Coca-Cola Q4 2007 Earnings Call Transcript

| About: The Coca-Cola (KO)

The Coca-Cola Company (NYSE:KO)

Q4 2007 Earnings Call

February 13, 2008 8:30 am ET


Ann Taylor - Vice President and Director of Investor Relations

Neville Isdell - Chairman of the Board, Chief Executive Officer

Muhtar Kent - President, Chief Operating Officer

Gary P. Fayard - Chief Financial Officer, Executive Vice President


Judy Hong - Goldman Sachs

Bill Pecoriello - Morgan Stanley

Bryan Spillane - Bank of America

Mark Swartzberg - Stifel Nicolaus

John Faucher - J.P. Morgan

Carlos Laboy - Credit Suisse

Christine Farkas - Merrill Lynch

Justin Hott - Bear Stearns


Good morning. My name is Jennifer and I will be your conference facilitator. At this time, I would like to welcome everyone to The Coca-Cola Company’s fourth quarter 2007 earnings results conference call. (Operator Instructions) I would now like to introduce Ann Taylor, Vice President and Director of Investor Relations.

Ann Taylor

Good morning and thank you for being with us today. I am joined by Neville Isdell, our Chairman and Chief Executive Officer; Muhtar Kent, our President and Chief Operating Officer; and Gary Fayard, our Chief Financial Officer. Following prepared remarks this morning, we will turn the call over for your questions.

Before we get started, I would like to remind you that this conference call may contain forward-looking statements, including statements concerning long-term earnings objectives and should be considered in conjunction with cautionary statements contained in our earnings release and in the company’s most recent SEC report.

In addition, I would also like to note that we have posted schedules on our company website at under the financial information tab in the investors section, which reconcile our results as reported under generally accepted accounting principles to certain non-GAAP measures which may be referred to by our senior executives in our discussions this 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’m going to start this morning with a few brief observations about the results and also highlight some of our accomplishments for 2007. Muhtar will then provide details on operational performance and our priorities for the current year, followed by Gary’s overview of the financials and some additional perspective on 2008.

Today we reported a very positive finish to 2007, with another solid quarter of business results, a strong 5% unit case volume growth and 12% ongoing EPS growth capped an excellent year for The Coca-Cola Company.

In the fourth quarter, all operating units reported volume growth despite tough comparisons in some key markets. We benefited from the diversity of our geographic reach and our breadth and also the breadth of our product portfolio.

We delivered consistent financial performance and achieved results ahead of our long-term growth model in each quarter of 2007. By successfully executing our clearly defined strategies, we achieved the following full year results: 6% unit case volume growth, led by our international operations up 8% and robust 4% sparkling and 12% still beverage growth; 20% net revenue growth -- even when you exclude the acquisition of bottlers, net revenue grew 12%; ongoing operating income growth of 14%; comparable earnings per share of 14%; and cash flow from operations up 20%.

Notably, this is our 11th consecutive quarter of delivering at least 4% volume growth. The strong top line performance is translating to bottom line results as we delivered our fifth consecutive quarter of double-digit comparable EPS.

In 2007, we sold over 1.2 billion incremental unit cases, 1 billion being organic, not acquisition related. What this actually means is that our consumers refresh themselves 1.5 billion times each day with one of our beverages. We’re a company moving successfully by executing against a clear strategic growth agenda. Across the company and throughout the system, talented people are driving growth and developing a culture of innovation and also improving efficiency.

We realize the journey is long and we are by no means declaring victory but we can confidently say that we have a solid foundation upon which to deliver long-term sustainable growth and value for our shareholders.

In 2007, we put our manifesto for growth into action. In fact, we now call it the manifesto in action. We made commitments to strengthen our sparkling portfolio, to enhance our position in still beverages, to improve our capabilities in consumer marketing, customer leadership, and franchise leadership, and ensure that our business is sustainable.

I am pleased to report that we delivered against each one of these commitments and are well-positioned to do so again in 2008 and beyond.

Specifically, we strengthened our position in sparkling beverages with trademarks Coca-Cola, Sprite, and Fanta, all delivering solid unit case growth. In fact, overall we captured 72% of the global sparkling beverage industry growth for the year.

Trademark Coca-Cola continued to be the key driver, with Coca-Cola Zero driving expansion of the category and gaining share. Coca-Cola Zero is now in 55 countries and it has become our 12th billion-dollar brand. Moreover, we’re executing against our three cola strategy with passionate and award-winning global marketing campaigns. This strategy has delivered the highest growth in trademark Coca-Cola since 1998.

As I’ve discussed in the past, sparkling beverages are going to continue to be the backbone of our global growth in both developed and emerging markets. Through integrated marketing and connection of our brands to consumer passion points like the Olympics in 2008, American Idol, and Super Bowl, we are uniquely positioned to capture the highly profitable sparkling beverage opportunity.

We also enhanced and expanded our still beverage business through organic growth and targeted bolt-on acquisitions. The biggest headline was our acquisition of Glaceau and its vitamin water brand. The fast-growing premier active lifestyle beverage has now become our 13th billion-dollar brand.

The acquisition has changed the game in North America beverages and helped align the Coca-Cola system to invest behind a winning portfolio of brands.

Beyond that one headline is continued global success across categories. Trademark Minute Maid increased unit cases 5%, driven by the expansion of Minute Maid Pulpy in China and other emerging markets. We’ve built a strong global juice position in all of the BRIC countries -- Brazil with Jugos del Valle and Suco Mais, Russia with the Multon brands, India with Maaza and now Minute Maid, and of course China, where Minute Maid Pulpy is the number one brand in key metro markets.

In sports drinks and water, we continue to look for the highest value opportunities and drive innovation through functional enhancements.

Additionally, we are starting to make progress in the ready-to-drink tea and coffee categories. While we are number one globally in both categories, we are continuing to innovate in-house as well as work with our global partners Nestle and [Nilli] to capture the opportunity in these fast-growing categories.

This solid performance across the portfolio resulted in our company growing faster than the industry and capturing close to a quarter of the 5.5 billion incremental non-alcoholic ready-to-drink unit cases sold in 2007. We gained non-alcoholic ready-to-drink volume and value share globally, driven by share increases in both sparkling and still beverages.

Our progress in consumer marketing and consumer leadership sparked new interest in our expanding portfolio among shoppers, retail customers, and our bottling partners. The Coke side of life, happiness factory the movie, and other award-winning marketing programs have reignited the energy and the optimism right at the core of our brands, and our bottling partners are investing behind the business and they are driving inspirational markets themselves at the point of sale. The combined efforts across the system are working and driving our winning performance every day in the marketplace.

Next, a commitment that’s become a true passion for me. We recognize that we cannot have a sustainable business unless the communities that we serve are themselves sustainable.

Our commitments center around four key touch stones: water, where we announced our new global partnership with the World Wildlife Fund to conserve seven of the world’s most important watersheds and to become water neutral in all our beverage production processes.

Packaging, where we see opportunities to turn today’s waste products into valuable resources for the future. We announced a significant expansion of our U.S. recycling efforts by investing $60 million, including the building of the world’s largest PET bottle to bottle recycling plant in South Carolina and just last night, we announced the long-term target to recycle or reuse 100% of our aluminum beverage cans which we sell in the U.S., which builds on our previously announced goal to recycle or reuse 100% of our PET plastic bottles.

Climate -- we’re intensifying our efforts to reduce carbon emissions. For example, at the 2008 Summer Olympic Games, we’ll buy more than 5,000 climate friendly coolers and vending machines.

And finally, well-being -- we need all consumers to understand the equation of calories in and calories out. We provide a range of beverage choices for our consumers and believe they thrive at the nexus of refreshment and nutrition. They all play a role in a balance diet for all age groups.

Overall, I am pleased with our accomplishments and strong performance in the quarter and the year. We have put in place a strong foundation and remain confident in our outlook for 2008.

While we continue to monitor the weakness in the U.S. economy, we remain optimistic about the resiliency of our portfolio, particularly in the developing and emerging markets. Of course, our eyes are wide open and we’ll continue to analyze and respond appropriately to both opportunities and challenges. We believe that we will continue to progress off this strong base.

Before I turn the call over to Muhtar, I’d like to make a few comments about our announcement in December. As you know, we announced plans to begin a seamless transition of the CEO responsibilities to Muhtar effective July 1, 2008. This is something that I’ve been engaged with the board on since my return in 2004. I’ve always believed that effective succession must be planned early in the game and also must be one of the core imperatives of how you manage the company.

Having worked closely with Muhtar for nearly 20 years, I am confident that his combination of industry knowledge, operational excellence, strategic vision, and commitment to our people, which he has already demonstrated as President in 2008, will continue to take our company forward.

With that then, let me now turn the call over to Muhtar to provide the details on our operations.

Muhtar Kent

Thank you, Neville and good morning to everyone. The strong results we’ve achieved in the quarter completed what was a successful year for the company strategically, operationally, and financially. The consistent execution of our strategic agenda and the renewed vigor and confidence across the organization enabled us to deliver balanced geographic and portfolio growth throughout the year. The fourth quarter was no different, as all of our operating units once again delivered positive volume growth.

Clearly the systems investments behind this brand, its people and its capabilities are paying off and we have built a strong foundation for sustainable long-term performance.

In the first quarter of last year, I outlined my key priorities for 2007 and I am proud to say that due to the dedication of our people around the world, we have made significant progress against each of those initiatives.

First, our international operations continued to be the primary driver of growth for the company. Volume performance exceeded our long-term growth target in every quarter of 2007. This success reflects the disciplined execution and local approach of our bottling partners every day in the marketplace and the connection of our brands with consumers around the world.

Second, in North America we took a number of aggressive actions which addressed some of our challenges and enabled us to deliver on our commitment of sequential improvement in the second half of 2007. We remain committed to restoring consistent growth in our home market while becoming the preferred beverage partner for our customers.

Third, our system-wide efforts resulted in improved efficiency for faster decision making and operating expense savings. These savings created operating expense leverage and were partially reinvested to drive top line growth.

And finally, we continue to push the envelope with innovation in product, packaging, delivery, as well as customer service. The global success of Coca-Cola Zero, our most successful launch in the past 25 years, is a perfect example of this.

Today I’d like to share with you details on our progress and add some perspective on our priorities for 2008.

Our international operations continued their strong performance and increased full year unit case volume by 8%. The performance was broad-based, as evidenced by 19 of our key 22 markets delivering positive growth.

Unit case volume growth in our international operations was led by the emerging markets. For the year, we achieved double-digit unit case volume growth in such markets as China, India, Brazil, Russia, Turkey, Eastern Europe, and Southern Eurasia. In the Philippines, since we acquired control of the bottling operations we also have delivered double-digit growth. Africa also produced solid balanced growth across key markets, including a 13% growth in South Africa.

Whilst it is clear that we are maintaining our focus and winning internationally, there are a few key markets that I would like to highlight where aligned system execution is delivering progress and results.

Latin America continued the success with all business units delivering solid growth. Latin America is now our largest operating group in volume terms, selling over 6 billion unit cases. It is also our second most profitable operating unit with $1.75 billion in operating income. Mexico increased unit case volume 6% while Argentina increased 9% and Brazil delivered double-digit growth.

The strong performance reflects the success of our strategies to drive growth in sparkling beverages led by trademark Coca-Cola and expand our footprint in still beverages both organically as well as through acquisitions, such as Jugos del Valle.

The strong performance in Mexico is particularly noteworthy as it validates our ability to transfer best practices to drive balanced growth in high per capita markets all around the world.

In Mexico, our highest per capita market in the world, we added another 25 servings per person in 2007. The growth across the portfolio led to share gains in both sparkling as well as still beverages for the group.

The European Union group has established a solid foundation for sustainable growth, evidenced in the balanced geographic and category performance. Our marketing programs and strong execution of our bottling partners provided the platform to overcome a difficult summer weather comparison from 2006.

For the year, unit case volume increased 3%, successfully cycling 6% growth in the prior year, as we achieved solid growth in most key markets. We are encouraged by our progress in Great Britain, which returned to growth in the fourth quarter.

Full year volume results in Germany were positive, although volume was slightly down in the quarter as we cycled strong growth in the prior year quarter.

We continue to make progress in this market as demonstrated by our move to a one bottler system and remain confident that we are building a foundation for consistent sustainable performance in Germany over time.

Europe delivered solid growth with sparkling beverages up 2% and still beverages up 15% for the year. Sparkling growth was driven by 3% growth in trademark Coca-Cola, including the continued success of Coca-Cola Zero, now in 21 countries in the E.U.

The strong performance of still beverages was the result of solid organic growth in Minute Maid, along with Nestea, Aquarius, Powerade, and Burn, as well as targeted bolt-on acquisitions. The brand performance led to volume and value share gains in both sparkling and still beverages for the quarter and the full year.

It is clear we have the right strategies in place and the E.U. leadership team is effectively managing our business with the goal of delivering consistent, sustainable growth.

In 2007, we also validated our track record of rapidly addressing problem markets and delivering on our commitments to restore growth to those markets. Let me give you some examples.

Japan delivered its fifth consecutive quarter of unit case volume growth, cycling 2% growth in the prior year quarter. Importantly, all four key trademarks delivered growth. A double-digit volume increase in trademark Coca-Cola drove sparkling beverage growth. Execution of the three cola strategy led to trademark Coca-Cola achieving its highest volume growth rate in 30 years.

Georgia grew 1% in the quarter, its first growth in eight quarters. The performance was driven by growth of the 190-milliliter can in the vending channels. The results reflect progress against our previously shared plans to stabilize Georgia’s performance.

Aquarius and tea brands Sokenbicha, Karada Meguri-Cha, and [Iyethica] also continued to perform strongly with innovation and solid integrated marketing execution, leading to all four brands gaining share for the year.

We have gained significant traction in Japan during 2007. With our management team in place and the health of our brand portfolio improving, we will continue to build upon a stabilized business in 2008.

Now let me turn to the Philippines. After acquiring the bottling franchise in March of 2007, we committed to quickly stabilize this key market and demonstrate sequential improvement throughout 2007. Our team’s effort to seamlessly integrate and improve execution through improved availability and focus on rapid execution resulted in performance ahead of our original expectations and volume growth for the full year.

We continue to invest in market capabilities and cold drink equipment while driving supply chain efficiencies. We remain confident that our management team will continue to drive growth in 2008 in the Philippines.

Overall, I am very pleased with the performance of our international operations. We have a talented and experienced team of operators across the system and our bottling partners are aligned to deliver high quality, broad-based growth while investing to solidify the foundation for sustainable growth in the future.

Let me now discuss the progress we are making in North America. In the fourth quarter, we achieved 1% unit case volume growth, the second consecutive quarter of growth, and we delivered on our commitment of sequential improvement in the second half of 2007.

We continue to focus on revitalizing the sparkling beverage category with our three cola strategy, Red, Black and Silver. For the year, all three brands gained category share. Coca-Cola Zero continued to deliver strong double-digit unit case volume growth even after two years in the market place.

Our key priorities for Coca-Cola Zero are continuing to build trial, increase awareness, and furthering channel penetration.

For the second year in a row, the Coke side of life ads that were featured during the Super Bowl telecast were amongst the favorites of both media critics and viewers. It’s Mine, where the nice guy finishes first in a tussle for a Coke over the streets of Manhattan, made the top 10 list in U.S.A. Today’s ad meter and also was the most popular non-alcoholic beverage commercial out of nine beverage ads that aired during the Super Bowl event.

The Glaceau acquisition continues to perform beyond our expectations as the trademark achieved triple-digit unit case volume growth in the quarter, driven by both sales velocity and increased availability. Additionally, we successfully moved distribution to a hybrid model to take advantage of the strength of our system while leveraging Glaceau’s unique [route] to market strategy.

I am pleased to report that the transition to our bottlers has been successful. This acquisition has aligned our North America system and we continue to expect the acquisition to act as a catalyst for growth across our entire North American business.

While we have made significant strides with our portfolio and organization in 2007, we still have much to accomplish. Overall, however, I am confident that our North America system is executing against the right priorities and we remain relentlessly committed to our goal of returning our whole market to sustainable growth.

Our successes with Coca-Cola Zero, Glaceau, Powerade, Fuse, Full Throttle, Minute Maid, Simply Juices, Dasani, and our recent investment in Honest Tea, provides the business a much stronger base from which to build in 2008. Our bottling partners are aligned and the system is in an improved position to serve our customers and compete in the marketplace, even with an uncertain U.S. macroeconomic environment.

Finally, I’d like to share the progress we’ve made in driving efficiency and effectiveness. As I’ve said, the results of productivity ultimately is leverage in the income statement. In 2007, we successfully achieved this in the core business, as well as in our bottling investments group.

We flattened our organizations of 80 fully functional offices to 37 business units across the world. This allows us to improve the speed of decision-making and it improves our effectiveness.

We executed lean productivity initiatives at our concentrate manufacturing facilities and were able to increase capacity as well as operational efficiencies. This resulted in the elimination of costs associated with the concentrate plant in Ireland.

Within bottling investments, we reallocated expenses from manufacturing and production supply chain and invested in market facing roles to further drive execution in the trade.

For The Coca-Cola Company, productivity remains a critical growth enabler to ensure the sustainability of our results over time. Looking forward, we see three main areas of opportunity.

First, supply chain optimization, which will allow our system to maintain or enhance our gross margins and increase affordability of our product.

Second, marketing and innovation effectiveness, where we optimize investments behind our brands and leverage global best practices.

And third, operating efficiencies, which we use to fuel growth and build a foundation for future performance. This includes the ability to fund investments behind the highest impact innovations in products, packaging, ingredients, as well as equipment.

As I look forward into 2008, part of the reason I remain confident is the result of the robust planning process we completed with our bottling partners. We have the plans in place to drive towards our ultimate goal of sustainable growth. We are focused on five strategic priorities.

First, continue to drive growth from our leadership position in sparkling beverages. Sparkling beverages provides the oxygen to our business. We know there is tremendous opportunity to grow all of our sparkling products in both developed as well as emerging markets.

Second, drive faster growth in our still beverage portfolio by adding new functional benefits, developing affordable formulations, pursuing strategic bolt-on acquisitions, and seeking margin enhancements.

Third, continue to generate and leverage the balanced growth that we have achieved across our geographic footprint. Growth in our emerging and BRIC markets remain robust, even as headwinds are developing in the U.S. economy. In North America, our business is stronger, our bottlers continue to invest, and we are better positioned from a portfolio and operating structure basis.

Fourth, accelerate the commercialization of our innovation pipeline through aggressive investments in product, ingredients, packaging, and equipment.

Fifth, further strengthen our system capabilities. Consumer marketing, commercial leadership, and franchise leadership remain our core capabilities. We will continue to drive productivity across our system so that we can expedite decision making and rapidly respond to the changing marketplace.

Savings extracted from these initiatives will enhance our ability to achieve consistent and sustained growth.

And last but not least, leadership development is a top priority across our system, fostering even more collaboration, accountability, clarity, and calculated risk taking than ever before.

Supporting all of this is our staunch belief in the health of our business, supported by the sustainability of the communities we serve. We understand that by acting as an engaged positive corporate citizen, we helped create communities of favorably disposed consumers and as those communities grow, our business continues to flourish.

I am pleased with the results we achieved and the progress we made against our strategic agenda. As we enter 2008, we’ll be watching carefully with the volatility in the macroeconomic environment.

From the strengthened foundation which I referred to earlier, we are better prepared to weather any potential challenges. I look forward to 2008 being another successful year for The Coca-Cola Company.

Now let me turn the call over to Gary. Thank you.

Gary P. Fayard

Thanks, Muhtar. Good morning. As Neville and Muhtar indicated, the fourth quarter was a solid finish to the year, where we achieved strong consistent performance in all quarters. As you saw in the release, reported earnings per share was $0.52 on a diluted basis for the fourth quarter, an increase of 79%. This included a net charge of $0.06 per share, primarily related to restructuring charges and some asset write-downs. Therefore, after considering items impacting comparability in both the current and prior year, adjusted earnings per share for the quarter was $0.58 versus $0.52 in the prior year, an increase of 12%.

This is our fifth consecutive quarter of double-digit EPS growth and it’s important to note that we successfully cycled our toughest quarterly comparison, cycling double-digit growth in both ongoing operating income and earnings per share in Q4 2006, again with double-digit growth in Q4 2007.

I am sure you’ve also noticed that our volume growth rate for the quarter was 5% versus our full year growth of 6%. We believe this is a very solid result. Sparkling beverages grew 4% for the quarter and for the full year. Still beverages increased 11% versus full year 12%. This quarter was impacted by a strategic decision to de-emphasize low value water in several countries, such as China, which caused volume to round down to 5% in the quarter.

For the year, reported earnings per share increased 19% to $2.57. This included a net charge of $0.13 per share, primarily related to restructuring charges. After considering items impacting comparability in both years, earnings per share was $2.70 versus $2.37 in the prior year, a 14% increase.

For the year, unit case volume growth was 6%, in line with concentrate sales. Revenue growth was 20% and 12% excluding structural changes related to bottler acquisitions. The increase was driven by a 6% increase in concentrate, a 4% currency benefit, and a 2% favorable impact from price and mix. After considering factors impacting comparability, operating income growth was 14% and 10% on a currency neutral basis.

In terms of margins, our core business remains healthy and expanded margins for the full year as we drove top line growth and delivered operating expense leverage. Bottling investments continues to improve margins as well.

Cash from operations for the year increased 20% to $7.1 billion on strong underlying business performance and a decrease in working capital. We repurchased approximately $1.75 billion of our stock for the full year, in line with our prior guidance. Additionally, the company paid $3.1 billion in dividends to shareowners in 2007. For 2007, this contributed to a 30% total return to our shareowners.

Now let me address some of the factors that we see impacting the company in 2008. As you know, our long-term growth targets are 3% to 4% volume growth, 6% to 8% ongoing currency neutral operating income growth, and high-single-digit ongoing earnings per share growth.

We successfully exceeded these targets in 2007. Our picture of success will be to continue to exceed these targets. We recognize that there is some uncertainty, particularly as it relates to the U.S. economy. However, as Muhtar said, we remain committed to restoring growth in our home market and believe our business is well-positioned to navigate headwinds that might develop.

Emerging and BRIC markets have maintained their robust growth, even against the backdrop of uncertainty in the U.S. market, and we remain positive on the global macroeconomic outlook, especially in many of these emerging markets.

As Muhtar detailed, we will continue to focus on driving efficiency and effectiveness across our organization and will utilize the realized benefits to further improve our ability to deliver consistent and sustained performance.

On commodity cost, 2007 was certainly a difficult year with cost pressures from several of our key system inputs, particularly in North America. Commodity cost volatility remains a risk. However, as we said on the third quarter call, for 2008 we continue to expect to see a moderation in commodity cost pressures. Currently our assumptions on commodity cost pressures. Currently our assumptions on commodity costs versus 2007 are a slight increase for the system and essentially flat for the company.

We expect to deliver operating expense leverage on both the core and bottling business in 2008 and 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 brand acquisitions, particularly in North America.

General and administrative expenses were tightly controlled in 2007 and we will continue our disciplined approach in 2008.

We would expect net interest costs to increase for 2008 as we carry a full year of higher debt associated with our 2007 acquisitions.

For 2008, our best estimate is that the full year underlying effective tax rate will be between 22% and 22.5%.

From a capital expenditure standpoint, we purchased approximately $1.4 billion in net PP&E during 2007. For 2008, we expect the total company net capital expenditures will be approximately $1.6 billion to $1.7 billion as we make investments in recently acquired bottling operations.

And we anticipate that our range of share repurchase on a gross basis will be $1.5 billion to $2 billion this year.

Now let me move to currency. We’re effectively covered for the full year on the YEN and for the first three quarters of 2008 on the other key hard currencies. Based on anticipated benefits of current hedging coverage in place, the company expects currencies to have a minimal impact on operating income in 2008.

Finally, let me say a few words about quarterly phasing. As many of you know, we report unit case volume on an average daily sales basis, kind of like same-store sales, to eliminate comparability issues due to calendar variations.

For 2008, we will have one extra day, since it is a leap year. The first quarter will have one fewer day than Q107 and the fourth quarter will have two more days versus Q407. This will not impact our unit case sales reporting but will impact our concentrate sales and therefore revenues. Additionally, also remember that Easter will shift from Q2 last year into Q1 this year.

Those are the topics that I wanted to cover and now we can turn it over to your questions. Operator.

Question-and-Answer Session


(Operator Instructions) Judy Hong, Goldman Sachs.

Judy Hong - Goldman Sachs

Good morning, everyone. Just looking at the fourth quarter volume trends globally, you’ve talked about a bit of a slowdown sequentially. I’m just wondering how much of the decision to de-emphasize the water brand really impacted the global volume number.

Muhtar Kent

Basically we had sparkling growth was both the same number for the full year as well as for the fourth quarter, and we still achieved 6% growth in sparkling in the international business. So we are very pleased with that trend.

What you see is a slight slowing down of the still beverages, mainly water and that because we’ve had growth in juice, good growth in juice comparable to the full year, same as in -- also in sports, also for tea and coffee. Essentially, it’s been a de-emphasizing of the water business in big large markets, particularly in Asia, like China, as well as in Indonesia and therefore -- and mainly as a result of that category being low value for us.

So it’s been a specific action on our part and we feel very confident about our business in all the categories.

Judy Hong - Goldman Sachs

And just kind of following up on that in terms of just looking at just over the next 12 to 24 months and thinking about the macro outlook and you sounded still pretty positive about the macro, but just in terms of whether there are any regions or markets that may be a bit more concerning if the U.S. starts to show a bigger slowdown?

Neville Isdell

Well, Judy -- by the way, just one other on the water, just to give you a data point -- full year growth was 13%. If we take out vitamin water here, the quarter was 8%, so that gives you the metric in terms of what happened with regard to water in the fourth quarter.

We don’t see there being a major impact on the emerging economies or the developing economies. There will be one or two economies in the developed world there will be housing bubbles, where we think there will be some pull-back. But balanced with that, we think the momentum that we have behind our existing brands and the new brands, the better execution, all the things that we talked about on our call are such that we are going to be able to manage what may be a half-a-percent decline at the worst in terms of overall global growth. And I think we already addressed the U.S. issue.

So let me put it to you this way -- we feel we’ve really got a strong tailwind behind our business and that that is going to carry us through 2008 even as we see some areas where there will be some economic dislocation.

Judy Hong - Goldman Sachs



Your next question comes from Bill Pecoriello with Morgan Stanley.

Bill Pecoriello - Morgan Stanley

I was hoping to get a little bit more color on the Pacific division, which decelerated sequentially. Aside from the China water strategy, some of the other markets that you didn’t discuss in the release -- Indonesia, Korea -- if there were some reasons there for the sequential deceleration versus the prior quarters and what efforts you are doing in those markets to improve the growth. Thanks.

Muhtar Kent

Essentially, Indonesia was specifically related again to a slowdown of the water, just like we mentioned for China. As far as Korea is concerned, as you know we’ve had a transition of our evolving partnership there and we are very confident that our new partnership and alignment with our new bottling partner there will take us into a modality of growth in Korea for the years to come and we are very confident about that. And there’s been a slight slowing down in the Australian economy but we feel generally confident that our business will perform in terms of its past historical trends in 2008 quarter by quarter in the Pacific.

Neville Isdell

Just to pick up on Korea, I think there is a real pattern here that you’ve seen with us in terms of acquisitions. In some instances, we were able to turn it around very quickly like the Philippines. In others, there have been more in-depth reforms required. Germany would be one example of that. And we take the pain along the way and that’s really Korea. That’s the story of Korea and we are confident that we’ll see that one turning around. I think we’ve got a good track record on that and we can deliver against it.

Bill Pecoriello - Morgan Stanley

And then on the bottled water, we should expect that across the four quarters as you made that decision and that would impact the following three quarters as well?

Muhtar Kent

No, I don’t believe that that will. I think that we now are in a situation where we are going into 2008 pretty clean in terms of where we want to be in the water category.

Bill Pecoriello - Morgan Stanley



Your next question comes from Bryan Spillane with Bank of America.

Bryan Spillane - Bank of America

A question on operating leverage; if you look at the 10% organic or currency neutral operating profit growth for the year, if you could give us a breakdown of how much of that growth was acquisitions, how much was cost savings, and then how much was underlying organic growth.

And then, as we look into ’08, you’ve taken -- the company has taken over $400 million of charges over the last two years and what’s the pay-back on some of the restructuring actions? And as we look at ’08, what should we be thinking about in terms of productivity as a contributor to profit growth?

Gary P. Fayard

Okay, Bryan. We hesitated on you for a minute because as we take these questions, we’re just trying to make sure that in fact you are who you say you are.

Bryan Spillane - Bank of America

I am the real deal.

Gary P. Fayard

As has been experienced by a few companies over the last couple of weeks. As we look at it, let me take you through a couple of different ways. Basically if you look at currency neutral operating income, we’ve gotten about -- of the 10% growth, about 8% of that is out of the core concentrate business, about a point is out of the bottling investments group, and about a point out of acquisitions, so that’s how it comes to your 10% operating income growth currency neutral.

Bryan Spillane - Bank of America


Gary P. Fayard

Relative to the charges, we in fact had within OpEx, and let me just talk about the quarter and the year, kind of the same. What we did this year, we had significant increase actually in marketing because we continue to invest behind the brands and we in fact accelerated some of that in the fourth quarter because we’ve had a really good year and we recognize that we have the flexibility to do that, to continue to drive the growth that we are seeing across all of our markets.

Within sales and service it’s been up but primarily it’s been up because of the acquisitions, primarily the bottlers but you’ll see some continue to increase from that not only there but also the brands.

Within G&A -- in fact, G&A in the fourth quarter on a -- if you kind of make it apples-to-apples, G&A in the fourth quarter was up 3% and 100% of that was due to incentive plans that we’ve accrued for long-term plans because we’ve actually exceeded and it’s where we want to be.

Relative to restructuring charges, the biggest restructuring charges this year was really around closing a concentrate in Ireland, which will be completely closed by mid-year 2008. It was a result, as we said, from applying lean manufacturing techniques to that and we’ve been able to in fact shut down a whole plant without any increases anywhere else. We are taking though -- some of that is going to the bottom line but a lot of that we are reinvesting actually behind the brand and into innovation to really drive the sustainability of this business over the long-term.

Bryan Spillane - Bank of America

So is it fair to say that the pool of productivity is going to be bigger in ’08 than it was in ’07? It’s just a matter of how much you spend back and how much you flex to the bottom line?

Muhtar Kent

I’d just like to make one comment just to build on what Gary said. You will see us relentlessly focusing across the entire organization on the effectiveness and the efficiency measures and also the programs. And we -- as we said, we’ll take some of that to create more expense leverage on the P&L and we will continue to invest for the health of our brands long-term.

Neville Isdell

Bryan, just on the fourth quarter marketing spend, when I came back, I discovered that we had major markets in the fourth quarter that weren’t spending a penny. The numbers weren’t that good but they still weren’t spending a penny. We are back up at a level now where we’ve got 12 months good, solid support right behind our brands and that’s part of what you saw in the fourth quarter. So we are in good shape now going into ’08.

Bryan Spillane - Bank of America

Okay, great. See you guys next week in Florida.


(Operator Instructions) Your next question comes from Mark Swartzberg with Stifel Nicolaus.

Mark Swartzberg - Stifel Nicolaus

Thanks. Good morning, everyone. Muhtar, I was hoping on your priorities, specifically the one about accelerating still beverage growth, you could peel the onion a bit more for us there, talk a little bit about the role of existing brands in that acceleration and the role of new brands and give us some idea, if you can, about regions where you see the opportunity being bigger than other regions.

Muhtar Kent

I think that, as I said, the key is organic growth, as I said in my remarks. Organic growth is the oxygen of our business and you will see us continue to drive innovation in organic growth in still beverages. I think the Minute Maid brand and the success of it in markets like China and Vietnam, Korea is a great example of that. I think you will see us -- we’ve just launched that also in India and it’s doing very, very well. You will see us focused on Glaceau internationally. You will see us certainly adding much more functionality and benefits to our still portfolio through innovation and I’d like to just highlight one thing that Neville said. We are now the leaders in juice in all four BRIC markets. That’s an incredible footprint. When you look at Brazil, when you look at Russia with our Dobriy brand. When you look at Brazil with Jugos del Valle and Suco Mais and when you look at China with the Minute Maid Pulpy across all metro markets, number one. In India with Mazaa, both in the mango category of juice as well as in the leading mango category as well as in the citrus now with our new launch, and many other emerging markets.

So you will see us focus much more on organic growth. We’ve got a great portfolio and we have a great innovation pipeline that we will drive through that portfolio.

Mark Swartzberg - Stifel Nicolaus

And I know it’s early but your comment on Glaceau internationally, we’ve heard your willingness to look at that since the day you announced the deal, but you’ve had maybe six, seven, eight months to test the water from a consumer buy-in or potential for buy-in in markets other than the U.S., other than North America. Have you found anything of interest there in terms of the opportunity for that brand on the other side of the world, if you will?

Muhtar Kent

You will certainly see Glaceau in international markets in the very near future. And CCE yesterday said that they will launch it in Canada in quarter two. I think you will see us in different international markets with that brand.

Mark Swartzberg - Stifel Nicolaus

Okay, and the linkage between that and Powerade here in North America is notable. Is that a fair linkage to make, at least in some cases on the other side of the Atlantic and Pacific?

Muhtar Kent

Well, we have said always that Glaceau is a wonderful brand that transgresses categories and sources volume from different categories, whether it’s sports or enhanced waters or the entire active lifestyle category. So it’s a category really on its own and we believe that it will also hit the same buttons with consumers in international markets as we progress that trademark, vitamin water, into international markets.

Mark Swartzberg - Stifel Nicolaus

Very good. Thank you, Muhtar.


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

John Faucher - J.P. Morgan

Good morning, everyone. A quick question on Japan; it looks as though the fourth quarter of this year was only about the second positive volume number on a positive comp in the past couple of years, the last being last year’s Q4. So can you talk a little bit about the ability to sustain that? What level of operating profit you’ve been delivering in Japan on a currency neutral basis over the past year or so and can you keep the volume positive while maybe needing to accelerate the operating profit growth there over the next couple of years? Thanks.

Muhtar Kent

I have said that clearly our target was to stabilize Japan and we have done that in 2008 and we have consecutively -- in 2007 and we have consecutively delivered quarter after quarter growth.

We are now in a much more normalized position in Japan, so you will see us delivering between 1% and 3% growth over the years. That’s our target. That’s basically how we see the picture of success.

We expect modest profit growth in Japan. Importantly also, as we have stabilized Japan in 2007 and from the end of 2006 and into 2007, what we see now also is that our bottlers, our bottling partners are in a much more strengthened position. Their willingness to invest in the marketplace is much more and I think that you are seeing one of the key categories in Japan -- one of the also important things in Japan in 2007 was that we had growth in two of the key channels, both in the vending channel as well as in the supermarket channel and the vending channel, of course, as you know, is a very highly profitable important channel and our bottler’s willingness to continue to invest will drive further growth in that channel is our belief.

John Faucher - J.P. Morgan

Okay, so what it sounds as though your levels of incremental investment over the past couple of years, it sounds like you kind of -- you feel like you’ve normalized the margins maybe there and we should see a more normalized growth rate going forward. Is that the right way to look at it?

Muhtar Kent

As I said, we’ve stabilized the business and we are looking for a more normalized growth rate in Japan going forward and we believe also that we’ve strengthened our brands in all the categories. Sparkling notably in 2007 was a key category that has grown, particularly the trademark Coca-Cola, very pleased double-digit growth, the highest in 30 years. The tea category is also growing and very healthy in terms of our brand, as well as Aquarius and as I mentioned in the call, we’ve also had a growth in Georgia Coffee in the fourth quarter of 2007.

John Faucher - J.P. Morgan



Your next question comes from Carlos Laboy with Credit Suisse.

Carlos Laboy - Credit Suisse

My question relates to some of these bottling JVs. You now have a growing collection of these non-carb JVs building around the world. Do you see more of these in the future and could you speak to some of the benefits and challenges of these arrangements and how they might affect your bottling relationships?

Muhtar Kent

First, let me just say that we are very pleased at where our bottling relationships are, in terms of how we are aligned, how we are planning together in joint force and how we see the future and the picture of success jointly together.

It’s a very simple reason why we have these JVs, because we believe that the categories that we have these JVs in are much better suited to be operated through these JVs, like we have now formed in Latin America for our juice acquisition and like the ones that we have in Europe and it basically creates the focus, it creates the scale, and it creates the economics that deal properly with the categories and allows the bottling partners and us to focus on how we build that business together.

Carlos Laboy - Credit Suisse

Thank you.


Your next question comes from Christine Farkas with Merrill Lynch.

Christine Farkas - Merrill Lynch

Thank you very much. Good morning. Gary, I have a question for you regarding your buy-back plans for 2008. You’ve indicated similar levels in ’08 to 2007, which was under my impression pulled back based on your acquisition of Glaceau. Can you help us understand, given that your cash flows can allow a larger buy-back, what’s going into that consideration? I understand CCE’s plans for buy-back. Perhaps there are other considerations there. Can you help us understand why that level is where it is for ’08?

Gary P. Fayard

Sure, or at least I’ll try. Let me go through that. First, as we look at it, as you look at the credit markets and the volatility there and with some modest increase of debt levels, we think it’s prudent at this point to be somewhat conservative in some of our financial policies and therefore with what we are looking at, as well as maintaining credit ratings for the system, we think the $1.5 billion to $2 billion is a pretty good place to start the year. I think it’s important as we go through the year, we’ll update you on that.

The share repurchase that was announced by CCE yesterday is also very modest. Really dealing with kind of trying to keep their share count kind of flat, so a pretty modest share repurchase program.

So I would say -- I would sum it up probably as we’ll be a little cautious just because of volatility in the markets but stay tuned and we’ll update you as we go through the year, and because the credit ratings are pretty important to us as well.

Christine Farkas - Merrill Lynch

Well, the CCE program is modest. Would you anticipate participating in that to maintain your stake?

Gary P. Fayard

No, I think -- I mean, that will just be arms length where they are just going into the market, I would think.

Christine Farkas - Merrill Lynch

Okay, great, and just on the back of acquisitions, can you tell us how much Glaceau contributed to your North American volumes in the quarter?

Gary P. Fayard

About two points.

Christine Farkas - Merrill Lynch

Great. Thanks, Gary.

Ann Taylor

Operator, we have time for one more question.


Your last question comes from Justin Hott with Bear Stearns.

Justin Hott - Bear Stearns

Thanks. On Glaceau, CCE yesterday mentioned that they might have been a little bit slower in promotional activity in the fourth quarter due to I guess the transition there. Would it be fair to say that CCE is ramping up that Glaceau can even accelerate its great growth? And also, if you could just give us, since it’s the last question, some comments on CoBos and where you stand with some of them around the world, your plans there. Thanks.

Muhtar Kent

Was the last question on CoBos? Okay, just let me give you the answer on Glaceau. It’s absolutely it was related to the transition and it’s back on a normalized sequence now in terms of our promotional calendar. And what you’ve seen is that we’ve had very good progressive increases as we’ve transitioned the distribution, bottler distribution into our bottlers, an increase in supermarkets for distribution as well as in convenience stores for both vitamin water, smart water, as well as vitamin energy. So all of the components are working very well for us as we’ve moved into a normalized fashion.

And as far as the CoBos are concerned, as we’ve said to you before, we will continue to look at opportunities in our ownerships and where we see some opportunities for divestiture, we will. And you’ve heard Neville mention our BIG as a hospital ward and we’re very happy with the performance of our BIG group but over time, you will see us taking some more on board and divesting some.

Justin Hott - Bear Stearns


Neville Isdell

Thank you, Muhtar and Gary. Just to wrap up, and also thanks to each one of you for joining us this morning. So now we’re in 2008 and it’s the next step on our journey. I am confident that we’ve laid a solid foundation on which to build in 2008 and we remain I assure you resolute about delivering against our strategic agenda this year as we did in ‘07. We’ll continue to leverage our leading brands, our global footprint, and our strategic acquisitions.

You’re going to see us building also on our innovation pipeline, which we didn’t talk a lot about today, and all the while driving efficiency to deliver sustainable growth and shareowner value. Thank you very much indeed.


Ladies and gentlemen, this concludes The Coca-Cola Company’s fourth quarter 2007 earnings results conference call. Thank you for your participation. You may now disconnect.

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