可口可樂 (KO) 2006 Q1 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 first quarter 2006 earnings results conference call.

All participants will be in listen-only mode until the formal question-and-answer portion of the call. [OPERATOR INSTRUCTIONS]

I would like to remind everyone that the purpose of this conference is to talk with investors and therefore questions from the media will not be addressed.

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

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

Good morning and thank you for being with us today.

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

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

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 cautionary statements contained in our earnings release and in the Company's most recent SEC report.

In addition, I would also like to call you attention to the fact that we have posted schedules on our Company Web site at cocacola.com in the Investor section which reconcile our results as reported under Generally Accepted Accounting Principles to certain non-GAAP measures which may be referred to by our senior executives in our discussion this morning and from time to time in discussing our financial performance.

Please look at our Web site for this information.

Now let me turn the call over to Neville.

Thank you, Ann, and good morning.

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

We're not going to spend too much time on the details because my intention this morning is, first of all, to make a few observations about the quarterly results and then Gary, as normal, will follow with an overview of the financials and some additional perspective on the current year on 2006.

I'm pleased to report to you this morning that we've achieved yet 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.

As a result, we were able to deliver unit case volume growth ahead of our long-term targets even with the shift of the Easter holiday into the second quarter.

That top line growth is also translating into improving revenue performance.

Now that may not be immediately apparent in reported revenue growth, and Gary's going to touch on this in just a minute.

But keep in mind that we had a negative 3% currency impact and a negative 2% structural change impact in the quarter.

I'm please to note that the improved revenue performance is also beginning to flow through to the bottom line.

We delivered currency-neutral ongoing operating income growth of 6% which is within our long-term targets.

And we did this even as we continued to support our brands through solid marketing investments and saw the impact of softness in our Georgia coffee business in Japan.

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

In addition and equally encouraging is the strength of some of our more developed markets.

North America grew 2% and delivered solid top and bottom line P&L results.

Mexico grew 8% through the strength of trademark Coca-Cola and a total CSD growth of 6%.

And Australia delivered double-digit trademark Coke growth through the tremendous success that we've had of the Coke Zero rollout.

Finally, I'm encouraged by the progress made this quarter in Northwest Europe as the region was able to reverse declines from prior year and grow 1% in the quarter.

Most importantly, I'm confidant that the business is on a solid base heading into 2006 and that we are on track to deliver our objectives.

To give a little more perspective on the quarter I want to highlight three areas for your attention: Carbonated soft drink trends, progress on non-carbs and our marketing and innovation pipeline.

Firstly, CSD trends.

Globally, our CSD trends are heading in the right direction.

Last year, as you know, for the first time since 2000, we grew unit case volume for CSDs in excess of 2%.

This quarter we accelerated the trend and grew CSDs 3% with regulars and diet growth of 3% and 5% respectively.

As a result, CSDs contributed more than 50% of our total growth in the quarter led by our Coke, Sprite and Fanta trademarks.

From a share standpoint, we continue to see improvements as both the absolute volume and value share increases this quarter represent a full one point positive swing in the trends from the first quarter of last year.

In Latin America, CSD growth continued to drive results.

Trademark Coke across the group grew over 6% in the quarter as strong marketing plans and excellent bottler execution drove share gains.

In North America carbonated beverages were slightly positive with solid pricing behind that in the marketplace.

Importantly, we're doing very well in immediate consumption with share gains coming through stepped up innovation and with foodservice volume growing mid single digits.

In Australia, some of you may have been keeping up with the success that we've seen on Coke Zero.

This brand has been an enormous success and demonstrates the true power of the brand Coca-Cola and of our marketing and of our system execution.

In a market with total CSD per capita consumption close to 500, trademark Coke grew by double digits this quarter thanks to the efforts of the entire team there and some insights that we learned form the North American launch of Coke Zero.

Now even in Northwest Europe where we are addressing considerable operational headwinds, carbonated soft drinks grew 1% in the quarter contributing to overall business growth there.

And, of course, I already mentioned countries like Chine, Turkey and Russia which continue to show very strong growth.

Now let me talk about our non-carb portfolio.

We're also making very solid progress in this portfolio on the platforms of sports drinks, water and juice and juice drinks, and all of them grew double digits for the quarter.

POWERade, Dasani and Minute Maid once again delivered strong results and we continue to see solid results from other important brands.

Brands such as Aquarius and Bonaqua which are largely in Europe.

Both of these grew double digits in the quarter and we continue to believe that we have strong growth ahead for these brands.

Because of the progress we've made in the categories, our non-CSD beverages as a percentage of our total beverage portfolio advanced another 100 basis points during the quarter, and that is also considering the fact that we've had CSD growth.

Now once again this quarter we improved global share in every one of our key non-carb categories with one exception, teas and coffees, and I'm going to touch on that in just a minute.

We also increased value share ahead of volume share in the majority of these categories as we increase our focus on margin enhancing opportunities.

The one outlier on our non-carb growth was Georgia coffee, in which our results came in below our expectations for the quarter.

Now last Fall, Japan launched a campaign to recruit [newer] users to Georgia coffee.

It was a risk.

There was a bold new look that was rolled out and a whole new marketing campaign.

Unfortunately, it did not meet our expectations and that's a possibility that always exists when we take risks.

And as the new look and the new message actually confused our core consumer base as we tried to widen that base.

In the first quarter we felt the full impact as the initial offtake slowed.

So we're now working aggressively to address the situation by implementing a fully integrated relaunch to be supported by our refocus on core flavors, a new advertising campaign, and some new product introductions.

We expect these plans to be implemented by the first of May and, therefore, we believe Japan will return to growth in the second quarter.

Now obviously, I'm disappointed our results in Japan weren't better but I believe that the quarter demonstrates some very important changes in our business.

First, we're taking more risks in seeking new ways to grow with the business.

And second, when those risks don't meet our expectations, we're able to learn the right lessons from them and to move quickly and decisively to recover from them.

And finally, and most importantly, even with taking these risks we still are able to deliver solid overall results.

Now talk about the marketing and the innovation pipeline.

I wanted to briefly mention the improvements in our marketing and innovation pipelines, specifically in North America, but also around the world.

Since the end of 2005 we've introduced significant new products including Coke Blak in France and in the U.S. just recently, Tab Energy, Vault, Dasani Sensations, and Simply Lemonade in the U.S.

We've also launched in North America the first fully integrated cross media campaign for brand Coke in our Company's history, "The Coke Side of Life" supported by an increased level of marketing investment.

I previously mentioned our launch of Coke Zero in Australia which has been highly successful as our entire system mobilized to launch this product.

Let me give you some numbers on this.

In a matter of days our bottling partners reset 50,000 [ipeds], placed 5,000 new coolers and built 1500 displays.

Behind that we invested heavily in ad support through TV and media and a strong outdoor campaign.

As I already mentioned, the results of this we grew Coke brand overall by double digits in the quarter.

So let's take Coke Zero.

Trial has been 50%.

Now that compares with an average for an FMCG launch of 8% and over 30% of consumers have now become weekly drinkers.

Now I go into this for a few reasons.

There are details here that I think are important.

It demonstrates what our system's capable of achieving when we work closely together.

It demonstrates that even in a developed market we can generate strong double-digit CSD growth and it demonstrates the power of our Company to leverage ideas around the world and learn through that process, all issues that I've mentioned to you in the past.

Because using insights from North America we focused heavily on the real taste and no sugar concept and we're now taking these learnings from Australia, and we will be applying them to Western Europe where we will launch Coke Zero in Great Britain this summer.

In summary, this quarter underscores that we are on track to meet out long-term growth targets.

These strong introductions combined with the equally strong pipeline of innovation in both our carbonated and non-carbonated beverage brands give me confidence that we will achieve our business objectives, and in doing so, creates sustained growth and value for the benefit of our shareowners and our stakeholders.

Let me now just turn the call over to Gary.

Gary?

Thanks, Neville, and good morning.

As you saw in the release, we reported earnings per share of $0.47 on a diluted basis for the first quarter, an increase of 12%.

This included a $0.02 impact primarily related to non-cash impairment of some assets in the bottling investments operating group in Asia.

Therefore, our adjusted EPS after considering these items was $0.49 per share, an increase of 4% over the prior year.

At the net revenue line we reported revenue even with the prior year but there are a few things specifically impacting the revenue number.

First was a negative 2% impact of structural change which was primarily from the transfer in Spain of the canning rights to our bottlers, which effectively moved that portion of the business to a concentrate model, having no material impact on our gross profit or operating income.

You may recall that we disclosed that we were going to make that change, disclosed that in our 2005 10-K.

And secondly, relative to revenue currency had a negative 3% impact.

Therefore, net revenue on a comparable basis increased 5% and if you look at that, that's on gallon growth of 4% plus 1 point of price and mix.

Within price mix there are really two factors.

On the plus side was positive pricing and very good product mix in many markets such as North America, Australia and Latin America.

However, with Georgia coffee coming in below expectations, as Neville said, it did have an impact on country and product mix.

We grew operating income by 3% on a reported basis.

As I mentioned previously, we incurred a charge in the quarter so after considering items impacting comparability in the current and prior year quarter, operating income increased 2%.

We were also impacted by a negative 4% effect from currencies, so on a currency neutral basis we grew operating income 6% in the quarter within our long-term targets.

In the quarter we repurchased approximately half a billion dollars of our stock.

As a result, our average shares outstanding in the first quarter of 2006 were about 44 million shares lower than the average in 2005 adding 2 percentage points to our earnings per share growth in the quarter.

In terms of dividends, the board raised the quarterly dividend 11% to $0.31 per common share, which is equivalent to an annual dividend of $1.24 per share, up $0.12 per share from the last year.

I also wanted to touch on the first quarter cash flow statement.

You will see a decline in cash from operations, and it's driven by an increase in working capital on a year-over-year basis.

The increase was really driven by just a few key items.

First was the settlement of the stepped up marketing accruals from the prior year along with timing of a few other marketing payments this year, and that is really a result of the stepped up 400 million of incremental marketing that we had last year.

You may recall that Neville and I talked about that, that most of that would actually hit the market in the fourth quarter and you're now seeing that come through as we make those payments in the first quarter of this year.

So a one-time item, if will you, on the cash flow statement.

Second was a tax payment of about $200 million related to the tax repatriation that we did last year as well.

We accrued that at the end of the year, made the payment in the first quarter, and therefore, again, another one-time item relative to cash flow.

And finally, we are lapping the timing of a one-time insurance payment of 75 million that was received in the first quarter of 2005.

So if you consider all three of those you will see that all pretty much one-time and cash flow still strong.

Now let me address a few other factors that we see impacting our outlook for 2006.

As Neville stated, and as we outlined in the release, with the progress to date in the pipeline that we have in place, we believe we're on track to deliver against our objectives.

Our read on the macroeconomic outlook for the year remains relatively positive, especially in many of our emerging markets.

The only caveat continues to be economic trends in Western Europe, which we believe will have muted growth for the year.

For input costs, we continue to see upward pressure, but we're actively managing those pressures.

Although we do expect to see some increase we believe it will be in a reasonable range.

SG&A.

SG&A increased 2% in the quarter on a reported basis and 4% after considering items impacting comparability.

Those items are primarily in the bottling investment group.

These trends reflect increasing investments in marketing, partially offset by a 3% decrease in currency.

What I'd say on SG&A is that we've continued to invest behind the brands.

You also are seeing an increase, substantial increase, because of structural change within the bottling investment group in sales and service, and then when you boil it down to general and administrative expenses, we have gotten leverage in that area with actually a decrease from the prior year quarter in G&A on a currency neutral basis.

With regard to taxes, we ended up the quarter with an underlying tax rate of 24%.

Our best estimate for the remainder of 2006 is that the underlying rate will continue to be 24%.

Now let me move to currency.

We saw a negative impact from currency for the quarter on operating income of 4% after considering items impacting comparability.

This was slightly better than our initial expectations, as we're able to benefit from an effective hedging strategy that mitigated some of the overall downside.

We continue to put coverage in place and are effectively covered now through the first half of 2006 on the euro and the yen.

Based on spot rates as of last Friday, and the expected impact on the coverage in place, the negative impact on operating income would be approximately 3% for the full year 2006, including the impact of the first quarter.

And on share repurchase we continue to expect to repurchase between 2 and $2.5 billion of our stock.

Before I close, I wanted to touch on our Form 8-K that we filed two weeks ago which contained the additional segment details for the bottling investment group under the leadership of Irial Finan.

Besides throwing many of your models into disarray, I hope you're able to walk away with some of the same conclusions that we've reached several moths ago which was the impetus for Irial's role.

There's no doubt that a business representing close to 20% of our revenues, and with negative margins, provide significant opportunities to improve, and I think thanks to Irial's leadership we're addressing that issue.

And as you can see from the first quarter results are already making strides to improve those margins.

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

Now if I could turn it over to the Operator for the questions.

Thank you.

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Bryan Spillane with Banc of America Securities.

Hi.

Good morning, everybody.

Neville, a question on Germany.

In the press release it cites that about -- relative uncertainties around the mandatory deposit legislation change, so I'd like to know if there's an update there on that situation and also if you can give us an update on your progress on consolidating bottlers there?

Good morning, Bryan.

Bryan, the reference that we're making with regard to the deposit changes which comes in May 1, is that it certainly is going to, to some degree, discombobulate the trade because various players are going to react in different ways and consumer preferences are going to change around.

So we think there's a level of uncertainty around that with regard to the package mix.

For example, we are relaunching cans.

Now, certain of the discounters will probably not stock cans, but there will be aggressive competition, we believe, from the like of supermarkets with regard to cans.

So that's one piece.

We are actually in a very good position to be able to answer all of those needs, but again, are the consumers going to go back to cans in the sort of volumes that existed before the deposit -- before the new law came in?

Probably not.

That was about 21% of our mix.

So because it's going to be a moving situation, and not everyone has decided exactly what they're going to stock we're just highlighting that as causing some confusion in the quarter.

We don't think that that's going to significantly change any of our overall results in Germany, because we planned for this, we knew that that was going to happen and we're still on track with regard to our overall plans in Germany.

Of course --

Has there been any change in timing in terms of implementation?

Well, it may leak into June, but it's going to be a second quarter event largely.

And, of course, we've got the World Cup coming up, which is a real positive with regard to Germany, which I'd like to highlight.

We're making generally very good progress in the German market.

We are now available in all the discounters, Barr, Aldi, which have never stocked brands, although now they're discussing stocking brands.

So the German situation we think is pretty positive.

You would note there was a 1% decline.

I don't think that's material given that by the way parts of Germany were closed down with record snowfalls, then you've got the movement of Easter, et cetera.

So the German recovery, I would say, is on track.

Second part of your question, Bryan, those discussions are ongoing.

They are very cooperative discussions.

I actually spoke to the head of the bottlers association just last week.

We've got some follow-up meetings coming through.

I would anticipate that we're going to know one way or another sometime around August, September whether we've actually finalized and closed and there should be some interim announcements before then, but it has cleared the air in terms of the ongoing working relationship, which I think is very important.

They have indicated to us that they are working in the marketplace as if we were one system regardless of where we're going to come out with the negotiations, and I think that's really what you should look at.

I'm still hopeful but until the ink is dry one doesn't have an agreement.

Okay.

Thank you.

Remember, of course, that one of the larger entities, Bremmen, we did acquire, so that has moved that process forward by, you know, a considerable degree.

Thanks, Bryan.

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

Good morning, everybody.

Couple of questions.

Gallons shipped were below case sales.

Can we assume that that will catch up during the year?

Hi, Caroline.

Gary.

Yes.

And in fact let me address this.

And this is going to sound a little technical but the case sales that we report in the first quarter are average daily sales.

It's kind of like what you would call same store sales, because the way we report on a four-four-five close, there was actually one less day in the first quarter of this year and there'll be one more day in the fourth quarter of this year.

If you actually went to actual cases instead of average daily sales cases, they're actually four and four, and so they're right in line.

They're right in line.

Okay.

So there won't necessarily be extra gallon shipments in the second quarter as a result of this?

No, no.

Can we also talk a little bit about the cost opportunity in Germany with or without the consolidation of the rest of the bottlers?

That is very clearly something that is high on Irial Finan's agenda.

There are a couple of elements to that.

One is, of course, the integration with Bremmen.

We saw that there were synergies there and that we're going to be able to bring those to the bottom line.

I think you'll see some of that coming through, through the year.

Secondly, looking at the overall structuring of the German business, and we're currently actually in discussions with the supervisory board which, as you would know, also involves the union representatives, about how we can improve our go to market and rationalization.

There's then a third piece which, frankly, we would not see too much of in '06 but for which we are planning and that is, if we do sign with the bottlers there'll be a more significant ability to save costs at the bottling side.

I actually think, given the level of cooperation that we have in discussions with the bottlers even if we don't bring about a one-bottler system that we will have consolidation savings coming through.

Because what this exercise has shown to the independent bottlers is the fact that there are opportunities and that's why in the negotiations -- and again, a deal is not finalized.

Remember that.

Most of those who have indicated they're willing to sign have actually said that they want to take shares, in other words, still be part of the future of the bottler.

And that therein indicates their confidence in the plans that we have for a bottler that's going to have improved profitability.

So I can't give you numbers, Caroline, but there are sort of three elements to that, and obviously it's a major focus.

It's a major focus for me, as you know, I'm involved in the discussions.

But also it's a major focus for Irial.

The final point I'd make is, of course, we did bring in new management and they have highlighted a number of areas of savings which they're going to implement in '06.

Thank you.

And just Japan.

Was part of the problem in Japan that Georgia coffee is particularly profitable and, you know, is that going to be, therefore, a drag on the second quarter profitability, because by the time you relaunch, et cetera, you've still got that continued drag there?

Well, I mean, Georgia coffee is a very profitable brand, there's no question about that, but we don't think there will be a drag either on profitability or on volume in the second quarter.

Thank you so much.

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

Good morning, everybody.

Question on North America are you satisfied with the market share trends and how the innovation thus far is performing, execution of CCE just in the backdrop of what the overall LRB industry growth has been as you look out over the balance of the year, you're still going to be rolling out a number of new products.

And then just a second question for Gary.

On the SG&A line you said there was leverage in the G&A part.

Can you just let us know on the DME how much that was up in the quarter?

Thanks.

Good morning, Bill.

I mean North America is still work in progress and is obviously a work in progress in terms of issues with the bottlers, in terms of POWERade, et cetera.

If we take CCE they are still settling in the reorganization that took place in the middle of last year in terms of improving their route to market and improving their effectiveness particularly in the on-premise trade.

You'll have seen, though, if you look at some of the share numbers, [pru] shares and convenience and petroleum, for example, which reflects that the new organization is working.

There is some difference in some of the share numbers.

Nielsen, of course, gives you one picture, but all of the other share numbers that we've seen, overall, if you look at our total portfolio, that would include foodservice, we have in the quarter, where the latest numbers we have up to the end of the quarter show a positive share swing of .3 of 1% for the overall portfolio.

So we've got to be happy with that.

I think we're also happy with the initial success of Vault, of Tab Energy, obviously of Full Throttle.

Now we have the rollout of Fury and that's allowed us to gain share, pretty significant share in the energy category.

If you look at the energy category, Bill, if you think back to the beginning of '05, we had less than 1% share.

Now if you pull it all together, including Rock Star, Van Deutsche, Full Throttle, Tab Energy, and you can put Coke Blak in and out of that category as you wish, but I mean we're a clear number two, I mean that's a major success in a very short period of time, and I think speaks volumes for the ability to execute.

Am I happy with where we are?

No, not yet.

We still, you know, have issues out there.

We still have gaps.

You can see them as you go around the marketplace, but the good news is that there's no difference of opinion around that with regard to our major bottling partners.

They see it, too, and we're working together, and much more cooperatively than I think, they will tell you, much more cooperatively than they have in years.

Don't pick the number but it's quite a long number of years.

And that, I think, is an important piece of the equation.

I'll hand over to Gary for the second part of the question.

Hi, Bill.

Relative to the SG&A line in the quarter, both sales and service and marketing, and when I talk about marketing, it would be direct marketing and other marketing, so total marketing were both up mid single digits, mid to higher single digits actually in the quarter than with G&A down.

Gary, would that be a good number to use that type of growth rate for the balance of the year as well what you were trending in the first quarter?

Yeah, I think it will, Bill, because, you know, the marketing is on the sales curve, the sales and service is really from both some growth but particularly structural change from acquisition of Bremmen, for example, that Neville talked about, so I would say that's a trend you would see for the rest of the year.

And it's where, it's actually higher than what you would expect out of our earnings bottle, if you will, but it's where we're able to actually balance our portfolio across the world and get some leverage out of G&A and then reinvest that behind the brands.

Thank you very much.

Bill, I just wanted to actually make one more point, what I think is important, not just for North America but something you'll see in other developed markets.

It really -- it feeds off the energy category but also Coke Blak, and that is the fact that we have launched a number of much higher margin but lower volume brands into the marketplace.

So there's a mix of innovation coming in, obviously in the volume, and we had good profitability out of it, sections with the likes of the Coke Zero, for example, but then there's this other leg where we're not looking for strong volume metric growth because they're niches, but high value and therefore margin growth overall.

So that's an element you want to keep your eye on as we go forward because I think it's very important in terms of the strategy, As I said, for North America and other developed markets, and you see that coming through in the first quarter in the North American results.

Thank you.

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

Thank you very much.

A question on North America.

The product mix was certainly favorable and we saw good operating leverage in the quarter.

Can you comment a little bit about maybe the contributions from non-carbs or POWERade and energy drinks in the quarter?

What's a reasonable level of operating leverage for the remainder of the year?

Is this a good indicator?

And just confirm if energy drinks are, in fact, included in your carbonated soft drink volumes being up slightly in the first quarter.

Thank you.

Hi, Christine, it's Gary.

Couple of things.

Number one, going in reverse order, the energy drink category is included in the CSD growth rates.

Secondly, relative to operating results of North America, there are a couple of things there.

Number one, there were some one-time items in the prior year around accelerated stock option amortization, which you may remember.

Yes.

Which is actually making the reported numbers in North America look higher.

So on a comparable basis, if will you, North America is showing 19% increase in operating income, comparable would be about 13%.

Within that you're seeing a strong mix benefit from the energy category as well as the other innovation in CSD that we've rolled out.

So I would say it's -- we will not maintain that kind of growth rate for the full-year in North America, because you've got some pipeline fill as the innovation was going in in the first quarter, but we're very satisfied with where North America is for the quarter, and I think we'll be very happy with it for the year.

Gary, maybe the pipeline fill you're talking about is Coke Blak or something else, but how does Coke view the marketing push and trial of Coke Blak relative to some of your other product?

Christine, it really is too early.

I can only give you anecdotal evidence.

That is that there are really two views.

There are people who like it and there are people who don't like it.

But that polarizing is actually important because those that I've talked to, and as I say, this is anecdotal, and I get this from other people who've talked to people, those who like it really like it.

And I think that's the only first encouragement we have.

And I mean we are looking at a targeted offering with high margins.

So if we can get just 1 or even 2% at the high of consumers who are in that box, that is going to feed through to the bottom line in a major way even though it may not give a strong uptick on the volume side.

As Gary said, energy's in there, but remember, on a volume basis, but energy's not a high volume contributor, but it is a margin contributor.

In France, though, where we are able to give some numbers, we're doing extremely well to the extent that we've had out of stocks and we're looking at new capacity coming in to be able to try and meet demand for the peak season.

So the early signs out of France are very good because we launched there about two months -- just over two months ago, so we've got some read on that, and that is very positive.

Thank you.

Your next question comes from the line of John Faucher with JPMorgan.

Good morning, everyone.

Focusing a little bit on the operating leverage piece here, Gary, if you look at it you're delivering basically 6% currency neutral revenue, 6% currency neutral operating profit.

Is the factor in terms of limiting leverage, you talked a little bit about limiting marketing spend.

Is it more of an regional issue this quarter and as we see Japan get better, and I know the U.K. is still up in the air, should we expect to get a little bit more leverage going forward off of these revenue numbers?

Yes, John, well first, good morning.

Yes, you're absolutely right.

In fact, I kind of mentioned that looking at price mix, if you will, out of the revenue, we got one point of pricing, price mix, if will you, and I made reference to the impact of Japan.

If you look at some very high revenue, high profitability markets, and you look at Japan being down two points in the quarter, Germany down a point in the quarter, Northwest Europe up one point in the quarter, all of those are very highly profitable markets.

And as we turn them, and as Neville said, we're expecting growth out of Japan starting second quarter with some of the relaunch of new marketing campaign on Georgia with the Easter shift and hopefully a lot better weather than what the first quarter was for Germany and with some encouraging news out of Northwest Europe, we would expect to see better margin characteristics in our price mix and, therefore, would -- are encouraged of what we're seeing going forward.

One sort of follow-up on that.

CCE has talked about potentially seeing a pretty big impact from the World Cup in the second quarter in the Northwest European business.

Can you talk a little bit about what you guys are expecting in your European business from the World Cup?

Thanks.

I guess I would say two things.

If you actually look at the segment data, and this is going to be the last quarter I'm going to talk about segments, I hope, but if you look at segment data on Europe you'll actually see we've actually are investing quite a bit in marketing behind the brands within Europe, and that really deals with the World Cup.

And so if you put the World Cup together, so what, July 10th, finals in Berlin, so in the month of June leading up, a lot of excitement globally, but particularly in Europe, and you consider the Easter shift, as well, both of those are very positive factors as we look to the second quarter in Europe.

However, just one caution, May, June last year in Europe was when summer arrived.

It wasn't there July August, so on a year basis you can be neutral about the weather, but we are cycling that, and the World Cup will help us do that because the main effect of the World Cup will really be in June, with the preliminary rounds when all of the countries are really involved.

As you get to the final, it will be more Germany and countries that happen to be in the final, or continents that happen to be in the final.

Okay.

Great.

Thanks.

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

Good morning, everyone.

Neville, since taking over you've spoken a great deal about better risk taking at The Coca-Cola Company.

Can you, first of all, maybe give us a sense of progress on where you are in terms of creating the risk taking culture that you seek?

And second of all, beyond The Coca-Cola Company and the bottler level, bottlers often view concentrate price increases as discouragement to risk taking so how do you balance that as you go forward to encourage them to take on more risks rather than less?

Let me deal with the second part first.

Concentrate price increases, I mean we're not going to run the business on a declining margin, not reflecting inflationary pressures, and that's the way that we've always run the business, and that's the way that we'll continue to run the business.

The real issue is bottler profitability at a level whereby those investments are going to yield a positive return for their investors.

And the evidence that continues to come through is of improved return of invested capital for our bottlers around the world.

So I've just come out of about three weeks ago I was down in Sydney with our top six bottlers.

We had what was seen as the best meeting that we've ever had between the top six bottlers of The Coca-Cola Company, not just in terms of atmosphere and attitude, but in terms of content, all the things that we are pulling together to do.

And, you know, they said that they've never seen so much innovation, and what we were talking about was how they can better exploit that innovation for growth of the system as a whole.

So concentrate pricing is not impacting our ability to perform in any way, and I think you can see that in terms of the results in Mexico, although I don't expect that level of percentage growth, because we've had a very hot winter down there to go through the full-year.

But I think that's just a proof point.

If you go back to innovation overall, some of the, I can't talk prospectively, because some of those are confidential, but if you want me to go through some of the innovations, I mean, we came out, for example, we launched two diet brands last year at the same time.

We launched effectively Zero and Diet Coke with Splenda.

That was something which people believed that bottlers couldn't handle that much innovation.

They were able to handle it.

We now have in supermarkets a one share for Zero, we've got a .4 share for Splenda.

But part of breaking the mold there was Diet Coke with Splenda.

Everyone was looking for another name because we couldn't carry, our lawyers said, another trademark together with the Coke trademark.

Well, we did.

Coke Blak.

I mean, Coke Blak is a real breakout in terms of Coca-Cola.

We've had flavored Coca-Cola, but one that is positioned at a premium price, I mean it's a very specific segment, with the enhanced caffeine, is something that would have been an [inaudible] to the system certainly ten years ago and I think even more recently.

So those are very real changes that you've seen take place.

And also what we've done with the like of Tab Energy.

Now, there's more along the way.

In some markets you will see that we will be coming out with enhanced versions of diets.

That, I can talk about prospectively.

I mentioned that in the past.

I'll just go back to those two examples of breaking the mold to exemplify that we're willing to do it, and you will see more of it in the future.

The reason that you don't see that much right now is because some of these developments do take time, and some of them require regulatory approvals.

Thank you.

Your next question comes from the line of Lauren Torres with HSBC.

Good morning.

I was hoping could you talk a little bit more about the improvement in Northwest Europe.

Are you attributing some of this or all of this to just improvements in the broader market or more so to initiatives that you've put in place to improve this division?

More to initiatives that we've put in place than the broader market because the U.K., in fact, continues to be weak.

Within those Northwest European numbers is very strong results in France and Belgium, more modest in Netherlands, but weaker in the U.K.

Just taking the U.K., we actually gained share whilst the volume in the U.K. was on the negative side.

We'd rather have had it positive than flat share.

But anyway, we did gain share and that's because of our efforts with diets and lights.

We've talked before about the rollout of the Zed flavor base with Fanta, et cetera, or Z, in U.S. terminology, and, of course, you know that we are going to launch Coke Zero in the U.K. to help turn that around.

But in addition to that, we've got the revenue growth management strategy rolling out, something we've talked about before.

That has done two things.

It's helped our share overall, but it's also increased our margins, and the bottler margins, and also what we've done with regard to non-carbs.

And, in fact, part of the improvement, the 100 basis point improvement in non-carbs as a percentage of carbs comes out of Northwest Europe, Minute Maid in particular in the U.K. with that launch which is one that I would point to in particular.

So it is broad-based.

It is execution, it is share gain, and it is a degree of innovation.

But with respect to the broader market that you haven't seen much improvement over in the last several quarters or so?

That varies.

France is -- France actually has improved in the broader market and we've improved ahead of that.

The U.K. is the opposite of that.

So it is not something that is the same in the four major markets, because it's actually Belgium, there's been growth, Holland, there hasn't, so you've got two countries where the overall market has not grown and two countries where they have grown.

But we have grown share.

But we don't see Great Britain as improving to a marked degree as we go through the year.

We still think Northwest Europe will be able to balance that overall.

Again, it's the portfolio effect, even within a relatively narrow frame, but the U.K. economy is going through some difficulty, and obviously the overall portfolio is reflecting that.

You see it in other categories as well.

Okay.

Thank you.

Your next question comes from the line of Cheryl Gedvila with Prudential Equity Group.

Good morning.

I was wondering if you could just detail what the FX impact was on your EU segments?

And also had one question regarding the Philippines.

You cite that in that segment that there was a little bit of a buy-in ahead of price increase that impacted the volumes there, and do you have just kind of an estimate of what that impact might have been?

Yeah, first on currency, within the EU, it was a negative, I'd say mid to high single digits.

Okay.

So much more -- much worse than overall total company.

On the Philippines, we don't have a detailed number with regard to the effect of that, but we did flag it because the overall trends prior were weaker than that 4%.

Therefore, we expect to see the effect of that in the second quarter.

I would highlight, though, that the Philippines is not a major area of profitability with regard to the Company overall.

So whilst volumetrically it's important, it's a pretty low margin market for us and, therefore, doesn't have a major effect on profitability overall.

And then maybe to beg the question with regard to what are we doing about it, I mean, it is of significant concern to San Miguel as well and we are right in the middle of detailed discussions about what we're going to do about turning that around.

Not all of you will know that I was in the Philippines from '81 to '85.

I know that market very well.

The good news that we have is that the brand scores are still high.

We still have amongst the highest in the world.

So we have not lost brand relevance in the marketplace.

What we have lost is availability and effectiveness in the marketplace.

And we're obviously discussing that with the Philippine bottler.

I do not anticipate that you're going to see any major turnaround in the Philippines this year.

That's different than my view of India, but in the Philippines I think you're going to see mid to high single-digit declines in volume as we go through the rest of the year because these distribution issues will take capital and human resources to turn around and even when we get the commitment of the bottler to do that, that will take time.

Today's final question will come from the line of Matthew Riley with Morningstar.

Good morning.

I actually wanted to talk a little bit more about India.

I wanted to get some background as to why you do feel that this will be kind of a turnaround year and also wanted to get some idea of the overall magnitude of the price increase that led to the 10% volume decline.

Well, the 10% volume decline was not just price increase, and that partly leads into why I believe that India itself is going to grow for the year.

Most of the decline was actually within the company bottling operations, which is about 71%, roughly, of the overall Indian business, and it really involves what we're doing to put those bottling operations on the right foot.

And, in fact, you're now going to be able to track that as you look at the bottling breakout.

You'll see some of the work that we're doing with regard to the bottling breakout.

And we have reduced credit terms.

We have improved our collection of receivables, and we have also decreased the bottle float that we have out there on credit in terms of putting more control into the business.

And that was one of the impacts in terms of profitability in the past.

We're trying to run a tight ship where a tight ship was not run before.

When you do that and you cut back, particularly as we start going into the peak season bottler, sorry, the inventories then drop because you're tightening up with the wholesalers and the distributors in the trade.

So that's why we think it is episodic and not a reflection of what's going to happen for the rest of the year.

At the same time, the whole skills, the overall level of skill has been increased within the bottler.

There's been a massive training effort, revenue growth management as part of that, and then on top of that, we launched a trust campaign, as you know, the India situation is multifaceted.

One of the issues where the pesticide allegations, which are unfounded, but we have launched a trust campaign and all the data that we've looked at on that has reflected an increase in purchase intent, a reduction in overall safety concerns, and also an increase in weekly and monthly users, and that, of course, reflects then an inventory reduction in the trade that I talked about, because I think consumer off-take is actually ahead of what we have with regard to the industry overall.

So that's why we think that India actually is stabilizing and that you'll see that improving in the second quarter and going forward.

That being the final question, I'd like to thank each of you for joining us this morning.

With the results in this quarter and the plans that we have in place, and I think you've heard this during the Q&A, that I'm confident the business is on a solid base heading into 2006.

It is going to be all about execution.

That's going to be critical for our path going forward, but we are getting traction.

I am pleased with our results to date, and I look forward to speaking to you again in the second quarter and the call in July to share our further progress.

Thank you very much, everyone.

This concludes The Coca-Cola Company's first quarter 2006 earnings results conference call.

You may now disconnect.