Coca-Cola Q3 2007 Earnings Call Transcript

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The Coca-Cola Company (NYSE:KO) Q3 2007 Earnings Call October 17, 2007 8:30 AM ET


Ann Taylor - IR

Neville Isdell – Chairman, CEO

Muhtar Kent –President, COO

Gary Fayard - CFO


Christine Farkas - Merrill Lynch

Kaumil Gajrawala - UBS

John Faucher – JP Morgan

Bonnie Herzog - Citigroup

Bill Pecoriello - Morgan Stanley

Mark Swartzberg - Stifel Nicolaus

Lauren Torres - HSBC

Bryan Spillane - Banc of AmericaSecurities


I would like to welcome everyone to the Coca-Cola Company'sthird quarter 2007 earnings results conference call. (Operator Instructions) Iwould like to now introduce Ann Taylor, Vice President and Director of InvestorRelations.

Ann Taylor

Good morning, and thank you for being with us today. I amjoined by Neville Isdell, our Chairman and Chief Executive Officer; MuhtarKent, our President and Chief Operating Officer; and Gary Fayard, our ChiefFinancial Officer. Following prepared remarksthis morning, we will turn the call over for your questions.

Before we get started, I would like to remind you that thisconference call may contain forward-looking statements, including statementsconcerning long-term earnings objectives and should be considered inconjunction with cautionary statements contained in our earnings release and inthe company's most recent SEC report.

In addition, I would also like to note that we have postedschedules on our company website at under the financialinformation tab in the investor section, which reconciles our results asreported under Generally Accepted Accounting Principals to certain non-GAAPmeasures which may be referred to by our senior executives in our discussionthis morning, and from time to time in discussing our financial performance.Please look on our website for this information.

Now let me turn the call over to Neville.

Neville Isdell

Thank you, Ann and good morning, everyone. I will start thismorning with just a few brief observations about the third quarter results, andthen Muhtar will provide details on operational performance and Garywill follow with an overview of the financials.

Today we report another quarter of solid business results.The strength of our brand portfolio, the breadth of our global system and theculture of winning increasingly exhibited by our talented people right acrossthe company and the system continue to drive our business forward. Theinvestments that we have made in our brands, our early and continued focus onrevitalizing the culture through our manifesto for growth, and our commitmenttogether with our bottling partners to re-energize our marketing and improveoperational execution are all working. They are driving high quality, balancedgrowth in volume, revenues, profits and cash flow.

This is the third consecutive quarter in which we haveachieved 6% global unit case growth. Notably, this is our tenth consecutivequarter of delivering at least 4% volume growth, and top line growth continuesto be robust, reflecting our ability to capture the highest value opportunitiesacross the whole non-alcoholic, ready to drink industry.

Revenues increased 19% in the quarter. Now the acquisitionof bottlers contributed about 8 points of this growth, so even excluding thisimpact, revenues grew a very strong 11%, demonstrating the success of thecontinued system-wide focus on revenue growth management and segmentedexecution strategies.

We delivered our fourth consecutive quarter of double-digitcomparable EPS growth, up 15% versus the prior year. Ongoing operating incomefor the quarter increased 12%, and year-to-date increased 13%. Cash fromoperations for the quarter increased 18% on solid underlying businessperformance.

Importantly, our focus on productivity is resulting inoperating expense leverage for our core business. Our effective management ofcommodity cost pressures is also reflected in the results.

Our international operations again led the way, posting unitcase volume growth of 8%, and once again driving strong top line performance. Thegrowth continues to be sourced from both developed and emerging markets. Allinternational operating groups, with the exception of the European Union --which as anticipated had a challenging prior year quarter this cycle --delivered strong growth.

We're also on track with our plans for North America, which recorded sequential volume improvement. In North America, I would like to highlight the continued execution of ourthree cola strategy; in particular, Coca-Cola Zero, and also our ability todrive our still portfolio, which now of course includes Glacau.

In terms of our global portfolio performance, we achievedcontinued volume growth in sparkling beverages, while expanding our footprintand enhancing our offerings in still beverages. Today we're reporting anincrease of 4% in sparkling beverages. Within sparkling, continued emphasis onour three cola strategy resulted in 4% global growth in trademark Coca-Cola.

Coke Zero, now launched in 51 countries, continues to drivethe expansion of the sparkling category and gain share. Given the strong repeatrates for Coca-Cola Zero, we're focused on driving trial via sampling programsto continue to recruit new consumers and retain core Coca-Cola drinkers withreal Coca-Cola taste and zero sugar and calories.

In still beverages, globally strong performance from ourwater portfolio, but also from POWERade and Minute Maid led to a 14% increase.This solid growth across the portfolio resulted in our gaining non-alcoholic readyto drink volume and value share globally, driven by share increases insparkling and still beverages, both internationally and importantly in NorthAmerica. I would note that value share is growing faster than volume share, aswe focused on the highest value opportunities.

Overall therefore I am very pleased with the strongperformance in the quarter and year-to-date. As we enter the final quarter ofthe year, we will continue to leverage our leading brands, our globalfootprint, and our strategic acquisitions. We'll build our innovation pipelineand all the while driving productivity to continue to deliver sustainablegrowth and shareholder value.

Now let me turn the call over to Muhtar to provide thedetails.

Muhtar Kent

Thank you, Neville, and good morning, everyone. Overall,this was another strong quarter for the Coca-Cola Company, both financially andstrategically. Importantly, we continued to deliver on our commitment. Weachieved balanced geographic and portfolio growth, further solidifying ourfoundation for sustainable, long-term performance.

Our international operations continue to drive results forthe company through the strength of our bottling system and the power of ourbrands around the world. The aggressive actions we continue to take to restoregrowth in North America are starting to bear fruit. Oursystem-wide productivity efforts are allowing us to focus on driving top linegrowth and creating operating expense leverage. Finally, we continue to pushthe envelope with innovation in product, packaging, delivery and customerservice.

Today I would like to share with you details on our progressthis quarter, and add some perspective for the remainder of the year. Even witha very strong third quarter of 2006 to cycle in Europe,our international operations increased unit volume by 8% for the quarter,following our 9% growth in the first half of the year. Broad-based growthacross each of our international operating groups has enabled year-to-date volumegrowth of 6%. This speaks to the power of our global reach and the executioncapabilities of our bottling partners.

Volume growth in our international operations was once againled by the emerging markets. We achieved double-digit growth in such markets asChina, Russia,India, Brazil,Turkey, the Philippines,Pakistan, Eastern Europe and Southern Eurasia. Africaalso experienced solid growth across all business units. Additionally, weexperienced robust growth across Latin America.

Mexicodelivered 7% growth in the quarter, a particularly strong performancereflecting the success of our strategies to drive growth in sparkling beveragesled by Trademark Coca-Cola.

While it is clear that we're maintaining our focus andwinning internationally, there are a few key markets that I would like tohighlight where best practice sharing is leading to world class execution.

In China,we once again achieved double-digit growth this quarter. We are aggressivelyand strategically investing in our infrastructure and our route to marketinitiatives to continuously adopt to a rapidly changing marketplace.Year-to-date we have activated over 120,000 outlets, placed approximately175,000 new coolers and we surpassed the 1 billion cases sold benchmark earlierthan any other year in our history.

Sprite in Chinacontinues to perform exceptionally well, growing nearly 30% in the quarter andyear-to-date. As we start the one year countdown to the Beijingsummer Olympics, our focus will be on leveraging our leading brands to become astaple in the local communities and ensuring our full portfolio is readilyavailable in every outlet.

Let me turn now to the Philippines,where our efforts have led to improved execution and seamless integration.After two quarters of managing the bottling operations, our double-digit volumegrowth is ahead of our expectations. We have a first-class management team inplace that has a deep commitment to, and understanding of, the marketplace. Weare investing in the market there, adding 2,000 additional front end salesforceassociates, while driving supply chain efficiency.

Next in India,strong double-digit volume growth reflects the benefits of the initiatives weput in place in 2006 to rebuild the fundamentals of the franchise. Our marketinginitiatives continue to gain traction, supported by improvements andinvestments made in the bottling operations, including a specific focus on theright route to market, supply chain and people capability. As a result, werecorded share gains in the quarter for both sparkling beverages led byTrademark Coca-Cola, as well as still beverages led by our juice brands.

Russiais another example of how we're working with our bottling partner to invest ina market with tremendous opportunity and growth potential. The Multon juicebusiness, including the leading Dobriy brand, continues to provide a solidplatform for growth in our still beverages. Also during the quarter, ourbottler demonstrated a commitment to this market by expanding capacity with theacquisition of a brand new plant.

Japandelivered another solid performance in the quarter. The team there iseffectively executing our strategy of leveraging our core brands, particularlyTrademark Coca-Cola, to drive progress. Overall in the quarter, we gained sharein non-alcoholic ready to drink beverages, a validation that our strategy isworking.

In the quarter, we delivered more than 4% increase in unitcase volume, our fourth consecutive quarter of growth, with August andSeptember achieving record breaking sales levels; performance driven by trademarkCoca-Cola with year-to-date volume growth at its highest growth rate in 30years.

From a marketing perspective the Coke Side of Life campaignand promotion behind Coke Zero are having measurable success. Year-to-date, wehave attracted nearly 5 million new drinkers to the trademark versus the prioryear.

We also leveraged our successful work that we have underwayin Europe linking Coke and iTunes by launching a similarprogram in Japanthat utilizes all brands and packages. Our still beverage portfolio in Japangrew in the quarter as well. Sokenbicha Tea, Aquarius sports drink and both ofour water brands drove the results with each gaining share.

While the favorable warm weather benefited most areas of ourbusiness, it did have an adverse effect on the coffee category. Results from GeorgiaCoffee in the quarter were disappointing, as gains in the recently introducedVintage label did not fully offset declines in other flavors. We remain focusedon driving growth in the coffee category through innovation, new promotions andcontinued marketing investments behind the brand. We have gained significant traction in Japanand it is reflected in the year-to-date results. But we do recognize we stillhave more work to do.

As expected, the European Union faced difficult 2006comparables that had benefited from World Cup activation and acquisition. Inthe current quarter, solid unit case volume growth in Central and Southern Europe was offset by a volume decline in Western Europe,resulting from unfavorable summer weather across Western Europeand the difficult cycling. I am satisfied that we have the right strategies inplace and the initiatives taken by the EU leadership team over the last twoyears have built a solid foundation for balanced, sustainable, long-term growthin Europe.

Year-to-date, volumes in the EU have increased 4%. For thethird quarter, after removing the impact of acquisitions, the two-year compoundorganic growth rate is 2%. The performance of both our sparkling beverages andthe ongoing expansion of our still footprint are two strong indicators of theimprovements we have made.

Additionally, as a result of our successful programs, we'veoutperformed the industry in the quarter and year-to-date across the EU. Wehave made broad improvements in sparkling beverages through innovation andtargeted execution led by the implementation of our three cola strategy and thesuccess of Coke Zero.

The roll-out strategy has delivered year-to-date trademarkCoca-Cola growth of 3% and Coke Zero, which is now available in Europein 20 countries, has become approximately a 3 share brand across the EU, andhas achieved as high as an 8 share in markets like Denmarkand Greece.That is a direct result of the close alignments we have with our bottlingpartners as we execute this key strategy.

Additionally, we are driving expansion of our still platformacross Europe, both organically and throughacquisitions. Minute Maid, along with Nestea, Aquarius, POWERade and Burn, allachieved growth year-to-date driving still category share gain.

In Germany,we had a particularly challenging quarter this cycle as we achieved volumegrowth of 15% in the third quarter of 2006. While volume was down in Germanyfor the quarter, during the year we've been able to stabilize share performanceand we continue to make progress in executing our plans for long-term growth.

We also continue to improve channel penetration as webroaden our offerings to discounters, enhancing our position in a growingchannel where we have historically been under-represented. Also during thequarter, we finalized an agreement to consolidate the German bottlers. Ourfocus has now turned to improving our speed and flexibility with our customers andover time, driving supply chain efficiency.

Overall, I am very pleased with the performance of ourinternational operations and our operators continue to deliver high quality,broad-based growth while maintaining investments to solidify the foundation forsustainable growth in the future.

Let me now discuss the progress we're making in North America. In the quarter, we achieved 1% unit case volume growth,the first quarter of growth in five quarters. While this reflects the benefitof acquisitions and an improved trend in sparkling beverages, we are notsatisfied with our performance. However, I am confident that our North America system is executing against the right priorities and isfully committed to restoring sustainable growth in our home market. We continueto focus on revitalizing the sparkling beverage strategy with our three colastrategy: Red, Black and Silver.

Coca-Cola Zero, which achieved a 1.3 share in the quarter,delivered strong double-digit unit case volume growth and along with Diet Coke,drove sparkling category share gains in the quarter. We believe there is stillsignificant opportunity for increased awareness and penetration for Coke Zero.

Building on our success in Asia and Latin America, we introduced the new contour grip bottle in the U.S.for all three cola brands. While only launched in early September, we havealready achieved approximately 75% availability. The new bottle not only allowsus to further leverage our iconic image, but the package also contains 5% lessweight than the prior 20-ounce bottle, reducing our carbon footprint andmanufacturing cost. This is just the first of many exciting package innovationsthat we'll be pilot testing in different North America markets over the comingmonths.

The Glacau acquisition continues to perform ahead of ourexpectations as we have been able to leverage the strength of the system whilemaintaining the culture and innovation capabilities of the Glacau team. In thequarter, brand growth continued to accelerate, driven by both sales velocityand increased availability. We expect Glacau to continue to be a catalyst fordriving growth across the entire North America business.

Last quarter, I mentioned that we were working with ourbottlers and distribution partners to develop a hybrid operating model thatwould take advantage of the strength of the system and leverage existing routesto market. As we announced during the quarter, I am pleased to report that wehave finalized an agreement with nearly 100% of our U.S.bottlers on this front. This is real progress and speaks to the effectivealignment with our North America bottling partners. Webelieve the new operating model will benefit our system, will bring value toour customers and will deliver attractive returns to our share owners. Duringthe fourth quarter, we will be working to ensure seamless transition to thisnew operating model.

Additionally, as part of the agreement, we gained brandalignment for the next three years and agreed on our 2008 business planpriority. Overall, we remain relentlessly committed to our goal ofre-energizing our business in North America and becomingthe preferred beverage partner for our customers. In the fourth quarter, wewill continue to expect sequential improvement and further evidence of ourprogress as we execute against our key priorities.

Finally, I would like to discuss some of the initialprogress we have made in driving productivity to improve margin performance.Our objective is simple: improve our speed of execution and drive operatingexpense leverage. When we organize around our three pillars, namely consumermarketing, customer leadership and franchise leadership, not only do we driveour top line growth, but we improve efficiencies as well.

After successfully delayering our international operationsduring the first half of the year, we transitioned the process to North America. Central to the new operating framework in North America is the creation of three business units: sparklingbeverages, still beverages and emerging brands, along with Glacau.

To support our consumer leadership pillar, the new modeldefines roles in the organization and allows for greater clarity andaccountability for our priorities. As a result, we will be better equipped as atotal organization and as individual managers to win the marketplace and toclaim leadership with consumers, customers and bottlers.

In terms of the supply chain, we have made several initialsteps across the organization. As I mentioned earlier, as part of ourrestructuring in the Philippinesbottling operations, we're investing to grow our front end sales force by morethan 2,000 people as we take cost out of our supply chain to fund additionalcustomer-facing roles. Additionally, we announced initiatives to driveproductivity in our Irish concentrate operations, resulting in our plan toclose one of our concentrate plants. By executing lean productivityinitiatives, we were able to increase the capacity of our remaining twoconcentrate plants and remove the cost associated with the third plant.

Efforts are underway to drive cost savings throughingredient and packaging harmonization, along with projects to optimizeprocesses for the most efficient production of our product.

Ultimately, we are building a productivity-based culturewhere employees feel engaged in the process. We are changing behavior acrossthe system and making productivity a core part of the way we approach ourbusiness every single day. As we reinvigorate the organization and realize theproductivity gains, we will selectively reinvest behind our three pillars todrive further top line growth.

In summary, I am very pleased with these results whichvalidate the progress we are making against our strategic agenda. Theconsistent, balanced results we are achieving are a culmination of the entiresystem working together seamlessly, which has been a key focus for us and isessential to our long-term success. The foundation for sustainable growth isbuilt and I'm confident that we will continue to deliver on our promises andcreate long-term value for our share owners.

Now let me turn the call over to Gary.

Gary Fayard

Thanks, Muhtar andgood morning, everyone. As Neville and Muhtar indicated, we delivered anotherquarter of strong financial results. As you saw in the release, we reportedearnings per share of $0.71 on a diluted basis for the third quarter, anincrease of 15%. This included a net charge of $0.03 per share, primarilyrelated to restructuring charges, which was offset by a $0.03 per share gain,primarily related to the sale of a portion of our investment in Coca-ColaAmatil.

Therefore, after considering items impacting comparabilityin both the current and prior year, adjusted EPS for the quarter andyear-to-date increased 15%.

In addition, we lowered our expected underlying effectivetax rate on operations for 2007 to 22% from the previous estimate of 22.5% tobring the effective tax rate for the year in line with the current estimate, werecorded income tax expense at a rate of approximately 21.7% in the thirdquarter, which resulted in a tax benefit of $0.01 for the quarter. For 2008, weexpect the underlying effective tax rate to be between 22% and 22.5%.

Net revenue in the quarter increased 19%, which included an8% benefit from structural changes related to our acquisition of bottlers.Excluding the impact of these bottler acquisitions, revenue growth was 11%,driven by 6% increase in concentrate sales, a 1% benefit from price mix and a4% increase from currency.

Price mix benefit on the core concentrate business waspositive in the low single-digits. However, this was partially offset bybottling investments, primarily due to the volume decline in Germany.

We grew operating income by 10% on a reported basis. Afterconsidering factors impacting comparability in the current and prior years,operating income increased 12%, which includes a 3% benefit from currency. Soon an ongoing currency neutral basis, we grew operating income 9%.

SG&A increased 16% in the quarter, so let me take aminute to walk you through the increase. About 12 points of the increase weredue to currency bottler acquisitions and increased selling and service expensesin our consolidated bottling operations, and behind acquired brands as weinvested for growth. The remaining 4 points reflect continued solid investmentbehind our brands, and similar to our year-to-date results, G&A expensesincreased low single-digits, reflecting the early results of our productivityinitiatives and disciplined expense management.

So while the quarter's reported operating margins are 23.8%,this includes a significant impact due to the lower margin bottling operations,including the recent bottler acquisitions. Underlying margins on the corebusiness remain healthy as we drive top line growth and deliver operatingexpense leverage.

We repurchased $1.6 billion of our stock year-to-date and westill expect to repurchase a total of $1.75 billion to $2 billion for the fullyear 2007.

Cash from operations year-to-date increased 18% on strongunderlying business performance and a decrease in working capital, primarily asa result of cycling the higher net taxes paid in 2006 related to therepatriation of foreign earnings from 2005.

Now let me address some of the factors that we see impactingthe remainder of 2007. We recognize that there is some uncertainty as itrelates to the U.S.economy. However, as Muhtar said, we remain committed to restoring growth inour home market. We continue to expect sequential improvement in our North America performance as we finish out 2007.

We also remain positive on the global macroeconomic outlook,especially in many of our emerging markets. We will continue to manage ourcountry portfolio as we expect solid performance in most of our markets. We feelconfident in our progress and have built a solid foundation strategically,operationally and financially as we finish out the year.

Given the recent focus on commodity cost, I would like toprovide you with some insight into our point of view. In 2007 we have seenheadwinds across several key input costs. Globally, we have seen significantincreases in orange juice cost which we have effectively managed. The resulthas been year-to-date, mid single-digit unit case volume growth in our juiceand juice drink brands, while driving volume and value share globally.

The other significant commodity cost increases in 2007 havebeen in corn sweetener and aluminum, which was primarily impacting the North America bottling system and has been reflected in retail pricing.However, we are starting to see a moderation in commodity cost impactingbeverage companies, both globally and in North America,and we believe the worst is behind us. While commodity cost volatility remainsa risk, our current assumption is that commodity costs overall for the systemin 2008 will be essentially flat with 2007. For the company, we expectcommodity cost to be flat to down slightly versus 2007.

From a capital expenditure standpoint, as we stated lastquarter, we expect total company net capital expenditures for this year to bein the range of $1.5 billion to $1.6 billion as we make investments in recentlyacquired bottling operations.

Now let me move to currency. As I mentioned, we saw apositive impact from currencies for the quarter on operating income of 3%.Benefits from the euro, Brazilreal and sterling are being partially offset by weakness in the yen. We areeffectively covered for the full year on the yen and the euro. Based on currentspot rates and the expected impact of the coverage in place, we expect a midsingle-digit favorable impact of currency on the fourth quarter results.

We're in the process of finalizing our 2008 business plan,so we'll provide our outlook for 2008 on our year end call in February. That'sit for the topics I wanted to cover this morning, so we can now turn it overfor your questions.



Your first question comes from Christine Farkas - MerrillLynch.

Christine Farkas - Merrill Lynch

Can you quantify at all how much Glacau Infused added interms of basis points to your growth? In the past, water had been a drag interms of the larger volumes. Is that now cycling itself and no longer a factor?Thank you.

Muhtar Kent

Certainly we have had a very, very good solid performancewith Glacau. It added about 2 points overall.

In terms of the bottom line, actually, we are very pleasedwith the North America performance, even without Glacau, it still had adouble-digit growth in the quarter. So that's basically how I would phrasethat.

Christine Farkas - Merrill Lynch

And in terms of thewater?

Muhtar Kent

Water, I think we're pretty much through the cycling.There's still a little bit of impact but nothing like in the first twoquarters.


Your next question comes from Kaumil Gajrawala - UBS.

Kaumil Gajrawala - UBS

Can you talk a little bit about productivity, and if any ofthat will fall to the bottom-line?

Neville Isdell

Well, it clearly already is, because we had 1 point ofoperating leverage if you go down to the core business this quarter. Muhtarfocused on the really consistent drive that we have with regard to creating amuch more effective, a much more efficient system. You are going to see thatcontinuing, and it will evidence itself obviously in operating leverage, but itwill also allow us, where we selectively choose to do it, to invest behind thebrands and invest in terms of top line growth.

You see that virtuous cycle actually in this quarter, wherewe've got the operating leverage, we have reinvested behind the brands and thatcontinuing investment behind the brands drives the top line growth. That's thebalance that we'll continue to strike and we certainly see that continuinggoing forward.


Your next question comes from John Faucher – JP Morgan.

John Faucher - JP Morgan

You talked about the flattish commodity cost as we head into2008. The question is, how does that impact your feeling on concentratepricing, given the fact that particularly with CC you took less net concentratepricing in 2007 because of the commodity environment?

Neville Isdell

John, we're still obviously in our budget cycle and wehaven't finalized that at this point in time, so it's premature to speculate onthat. However, I would go back to the broader statements that I've made in thepast and that is that we will be increasing concentrate around about inflation,or slightly less. And also reflecting on the fact that as you look at thehealth of the overall bottling system and the recalibration that we have had todo really over the last seven or eight years, that we now have a very healthysystem so a more normal situation will prevail into the future. But it is tooearly for me to give you any real guidance on that for '08.


Your next question comes from Bonnie Herzog - Citigroup.

Bonnie Herzog - Citigroup

Unit case volume growth that you've reported this quarter,since your total worldwide volume growth you mentioned was up 6% and that wascertainly led by the international unit case volume growth which was up 8%, Ibelieve you mentioned North America was up 1%. I am quite frankly just simply trying to dothe math and understand how that works or where do I exclude the acquisition?

Muhtar Kent

We may have missed justthe beginning of your question, Bonnie, because there was interruption in the line. Tell me ifI haven't answered it properly. Internationally, as you said, we've grown 8%and in terms of both international as well as U.S.volume we're increasing still beverages double digits in both international aswell as in our North American operations. Overall, international we've grown 8%and in the U.S.we've grown overall 1%; that generates the average of 6% globally in thequarter.

Bonnie Herzog - Citigroup

I think you may haveanswered it. You're right, I just was trying to make sure I understood the mathcorrectly, Muhtar, because what you just stated, worldwide is up 6%,international is up 8% and North America is up 1%.

Muhtar Kent

That's right. And in both operations we've increased stillbeverages double-digit growth in both international and North America.

Neville Isdell

Bonnie, just to the other part of your question is how muchof that is acquisition? It's actually 1% on a global basis and 2% for North America. So the underlying North America is1, which is what you're looking for, I think, the plus 1%. Global is plus 6%and plus 5% if you exclude acquisitions.


Your next questionwill come from the line of Bill Pecoriello - Morgan Stanley.

Bill Pecoriello - Morgan Stanley

Good morning, everybody. On North Americaas you're looking out to '08, do you see most of the focus on the integrationand continuing the momentum behind Glacau, which is going to be a bigundertaking for the system, or do you also see a strong innovation pipeline andefforts to improve the core sparkling business? You had had mentioned in thepast leveraging Glacau benefits to re-energize the core and you brieflymentioned some package innovation in your prepared comments.

Muhtar Kent

Certainly Glacau is going to be a very important catalystfor sustainable growth in North America, and really,this new agreement is really a milestone with our bottling partners. Almostunanimous agreement with our bottling partners going forward, which iscompletely in line with our three key goals, which is leading growth insparkling beverages led by Trademark Coca-Cola, delivering our fastest volumegrowth in the still portfolio for North America; and being the preferred partnerfor our customers.

What this agreement has done is aligned our 2008 businessplan agreement and it's given us agreement on brand alignment, veryimportantly, for the next three years and it's also had very important impacton capability assessments going forward for reinvestment into our totalbusiness in the United States.

Now having said that, our key focus is still to stabilizeand regenerate growth in sparkling beverages and you'll see us innovating bothfrom a package point of view and our three cola strategy is really workingwell, driving growth in the diet category and sparkling beverages and we willcontinue to focus on that. We will also certainly be coming out with a lot ofinnovation in packaging in also sales equipment as we move forward. A key focuson the point of sale going forward in the United States with our bottling partners wherewe're fully aligned for Q4 onwards.

Gary Fayard

One other thing Iwould add, Bill, that I think gives us a lot of confidence in our statementsaround sequential improvement and winning in our home market is we have talkedabout in the past that we've been doing some tests around segmented executionand really ramping up those capabilities.

One of those is in Philadelphia.We've seen the results of that coming through this year and in fact in thequarter Philadelphia was positivein volume terms in sparkling. We know what we can do and have great confidencethat the entire bottler system can now execute behind what we're seeing andreally continue to improve our North America business.

Bill Pecoriello - Morgan Stanley

Great. So on that,you plan to take the learnings from Philadelphiaand extrapolate that out to the balance of the system?

Neville Isdell

Yes, we certainly do. We have many plans around leveragingthe best practice out of markets like Philadelphia,as well as some other markets and drive that through across the system with akey focus, as I said, on execution at the point of sale and driving packaginginnovation at the point of sale.

Just to give you the example of the grip bottle, which hasbeen a really important addition to our packing portfolio in the United States, it's already in 50 internationalmarkets and it's driving results across trademark Coca-Cola in all the markets thatit's been introduced and it's achieved about 75% availability already.


Your next question comes from Mark Swartzberg - StifelNicolaus.

Mark Swartzberg - Stifel Nicolaus

If you step back and look at the volume that this companyhas been producing, compared to what it might produce over the next year or so,if you take a mathematical view you could just say the compares are gettingtougher. If you take a qualitative view, you could say the momentum is reallypicking up here.

What in your mind, if you had to rank the key drivers of nomaterial slowdown and unit volume growth where we assuming you're managing themix as well as you have been, what in your mind ranks at the top here?

Neville Isdell

Mark, I wouldactually say consistency, execution and partnership with the global bottlers. Fromday one I have talked about executing for the long term and that that thenbuilds a momentum of its own. I also have said that don't judge us quarter byquarter, judge us over a period of time, because we will certainly havedifficult quarters. That happens.

Now, cycling the summer of '06 in Europe, wemanaged to be able to do that because of the strength of the rest of ourportfolio. You may recall that didn't occur when there was a very bad summer inEurope in '04, cycling a very strong summer in '03. So Ithink that underscores the fact that we have momentum and that momentum isgoing to continue.

It is broad-based. It is based on sparkling and the completereinvigoration that we have of the sparkling category. Muhtar has outlinedwhere we are with regard to that in North America andhow he feels that there will certainly be a recovery and we will have anabsence of the headwinds with regard to the cost pressures that we experiencedin '07 and '08 as well.

So I would really use the words consistency and continuingexecution, execution, execution. In a way, it's steady as she goes. There isnothing new we are going to say about a new initiative, it's all of the keydrivers of growth that we're going to continue to execute much better as we goforward and I think you see that happening with this management team as it hascome together very successfully.

Mark Swartzberg - Stifel Nicolaus

Coke Zero, you've got a level of detail globally we don'thave. The same question, obviously it's been an important contributor to growthbut there's real buy-in at the consumer level there. How do you think aboutthat brand as either a risk in terms of lapping or really continuing to act asa driver of growth?

Neville Isdell

I'll give you aheadline and let Muhtar give you some granularity. Every piece of evidence wehave is that that growth continues as we lap very successful launches.

Muhtar Kent

We are now in more than 50 countries. By the end of the yearit will be close to 60 interms of launches. Everywhere, whether broad-based Asia,Latin America, Eurasia, Europeand North America, everywhere the brand is performingtremendously well, high double-digits. But I'll give you one piece of statisticthat may help you. If you take the total global Diet Coca-Cola and Coca-ColaZero volume, we have a double-digit growth versus prior year. The importantthing is that in most, in almost all markets Coca-Cola Zero drives a substantialamount of incremental volume.

Of course, there is some cannibalization. But if you takethe two in terms of Coca-Cola Zero as well as Diet Coca-Cola and add the twotogether versus prior year, right now we have double-digits and very highrepeat and high velocity in all markets. So we expect this momentum to continuegoing forward and you can see that from our business where we're lapping,there's still tremendous velocity in the brand and horizontal expansion takingplace. That also is true for North America. We seetremendous potential right here in North America forfurther expansion of the brand.

Mark Swartzberg - Stifel Nicolaus

So it sounds likeeven the oldest market you're seeing that double-digit relationship?

Muhtar Kent



Your next question will come from the line of Lauren Torres -HSBC.

Lauren Torres - HSBC

Solid results this quarter from some of your previouslytroubled markets. I guess that would be Japan,India and the Philippines.Outside of just cycling easier comps, can you talk about what's fundamentallychanged in each of these markets? I know, Muhtar, you talked about it in yourprepared remarks. Why should we expect some of this positive momentum tocontinue?

Muhtar Kent

Well first as afocus, the important thing is that we have now out of our top 22 markets, 19 ofthem are growing and growing with an increased momentum. That's the key. Wecertainly have had, as you put, issues around four large markets last year.Those were Japan,India,certainly Philippines,Nigeria and allof those are showing positive growth right now.

Now as I said, out of the top 22 markets 19, there's stillthree of them that are not performing. There will always be some in ourportfolio across 200 markets that need fixing. I can assure you that we focuson those religiously and with intensity and we fix them. You see all those fourmarkets today that were not performing that I mentioned to you now growing.

All of them had different issues. We had indicated a plan torestore, to stabilize Japan.I think we have stabilized Japannow. From here on we will continue to execute in Japanand it is a very high per capita market and we will return to traditionalgrowth rates in Japan.

In the case of Philippines,in the case of India,in the case of Nigeria,they're emerging markets and we'll continue to drive our volume and gain sharein those markets.

Neville Isdell

Let me just add oneother thing which I think is important, because it comes from the wholestrategy of the formation of the bottler investment group. We now have veryskilled bottling professionals within the company and you see that in theresults in Indiaand the Philippines,where we are able to go into those sort of markets and very aggressively,particularly with the Philippines,turn around in a very short period of time.

Now, we have bottlers who are able to do that with marketsas well. But the strategic point is that what that does is it means that wetake a systemic view. We are able to think about the whole value chain, we'redoing that of course obviously when it comes to productivity as well. But we'vegot executives who now not only think about the concentrate side at theexclusion of the bottling side or vice versa, we now have a total systemicview.

When you're able to do that and link that togethereffectively, that's when you get the execution and that's when you get theresults. So that move has given us the intellectual capital within the businessto be able to execute the way we are doing and to be able to execute rapidly.


Your next question comes from Bryan Spillane - Banc ofAmerica Securities.

Bryan Spillane - Banc of America Securities

I just wanted to ask a question about productivity and Iguess the potential to start thinking about increasing the co-mingling of beerand soft drink distribution in some markets. If my memory is correct, this hasbeen a platform that's been in and out of favor at Coke over the years. But itappears like there's a few markets where that is effective right now and Iwould like to get an update on your current thinking, if it's changed at all asto whether or not that's a viable option in terms of creating some leverage insome markets around the world.

Muhtar Kent

Bryan, let me just firstly just say that our strategy and effortsaround productivity are to ensure that we have a realigned organization thatcan make decisions with speed, that we can drive value in key spend areasacross our organization on our system, build the foundation for sustainablegrowth going forward in key processes and then of course the culture piece.

In some exceptional situations, there may be distributionand there may be synergies in the back office. But clearly, we are focused toensure that we have exclusive management of the market development at the pointof sale across the world and this is critical for us. Developing outlet byoutlet, impulse creation across the world and that requires an exclusive focus.

So our thinking is very clear. Where there may be someopportunities on an exceptional basis, I think the bottling system finds those.It's not a strategy that we look to develop across the world from here andcertainly our strategy on productivity are those that I've outlined to you.


Your final question comes from Mark Swartzberg - StifelNicolaus.

Mark Swartzberg - Stifel Nicolaus

Muhtar, a quick question on Glacau North America. Anydifference in the contract, the distribution contracts you have with CCE versusother Coke bottlers?

Muhtar Kent

No. Essentially we have, as I said, an agreement, really Iwould call it a historical agreement, almost unanimous participation by all ourbottlers that essentially focuses on the areas that I've already outlinedbefore. It is the same with distributors.

Mark Swartzberg - Stifel Nicolaus

It's the same across distributors?

Muhtar Kent


Neville Isdell

Thank you very much, indeed, everyone. Thanks Muhtar andGary. Just to conclude, it's good to be with you again this morning. I justwant to reflect on the fact that for decades the Coca-Cola Company, we've stoodfor positivity, we've stood for happiness. One of the things I feel as I walkaround the corridors, the halls in Atlantaand also in our field locations, because we all spend a lot of time out therearound the globe, is that our employees are engaged and just as importantly,they're having fun again.

So I'm confident that our strategies are working. We remainresolute about delivering against our strategic agenda in order to continue tocreate sustainable growth and value for our shareholders.

Thank you very much indeed.

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