可口可樂 (KO) 2006 Q3 法說會逐字稿

Good morning.

My name is Judy and I will be your conference facilitator.

At this time I would like to welcome everyone to the Coca-Cola Company's third quarter 2006 earnings results conference call.

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

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 could 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 am pleased to be joined by Neville Isdell, our Chairman and Chief Executive Officer, Gary Fayard, our Chief Financial Officer, Muhtar Kent, President of our International Operations, and Sandy Douglas, President of our North America Operating Group.

Following prepared remarks by Neville and Gary this morning, we will turn 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 your attention to the fact that we have posted schedules on our Company's Web site at thecococolacompany.com in the Investor section, which reconcile our results as reported under Generally Accepted Accounting Principals to certain non-GAAP measures, which may be referred to by senior executives in our discussion this morning and from time to time in discussing our financial performance.

Please look on our Web site for this information.

Now let me turn the call over to Neville.

Thank you, Ann, and good morning, everyone.

As usual I'm just going to make a few observations about the quarterly results and then Gary's going to follow with his usual overview of financials and some additional perspective on 2006 which should, we believe, give you plenty of time for your questions.

I'm pleased to report that we delivered another solid quarter.

In the quarter top line volume growth of 5% resulted in ongoing operating income growth of 8%, including a slight currency benefit.

Our performance was driven by balance growth across our international geographies, a continued systemwide focus on execution and, of course, on innovation, and effective marketing programs that are increasingly connecting with our consumers.

On a year-to-date basis then, ongoing currency neutral operating income increased 7% and ongoing EPS grew 8%, both within our long-term growth model.

And that was even as we continued to make solid investments in our marketing.

From a top line perspective, I'm particularly pleased with three important factors.

First, we again demonstrated our ability to deliver consistent volume growth on a year-over-year basis.

We cycled 5% growth in the prior year, something that I know you've all raised as an issue.

Can we cycle the third quarter [inaudible] last year and our two-year run rate continues to be a hit of our long-term growth target.

Second, we achieved balance growth across categories with 5% growth in carbonated beverages, our highest growth rate for carbonated beverages in more than 5 years.

And 5% growth in noncarbonated beverages.

Trademark Coca-Cola grew 3% accelerating on the 2% growth in the prior year.

Sprite delivered 11% international growth and 6% worldwide and Fanta grew 7%.

As a result, these core brands contributed more than half of the growth in the quarter and we gained share in carbonated soft drinks globally.

In noncarbonated beverages, we continue to expand our presence cycling strong double-digit growth in the prior year with solid performance in water, ready to drink juice, and sports drinks.

However, we are not satisfied with our share performance in noncarbs.

Expanding our presence in ready-to-drink tea and coffee continue as a significant opportunity and neither we nor Nestle are happy with the progress that we have made in this area.

Now you're starting to see signs of progress, including the recent relaunch of Nestea in the U.S., the introductions of Enviga and Gold Peak in North America, but there's clearly more that we can do.

Finally, our results continue to benefit from the geographic diversity of our business.

Our international operations delivered 7% growth as four of our five international groups achieved mid single-digit or better volume growth.

The quarter was led by strong volume growth in key emerging markets in Latin America, central and eastern Europe, and many parts of Asia and Africa even as they lapped solid results in the prior year.

Volume increased 11% in markets with per capita consumption less than 150.

It's a statistic that I love giving to you because this is where a great deal of our long-term growth comes from.

Now these results more than offset the volume declines in the Philippines, in Japan, and North America.

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

I'd like to just take a moment now just highlight two groups that I'm particularly encouraged by.

In Latin America we delivered another outstanding quarter.

Strong core brands, marketing programs, World Cup included.

The focus on noncarb opportunities and world-class bottler execution led to 7% volume growth, lapping a prior year growth rate of 5%.

In Mexico, Brazil, and Argentina, trademarks Coke, Sprite, and Fanta grew 7, 9 and 10% respectively as we gained carbonated soft drink share in Latin America.

We gained traction with noncarbonated beverages in many markets.

Noncarbonated beverages in Latin America grew double-digits and represented over 20% of the Company's total noncarb growth for the quarter.

Secondly, I continue to be pleased with the progress we're making in Europe where volume grew 10% in the quarter.

Now, we clearly did benefit from favorable weather for most of the quarter but we also are delivering on the strategies and the priorities outlined on our earnings call a year ago and we are gaining momentum.

Spain and central Europe continued their solid performance and our actions in northwest Europe and Germany gained traction.

The performance is a result of strong execution of our key marketing programs in alignment with our bottling partners as we drove growth in CSDs and accelerated our position in noncarbs.

Europe successfully activated our World Cup marketing program as, in fact, did over 100 markets globally.

As the World Cup closed, we started launching Coca-Cola Zero in Great Britain, Germany, and Spain.

For Coke Zero in Britain early results are really positive.

Let me just give you some data.

Growing household and impulse penetration in the 16 weeks since the launch has resulted in our share of colas increasing by over 3 percentage points versus the prior year, and our primary competitor share fell by almost 3 percentage points.

In other words, a 6 point swing.

Six percentage point swing.

Strong repeat purchase on lower than expected cannibalization demonstrates to us that our innovative three cola strategy will be successful in these markets.

Therefore, in addition, we're going to be launching Coca-Cola Zero in Belgium and Nordics during the fourth quarter, something that we had not originally budgeted.

Europe has also made good progress in expanding beyond carbonated soft drinks.

Now while they only account for 13% growth of the volume, nonCSPs contributed 51% of total growth.

We completed two strategic acquisitions in the quarter.

The Apollinaris source water brand in Germany, queen of table waters, and the Traficante source waters in Italy.

Now that combined added 3 points of growth to the quarter.

So organically there was a 7% growth.

Additionally, we continue to innovate and expand the presence of our Aquarius, POWERADE and Burn trademarks across the group.

So you can see that we are continuing to turn the corner in Europe.

But now let me discuss what are probably going to be your two top questions: Performance in Japan, and North America.

We've started the recovery process in Japan and we've delivered on our commitment of sequential volume growth improvement versus the second quarter.

Weakness in core brands and softness in the overall soft drink category continue to impact our results.

Now while our overall share continued to decline, we did gain share in carbonated soft drinks and, importantly, in ready to drink coffee.

The Georgia Coffee relaunch continued to be on track resulting in a slight volume improvement versus the prior quarter and a gain in category share.

The new marketing campaign has been well received as our consumer tracking shows improvements in brand awareness, ad awareness, and purchase intent.

And additionally, just one small proof point, but the TV spot supporting the campaign was recognized by Independent Consumer Research as the top spot in Japan in August.

In the fourth quarter, we're going to have new flavor launches under Fanta and Georgia Coffee including a four promotional campaign.

And under Trademark Coke we're going to continue to focus on Diet Coke.

We introduced Cherry Coke during holiday season as well Coca-Cola promotional efforts in focused key channels to maximize home consumption during the winter season.

The Japan team is aggressively addressing the issues and is focused on executing the strategies required to drive the long-term health of the business.

I'd like to reiterate that we continue sequential improvement and we will see that in the fourth quarter, though the results will remain weak.

Let's turn now to North America.

While there was certainly positives in the quarter, overall, once again I'm not satisfied with our performance.

North American unit case volume was down 1% in the quarter lapping a 3% growth in the prior year.

Volume results were certainly impacted by a weakening of the CSD category in September and by several strategic choices that we made to improve long-term profitability.

So let me take the positive side first.

We continue leadership in carbonated soft drinks and we actually gained share in what is, as you all know, a challenging environment.

Of course, the near-term cost environment is also likely to put pressure on category volumes as we go forward.

However, and I'm being consistent on this, we continue to see significant opportunity in carbonated beverages as broadly defined.

This is going to require us to continually innovate and redefine carbonated beverages and deliver the right level of execution.

We also began to refocus our resources behind the more profitable Dasani business.

So if you exclude the impact of warehouse water, North America unit case growth would actually have been flat with the prior quarter.

In other words, the volume impact of that on the water side, but actually there was a minimal profit impact as we move to more profitable Dasani.

In juices, we also announced our third price increase in our premium chilled orange juice to offset what are significant cost increases in orange juice solids and volume was obviously negatively impacted.

And what we're doing here is continuing to take actions to enhance the value proposition of juices to our consumers.

It's important to note, though, that we gained volume and value share in the quarter and that was driven by strong performance in the premium trademark Simply and the products under that trademark.

Therefore we continue to focus on profitability, accelerating our presence in noncarbonated beverage categories with particular focus on the tea category at the moment and you'll see that again in the fourth quarter.

And as I mentioned earlier, that includes the relaunch and repackaging of Nestea, the introduction of Gold Peak, our premium brewed tea.

Trademark POWERADE grew in mid single-digits and that was cycling over 30% growth in the prior year.

Now while I'm not satisfied with the quarter in North America, Sandy, in his first 30 days on the job, [as] we have focused on assessing our brand, category, and customer marketing plus working with our bottler partners to focus efforts on capturing the opportunities that we believe are there for long-term growth and profit for the system.

Sandy's long experience and successful experience in North America and his leadership of our customer organization globally, in my view, make him uniquely qualified to drive our efforts forward and we have seen a seamless transition from Don to Sandy.

In summary, overall, I'm very pleased with our top and bottom line performance.

We continue to effectively manage our portfolio brands and our portfolio countries to deliver results in line with our growth targets.

I'm confident we're taking the necessary actions to create sustainable growth and value for the benefits of our shareowners and other stakeholders.

Now let me just turn you over to Gary.

Thanks, Neville, and good morning.

As you saw on the release we reported earnings per share of $0.62 in the quarter, an increase of 15%.

On a year-to-date basis reported earnings per share of $1.87, which represents an increase of 12%.

Our quarterly results included a couple of items that impact the comparability that essentially offset each other in the quarter.

We had some charges related to asset impairments and restructuring which were primarily offset by the benefits that we had from a reversal of a tax valuation allowance.

Therefore, there's no difference between reported and adjusted or comparable earnings per share for the quarter.

After considering items impacting comparability in both years, earnings per share increased 9% in the quarter and 8% year-to-date.

In addition, we have lowered our expected underlying effective tax rate on operations for 2006 and for 2007 to 23.5% or 24%, which provided a $0.01 per share benefit in the quarter and I'll touch a little bit more on that in a minute.

At the net revenue line for the quarter, we reported revenues up 7% versus the prior year.

There were a few items that specifically impacted that number.

Structural change negatively impacted revenues by 2%, primarily due to the transfer in Spain of canning rights to the bottlers, and we've discussed that in the past and as a reminder, there's no profit impact from that change.

So excluding structural changes, revenues in the quarter grew 9%.

Pricing and mix was 4%, driven by solid pricing environment across many of our key markets, in particular Latin America, and improved performance in our bottling investment group.

We grew operating income by 11% on a reported basis for the third quarter.

We also had some items impacting comparability in the current and prior year quarter.

So after considering these impacts, operating income increased 8%, which included a slight positive impact from currency.

SG&A increased 12% in the quarter, which is higher than our run rate in the first half of the year.

So let me take a minute to walk you through what contributed to that increase.

About half of the increase is due to structural change, in acquisitions, the cycling of lower expenses in the prior year and currency, each of those contributing about two points to the growth.

First, as expected we saw higher expenses in the bottling investments group, including the impact of acquisitions as we continue to invest behind sales and service.

Second, we cycled lower stock option expense and some various small gains on the sales of land in the prior year.

And lastly, currency increased SG&A by 2%.

Driving a significant portion of the remaining growth was continued solid investment behind our core operations as marketing expenses grew at a rate similar to our top line.

Now with regards to cash flow in the quarter, you will see a decline in cash from operations driven by an increase in working capital on a year-over-year basis.

This is caused by the same key items that we discussed in the first two quarters, which we relate to settlement of marketing accruals and timing of marketing payments and cash tax payments related to repatriation of foreign earnings from last year.

And as you'll see, these relate to timing of expenses rather than changes in the fundamental working capital structure of our operations.

Let me address a couple other factors that we see impacting our outlook for the remainder of this year.

During the second quarter earnings call, we stated that there was a $0.02 per share benefit from gallons timing that we received in the quarter and that that benefit would reverse in the second half of 2006.

We see one penny of that gallons timing reversing in the third quarter and expect the additional penny to reverse in the fourth quarter.

On share repurchase, as a result of the number of recent and potential acquisition activities we were conservative and refrained from actively repurchasing shares during the majority of the quarter.

We currently intend that our range for share repurchase in 2006 will remain between 2 and $2.5 billion.

For input cost, we continue to see upward pressure, but we are actively managing those pressures.

Now on taxes, I mentioned earlier we anticipate that our underlying effective tax rate for the full-year 2006 and 2007 will be approximately 23.5%.

The tax rate for the quarter was slightly lower than this revised underlying effective rate due to two reasons.

One there's a catch-up to bringing the effective tax rate for the first nine months in line with our new lower full-year estimate.

Recall that we've previously anticipated and applied an underlying effective tax rate of 24% through the first half of 2006.

And secondly, we have a one-time net tax benefit of approximately $41 million, due primarily to a reduction of a valuation allowance on our U.S. capital loss carry forwards.

This is associated with our fulfillment of a 2003 agreement with FEMSA which allows them to regain a majority ownership in Coca-Cola FEMSA as they were diluted to a minority stake as a result of the Panamco acquisition.

The planned sale which will impact the fourth quarter will result in a gain and on that gain as opposed to what some other companies would want you to do, I would suggest that you treat it as a non-recurring item and exclude it from ongoing earnings.

Now let me move to currency.

On a comparable basis, currencies had only a slight positive impact on our operating income for the quarter.

Year-to-date it's been a 1% drag.

We have put coverage in place and are effectively covered through the fourth quarter of 2006 on most key currencies, but based on current spot rates and the expected impact of the coverage in place, we expect currencies to have a slight negative impact to operating income in the fourth quarter and a 1% negative impact for the full-year 2006 and that includes the impact of the first nine months.

This is slightly more pessimistic on the impact in the fourth quarter than I gave you at the last earnings call as the yen and the rand remained weak.

In closing, and as we outlined in the release, with the progress to date and the pipeline we have in place, we believe that we are taking the necessary actions to create long-term sustainable growth and value for our shareholders.

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

Neville, Muhtar, Sandy, and I are now ready for your questions.

Operator?

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Mark Swartzberg with Stifel Nicolaus.

Thanks operator, good morning, everyone.

Gary or Neville, simply fact question for you.

Year-to-date marketing spend.

If you look at that on a per case basis, can you give us the rate of growth there?

Yes, Mark, it's 10%.

10% on a per case?

Oh, I'm sorry, per case, no.

Year-over-year it's about 10%.

Okay.

Then we can adjust for the case.

You can adjust it for the case as well.

That's very helpful.

Thank you.

But you know, I think as I said in my earlier remarks, Mark, we believe we're getting traction out of the spend.

And I think if you want to go back to really the question about the $400 million, I think you see it's certainly in the international results as to how that is now working for us.

And again, you see that positively on the revenue line which, marketing is essentially up at the same level as revenue overall.

Yes.

Thank you.

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

Good morning.

Two markets that you really didn't touch upon were India and the Philippines.

I was hoping you'd just give us an update for what you're seeing there, if we see an improvement.

Structurally any changes?

Anything you could add there would be great.

Okay.

Muhtar, do you want to help her?

Yes.

Good morning.

On India despite the issues around the pesticide issue, we grew our unit cases in India 4% in the quarter and that was actually the first growth we've had in India for the last eight quarters consecutively, despite all the issues around that matter.

I think we need, you know, we're still cautious about our results in India, but we're working our imaging programs in India, marketing programs are really working.

And I think you can see that from the results.

As far as the Philippines is concerned, we're still in discussions with [inaudible] and we basically see the business continue to be challenged at the moment.

But we're working very hard to try to resolve the issues with our partner.

Do you have a time line as far as discussions are concerned?

As soon as feasible.

Thank you.

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

Good morning.

Just a question on new products.

What contribution to your volume growth rate in the quarter came from new products introduced this year?

I actually don't have that one right off the top.

We're going to have to come back to you.

It varies obviously by geography.

Where we have put those new products in, you would see all of the growth that's in Australia would have come out really of what new products you would see a major amount of the turnaround in the U.K. out of new products.

We've also, of course, got acquisitions in there, that would be about seven-tenths of 1%.

We actually don't break that out normally in terms of giving that breakout.

Let me just go back.

If you look at core brand, if you look at what you call here, Coca-Cola Classic, you're looking at a 3% growth off that base.

So I think the -- I've always said job one is to regenerate growth with the brands that we have and that we would be able to do that.

That's not true across every geography.

And I refer to some of the geographic splits.

We have proven to be able to do that.

So that is against the marketing, that's against the new campaign.

That's against bringing in the increased intellectual capital with better people, et cetera.

You see it with Fanta and you see it with Sprite.

Within that, of course, there are some new flavors, et cetera, but the innovation is not at this point in time the key driver.

That is still down the line and I think that's '07, '08 as you see that coming.

You see the early pieces of that as I mentioned with tea in North America, as you look at Gold Peak, relaunch of Nestea, you see the launch of Enviga.

You know it's the tip of the iceberg now coming through.

So we're maintaining our ongoing volume targets.

I think the encouraging thing is that job one is working pretty well, which is the reinvestment behind the core and the growth of that.

Now, does that mean there is not a pipeline of launches out there?

No, I mean you've seen the innovation around the Odwalla trademark, you've seen the extension of the Simply brand in juice, you've seen now what we've done with Godiva and, of course, with the other brands that I've mentioned.

So there's a lot going out there, we're running out Aquarius across Europe after great success in Spain.

I mentioned Burn in my early remarks across Europe.

That is not high volumetrically but it's high from a profit standpoint.

So that mix is taking place.

And again, when we talk about innovation, you know, I want to look at it in two ways because some of the innovation is not going to show up on the volume charts and Burn would be a particular example.

Full Throttle would be another example where you actually see it in terms of overall margins and overall profitability.

So some of these innovations are not -- a raw comparison of what's the percentage in volume terms is probably is not a good one and we certainly wouldn't want to give away the profit ones, as well.

Sandy, I don't know if you want to say something about Vault and Energy in North America but I think you're pretty encouraged with the early results on Vault.

Yes, Neville.

I think the results of Vault, particularly in immediate consumption, have been very strong and we continue to build momentum with that brand.

Energy year-to-date is growing share around Full Throttle, Tab Energy, and yet we have tremendous plans going forward for new products in the energy area.

So you mentioned the momentum was simply in Odwalla and then, of course, the year-over-year momentum with Coke Zero where we still have a lot more to do in terms of marketing and executing Coke Zero, but as we lapped the introduction we have good growth in the quarter of about 30%.

So Neville, your progress on loading the innovation pipeline, do you feel like you're pretty much on track with what you'd laid out a year ago?

Yes, I am.

And the proof point that we have with regard to that is what's in the pipeline.

We have an innovation lab here which we bring customers into so that they can see what we're doing and what we're working on.

It's part of this collaborative customer model that Sandy actually put in place in his old job where we involve our customers at an earlier stage in terms of what we're bringing down the pipeline on a confidential basis.

And you know, they'll agree to come, they'll say, well, we can spend an hour and a half and they spend four hours, and that's where we open up the window as to what's coming down the pipeline.

And I'd also refer to a day that we spent with our top to top bottlers about three weeks ago and each of them, as they went through the summary said, you know, this is the best meeting that we've had.

We are very encouraged with what you have coming down the pipeline.

The issue, of course, is that some of these innovations, because are value-added.

Some of them along the line are going to involve health claims.

That's going to need FDA approval.

But, you know, I say it, I'm here for the long-term, I'm managing for the long-term so some of these are out in '08 and '09.

This is not something where we can get instant gratification, I'm afraid, but I'm confident that the pipeline's being built the way that I outlined it.

Thank you.

Your next question comes from the line of Marc Greenberg with Deutsche Bank.

Thanks.

Good morning.

My question relates to Japan.

I'm hoping you might be able to offer some insights with regards to the system and portfolio capabilities, ability to offset any risk that you see in change on consumer buying patterns.

In other words, have you thought about whether or not the consumer's fundamentally shifted away from ready-to-drink coffee given the ongoing category weakness and what impact growth in Starbucks and the like are having on that important profit business for Coke?

This is Muhtar.

I'll just try to reflect on that.

We think that there's a totally different consumer that is actually buying, the going out to the Starbucks type, the chilled cup coffee versus the canned coffee that is a very, very difficult business that is driven by vending and driven by a different kind of consumer.

The profiles of the consumers are different.

While that doesn't mean that there's not going to be future success for that Starbucks-type chilled cup coffee, which there are many other products out in the marketplace and is a growing segment, but we feel that there is certainly a very different consumer and also as far as that segment, the canned coffee segment is concerned, you're talking about roughly 8 to 10 million transactions per day, which currently and it is done through convenience stores, done through vending machines, primarily.

So we don't see that that is something necessarily that will take away, but it will be complementary.

That's how we see it.

As far as that doesn't mean that there's no opportunities, and we are certainly looking at that opportunity very, very seriously in terms of what that can give to our business also going into the future.

But we don't see that as a threat to that very large canned coffee market in Japan.

And I think the results that we outlined just broadly in the terms of the growth that we're getting back into Georgia underpin that.

But let me just talk broadly in the coffee category.

We think there are exciting margin opportunities there.

That is obviously what's happening with regard to Starbucks.

You see us with our test with Far Coast in Canada very early days.

You know, we're exploring.

This is, again, not going to show up on the charts in a hurry.

But that gives us new ways to test, new ways to test flavors in different markets, flavor combinations with coffee, and you'll see that rolling out in our Norways, Singapore, et cetera.

So there's a great, again, if you go back to the earlier question about innovation.

That's an area where we're innovating.

And we think chilled coffee in Japan through the convenience channel is going to be an additional opportunity for us but without obsoleting the existing pack and the existing formulations that we have.

And again, to be repetitive, but I think it's important to say this, that turnaround is very much on track.

Thank you.

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

Thank you very much.

Good morning.

A question for Neville or Sandy.

Looking at North America, with revenues up 4% and profits down 7% and given your discussion about the focus on more profitable water, can you just talk through a little bit about how your mix was negative if warehouse water volumes were down?

Talk a little bit about the magnitude of the input cost in the quarter.

And then in perspective, what drove the 4% favorable price mix on a global basis when country mix seems still a bit negative?

Thank you.

I think there's a global question here.

Gary why don't you start with that?

Yes, there are a can a couple of things that I would say.

Let me start with North America.

If you look at year-to-date North America's actually had a very good year-to-date.

And you see that gallons were actually ahead of cases in the first half of the year, which we highlighted in the second quarter call.

That started reversing in the third quarter and that's what you're actually seeing a lot of what happened at a high level in North America where gallons were actually down, too, in the quarter.

We do have higher input costs, we're managing that.

And we are optimistic, particularly because where we've got the premium high end of the market, particularly in juice, where there's been a lot of pressure on input costs where we've got the Simply trademark and Odwalla we've actually continued to see growth there and really offsetting the input cost.

So while there is pressure there, I think we are effectively managing that.

And lastly on North America, we purposely and had actually planned all along in this quarter to start changing out some of our water plants and switching those over to the Dasani brand, which drives higher profitability.

It had an impact on volume but very little impact on profit for the quarter.

If I look then globally at what happened price mix, as I said, if you go to revenue, revenue was 9% comparable without structural change.

Price mix of that 9% was actually 4 points.

And of that bottling investments group while their margin percentages are lower, and it can have some impact on the margin, bottling investments actually contributed 2 points of that 4 points price mix growth and that's where we're seeing significant improvement from the bottlers, the CBOs that we own.

And I'm happy that we also got 2 points of pricing in the core business as well, which is in line with what we've said our long-term earnings model is.

And we're getting that, if you look at the mix of our volume in the quarter, you had Latin America, obviously doing very well, but you also had very good volume results and profit results coming from Europe, which is a high-profit market and therefore overall results were very good.

Okay.

That really makes sense globally.

And again, just touching on North America then the negative product mix was driven by water even though the wholesale volumes were down?

Yes.

Thank you very much.

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

Yes, good morning.

Question for Gary.

It looks like you spent about $500 million on the acquisitions in the quarter.

Did that have any impact on the operating profit growth numbers?

Robert, very little negligible impact.

It obviously did on volumes but in this quarter negligible impact on operating income.

Okay.

Thanks.

[OPERATOR INSTRUCTIONS] Your next question comes from Carlos Laboy with Bear Stearns.

Good morning.

Muhtar, can you speak to progress and challenges for reaching noncarb deals in Latin America?

And specifically, do incidence rates work for noncarbs?

And why or why not?

Could you repeat the second part of your question?

The second part of the question, Carlos, was that incidents work for noncarbs?

Is that what you said?

Can you speak to progress and challenges for reaching noncarb deals in Latin America and do incidence rates work for noncarbs?

Why or why not?

Yes.

Well, first let me say this.

As far as noncarb deals in Latin America is clearly growing, having a balanced growth, both driving our CSD portfolio as well as looking at every opportunity in the nonalcoholic beverage category and noncarbs is clearly our priority in Latin America.

So if we see opportunities in Latin America that work for us on a regional basis, on a country basis we will certainly go after them.

And therefore, you know, we look upon the whole area of opportunities across Latin America in noncarbs in both driving them organically, but also any other acquisitions that could work for us on a country-by-country basis.

Now, as far as the noncarb business model is concerned, we are in discussions with our bottling partners in Latin America to reach a mutual win-win model, a business model that works, that drives volume and sustains profitability across Latin America for noncarbs.

And I was just down there last week meeting with all our Latin American bottlers and I'm very excited with the opportunities in that area.

But specifically with regard to incidence, Muhtar?

With regard to incidence, I believe that you need a more all-encompassing business model around noncarbs that works, that drives a win-win model for both us and our bottling partners and I'm very excited by the prospects of that.

And I just want to add maybe here, that we reached a forward-looking agreement that demonstrates our solid and constructive relationship with our bottling partner, FEMSA.

This agreement underscores our mutual understanding for value creation alternatives from a potentially larger revenue pool.

And I think we're -- I'm very happy to note that both of our companies are aware of the growth opportunities, agree on the growth opportunities that exist in the carbs as well as the noncarbs business, and we will pursue these opportunities to fulfill our growth objectives for both of our shareholders.

So I'm excited by that prospect also.

I just want to say at this moment, Carlos.

Carlos, obviously we're somewhat inhibited in that FEMSA still have to make their results announcements but I encourage you to follow-up with FEMSA and I think you'll get some more granularity.

This is of course, across Latin America, but I think you'll get some more granularity to the agreements we have and how we're going to move forward very effectively with them within the next couple of weeks.

Thank you very much.

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

Good morning, everyone.

My question, can you talk about the cash flow impact looking out towards '07 from some of the bottling businesses that you've already announced you'll be acquiring or in the works of in terms of the cash to acquire as well as the capital to acquire to run the business say, China, Philippines, Philadelphia, you also have the billion dollar payment to Germany growing next year.

So what are the cash flow impacts?

Any impact you see on the repo program looking out to '07 as a result of any of that?

Yes, Bill, relative to the acquisitions, and let me just, let me categorize those as carry beverages in China, Philadelphia, and Germany.

While we and San Miguel have made some references in the Philippines to having some discussions, there are no definitive agreements there so I really cannot comment on that.

First on Philadelphia, we actually have entered into a put-call arrangement which is two years out so there'll be no impact on cash flow or capital for 2007.

If you look, though, at Apollinaris Germany, the acquisition of Apollinaris, acquisition of Traficante in Italy, the German bottling system and the put-call arrangement there as well as the kind of letter of intent with the other bottlers as well as China, there will be some additional capital in 2007 from those, we do not see it as being significant.

It'll be, you know, maybe a few hundred million dollars, let's call it 3 or $400 million probably for those bottlers next year.

My expectation, though is we had a significant ramp up in capital in North America for 2006.

We see some of that declining and don't have to add as much capital to North America in 2007.

So those will somewhat offset so you'll see some slight modest increase, but I don't think it's going to be a material kind of increase.

And Gary, that's the couple hundred million is the actually Cap Ex involved in those bottling operations but then taking into account the billion dollar payment and some of the acquisition costs, as well?

Yes, we do have about a billion dollars that we, in Germany for the put-call.

And in addition to that, if while we've got a nonbinding letter agreement with the remaining independent bottlers in Germany, I think most of that will probably be on a merger versus a cash basis.

So it's a -- call it a billion plus a little, but not material.

We've factored that in, have significant cash flows, I think in line with what we've been seeing and there should not be any impact on our share repurchase program.

Bill, while we're talking about bottlers, let me just fire off that because that's the capital going forward.

I just want to go back.

I think within the broad strategic intent of what I laid out what is nearly 2.5 years ago about what we wanted to do.

One of the issues that was out there was can the Coca-Cola Company run bottlers and run them effectively.

I created what I call sort of euphuistically the hospital ward as it were, for bottlers where we need to turn them around and brought in the capability.

And it's not just [Arial].

Underneath him we've brought in half a dozen very high quality operators.

And, you know, it's doing the basics, as you know, I spent a lot of time on the bottling side, as well.

But it's doing just the basics, which allow us to enhance the margins and you'll see that as we've gone through year-to-date, you know, we're talking about up three and therefore, whilst we're not going to retain them, I mean the whole idea of the hospital ward is that we're going to fix them and we're going to move them out and you'll see some of that happening as we go forward into '07.

There's nothing that I can commit to at this stage, but I think you'll see some cash coming out of sub disposals because we've got them fixed and more will come into that mix as we need to.

And I think from a very broad strategic standpoint that's extremely important because now we've got the ability to turn around bottlers that are underperforming and do that successfully.

And that was something I know and quite legitimately I'm not pushing back hard on this was a big, big question about, well, you know, historically you happen to run bottlers very well, what are you able to do.

I think the proof points are coming in there as you look at those bottling investment numbers and therefore it has a very strong impact on what we're also able to do with regard to our overall a base business, our core business in terms of concentrate sales because as we turn those around, therefore we've got higher performing bottlers out there.

I think the reason I've expanded it, I know you need to look at what the capital is needed to do that, but I think the capability, which is just as important is something that we're beginning to demonstrate.

And Neville, given that you have that increased confidence on the capability, do you need to use anymore of the hospital ward that you referred to, say, in North America where there are structural issues?

Bill, I will never comment on any part of the world about where the hospital ward may be.

That is -- that's unfair do that to anyone.

And very largely it actually comes to the bottlers themselves where they are unable to grow the business they've decided that they want to move out.

I mean it's interesting how this always evolves.

It tends to be a business that is underperforming and the owners say they've lost confidence in the ability to get a return on their capital and they sell to us because they've lost faith in the business.

We haven't lost faith in the business.

We take it, we turn it around, and we show that this is still a good business with business growth.

So it's not -- in some instances the restructuring of Germany would be one.

We would take maybe an aggressive stance and bring about change and I'm not, I don't take that off the table for some future actions, but by and large, it tends to be people who come to us and want to exit and we take it over and turn it around.

Thank you.

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

Yes, good morning, everyone.

It looks like you guys are trying to pull back on some of this low, no negative profit bottled water that got added, let's say, probably four or five years ago.

Can you walk us through maybe some other regions where we might see a pull back on some of this low margin bottled water volume and, you know, should this continue to be a little bit of a drag on at least volumes over the next couple of quarters, if that is the case?

Thanks.

Basically, we've done most of it.

I've talked about that with regard to a number of countries where we've underperformed in terms of pulling back.

Indonesia was one, for example, parts of Europe were the other.

There's obviously still some in North America and you will see some modest impacts that you're going to see there.

And that's, you know, goes through probably to about Q2 '07, first half of '07.

In terms of the overall company, I don't think it's going to be a major number.

We'll highlight it, obviously, as you break out North America, you'll see it within that.

But again, as Gary pointed out to you in terms of the actions taken in the third quarter was it has a volumetric impact, its impact on profitability is very limited.

So we don't see that the moves that we make in that area will in any way undermine our ability to meet our long-term growth targets for volume growth.

Great.

Thanks.

Your next question comes from the line of Matthew Reilly with Morningstar.

Good morning.

I'd like to return to India for a moment.

I was wondering if think that the long-term potential of the carbonated soft drink category has been limited by the latest round of pesticide allegations and product bans?

Yes, let me take that.

I do not think so.

I think that the per capita consumption of carbonated soft drinks in India is very, very low and I think that they have a great future in India.

I think the issue we've dealt very effectively and are continuing to deal effectively with the issue of pesticide with the allegations.

And we feel very confident about our programs in India around both marketing both on a local basis as well as across the whole country.

And we don't really -- we see this only as a very short setback.

We feel that our growth in the third quarter could have been higher than it actually was but we feel that over the long-term we see great, great potential for our total portfolio in India, both in the carbonated beverage space as well as in the noncarbs.

You know Muhtar and his team, I'm sure don't want to put themselves in the position of being any way self-congratulatory, but if you look at the 4% growth that we had in the quarter and, obviously, immediately after the pesticide issue hit again, when the [inaudible] CSE decided to use it as she admits for a broader issue of pesticides in the food chain in India, admitting that they picked on carbonated soft drinks because that would get the headlines, we had a major downturn for a few weeks.

I think if you look at the 4%, you can see that we were prepared to handle it, we were prepared to go out there very rapidly work with the government.

You've seen the government statements, you've seen the judicial system work for us.

And I think you see the consumers starting to read it for what it is.

Thank you.

And your final question is a follow-up from the line of Mark Greenberg with Deutsche Bank.

Thanks.

Good morning.

Question relates to anything that you can offer with regards to the Coca-Cola systemwide procurement efforts.

Wondering if you might be able to provide an update on how Coke is working with its bottlers to offset what appear to be higher input costs for both aluminum and high fructose corn syrup and if at all that factors into your thinking for concentrate price increases in '07?

Thank you.

Well, it, [inaudible] complex mix, let me just go to input costs overall and I think we have to include in that sugar.

But sugar prices did move up to something in the order of a 15-year high.

And that is important with regard to most of the rest of the world because we use sugar as opposed to high fructose, [HFFS], high fructose corn syrup.

You've seen those prices come down and certainly in the markets where we import as a system because you're talking about the systemic purchasing that we have, we have taken -- be able to take cover to be able to minimize those costs.

So it's a 25-year high, actually, in sugar prices but we've been through this one before.

So that forward coverage, which was taken out systemically for import markets, remember, because it's also a controlled price commodity is one piece.

PT is another important piece.

But we do not believe given the capacity, although there is some [typus in parazylene] in one of the input costs, but with the capacity that that won't have a major effect.

Aluminum, we have seen the price of Alumina come down with the raw material.

We haven't seen the price of aluminum coming down and part of that is actually, you know, the focus is on the London Metal Exchange on the trading on the London Metal Exchange.

And trading and hedging has got a big effect on that.

So if you look at the raw material input, we think sometime around the end of '06 beginning of '07 that the reality of the marketplace is going to come through and there will be some easing.

It's a tough one to call.

So if you go back to the questions around what's that going to mean with pricing and overall pricing flexibility, that's, as I say, a complex equation because to what degree are you able to get that price out of the marketplace?

It's obviously something that we face on an equal basis with all of our competitors, particularly with aluminum where most supplies have declared force majeure and therefore, that may well be reflected more in pricing with the consumer rather than affecting our ability to price concentrate.

We're going to take this on a quarter-by-quarter basis because we think given the other dynamics within that that that's an important piece.

Gary, do you want to add to that?

Mark, just a couple of other thoughts on that.

We do have a global procurement council made up of ourselves and all of our major bottlers and all of our, the main ingredients, be those ingredients are packaging, are included under that procurement group and we are procuring on a global basis.

So most of the ingredients and packaging materials that we're talking about, we are one of or perhaps the largest purchaser in the world, and therefore that gives us some advantages in that and we are definitely working together as a global system on procurement.

The second piece, as well, is that as you look at different areas of the world, some of these commodity costs are, in fact, dollar-based and because of that, different currencies will give you different impact and different views on commodity costs and the pressures are not as great in some of the international markets because of that as they are, perhaps in like in the U.S.

So we're managing it actively and we'll continue to keep you updated as we go quarter-by-quarter.

I think before I just close just a broader comment.

You know, you're going to see more of this consolidation taking place in terms of managing input costs and using the strength of the system overall.

I think I mentioned on the last call what we're working on with regard to IT, not just in terms of developing common platforms with our bottlers but being able therefore to cut costs in terms of overall IT development.

That's just another initiative building off what Gary has said and that certainly is a major strategic thrust to enable us to actually capitalize on the size of the system, something that I think we have not done as well as we might.

And I think that will over time you will continue to see that mitigate the costs of our system overall, because after all, we are the ones who are able to help our bottlers by leveraging the overall power of the system.

So I'd like to thank each of you for joining us this morning.

I would believe that the results in this quarter and that the plans we have in place that I am confident that the business is on a solid footing.

I did not put in, but I really should have in my other comments, that there'll always be a bump on the road.

Hopefully we never hit one, but on a quarterly-by-quarterly basis, that's something that's always a reality sometime down the road.

We continue to focus on execution.

It's critical on our part to going forward, but again, I think our results to date do underline the fact that our execution is improving.

And of course, I look forward to speaking to you all again on the fourth quarter call early next year to share our progress.

Thanks very much indeed.

Thank you for participating in today's Coca-Cola Company's third quarter 2006 earnings results conference call.

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