The Pepsi Bottling Group, Inc., Q1 2009 Earnings Call Transcript

The Pepsi Bottling Group, Inc. (PBG)

Q1 2009 Earnings Call

April 22, 2009 11:00 am ET

Executives

Mary Winn Settino - VP IR

Eric Foss - Chairman and CEO

Al Drewes - SVP and CFO

Rob King - President, PBG North America

Analysts

William Pecoriello - Consumer Edge Research

Judy Hong - Goldman Sachs

Lauren Torres - HSBC

Kaumil Gajrawala – UBS

Mark Swartzberg - Stifel Nicolaus

Christine Farkas - Bank of America Merrill Lynch

Carlos Laboy - Credit Suisse

John Faucher - JPMorgan

Ann Gurkin - Davenport

Marc Greenberg - Deutsche Bank

Damian Witkowski - Gabelli and Company

Celso Sanchez - Citigroup

Presentation

Operator

Welcome to The Pepsi Bottling Group's First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, today's conference is being recorded, Wednesday, April 27, 2009.

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 27, 2008.

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

Thank you, Kate, and thanks everyone for joining us today. Eric Foss, our Chairman and CEO, Al Drewes, our CFO and Rob King, President of PBG North America are on the call this morning. Our call is being recorded and will be available for playback on our website at 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 reconciliations, which are available on the Investor Relations section of our website.

As we have asked each of you when it comes to Q&A, please try to limit yourself to one theme of questioning at a time, so everyone has a chance to ask what is on their mind. If you would like to ask a second question, please get back in the queue. 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. We are pleased to be with you today. Let me start by addressing the topic that I am sure is on the top of everyone's mind and that's the recent announcement by PepsiCo of there intention to purchase outstanding common shares of PBG that it does not already own.

I am going to have limited comments on this today, because our board of director is in the process of evaluating PepsiCo's offer. Here is what I can tell you about where things currently stand.

Our board has appointed a special committee of independent directors that will carefully evaluate the proposal. That process in underway and our board will respond in due course.

Unfortunately, we can not discuss this matter in greater detail until the board has completed its work. In the meantime and in typical PBG passion, we remained fully focused on doing what we do best, selling and serving our customers, operating our business as effectively and efficiently as possible and continuing to build this business for the future to create growth and shareholder value.

With that in mind, I would like to move on to a discussion of our strong Q1 performance. And our priorities for the balance of the year, Al will follow by providing an update on our financial results and outlook, and then we will be happy to take your questions.

As you all saw in today's press release, PBG's start to 2009 was well ahead of our expectations. Comparable worldwide operating profit increased 10% exceeding our forecast.

We also meet our earnings forecast with comparable diluted EPS of $0.10. We had strong operating free cash flow improvements of about $150 million year-over-year. And we raised our quarterly dividend for the sixth consecutive year, further evidence of the confidence we have in the business going forward.

The strength of our Q1 performance, combine with the confidence we have in our plans for the balance of the year, has led us to raise our full year earnings and operating free cash flow guidance. We now expect 2009 earnings of $2.20 to $2.30 per share, and operating free cash flow of about $500 million.

The key drivers of our success in the quarter included successful execution of our global pricing strategy. Our worldwide net revenue for case increased 5% on a currency-neutral basis with growth in each of our recording segments.

Our currency-neutral gross profit per case increased by 5% as well, we also delivered significant cost and productivity improvement and were well on our way to achieving over $250 million in savings for the year. We did all this despite the economic realities in today's marketplace.

GDP weakness is pressuring liquid refreshment beverage category growth in our market, and we will be dealing with that for the near-term. On positive note, we have seen some modest strengthening in our international currencies, and there is historical precedent for an LRB category rebound in the international markets once the economy begins to recover, something I will discuss with you in a few moments.

The short-term category softness I mentioned continues to pressure our volume performance. Total worldwide physical case volume was down 5% in the quarter. This was negatively impacted by a two point percentage shift due to the Easter holiday from the first quarter of 2008 to the second quarter of 2009.

However, we did the category improve in the United States in first quarter, performing above 2008 trends. And we are very pleased that we have been able to maintain or strengthen our marketplace position in the majority of our markets.

Our ability to do so is an indication that we continue to execute effectively in a challenging environment. From the geographic perspective, our US and Canada segment delivered a very good quarter with, both profit and volume exceeding our expectations.

Comparable operating profit was up 7% in US dollars, or 8% on a currency-neutral basis. Our volume is down 3% marking a meaningful improvement versus our recent trends and reflecting a negative two point impact on the East shift that was offset by comparable upside from the Lane acquisition.

In Europe and Mexico, as you know Q1 is a seasonably small quarter, so I caution against drawing any concrete conclusions about the full year. Our top priorities as we manage our international businesses are to optimize our top-line through effective value, revenue and margin management, to execute our cost and productivity initiatives and to make sure we exhibit disciplined capital and working capital management.

We believe that by doing those three things well, we will be able to cover our transactional cost pressures, driven by foreign exchange rates, while also maintaining and growing our marketplace position.

Our Mexico performance was inline with expectations. We continue to focus on executing against our value, revenue and margin management plans, delivering gross profit per case growth of 3% on a currency-neutral basis. We are also on track to deliver significant cost savings across our Mexico operation this year.

In Europe, our results were more mixed. We exceed our profit expectations and our currency-neutral gross profit per case was up 8%. Our performance was driven by strong net revenue per case growth, which increased 11% on a currency-neutral basis, and we also delivered a 5% improvement in our currency-neutral SD&A performance.

The biggest difference in Europe this quarter has been the worsening of the macroeconomic environment, which will continue to place added pressure on the category, but we do expect this pressure to ease overtime.

We are taking a prudent approach to managing our business in, both Europe and Mexico while also gearing up for the summer selling season. Looking at Russia specifically, we are making conscious choices about the distributors we do business with to mitigate counter party risk.

We took pricing ahead our largest competitor in the first quarter, helping to drive positive top-line growth in Russia, and we subsequently see our competitor move with us. And although the ruble has stabilized somewhat, we are continuing to monitor the currency situation closely.

As we exit first quarter, we have once again demonstrated our ability to manage our business effectively across our geographies during the quarter. We made meaningful progress to strengthen our brand portfolio, continued to perform relative to point-of-sale, demonstrated tremendous discipline and execution in the areas of cost and productivity leadership and working capital management.

And once again, PBG showcased the power of our people and their unmatched ability to drive good results in all types of economic environments. As we look ahead of the second quarter and the balance of the year, success in all of our geographies will really be measured by our ability to make progress against the strategic platforms for growth.

First, repositioning and strengthening our brand portfolio. Second, transforming our performance through operational excellence. And third, capitalizing on the geographic growth opportunities.

Repositioning and strengthening our brand portfolio starts with CSDs and there is currently a lot of excitement in the marketplace driving our CSD portfolio, which was down 1% in the US and Canada in the quarter. Our CSD momentum has by driven by PepsiCo's Refresh Everything campaign beyond brand Pepsi, which is providing a platform to reengage consumers.

Also the addition of Crush to our portfolio has proven very successful that fills in the gap in our flavor lineup. Our objective is to be number one, or strong number two in food flavored CSD, and we are off to a very good start towards achieving that.

We have already exceeded our 90% distribution target reflecting the power of our selling and distribution system. We quickly established Crush as a major player in the category. And we will be taking additional steps to build on our early momentum in the weeks and months ahead.

Trademark Mountain Dew was up 1% and continues to perform well driven by consumer excitement behind Mountain Dew Voltage. We have also recently launched Sierra Mist Ruby Splash a new grapefruit flavored line extension.

Our renewed commitment to CSD is also being demonstrated in our international markets. We launched Pepsi Kick and Mirinda Fiesta in Mexico. And we are in the market with Frustyle in Russia a carbonated juice drink from the Lebedyansky portfolio.

On the non-carb side of our portfolio there is a lot of activity that will enhance our leadership position in tea including the launch of Lipton Sparkling Green Tea as well as multi serve jug across our Lipton lineup.

We have also launched Lipton Linea in Russia following last year's successful roll out in Greece. A beverage that appeals to health conscious consumers by promoting weight control.

The consumer excitement behind zero calorie SoBe Life Water is also encouraging sweetened with PureVia an all-natural, zero-calorie sweetener it's an attractive offering for health and wellness seeking consumers. And we expect it to continue to gain traction in the market place.

We are equally excited about the addition of Rockstar to our portfolio, which we begin rolling out this week. We expect this to double our share in the energy category. And it now gives us three of the top six energy brands in the US providing a great platform for future growth.

The final point I will make about our brand portfolio relates to our efforts to pursue growth opportunities in new categories and segments. And the best example of this right now is Muscle Milk the number one value added protein brand that we begin distributing in first quarter.

We are currently activating programs to increase distribution and purchase frequency and will continue to seek additional opportunities to enter new beverage segments when and where it makes sense.

In the area of operational excellence there are couple of ways we will seek to transform our performance. The first is by rethinking our approach to value revenue and margin management. And the second is by achieving continues cost and productivity improvements.

Let me say a few words about what we are doing in each. As we said previously value has become more important to consumers than ever before. Consequently we needed to migrate towards a new pricing package architecture that better meets consumer demand while also creating opportunities for volume growth and expanding our margin roughly.

We spent the past several months testing an 18 pack across about 20% of our US markets. And we been able to deliver a very good improvement in consumer value. We have increased our recent value significantly in each market. Household penetration on our core can packages has also materially increased in these test market. We currently have national availability of 18-packs today. And we have already executed promotional and limited time offers.

We will plan more of this over the balance of 2009 and I think our tests have shown that having 8 and 18-packs is part of the comprehensive package management strategy will enhance our overall business while also benefiting the CSD category and our customers.

The consumers' quest for value is eliminated to the United States so just like in United States our approach to value internationally begins and ends with the consumer. And specifically there are a couple of things we are focused on.

First offering attractive and affordable price points. Second maintaining a relative value position that optimizes our value the margin opportunities. And third continually seeking new ways to enhance our value proposition.

We are currently doing several things to achieve each of these objectives including the introduction of value brands in some of our international markets. This includes the Mirinda Fiesta launch in Mexico that I mentioned a moment ago, as well as roll out of value energy and tea offerings in Russia.

We are also demonstrating an unwavering commitment to revenue and margin management outside the US and Canada. I already mentioned our strong first quarter currency neutral net revenue per case performance in both Mexico and Europe and this will remain a critical focal point as we moved forward with the objective of covering our transactional for its exposure.

The other area of operational excellence that we are focused on is cost and productivity improvement. As I mentioned at the beginning of this call we are well on track to deliver in excess of $250 million in productivity savings in 2009.

About two-thirds of those savings will come from SG&A improvements the remaining one-third will come from lower cost initiatives and I am pleased to announce that our structure to succeed initiative is on track to contribute about $70 million of our total worldwide savings for the year.

We are achieving efficiencies across all aspects of our business by optimizing our manufacturing cost, transforming our warehouse operations and maximizing our go to market strategy.

We it comes to geographic growth. We have many attractive growth opportunities. Last month we signed a letter of intent to acquire Better Beverages, a Pepsi and Dr. Pepper bottler in Texas.

In addition, the lean integration process is going very well. We also have tremendous opportunity for long term growth outside the United States a fact that should not be loss amidst to macroeconomic challenges at the moment.

While Mexico and Russia are experiencing heightened economic uncertainty, they will both be major drivers of growth going forward. So, whether it's expanding our brand portfolio our commitment to value revenue and margin management, our cost and productivity initiatives or our geographic growth strategy. PBG is a company with a very positive near and long term outlook.

We got off to a very good start in Q1. We have the right plans in place for a successful 2009 and we have the right strategy to grow our business increase shareholder value well into the future.

Now let me turn the call over to Al for closer look at our financials. Al?

Al Drewes

Thanks, Eric and good morning. I would like to structure my comments into three sections. First, I will provide some additional insight into our Q1 performance. I will then talk more about the current macroeconomic environment and our outlook for the longer term outlook for the LRB category and I will close by providing our guidance.

As Eric indicated our Board of directors is in the process of --

Operator

Ladies and gentlemen please continue to hold for just a moment.

Mary Winn Settino

Hi, this is Mary Winn Settino and we are picking back up right without comment, so I will let start as we get back into the prepared remarks.

Al Drewes

So, we apologize we had a little technological issue with the phone system. So, let me start over with my piece.

So, thanks Eric and good morning everyone. So, I would like to structure my comments in the three sections. First, I will provide some additional insight into our Q1 performance. I will then talk more about the current macroeconomic environment and our outlook for the LRB category. And I will close by providing our guidance.

As Eric indicated, our Board of Directors is in the process of evaluating PepsiCo's recent offer. So our guidance reflects the performance we expect to deliver at PBG after the transaction with PepsiCo. We are off to a strong start have to strong start in 2009, our start coupled with an improved raw materials costs environment and foreign currencies which appeared to have stabilized and some cases have even approved a bit, these facts give us the confidence to raise our full-year earnings outlook, to $2.20 to $2.30 per share.

Comparable operating profit was up 10% or comparable EPS of $0.10 was well ahead of our previous guidance reflecting the strong operating profit performance. Prior year EPS comparisons were negatively impacted by higher interest expense at $0.06 and below the line foreign currency the valuation of $0.03.

The higher interest expenses associated with acquisitions which have a seasonally low operating profit contribution in Q1, our operating free cash flow improved $150 million over a year and due to the capital spending efficiencies we discussed with you last quarter and substantial improvement on our working capital positions since year-end.

We are raising our full-year cash flow guideline by $50 to $500 million driven largely by improvements in our working capital and our strong Q1 cash flow performance. As I told you on previous calls, we continue to enjoy a strong balance sheet and ample liquidity. We have the solid AA2 credit rating. We have 1.2 billion in committed bank lines that are placed through 2012, and we don’t have any long-term debt maturing until November of 2012.

Foreign currency devaluation was a substantial headwind in the quarter. Negative transactional ForEx totaled $37 million with $27 million booked in the COGS lines and $10 million year-over-year change book below the line is other non-operating expense. Translation ForEx reduced revenue COGS in SG&A by between 5 and 6 percentage points and yield at a $5 million operating profit benefit. But the net of the transactional and translation ForEx reduced EPS by $0.09. Our strong bottom-line performance despite this near-term ForEx pressure is indicative of the operating capability of PBG.

As Eric mentioned recent trends indicate that the likely load in the mid single-digit GDP declines in each of our countries this year. We consequently expect near-term LRB category contraction in all of our countries, but we also know that LRB category trends will rebound robustly once the global economy begins to improve.

We have done extensive research in the past economic crisis to understand how they have impacted the LRB category. We look specifically at the Asian and Russian economic crisis during the late 1990s so called Tequila Crisis in Mexico and the mid 1990s as well as previous US recessions. This research let us to draw three conclusions; the first is, there is strong correlation between GDP and LRB category growth particularly outside of the US. The LRB category contracted with the GDP in each of the previous international crisis we looked out.

Second, the LRB category rebounded strongly with GDP growth in these markets. For example, the category experienced in mid single-digit decline during the Russian crisis of 1998 and 1999. In the two years after the crisis the category averaged 15% growth and began a robust decade long growth run.

And third, carefully balancing near-term results with appropriate investments in the future health of the business is key to exiting a crisis successfully and returning to strong growth rates. That’s exactly what we have been doing. The steps we are taking to strengthen our brand portfolio, transform our performance through operational excellence and pursue geographic growth opportunities will fuel our success as the economy recovers. And we are confident in the longer term LRB category growth prospects.

Turning to our guidance, let me start by reminding of you of the impact of foreign currency devaluation has had on our results in 2009. On our last earnings call we told you that our foreign exchange assumptions are based on spot rates as of early February. Our guidance continues to reflect the February rates. The good news is that the ruble and the peso has strengthened somewhat since then and hopefully indicating that they have reached the bottom and may provide an earnings cushion if they remain at current levels.

The raw material trends also continue to be better, consequently we are now guiding to the low end of our previous COGS range, i.e., about 7% per case on a currency neutral basis. And while I am characterizing this number is currency neutral it does include 2 points of inflation due to transactional ForEx. You will recall that we are providing guidance this year both on a currency neutral basis and in US dollars. Our guidance includes a negative $0.18 impact from transactional ForEx devaluation.

In addition, there is approximately $150 million in transactional COGS and that’s the 2 point impact to COGS I just mentioned. We have asked each of our international teams to manage the local currency operating profit targets, consequently there maybe variations in our US dollar guidance in the event of further ForEx movements.

Our currency neutral comparable guidance is as follows; top-line growth in the low single-digits; COGS per case now forecast to be up 7% including the impact from transactional ForEx; and operating profit up low single-digits.

Our comparable guidance in US dollars is as follows; top-line down low- to mid-single digits; COGS per case will be about flat; operating profit down in the low- to mid-single digits; and EPS of $2.20 to $2.30.

We anticipate capital expenditures of $550 million to $600 million. Our guidance for the first half of 2009 is in-line with our planned expectations. Our operating profit and EPS growth will be stronger in the second half of the year. In particular our prior year comps are difficult in Q2 because the GDP slowdown in international markets became more pronounced in Q3 of 2008.

We also faced unfavorably interest expense for foreign exchange lab. These comps will sequentially ease in the second half of 2009. Our outlook for comparable EPS in the first half of 2009 is $0.75 to $0.79. Comparable Q2 EPS is expected to be $0.65 to $0.69 with higher interest expense of ForEx pressure growth. Overall, there is a lot to like about how we are performing, or we rather be operating in a more favorable economic environment where the LRV category was performing better, we are dealing with today's challenges effectively and we remain confident in long-term health of our business.

And with that I will turn it back to Eric.

Eric Foss

Thanks Al. Before we take your questions let me just add a couple of thoughts. As we manage this company we always stress the importance of executing our game plan and building strong teams across all geographies. We really do this because great teams possess many of it's same trades that great companies must have in order to be successful in today's marketplace.

Great team do little thing extremely well, great teams are resilient and able to overcome obstacles, and most importantly great teams have great players. And I think the strength of our Q1 results illustrates that PBG has these three trades. We believe we have the right plans in place for the rest of 2009 as well as the right people to implement them. And while macro trend will improve overnight we are prepare to deal with them while also position in this company for future growth.

With that let me turn it back to Mary Winn.

Mary Winn Settino

Thank you, Eric. Now before we start questions I just like to remind everyone that we are not able to discuss the PepsiCo offer today in any great detail since it is currently being evaluated by our Board of Directors. Please bear this in mind if you ask your question this morning. Kate we will now take the first questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question today is coming from William Pecoriello. Please announce your affiliation, then pose your question.

William Pecoriello - Consumer Edge Research

Consumer Edge Research. Thank you. Eric, I was wondering if you can address your thoughts on whether you agree the franchise model is in the right or best strategy for the future given the changing landscape in the beverage industry and your view is the logic for the separation no longer valid for the future. Thanks.

Eric Foss

Good morning, Bill. I think as you look at the franchise bottler model. I can look at over the last 10 years where that been the model at least for the Blue System and I guess my assessment would be that it has worked pretty well. I think if you look at the key stakeholders through our eyes, PBG's eyes, you can look at it from a shareholder perspective and look at PBG, it's a company that's doubled our revenue our compounded annual EPS growth has been about 19%, our stock prices up over a 100% in an environment where the down, as [compete] and others are down.

I think importantly if you look at another key stakeholder like customers, customers I think is benefited. There has been an improvement in our satisfaction ratings and royalty ratings and I think the DSP go-to-market model and specifically PBGs people and capability in the area what we call our journey of excellence is performed really well from point-of-sale.

And then I think as we look at employees, its been a good model as well, we doubles the size of our work force, we think we have created a great company, great place to work, made great progress on diversity and some of the cultural measures like appreciation and recognition. So, I think my assessment is this, it's worked well and it I think can continue to work well as I look at what we have to do with right now in the marketplace.

Mary Winn Settino

Alright, operator we will take the next question.

Operator

Thank you. Our next question today is coming from Judy Hong. Please announce your affiliation, then pose your question.

Judy Hong - Goldman Sachs

Thanks. Goldman Sachs. Hello everyone.

Mary Winn Settino

Hi Judy.

Judy Hong - Goldman Sachs

Eric, you talked about the improving trends in the CST category in the first quarter. If you look at the scanner data, a lot of the volume growth is actually been driven by private labels and to some extent Dr. Pepper's brand. So, I am just wondering if you can give us some perspective on sort of that volume dynamics and how you see that playing out as you get into the balance of the year and given some of the volume share pressures that you are seeing across your brands and Coke, your views on sort of the pricing environment as you get into the key summer selling season.

Eric Foss

Okay. Judy, let me take a shot, particularly relatively to maybe kind of painting the picture of the trends, and I may have let Rob comment a little bit on your question in there as well in the terms of pricing private label.

But when I said what we like about the category and our volume trends, the math I am looking at to support that argument is, the category, if you look at most to last year, kind of quarter in, quarter out, it was down 3%, 4%. In Q1, it was down too.

If you look at our volume trends, again, most of last year, we were down in, mid single-digit range. And for the quarter, we were down three in that has two points in Easter in it negatively.

So you can make the same math work, if you look at it on a two-year basis. And so I really do believe that, the CSD business in North America is performing much, much better. I think the catalyst for that growth for us have been, we have seen a sequential improvement in the category of CSDs and our North America CSD volume.

Part of the reason for that is, we have strengthened our brand portfolio, I believe that's paying off for. And I believe the work we have done, and I think it has really been good work to redefine value has also helped us. And so I think, we are pretty encouraged and pleased what we saw in the first quarter.

Let me ask Rob to comment on your pricing private question.

Robert King

Judy, if you look at the private label, I think it's probably not a surprise. But based on the current economic environment, the private label does have some momentum in the marketplace. But I do think if you look at their historical share range, both volumetrically and from a dollar perspective that relative to high end of their historical ranges, it's still a modest the player in the category with about a 13 to 14 volume share in our markets, and then a high single-digit dollar value share.

Another thing I mentioned to you is that private label in CSDs is disproportionately a flavor CSD proposition. About two-thirds of the business is in flavors. And as we look at our portfolio today, our flavor CSD portfolio is a strong as it has ever been.

In fact, year-to-date right now, our flavored CSD business is actually up around mid single-digit versus prior year, and we have got strong momentum on our Mountain Dew business, we have strong momentum obviously on Crush and we are right now launching Sierra Mist Ruby Splash.

And so we think that when you look at the consumer proposition and what they buy in private label CSDs, what our brand offer is and then our approach to wining at the point-of-sale to execution in service, we actually think we are in a very good position to defend our business and grow our CSD business and perform certainly well within the category versus private label.

Al Drewes

And Judy, the only thing I would add is, if you think about private label, where private label makes a lot of inroads. It tends to be in categories that are fragmented. Where there is limited brand loyalty and in categories that don't have a lot of innovation. That's definitely not the case and beverages broadly, and it's certainly not the case in CSDs.

Mary Winn Settino

Kate, we will take next question please?

Operator

Thank you. Our next question today is coming from Lauren Torres. Please announce your name and affiliation before closing your question.

Lauren Torres - HSBC

HSBC. Good morning, everyone.

Eric Foss

Good morning, Lauren.

Lauren Torres - HSBC

My question, Eric, is with respect to you raised guidance for this year, you seem a little bit more positive than you did with us two months ago. I was just wondering if much of this upside was already, or is already reflected in the first quarter numbers, or you are getting that much more positive, I guess in particular for the second half.

And knowing that we are still rather early on at the year and there is still a number of headwinds to face, what gives you that confidence?

Eric Foss

Well, I think there is a couple of things, and I'll let Al add his thoughts as well. Obviously given we are off to a strong start, double-digit operating profit improvement, our EPS was ahead of our guidance, and so we thought confident in flowing that through.

Al mentioned the strong cash flow performance. And I think just the improving trends, particularly in North America for the category and our business in total relative to where we thought we would end up when we talked to you a few months ago, I think we are executing well in the marketplace and I think that gives us a tremendous amount of confidence as we look through the key summer selling season and on a full year basis.

Al Drewes

Okay. And yeah just couple of other thoughts if you went back to two or three months ago, there still remains a fair amount of uncertainty out there. But some things have become have clearer, in particularly we are on a trial situations more clear now than it was a while ago.

The other thing that we have done effectively is in these international markets is we have been able to cover a big piece of this transactional ForEx, and I think I reported some gross profit numbers on a currency-neutral basis in the international markets, and so, that's something we had to go out and execute.

We thought we would do it. We are going to plan to do, but now we have done it and so that's taking care of it as well, so I think some of the uncertainty has come off the table still have to get through the summer like we always say, but we were well ahead of our guidance in Q1, and when there is more certainty about some items that we needed to button down before we could raise our guidance.

Eric Foss

Thank you

Mary Winn Settino

Operator, next question please?

Operator

Thank you. Our next question today is coming from Kaumil Gajrawala. Please announce your name and affiliation before posing your question.

Kaumil Gajrawala – UBS

Hi. From UBS. I recognize you are limited in what can says as it relates to the deal, but the message from PepsiCo certainly at least says that there needs to be some changes at least in their view, so can you maybe comment a bit about how you feel about hybrid distribution and how you feel about potentially transitioning may be part of your system to different after-market method.

Eric Foss

Kaumil, it's Eric. I think we have been pretty clear on this historically, I will start with we are huge believers in direct store delivery. I think PepsiCo as well by the way. I think that if you look at the beverage business or the snack business and really look at the benefits you get from DSD speed, reach and lift.

The ability to offset customers labor cost, I think the value of DSD is fairly proven, you really think about that in the context of beverages, there are very few beverages that have been able to build a big kind of sustainable business that have not gone through DSD. Gatorade would be one, but I really do believe that if you get into beverage business most brand companies and most people within beverages really seek out the power of DSD.

Having said that, I think as PepsiCo mentioned, there are emerging customer needs in these area. And so I do think there is probably a need to flex direct store delivery and be somewhat nimble and open-minded, but I think those cases are fairly isolated and limited. I don't know if they are very broad based. So those would be my thoughts. Thank you.

Mary Winn Settino

Operator, we will move to the next question.

Operator

Thank you. Our next question today is coming from Mark Swartzberg. Please announce your name and affiliation before posing your question.

Mark Swartzberg - Stifel Nicolaus

Thanks. Stifel Nicolaus. Good morning, everyone.

Eric Foss

Good morning, Mark.

Mark Swartzberg - Stifel Nicolaus

I was wondering Eric or Rob if you could talk a little bit more about your pricing intentions this summer, we certainly heard enough from the channel about what you guys are beginning to do and of course Pepsi pointed this out in their call of Monday. So could you speak little bit more to your plans generally and where your thoughts are in terms of constrain on protecting profitability in a given channel?

Eric Foss

First of all I would say is that the pricing environment in the marketplace is rational and it is consistent with our expectations this year. Mark, we are going to play our game, so we believe that we have the right strategy for wining in the marketplace this year, we are focused on wining at point-of-sale for execution in service.

We are focused on leveraging our revenue in margin management the capability with a sensitivity to consumer value. And we are focused on leveraging all the innovation and marketing strength in our brand portfolio this year to drive our business.

We think we have the flexibility built into our plan to be adequately promotional when appropriate, but still to achieve a revenue and margin objectives in the marketplace. So we are playing our game, we consistently demonstrated that we know how to do this and that's our plan for balance of this year.

Mary Winn Settino

Okay. Operator, we will take a next question.

Operator

Our next question today is coming from Christine Farkas. Please note your name and affiliations before posing a question.

Christine Farkas - Bank of America Merrill Lynch

Hi, there. Merrill Lynch. I have housekeeping question. If I do the math between your volume declines and Pepsi's volume declines, I just want to understand if Crush could have added a point to your quarterly volume.

But I also want to understand where Lebedyansky would be in your numbers? Is it too small to note this quarter as an offset in SG&A, or if it is buried in there, how do we look at that versus the underlying leverage? Thank you.

Eric Foss

So Crush is two points of volume in the quarter so that’s what's embedded in our volume number for the US volume. Revenue on skews booked as a in the SG&A line. It was a pretty small number in Q1 because of the seasonality and the SG&A trends that you are seeing which looks favorable in Q1 are largely due to the product initiatives we have in place. Thanks Christine.

Mary Winn Settino

Operator we will take next questions.

Operator

Our next question today is coming from Carlos Laboy. Please announce your name of affiliation before posing your questions.

Carlos Laboy - Credit Suisse

Thanks Credit Suisse. Good morning.

Eric Foss

Good morning, Carlos.

Carlos Laboy - Credit Suisse

Al the category grows after devaluations in some of these international markets like you said. But you referenced for example that crisis where brand Pepsi lost what about 30 market share points, 3 to 4 years after what similarly in the Argentina. I do not think the more brand grew afterwards. Could you expand on how you look at these international markets where you have a footprint and where you are in your developing now that gives you comfort. But perhaps you can win in these devaluations and grow at a very accelerated pace coming out of them?

Eric Foss

How was it, Eric. Let me add a though and then I will ask Al to comment as well. I think if you look at our performance in Q1 and you think about the gain we were trying to play particularly in our international markets, one of the things that’s pretty important I know you know this because I have heard you talk about it in the past is the importance of making sure you cover the transactional ForEx exposure that you have. And so as I look at what we did in first quarter I think we successfully did that across each of our geographies.

I would say equally important is the fact that you need to grow but at a minimum maintain your marketplace position. And I think if you look at our share performance in the first quarter literally across, the US, Canada, Russia, Mexico we were in a position of minimal holding our relative market share and in many instances increasing our market share.

So I think that is really kind of two of the critical trust for us in this kind of environment and I think we did it very successful in Q1 and have plans to continue to do it successfully going forward. Al do you have any comments.

Mary Winn Settino

Okay, operator we will take the next question.

Operator

Certainly, our next question today is coming from John Faucher, please announce your name and affiliation before posing your question.

John Faucher - JPMorgan

Yes, Its JPMorgan, thank you, want to a talk a little bit about the core channel, both in terms of the general results you are seeing there particularly the immediate consumption business versus the take-home from the C&G channel. And then also there has been some questions about the right level of focus of this new price pack architecture in terms of how much you push the smaller SKUs with the lower price points versus just having them available. So can you give us a glimpse in terms of the performance in the channel and then also maybe some early lessons learned about, how much focus you need on this cheaper SKUs? Thanks.

Eric Foss

So, our cold drink trends, this is really addressing the US business in the first quarter, continue to be soft so we were down about 7% total cold drink for supplier year. Six of those seven points were food service. So foodservice for us was disappointing in its this proportion we meet. Just for clarity on foodservice for us though, we are primarily a bottle and can foodservice business about 70% of our business, foodservice is bottle and can.

So we do not get the leverage that you might get out of the quick served beverage industry down focus and that just for clarity. A bright spot for us though in cold drink in the first quarter was actually our CSD cold drinks, CSD 20 ounce business was actually up 3% versus from our prior year.

So we are seeing improved trends on the retail side of the business, we are seeing improved trends on the CSD side of the business with the softness in non-carbs, softness in food service.

As far as price pack, we think that there is a role for smaller sizes that have an entry price with the value price points at around the dollar. Our binary course package in cold drink is our 20 ounce single serve package and that’s going to be the case in the future. But we will have a 60 ounce plastic or canned package available across the country targeting a dollar price point as we approach the summer time.

And I think it's all about managing the mix and the role of those packages. We think that the dollar offer will play an important part in the proposition but it's in concert with our course package 20 ounce as opposed to a replacement for it.

John Faucher - JPMorgan

Thanks.

Mary Winn Settino

And operator we will take the next question please.

Operator

Thank you. Our next question today is coming from Ann Gurkin. Please announce your name and affiliation before closing your question.

Ann Gurkin - Davenport

Davenport, good morning.

Eric Foss

Good morning, Ann.

Ann Gurkin - Davenport

If you look at the balance of the year in North America, is there any change in your focus on your outlook for volume versus market share, in other words, you are going to be more price competitive and give up volume or give up market share you are going to focus on volume? And then secondly, if you can give an update on pricing and consumer behavior in both Mexico and Russia?

Rob King

So, in the US and Canadian businesses we are very confident in the play that we are running right now. We are going to continue to run that play. So our play is to win at a point-of-sale through execution and service. It’s to absolutely deliver consumer value through a suite management of revenue and margins and then we are going to leverage our very, very strong brand portfolio this year to achieve the wide goals that we have outlined in our guidance.

So we do not foresee any changes in that approach and then as far as Mexico is concerned I think both Eric and Al have alluded to this. I mean we're really focused in that market on ensuring that we optimize our top-line through effective revenue and margin management.

I mean reality is that the Mexico there is an inflationary market due to the deterioration in the peso and we need to ensure that we got the right revenue and the margin strategy in place to leverage our business.

In addition in Mexico we are completely focused on our costs and productivity initiatives and then making sure that we get the right discipline around CapEx and working capital management so that’s our approach in Mexico.

Eric Foss

And Ann relative to your question in Russia you know there is no doubt the short-term macros are going to put pressure on the category. I mean GDP, inflation, overall consumer confidence. I think a very important number relative to Q1 is that we had 8% local currency top-line growth. We even approved our gross profit per case and we improved our competitive position in the marketplace. So I think the Russia team deserves a lot of credit for managing in a difficult environment but making the proper trade-offs to really run that business pretty effectively given the challenges. Thanks.

Mary Winn Settino

Operator we will move to the next question please.

Operator

Thank you. Our next question today is coming from Marc Greenberg. Please announce your name and affiliation before posing your question.

Marc Greenberg - Deutsche Bank

Thanks its Deutsche Bank. First let me say excellent timing on the beaten rays guys. With regards to the volume results in Mexico, and just based on what Coke said yesterday. They looked like they continued to materially lag the Coke system. I understand some of the business at the low end is unprofitable and that you are taking out cost and managing some margin.

But I wonder if you would characterize that enterprise as competitive in the marketplace. And do you believe that its important at this point to start considering new investments to achieve better sales results. I am talking about more volume there really.

Rob King

We certainly would like to have more volume in Mexico. And we are focused on that as well. One thing I would like to just add, give you some clarity though is that as you look at our volume performance in the first quarter. We actually held share on CSDs we did have some share softness on our jug water business.

But I think as we have mentioned to you in the past we rationalized sort of our jug water business in the back half of 2008 based on unprofitable drop sizes and that’s contributing to some of the volume softness that we have in jug.

Just in reference to our competitors announcements yesterday in Mexico certainly there is some leverage on the volume side that suddenly contributing to their volume growth. But as we look at our share in the marketplace its consistent with what our expectations were for the business going in to the year. And we are continuing to work with on volume but that would be in concert with the comments I mentioned before which is really optimizing the top line through revenue and margin management and that really focusing our cost and productivity in the short-term.

Mary Winn Settino

Operator, we will move on to next question.

Operator

Thank you. Our next question is coming from Damian Witkowski. Please announce your name and affiliation before posing your question.

Damian Witkowski - Gabelli and Company

Good morning. Damian Witkowski with Gabelli and Company. Can you help me understand if the PepsiCo deal does get consummated eventually does that pose a risk for any of the brand that you currently distribute which don't, actually that PepsiCo actually doesn’t own. And I am thinking about Dr. Pepper in particular meaning would they be able to now cancel their license with you to distribute their product?

And on then on the actual maybe you can't comment on this, but what is your understanding in terms of eventual vote on this deal if it does get as far from shareholders? Is it just a majority of all shares including PepsiCo?

And then if I could also just very quickly on your comment on a strong 20-ounce cold volumes in the quarter. Any channel in particular on the cold side if that's really driving that? Thank you.

Eric Foss

Damian, let me take the first two and I will ask Rob to add his comments on cold drinks. So, let me start with your second question, I think at this point in time as we mentioned the Board has appointed a special committee of independent directors who is going to evaluate the PepsiCo proposal. The board will respond in due course, in the meantime the management team right now is really focused on selling and serving customers operating this business as effectively as possible and continuing to try to build the business for the future to create shareholder value.

Relative to the question on brands, the majority of our non-Pepsi brand volume is Dr. Pepper/Snappel. We have perpetual agreements. I am not going to speculate on what that would mean under a different ownership, but we have strong partnership with Dr. Pepper/Snappel they have good brands, notably Dr. Pepper and Crush and they play an important role in our portfolio.

Rob any comments on the cold drink question.

Rob King

Yes, so I have mentioned before our CSD 20-ounce business was up 3% in the first quarter and what we are seeing is real strength in retail on our 20-ounce CSD business. So, whether its small format accounts like convenient gas stores or the IBS or Dollar Stores and large format stores like Super markets like Wall-Mart, we are seeing real strength on CSD and 20-ounce across those segments and that's being driving the out-performance.

Mary Winn Settino

Operator, we will take the next question please.

Operator

Thank you. Our next question today is coming from Celso Sanchez. Please announce you affiliation, then pose your question.

Celso Sanchez - Citigroup

Hi, with Citi, thanks. Rob on the US, can you talk across little bit about how, you talked about private label before competition, but how about your principle brand competitor and some of the moves they are making. To what extent is anything they are doing allowing you to execute your strategy even more effectively now the recent that the industry is moving perhaps at the same direction when it comes to price back all over the places. And to the extent that you are rolling out success with net impact, could that be accelerated if proliferation both as your principle competitors but other picks up a little bit or is that really strictly you see it is on your time line more than anything.

Rob King

Well there is a lot there. Let me just tell you regarding the North America business that we think we are focused on a winning strategy in the marketplace this year. So, we have a plan toward revenue and margin management that allows us to achieve, revenue growth and margin expansion, but still allows us to deliver consumer value in a certainly challenging economic environment.

We have this year a very strong innovation pipeline and series of marketing programs across our portfolio that we were able to leverage in the marketplace. And then PBG is focused on it's historical ability to win at the point-of-sale and that’s we are leveraging our execution in our service model. So, that play is being translated with all of our customers across our geography and as building traction in the marketplace and we are confident that that’s going to continue to transpire over the balance of the year.

To answer your question, I will just package mix management as we mentioned before, 8 and 18 packs we have that in Florida and Northern California now that start 20% of our US footprint. We actually 18 pack available everywhere in the United States right now, we have been running a variety of promotions a limited time offers on that, and we think 8 and 18s as a part of comprehensive, package mix management strategy, its going to allow us to move our proposition forward and we are going to continue to work through how we execute that in the US over time.

Eric Foss

And I would just add that, on the 8 and 18 pack, I mean there are some things to like as Rob mentioned earlier, we got a lower entry point which really helps your everyday value impression and comp off promotion volume, we have more weeks in value, we have seen some good improvement in terms of penetration at the household level. I still think we have some work to do particularly in the area of marketing and consumer awareness but we are somewhat encourage by what we are seeing right now.

So, let me close down and again I think as we have demonstrated with our first quarter results, PBG is off to a strong start in 2009. I think that evidenced in our higher guidance and cash flow outlook that we have announced this morning and really reflects the confidence that we have in our ability to deliver very good year.

I think these results show once again why PBG is a great company. I think we are able to leverage our core strengthens and capabilities. First, is a long track record of success including stronger balance top-line, solid earnings growth that’s really generated superior shareholder returns ahead of the market. And I think our geographic portfolio diversity, our unmatched operating capability as well as most importantly our culture and our people really do make a big difference. And, so I would like to thank everybody for joining us, and we look forward speaking to everyone soon. Thank you.

Operator

Thank you ladies and gentleman. This does conclude your conference call. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.

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