I did say in December, but it's worth repeating.

We've been on a very significant journey to put real structure and discipline into how we go to market and you're starting to see some of that come through.

That rebasing is part of that 18 to 24 months that I talked about in terms of the overall turn-around.

And within that discipline is part of what Gary talked about in terms of what I call stopping the pendulum in the middle, between the local and the global, which then does drive costs out of the system.

But is putting in a very collaborative model in term of exchanging ideas and -- right across the globe.

And we are starting to get traction on that.

And part of that, you've seen during the back half of the year, you will see more of it in '06.

But it is a journey and I have wanted to go, in a way, slow in order to go fast.

And you will start seeing that over -- after we get through that 24-month period.

You will start seeing that ramp up.

But I do want to emphasize the amount of work that we've put in in terms of having a disciplined process to the allocation that you're talking about and to then to pursuing where we think the highest growth, both in terms of volume but also in terms of margin and profit where those come from.

Thank you very much.

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

Yes, good morning.

I just want to follow up on the long-term pricing algorithm.

As you mentioned, Gary, you're getting about 1% for 2005 in price and mix and your long-term algorithm calls for about 2%.

Do you expect to hit that in 2006?

And if so, what is going to change compared to this year?

Yes, Robert, thanks.

And very good question.

I would say it's a combination of several things.

Number one, I think what you started to see in 2005 was a real emphasis on quality of growth and so while we look at the volume increase, the 4% for the year, the quality of growth was significantly improved over prior years and I think as we continue, as Neville said, continue to drive with a renewed focus on CSBs and we really believe we can drive CSBs, that quality of growth will definitely drive margin improvement for us.

Secondly, we've also talked about that our bottlers, over the last four or five years, we have intentionally been very focused on improving financial health of the bottler system.

Most of the bottlers are now back to or above their weighted average cost of capital.

So we can now both move to grow together and so that will help us also with that 2% price mix.

And as we get more normalized price increases.

And then a real focus, not only on quality of growth, but a focus on mix -- and we really started seeing that coming through, particularly in North America this past year, as we really focused not only on diets, where, as you know, we get better margins, but also particularly on the energy category, where if you think back to the beginning of 2005, we were basically nonexistent in the energy category and by the end of this past year, we were a solid number two in the category in the U.S.

So I think the mix and that balanced quality of growth, all of those together, as we continue to focus on that, will lead -- lead to that 2%.

Now, with that -- I'm sorry this is a long answer, but I just want to be, -- go through all of that.

As we think through -- I said that northwest Europe would have muted growth this year and as you think about that, that is a high margin country, as well.

And back in December at our December analyst meeting, if you remember, I did say that there were some markets, if you think about the Phillipines, India, and northwest Europe, that would be a drag versus where we needed to be, but we also are seeing significantly improving health in the Company on bottlers, as well, which are not included in the model and that's why we feel very confident on where we are.

And if I can just follow up, do you expect a higher concentrate price increases to be benefit in 2006 or is it more in 2007, when your highest incidence rates in Mexico go into effect, for example.

We, in fact, every year, increase concentrate prices for almost all bottlers throughout the year -- throughout the world.

And those have been implemented.

It just -- it happened that everyone heard about the ones in Mexico but we actually do that on a global basis every year.

I would expect to see concentrate pricing back into a more normalized pattern than what we've seen in the last few years so we should see a benefit for that coming through in 2006.

Great, thanks.

Thank you.

Your next question comes from Carlos Laboy with Bear Stearns.

Good morning, Neville, to stay on that issue, since informing these Brazilian and Mexican bottlers of a modification to the pricing arrangement, you've now had two large bottling owners allocate almost $400 million to alternate food and beverage investments and some of the other bottlers are telling you that they're considering similar investments.

Is this in conflict with your objective of accelerating execution and does it worry you that these bottlers are putting their bottling platforms and their bottling cash flows to work in long-term investments elsewhere, away from those brands?

There's a very clear answer, and it's absolutely not.

And you have been more delicate in your question than you were in your paper the other day.

The reality of our system and the reality over 120 years has been that our bottling partners are invested in many businesses.

You've got SAB Miller, which is invested in beer, Femsa which is invested in beer, their beer business has expanded in Brazil, which is a natural thing to do for a brewer.

Even where you've got ownerships which are focused on CSDs or businesses, which are quoted and focused on CSDs, if you take and follow HBC, the families have got a multiplicity of other investments and they take their dividends and they invest them in hotels and everything else.

This has gone on for 120 years.

Many fortunes built out of it because it is a very strong cash flow business.

The issue really is are the investors or are the bottlers keeping sufficient cash in order to be able to invest against the business plans that we have for the growth of the plans and the growth of the business.

We review these plans with the bottlers.

It's part of the bottlers agreement.

There is a requirement in the bottlers agreement for them to invest sufficiently against the marketplace.

And every single one of the bottlers you're talking about, and that would include Coca-Cola, Amytal with their approved acquisition of SPC Ardmona last year.

Which we voted in favor of at the Board.

Each one of those has met that criteria.

So that's part of the business planning process.

That's part of the contractual arrangement with all of the international bottlers.

So I honestly think that as people look at the excess cash being invested in some other businesses, that they're chasing something that is not an issue, is not going to be detrimental to the business and which is not a depth definer of our relationship with the bottlers.

At all.

So I think this is a very small issue that is being blown into something that's seen to be much bigger than it is.

Thank you.

Your next question comes from Caroline Levy with UBS.

Good morning, everybody.

I was wondering, first, if Gary could just clarify why marketing -- the marketing upspend would affect corporate expenses?

If you could go into that a little bit.

Secondly, on equity income, the rate of growth slowed dramatically in the fourth quarter, if you could just address that.

And I was also wondering, bottlers in North America have started to look outside of the Coke system for brands, which seems inconsistent with the stepped-up innovation that you've delivered and are promising.

I'm just wondering what your attitude towards that is?

And maybe you can wrap into that, just how you see things going with CCE?

Okay, Caroline, first on the marketing and corporate, there are two components.

Number one, all of the innovation, or primarily all of the innovation spend is in markets, in corporate.

And it's really a corporate function.

So even though it's global, it's sitting in the corporate segment.

And that's the reason, and as we said, that because of that, it would impact the fourth quarter.

In addition to that, within corporate marketing itself, as I talked about, the new global campaign, et cetera, has been developed from the center and in corporate, in collaboration with the business units, but classified in the corporate segment which is why you're seeing the increase in corporate expenses in marketing and innovation in the fourth quarter.

Relative to the bottlers looking outside of the Coca-Cola Company for brands, I can -- I guess maybe I almost need to ask you that -- for some specifics, but I can give you -- I know that there's one specific, a very small innovative brand that Coke Consolidated was picking up.

That actually is something we've discussed with them.

The owner of that brand, we know very well.

It's really one of those where we need to just kind of see does it have legs, but I think by and large with all of our bottlers, we have a very good relationship about, together looking at the market, looking at what consumers want in the beverage categories and then delivering against that jointly.

So I'd say by and large it's not an issue going forward.

And, Gary, the equity income growth slowing?

Oh, I'm sorry, on equity income, it's primarily because as we said in the release, there was about $0.02 per share impact on our results from some charges at an equity investee, so, it in fact, are some charges that's coming through that equity income line.

And also just following up on that corporate expense that you described, the way that it broke out, I guess the sort of $900 million for the full year is the new base but it's skewed very heavily in '05.

Should we just even it out for '06?

Well, first -- it's spread unevenly because, primarily because of the marketing curve versus the 2004 base.

Okay, because if you think about the increase in 2005, of the extra spend, primarily hit in the third and primarily the fourth quarter, so, you're seeing the percentages increase significantly, but it's because of the '04 base.

So 2005 actually should be now a more normalized base on which to base your 2006 models.

Thank you.

Okay, thanks.

Your next question comes from Judy Hong with Goldman Sachs.

Good morning, everyone.

Neville, there's been a lot of chatter about the Coke system testing the warehouse delivery for POWERade in North America.

I just wanted to get your thought on this topic and maybe more broadly speaking, just get your latest thinking on how you envision the bottler distribution system really evolving over time?

Well, that's a very good question because -- I want to answer this first globally...

What we are dealing with and what we are responding to and responding positively to are the changes that are taking place with regard to our customers.

And how they want us to serve them in order to be able to serve the market.

One of the things that we've ramped up, as you know, is our overall customer level of expertise and I won't go through into all of those -- through all those details on that.

But part of that is what we call a collaborative customer relationship model, which we are developing with a number of customers.

And that means responding to their needs in a better way than we have in the past.

So that's something that we have agreed around the world with our key bottlers in terms of doing that.

Therefore, the test that you see in Wal-Mart, which is only in Texas, it's a small test at the moment, is part of, in fact, undertaking a review of how we might be able to go to market better with Wal-Mart and we will monitor those tests and we'll discuss with the other bottlers.

Because it's actually not our test, it's a CCE test, wholly within the CCE territory, but we're doing that in a number of markets around the world.

And, in fact, it is part of an overall look at systemic profitability.

Therefore, it's part of a broader strategy and you will see summarized what's coming out in the next six weeks to two months, which will reflect the fact that we are addressing the overall system efficiency in various countries in some new ways and some new agreements, which benefit the total system, because at the end of the day, we're looking at the aggregate price, in other words, the price that meets the retailer and then meets the consumer.

And if we can work with our bottlers to take cost out of that system to be much more effective and efficient, that's to our benefit and to the benefit of all the brands.

So I've put this in a very broad context, but very deliberately so because it is part of a real strategy, with our bottlers, I will be down in Sidney with our top bottlers, six bottlers, at -- talking about these issues for a couple of days at the end of March again, very active dialogue that we have in terms of looking at different ways to market.

So I think you will see that evolve.

It will evolve on a rational basis with a rigorous analysis as to what the cost benefit of that is and clearly sometimes, not everyone likes to embrace change.

You've seen that with some of the other things I've done.

But if change is to the benefit of our consumers, and for our bottlers, and ourselves, we will move ahead.

Great, thanks.

Your next question comes from John Bucher with JPMorgan.

Yes, good morning, everyone.

Gary, you mentioned the fact that you're seeing an improvement in the quality of the volume.

And to that point I know you guys -- you don't have a ton of bulk water in your volumes.

I know you've been trying to get rid of it.

Can you give us an update on where you stand relative to bulk water?

Are you completely out of it at this point?

John, great question.

I'm looking around the room to see if anyone can give me an answer.

But -- John, I think completely out would be too strong.

It is in no way significant.

Anything that we have we have is at the edges.

It's pretty small right now.

I mean, can you give us an idea of how much -- was it 2% two or three years ago and you've drawn it down mostly to Zero?

I'm trying to figure out if it's been a noticeable drag on results over the past couple of years, at least from a volume standpoint.

John, I will have to get back to you on the data for that.

Yes.

Significant it will not be, but it will be noticeable.

That's -- that's what I would say.

Directionally I will get the numbers to you.

Okay, thank you.

Thank you.

Your next question comes from Marc Greenberg with Nicholas.

Thanks, operator.

Good morning, everyone.

Neville, on your long-term targets, when you talk about '06 and assess us against the targets beginning in '06, do you expect to perform at least in line with these targets in '06 on a currency neutral basis?

And then secondly, if you could, could you characterize the -- I don't know how to phrase it, but the pain/gain dynamic out there among your managers if you do or do not hit these targets in '06?

Okay.

Let me deal with pain/gain, the pain game.

But I would rather say it's the benefit game because obviously we're driving for people to exceed the targets and I am going to go back to '05.

The fact that we have exceeded our internal targets in '05 and I pointed to the fact that that is the first time for many years, is actually very beneficial to morale because people feel that they can actually win again and they're able to achieve their targets.

And honestly, I can't overemphasize the benefit of that.

So the targets for '06 are certainly within that benchmark that we have.

And they're realistic and they're achievable and peoples at risk remuneration is going to be linked to those targets.

And as I say, we're going to stay within -- to hold the range of the benchmarks that we've given you.

We must deliver against those and the reward comes by overdelivering, but I'm not promising overdelivery in '06.

That's not where I'm headed, but I'm pushing the system to better execution, to enable us to hopefully be able to do that as we go into the future.

That's my goal.

Great, thank you.

Your next question comes from Lauren Torres with HSBC.

Good morning.

Just to pursue Mark's question a little bit more, my thoughts are for '06 and trying to achieve the 6 to 8% operating income growth targets.

Seeing '05 somewhat difficult getting some operating leverage here, what gives you confidence in '06 that these targets, particularly that 6 to 8%, is achievable in '06?

Lauren, Gary.

A couple of things -- I'd go back to some of the prior comments, is around quality of growth.

That's number one.

And where the growth is coming from.

The second, and we have not really discussed it today, we have in the past, is that if you think about the marketing spends that we had in 2005, that $400 million increased step-up, most of that, as we have talked this morning about cycling and quarter spreads and those kinds of things, as I've said, most of that marketing actually hit in the fourth quarter 2005, a large percentage of it.

Marketing does not immediately pay back, particularly when it's brand-building.

So one of the things I think we have is starting with quality of growth, starting with a real focus on mix, but also we strongly believe the impact of that marketing from the third and fourth quarters particularly, then helping us in 2006 as we go forward and then continuing the spend on the brands, off of that increasing -- off of that new base that we have, additionally our innovation pipeline, we started really ramping up last year.

We would expect to continue to see that ramp in 2006 as we introduce new innovations and that's not just new product variance as new brands, but it's new packaging.

It's ll of the areas of innovation.

So I think if you think in terms of quality of growth.

If you think about the marketing spend and improving marketing at the same time and the innovation that was ramping during '05, it should give you some confidence going into 2006.

Okay.

Thank you.

Thank you.

Your next question comes from Ann Gurkin with Davenport.

Good morning.

Neville, you reviewed the transition year, I was wondering if you'd comment on where the progress has been greater than you expected, where it's been slower than you expected, kind of give us an update, progress report?

Well, I -- I think that as I talked in around about May -- March, April, May, so, if you go to the beginning of the year, I was not happy at that time with the traction we were getting with marketing and innovation, and that's why I made the change, so that is part of '05.

I would say that I'm extremely happy at how quickly we've managed to wrap that up and deliver better marking and begin that innovation process.

So I think we're back on track at the end of the year, but we weren't at the beginning of the year.

The other thing that I really want to emphasize is this whole issue of morale.

That has been significantly improved.

We're talking about 10%, 12% improvements, as we measure against some of the key morale measures and that is very significant.

This business is now starting to believe that it can win again.

And we monitor that.

We track that.

And the fast-moving consumer goods business, yes, we have to have great marketing, yes, we have to have great innovation, but it all comes from people and people who are absolutely well motivated.

And that to me is a major success, although it's something you will never see on the bottom line until the innovations and marketing come through.

The -- I think that there are really two areas that I'd point to as being disappointments, northwest Europe.

I think we've talked about that.

And then also the Phillipines, where I obviously have a lot of history and where the execution in the marketplace has resulted in some very disappointing numbers.

Even though we're holding -- largely holding share.

We haven't lost a lot of share in the Phillipines.

The market -- we have contracted the market by not doing the right things.

We have got a program to try and address that, but that is going to take time.

So, that would be my biggest single disappoint.

But we've made wide-ranging progress.

It's not just a couple of parts of the world.

I pointed out to the strength of Latin America, I did mention Africa, it's 5 to 6% of our business, but again, strong, steady growth in a difficult environment.

Then of course, the Chinas and the Russias continue to do very well in central and eastern Europe and, of course, through to Turkey.

That's very, very strong and a very stable growth in Japan.

We have never highlighted Japan as being something that was going to accelerate our growth rate in a major way, but given its level of profitability, we need good, solid growth there and we see that coming through in '05.

And then the last thing I would point to is the -- working with our bottlers.

In fact, last night I had dinner with the Chairman of CCE and we were just talking about how much better we were working together as a system he'd be either at a meeting in Texas watching our people work.

He spent two days out there and said, you know, I won't give an exact quote, but he did say there was no nonsense, let's put it that way.

And today it was all about the nitty gritty, all about what we needed to do together to build this business over a three-year timeframe.

You can ask them that question tomorrow when they release their results.

Because I'm sure he will bear me out on it.

I do think -- although there's a noise level, which I believe is incorrect, that the relationship with the top to top bottlers has significantly improved.

Right.

Thank you.

Your next question comes from Matthew Riley with Morningstar.

Good morning, I just had a quick question on long-term CSD growth.

It seems like the Company might be in store for kind of a prolonged adverse mix shift.

As I know many times you've talked about how CSDs are the most profitable category.

That is, we keep on seeing double digits in noncarbs and water.

How can you keep profitability up despite this kind of long-term trend?

I think number one, that we've demonstrated that there's growth still in carbonated soft drinks and we've demonstrated that in '05.

That's something that I've said continually since I came back in June of '04 that I did not believe that growth in carbonated soft drinks was over and we've seen a 2% growth this year.

That's in line with our targets.

So then there's the other side of the equation, which is the growth of noncarbs and you point to water.

Water is lower margin, but not everything is lower margin.

In fact, if you look at energy drinks, if you look at sports drinks, where we're getting very good growth, you will see within that, that we are able to get better margins.

And I will -- we're doing extremely well.

If you go back to a data point on that, Kennadien who does global research, something that we don't normally talk about and something that you don't normally see, they've come up with some numbers for juice and sports drinks, globally for the year.

They say that we captured 37% of the growth in juice and juice drinks worldwide, that gives us a 9.7 share worldwide in '05.

And in sports drinks, we captured 57% of the growth.

And in our global share of sports drinks is 25%.

That's putting POWERade and Aquarius, our two sports drinks, together.

POWERade, as you know, that grew strongly, but Aquarius, our other sports drink, grew 25%.

So the equation is not one of noncarbs being unprofitable.

Some of them are narrower margins.

Water, clearly, but we're moving that again to more value-added with better margins, with the flavor extensions and, of course, the upcoming launch of DASANI Sensations in the United States.

So, I believe that that -- the global trends fit our model.

That's how we put it together.

And the real pushback is I believe there's still growth in CSDs.

Do you think that 2% can accelerate?

Well, I -- in our model, it's 2 at the moment.

I think that as we address some of the issues that we will be able to probably do better over time.

But I'm not making a specific prediction for 2006.

Operator, I think we're out of time.

I want to just first of all clarify something in my opening comment where I referred to the combination of diet carb -- diet soft drinks and noncarbs.

My funny accent sounded to some people as if I said 40%.

I said it's 49% of the North American business.

I will get a translator next time.

So thank you, everyone, for joining us this morning.

I -- as you heard, believe that we've had another solid quarter.

It's in the books.

And that the plans are well in place for 2006.

Again, I'll repeat, it's about accelerating our execution.

As we continue to turn this ship around and, in fact, to now move it forward.

So I look forward to talking to you again, the first quarter call in April.

Thank you very much, everyone.

This concludes today's conference call.

Thank you for participating.

You may now disconnect.