The Pepsi Bottling Group, Inc. (PBG)

Q2 2008 Earnings Call

July 8, 2008 11:00 am ET

Executives

Mary Winn Settino – VP IR & PR

Eric Foss – President & CEO
Alfred Drewes – Sr. VP & CFO

Rob King – President PBG North America

Analysts

Bill Pecoriello - Morgan Stanley

Lauren Torres - HSBC

Judy Hong - Goldman Sachs

Christine Farkas - Merrill Lynch

Todd Duvick - Bank of America Securities

John Faucher – JP Morgan

Bryan Spillane – Banc of America Securities

Carlos Laboy - Credit Suisse

Kaumil Gajrawala – UBS

Mark Swartzberg - Stifel Nicolaus

Presentation

Operator

Welcome to The Pepsi Bottling Group’s second quarter earnings conference call. (Operator Instructions) Please note the company’s cautionary statement. Statements made in this conference call that relate to future performance or financial results of this company are forward-looking statements which involve uncertainties that could cause actual performance or results to materially differ. PBG undertakes no obligation to update any of these statements.

Listeners are cautioned not to place undue reliance on these forward-looking statements, which should be taken in conjunction with the additional information about risks and uncertainties set forth in the company’s Annual Report on Form 10-K for the year ended December 29, 2007.

I would now like to turn the conference over to Mary Winn Settino, Vice President of Investor Relations and Public Relations of The Pepsi Bottling Group; please go ahead.

Mary Winn Settino

Thanks everyone for joining us. Eric Foss, our President and CEO; Alfred Drewes, our CFO; and Rob King, President of PBG North America are on the call today. Our call is being recorded and will be available for playback on our website at www.pbg.com. We are also broadcasting the call live on our website.

Please keep in mind that all numbers referenced, unless specifically stated otherwise, are on a comparable basis. The items that impact our comparability are laid out in our non-GAAP reconciliation which is available on the Investor Relations section of our website.

I would ask that you take note of our cautionary statement that the operator read. With that, let me turn the call over to Eric.

Eric Foss

Thanks Mary Winn and good morning everyone and thank you for joining us this morning. I’d like to take a few minutes this morning to provide greater insight on our Q2 performance and I’ll also update you on our business outlook for the second half of the year. I’ll then turn it over to Alfred for a discussion of our financials and an update on our guidance before we take your questions.

Before I begin, let me refer to this morning’s press release where we confirmed our full year earnings per share guidance of $2.30 to $2.38. As our second quarter performance indicates PBG continues to demonstrate an ability to deliver strong results despite the challenging set of business conditions that currently exist. We once again delivered our worldwide profit and earnings per share objectives for the quarter with operating profit up 4% and EPS up 12% to $0.78.

We also continued to return cash to shareholders, having invested nearly $400 million in our share repurchase program so far this year illustrating the confidence we have in the long-term health of this business. And as I mentioned, we are confirming our full year earnings guidance as we believe that we have the right strategies and capabilities in place to achieve our objectives.

In the midst of all the macroeconomic uncertainties that companies are faced with today, it’s undeniable that a premium has been placed on our superior operating capabilities. At PBG our commitment to operational excellence and our ability to control what we can control have been the two driving forces of our recent success. To us this means three things.

First we’re building on our already strong track record in the area of revenue and margin management. Worldwide net revenue and gross profit per case each grew 8% in the quarter as we achieved pricing gains across all of our geographies. Currency contributed three percentage points to both numbers.

Second we continue to make progress against our cost and productivity initiatives and are on track to deliver more then $100 million in cost productivity gains this year. And third we’re executing at the point-of-sale to leverage the strength of our brand portfolio. The results of our Mountain Dew DEWmocracy program and our hydration activities are evidence of that, both of which I’ll talk more about in a few minutes.

Another major driver of our second quarter results is the continued success of our efforts to reposition our geographic portfolio. Through the first half of 2008 our international operations have demonstrated positive momentum and strong long-term growth prospects. The diversity and strength of our geographic portfolio is enabling us to affectively manage through the macroeconomic challenges of the moment while also positioning us well for the future.

So, while this remains a very difficult operating environment our strong operating capabilities and our successful portfolio repositioning efforts have enabled us to make the most of a challenging situation. Let me now provide some additional insight into our performance in each of our three geographic segments. I’ll start with the US and Canada.

While we remain committed to our objective of achieving profitable top line growth in 2008 there’s no question that the macroeconomic situation in the US continues to create a challenging business environment for our industry as a whole. What we see today is really a perfect storm of macroeconomic headwinds. Record high gas prices, persistent food inflation, and a weak job market have created a marketplace in which consumer confidence is at a 25-year low.

This combination of higher prices and reduced buying power is squeezing the average American consumer a great deal. When you look at the impact this is having on our industry, there are two significant trends that stand above all others. One is that consumers are becoming increasingly cautious, altering their purchase behavior in search of ways to better manage costs. There’s evidence that households across all income groups are splurging less, trading down, and shopping in places where they feel they’ll receive greater value.

The other is fewer trips. The number of miles driven declined last year for the first time since 1980 and with gas prices continuing to climb; we expect this trend to persist. We’re seeing consumers combine errands, spend more time at home and dine out less. This impacts our cold drink performance in particular given that the food service channel accounts for 60% of our cold drink volume.

All these factors have resulted in a different picture of the LRB category then anyone would have expected a year ago with the category down 2% year-to-date. With that context it’s not surprising that our business in the US continues to be challenging. In the US and Canada segment total top line growth for the quarter was flat, with net revenue per case up roughly 5% and volume down about 4%. Two points of the volume decline is attributable to the Easter shift. Cold drink volume was down 2% similar to what we saw in first quarter and take-home volume was down 6%. Our full service vending initiative contributed one percentage point to our cold drink decline.

A few bright spots in the quarter included the success of our brand innovations, our net revenue per case and margin performance and our ability to control costs. In the US our Mountain Dew line extension through our DEWmocracy program, drove trademark Mountain Dew cold drink up 4% in the quarter while trademark Dew take-home was up 6%. The Sierra Mist Undercover Orange limited time offer was a big hit improving our overall trademark Mist cold drink volume by over five percentage points and our hydration portfolio continues to be strong with volume up over 50%.

I was pleased with our net revenue per case growth of 5% which led to a 3% increase in gross profit per case. And we delivered excellent cost performance with SD&A expenses up 1%. Turning our attention outside the US and Canada, we continue to feel very good about our business momentum in Europe; particularly Russia and Turkey and we remain pleased with how we’re tracking against our full year objective of fully capturing the growth potential in this segment.

Europe experienced solid top line growth of 14% in local currency. This was led by a 27% top line growth in Russia, and 21% top line growth in Turkey. This also marks the fourth consecutive quarter that Turkey’s top line growth has exceeded 20%. Volume was up 1% in Europe led my mid single-digit increases in Russia and Turkey that were partially offset by softer volume trends in Spain and Greece.

What really stands out about our results in Europe though is our profit performance. Net operating profit tripled in the quarter versus prior year with double-digit growth in every country. The promise of Russia and Turkey as two key emerging markets makes me optimistic about the long-term outlook for our European business. We continue to strengthen our position with the successful execution of clearly defined strategies to drive growth and position ourselves well for the future. In addition the acquisition of Lebedyansky that we announced with PepsiCo in March remains on schedule to close in few months.

Moving on to Mexico, I am pleased that we were able to build upon the encouraging progress we made during the first quarter of the year. As I said at the beginning of the year, one of our primary objectives for 2008 is to achieve sustainable, profitability improvements in Mexico and we’re on the right path towards doing so. As in Europe, our profit performance in Mexico has been excellent. We experienced strong double-digit operating profit growth in the quarter and our operating profit growth is up over 30% for the first half of 2008.

A combination of good execution, appropriate pricing actions and good cost discipline has put Mexico on solid ground to be able to deliver on our full year objective. Top line growth in Mexico was 8% with currency contributing four points of growth; volume was down 3% as we continue to address segment profitability opportunities. Specifically we focused on three key areas to improve our margins; jug water, bottled water and select multi serve CSD packages. With this kind of volume impact the rate actions in 2008 have significantly enhanced the overall profitability of the business and position us well for the future.

So in summary our Q2 results showed that PBG is a company that can be described as focused, flexible and forward-thinking. We’re focused on controlling what we can control and managing through the current macroeconomic challenges in the most effective way possible. We’re flexible enough to be able to deliver on our earnings objectives and maintain our earnings guidance despite these challenges; a testament to the strength and the diversity of our portfolio. And we’re forward-thinking, never losing sight of the importance of enhancing our position in the marketplace by investing for future growth.

Short-term challenges will not distract us from our long-term objectives. Great operating companies should be able to balance both. Looking ahead to the third quarter and balance of the year, our attention remains focused on three major priorities. First seeking margin opportunities in the US and Canada, second leveraging our strong brand portfolio and innovation pipeline during the summer selling season, and third maintaining disciplined cost and productivity strategies.

Let’s take our margin performance in the US and Canada first, I told you last quarter that this would be our primary focus and that will remain constant. As such, we will be taking a number of steps over the course of the remainder of the year to improve. We’re preparing to take additional pricing actions across our key packages in an effort to counteract the increasing economic headwinds we’re facing.

We’re also getting up [and test] in a variety of new packaging initiatives across both cold drink and take-home. The three objectives of these initiatives are to provide greater consumer value, drive volume and enhance margins. Looking at the summer selling season, we’ll leverage our innovation pipeline across all of the beverage categories be it refreshment, hydration, or invigoration. In refreshment consumer response to our DEWmocracy promotion has been terrific and we’ll continue to make an aggressive push behind the program in third quarter.

We’ll looking forward to another exciting limited time offer this fall with the return of Pepsi Twist in conjunction with the start of the NFL 2008 season. And outside of the US we have some great soccer and music promotions in store for brand Pepsi in [Europe].

In hydration we’ll introduce three new flavors of Sobe Life Water in the US in third quarter. We’ll also launch a lemon-lime flavor of G2 adding to our strengthening isotonic portfolio and in Mexico we’re in market with vitamin water by [B Light] a new entry into the enhanced water category.

Lastly our invigoration portfolio continues to strengthen behind AMP. AMP volume was up 85% in the second quarter and we’ll continue to focus on strong execution behind our three new flavors in third quarter. We’ve also recently launched a new promotional program behind Adrenaline Rush in Russia and we’ll continue to focus on building the brand through the summer months.

One constant across everything that we do will be an unwavering commitment to controlling costs and maximizing productivity. As I mentioned to you last quarter these efforts focus on improving productivity globally, capturing the benefits of our 2007 restructuring program, leveraging our revamped transportation infrastructure, and eliminating underperforming SKUs from our portfolio.

We also have plans to lower our capital expenditures during the remainder of the year. Now before I turn the call over to Alfred, I’d like to reiterate my belief that all things considered, PBG remains on track for a solid year. There is no quick fix for the current economic softness in the US and we expect the industry to continue to face pressure as a result. However, our track record of excellence over the years is second-to-none, which means that we’ll execute our game plan in the most disciplined, affective and efficient way possible.

At the same time, we’ll benefit from a diverse geographic portfolio that will enable us to offset many of the challenges we face. At times like these, when an entire sector is under pressure, it’s easy to paint all companies with the same brush and while all companies may share the same set of macroeconomic challenges, the truth is, they don’t all share the same abilities to manage through them. And when I evaluate our success in today’s competitive environment, I look at our ability to execute our strategy, to capture the appropriate rate increases, to achieve cost and productivity gains, and to manage our capital spending appropriately.

I also look at our ability to balance the challenges we face in one geography with opportunities we enjoy in another. If we’re doing all of those things and our results through the first half of the year show that PBG is, then we’re going to be well positioned to outperform others and achieve continued success in the marketplace.

With that let me turn the call over to Alfred.

Alfred Drewes

Thanks Eric and good morning. I’d like to take a few minutes to provide some additional insights into our second quarter results as well as discuss our outlook for Q3 and the full year. Before I get into that though, let me add my thoughts on how we’re managing in this difficult environment.

We knew coming into the year that we faced significant commodity cost pressures across our business. While commodity prices have worsened during the course of the year, we’ve had good visibility [and/or] COGS and are able to maintain our COGS per case guidance of 6% growth before Forex impacts. We’ve been able to effectively deal with raw material cost increases by taking necessary rate actions and improving our cost productivity; two things that we’ll continue to do throughout the balance of the year.

We’ve also been able to leverage the strength of our international portfolio to offset earnings weakness in the United States. What was not expected as we entered the year was the consumer softness in the US. The resulting LRB category weakness is something which we believe will continue during the balance of the year and it is quite dynamic. So looking to the balance of the year, we have a firm grip on our commodities, the pricing environment as rational and we are executing our productivity plans. What is less certain is this consumer impact.

With that as context, let me now turn to our Q2 results. Given the current environment our financial results are quite good; 4% operating profit growth and EPS at the high end of our guidance. Our results were driven by solid net revenue per case gains of 8% that yielded gross profit per case growth also of 8%. Productivity initiatives were on track to exceed $100 million for the full year and we achieved double-digit operating profit growth in all of our international markets.

Let me now turn to our 2008 guidance, we’re reconfirming our comparable EPS guidance of $2.30 to $2.38. This represents growth of 5% to 8%; solid performance given the current operating environment. Comparable operating profit growth is forecasted to be in the low single-digits. We anticipate top line growth will be 5% to 6%, worldwide net revenue per case is expected to grow about 6% to 7%. All of the P&L line items in our outlook include about a two percentage point impact from foreign currency translation.

Our COGS per case outlook remains at the high end of our previous guidance range of 5% to 6% with Forex also likely to add an additional two points. I do not anticipate that raw materials inflation will cause any additional upward movement in our COGS outlook. Our full year tax rate is unchanged at 33% and 34%. Given our softer volume we’re reducing our capital expenditures to the range of $750 million to $775 million and this will allow us to deliver our operating free cash flow target of $620 million.

Looking specifically at our guidance for Q3, comparable Q3 EPS is expected to be $1.02 to $1.06. So to wrap up, the challenges facing our industry are real; however I think our second quarter results as well as our continued commitment to our full year EPS guidance show that PBG is well equipped to deal with these challenges in the most effective way possible. We’ll continue to control what we can control while adapting to the current volatility in the marketplaces necessary.

With that I’ll turn the call back over to Eric.

Eric Foss

Thanks Alfred, we’ll be happy to take any questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Bill Pecoriello - Morgan Stanley

Bill Pecoriello - Morgan Stanley

My question is around your price increases and the commodity outlook, you mentioned you were going to take some pricing, I guess post Labor Day, can you talk about the magnitude of the price increases planned and given that we can see another tough COGS outlook for 2009, do you anticipate taking more pricing post Super Bowl, or are you going to take the majority of it post Labor Day.

Rob King

So first off, the markets are very rational right now on pricing and we actually would continue to expect that to take place over the balance of this year. Consistent with our practices over the past really seven to nine years, we are going to take pricing post Labor Day. We’re committed to managing our revenue and our margins and we’ve got a track record of doing that. So post Labor Day price increase, we think is consistent with that and will take place. We’ll continue to evaluate the marketplace post Labor Day to determine if additional pricing needs to take place post Super Bowl, but what I think I can tell you is that the market is rational and we’re committed to our revenue and our margin strategies as an element of our business plan.

Bill Pecoriello - Morgan Stanley

If I could just follow-up, you said that you don’t anticipate any further COGS pressure in 2008, is it too early to look out to 2009 at all and some of the moving pieces to anticipate what you might be facing in 2009 or what areas are the most concerning be it the resin energy and then the corn?

Alfred Drewes

Well I think anybody that’s got a Bloomberg terminal can see what’s happening with corn and oil prices during the course of this year so they’re up and you know, we’re taking some positions now—we’ve already taken a few positions but really we typically try and talk about our outlook for next year during Q4 and back to your question to Rob about pricing, all of this is going to factor into what we do for next year and we’ll talk in specifics about it for 2009 in Q4.

Operator

Your next question comes from the line of Lauren Torres - HSBC

Lauren Torres – HSBC

I guess also on pricing in the US, I was hoping you could talk a little bit about the effect of that pricing and how you’re thinking about volume guidance for this year. I don’t think you really talked much about your US volume expectations, how do you think about that trade-off with respect to pricing? If you’re going to be more aggressive on pricing, how do you feel about losing some of that volume growth and how should we think about that for the full year?

Eric Foss

Let me try to give you a little bit of context and then share with you how we tend to think about this. First of all I think its important to note that you know, the reality is, is some of the questions and concerns around consumer confidence are really having an impact and the category is softer then we anticipated. And again, the way I would dimensionalize that is the category year-to-date is down 2% versus what we had planned for which is to see the category growing at about 2%. Our volume year-to-date in the US is down 2% as well.

Again where we see the most impact is in food service. The reality is, is people are eating out less. I think another important point is the fact that the water category—if you look at the sub segments of CSDs, CSDs are pretty much inline with what we had planned for. They’re down roughly about 4% which is pretty consistent with what we had planned at about down 3%, but the big difference is largely being felt on unflavored water and specifically case pack water.

The unflavored water category is up mid single-digit versus what we had expected which would be low double-digit. And so I think that if you look at our volume, one full point of the two point decline comes from the unflavored water category year-to-date and we’ve made a very conscious effort given the commodity pressures to try to take pricing in that area. But again, I want to make a couple of points here. It’s important not to get confused by the optics of this Easter shift. So if you look at year-to-date our worldwide volume is down about 1%, Europe is up 3%, Russia and Turkey are up &5 and up 4% respectively right in line with how we planned. Our Mexico year-to-date performance is down 1%. We’ve been very clear with the focus that we had on continuing to improve our profitability and we’ve made major progress year-to-date and so most of that volume shortfall really comes back to the US macroeconomic environment and the impact it’s having on the category.

Operator

Your next question comes from the line of Judy Hong - Goldman Sachs

Judy Hong - Goldman Sachs

I just wanted to ask questions about Europe, you talked about Russia and Turkey year-to-date being strong, but in the second quarter Russia softened a little bit, there’s more concern about whether you’re seeing the inflationary environment in that market hurting consumers in that region so, can you just talk about from a consumer standpoint what you’re seeing in Russia and Turkey and Spain and then secondly, even with volume being a little bit soft in Europe you saw just pretty impressive profitability improvement, you’ve talked about cost productivities coming in line, can you just talk about how much you are getting from that initiative? Are we half-way through, are there more to come on the cost productivity side of it?

Eric Foss

There’s a variety of questions in there, let me do my best to try to answer them. First of all I think the story of our European business is really a simple one, we are having an excellent year again in Europe. We’re having excellent profit growth; Europe’s profits tripled in the quarter, double-digit growth across all geographies. If you really think about it, again I think we’ve mentioned this in the past, our growth priorities really center around Russia and Turkey. Those are countries that are very attractive for us. Our Russia top line was up 25%, volume was up 6% and to your point we were lapping 22% growth from a year ago in Russia so on a two-year basis, that 28% or 14% [inaudible] is pretty strong. Our top line growth in Turkey; very encouraging up 20%, volume up mid single-digit. One of the things I’m really pleased about in our Turkey business is we’ve had very good revenue and margin management discipline. Our gross profit per case was up in the mid teens for the quarter in local currency. So I think this whole idea around fully capturing the growth potential in Europe led by Russia and Turkey is a plan that we continue to execute very, very well.

I want to give credit to our Europe and Russia and Turkey teams for that. Let me give you a little context on the macros. I think in Russia we continue to see GDP growth up 7% to 8%. There is some acceleration on the inflation front, but the reality is, is we’re seeing double-digit increases on wages and income. So I think we continue to be very confident and optimistic about the long-term growth potential of Russia and Turkey.

Alfred Drewes

On the productivity question that you had, if you think back a couple of years ago, one of the things we talked about was the need to really step up our productivity efforts in the United States so going back to 2006, we’d been feeling the impact of SKU proliferation in our warehouses and also our logistics costs, and so we made a conscious effort starting last year to put in place, programmatic and process changes to help make ourselves more productive in that supply chain and also on our selling and delivery costs. We started to see the benefit of that in 2007 and we’re continuing to see it in 2008 and so I think we feel quite good about what’s happened from a productivity standpoint, again particularly in the United States and this isn’t sort of a one-time cut thing, this is an ongoing effort to improve the efficiency of our operations in the supply chain and on the S&D side.

Judy Hong - Goldman Sachs

So the magnitude of the profit improvement in Europe in the second quarter, should we expect similar improvement going forward?

Alfred Drewes

We’re going to have strong double-digit profit in Europe for the full year is kind of where I’d leave it with you and similarly in Mexico.

Operator

Your next question comes from the line of Christine Farkas - Merrill Lynch

Christine Farkas - Merrill Lynch

I’m wondering if you can just give me a little bit of clarification on some of your US or North American volumes, your take-home was down 6%. In this environment one would expect a take-home to perform a little bit better then the cold drink and I understand the Easter shift probably had a greater impact on the take-home. Can you extrapolate that impact between the channels?

Rob King

I think as Eric said, if you look at our Q2 volume and the decline in the US versus prior year, two points out of the five was associated with the Easter shift, another point was associated with soft cold drink, and about a point was associated with declines in unflavored water. So as you think about shifts into the take-home channel on a year-to-date basis, I’d say that that’s accurate but you just have to look at the second quarter under the lens of the calendarization of Easter.

Eric mentioned to you before on unflavored water that at the end of the day, the consumer is making some decisions on either saving some money and reverting to tap water or actually he didn’t mention this, there’s some growth in private label water. At the end of the day we’re making conscious decisions to not chase low profit water in the take-home channel, we’re focused on our revenue and our margin management strategies. We’re focused on execution to get profitable volume and we’re focused on controlling our cost and productivity to have an affordable operating structure.

Christine Farkas - Merrill Lynch

If I could just push into Canada for a second, I don’t think you highlighted what the Canadian volumes were in the quarter and are you seeing any changes on the margin there on the back of the US economy with respect to cold drink channels as well?

Rob King

Our Canada business performed well volumetrically in the quarter compared to the US. Our volume was flat, cold drink was up mid single-digits and our take-home business was down low single-digits.

Operator

Your next question comes from the line of Todd Duvick - Bank of America Securities

Todd Duvick- Bank of America Securities

I wanted to ask a quick question about the cash flow statement and the balance sheet, I think generally you have stronger cash flow in the back half of the year and I was wanting to know if as you take a look at your operating pre-cash flow if you expect to use a portion of that to pay down some debt or if you can give us some guidance on debt and share repurchases for the back half of the year.

Alfred Drewes

From a debt standpoint, I think we’re pretty comfortable with our capital structure. We have a bond maturing early next year which will probably get refinanced towards Q4, depending on the effect of the market conditions, but we’ll pre-finance that. In fact if you looked at our balance sheet I think you’d see there’s a movement up in the current—some of our debt moved up to current and that’s that bond that’s maturing, so that’s the situation on the debt. I don’t see a dramatic change for our capital structure any time soon.

On the share repurchases, we’ve been aggressive so far this year buying back the stock. We think there’s been a good opportunity to do that and we’re always opportunistic about buying back the stock. The one thing just to balance the overall cash expenditures on that during the course of the year, but our track record is over the last probably five years or even more, we’ve returned all of our excess cash flow to shareholders, largely through share buy backs but also through an increasing dividend over time.

Todd Duvick - Bank of America Securities

Just with respect to that bond that is coming due the first of next year, that is currently guaranteed by PepsiCo if I’m not mistaken, would you expect new issuance to be guaranteed by PepsiCo or not?

Alfred Drewes

Yes it would.

Operator

Your next question comes from the line of John Faucher – JP Morgan

John Faucher – JP Morgan

I was kind of surprised that the cold drink trends didn’t decelerate at all it looks like in the second quarter, can you talk a little bit about maybe what you’re doing or was there just simply no change in the consumer outlook in that channel. And then can you go and talk a little bit about the category performance in there. Are you seeing similar weakness in bottled water and cold drink, relative to the rest of your portfolio and then can you also talk maybe a little bit about the energy category and how that’s holding up in the cold drink channel.

Rob King

Cold drink trends directionally were the same in the second quarter as they are year-to-date. I think you know that our food service business represents about 60% of our cold drink business and as we’ve said, as consumers change their shopping habits and spending of discretionary income, the food service business is one of the first places to be hit. That being said, we actually did see some positive trends in our retail cold drink business. Our retail cold drink business was actually up modestly in the second quarter and that was primarily based on strength in our DEWmocracy program which Eric alluded to, hydration sales grew nicely as well and our AMP business performed very well; up 85% in the quarter with a disproportionate amount of that business being in cold drink.

So you’ll see more of that activity in Q3 and the second half of the year. DEWmocracy will continue to be an element of our cold drink strategy in Q3. We’ve got a Pepsi cold drink initiative behind an NFL limited time offer and then as we mentioned earlier, we’ve got some new Sobe Life Water flavors and some new G2 flavors to help our hydration business. And then lastly, energy in the second quarter performed well for us primarily based on the strength of AMP and we foresee that continuing in the third quarter and the second half of the year.

John Faucher – JP Morgan

And then on the bottled water side, any—are you seeing as dramatic a fall-off there relative to the rest of the business as you are in take-home?

Rob King

The trend is consistent with year-to-date trends in bottled water.

Operator

Your next question comes from the line of Bryan Spillane – Banc of America Securities

Bryan Spillane – Banc of America Securities

I guess a question on just the sensitivity to the macroeconomic environment, its been a little, I think I counted six times in the prepared remark you talked about the macro environment being an impact and you know when we think about consumer staples, one of the things that we think of is that they’re somewhat insensitive to the economic cycle, and so understanding that there’s certainly been an impact on food service, why shouldn’t we think part of what’s happening to the LRB category is that its just been oversaturated or that there’s more to it then just the macroeconomic weakness and that as prices increase you’re really getting sort of a reset on what consumers are really willing to spend on LRB.

Eric Foss

Let me try to address that, I think again if you view this through the eyes of the consumer, kind of the current state, there is no doubt that the fuel pressures and the food pressures that she feels, which are among the highest in the last 20 years, is having an impact on the confidence level which is one of the lowest that its been over that timeframe. And that’s had some impact on the category; however, let me make sure I’m clear on where it is impacting the category and where it is not impacting the category.

Where it is impacting the category is away-from-home consumption, food service that because its 60% of the cold drink mix will trickle over and affect cold drink. However, as Rob just mentioned, our retail cold drink business was slightly positive in the quarter so I think that’s a very encouraging sign despite the difficult macro environment. I think the other place its being felt is if you look at our take-home business I think our CSD business, and actually the CSD category which does tend to be fairly resilient in these times, is continuing to show some resiliency. I think that on the take-home side where we’ve seen the biggest impact is in take-home water where I do think the consumers looking at that $4 or $5 expenditure and thinking differently about it in these economic times.

So I still believe that as we think about this category, not just on a global basis, but on a US basis, again we expect near-term these category pressures are going to continue however over the longer term, we continue to be very positive and confident that consumers are going to continue to consumer beverages, and they’re going to continue to look for on-the-go beverage consumption just given the lifestyle that they lead and we continue to see the LRB category over time growing in the low single-digits.

Operator

Your next question comes from the line of Carlos Laboy - Credit Suisse

Carlos Laboy - Credit Suisse

You spoke of some new package innovation in North America, can you expand on that and on international if you could expand on the volume performance in Mexico; what was up, what was down and what’s your outlook on those categories?

Rob King

We’re testing a couple of package initiatives as we speak and in the second half of the year, on single serve we have a couple of initiatives; a 12 oz. plastic bottle and a 16 oz. container, primarily priced at around $1 and then we’ve got some take-home tests going on as well primarily with different can configurations; eight pack, 18 pack and 20 pack. I think we mentioned in our remarks that we’re focused on three things when it comes to these packaging tests; value, volume and margin. And what we’re trying to test is essentially the balance and striking the right balance across all of those variables to come up with a solution to drive our business. We are committed though to ensuring our revenue and our margin management strategies staying in place so we’re not pursing these initiatives for the sake of value or volume. Striking the right balance and achieving our revenue goals would be very important for us to consider expanding any of these initiatives beyond our tests.

Eric Foss

If you look at our volume in Mexico, again on a year-to-date basis, we continue to see the category of CSDs growing; our CSD business is up about a point. We’ve got good performance on trademark Pepsi, up about 2%. Bottled water continues to grow high single-digit. The softness has been both at the category level and on our business largely in the jug water business down mid single-digit year-to-date.

Operator

Your next question comes from the line of Kaumil Gajrawala – UBS

Kaumil Gajrawala – UBS

Following up a little bit on Bryan’s question on the consumer environment is there a point or a volume decline number that you look for that you might be watching out for where you either stop taking additional pricing after Labor Day or that maybe you’d increase your promotional activity even despite what’s happening on the commodity cost side?

Eric Foss

Let me tell you how we try to think about it, I think given the high commodity inflationary environment we’re faced with, the way I’d ask you to think about it is, we think about it twofold. Number one it’s critically important given that commodity inflation that we attempt to cover COGS with pricing. And the pricing environment is very rational and you can continue to expect us to play that game. The second dimension however is its very important to watch how your share is performing and the reality is, is we’re very sensitized to making sure where the category resets from up two to down two, and we perform in line and we’re holding our position, which we’re doing year-to-date, on CSDs, on non-carbs, on hydration.

Really the only area we’ve seen share slippage is in the unflavored water and that’s been somewhat of a conscious decision based on our price margin discussion earlier. But I think it’s twofold. I don’t want either of those to get out of balance so—but again I want to emphasize that the reset here is largely a category that was expected to grow 2% that is now down 2%. Our position in that category continues to be very, very strong and its very important that we watch that closely while at the same time making sure we’re making the right trade-offs economically in the inflationary environment we’re faced with.

So those are the two dimensions that we watch very closely and make the right trade-off.

Kaumil Gajrawala – UBS

And then you may have mentioned this already, did you provide an outlook for what we should be looking at for volumes for the full fiscal year or just for the back half?

Alfred Drewes

The full year, our worldwide volume will probably be down low single-digits, US will be comparable to that.

Operator

Your next question is a follow-up from the line of Bill Pecoriello - Morgan Stanley

Bill Pecoriello - Morgan Stanley

I was wondering if you’d comment in June, early July, any change at all in trends in C&G or take-home versus what you saw in kind of the normalized April, May after you adjust for the Easter and then also when you commented on the 12 oz. and 16 oz. at $0.99, is it too early for you to know, are you driving incremental transactions there or are you trading down you and the retailer which would not be ideal?

Eric Foss

It’s still very early in the quarter. I think what I can tell you is as we looked to July 4^th, the category softness was fairly consistent with what we saw the first half of the year and kind of consistent with our expectations. And then regarding your second question, it’s just too early to tell. We’re just getting these packages into market but the reality is as to your point, we’re highly sensitized in watching the 20 oz. package to make sure that what we’re trying to do here is bring new users into the category at a price point that keeps them engaged. What we have to watch is to make sure that we don’t—that doesn’t come at the expense of the profitable 20 oz. package. We think our marketing and merchandising strategy incorporates the ability to do that. But it’s just too early to read.

Operator

Your final question comes from the line of Mark Swartzberg - Stifel Nicolaus

Mark Swartzberg - Stifel Nicolaus

On Europe, could you talk a little bit more about the rationale behind the pricing you’ve taken, obviously you’ve seen a very nice bump in margin there and you’ve talked about seeing strong growth for the year profit-wise in Europe, but just trying to get a better handle on how sustainable or to what level the sustainability of margin we’ve seen in Europe is going to hold to the balance of the year and for example, costs, is this an anticipation of some big pick-up in costs for the region later I the year or next year, just trying to better understand the absolute level of pricing you’ve taken there.

Eric Foss

Again, I think I’d ask you to think about it in a couple of ways. First of all in Turkey, similar to some of the work we’ve done in Mexico, improving our revenue and margins is very, very important. So there is this kind of sustainable profit momentum point that we’re trying to emphasize in Turkey and as I have mentioned, have done so very successfully. I think in Russia, our real focus is on fully capturing the growth potential and there it’s been a combination I think over the last several quarters of both good volume growth as well as good pricing growth and I would expect that to continue.

Mark Swartzberg - Stifel Nicolaus

So it sounds like there’s not some looming cost issue over the next few quarters in those markets?

Alfred Drewes

I wouldn’t say there’s a looming cost issue; I would say we’ve had cost pressures in those markets. I know we talk a lot about the cost pressures and then usually its sounds like we’re just talking about the US but this global oil impact in particular is a global thing. So that’s part of what’s happening with the pricing actions. They are actually in Mexico as well as trying to cover all of that. So I don’t think there’s a looming cost issue outside of what we all know about.

Operator

There are no further questions in the queue at this time.

Eric Foss

Well again thanks for taking the time and we’ll talk to you soon. Thank you very much.

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