PepsiAmericas Inc. Q3 2008 Earnings Call Transcript

Oct.22.08 | About: PepsiAmericas, Inc. (PAS)

PepsiAmericas Inc. (PAS) Q3 2008 Earnings Call October 22, 2008 11:00 AM ET

Executives

Sara Zawoyski - VP, IR

Bob. Pohlad - Chairman and CEO

Ken Keiser - President and COO

Alex Ware - EVP and CFO

Analysts

Lauren Torres - HSBC

Marc Greenberg - Deutsche Bank

Lindsay Mann - Goldman Sachs

Damien Witkowski - Gabelli & Company

Operator

Good day everyone and welcome to the PepsiAmericas Incorporated, third quarter 2008 Earnings Call and webcast. This call is being recorded. At this time for opening remarks and introductions I would like to turn the conference over to Ms. Sara Zawoyski, Vice President of Investor Relations. Please go ahead.

Sara Zawoyski

Thank you, Christine. Good morning and thank you for joining us today to discuss our third quarter 2008 results. On this morning's call are Bob Pohlad, our Chairman and CEO; Ken Keiser, our President and COO; and Alex Ware, our CFO. Our call is being recorded and will be available for playback on our website at www.pepsiamericas.com.

Please note that throughout our call this morning we will be presenting certain forward-looking statements of expected future performance, including expectations regarding anticipated earnings per share as well as other matters.

These forward-looking statements reflect our expectations and are based on currently available data. However actual results are subject to future risks and uncertainties, which could materially affect our performance. We undertake no obligation to update any such forward-looking statements and we wish to advise you that the risks and uncertainties that could affect our actual performance are set forth in the cautionary statements found in our Annual Report on Form 10-K.

We will also reference certain non-GAAP financial measures in our call this morning. Specifically adjusting for special charges, as well as discontinued operations in operating profits and earnings per share.

In addition, our discussion today of full year outlook is on a 52 week basis and includes the impact of acquisitions. We anticipate the 53rd week to add roughly one percentage point to full year revenue and operating growth and a $0.01 to EPS. Reconciliations of these items to GAAP financial measures are included in our earnings release as well as on our website. With that let me turn the call over to Bob.

Bob Pohlad

Thanks Sarah. Good morning, everyone. Thanks for joining us and for your interest in PepsiAmericas. We had a good third quarter and it positions us well for another good year. Our results reinforce the effectiveness of our strategy, top-line growth in Europe, and strong cash flow in the US. In 2007, adjusted EPS grew 26% and in 2008 EPS will grow at least 16%.

That our share price is down by roughly half this year despite these results is certainly a frustration, but one that is faced by most in their portfolio. So, this morning, Alex and I will review Q3, but I want to first share with you how we are thinking about 2009 and our continued confidence in our ability to grow.

We last spoke about PepsiAmericas at the Lehman conference in early September. Since then, the US and world economies have changed dramatically. Those factors that are challenging the US are increasingly extending globally; credit shortages and rising rates, currency swings, commodity uncertainties and declines in our consumer's confidence and consumption.

In our planning for 2009, we recognize that PepsiAmericas will not be immune to these factors. However, we do believe that our markets will be relatively less affected and we believe that the confidence in our ability to grow is realistic.

Here is why. First, the economies in our Central and Eastern Europe markets have in the past been stronger than markets to the east and west. They are projected to moderate but still grow between 4% and 5%. Further, our brands and execution should drive growth ahead of these GDPs and ahead of the categories.

Second, while we do expect headwinds, we anticipate these to be partially offset by a more favorable commodity outlook. The combined effect would be some profit contribution shifting from Europe to the US.

Third, our US markets are high share and remain dominated by Pepsi and Mountain Dew. Dew has been growing while Pepsi has been declining 5% to 6% annually. We are encouraged and excited about Pepsi's reemphasis on these core brands, and in 2009 it will be our biggest domestic initiative. One that we believe can moderate the historical decline.

And finally, as we improve the CSD performance, we believe our price pack architecture and productivity initiatives can enable our US business to continue to be a strong source of both cash and profitability. These should have a meaningful impact on 2009 and while we're still building our plants, we believe our long-term growth targets are still within reach, as we sit here today. And as we customarily do, we will talk more specifically about 2009 on our year end call in February.

So, turning to Q3, we grew revenue by 12%, led by solid results in Poland, Romania and with Sandora adding eight points. Productivity gains and continued cost discipline helped to maintain operating margins just slightly below that last year. Operating profits were up 9% and taxes were lower driving adjusted earning growth of 25%.

In the US, we continue to manage our business exceptionally well. Despite changing consumer buying behavior with consumer seeking more value and making fewer trips, and significantly higher costs, we maintained revenues and margins of a year ago, while delivering Q3 operating profits of $89 million, down just 3% from prior year.

Coming into the year, our US plan was built to hold operating profit even with 2007, supported by three priorities. First, execute channelized pricing strategies and marketplace initiatives. Second, increase productivity and continued cost discipline, and third drive cash flow with a renewed focus on primary working capital. We've delivered on all three of these and at the same time we've grown market share and strengthened customer service.

In revenue management, we're currently piloting our new price pack architecture. We are testing 8 and 18 pack can configurations in place of the 12 pack, with tests underway in a variety of channels and markets. With this new price pack architecture, we are looking to accomplish three things.

First and most importantly to reengage consumers to the right value and the right pack size. The smaller can configuration allows for more variety and routine shopping trips, while the larger pack size should provide value and deliver volume.

Second, it provides an opportunity to close the price gaps between everyday features and holiday. Third, we can further differentiate packaging by channel to match consumer's shopping behavior looking for the optimal value with the best margin.

Market execution in our field by our US field organization is strong. We are gaining share in CSDs, growing drug and dollar store channels, and driving single-serve growth in retail channels. US volume was down 2.4% in the quarter, but improved from down 3.4 in the first half.

CSDs trended favorably behind good innovations, promotions, and in-store execution. Take-home water and food service continue to be the primary source of our volume decline. Our take-home water declines are a function of softening category and share declines as consumers seek lower price alternatives to branded water, including both private label and tap.

It is an area which we choose not to play within this food service channel, our third party operator and full service vending business has continued to be impacted by price increases and growing unemployment in businesses and factories.

Compared to year-to-date trends we expect US volume declines to accelerate in Q4 because of pricing, but mostly because we'll have strong holiday promotions with key customers a year ago.

PepsiAmericas has one of the lowest cost structures among our bottling peers and are focused on productivity and cost, and cost discipline precedes today's economy. But it does take on even greater importance this year with top line pressure and higher costs.

Our customer alignment initiative realigned our selling resources against the highest growth opportunities within each channel. It refocused the field sales division on marketplace executions and added revenue and category management capabilities, creating the flexible structure that we have today.

This structural advantage is complimented by our CO3 supply chain initiative. With CO3 we have streamlined warehouse processes, increased selling efficiencies, optimize route and continue to see significant improvement in our stocks.

CO3 has also been a key enabler for driving greater working capital efficiency. For example our improved inventory management system ensures that we have the right level at each SKU in each warehouse; not too much to reduce cash flow, and not too little to cause out of stock.

Beyond CO3 we’ve added products initiatives including GPS truck management and tracking to raise productivity and reduce fuel consumption, headcount optimization for field sales, employee safety and wellness initiatives to reduce cost and discretionary cost management. All in all, we expect full year US SG&A cost to be essentially flat relative to prior year. It reflects the tremendous job our team is doing around both productivity and cost management.

In Central and Eastern Europe, we continued to deliver broad base top line growth particularly in our three key markets Poland, Romania and Ukraine. Revenue was up over 60% in Q3, constant territory up 23% with rate, mix, and volume all contributing. We are executing our local currency pricing plans in every market, expanding our single serve business and growing our beverage portfolio through innovation.

Operating profits grew 35%, driven by acquisitions and ForEx, while local currency organic profits modestly declined due to inflation, market reinvestment, and a tax charge.

In Poland volume grew by 12%, and local currency revenue grew 18%, reflecting strong single serve and some rate increases. In Romania, we increased volume by 4%, as Q3 pricing moderated volume growth with local currency revenues of 12%.

Total Ukraine volume declined 2% due to the more volatile export business, while pro forma revenues were up 14%. In-country volume, though, was up 6% led by the successful rollout of both Lipton and package innovation in juices. In addition, snacks in Ukraine grew double-digit and remain a key future growth platform for us. These three markets comprised roughly 90% of our CEE operating profit.

Hungary, our next largest market in revenues but our smallest in profits, remains under repair and drove a negative two point contribution to CEE’s Q3 volume. We are, however, encouraged by the sequential profit improvement in Hungary as we do execute margin improvement initiatives that we began last quarter.

In Central and Eastern Europe, we have begun our global growth platform initiative to design and build the structured system and capabilities required to support the growth of this business in the years ahead. Our priority will be to identify and or receive implementation of global PAS best practices, beginning in Q1 of '09 with the rollout of the CO3 production forecasting capabilities in Romania.

For Q4 and 2009, we expect to see continued volatility in foreign currency. And while inflationary pressures should subside, we expect pockets of volume softness in the quarters ahead. We do not expect the impact to be uniform across all our markets or as great as some others. In fact, Ukraine and Romania are on track so far to post Q4 volume growth ahead of Q3. These economies may be volatile in the short-term but remain highly attractive going forward.

So our strategy remains simple. Grow, share, and consolidate the marketplace, add new distribution, and bring in new products, all to capture the growth opportunities that each market provides. Our geographic and portfolio M&A pipeline is strong and we look to be active in this environment.

Let me take just a moment on the Caribbean, as Alex will take you through the Q3 charge in greater detail.

Our Caribbean business, which represents less than 1% of our operating profits, continues to be difficult. On many of the islands we are taking steps to streamline production, selling, and distribution processes, but going forward more has to change for the Caribbean to contribute more to PAS both in profits and margins.

In closing, PepsiAmericas does have unique maneuverability. It's our attractive markets, resilient brand portfolio, and expansion opportunities that can take us strongly into the future. We are very purposeful about growing and managing our business and while there are uncertainties, there are also many opportunities in every market. With our resources and with our organization, we are very well positioned to capture those opportunities that best fit PepsiAmericas.

So with that I will turn it over to Alex.

Alex Ware

Thanks and good morning, everyone. Continuing from Bob's comments this morning, I'll discuss our Q3 performance, which puts us on track to grow our adjusted earnings by 16% to 18% this year. Our expectations for the remainder of the year, as well as some perspective on those areas that are top of mind in today's environment namely commodities, ForEx, and liquidity.

Amid these uncertainties, we are managing well to achieve our ’08 goals and enabling PAS to deliver strong value for the future. In our third quarter, revenue grew 12% and 4.5% on a constant territory basis with CEE providing most of the growth. As US volume, as well as ForEx moderate, we now expect full year revenue to grow in the 10% range.

Worldwide cost of goods per unit was up, as expected 5%, reflecting higher raw material costs in each of our markets. While costs will push ahead of this trend in Q4 as we lap procurement savings from a year ago, we expect full year cost per unit at the lower end of our 6% to 7% range.

Looking broadly at commodities, we have virtually complete coverage for packaging and sweetener costs along with fuel for 2008, so our visibility is clear. And looking ahead to 2009, we are roughly 65% locked on raw material costs in total at this point in the year, which is consistent with prior years.

As a reminder, our goal for raw material management is to minimize the volatility and increase the visibility to our costs, such that we can effectively build pricing architecture for the year ahead.

Turning to SG&A, we continue to drive productivity gains and maintain cost discipline, as our cost increases were lower than expected. SG&A increased 14% in the quarter and 10% year-to-date including acquisitions, with acquisitions and ForEx each driving roughly four points of the increase.

In the quarter we received unfavorable rulings in check on 2001 VAT taxes and recorded a $3.5 million expense, which reduced CEE margins in the quarter. In Q4, overall we would expect SG&A cost to moderate due to lapping of the Sandora purchase, '07's higher US costs, along with lower ForEx. Expected worldwide SG&A for the full year is now two points better than previously communicated, currently expected in the 8% range.

Operating profits for the quarter were up 9% and 12% year-to-date, with full year '08 expected to finish in the 10% range. On the below-the-line items, we continue to expect full year interest expense of $115 million, with floating rates on about 20% of our debt.

With regard to taxes, our rate in the quarter was 27%, reflecting favorable book to tax and FIN-48 adjustments of four points and a lower underlying rate of 31%, based on country mix that we would expect to remain through the balance of the year. In the quarter, ForEx added roughly $11.5 million to pre-tax profits.

Due to the recent dollar gains and local currency movements, we would estimate ForEx to be slightly negative to Q4 profits at recent spot rates. Our EPS forecast assumes roughly a $0.04 to $0.05 FX impact, which is offset by the tax favorability generated in Q3.

There are several items impacting comparability this quarter, including special charges and discontinued operations. We reported Q3 special charges of $7.1 million pre-tax or $0.05. The charge primarily reflects non-cash asset impairments and a facility closure in the Bahamas, resulting from the strategic review of our Caribbean operations to improve profitability.

In the Bahamas, we will no longer produce locally, but instead source products from other locations and utilize third party distributors. In Q4, we expect another $0.02 in charges related primarily to severance as we further streamline our production, distribution, and selling activities in our other markets.

In discontinued operations, we recorded an after-tax charge of $9.2 million or $0.07. For revised estimates regarding environmental remediation, legal, and related administrative costs expected to be paid out over the next five years. With roughly 70% completion on our remediation efforts, we made significant progress.

Like wise meaningful progress has been made on the legal front. For example the number of plaintiffs in the Abalos suit have been reduced from almost 1,200 to about 40. As a result of such progress, we believe that we have much greater visibility to the ultimate costs.

Our adjusted return on invested capital continues a positive trend, finishing the quarter at 8.1%, putting us on track to meet our full year target of 8%. As we've discussed, cash flow generation is a focus plank for domestic. By year end, we have targeted working capital to improve by $16 million, almost 10% of our total cash flow. Going forward, we have more tools being rolled out to further improve our inventory management capability and precision.

Given the current credit environment, liquidity is certainly top of mind today. PAS generates significant cash flow and we are on track to deliver $180 million this year. We have a strong balance sheet and solid credit ratings. So we continue to effectively issue commercial paper without significantly higher costs.

Currently, we have about $380 million in commercial paper outstanding, which is backed by a $600 million revolver through a broad bank group. We have $150 million in term debt due in May of '09 with no immediate pressure to fund. So our liquidity and funding picture is healthy.

In closing, we are navigating the volatile markets and confirming our raised full year adjusted EPS guidance of $1.92 to $1.96. As we look ahead, we are excited about the opportunities for PAS. Certainly there are lots of factors to focus on and be concerned with in this environment.

As we think about our '09 algorithm we anticipate ForEx headwinds. We also anticipate improving commodity trends that can be a meaningful offset. If the current relationships hold, we will likely see profit contribution shifting from Europe to the US.

These external factors are being incorporated into our '09 plans, so that we can make the adjustments needed to best achieve our growth goals. Recognizing the global uncertainties, we believe that we are well positioned to capitalize on the opportunities ahead.

With that, Christine, we are now ready to move on to Q&A.

Question-and-Answer Session

Operator

Thank you. The question and answer session will be conducted electronically (Operator Instructions).

We'll take our first question from Lauren Torres with HSBC.

Lauren Torres - HSBC

Good morning.

Bob Pohlad

Good morning, Lauren.

Ken Keiser

Good morning.

Lauren Torres - HSBC

I know you took a price increase post Labor Day, but I don't think we saw much of that reflected in your third quarter results. I was just curious if you could just talk about the types of increases you have been taking and how the market has been accepting them or not accepting them?

Ken Keiser

Yes, Lauren, this is, Ken. You are right. As we talked actually on our last call that that most of this pricing would probably fold in over the course of Q4 and that in fact is happening. By the first of November, basically all of our retail pricing will essentially be in place and as we said that on the take home side we will see our net pricing grow in the 5% to 6% range.

Lauren Torres - HSBC

What are you seeing at the trade at this point, in light of a tougher environment and consumers? Is it being passed along, are we seeing acceptance? What that is right now?

Ken Keiser

Yes. That's being tape walled, it has been accepted and it is being passed through in moderately higher retails. At the same time, we are competitive in the marketplace.

Lauren Torres - HSBC

Okay. To take it a little bit further as you where thought and to maybe next year with respect to continuing to do the same. Are you expecting some pushback? Can you continue to do this? How comfortable are you continuing to push this pricing lever?

Ken Keiser

Well, as we traditionally do, when we think about our Q4 pricing, it is to set us up for what we anticipate to be the kind of cost outlook for the following year and so majority of our pricing is in place. Again we'll recalibrate in the first year as we always do, but the good news is that as we put this pricing in place, the commodity outlook while it's still higher is not as high as it was when we kind of contemplated the level of pricing that we would ultimately need to take.

So I think with the pricing hornets in the marketplace and with a commodity outlook that is slightly more optimistic and with our new price pack architecture, the 8 and 18 pack, I think the combination of all those makes us feel reasonably solid about how we get through 2009.

Lauren Torres - HSBC

If I can ask just one quick question to Alex with respect to the tax rate. Seeing a change here in country mix, should we think a little bit differently about your tax rate be it for the fourth quarter or next year?

Alex Ware

Lauren, we have been guiding to a 31% or 32% rate, and we saw a favorable country mix come through in Q3 which dropped that rate to 31%. Our estimates now are now that that country mix will hold and that 31% rate would be the effective rate to use for Q4. Then the four points to drop it down to 27%, were one time in nature related on the ultimate, the outcome of the book-to-tax adjustments based on the ultimate filing of our federal return as well as some FIN-48 adjustments.

Lauren Torres - HSBC

For now the 31 is good to use for next year also?

Alex Ware

It is. I think the other two variables that are going to drive that number are going to be country mix and FIN-48 adjustments.

Lauren Torres - HSBC

Okay. Thanks.

Operator

We'll go next to Marc Greenberg with Deutsche Bank.

Marc Greenberg - Deutsche Bank

Thanks. Good morning. First a couple of things on Europe, any insights you could offer with regards to what you are seeing lately in terms of either trade down or private label growth and how you think that might impact the business?

Ken Keiser

Marc, this is Ken. I mean, at this point we are not seeing any real trends. Clearly the category growth rates have slowed somewhat but I think the relative market share position of the various segments has not significantly changed. But as you know over the past couple of years as we have outpaced full LRV growth a part of that share has come from these regional and more of these regional B brand type of competitors.

Marc Greenberg - Deutsche Bank

Okay. Second question on the Ukraine you talked about getting T going through the system. I wonder if you could talk more broadly about what else within the Pepsi portfolio you are contemplating and how soon we might see those benefits?

Ken Keiser

Well, the biggest benefit of course, Marc, will be as we transition into mid part of 2009 into 2010, where the Pepsi CSD business we will start integrating into our system. We have just recently as we talked last time we approved the capital to get our production capacity in place, which will be our CSD capacity in July of 2009. So that will be the most significant add to our business, as well as Bob has mentioned a couple of different times that the snack side of the equation will become much more significant as we get into 2009.

Marc Greenberg - Deutsche Bank

Okay. Last question Alex, you and Bob have talked about opportunities and ability to make acquisitions. Can you talk some about PepsiAmericas access to capital in this market? At what level you start bumping into a wall in size terms?

Alex Ware

Marc, historically our cash hierarchy has focused on, share repurchases has been a higher order initiative for us. But I think in light of the current environment, I think we are going to be looking for to be opportunistic frankly in this environment and identify acquisition opportunities that might arise. Put that as a higher order initiative for us and share buybacks may take a back seat in this environment.

Marc Greenberg - Deutsche Bank

But, again just in terms of ability, either by way of your banking partners, anything out there because of this environment are you restricted in any way in terms of pulling the trigger?

Alex Ware

Yes. I think certainly for a very large transaction obviously, we would have to tap the turn markets and I think you have recently seen what the terms are in that environment. So we'll have to take that into account as we consider the size of the acquisition opportunities that are out there, but we do believe this opportunity or this environment creates an opportunity for deals to perhaps surface more than what we might have seen in the past.

Marc Greenberg - Deutsche Bank

Great, thanks

Operator

(Operator Instructions). We'll go next to Lindsay Mann with Goldman Sachs.

Lindsay Mann - Goldman Sachs

Hey, good morning.

Bob Pohlad

Good morning, Lindsay.

Ken Keiser

Good morning, Lindsay.

Lindsay Mann - Goldman Sachs

Can you give a little bit of color what drove the volume improvement in the third quarter versus the second quarter?

Ken Keiser

The major difference, Lindsay, was our take home business was stronger. For example our fill and take home business was actually only down 1.7 for the quarter. Our CFD take home business was actually slightly up, as we had some strong innovations with democracy as well as a really pretty strong retail channel. Our can volume actually was moderately up. So that would have been the major difference between Q3 and Q2.

Lindsay Mann - Goldman Sachs

Okay. Thanks. And Alex, could you give us a bit of color on what the COGS outlook could be for the US considering you have got so much of your inputs already locked in?

Alex Ware

Sure. We are 65% locked for next year. We continue to be open on some of the commodity areas specifically BET, which we have a portion of that position open which tends to be the one that has the most volatility quarter-over-quarter.

So we continue to see favorable trends there. Currently we are looking for our '09 COGS broadly, not just in U.S but broadly across our portfolio in the mid to high-singles digit increase next year. But as commodities are trending down, we are moving favorably against that range.

Lindsay Mann - Goldman Sachs

Then Bob you mentioned some pockets of weakness that you expect going forward in international. Could you just give a bit of color on where and why?

Ken Keiser

I'll take that Lindsey, but as Bob suggested, a couple of our markets, i.e. Romania and Ukraine still seems to be tracking positively. We have seen a little bit slowdown in Poland, and well as you saw Q3 was actually very strong up double-digits. We are seeing a slowdown in Q4. There's a little bit of credit squeeze there where retailers, specifically the smaller retailers are having more difficult times, financing their working capital needs.

So that certainly is go have an effect on Q4. But within our countries each one of them has a little bit different set of challenges, and so I think we will see some ups and downs in each of these 11 countries as we go forward. But broadly speaking, I think a combination of our stronger markets will keep the total CEE growth portfolio to be fairly robust and fairly strong.

Lindsay Mann - Goldman Sachs

Okay, thanks. Then lastly, could you talk about on how you are managing ForEx volatility looking into next year?

Ken Keiser

I can take a part of this and then Alex can intervene, but as we look at it across our markets, there is a couple of things. One is clearly commodity prices are falling, relative to what we anticipated a couple of months ago. Secondarily, we are dialed in and looking at kind of the margin aspect of our business in each of the countries. As we've talked many times before, we even focused more on the volume and top line growth.

So we do believe there are some margin opportunities. If in fact if the growth rates in these markets decline somewhat which they probably will. We will reassess the investment we are making in the marketplace both in terms of capital, marketing and kind of our feet on the street resources to make sure that investment I think is consistent with what we are seeing the growth rates are. So I think by doing those three things, I think we can certainly help neutralize some of the ForEx headwinds.

Alex Ware

Then from a hedge perspective Lindsay, this year for the fourth quarter we had locked in a significant portion of our transactional exposure. That reduced our translation exposure in the fourth quarter by about a third. As we go into 2009, our coverage is about half that level. So roughly 15% or so of our translational exposure would be covered at this stage and most of that would be early in the year.

Lindsay Mann - Goldman Sachs

Okay. Thanks very much.

Operator

We'll take our next question from Damien Witkowski with Gabelli & Company.

Damien Witkowski - Gabelli & Company

Hi, Good morning. Sorry if I missed. I had to jump off for a second, but just going back to cost of goods sold, your outlook for '09, you said that you had 65% hedged or thereabouts. Just wondering what that was three months ago last quarter. Did you do most this in the last three months or have you been hedging along the way?

Bob Pohlad

We have been layering in sequentially Damian. So we were 50% hedged at the end of Q2, 65% at this point, that's a pretty consistent pattern to the way we've been operating over the last few year's. So the areas saw the most exposure for us as we go into '09 would be on the residence side.

Damien Witkowski - Gabelli & Company

Okay. Going back to flavors and Mountain Dew I guess in particular were really strong in the US. What's behind that? Is it just that's it's less of a penetration, less alternatives in terms of substitute? Just trying to get a sense of what the strength is? Which is great but obviously just want to see what's behind it?

Ken Keiser

Well, traditionally Mountain Dew has been a strong trademark for us as we talked to gas channels. Actually the number one selling the single serve item, but aside from this some underlying strength of Mountain Dew which has been there for the past people want us to present some CSD pressure is really the result of very successful innovation with our democracy, which really drove the tremendous amount of trademark Mountain Dew growth. So that would be the main reason.

Damien Witkowski - Gabelli & Company

Did you say anything on AMP, which I think you began manufacturing that and distributing it in August? I think energy still seems to be holding up, any comments on that?

Ken Keiser

Yes. First Mountain Dew, actually is a part of our energy portfolio, it's not in the Mountain Dew trademark. Our energy business was actually up 25% in Q3. So we've actually for the second quarter are really growing faster than the category and of course by bringing that into our system for manufacturing perspective is also improving the margin on the product. So it's done very well.

Damien Witkowski - Gabelli & Company

Okay. One last question and going back to CEE, any different trends that you are seeing for beverages versus snacks in terms of demand?

Ken Keiser

That would be -- I think at this point a pretty hard question.

Damien Witkowski - Gabelli & Company

Okay, too early to tell I guess so.

Ken Keiser

As our trend there are fairly small in front of our total portfolio. So I couldn't, I'm not sure I have the answer, but…

Damien Witkowski - Gabelli & Company

Okay. Thank you.

Operator

At this time we have no further questions in the queue. Mr. Pohlad, I would like to turn the conference back over to you for any additional or closing remarks.

Bob Pohlad

Once again thanks for your interest in PepsiAmericas and we look forward to talking to you in the February call for the end results.

Operator

This concludes today's conference. Thank you for participating. You may now disconnect.

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