The Coca-Cola Company Q4 2008 Earnings Call Transcript

| About: The Coca-Cola (KO)
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The Coca-Cola Company (NYSE:KO) Q4 2008 Earnings Call February 12, 2009 9:30 AM ET


Jackson Kelly - Vice President and Director of Investor Relations

Muhtar Kent - President and Chief Executive Officer

Gary P. Fayard - Chief Financial Officer


Judy Hong - Goldman Sachs & Company, Inc.

Marc Greenberg - Deutsche Bank Securities

John Faucher - J.P. Morgan

Kaumil Gajrawala - UBS

Christine Farkas – BAS-ML

Lauren Torres - HSBC

Mark Swartzberg - Stifel Nicolaus & Company, Inc.

Carlos Laboy - Credit Suisse

Celso Sanchez – Citigroup


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

Jackson Kelly

Good morning and thank you for being with us today. I'm joined by Muhtar Kent, our President and Chief Executive Officer, and Gary Fayard, our Chief Financial Officer. 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 periodic SEC report.

In addition, I would also like to note that we have posted schedules on our company’s 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 principles. Please look on our website for this information.

Now let me turn the call over to Muhtar.

Muhtar Kent

I am pleased to report that we have delivered another quarter and year of strong financial performance. This marks our ninth consecutive quarter of double-digit comparable EPS growth and the third straight year of meeting or exceeding our long-term growth targets.

Our results reflect the hard work and dedication of our global system through this incredibly challenging economic environment. Together with our bottling partners we are assertive and flexible in terms of managing our business, focusing strategies, accelerating actions, redirecting investments, and being prudent with our capital and other expenditures, while maintaining a disciplined long-term approach to our operations.

Our performance for the quarter and full year underscore our firm belief that there is no better business to be in than non-alcoholic commercial beverages. In a challenging environment we added another billion incremental unit cases in volume, essentially another Japan, our fifth largest volume market. We firmly believe our industry will continue to experience growth across all categories and geographies as macro population and person expenditure trends still highly favor the simple moments of pleasure we bring to our consumers over 1.5 billion times a day, a cent at a time.

Strong, decisive execution based on focused strategies enabled us to deliver continued global volume and value share gains across key geographies as well as categories. As we all manage through these globally challenging times, volume and value share gains will continue to be critical benchmarks for our performance progress.

We remain on track to deliver $0.5 billion in annualized savings from productivity initiatives by 2011. The continued acceleration of these efforts are going to enable our cash to be re-deployed to drive investments for sustainable growth. And there is no question that this year will pose unique macroeconomic challenges for all businesses.

That said, we are not content to just ride out the storm, rather we will leverage this as an opportunity to further build the equity of our brands and drive value for our system and customers. Our highly skilled management team has navigated through a very difficult operating conditions around the world before and is well equipped to run our operations in these challenging times.

I’m confident that our solid brands, as well as our business fundamentals, coupled with a sound balance sheet, robust cash generating model, and strong bottling partners spread across all five continents, provide a sound foundation for our management team to continue delivering against our long-term targets this year and position our company and our system to become even stronger over the long term.

Looking at this past quarter and year, we delivered 4% unit case growth for the past quarter and 5% unit case growth for the full year of 2008. Our international operations again led the way with 6% volume growth for the quarter and the full year. In close, close collaboration with our bottling partners, we are building from a strong competitive position with share that is three times that of our nearest competitor to drive continued, solid international growth.

This growth was well balanced across the entire globe as each of our five geographic operating groups outpaced the industry for the year, resulting in consistent top- and bottom-line performance. By any measure, we continue to believe these are strong results. We credit our performance to a consistent set of strategic initiatives.

Now I would like to take you through some of the progress we have made against those strategic initiatives. First, drive growth in sparkling and still beverages. Sparkling beverages are the very oxygen of our business, as I’ve said many times. Unit case volume for sparkling beverages grew 2% for the full year with our international performance up 4%, representing incremental growth of 0.5 billion unit cases last year.

Full year global performance was driven by Coca-Cola, up 2%; Coca-Cola Zero up 35% with nearly 600.0 million unit cases sold; Sprite, which became our third trademark to reach 2.0 billion unit cases in annual volume, was up 6%, led by countries like China and India; and Fanta, driven by innovation, was up 3%.

Coca-Cola continues to be the brand that consumers love most around the world with a three-to-one favorite brand preference versus our global competitor.

Our Olympic sponsorship is a great, great example of how incremental investments have an exponential impact on building the global equity of our powerful brands. During the most successful Olympic activation in our history, we connected with more than 0.5 billion consumers in China and were cited by many as the most recognized and effective sponsor of the Beijing games.

Also, we are continuing to build on the heritage as well as the incredible global appeal of our flagship brand with the recent launch of our new worldwide Open Happiness campaign. This exciting new integrated marketing campaign is the next generation of the Coke Side of Life and stays true to Coca-Cola’s 123-year heritage, while opening new doors to connect with consumers around the world in a relevant and timely manner.

Again, this year our ads rated highly during Super Bowl, and importantly, Open Happiness will be leveraged globally with launched in most of key markets by mid-2009.

Importantly, we gained sparkling beverage share globally for the quarter and the year across most of our key global markets.

Our still beverage unit case volume increased 13% for the year, driven by strong growth in existing brands and several strategic brand acquisitions. Internationally still beverages were up 17%. Still beverage growth across each of our operating groups drove category volume and value share gains globally. Leading the way were gains by Vitaminwater and our global juice, tea, coffee, as well as energy brands.

Our strategy to build on the world’s strongest juice business continues to succeed. Minute Maid Pulpy, already a huge success in China, is being expanded to several other key international markets. Here in North America our multitude juice strategy continues to outperform the category and drive share gains. The Simply trademark is quickly approaching billion-dollar brand status. Our Latin American acquisitions are providing growth and scale to drive efficiencies for our bottling partners.

In 2008 we continued to innovate with new brand launches such as the successful Original Leaf Tea in China. We are also leveraging our partnership with Illy and launched this ready-to-drink coffee in ten markets in close collaboration with our bottling partner Coca-Cola Illy.

Glaceau, led by Vitaminwater, remains well on track to become a $2.0 billion trademark through continued volume and value share gains and we have several new product innovations in store for this year. we grew Glaceau double digits in the quarter as well as full year in the U.S. while expanding this great brand to five international markets in 2008.

And finally, better marketing focus drove performance for our critically important Georgia coffee brand in Japan. Unit case volume for Georgia grew 2% for the year in 2008, driven by 9% growth in key core Georgia flavors.

Before I move on to a summary of our geographies, let me briefly touch on two innovations that many of you will get to experience at the upcoming Cagney Conference next week in Florida, one in ingredients and the other in equipment.

In 2008 we announced two significant advances. First, the introduction of products sweetened with Truvia, an all natural non-nutritive sweetener. We have already launched several products, two new Aguila flavors along with Sprite Green, the first sparkling beverage enhanced with this break-through sweetener. Also we are announcing the launch of Vitaminwater Ten, the perfect combination of ten naturally-sweetened calories and great taste.

Second, last September we unveiled our breakthrough fountain dispensing technology that empowers consumers to select from over 100 branded beverages in the same footprint as our current six-valve fountain. Through unique design and micro-dosing technology this is surely something you will want to try first-hand at the Cagney Conference next week.

These are just two examples of how the Coca-Cola Company is applying new thinking and new ways of quickly leveraging our R&D investments across our global operations.

We continue to leverage our geographic footprint in over 200 countries where our three-fold strategy is focused on: first, leveraging our share leadership position for profit in developed markets; second, driving value as we achieve scale in developing markets; and investing for volume growth in the emerging markets.

Let me share a few highlights from some key markets. In Japan we delivered our largest unit case volume year on record, successfully cycling 3% growth in the prior year, resulting in non-alcoholic commercial beverage share gains. We continue to invest in our three-cola strategy and this investment paid off with the 5% growth of sparkling beverages during the year, led by trademark Coca-Cola.

Europe grew 3% for the year, cycling 5%, continuing our successful efforts to gain share in both sparkling and still categories. Continued expansion of Coke Zero was strong in European marketing platforms such as our 007-Bond activation and the Christmas activation on Coca-Cola drove our sparkling beverage growth.

And in Latin America, which is a great example of how we achieved scale in a developing market very rapidly. We delivered solid balanced growth with all Latin America business units delivering mid- to high-single-digit unit case volume growth and share gains for the year. Coca-Cola increased 4% and still beverages increased 40% as we continued to leverage the regionally important [Kuka Staballa].

In Russia, unit case volume increased slightly for the year, primarily the impact from unseasonable weather during the summer and economic pressures at year end. Despite the slowdown of volume growth in Russia, we gained volume and value share in non-alcoholic registered drink beverages in the quarter and full year. The fundamentals of our business in this key market remain very strong.

In Turkey, one of our leading emerging markets, we increased unit case volume 11% in the quarter and 15% for the full year as we benefitted from the strength of our brand portfolio and solid execution by Coca-Cola Bishkek, our bottling partner.

Importantly, in our 120 countries with per caps less than 150, our volume growth was 9% for the year, cycling 11% in the prior year. We continue to believe we are early in the game in key emerging markets. To that end, this past year we grew volume 19% in China and 14% in India, the two fastest growth economies in the world.

While China is clearly expecting slower GDP growth this year, we are confident in our plans to ensure our brands as affordable consumers’ favorites continue to offer real value to Chinese consumers during these difficult times.

During 2009 each of our operating groups will continue to execute against our strategies and focus on delivering consistent results. We will continue working closely with our bottling partners in these challenging times to adapt to conditions on the ground and better meet the needs of our consumers, as well as customers.

In North America, we along with so many other industries, are facing some of the most challenging economic conditions in the world. However, we made real progress last year. In what is arguably the world’s most competitive beverage market, I am pleased that our brand portfolio is getting stronger, our customer relationships are improving dramatically, and we have a more aligned and capable bottling system.

The continued success and enduring investment in this progress is enabled by a relentless ongoing focus on cost management and productivity. The fundamental measurement of our results is brand health and share gains. Clearly, the volatile economic environment and bottler price increase impacted our results, however, it is important to recognize we outperformed the industry. When measuring across all channels, we gained volume and value share in the quarter and the full year.

In fact, the Coca-Cola Company owned five of the top ten fastest growing trademarks in incremental retail sales in North America for 2008 with Coca-Cola Zero, Glacéau, Simply, Nos, and FUZE. And our system also handled half the volume of the Monster trademark, given us access to a sixth brand.

Real and tangible progress is being made in strengthening our aligned with our bottlers, as illustrated by strong customer teamwork across our system. We have a rigorous portfolio effectiveness and efficiency initiatives with our bottlers as we move forward. These actions are ongoing and we expect will drive incremental gains and long-term profitability for our system in North America.

Our marketing and innovation calendar for North America is robust with numerous activities across the portfolio. As the economic environment strengthens, we believe our continued investment in our brands, customer and franchise relationships, will enable us to return our sparkling brands to growth and accelerate continued growth in our still brands.

Before I turn the call over to Gary, let’s just step back and review what makes the Coca-Cola Company’s model so special. First, we have some of the best brands in the world and the cash flow to keep investing in them to build long-term equity with our consumers and customers. Second, our invested capital generates high returns. Simply said, we were built for times like these. The Coca-Cola system generates up to $50.0 million of cash per day. Our fundamentally sound balance sheet allows us to pursue growth and we have demonstrated the ability to deliver a reliable dividend which has increased each of the last 46 years.

We enter 2009 with the same mindset as one year ago: deliver on a consistent set of strategies and initiatives that provide us a disciplined road map to operate in the best consumer business in the world, a business with significant long-term opportunities. We have a tradition of delivering growth over the long term and it is our intention to continue to drive long-term balance to sustainable growth for the benefit of our shareholders.

Our picture of success this year is clear. First, maintain simplicity by focusing on a critical set of measurable deliverables. Second, increase the speed and efficiency of execution to capitalize on opportunities while mitigating risk. And third, remain constructively discontent in all that we do in order to deliver against our long-term growth targets and enhance our long-term brand and system health.

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

Gary P. Fayard

As Muhtar indicated, we once again delivered strong financial results in the quarter, resulting in our ninth consecutive quarter of double-digit comparable EPS growth and our third consecutive year of delivering against our long-term growth targets.

We continued with our disciplined approach to financial management using our many business levers, consistent volume, solid price mix, improving operating expense leverage, and disciplined capital allocation to deliver value customers, consumers, and share owners, even in this difficult operating environment.

Our management’s effort to diligently execute our strategies and work with our bottlers to adapt to the marketplace is a testament to the resilience of our business model and the talents of our employees.

We reported earnings per share of $0.43 per quarter on a diluted basis in the quarter, however, this included a net charge of $0.21 per share. $0.15 of the net charge was related primarily to our proportionate share of the non-cash impairment charge recorded by Coca-Cola Enterprises. The remaining $0.06 of the net charge was primarily related to asset impairments, restructuring charges, and costs related to our global productivity initiatives. Therefore comparable earnings per share was $0.64 per share, an increase of 10%.

For the year, recorded EPS was $2.49. Comparable EPS was up 17% to $3.15. The net charge of $0.66 per share primarily related to non-cash impairment charges recorded at Coca-Cola Enterprises in the second and fourth quarters as well as asset impairments, restructuring charges, and costs related to our productivity initiatives.

For the year unit case volume growth was 5%, essentially in line with concentrate sales. Revenue growth was 11% as we balanced the volume and value equation by delivering a 4% increase in concentrate sales, a 3% favorable impact from price and mix, and a 4% currency benefit for the year.

Full year comparable operating income was up 17% as our productivity efforts have begun to pay off and includes a 6% benefit from currency. Again, ahead of our long-term targets.

Importantly, our advantageous geographic diversity played a key role with each of our international operating groups contributing to our profit growth for the year. In terms of margins, our core business remains healthy, expanding margins for the full year as we drove top-line growth and delivered operating expense leverage. Bottling investments continues to improve margins as well.

In the fourth quarter you will have noticed that we delivered significant operating expense leverage. We do not expect to achieve that Q4 leverage in 2009. Rather we would expect the run rate for 2009 operating expense leverage to be more in line with our 2008 full year results. Our productivity initiatives remain on track to deliver $500.0 million in annual savings by year end 2011 and we are accelerating efforts to rewire the organization to support our next era of growth.

Cash flow from operations for the year increased 6% to $7.6 billion on strong underlying business performance. But you may have noticed that working capital was a $700.0 million year-over-year use of cash. The working capital change was primarily one-time international tax payments which will reverse in 2009 and cash payments related to restructuring charges and our costs incurred for productivity initiatives.

Excluding these items, cash from operations increased 13%. As part of our ongoing productivity initiatives we will continue to focus on managing our working capital in 2009.

We repurchased approximately $1.1 billion of our stock for the full year in line with our prior guidance. Additionally, the company paid $3.5 billion in dividends to shareholders in 2008.

Our balance sheet remains fundamentally strong with solid interest coverage ratios and a conservatively invested cash position of $4.7 billion.

Now let me address some of the factors that we see impacting 2009. First, let me reiterate Muhtar’s sentiment, there is no question that the coming year will pose macroeconomic challenges for all businesses but we will not be content to just ride out the storm. We will leverage this as an opportunity to drive our business for the long-term and build on our track record of success.

We have continued to evolve and improve our operational and fiscal discipline while building on our solid foundation with consistent strategic priorities. Our seasoned management team is poised to continue to do so in 2009.

As you know, our long-term currency-neutral growth targets are 6% to 8% operating income growth and high single-digit ongoing earnings per share growth. Our picture of success for 2009 is to achieve those targets as well as enhancing brand health and gaining share despite the difficult operating environment. Additionally, we will track share gain across all of the key markets and categories.

On concentrate pricing we will continue to work in alignment with our bottlers to adjust our occasion, brand, price, pack, and channel architecture to bring value to both our customers and consumers. As always, our intention is to take pricing in line with our bottlers net retail pricing over the long term.

As in the fourth quarter, our revenues will continue to be impacted due to structural changes primarily related to disposal of bottlers. We would expect a similar drag during a portion of 2009 as we cycle the sale of the re-milled bottler in Brazil at the end of Q2 and the Pakistan bottler investment at the end of Q3.

We expect to deliver operating expense leverage on both the core business and bottling businesses in 2009. We will continue to invest behind our brands and innovation initiatives.

Additionally, selling and service expenses will increase as we invest for growth in our bottling operations as well as investments behind our band acquisitions, particularly in North America.

G&A expenses were tightly controlled in 2008 and we will continue with our disciplined approach in 2009, including further progress on our productivity initiatives.

As for our pension plan, we remain on fairly solid ground, however, we were impacted by declines in the value of plan assets and a lower discount rate. As a result we would expect pension expense to increase $0.03 to $0.04 per share in 2009 as compared to 2008.

From a capital expenditure standpoint, we purchased approximately $1.8 billion in net property plant equipment during 2008. For 2009 we would expect the total company net capital expenditures to be approximately $1.8 billion to $2.0 billion as we continue to make investments in our business as well as recently acquired bottling operations.

For share repurchase, we do not plan to repurchase additional shares in 2009 due to the pending acquisition of Huiyuan Juice Company in China.

Now let me move to currency. As expected, currency has proved to be a headwind in the fourth quarter, impacting comparable operating income by a negative 9%. As for our 2009 currency outlook, it is obviously a very volatile environment and there are no clear trends for the U.S. dollar. As we are all observing, the market’s risk perspectives continue to evolve and may move to mute the attractiveness of the dollar as the year progresses.

However, there are many different scenarios that could play out and we are managing against this backdrop. We are effectively 100% hedged on key hard currencies like the Euro and the yen for all of 2009, but emerging market currencies continue to be particularly volatile and provide the highest risk and opportunity for our currency expectations for this year.

Base on our current hedge position, we are expecting an estimated 10% to 12% headwind from currencies in the first quarter and will provide further updates as we progress through the year. It is important to note that we manage our business in local currency to ensure we make the right decisions for the long-term business health.

For 2009 our best estimate is that the full year underlying effective tax rate will be approximately 23% to 24%, up from the rate of 2008 largely due to the impact of currency.

Finally, let me say a few words about quarterly phasing. As many of you know, we report quarterly unit case volume growth on an average daily sales basis to eliminate comparability issues due to calendar variations. For 2009 we will have one fewer day, since 2008 was a leap year. first quarter of 2009 will have five more days than Q1 2008 and the fourth quarter of 2009 will have six fewer days versus Q4 2008. This will not impact our unit case sales reporting but will impact our concentrate sales and therefore revenues.

Additionally, both Easter and the impact of July 4th U.S. holiday will shift into Q2 this year. We expect 2009 will be a challenging but successful year. We continue to be a consistent generator of operating cash flow providing attractive, long-term returns to our shareholders.

Well, that’s it with what I wanted to cover this morning. We are ready for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Judy Hong - Goldman Sachs & Company, Inc.

Judy Hong - Goldman Sachs & Company, Inc.

Muhtar, can you speak to the volume strength that we saw in fourth quarter in a lot of the international markets? And if you can go through whether this is really driven by the category being very resilient in the face of the economic downturn or you’re just maybe gaining more share in those markets. And then, as we look out at 2009, you talked about the picture of success in 2009, meeting your long-term targets, does that apply to the volume targets of 3% to 5% as well?

Muhtar Kent

The answer to the first part of your question is both, the resilience of the category. As I said many, many times, we are selling moments of pleasure billions of times a day. More than 1.5 billion times a day, a cent at a time, and our bottling partners have been continuing to invest very heavily on the ground in equipment, with the customers in the past two or three years, and I think that’s paying off. We had a balance growth. Our developed markets like Europe grew as well as our emerging markets and Latin America grew. Eurasia and Africa grew very well. The brick markets, particularly India and China, had a very strong quarter in the last quarter of last year. So I think overall we have had a very strong quarter.

As far as going forward, we recognize the challenges, our picture of success still remains to meet our long-term growth targets, but we have said we will have bumps along the road. And we may not achieve our targets in one or two quarters, that is possible. But our picture of success remains to continue to drive investments, to ensure that we are investing in the health of our brands, and to ensure that we gain market share as we have done this past year—this past quarter and this past year—and to come out of this tunnel with stronger portfolios, strong brands.

And one thing you will not see us doing is that we will not cut our communication with our consumers. We will continue to invest with our bottling partners. Our bottling partners’ appetite for investment remains very strong around the world and that is a very good litmus test of what’s happening in the marketplace with our system.

Judy Hong - Goldman Sachs & Company, Inc.

In relations to that, we have seen media rates coming down pretty substantially. Is there an opportunity to kind of look at the marketing expense line and get more leverage and maybe flow some the more productivity savings to the bottom line in this environment where the media spending is trending down?

Muhtar Kent

Well, even when media costs were not trending down, we were achieving significant efficiencies in our marketing. We have much fewer agencies that we are working with. We have consolidated our agencies. The Coke Side of Life campaign was leveraged all across the globe as will be the Open Happiness campaign. The new Open Happiness campaign agency numbers have gone down by more than half and I think we have driven a lot of efficiencies in our market research costs, in our marketing, over the past 12 months.

That will continue and we will evaluate the cost of media but ensure that our GRPs remain very healthy in the way that we communicate with our consumers across the world. And I have personally seen, in Russia, where I have live through these crises in the past in the 1990s and in Turkey, Argentina. It’s always paid off to ensure that you keep communicating with your consumers in macroeconomic conditions as the ones that we’re living through right now.

Judy Hong - Goldman Sachs & Company, Inc.

Gary, is there any transactional impact that we should be aware of beyond that 10% to 12% impact in the first quarter you talked about. And if the reason you’re not giving the full year currency guidance is just volatility in the emerging markets currency and really the full year depends on where these currencies go from here through the end of the year?

Gary P. Fayard

That’s exactly right. 10% to 12% impact on the first quarter at operating income is kind of what we see today for the quarter. But you’ve seen the volatility as well as we have and I think to try to give guidance on what currencies could do for the full year is impossible. Because of these swings. I think long term there is no doubt in my mind that the dollar is going to weaken. For many reasons.

But right now obviously it is a safe haven, it’s why the feds is looking at adding four new primary dealers for Treasuries right now because of everybody going to safe havens. But at some point it’s going to turn. We just don’t know when it’s going to turn.


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

Marc Greenberg - Deutsche Bank Securities

Muhtar, I was hoping you could elaborate on something. Expense management in the quarter was terrific. Can you talk about longer term how you can increase investing to drive brand growth and at the same time get expense leverage? Beyond some of the comments to Judy. I guess I’m thinking about the sustainability of lower SG&A into 2009.

Muhtar Kent

Firstly, I think what we want to say is that over this year and 2009 you should be guided by our full year expense leverage from last year. So 4% to 5% opex leverage is what you should be looking at for 2009 and that is going to be achieved through our continuing successful transformation process. As you know, we started that process way ahead of the current macroeconomic downturn. It’s been going on now for more than 12 months. We have already captured significant effectiveness and efficiency and productivity and we will continue to drive our target of $0.5 billion by 2011, recurring.

And I think that is a combination of effectiveness and efficiency in our process and our systems and how we approach our business and also it is being driven by the whole new architecture that we have in our organization that we put into place at the end of 2006 in our international markets and North America continues to drive also a lot of effectiveness and efficiency inside their own transformation process. And this is all outside of the supply chain efficiencies and effectiveness that we are also beginning to tap into.

Gary P. Fayard

I would just add a little color on that and I am going to give you a little granularity because as we are going through rewiring our company for significantly enhanced effectiveness, what we’re getting is a lot of efficiency as well. And let me just give you a really granular example.

In finance itself, global finance within our company, we have been going through and starting to rationalize the companies we own and the legal entities. So when we do a consolidation each month or each quarter, we consolidate about 1,200 entities. We have gone through and last week have found 112 of those that we can eliminate, another 200 that we can probably eliminate, and if you just think about, there are people spending many, many hours doing work on legal entities that actually don’t need to exist, that have just been around for years, that there was a reason for in the beginning.

It goes to how do we do inter-company accounting. We are in granular detail of how we wire and rewire the company to be significantly more effective and we will be a lot more efficient at the same time. So we are very confident that we’re going the right way and doing the right things for long term and getting short-term benefits while we’re doing it.

Muhtar Kent

One other point I want to add is that we always talk about the money side of it. I think the piece I would like you to really focus on also is the organization now that we have in place, as a result of the work that we have done, is executing with much greater speed and effectiveness and mitigating risks as it goes along. And I think that’s the piece that is also very important. We are much closer to the marketplace today, much fewer meetings, much more time in the marketplace with our bottling partners, with our customers, and that’s really also a significant advantage of the transformation process, in addition to the actual monetary side of the effectiveness.


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

John Faucher - J.P. Morgan

Gary, the capex has risen and you talked about investing in companies and company-owned bottlers. It’s a little bit of a change from how we have historically thought of capex at the Coca-Cola Company. So how long do you see this higher capex trend continuing and as you begin to divest more bottlers does it have less of an incremental impact year-over-year?

Gary P. Fayard

If you look at, like I said, about capex last year and in 2009, $1.8 billion to $2.0 billion for 2009, about half of it or so is actually related to the bottling investments group or the bottlers that we own. My expectation, as you saw, in 2008 is over time we will be net sellers and as we actually sell bottlers, the capex will come down fairly significantly.

The capex is really being driven right now because as we continue to invest in China and the Philippines and Germany and those bottlers, and really invest in India, investing in cold drink equipment, those kinds of things, to drive volume, value, across the long term, we think we’re doing the right things for the long term in those, but capex will start coming down significantly over the next five years, if you will, as we are disposing of some of those bottlers.


Your next question comes from Kaumil Gajrawala – UBS.

Kaumil Gajrawala - UBS

As you consider this economic slowdown in emerging markets and the fact that a good percentage of your portfolio is the premium ready-to-drink offering, to what extent are you considering affordability in these markets and what would you do to address it?

Muhtar Kent

I think we are always ensuring that our products are affordable, we have the right price pack architecture and we are doing a lot more work on ensuring that we have the right price points in this current environment, adding more packages that will bring the price point down, both in the at-home market as well as in the immediate consumption market.

And we’re not doing that only in emerging markets. We are doing it across the world, in North America, right here, with really good initial results in terms of the new price pack channel architecture. With 16-ounce and some other smaller packages. And so as well as places like Mexico, to ensure that we are much more a part of the new location and we increase pantry.

And so what we have seen in this environment is that it is really working well in terms of driving the pantry at home, creating more occasions in this environment, and whether it’s in China or whether it’s in Great Britain. In China we just launched a new 355 ml PT that’s doing, initial results are very good, just to give you one example.

So I think across the entire geography, across all continents, we have done a lot of work in the past four or five months in that area.

Kaumil Gajrawala - UBS

With media deflation, are you maintaining the budget and increasing impressions or maintaining the number of impressions and just enjoying some efficiency?

Muhtar Kent

I think we are doing all of the above and it’s too early to say where it’s going to pan out. One thing you can be sure of is we are not going to reduce our weight and we will capitalize on the current market trends.


Your next question comes from Christine Farkas – BAS-ML.

Christine Farkas – BAS-ML

I’m looking at a couple of your mature markets, North America and Europe and you talked about unusually high leverage in the quarter and maybe you can speak to this on a more normalized basis, but the margins were quite strong. Are some savings coming through from the $500.0 million program already? Was this about market allocation timing of where you put your dollars in the quarter? And then within those regions, speak to the strong food service trends and what countries worked or didn’t work in Western Europe.

Muhtar Kent

Basically I think as far as Europe is concerned, I think we have had a lot of initiatives for Pan European programs over the last 12 months and I think they have really started working well for us in this environment. So we have got a lot of efficiencies, and they are sustainable efficiencies.

Across the whole company and across our headquarter’s functions, we have started to reap some of the benefits already of the transformation process. We have got a lot more coming. And again, in terms of, there is a tremendous focus on G&A across the whole company, and particularly opex. And what we’ve said is this is the time to be choiceful about how we spend our money and anything that basically does not drive value does not have a place.

So we have certainly also launched a lot of products with better margins in Europe. New teas, new smoothies, that has brought some efficiencies effectiveness on the P&L line, in our European business.

In North America, a lot of work is going on in effectiveness and efficiency. Part of the transformation process but also the work that is ongoing with our bottling partners in the supply chain and then some other areas in order to drive again some leverage on our P&L.

In terms of food service, we are cycling (3%) from Q4 of 2008 which was the beginning of the economic downturn. And I think that, again, we have launched some new products in our food service in Q4, some new teas, some new coffees and smoothies. And I think basically all the investments that we’re doing with all our customers are paying dividends.

Christine Farkas – BAS-ML

Was Germany positive in the quarter?

Muhtar Kent

Basically we would prefer not to comment on individual countries but I would just basically say to you that overall, key markets like Great Britain, France, were positive and I think all the programs that we have in Germany are paying dividends. And 2009 is going to be the first full year of consolidation in Germany when we will get really, the results of all the good work that’s being done. We’re gaining traction in Germany.

Gary P. Fayard

Let me add one thing to your Europe question, and I don’t know if this is where you were coming from but I know I picked up a few comments earlier this morning about Europe and I think a lot of people perhaps thought currency was a really significant tailwind in Europe in the fourth quarter. We had some hedge coverage in place, so let me just kind of give you a little bit on that.

Currency for Europe was a negative 8, so if you look at that versus what you are expecting it to be, you may find that there is a little bit of difference as well because of our hedge coverage.


Your next question comes from Lauren Torres – HSBC.

Lauren Torres - HSBC

Yesterday Coke Enterprises spoke about their strengthening relationship with you and the formation of Coca-Cola Supply. I was hoping you could just give us a little bit of your thoughts behind this organization, what are your expectations. How should we gauge and monitor the progress that’s developing in this new relationship.

Muhtar Kent

I think basically we are very serious about our efforts in Coca-Cola Supply and I think we have got a very good program in place in terms of the new integrated supply chain initiative that will consolidate the common supply chain initiatives. It will optimize product flow and create over $150.0 million of annual incremental operating income by 2011 for CC and the Coca-Cola Company. I think all our other bottling partners are going to benefit from that. It is a very serious initiative.

Lauren Torres - HSBC

Is there anything we’re going to see or should expect to see over the course of this year? I know we’re talking about the savings through the next couple of years but as far as the immediate impact, just something somewhat more material that we will be seeing coming through?

Muhtar Kent

I think you can look at it similar to the transformation initiative that we announced over 12 months ago in our company. Basically you can expect that the 2009 plan will deliver an aligned outcome for both companies, the Coca-Cola Company as well as our bottling partners and certainly a more progressive agreement for the future.

I think that we will wrap up everything as best as we can and we have a very good plan forward.


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

Mark Swartzberg - Stifel Nicolaus & Company, Inc.

When you look, particularly at your emerging market businesses, and even to an extent your developed market businesses, can you talk a little about some of the assumptions you are making about key macro trends unfolding? Obviously they are getting worse but I’m particularly interest about how you’re thinking about inflation and other key variables affecting the broader environment you are operating in.

Muhtar Kent

Well, what you have to do is absolutely remain flexible because it’s changing so fast. We don’t right now, I think immediate there is no threat of inflation but over a period of time there is no question with all the amount of money that’s being printed around the world, no question that we need to make some planning ahead. We may be facing an inflationary environment but we certainly don’t know when that will when, if that will happen, and where it will start or how it will evolve.

All I can tell you is that we have lived through those inflationary environment in the past and our businesses really, we have great operating talent across the whole world that have operated in that environment, whether it be Latin America, in Eurasian countries and we will certainly be looking at what’s evolving and we will remain very flexible as well as ready for anything that comes in that area.

Gary P. Fayard

I would add one thing about inflation. If you go back and look at history, any time we really enter into an inflationary environment our company actually benefits. We do extremely well in that type of environment.

Mark Swartzberg - Stifel Nicolaus & Company, Inc.

Some interesting comments out of Diagio this morning describing at least parts of their emerging markets business as having not only the better growth but perhaps the most enduring growth. When you look at your own business and think about volatility and risk of slowdown and magnitude of slowdown outside of the U.S., what do you consider your markets that are most vulnerable to slowdown, just from a macro perspective? Hearing what you all can do to defend against that is I think pretty persuasive, but what do you kind of put at the top of the list as your most vulnerable market? If you have to put something up there.

Muhtar Kent

Certainly we talked about Russia. Russian has been hit in a different way and earlier than some of the other markets and we have certainly seen the results of that slowdown on our business, too. Our volume growth has slowed down.

Philippines was one of the other markets that’s been hit significantly earlier than the rest, in terms of the macroeconomic situation and in terms of the remittances that were driving a lot of the consumption in that economy came down. And we have seen the impact of that.

And no question that there are some Latin American markets that are beginning to feel the United States more, like Mexico. We know that the GNP in India and China is not going to be the same as it was in the past 12 months, it’s going to be slower but there will be growth. The Chinese prime minister reiterated the objectives of his government to ensure that they grow at 7% to 8% last week and announced more details of their stimulus package, which is very real.

And I think all governments, across the world, are launching, in their own way, different stimulus packages whether it’s tax cuts, investment incentives, supporting small and medium size enterprises. So across the world there is a tremendous effort that we are seeing by a lot of governments, by central banks, to ensure that the macroeconomic downturn in their markets is not as deep as in some of the other markets that have already been hit.

And we shall see how all of that evolves. Then we have others that are still resilient that are still growing, countries in Latin America, Indonesia, Turkey, and I have mentioned earlier, we have got a lot of small countries that make up a fairly large portion of our volume. Over 100 countries that we have, with per caps of less than 150, where last year we have grown almost double digits, 8% to 9% in these countries.

So all the investments that we’re doing on the ground, in distribution, in customer connectivity, in cold drink equipment, in packaging, in new product, are paying off in a lot of those markets.


Your next question comes from Carlos Laboy - Credit Suisse.

Carlos Laboy - Credit Suisse

On Japan, the co-op of the bottlers there was being restructured and you were looking at the structure of Japan, I was hoping you could offer some thoughts on how you see that system evolving and whether you see yourself having to buy any bottlers there. And on the issue of China, how detached do you feel that your business trends might be from these macro pressures given how low you are in the evolutionary development of these markets for you?

Muhtar Kent

Let me just talk first, shed some light on the supply chain. The supply chain was set up for speed, flexibility, as well as scale, in Japan and none of that is being lost as we restructure it. The key is now it is much more aligned with local bottlers and how they ensure that their needs are met on a more timely basis. So it’s a restructuring but ensuring that the scale and the flexibility and the speed is still there. That is point number one on Japan.

In terms of detachment, in markets like India and China that you referenced, our per capitas area still very, very low. 24 in China, less than 24 in India and again, we know that there is a pressure on migrant workers, for example. I will give you one example in China, that are returning back to the rural areas. Well, we have 30+ bottling plants in China, scattered across the whole country. We are selling to those rural customers and we were selling to them before they migrated to the cities and we are selling to them now.

And we are, again, re-architecturing, creating new price points, ensuring that we are available and we are available in more formats with different price points to ensure that the affordability of our brands is still in place for Chinese and Indian consumers as well as consumers across all of the emerging markets can still afford and buy our products.

Trademark Coke in China was up 18% in Q4, Minute Main Pulpy, a great product, that was up almost more than 50% in Q4 and is now a couple of hundred million case business on its own in China. And we’ve doubled our volume in tea last year in China. Growth more than 90%. So again, a lot of our organic growth has been very successful in China. And I repeat, organic growth.

Carlos Laboy - Credit Suisse

Just to clarify on the Japan issue, do you see yourselves having to inject yourselves into Japan maybe more aggressively in terms of M&A? There was a transaction that hit the tape on Japanese bottling.

Muhtar Kent

I think the thing about Japan is, think about it, we have had success with our cluster in west Japan. It has produced good results, achieving great market results now, with that cluster that has been formed where we injected ourselves in a minority position but ensured that we played a critical role in creating West Japan.

And again, after the investment that we had in Coca-Cola Bottlers Tokyo, we are continuing to work to create the next cluster in Japan, around [Kynto] and if there is a need for us to inject ourselves in a small way, to ensure that we can play a role of catalyst there, we will do so.


Your final question comes from Celso Sanchez – Citigroup

Celso Sanchez – Citigroup

Could you talk a little bit about the fountain business in North America, specifically the U.S.? The innovations with the mega-choice dispenser that you will be displaying next week certainly encouraging. But if you could speak more to the organizational changes that may be occurring in terms of how you approach the business and how you approach it in conjunction with your bottlers? I would love to see your roles evolving, both bottler and brand owner, over the next 12 months or so.

Muhtar Kent

First, the fountain of the future is something we’re very excited about. We have been working on this as part of our innovation pipeline over the past couple of years and certainly what we have seen so far is very encouraging in that the consumer gets excited with the choice and with the flavors and certainly compared to a much more limited choice, we see great consumer excitement in the marketplace and how the consumer interacts.

So we’re excited with what that will bring to us in a key channel of our business in North America and other parts of the world as we roll it out. So our efforts are really focused on the deployment of beverage offerings that this will create a lot of excitement at the point of sale with all of our customers as we start to roll that out. And I hope that you can see it for yourself at Cagney next week.

In terms of the organizational change, an approach to business with our bottler and price pack architecture, don’t think about it as an organizational change. Think about it as a tremendously aligned approach. We have dual customer calling in about 20% of CC’s territory. We have begun to move to a single call model in the market to improve value to the customer and the system and it’s in early stages of its development and it’s all about being more effective in the marketplace and it’s all about being flexible and fast in the marketplace.

Celso Sanchez – Citigroup

That sounds like a procedural change but I was wondering more along the lines of the alignment you spoke of in the markets where there is not dual calling. Is there room for improvement, do you think, for the alignment of price pack between found and bottle can?

Muhtar Kent

I think there is and that’s one of the work streams that we have with CCE and our other bottling partners, what we call fountain harmony, which offers the opportunity to implement the occasions brands package pricing as well as channel architecture across on-premise channels in a manner that will ensure that we meet evolving consumer desires. And also the incremental volume opportunities.


There are no further questions in the queue.

Muhtar Kent

Thank you. Our focus in this challenging and dynamic environment is to proactively drive our strategic agenda. We see tremendous opportunity to extend the reach potential and profitability of our business around the world despite the prevailing macro conditions and we are confident we have the right strategies as well as the right leadership team to do just that. We also remain committed to always ensuring open and ongoing transparent communication with you, our investors.


This concludes today’s conference call.

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