The Coca-Cola Company Q3 2008 Earnings Call Transcript

| About: The Coca-Cola (KO)

The Coca-Cola Company (NYSE:KO)

Q3 2008 Earnings Call

October 15, 2008 8:30 am ET


Ann Taylor - Vice President and Director of Investor Relations

Muhtar Kent - President and Chief Executive Officer

Gary P. Fayard - Chief Financial Officer

Sandy Douglas - President, North America Group


Bill Pecoriello - Morgan Stanley

Judy Hong - Goldman Sachs & Company, Inc.

Kaumil Gajrawala - UBS

Christine Farkas - Merrill Lynch

Bryan Spillane - Banc of America Securities

Lauren Torres - HSBC

Mark Swartzberg - Stifel Nicolaus & Company, Inc.

John Faucher - J.P. Morgan

Marc Greenberg - Deutsche Bank Securities

Carlos Laboy - Credit Suisse


Welcome everyone to The Coca-Cola Company third quarter 2008 earnings conference call. (Operator Instructions) I would now like to introduce Ann Taylor, Vice President and Director of Investor Relations.

Ann Taylor

I'm joined by Muhtar Kent, our President and Chief Executive Officer, Gary Fayard, our Chief Financial Officer, and Sandy Douglas, our North America Group President. Following prepared remarks this morning by Muhtar and Gary 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 note that we have posted schedules on our company website at under the Financial Information tab in the Investor section which reconciles certain non-GAAP financial measures that may be referred to by our senior executives in our discussion this morning and from time to time in discussing our financial performance as reported under generally accepted accounting principals. Please look on our website for this information.

Now let me turn the call over to Muhtar.

Muhtar Kent

I'm happy to report that our financial performance continues to be strong and I'm pleased with our results for the quarter. Our ability to proactively address the rapidly changing economic environment exemplifies the strength of the Coca-Cola system. The fundamentals of our business are strong and we continue to work closely with our bottling partners to take action to drive sustainability growth.

We are clearly in uncharted territory in these global markets, and we continue to calibrate and recalibrate the actions we need to take to continue delivering strong results. Given our performance this quarter and our proven ability to deliver strong and sustainable long-term results for our shareowners, we remain confident in our ability to navigate in these challenging times.

However, the current global macroeconomic environment continues to be volatile. This is particularly true in North America, and we expect this to continue through 2009 with economic growth moderating around the globe. Nevertheless, I remain confident that we operate in a very resilient industry and that we have the management and strategies to help us operate successfully during these difficult times. Our performance during the third quarter demonstrates this resilience.

During the third quarter we achieved double-digit comparable earnings per share growth of 17%, marking our eighth consecutive quarter of double-digit EPS growth, which means we are well ahead of our long-term earnings growth model in 2008.

Our unit case volume increased 5% in the quarter and, as expected, accelerated versus the second quarter, which was impacted by several one-time events.

Revenue growth increased 9%. This growth was negatively impacted by 2 percentage points due primarily to the sale of bottlers. So, excluding the sale of bottlers, revenue increased by a very solid 11%.

Once again, we successfully balanced the value and volume equation to deliver consistent top line performance.

Ongoing operating income increased 17%, reflecting the solid revenue growth, continued brand investment and disciplined management of operating expenses.

Year-to-date, cash generation remains strong, with over $5.5 billion from operations. By any measure, a strong set of results.

Our volume performance during the quarter was again led by our international markets, including solid growth across most emerging markets. Unit case volume in international markets increased 7%, cycling 8% growth in the prior year quarter. The international performance was driven by 5% growth in sparkling beverages, including Coca-Cola, up by 4%, Coca-Cola Zero up by 22%, and strong growth in both Sprite as well as Fanta. Coca-Cola Zero, now in over 100 markets worldwide, is on plan to exceed half a billion unit cases for 2008.

Most key emerging markets delivered solid growth, with China up 17%, India up 18%, and Brazil and Mexico both up 7%. In addition, we saw strong performances in Argentina, Turkey, Eastern Europe, Southern Eurasia, Pakistan, North and West Africa, Nigeria, Korea, and across most of Southeast Asia, including Thailand. As you can see, our quality performance spans most of the globe. In countries with per capitas of less than 150, our volume growth was 9% in the quarter, cycling 12% from prior year.

Importantly, we continued to gain volume and value share in most of our key markets and in core sparkling and still beverages. This illustrates how the strength of our brands and the strength of our system enable us to successfully operate in tough environments. History has proven by continuing to invest in our business, even during difficult economic times, we can further strengthen our bonds with consumers, thus garnering a stronger share position for the long term. Simply said, we are winning in the marketplace.

Let me turn now to the results in our geographies.

Latin America once again achieved very solid results. Unit case volume increased 8%, cycling 9% growth in prior year. The growth was balanced across geographies as well as the beverage portfolio, with all business units delivering high single-digit unit case volume growth. Coca-Cola increased 4% and still beverages increased 38% in the quarter as we continued to leverage the Jugos del Valle acquisition. The group also continued to achieve share gains in all key countries.

In Eurasia and Africa we achieved unit case volume growth of 9%, cycling 13% growth in the prior year. The performance was led by double-digit growth in key markets, including India, Nigeria, Turkey, Southern Eurasia, and high single-digit growth in the Middle East and Northwest Africa. Growth was solid across sparking and still beverages, with sparkling beverages growing 6% and still beverages growing 21%.

In Russia unit case volume declined 3%, primarily reflecting the impact from unseasonable weather and economic and inflationary pressures. Despite the slowdown of volume growth in Russia, we gained volume and value share in nonalcoholic ready to drink beverages in the quarter and the fundamentals of our business in this key market remain strong.

The Pacific group grew unit case volume 7% in the quarter, cycling 11% growth in the prior year. China and Japan delivered strong results, solid results offsetting weaknesses in the Philippines due to continuing weather and inflationary pressures, both of which impacted consumer spending.

China once again delivered solid double-digit growth, which accelerated versus the second quarter. Sparkling beverages grew 13% and still increased 27%, led by the continued success of Minute Maid Pulpy and the expansion of our Original Leaf Tea, which, as you will recall, we launched earlier this year.

Perhaps the most significant achievement for the company in the quarter was our successful activation of the Beijing Olympic games sponsorship. Our sponsorship attracted widespread positive media and consumer attention for the company in China and around the world.

During the 16 days of the games, over half a billion Chinese consumers connected with our brands through sampling programs, Olympic torch relay activities, and downloads of the Coca-Cola Olympics song, which was downloaded over 260 million times and reached number one on the pop music charts in the country. All of these activities, as well as numerous other events and promotions, resulted in Coca-Cola being cited as the most recognized and effective sponsor of the Beijing games, as reported by Neilson.

Also in the quarter we announced our offer to acquire China Huiyuan Juice Group Ltd. The acquisition provides a unique opportunity to complement our existing leadership in China in sparkling beverages and expand our presence in still beverages, particularly in the dynamic and fast-growing juice category. Huiyuan brands are highly complementary to our Minute Maid business and Huiyuan's existing manufacturing footprint will provide additional scale to our China operations. In terms of the process, we've filed for Chinese Ministry of Commerce approval and are fully cooperating with their review of the transaction.

In Japan volume increased 1%, successfully cycling 4% growth in the prior year, resulting in nonalcoholic ready to drink retail share gain. We continued to invest in our three cola strategy, and the success of this was evident in the growth of sparkling beverages during the quarter, which was led by trademark Coca-Cola.

Additionally, we've continued with successful innovation behind the Fanta trademark. Georgia Coffee grew 4%, marking its fourth consecutive quarter of growth and core Georgia flavors increased 10%. The strength of the marketing activity behind the Georgia brand led the continued category share gain.

In Japan, we've continued to execute against our strategies and focus on delivering consistent sustainable results.

The Europe group overcame a slowing Western European economy and unseasonable weather in Northwest Europe to increase volume 3%. Despite the challenges, we are outperforming the marketplace and gaining overall nonalcoholic beverage share. We continue to strike a balance between tactically addressing the current economic environment and investing for long-term growth by supporting our core sparkling brands and driving innovation across the portfolio.

Driving sparkling performance in Europe is the development of the Zero range, including Coca-Cola Zero, which grew double digits in the quarter, the launch of the Pan-European Pemberton program, which highlights the heritage of Coca-Cola, and the German launch of the Spirit of Georgia, our first adult-targeted lightly sparkling lemonade beverage containing fermented juices.

We continue to expand our still beverage offerings to generate more balanced growth, including continued support of Illy ready to drink coffee, which is now in 9 markets, as well as Vitamin Water in Great Britain. We are consistently making solid strategic investments behind our brands for the balance of 2008 in Europe, and we will activate the recently announced Zero Zero 7 campaign supporting the latest James Bond film as well as our traditional holiday campaign.

In North America results were clearly impacted by the volatile economic environment, however it is important to recognize volume declines of 2% outperformed the industry in the quarter. This resulted in total measured and unmeasured nonalcoholic ready to drink volume and value share gains in the quarter.

Sparkling beverages declined 2% in the quarter, an improvement from the year-to-date trend, and resulted in core sparkling volume and value share gains. This reflects the successful activation and execution of our Olympic marketing program during July and August. Our red, black and silver portfolio - Coca-Cola Classic, Coca-Cola Zero and Diet Coca-Cola - continued to gain volume and value share as well.

Coca-Cola Zero delivered strong results, growing 30% in the quarter, cycling double-digit growth from the prior year. However, there was continued softness in our Food Service business and other on-premise channels, both of which are being impacted by the current economic reality. Additionally, bottler pricing post-Labor Day has impacted volume performance. As a consequence, we are aggressively moving to address these challenges by allocating resources to consumer and customer-facing programs.

Our still beverages portfolio continued to outperform the industry, resulting in volume and value share gains. Our multi-tiered juice strategy, led by double-digit growth in Minute Maid Enhanced and Simply trademarks resulted in continued superior category performance and share gain.

Glaceau performance remains solid, increasing double digits in the quarter, with strong performance in the immediate consumption and non-measured channels, driving increased volume and value share leadership. Glaceau remains on target to becoming a $2 billion trademark in early 2009. Glaceau, along with trademark Simply, Coca-Cola Zero, [Nos] and Fuse are five of the top 10 fastest growing trademarks in incremental retail sales for North America.

Last week we also announced a distribution agreement for Hansen's Monster Energy Drinks. We believe the Monster brand will complement our existing portfolio of energy drinks and provide our bottlers with further opportunity to drive profitable growth.

While we have a strong marketing calendar with our bottling system and customers across sparkling and still brands for the remainder of the year, we expect fourth quarter volume to trail the year-to-date trend due to the continued impacts of the economic slowdown and bottler pricing action. We continue to focus on productivity and expense management initiatives to target investments in consumer and customer-facing programs for future growth in North America. We remain committed to our strategies and to winning in North America.

Now let me update you on our company wide productivity initiative, which has been up and running since last quarter. We are leveraging our efforts to redirect investments to drive top line growth and long-term sustainable value creation. Our systemwide focus on productivity remains a priority for 2008 and beyond.

As you know from our last call, we moved early to take aggressive steps in this area. Through this work we are rewiring our business and reallocating our resources to be more directly focused on the marketplace as well against our highest growth opportunities. Building strong brands with world class marketing is the key to our sustainable top line growth.

As previously indicated, our target is to generate annualized operating savings in the range of $400 to $500 million by the end of 2011. These are savings accruing directly to the The Coca-Cola Company. We will also continue to work towards improving the system supply chain. We also previously indicated that there will be nonrecurring costs of approximately $400 to $500 million associated with implementing these initiatives and that both the benefits and the costs would be spread fairly equally annually through 2011.

A team led by seasoned operators has ensured that we are on track to deliver against these targets, and we have already begun to benefit meaningfully from this initiative in 2008.

Once again, I am pleased with our results for the quarter. We are winning in the market as evidenced by our share gains in key categories and markets. Our increased focus on effectiveness and efficiency is providing the additional flexibility needed to consistently deliver long-term growth and create value for our share owners.

During periods of economic stress, the merits of The Coca-Cola Company truly come to the fore, as we have seen again in this most recent quarter. Our brands and our business were built for times like these. We have a seasoned management team with great experience honed through many tough cycles in markets across the globe. Our business is balanced across nearly every market, our product portfolio spans most major nonalcoholic beverage categories, and our brands are available in more channels and outlets than any other consumer company.

This quarter's performance reflects that reality. Backed by a solid balance sheet, The Coca-Cola Company continues to deliver attractive earnings growth, strong free cash flow, as well as a reliable dividend that we have included for 46 straight years in both good and challenging times.

It is incumbent upon us to ensure that we not only meet these challenges but that we use them to our advantage. We continue to define our picture of success as exceeding our long-term growth model. We are also realistic about the operating environment for 2009. We're in the process of reviewing and finalizing our plans for 2009 and will provide more color on our expectations for next year during our fourth quarter call in February. However, you can expect us to continue to invest to fuel brand growth while aggressively managing costs. I remain confident we're building a stronger Coca-Cola system for the future.

With that, let me turn the call over to Gary.

Gary P. Fayard

As Muhtar indicated, we've just again delivered strong financial results in the quarter. We reported earnings per share of $0.81 per share on a diluted basis in the quarter; however, this included a net charge of $0.02 per share for restructuring charges and costs related to global productivity initiatives, partially offset by the gain on the sale of a portion of our investment in our Pakistan bottler. Therefore, comparable earnings per share was $0.83 per share, an increase of 17% after considering factors impacting comparability in both the current and prior year quarters, our eighth consecutive quarter of double-digit comparable EPS growth.

Net revenue in the quarter increased 9% and increased 11% excluding the impact from structural changes primarily related to the sale of bottlers. Growth was driven by 2% favorable impact from price and mix, a 3% increase in concentrate sales, and a 6% increase from currency.

In the quarter, unit case volume increased 5%, cycling 6% growth in the prior year quarter, and year-to-date concentrate sales and unit case growth rates are essentially in line.

We grew operating income by 20% on a reported basis. After considering items impacting comparability and the current and prior year quarters, operating income increased 17%, which includes a 9% benefit from currencies. Year-to-date, our currency neutral operating income of 9% remains ahead of our 6% to 8% long-term target.

Total selling, general and administrative expenses on an ongoing basis increased 8% in the quarter. This translated into 5 points of operating expense leverage. We continued to invest in our brands and build market execution capabilities. Marketing expenses increased at approximately the same rate as gross profit growth, and sales and service increased solidly to support our bottling operations.

Our focus on expense management and productivity initiatives is reflected in a mid single-digit decrease in general and administrative expenses. Additionally, we continue to see year-to-date margin improvement in both our core business and in our Bottling Investments group. For the remainder of the year we would expect to continue to achieve expense leverage, but at a more moderate rate as we start to cycle some of the programs put in place late last year.

Our net interest expense decreased in the quarter, reflecting the benefit of interest income earned internationally at higher rates.

And with regard to taxes, we ended up the quarter with an underlying effective tax rate of 22%, and we expect to remain at the underlying effective rate for the remainder of the year.

As we've previously announced during the quarter, we have curtailed our share repurchase program for the remainder of the year as we pursue the acquisition of the Huiyuan juice business in China. We repurchased a slight number of additional shares at the beginning of the quarter and now have bought approximately $1.1 billion of our stock year-to-date.

Now let me address some of the factors that we see impacting the remainder of 2008. We remain confident in our ability to achieve long-term sustainable growth and our picture of success remains to exceed our long-term growth model. We will continue to portfolio manage globally as we expect solid performance in most of our markets. While we expect economic growth in some emerging markets to moderate, we believe that key emerging markets like China, India, Eurasia and Latin America should continue, with solid business growth.

It is our belief that among other consumer goods companies, our business will better navigate the current economic environment as we reach the consumer through a broader array of channels and packages with preferred brands. Improvement in our market share will continue to be a benchmark of our success.

Globally, we are working closely with our bottling partners. The fundamentals of our business remain strong, and as a system we continue to take appropriate actions to navigate the near-term volatility while strategically investing behind our brands in the marketplace for long-term growth. Last quarter we revised our net capital expenditure forecast to approximately $1.8 to $1.9 billion, and we'll likely come out close to $1.9 billion for the full year.

Lastly, as you saw in the quarter, structural changes primarily related to disposal of bottlers, caused a drag on net revenue growth. We sold all of the Remil bottler in Brazil to Coca-Cola FEMSA at the end of the second quarter. We sold a portion of our investment in the Pakistan bottler to our Turkish bottler at the end of the third quarter such that we now own just under 50% and will no longer consolidate the Pakistan bottler, but include it in equity income.

Additionally, we will not have the offsetting impacts of the Norsa bottler in Brazil and PCAG, our German bottler acquisitions, as we cycle these in the third quarter, so we would expect a larger impact from structural change on net revenues in the fourth quarter and into 2009.

Moving now to two key topics - liquidity and currency. Given the recent market volatility, I know liquidity may be top of mind for some of you. Our liquidity remains strong and our commercial paper program continues to function each day as broadly authorized by investors and is [praised] strongly. We have been able to continue to access 60 to 90-day terms and have not had a material change to our spreads to benchmark rates.

We also have $2.2 billion of committed unused credit facilities from our network of relationship banks and our almost $8 billion in cash is available and in liquid, high-quality investments. Most of the cash is offshore, but we have reviewed our contingency plans and would be able to access the cash on short notice.

Year-to-date we have generated over $5.5 billion in cash from operations and, in short, liquidity is not a concern as we're able to fund our operations from internal cash generation and commercial paper.

With regard to currency, as I mentioned, we saw a positive impact from currencies in the quarter on operating income of 9% and 10% year-to-date. We are maintaining our full year 2008 forecast of at least a mid single-digit currency benefit. We realized a stronger than expected benefit in the third quarter which we expect to be offset by a slightly weaker forecast in the fourth quarter, therefore no change for the full year.

As for our 2009 currency outlook, it is obviously a very volatile environment. We're already 100% covered on key hard currencies like the Euro and the yen. Emerging market currencies are particularly volatile, as we've seen over the last few weeks; therefore, it would be impractical to give a view on currencies for 2009 at this time. However, it is important to note that we manage our business in local currency to ensure that we make the right decisions for the long term.

As Muhtar indicated, we're in the process of finalizing our 2009 business plans, so we'll provide our outlook for 2009 on our year end call in February.

So that's the topics I wanted to cover this morning. We're ready for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Bill Pecoriello - Morgan Stanley.

Bill Pecoriello - Morgan Stanley

You mentioned the system's ability to adapt to the rapidly changing economic environment as a key competitive advantage. Can you give us some examples, some of the tactics the system is using to adapt, especially as immediate consumption begins to slow in several regions of the world, maybe a shift in channel or package focus to adapt to that?

Muhtar Kent

First I think what you need to see is that we keep focus with our strategies of growing sparkling and expanding still beverages, balanced growth, increasing our pace of innovation and growing capability. But within that, as I said, we've continued to calibrate and recalibrate to ensure that our system remains very flexible, leveraging new packaging innovations, new price points, and also ensuring that there's an absolute good balance between above the line and below the line activities; a much closer relationship with our customers, value offers.

And in this environment more and more people, particularly in the West, are going to spend more time at home and we have programs to address that with future consumption, bringing back refillables in many countries in emerging markets. So all of that taken as a whole, I think - affordability focus, new price points, package innovation, and continued bottler investment ensure that we keep focus.

There is no other business in the world that visits 20 million customers on a weekly basis and no other business that is as close to the marketplace as our business, so we've continued to leverage that and stay connected with all local markets and I think we're seeing the benefit of that.

Bill Pecoriello - Morgan Stanley

Any implications for system margins as you see more of the future consumption focus or are you going to pull various levers so the system can maintain margins as you get that shift?

Muhtar Kent

I think we will balance the margins with share gains. And we want to be absolutely sure that we do the right thing for the long term. You know, I've been through this movie in smaller versions a number of times in the past - in 1998 in Russia, 2001 in Turkey, and in Latin America - and I can tell you that the key here is to make sure that you keep connected to the consumer, maintain the health of your brands, and that's what you're going to be seeing us do.

But also we are going to be making sure that any kind of costs that are not necessary are going to be - we will continue to eliminate them out of our system religiously and refocus our resources to market-facing and customer-facing activity.


Your next question comes from Judy Hong - Goldman Sachs & Company, Inc.

Judy Hong - Goldman Sachs & Company, Inc.

Muhtar, can you speak to the resiliency of or even sequential improvement of some of your key international markets in terms of volume trends in Q3 versus Q2? And then, as you look out to 2009, as you kind of deal with the economic conditions - and I understand you're not giving specific guidance - but if you can give us some perspective as to how you think about '09 relative to your long-term growth targets, both from a volume and EPS perspective.

Muhtar Kent

I think what you see, Judy, is first, you see the balanced portfolio working in our favor. We had some countries that even again in the third quarter did not perform up to our expectations, like Philippines, like Russia, like U.S. Food Service. Germany was flat. But despite that we came in with a very strong quarter. You saw that every single one of our international operating groups increased their growth trend versus the second quarter of '08 - Europe from zero to 3%, Latin America from 7% to 8%, Eurasia and Africa from 6% to 9%, and the Pacific group going from 4% to 7%.

And we had indicated to you that there was a lot of one-off items in the second quarter that were impacting our business, and I think that you saw us coming through in what was still a very difficult quarter. And the balance and our actions, the flexibility in the marketplace, our bottlers' ability to continue and an appetite to continue to invest in the marketplace, you saw us coming through.

I think that there are going to be areas of the world next year that will be growing less. There will be growth for sure in the emerging markets. It may not be to the same extent as we saw this year, but I think that despite the volatility we are in the best consumer business there is. Tremendous resilience, providing we take the right actions, and you will see us taking the right actions.

Judy Hong - Goldman Sachs & Company, Inc.

And your comment about the fourth quarter volume trending a bit below the year-to-date volume, is that more a function of North America potentially showing another leg down or is that also related to international markets?

Muhtar Kent

No, no, that was purely - that comment was purely related to North America, and I made sure that I stated it that way. It was purely related to North America and related to those issues that I discussed with you because of the continuing pressure on immediate consumption and attitudes of the U.S. consumer as well as pricing to shore up the margins by our bottling partners at the end of the quarter.

Judy Hong - Goldman Sachs & Company, Inc.

And then just a quick question for you, Gary. If you look at your expense leverage, clearly a big driver is the corporate expenses coming down. And if we look at the run rate in the last two quarters, it looks like around 3% of net sales. Is that sort of a good run rate to use going forward?

Gary P. Fayard

Yes, Judy, I would expect that the run rate will be about that or slightly less. We actually started having some of that leverage coming through in the fourth quarter of last year, so it'll actually go down a little bit because of what we're cycling.


Your next question comes from Kaumil Gajrawala - UBS.

Kaumil Gajrawala - UBS

A couple questions on the regions that you mentioned with the per caps under 150. First, just quickly, how much of your volume comes from those regions? And then second, given the economic environment, should we be assuming a lower run rate, maybe these regions in aggregate going forward? And then are some of these regions big enough that we should start seeing margins grow at a much faster rate than we're seeing sales grow?

Muhtar Kent

I think roughly it's fair to say about a third of our volume globally will come from those kind of markets, per capitas of around 150. And I think that what you've seen in many of the markets that were there and now are at higher per capitas - Latin American markets, South Africa, Turkey and so forth, that have passed that level - you're seeing margins for the system improving fairly radically. And I think that as we see per capitas growing, we certainly will make sure that the same trend is also valid for margin improvement and enhancement.

And I think that we are seeing from many African markets and many other smaller Latin American markets, Asian markets, Middle Eastern markets, Eurasian markets, that, as they approach the sort of 100 to 150 per capita range the scale of our business is beginning to power ahead and that we're seeing really good growth levels and also margin enhancement in these countries.

Kaumil Gajrawala - UBS

And then on a volume run rate?

Muhtar Kent

I think that basically I am cautiously optimistic that we will have growth coming through in all those markets, as we've seen this year.


Your next question comes from Christine Farkas - Merrill Lynch.

Christine Farkas - Merrill Lynch

There were some reversals, as you indicated, in the third quarter versus the second quarter. I'm wondering if you can talk about early fourth quarter trends, specifically in Russia given their macro environment, China post the Olympics and how those trends are, and then Mexico on the back of the U.S. economy. I mean, your volumes there have been pretty strong. Can you talk about perhaps the competitive environment?

Muhtar Kent

Firstly, I wouldn't call it reversals. I would call it improvements. But I think I can't give you basically guidance for quarter four at the moment, but I can tell you that our business is very, very strong in markets in Latin America, including but not limited to Mexico, as well as China. And I think that we certainly are going to be looking at ensuring that we can move forward with our plans for Q4 and '09 so that our picture of success remains valid, that we can meet or exceed our long-term growth targets.

Christine Farkas - Merrill Lynch

And then a follow-up for Gary. I think if I heard you correctly you mentioned equity income may have been boosted by the impact of the sale of the Pakistan bottler. Can you tell us how much was reflected in that line item?

Gary P. Fayard

Yes, Christine. What I said was it would now be reported in equity income. We actually closed the transaction at the very end of the third quarter, so starting in the fourth quarter, but it's really not going to be a significant change. The biggest change you'll see is just it'll be a drag on top line revenue, but relative to income it's not going to make a big difference at all.

Christine Farkas - Merrill Lynch

So the equity income line was actually just the regular equity income drawing from your anchor bottlers, etc.

Gary P. Fayard

Correct. Correct.


Your next question comes from Bryan Spillane - Banc of America Securities.

Bryan Spillane - Banc of America Securities

Gary, a question for you on liquidity. Just two areas of interest; one is what's the potential that there may be a tax holiday to allow you to repatriate some of that cash back to the U.S. without taking the tax penalty? And then second, just related to both bottlers and trade customers, are you seeing anything different in terms of the tighter credit markets, whether it's retailers carrying less inventory, maybe a destocking situation, or bottlers that may not have otherwise been under stress that may be stressed by the liquidity or the credit market?

Gary P. Fayard

Number one, potential for a tax holiday, you know, coming up to the election and everything else, I really don't know. If it happened we would look at it and we'd make the right decision for the long term, but that one I really can't speculate on. I don't know at this point. What I do know is we've got the cash. We can access it if needed, but whether we repatriate or not, I really can't comment on that.

Relative to bottlers and trade customers, I'd say two things. Let me address both; first, receivables, as we've really been working on our working capital. And, in fact, if you look at our cash flow, in fact, I'll point out one item within our cash flow statement that does not - it makes it look like we did not improve working capital as much as we did. There's about a $350 million tax item on a settlement of an issue with - a foreign tax issue where we paid the cash in the quarter, and we'll actually recoup it, we'll get it back, but it'll be - we'll get it back in the fourth quarter or early first quarter of next year.

So if you look, then, if you take that out, we actually bettered our use of working capital significantly, I mean, like $700 million or so year-to-date Q3 versus year-to-date Q2.

The other is our days in receivables are exactly in line with where they were at the end of third quarter last year, so we've not seen any issues there. We've also not seen a lot of destocking because for us obviously it's primarily with the bottlers, and we actually work with the bottlers every year as we put our plans together on optimizing what their inventory should be. And so it's something we work on routinely every year to ensure that they're in exactly the right place because we don't want them holding too much inventory and having a lot of working capital tied up, either.

So I think we're in a pretty good place right now.


Your next question comes from Lauren Torres - HSBC.

Lauren Torres - HSBC

[inaudible] has been rather vocal, I'd say, over the course of this year with regard to challenges in several of their markets. You've been somewhat more positive on emerging market growth, but I was hoping you could address specific markets, expectations for Russia, maybe parts of Eastern Europe. I know there's some macro challenges or there are macro challenges, but I was just curious about your thoughts looking out over the next year or so about a return to some more normalized growth there.

Muhtar Kent

Yes, Lauren. First, the current conditions in Eastern Europe, Russia, the markets of Eurasia are still - the macroeconomic conditions are still such that they are generating growth. And the sentiment is a lot better than it is, say, in the United States or Western Europe.

Now, I don't think they'll get as bad as the United States or Western Europe. I don't think they will stay as good as they were in the past 12 months. Russia is certainly experiencing issues and problems in their financial markets. But I think that if you look at our business, the fundamentals of our business are strong in all these markets. We're a business, you know, you've got to keep in mind that we're a business that generates with our bottlers as a system $15 billion plus of cash a year. We visit multiple, multiple customers, millions of customers in these markets, and in many of these markets that you've referenced, the trade is very fragmented, very, very fragmented, and that I think is a big advantage going forward for us in working closely with all these smaller customers.

My experience in this kind of environment is that Coca-Cola and our brands become a bigger part of the revenue of these smaller customers in these circumstances. We mean more to these customers as we service them. No one services them like our system services them, and I think that is a huge advantage that we will continue to leverage in this environment.

Lauren Torres - HSBC

So with that said, even though we may see some volume weakness, you're still seeing share gains, be it volume or value share gains?

Muhtar Kent

Yes. And I do still believe that there will be growth in these markets for our business.


Your next question comes from Mark Swartzberg - Stifel Nicolaus & Company, Inc.

Mark Swartzberg - Stifel Nicolaus & Company, Inc.

Muhtar, acquisitions. I was hoping you could talk a little bit more here about you appetite for additional multi-billion dollar acquisitions generally? And then, with share repo being on hold because of Huiyuan, if the right thing were to present itself, is there any issue with your credit rating given, you know, you backed up your bottlers, that would prevent you over the near term from doing additional major acquisitions?

Muhtar Kent

Right. Mark, I'd just say the following: First, I said it and I'll repeat it again. Organic growth is key to our success. Sparkling growth is key to our success. It's the oxygen. We've got to balance sparkling growth with still growth, and we've got to have organic growth. And any opportunities for acquisitions will come on top of that. That remains absolutely valid.

Huiyuan, I think, is a great opportunity, and we continue to work with the Chinese government. We are the first company to apply to the Minister of Commerce under the new law, and we believe that we will prevail in China with that great opportunity.

If there are any other opportunities that present themselves, our strategy remains bolt-on acquisitions are still part of the strategy. And we will make sure that, if we see a great opportunity for the future of our business, complementing our existing business in a country, we will not let it go by.


Your next question comes from John Faucher - J.P. Morgan.

John Faucher - J.P. Morgan

In looking at the performance of your publicly traded anchor bottlers year-to-date, obviously some pretty tough times in that regard, so I guess a couple of questions. You've talked about selling off bottling assets. We've begun to see that a little bit. Has the change in the public market valuations drifted into the private markets? And then, flipping that around, given the fact that the private market valuations are so low, does that change your interest in maybe bringing more bottlers into the hospital ward or is that something you say, look, we're going to worry about the market. We'll let the market deal with that, and we're just focused on operating where we need to operate.

Muhtar Kent

I'll reflect on that and maybe Gary can also comment on it. Firstly, I was with - we had a big bottlers meeting three weeks ago with about 50 of our top bottlers around the world, the first meeting of its kind for some time, and I can only tell you that I think everyone comes away with tremendous passion, realistic optimism as well as determination to continue driving our business, to continue investing, and to continue to do the right things for our business whether they're public or private bottlers.

And I think that nothing really has changed from our strategy in terms of looking at homes for bottlers that - weaker currently - are running when it makes sense, the right homes, and also if there's a need, we will not hesitate to bring another bottler into our sphere. However, I don't see anything near on the horizon for us to do that right now, and I think that I came away, as well as our bottling partners came away, from that meeting really charged up and really feeling good about the future of our business.

Gary P. Fayard

And John, I would add relative to values of the bottlers that we have, that we own, I'd say a couple of things. Number one, we've always taken a long-term view basically that we would only sell a bottler if the purchaser had the financial and the management resources to really grow that market for the long term, and that when selling we would sell at a fair value. And so I would say that's still where we are. If we were looking to sell a bottler today, we would be looking for fair value and then that would be just subject to negotiation on how you define that number. But our strategy really has not changed at all.

John Faucher - J.P. Morgan

And then if I could ask one follow up on that, which would be you guys have been managing Philly Coke for awhile now. Any insight into how the rest of your North American bottling system should deal with its recent struggles given the fact that you guys have a little bit more hands on experience right now?

Muhtar Kent

Well, I think, John, we're learning from many experiments in North America. It's not just Philly. I think Philly is doing many things to prop up their on-premise business very successfully. In fact, they've been proving to everyone that sparkling beverages can grow again in North America if you do the right things. But then with many of our other bottlers, including [CC], we have a number of initiatives going, whether it be packaging initiatives, whether it be sparkling growth initiatives, whether it be still growth initiative, on-premise initiatives as well as in the Food Service business of ours, where we're looking at commercializing a number of innovations in the coming months.

So I think it's not just limited to Philly, and the entire system - the entire system - is really learning from all the - not experiments but lead market tests that we're doing, not just experiments. And I think that you will see us rolling out a number of those very, very shortly.

And Sandy Douglas is here, President of our North American business, and I'll ask him to also shed some light on that.

Sandy Douglas

Muhtar, I think you said it well. We've been working with the entire system on remerchandising the sparkling packaging mix with a number of lead markets, all bottlers involved. We're working closely with the system to create new processes and approaches for managing large customers, and we're continuing to work on integrating our supply chain to drive out waste and to be able to have more money to invest in the consumer and the customer.

And we couldn't be happier about bottler involvement and participation, and those lead markets, as you say, are presenting a road map for us to go forward that will put us in a stronger position in the years ahead.


Your next question comes from Marc Greenberg - Deutsche Bank Securities.

Marc Greenberg - Deutsche Bank Securities

First, just a follow up on John's question. In light of Pepsi's comments yesterday about taking a restructuring and investing significant new monies behind North America, Sandy or Muhtar, do you feel that the absolute level of investment behind the U.S. business is sufficient right now? Is it going to be a step change kind of a year in 2009?

Muhtar Kent

Yes, Marc, I think you need to understand that we have been on a path indicating and saying and wholly believing that sparkling beverages can grow in North America since late 2004. And we have pushed this agenda forward, and you've seen the successes of Coca-Cola Zero and many other initiatives. Fanta brand also doing really well in our business in North America.

Don't forget that we also took out $400 million in '05 and invested it in marketing across the world, and a lot of that was honed in here in the United States. So our marketing base had already grown.

We will continue with our bottling partners to ensure that we have the right level of investments in North America, to make sure that we can leverage all of the opportunities that we talked about in the answer to the previous question, to make sure that we can replicate great experiments, great examples, great lead market stories in both innovations in packaging, new price points, and much more inspiration at the point of sale, much more focus on gaining availability in the universe of accounts that we have. And learn from all the lead markets in the United States and make sure that we have the right level of investment, customer-facing and consumer-facing investments.

Marc Greenberg - Deutsche Bank Securities

Gary, just a quick housekeeping item. The 7% volume growth in Mexico, I'm wondering if there's any kind of a timing or acquisition bump in there. Based on comments and guidance from some of the larger Mexican bottlers, our sense was that it wasn't going to be that big a number in the quarter, and obviously expectations for the fourth quarter may be coming down a little bit. Can you talk to that?

Gary P. Fayard

Yes, Marc. In Mexico specifically, acquisitions contributed low single digits to that growth rate or 5 points to that growth rate and our organic was low single digits.


Your last question comes from Carlos Laboy - Credit Suisse.

Carlos Laboy - Credit Suisse

Muhtar, you've mentioned this, I think, in some form, but market downturns sometimes - they open up opportunities to radically change a market. Argentina a few years ago, for example, comes to mind. Can you expand on the company owned bottler performance expectation through this macro slowdown and whether it's Germany or the Philippines, what kind of opportunities do you see in this downturn to gain competitive ground?

Muhtar Kent

Well, Carlos, I see opportunities in their environment not just for our company owned bottling operations, for our entire bottling system. I want to stress that. And I think that the consolidation in Germany is complete. We are gaining share in the German market. We are doing some great things under one of our great operators in our bottling business in Germany, and we're gaining great traction with discounters in Germany. And I see the business fundamentals getting stronger every day.

In the Philippines, I think we're again doing exactly the right things for the long term. We had a disappointing quarter in the Philippines - it was 9% down - but you will see that trend improving going forward. And I think that the Philippines has had more than its fair share of this economic volatility in the third quarter, with food pricing really affecting consumer spending and sentiment. But going forward I believe that trends in the Philippines are going to improve.

And I think in China, again, we're doing exactly the right things to have a great, great business. I always say China is another Coca-Cola company, and I firmly believe that.


I'll now turn the call over to Mr. Kent for closing remarks.

Muhtar Kent

Thank you, Gary and Ann. Before we close the call I'd like to thank Ann Taylor for serving as Director of Investor Relations for the last four years. She and her team have done a tremendous job helping craft and deliver our strategic and financial message as the company has evolved during both Neville's and now my tenure as CEO. Ann will be moving within our organization to a role overseeing the company's transformation efforts, one of our most critical growth enablers. I want to thank Ann for her contributions, and I know she will continue to play a very meaningful role going forward.

I'm pleased to announce that [Jackson Kelly] has been appointed our new Director of Investor Relations. Jackson has spent the last two years working directly with me on global strategic initiatives, and Jackson's 17 years with the company, his background as a CPA as well as his experience in marketing, strategy and finance, will add an important new dimension to how we interact with each of you.

Thanks for joining us this morning, and have a great day.

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