The Coca-Cola Company (KO) Q4 2006 Earnings Report, Transcript and Summary

At this time I would like to welcome everyone to the Coca-Cola Company's fourth quarter 2006 earnings results conference call. (Operator Instructions) I would now like to introduce Ann Taylor, Vice President and Director of Investor Relations. Ann Taylor: I am pleased to be joined by Neville Isdell, our Chairman and Chief Executive Officer; Gary Fayard, our Chief Financial Officer; and Muhtar Kent, our Chief Operating Officer. Following prepared remarks by Neville and Gary this morning we will turn the call over for your questions. Before we get started I'd like to remind you that this conference call may contain forward-looking statements including statements concerning long-term earnings objectives and should be considered in conjunction with cautionary statements contained in our earnings release and in the company's most recent SEC report. In addition I would also like to call your attention to the fact we have posted schedules on our company website at thecocacolacompany.com in the investor 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 discussion 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. As usual I am going to make a few observations about the results, slightly more extended given that it's year end, and also highlight our accomplishments for 2006. And then, Gary is going to provide you with an overview for the financials, some additional perspective on '07. It's been yet another solid quarter, and we achieved full year results at the top end of our long-term growth targets for volume, for operating income, and for earnings per share. We again demonstrated the geographic diversity of our business and we continued to focus on daily execution right across the globe. For the year, we achieved 4% unit case volume growth resulting in ongoing currency neutral operating income of 8% and ongoing EPS growth of 9%. We also gained share -- numbers are just in -- globally, in all key categories with the exception only of ready-to-drink tea and coffee. For the year, international operations delivered 6% unit case volume growth. Performance in Latin America was particularly strong, growing 7% while cycling 6% growth in the prior year. Additionally, we achieved double-digit growth in key emerging markets. Those include China and Russia, Turkey, the Middle East, with solid growth throughout Africa. The European Union group delivered 6% growth with solid results in Spain, Central Europe; and, happy to say, continued improvement in Northwest Europe. Japan finished the year down as we predicted, but again, as we predicted, delivered sequential improvement with fourth quarter growing by 2%. The Philippines, by the way, continues to be a drag. In fact, the Philippine decline reduced our overall growth by 1% for the year. However, that was compensated for by the bolt-on acquisitions primarily in juice and water which therefore added 1% to the international unit case volume. So that balanced out the Philippines, but I just wanted to highlight the drag on those overall numbers. North America. North America was obviously disappointing from a volume perspective but it did contribute with solid profit growth as we focused on operating expense management and also we had solid performance in food service and the Minute Maid business but that was offset with weakness in retail, particularly of course evident in the second half of the year. We are going to talk to you more about our 2007 expectations in just a few minutes, particularly around North America. We have achieved the objectives that we set out for you at the beginning of the year. If I go back to December 2005 we articulated a clear and focused agenda. That was reinvigorate sparkling beverage growth; expand the footprint of our other core brands to capture emerging consumer needs; lead the franchise; and, address and of course, correct as issues arise. I'd like to review our progress on each one of these. First of all, reinvigorating sparkling beverage growth. Sparkling beverages, what we simply define as nonalcoholic ready-to-drink consumer beverages with carbonation grew 4% for the year and achieved its highest growth rate in almost a decade -- since 1998 to be exact. That success was driven, I'm happy to say, by our core global brands with trademark Coke up 3% -- again the highest rate since '98 -- and Fanta up 4%, Sprite up 5%. All these brands represented an additional 11.7 billion servings last year. Think about it; that's almost two additional servings for every single person on the planet. I'll highlight trademark Coca-Cola, because we executed on four key global initiatives to drive growth. The Coke Side of Life. Our integrated global Coca-Cola marketing campaign has now run in almost 100 markets representing over 85% of worldwide Coca-Cola volume. The Happiness Factory spot has been a star performer, scoring, in fact, as our best ever global commercial. I'm sure many of you have seen some of our other spots such as Video Game on American Idol and during the Super Bowl. It's not only good reviews. What these commercials are doing is driving increased efficiency, as our television commercial reuse rate was double our 2002 to 2005 average, resulting in a mid-teens percentage reduction in our overall TVC production and agency fees. Second, in over 100 markets we launched an integrated marketing platform threaded together by a unifying theme We All Speak Football, supporting the very successful FIFA World Cup. We saw the results not only in volume but across key marketing scores such as favorite brand and purchase intent. Third, the rollout of Coca-Cola Zero was a really important success, contributing almost one-third of trademark Coca-Cola's growth and driving incremental share gains by sourcing volume from competitors. In 2006, Coke Zero launched in 14 new markets from Australia to Ireland. By the end of 2007, we will have reached over 35 markets. Last, interactive communications. CocaCola.com, our common Internet platform, launched in 31 countries in 11 languages and reached 664 million impressions. It is really a step change in recruiting and connecting our brands to teens in a truly unique way. We're really leveraging their passions for entertainment, for sports and for music. In all, trademark Coca-Cola, Sprite, and Fanta contributed over half of the growth for the year, and as I mentioned earlier, we gained share in sparkling beverages globally. Secondly, expanding the footprint of our core brands. We've done that by capturing emerging consumer need states and that was our second priority. Let me give you some data. 2006 we continued to build our innovation pipeline with the total of 1,383 total product and package launches: 590 of those were new, and 367 were existing products launched into new markets. Trademarks Dasani, POWERade, and Aquarius continue to perform solidly. In packaged water we gained share, excluding the impact of the strategic decision on the Dannon brands in North America. The sports and energy categories continued to be a strong growth area and a global opportunity. Our juice platform continued to evolve. As you know, we're already the global leader in juice and juice drinks and we increased our global presence through trademark Minute Maid's expansion and key acquisitions. Trademark Minute Maid was launched in nine new countries and volume increased 7% with solid growth in China, Korea, Great Britain, and Belgium. In the U.S., our warehouse juice and juice drinks portfolio continued to gain volume and value share as we successfully implemented price increases in what is a difficult cost environment. The acquisitions of Multon in Russia which took place during 2005 and the recent announcement of Jugos del Valle, the second largest producer of packaged juices and fruit-flavored beverages in Mexico and the largest producer in Brazil, solidify our global leadership in juice. In fact, it makes us number one in Latin America. The activity resulted in a one percentage point increase in our volume and value share of international juices and juice drinks. Third on our agenda is leading the franchise. From my first day back I have stressed that the Coca-Cola Company, in order to excel, needs our whole system to be healthy and to be aligned. This is more than just a financial metric. It's about changing the mind-set of our people to take a total system focus and understand the value chain all the way from consumer to manufacturer. But it's also about making the hard decisions, and we have done that time and again. In Germany, we have made significant progress on the creation of a one bottle system in order to move more effectively and more efficiently to serve the marketplace. In Latin America, we jointly created with our bottling partners a new system operating framework. You have also seen us take control of our destiny in certain markets. In China with the Cary franchise the Company made a proactive decision which will clearly facilitate new long-term investment plans to expedite the already fast-growing China business. The most recent company announcement that the company has now agreed with our bottlers to acquire the remaining stake in the Philippines, and this is going to be a significant issue with regard to 2006 [sic]. You all know I have got a long history with the Philippines, and I believe that we can bring about a turnaround starting with that acquisition in 2007. So let me come to the fourth point. Address and of course correct as issues arrive. Now, addressing issues is always going to be something that happens to a company that operates in 200 countries. What we did is we highlighted at the beginning of the year three markets in particular that needed addressing. They were the Philippines -- which we have already covered -- the European Union group, and India. As for the EU group, particularly in parts of Western Europe and India, the results have certainly improved. For the EU group, we are continuing to see the results of world-class execution of our key programs and alignment with our bottling partners. The results: sparkling beverage growth of 4%, still beverage growth of 20% plus and our low or no calorie beverages amounting to 62% of our total growth. 2006 demonstrated our ability to remain focused on our commitments and to rebuild a solid foundation. Of course, we are not claiming victory. We must grow our core sparkling beverages, take share in emerging and existing store categories, and continue with breakthrough innovation. India's fourth quarter results were certainly encouraging. Unit case volume increased 12%, and we certainly gained overall value share there as well. We would expect India to return to its prior growth story over the long term, and we will continue to reinforce the trust campaign, which has worked so well in supporting the safety and quality of every Coca-Cola product. Additionally, during the year we highlighted Japan, as weakness in our core brands, particularly Georgia Coffee, impacted our results. We committed to you a sequential quarterly improvement, and we have delivered against our commitment in our fourth quarter. As I announced earlier unit case volume increased 2%, cycling a 1% growth in the prior year quarter. The quarter's overall results reflect stabilization in performance and an improved position for growth in 2007. As you will note, we have quickly addressed issues in markets that have required it, and we put them back on the right path. The last key market to address currently therefore is North America. In North America, we are not satisfied with our performance and in 2007, our system faces a challenging cost environment and weak sparkling beverage trends. We're now moving forward in a collaborative aligned way with our North American bottling system to meet the market challenges. However, we do expect 2007 to be weak, particularly in the first half of the year, as we cycle strong performance in the prior year. The second half of 2007 we do, however, expect to see sequential improvement and evidence of momentum building in North America as we execute against our key goals. Leading growth in sparkling beverages led by trademark Coca-Cola is one of those key goals. Delivering the fastest value growth in still beverages is another. Finally, the other leg of the stool, being the preferred beverage partner for our customers. No matter which market you examine the basics are clear. When an issue arose we quickly identified the root causes, developed and communicated our action plan, and delivered results. While I'm sure other issues will arise, our ability to better anticipate consumer and customer needs and provide customized solutions when executing our initiatives is going to allow to us rapidly address and course-correct when these unfortunate things occur. Let me say this, however: while we achieved these short-term strategic operational and financial objectives there is more we now need to do. Our momentum is building as we begin to realize the extent of our full potential. Before turning the call over to Gary I'd like to highlight some recent key management moves. First, I'd like to congratulate the gentleman sitting next to me, Muhtar Kent, who was elected by the Board in early December as President and Chief Operating Officer. This clearly recognizes the success of our international operations this year, but also Muhtar's 25 years of system experience and achievement. Additionally we announced changes to our operating structure to align geographic responsibility. Glenn Jordan is going to assume responsibility for the Pacific Group including Japan, China, and the Philippines. Ahmet Bozer was promoted to lead the Eurasia group. Ahmet is a tremendous operator. You heard me talk about the Middle East results; Russia, part of his existing territory. He's got both company and bottling experience, a trend that you have seen developing in terms of a number of the appointments that we've made. He's certainly well deserving of his expanded responsibilities. Muhtar, with his large bandwidth, and his belief in operational excellence, is going to be highly focused on our priorities for this year and we together look forward to coming back to you in the future to discuss our progress, and, of course, he's here to answer your questions later on. So I will now be focused on the job that I was originally recruited for, Chairman and CEO. In summary, I believe that we now have in place a firm foundation from which to build our business going forward. Our strategies are working. We will continue to effectively manage our portfolio brands and countries to capture the highest value opportunities. We will undoubtedly hit bumps in the road along the way. That's what happens when you operate in 200 countries, but our strategies and objectives remain the same. I believe that we have demonstrated our intent to lead the franchise with strength and capabilities in consumer marketing and customer and commercial leadership, and to take the right actions against a consistent focus on delivering superior long-term returns to our shareholders. Now let me turn the call over to Gary. Gary Fayard: Thanks, Neville and good morning, everyone. As you saw in the release we had a very good year in 2006 and it's a great base to start 2007. We reported earnings per share for the year increased 6% to $2.16. This included a net charge of $0.21 per share primarily related to a non-cash impairment charge at CCE in the fourth quarter. After considering items impacting comparability in both years, earnings per share was $2.37 versus $2.17 in the prior year, a 9% increase. For the quarter, we reported EPS of $0.29 per share, which included a net charge of $0.23 per share, primarily related to the CCE impairment charge after considering comparability items, EPS for the quarter increased 13%. In addition, our 2006 underlying effective tax rate on operations was 22.4% versus the previous estimate that I had given you of 23.5%, to bring the effective tax rate for the year in line with the current estimate. We reported income tax expense at a rate of approximately 18.2% in the fourth quarter which resulted in a tax benefit of about $0.03 per share for the quarter and the year. For the year, volume growth was 4% after considering factors impacting comparability and a 1% negative currency impact. Operating income growth was 8%, along with the ongoing EPS growth of 9%. All of those results at the top end of our long-term growth targets. For the year, we repurchased $2.5 billion of our stock, an increase of 24% over the prior year and that added 2 points of growth to earnings per share for the year. Additionally, the company paid $2.9 billion as dividends in 2006. In all, a total return of 23% for 2006. The fourth quarter was a strong finish to a very solid year of performance. Now turning to 2007, let me address some of the factors that we see impacting our outlook. Our benchmark for success will continue to be our long-term growth targets, 3% to 4% volume growth, 6% to 8% ongoing currency-neutral operating income growth, and high single-digit ongoing EPS growth. In addition, our initial read on the macro economic outlook for the year is relatively positive, especially in many of our emerging markets. We will continue to portfolio manage globally as we expect solid performance in most of our markets with weak performance in North America, particularly in the first half as we cycle strong volume and profit results. In Europe, while performance is improving we will face cycling the favorable weather through most of the second half 2007 and of course, the World Cup. However, we have solid plans in place and we'll continue to focus on executing the fundamentals of the business. As with 2006, we would again expect our consolidated bottling operations to be a positive contributor as we focus on building world-class operations. Currently, we have not included the consolidation of the Philippines bottler in our plans. The Philippines bottler acquisition is expected to close in the first quarter. After the transaction is closed we will provide an update on our expectations for that business going forward. In terms of input cost in 2007, there's certainly unprecedented upward pressure. However, this is primarily in North America for juice and sweetener. Although we do expect to see an increase, we will continue to manage the overall impact on our business just as we did in 2006 through appropriate pricing and other strategies. We expect SG&A trends for 2007 to be similar to full-year 2006 results. 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 reflecting the impact of bottling operations we owned for only a partial part of the year in 2006. General and administrative expenses were tightly controlled in 2006, and we will continue our disciplined approach in 2007. We would expect net interest cost to increase primarily due to lower cash balances and higher debt balances. You will note that our net debt balance going into 2007 is approximately $2 billion, double the level from a year ago. We would expect that level to increase during the year due to share repurchase dividends and capital spending. Also keep in mind that we reduced our ownership position in Coca-Cola FEMSA and our Turkish bottler along with CCE's recent announcement on restructuring that will impact our equity income. With regard to taxes and as previously mentioned, we ended up the year with an underlying effective rate of 22.4%. Our best estimate for 2007 is that the full year underlying effective tax rate on operations will be about 23%. We anticipate that our range for share repurchase in 2007 will be between $2.5 billion and $3 billion. Now let me turn to currency. As we look into 2007 based on current spot rates and the anticipated benefits of hedging coverage in place, we currently expect very little impact from currency in 2007. We have begun to put coverage in place and are effectively covered through the first half of '07 on the euro and for the first quarter on the yen. From a CapEx standpoint, we purchased approximately $1.4 billion in property, plant, and equipment during 2006; for 2007 we expect that amount to increase to about $1.5 billion as we make investments in recently acquired bottling operations. Additionally, early last month we finalized the payment for the remaining shares of CCAG, our German bottler, as part of the exercise of our put-call provision that we previously disclosed the total amount of that payment was approximately $1 billion. For quarterly modeling purposes, we will have one less shipping day in the first quarter and one more in the fourth quarter as compared to 2006. Before I close I wanted to touch on a comment in the release and that Neville referred to about the new reporting segments, the Pacific and Eurasia. Beginning in the first quarter we will begin to report these geographically realigned operating segments and as we get closer to the first quarter release we will provide you with historical data on the new segments. That's it for the topics I wanted to cover this morning. Neville, Muhtar and I are now ready for your questions.

(Operator Instructions) Your first question will come from the line of Mark Swartzberg - Stifel Nicolaus.

Neville or Gary, nice to see Japan improving in terms of the top line; yet if you look at the whole region which it's a part of and dominates in terms of profits, profits declined at an increasing rate there. It seems hard not to conclude that you really stepped up spending in Japan in the quarter in terms of SG&A level there. Is that a reasonable conclusion? If not can you talk to us a little about what's going on at the GP and SG&A line in the larger North Asia? Gary Fayard: What I would say first for that segment is to look more at really the full year. What you see is some swings in gallon shipments between the third quarter and the fourth quarter in Japan where gallons were up in the third quarter and down in the fourth quarter, full year that evens out, so it's kind of a quarterly spread within that region, particularly around Japan. So if you look at the full year I think you'll get a better picture of what it really looks like. Mark Swartzberg - Stifel Nicolaus: That's helpful. When you say gallon shipments down in the quarter in Japan, Gary, we got a 2 on the unit volume. What level of spread are we talking about versus that 2? Obviously it's at least 2, but what's the number? Can you give us an idea? Gary Fayard: It's probably like a point. Mark Swartzberg - Stifel Nicolaus: An added point. So call it down one versus up two? Gary Fayard: No, like plus two versus plus one. Mark Swartzberg - Stifel Nicolaus: Actually, I'm still wondering now in light of that. Doesn't seem like enough to explain what happened in North Asia. Ann Taylor: Mark, what I would suggest that the full year Japan gallons in unit cases are in line so we are not in an inventory build or de-stock position in Japan, so I think that's really the important thing. Gary Fayard: It's really a swing between quarters.

Your next question will come from the line of Bryan Spillane with Banc of America. Bryan Spillane - Banc of America: Good morning. Just a question regarding input costs going into '07. We're all pretty well aware of what's happening in North America, but when you look outside of what's happening here, can you talk a little bit about what the input cost inflation looks like for bottlers outside of North America? Is that going to impact your plans in terms of maybe having to raise more prices in some of the developing markets and just the way you are going to go to market in '07 maybe relative to the way you did in '06. Neville Isdell: Very significant difference between North America and rest of world. First of all, one of the major input costs in North America is HFSS. We are using sugar largely in the rest of the world, and where we're not, HFSS prices are actually tied to sugar prices. Had you asked that question six months ago when sugar was at a high it would have been a different answer but it's come back right down to the level it was at prior year. In fact, there may almost be a slight benefit with that. Then you have got to look at your mix in terms of packaging. PET costs are going to be lower because of new capacity that comes on, offsetting some of the increases in terms of some raw materials for PET. You then have a larger mix of glass and glass bottles as well, so cans are a much smaller piece. We don't see any major cost inflation; there are going to be pockets in one or two countries, but there's really no unusual increase that we see that are going to impact our overall volume in the international business. Bryan Spillane - Banc of America: Okay. So relative to your pretty favorable macro view in the emerging markets it sounds like it's a pretty supportive cost environment as well. Neville Isdell: Yes, it is.

Your next question comes from the line of Bill Pecoriello - Morgan Stanley. Bill Pecoriello - Morgan Stanley: Good morning, everybody. A question on North America. Obviously a tough '07, the sparkling volume was down 3% in the fourth quarter so can you talk about both '07 and then even multi-year what is the system approach to more rapidly diversifying and accelerating the growth in the sparkling category? Both the challenges of '07 and then from a longer term perspective? Neville Isdell: I'm going to hand part of this over to Muhtar, but let me make a headline comment. You know that we took some controversial action in order to be able to get our system better able to address the needs of the customer and the consumer, and what comes out of these things is some very good deep discussion about where the business is headed. Sandy Douglas has done a great job in terms of leading that. Muhtar spent yesterday with the whole U.S. bottling system in terms of looking at '07 and how we move ahead as a team. I think you heard some of in that John Brock's call yesterday in terms of how the overall feeling as to how we work together has changed, but let me ask Muhtar to give you some more flavor. Muhtar Kent : There's no doubt 2007 will be a challenging year, with the cost increases that was referred to in the earlier question, but I want to just reiterate that we remain excited about the long-term growth opportunities and our system's ability together to capture that growth here in North America. Critically I want to stress that we are leaving behind confrontation and moving to a system that is a good working relationship based on cooperation and collaboration with our entire bottling partners here in North America. I think that's very important and critical, and whenever you see us aligned with our bottling system I've always said, I'll reiterate, the system is unbeatable. I think I can reiterate that, having spent the whole day with our U.S. bottling partners yesterday, in a meeting looking at how we capture those opportunities. The innovation is certainly going to be there, particularly in the second half, and we will be leading growth in sparkling beverages led by trademark Coca-Cola, delivering certainly also fast value growth in still beverages, Fuse is an early proof point. It's not certainly the end of the game. Being the preferred partner for our customers is going to be a key element in how we improve that relationship and become the preferred partners to our customers is going to be key. Strong innovation across sparkling and still portfolio as well as consumption, packaging, you will see that certainly being a key element as we move into the second half, particularly. But the full year, of course, as you heard from John Brock, is going to be weak, and you will see a better second half than the first half. Bill Pecoriello - Morgan Stanley: If I could just follow-up with one question on the North America profits, will there be certain leverage that you pull to help offset the volume weakness in the cost pressure, or is it more of a portfolio approach and you rely more on the international and the COBO profits, recognizing North America profit is going to be down? Muhtar Kent : Certainly you'll see us managing it on a portfolio basis but there will be a great amount of attention also being paid to the cost side to ensure that we can find the leverages where we can, but you are not going to see us cut back on spending on our brand. Bill Pecoriello - Morgan Stanley: Thank you. Neville Isdell: If I could add just one thing, Bill, there's an awful lot that happened last year that flows through. I have just one small proof point, My Coke rewards. We got 3.3 million registered users. We have given out about 1.5 million rewards. That's just one little piece of what's happening. You have seen the acceleration of Zero. Vault has been a successful launch. Zero, as I say, has cycled positively in its launch period. You are going to see that growing. So it's not as if we're not coming off a platform where we don't have some ammunition to come into a weak cost environment. But again, on the broader piece to reiterate what Muhtar said, really back to what we talked about six months ago with regard to Japan. We believe that we can meet the long-term objectives that we've given to you by balancing the overall portfolio. Bill Pecoriello - Morgan Stanley: Thank you.

Your next question comes from the line of Lauren Torres - HSBC. Lauren Torres - HSBC: Good morning. As somewhat of a follow-up to the previous question I was hoping you could you talk a little bit more about the relationship you have now with your bottlers and your strategy regarding testing and potentially shifting to alternate routes to market? How will this impact how the bottlers distribute your brands and ultimately share in the profits? Muhtar Kent : In terms of what you asked about alternative routes to market, that's certainly something we always are looking to see how we can improve our routes to market, the DSD system being the key to our success and our future but also how we can complement and supplement that, not as an alternative, but as a complement and a supplement and that's what you read about in the recent settlement. I think the key question here is that we, jointly with our bottlers, have established a very, very clear process to identify the new opportunities and to develop or acquire the brands or products needed to respond to these opportunities together. I think that's the key important piece of the collaboration going forward. As I said before, this is the basis of our franchise leadership. We have talked about how we need to ensure that we do the three things on our triangle extremely well, which is integrated consumer marketing, commercial and customer leadership and franchise leadership, and that is what we are talking about here is a key component of one of those three key pieces moving forward, which is franchise leadership. Lauren Torres - HSBC: In markets so far where you are testing these alternate routes to market can you give us a sense of what the customers are saying? Muhtar Kent : I don't think that we have any example where we have these alternative routes to market that we can give you examples of across the world. I think what you see here is certainly, because of the specialness of the U.S.A. market with food service, I think outside of the United States we use many different alternative routes to market but there isn't a single one that we can say this will be the model for the United States this is a test in how we move forward to find better ways to serve our customers. Lauren Torres - HSBC: Thank you.

Your next question comes from the line of John Faucher - JP Morgan. John Faucher - JP Morgan: Yes, good morning, everyone. It looks as though after a tough couple of first quarters to start the year where the cash flow was down, and some of that I think was due to taxes, cash flow looks like it's been up the past couple of quarters. Gary, can you give us maybe a trajectory on cash flow for next year in terms of would we should look for? Gary Fayard: Yes, and first, John, just off the headline of your little release this morning, Happy Valentine's Day to you. On cash flow, I would say a couple of things. Let me talk about full year for a minute. Full year cash from operations actually shows reported down versus 2005. If you look at the working capital, it was a source of cash in 2005, and it was a use of cash in 2006. The swing was about $900 million to $1 billion. That big use of cash from working capital in 2006 was really coming from three specific items. One was the cash taxes paid on repatriation of foreign earnings from '05 that we paid the taxes in '06. There was a piece where we funded a couple hundred million dollars into a VEBA for employee benefit plans, and it allowed us to accelerate some tax deductions. Then there was $100 million donation in the fourth quarter to the Coca-Cola Foundation. Those items actually were discrete items, if you will. If you eliminated those you would see that '06 cash flow actually was a pretty good significant increase versus '05. I would expect to see '07 increase, if you will, off of a normalized '06 as well, and then off of a reported '06 I would expect cash flow to increase significantly. That may be too much detail. Does that answer the question? John Faucher - JP Morgan: Yes, it does. Thanks.

Your next question comes from the line of Christine Farkas - Merrill Lynch. Christine Farkas - Merrill Lynch: Thank you very much. A question on acquisitions, if I could. In '06 we saw acquisitions of Apollinaris and Multon in Russia. I'm wondering if you can put into perspective your recently acquired Latin America juice company, as well as Fuse beverage, and talk about perhaps the incremental expectations from acquisitions in '07 as well as the opportunities of what you see around the world in the categories that you seek to expand in? Neville Isdell: Well, first of all, I just want to highlight technically, of course, we haven't closed the Mexican acquisition yet. There are regulatory pieces to go through, just to make that point. But, Christine, I've continually said that bolt-on acquisitions are the way that we are going to go, and we will be opportunistic about that. By the way, you could add the Traficante acquisition in Italy to that with regard to water in Europe, and I think you are going to see it in the juice and in the water arena primarily, water as a key platform. Major acquisitions are very difficult from a regulatory standpoint given what they call the portfolio effect theory, certainly in the likes of Europe, so they are going to have to be bolt-on acquisitions. Again, when you come to water, because primarily we are talking sourced water, sourced water by its own nature is geographically specific. Therefore, there will be country by country, which is what you have seen. We'll continue to look at juice, as I say. Although we have nothing major in the pipeline at the moment, it's probably going to be around the same sort of level in '07 as '06, as we reinforce our business in key countries. Our bottlers are now aligned with us in terms of a model that works. Muhtar, I don't know if you'd like to comment on that, because I think that's a very important piece going forward, particularly where we are with the likes of CCHBC and with FEMSA. Muhtar Kent : I just want to add that essentially what we are not doing certainly in any way or form trying to replace organic growth with our acquisitions. What we focus on religiously is organic growth, and wherever there's an opportunity we will have a bolt-on acquisition where you will see us doing those in harmony and in complete collaboration with our bottling partners. That's the key principle going forward. On the models, certainly you will see us testing models that really work and enhance our relationship in those categories that actually lend themselves to those models with our bottlers. Juice certainly is one of those. You will see those models emerging as we move into 2007. Christine Farkas - Merrill Lynch: That's great. Thank you. Just as a clarification, how much did the warehouse water decline hurt your North American volumes in the quarter? Gary Fayard: About 1%. or less than 1%. Muhtar Kent : The first half of 2007 will still be impacted by that, but as we will transition out of that into the second half of 2007. Christine Farkas - Merrill Lynch: Great. Thanks a lot.

Your next question comes from the line of Carlos Laboy - Bear Stearns. Carlos Laboy - Bear Stearns: Good morning. Muhtar, last quarter you indicated on this call that traditional methods of charging for non-carbs were not applicable, and that more comprehensive partnerships were needed. With the U.S. now under your belt, does your view of comprehensive partnerships also stand for the U.S.? Muhtar Kent : The critical piece here, Carlos, is to ensure that we have an equitable model in our franchise relationship that we see for whatever category we are talking about, the common vision, and we have transparency on how we share the value. I think that's the key piece. Emerging out of that, then, will be maybe some new models where applicable. I can't tell you specifically how that that will evolve in North America right now. All I can tell you is that certainly you will see examples of this emerging around the world that will benefit and that will be beneficial both to us and our bottling partners, on a win-win basis. Carlos Laboy - Bear Stearns: Thank you. Neville Isdell: Carlos, just to add to that, don't forget, you've got a different structure in North America in terms of what we used to call fountain food service. So that actually changes the way that you go to market with some of that. Also, if you look at what we're doing with Fuse, what we've done with Odwalla, we see Fuse, of course, it goes to 20 bottlers already, expanding through the bottler system, but we're going to manage that as a discrete unit in order to be able to keep the entrepreneurial capacities of those people available to us. Again, that fits in entirely with what Muhtar is saying as we move in a way sometimes even experimental models in order to move the business forward. Carlos Laboy - Bear Stearns: Thanks.

Your next question comes from the line of Robert van Brugge - Sanford Bernstein. Robert van Brugge - Sanford Bernstein: A question about Latin America. It seems to have driven about half of your operating profit growth in 2006 and a lot of it came from especially strong price mix. Could you maybe comment on the sources of where the price mix is coming from and as to what extent that's sustainable in 2007 and beyond? Muhtar Kent : Robert, good morning. I do not think that there's anything very specific. It's much more wide-based, and it's not only a question of price, but also our ability to execute with our customers in terms of revenue growth management and all the systems that we have got in place and the information that we are using in order to ensure that we leverage the right execution daily, all the way from the south of the continent to the north. You will see that there's some mix in packaging, and IC as we continue to invest heavily in cold drink, and continue to leverage the first moment of truth in all our customers across Latin America. Robert van Brugge - Sanford Bernstein: And next year, or in 2007 ? Muhtar Kent : I expect that you wouldn't see anything different from what we have been doing in '05 and '06. Neville Isdell: But, Robert, you will see the right execution daily. You will see RGM rolling out and the benefits of that in terms of the value equation in the rest of the world as well as we move forward. I have talked about innovation not just being product and package but being much more wide ranging. This is part of what we believe is real innovation and is strategic advantage. You have seen it working in Latin America, and we will roll it out elsewhere. It is also part, if you listened to my prepared remarks, I kept using the word value -- value opportunities. So it is that mix, and we have got that mix very well balanced in Latin America, and we'll continue to do that there but also to roll it out around the rest of the world.

Your next question comes from the line of Kaumil Gajrawala - UBS. Kaumil Gajrawala - UBS: In some of these key growth regions, particularly Russia and China, can you talk about how much your growth is coming from ready to drink gaining share from the entire beverage category versus yourselves gaining share versus other branded companies? Muhtar Kent : I think it's a mix of both. There's certainly a Fuse opportunity, particularly in a place like China as urbanization takes foot. There's a conversion factor that benefits us certainly, because the current ready-to-drink component of total beverage consumption is still very low, in the 30s, 30%; in Russia it's slightly higher but there's also a significant conversion happening there. But also from other beverages as society changes, less consumption of alcoholic beverages also taking place in Russia. But then in addition to that, of course, we're certainly gaining share also in those markets in the current ready-to-drink category, too. Kaumil Gajrawala - UBS: Thank you.

Your next question comes from the line of Judy Hong - Goldman Sachs. Judy Hong - Goldman Sachs: One segment where you didn't gain share globally last year was ready-to-drink coffee and tea, and I guess some of that is because of the weakness in Georgia Coffee in Japan. Can you also talk about just broadly what you're doing to improve your performance in that segment especially in markets like North America where you have been lagging competition? Muhtar Kent : Certainly we see that as a key opportunity going forward. You have seen Gold Peak, you have heard about Caribou in North America but across the world I would just say that certainly that's an area of opportunity for us, and you will see us being focused in that ready-to-drink tea, which is a much bigger segment, but also ready to drink coffee, which is a high-value segment. Godiva you have heard about in the United States, and you will see us certainly, as you rightly also said, that part of the weakness was from in the initial part of the year, particularly from Georgia coffee. You see the six core Georgia products in the quarter that we have just left behind accounting for more than half of the total segment double-digits in Japan. So certainly as we ramp up our efforts in Japan, as well as across the world in both ready-to-drink coffee and also under the Nestea trademark, with our partnership with Nestle you will see us capturing some of those opportunities across the world both in Europe, Asia, as well as North America. Judy Hong - Goldman Sachs: But is this really more of a multiyear opportunity in terms of having more impactful presence in that segment? Muhtar Kent : It's certainly not a single-year opportunity. It is long-term. You will see us looking at the entire category of tea as a carrier for functional benefits also, but also certainly expanding our footprint in ready to drink coffee across the world is an important opportunity.

Your next question comes from the line of Matt Riley - Morningstar. Matt Riley - Morningstar: Good morning. I was hoping you might be able to provide a bit more background regarding what's gone right in Germany as far as stabilization of the market is concerned, and what learnings might be applicable to other struggling operations where a bottler consolidation is an option. Muhtar Kent : Germany certainly after a number of years of struggling, you have seen us returning good volume results in Germany. There's been a very successful launch of certainly Coke Zero, very, very good benefits that we have been able to extract from the World Cup activation in Germany, focus on immediate consumption and revenue growth management, so we're actually capturing more value than volume but also looking at capturing volume as we move forward and the new bottler management there, we haven't been focused on execution. So as we move forward as we fully integrate our total German system, you will see us leveraging that opportunity and the whole system is working together very effectively in Germany as we move into the full year of 2007. Neville Isdell: I want to add to that because obviously I have lived in Germany for awhile and have worked through this whole issue with the bottlers, I referred to this earlier in terms of franchise leadership. Taking the tough decision to restructure that business and you get obviously for a period of time a situation where you are not firing on all cylinders in the marketplace. But was the right thing to do for the long term. We are willing to take that short term pain. That's what you have seen. Now what you have seen is that even though we haven't quite finalized the formal agreements, that the system has now recognized that the one bottler system is the way to go, they have seen the cost benefits, because we're a very high cost system that will allow us to be much more competitive, and therefore, we're actually working as if that whole one bottle system had actually come into being. So this is what franchise leadership is all about, this is what modernizing our system is all about. And this is where we manage then to work together to move effectively into the marketplace. I go back to earlier comments that Muhtar made. When the system gets together, as they are now in Germany, as they now are in the United States, we are unbeatable. Thank you very much. We have come to the end, and I'd like to thank each of you for joining us this morning. We clearly have a solid 2006 in the books, and 2007 is underway with our organization more than ever engaged in driving innovation, in improving our speed to market, and maintaining our outward focus on our consumers, our customers, our bottling partners, and our broader community. I'm confident that our strategies are working, and that our actions are going to create long-term sustainable growth and value for our shareholders. That is what we are all focused on, and that is what we will work hard to do, Muhtar and I, Gary, the rest of the team, every single day. Thank you very much.

Ladies and gentlemen, this does conclude the Coca-Cola Company's fourth quarter 2006 earnings results conference call. You may now disconnect.