Pepsi Bottling Group Q2 2009 Earnings Call Transcript

The Pepsi Bottling Group, Inc. (PBG)

Q2 2009 Earnings Call

July 8, 2009 11:00 am ET

Executives

Mary Winn Settino - Vice President of Investor Relations and Public Relations

Eric J. Foss - Chairman of the Board, Chief Executive Officer

Alfred H. Drewes - Chief Financial Officer, Senior Vice President

Robert C. King - Executive Vice President; President, North America

Analysts

William Picarello - Consumer Edge Research

Judy Hong - Goldman Sachs & Co.

Lauren Torres - HSBC

John Faucher - JPMorgan

Kaumil Gajrawala - UBS

Mario Montoya - Longbow Research

Damien Wykowski - Cavelli & Company

Mark Swartzberg - Stifel, Nicolaus & Company

Presentation

Operator

Welcome to the Pepsi Bottling Group’s second quarter earnings conference call. (Operator Instructions) Please not 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 risk 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, Operator and thanks, everyone, for joining us. 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 reconciliation, which is available on the investor relations section of our website.

As we’ve asked of each of you, when it comes to Q&A, please try to limit yourselves 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 this Operator read.

With that, let me turn the call over to Eric.

Eric J. Foss

Thanks, Mary Winn and good morning, everyone. We’re here today to discuss our second quarter results and our outlook for the remainder of 2009, and while I am sure that some of you have questions related to the Pepsi Co.’s proposal to acquire PBG, let me state up front, consistent with our position a few weeks ago where we said we would not comment on the status of discussions or negotiations, we will, consistent with that approach, not be commenting on the proposal on this morning’s call.

Instead, our comments will be focused on how we are running the business, the factors driving our results, and the outlook for our future.

PBG has performed very well during the first half of 2009. The strength of our performance led us to raise our second quarter and full-year earnings guidance last month. As you saw in this morning’s press release, we delivered comparable earnings per share of $0.78 in the quarter, exceeding our revised guidance. We also guided to the high-end of our full-year comparable EPS guidance of $2.30 to $2.40, and we confirmed our operating free cash flow forecast of $525 million.

Our success is being driven by a number of factors -- one is our best-in-class operating capabilities, which continue to give PBG a significant advantage in the marketplace. Our global pricing strategy, our cost and productivity initiatives, and our execution at the point of sale have enabled us to deliver good results despite continued macroeconomic headwinds.

At the same time, there have been several encouraging developments in the external environment that add to our confidence as we look to the second half of the year and beyond. Carbonated soft drink trends in the U.S. have improved. Foreign currencies in our international markets have strengthened. Commodity cost deflation has given us a much more favorable raw material outlook, and the pace of bottler consolidation in the U.S. has accelerated, presenting us with a great opportunity that I’ll talk more about in a few minutes.

All of this shows that PBG is a company that is built to succeed in all types of economic environments. We have a proven track record of adapting to challenges when they arise and doing so without losing focus on our future growth plans. As a result, we believe that PBG is very well-positioned to win in the marketplace and create greater shareholder value as global economies begin to recover and consumer spending starts to rebound.

What I’d like to do now is discuss the recent progress we’ve made against each of our three strategic priorities for growth and provide an overview of our plans to continue our momentum in Q3 and beyond. I will then turn the call over to Al for a closer look at our results and guidance.

Let me begin by discussing our efforts to strengthen and reposition our brand portfolio. You’ve heard us consistently talk about trying to achieve four things -- investing behind our core brands, filling portfolio gaps, entering white space, and pursuing scale opportunities. We are very pleased that we’ve been able to take significant steps forward in all of these areas. When it comes to core brands, the refresh everything campaign behind trademark Pepsi has been very successful at reengaging and reenergizing consumers in the U.S., where our cola portfolio has performed above our expectations through the first half of the year.

In Q2, trademark Pepsi was flat, showing strong improvement from recent historical trends. Our cola performance also is benefiting from Pepsi throwback’s limited time offer, which was well-received by the marketplace.

We will be launching the refresh everything campaign in Canada in third quarter and we are also investing behind our cola portfolio in our international markets. In Russia, for example, we’ll be restaging brand Pepsi in third quarter with a new campaign geared towards young consumers.

In Mexico, the Pepsi kit limited time offer has been so well-received that we’ve permanently added it to our lineup.

Our Mountain Dew portfolio is also performing well, with trademark Dew up slightly year-to-date. We feel very good about Mountain Dew headed into the third quarter, especially with the return of Mountain Dew Game Fuel as a limited time offer.

This year’s game fuel features a tie-in with one of the world’s most popular online gaming platforms, a cross-promotional opportunity that will create added excitement among some of Dew’s most loyal consumers.

Outside of our core brands, we’ve also been very effective at filling portfolio gaps, and there’s no better example than Crush, which continues to perform extremely well in the marketplace. We’ve exceeded our distribution objectives across channels and we’ve gone from having a distant number four fruit flavored CSD brand in the U.S. to having the number one or number two brand in the vast majority of our Crush markets.

Crush will remain a major focus of our summer selling and marketing activities. The positive momentum behind trademark Pepsi, trademark Mountain Dew, and Crush has enabled us to capitalize on the favorable CSD trends I alluded to earlier. Our CSD business is up slightly in the U.S. year-to-date and we also grew our CSD share by one point in the second quarter.

Looking beyond carbonated soft drinks, the addition of Rockstar has filled a gap in our energy portfolio. Our share of the U.S. energy category has more than doubled since we began distribution at the beginning of second quarter and we now have two of the segment’s top four brands. We also recently announced an agreement to distribute Rockstar in Mexico, which will move us closer to the top of the energy drink space throughout all of North America.

Another of our brand objectives has been to enter new beverage categories with high growth potential. Along those lines, we continue to expand distribution and display activity on muscle milk. We are also rolling out our learning labs program, where we will be testing emerging, niche segment brands in incubation territories to determine their viability within a bigger distribution system. We believe this will give us access to new brands with high growth potential before they hit major inflection points.

We are currently working with a few different brands and will share details of those activities as appropriate.

Our final objective as it relates to our brand portfolio has been to pursue scale opportunities. Here, Lebedyansky remains a strong strategic platform for future growth. It’s the number one juice brand in Russia and has a strong portfolio across all segments. While the long-term outlook for the juice category in Russia remains very positive, it is expected to experience a double-digit decline in 2009 as a result of a challenging macroeconomic environment. However, both in second quarter and year-to-date, Lebedyansky’s volume significantly outperformed the category and therefore gained share.

We are working closely with PepsiCo to fully maximize the Lebedyansky integration opportunities that exist. We are implementing cost and productivity initiatives, especially in our logistics and support functions. We are taking targeted pricing actions and executing promotional activities in the marketplace, and we are doing a comprehensive channel review to enhance distribution.

We are also investing in research and development to develop unique products that will further differentiate us from the competition and we are leveraging our power of one advantage to achieve additional integration benefits.

We believe these are the right actions to successfully manage through the economic downturn. We also believe that the juice category will rebound strongly as the Russian economy begins to recover and when that happens, we’ll be in a great position to grow and lead the category forward.

The real power of PBG is that we are able to combine all of these exciting brand initiatives with best-in-class operating capabilities. Along those lines, another one of our strategic priorities for growth is to transform our performance through operational excellence. This is an area where we have two primary objectives -- generating robust cost and productivity savings and delivering attractive consumer value. We are making good progress against each of these objectives, so let me spend a minute or two talking about what we are doing.

In the area of cost and productivity, you’ll recall that we implemented a program last year called structured to succeed that was designed to do four things -- strengthen our customer service and selling effectiveness, simplify our decision making and streamline our organization, drive greater cost productivity to adapt to the current macroeconomic challenges, and rationalize our supply chain infrastructure.

Structure to succeed has proven to be effective in each of these areas. The positive impact of structure to succeed, combined with our ongoing work to optimize our manufacturing costs, transform our warehouse operations, and maximize our go-to-market effectiveness, is enabling us to generate multi-year cost savings. We are on track to deliver $265 million in cost savings in 2009, an estimate that has increased by $15 million since the start of the year. This is truly a core competence of PBG and there are still many opportunities for us to unlock value within the [blue] system.

When it comes to consumer value, we’ve previously taken you through some of our work we’ve done to develop a new price and package architecture that appeals to today’s value-conscious consumer. We’ve been in test markets in the U.S. for several months and we’ve learned a number of things.

One is that eight and 18 pack cans have an important role to play as part of a comprehensive package mix management strategy. We’ve already executed promotional and limited time offers on 18 packs nationally and we believe eight packs can play an effective role as an everyday value package with a low entry point across the wide variety of retail channels.

Additionally, we’ve recently launched an eight pack 12-ounce PET package nationally across our business. The combination of eight and 18-pack cans and eight pack 12-ounce PET will enable us to provide our customers and consumers with a more flexible package and value offering. At the same time, will increase our number of weeks in value, drive volume, and expand our margin runway.

Another component of our quest to increase consumer value is our 16-ounce $0.99 single serve can package. This package is designed to complement our 20-ounce offering, has performed well in existing markets, enabling us to gain share in single server CSD. Most importantly, this is a strategy that benefits everyone involved. We achieve improved volume and margin performance, customers gain a sustainable margin platform, and value-conscious consumers receive great brands at a highly desirable price point.

We’ll continue to expand distribution during the third quarter.

You know, one thing we really like about these tests is that whether you are talking an eight-pack or $0.99 cans, we’ve been able to offer consumers a low price entry point into the category and as a result, we are building a much more attractive value portfolio.

Most importantly, we are doing all of these things I’ve just taken you through without losing site of investing for future growth. Our third strategic priority is to capitalize on geographic growth opportunities, something we continue to do in the U.S. and abroad.

In the U.S., you’ve heard us talk a lot about capitalizing on the accelerated pace of bottler consolidation. We’ve been very successful at doing this. We’ve announced deals to acquire five domestic bottlers since the start of last year that has generated a combined $300 million in annual revenue. By comparison, you’d have to combine the previous seven years of acquisitions to equal the same level of annual revenue.

Most recently, we signed a letter of intent to acquire AB-Tex, a Pepsi and Dr. Pepper franchise bottler in Abilene, Texas. This deal, combined with our acquisition of Better Beverages in Howitsville, Texas earlier this year will expand the PBG footprint across the vast majority of the state, which positions us very well for the future, given the favorable long-term growth trends in Texas.

We have a strong track record of creating value through the acquisition of well-run, independent bottlers. They provide access to new markets and enable us to grow our top line. We are also able to consistently achieve synergies in the area of manufacturing, supply chain, route to market, and general and administrative expenses.

Our acquisition of Lane is a great example of our ability to take advantage of these types of synergies as we expect to improve profit per case on that business by roughly 45% this year. We believe there will be continued opportunities for consolidation in the U.S. and we remain focused on pursuing them.

Looking outside the U.S., we continue to focus heavily on our largest growth markets. In Russia, we continue to invest for the future. Earlier this week, we joined with PepsiCo to announce that the Pepsi system plans to invest $1 billion in Russia over the next three years. As part of this investment, we just opened a new PBG plant just outside of Moscow. This is the largest PBG plant in the world, as well as the largest of any bottling plant in the Pepsi system. It gives us a large scale, state-of-the-art facility that will help us to fully capture the long-term growth opportunity in Russia. The investments we are making in our Russia business are creating new jobs, providing us with the flexibility to produce a wider range of beverage offerings for consumers, and enabling us to better serve our valued retail partners.

At the same time, we are also focused on making sure we have the right plans, capabilities, and people in place to manage through the current economic environment in Russia. Our revenue management, cost and productivity and disciplined capital and working capital management initiatives have allowed us to deal with the situation effectively.

In Mexico, our focus has been on transforming our cost base to maximize efficiencies. We are doing this by rationalizing our facilities, right-sizing the workforce, and enhancing our productivity across the supply chain. We are also leveraging best practices from the U.S. to strengthen the capabilities of our employees.

While we expect the current business environment in Mexico to remain challenging short-term, the work we are doing in all these areas will position us well for the future.

Whether you are looking at Mexico, Russia, or a number of other countries, the LRB category has a history of rebounding strongly as international economies exit recessionary periods, and we fully expect this to be the case once again. This will obviously benefit our business and the actions we’ve been taking throughout the downturn will leave PBG well-positioned to win the marketplace as the recovery begins.

So to tie everything together, while we are still facing a challenging economic environment, we believe we have the right strategy, the right operating capabilities, and the right people in place to continue delivering good results. Whether you look at PBG's historical track record, our performance in the current environment, or our long-term outlook, this is a company that’s built for growth and shareholder value creation.

With that, let me turn the call over to Al.

Alfred H. Drewes

Thanks, Eric and good morning. I am going to provide a brief overview of our Q2 performance, as well as discuss our outlook for the balance of 2009. As Eric mentioned, there’s a lot to like about Q2 and we are very pleased with our results for the first half of the year. We are executing our strategy effectively while also benefiting from positive developments in the external environment.

Our comparable diluted EPS was $0.78 in the quarter, beat our expectations, a sign that the positive momentum we saw in our business in Q1 has continued. We are consistently executing the game plan that we outlined at the beginning of the year. There are two elements to this game plan.

First, we are taking -- we have taken local pricing actions, local currency pricing actions to mitigate cost of goods sold increases. Consequently, our second quarter worldwide net revenue per case increased 5% on a currency neutral basis, with growth in each of our reporting segments.

Second, our robust cost and productivity program is on track to deliver more than $265 million in savings for the year, which is $15 million above the estimate we provided back in January. These actions have enabled us to deliver solid bottom line performance despite macro-driven top line softness and for-ex headwinds.

Our profit performance was ahead of our expectations. Comparable worldwide operating profit decreased 5% but more importantly, it was down only 1% on a currency neutral basis. You will remember from prior calls that we expected our first half of the year to be more challenging than the second half. That’s because the macro slow-down didn’t hit the international markets until Q3 of last year.

Also, our raw materials and for-ex comps eased in the second half. Consequently, our ability to successfully manage through the first half of 2009 is encouraging.

In our U.S. and Canada segment, comparable operating profit increased 5%, including a two percentage point negative impact from currency. While there have been some positive developments in the external environment, the marketplace does remain challenging. This is reflected in our volume numbers. Total worldwide physical case volume declined 4% in the quarter, which was in line with our expectations.

The positive takeaway here is that our markets appear to be stabilizing. In the U.S., we did benefit from the shift of Easter by about [two] percentage points and the Lane acquisition added about a point of volume to our performance.

We continue to believe that volume will improve as GDP begins to return to growth across our markets.

Items that impacted our results for the quarter included charges associated with our previously announced structure to succeed workforce realignment and advisory fees related to PepsiCo’s proposal to acquire PBG. More than offsetting those two items were the settlement of tax audits in Canada and the favorable closing of the statute of limitations for the IRS audits of our 2003 and 2004 tax returns in the U.S. Reconciliations for these items were attached to our press release and can also be found on our website.

Our operating free cash flow performance was very robust, as it improved about $300 million year-to-date. This reflects improvements in our working capital management. It also reflects more efficient capital spending, which is consistent with our CapEx guidance for the full year.

We have really stepped up our focus on working capital management and we are pleased with our results so far this year. In particular, we’ve been able to leverage financial best practices from our U.S. business in our international markets. Our increased focus on receivables and credit and collections has produced strong results.

Overall, we feel very good about our Q2 performance. We’ve now exceeded our earnings targets for two consecutive quarters and at the same time, we’ve made a number of moves to build this business for long-term growth.

And now, let me turn to our guidance. For the full year, our currency neutral comparable guidance is as follows -- we expect top line growth in the low-single-digits. We’re now forecasting COGS per case to be up 6% to 7%, and we expect operating profit growth in the low- to mid-single-digits.

Our comparable guidance in U.S. dollars is as follows -- top line down low- to mid-single-digits; COGS per case will be about flat; operating profit will be about flat; and EPS will be near the high-end of our existing guidance range of $2.30 to $2.40. Operating free cash flow will be about $525 million.

For the third quarter, we expect comparable operating profit to be flat to up slightly and comparable EPS in the range of $1.03 to $1.08.

Two things that give us confidence in our outlook for the second half and beyond are improvements in commodities and for-ex. I told you last month that the rate of growth of the commodities and fuel expense which flows through our P&L is moderating this year and our expectation is that it will turn positive in 2010.

At the same time, foreign currencies have become more stable since their lows in the first quarter. While they are still a negative factor in year-over-year earnings growth, the strengthening of the Ruble, Peso, and our other currencies [against] their lows in the first quarter is obviously a positive development. It’s these types of encouraging developments in the external environment, combined with our continued ability to execute effectively in the marketplace that fuel our optimism about the future.

With that, I will turn the call back to Eric.

Eric J. Foss

Thanks, Al. Before we open the call up to questions, I would like to express my sincere thanks to Mary Winn Settino for her service to PBG over the past nine years. Today marks her final earnings call with PBG, as she is moving on to pursue a career opportunity outside the company that will also enable her to return to the south and be closer to her family.

During her tenure here, Mary Winn has been a valuable partner to me, Al, and the rest of PBG's senior leadership team. She has also been a trusted and responsive professional to the financial community and I know many of you on the call today have enjoyed working with her.

While we will miss Mary Winn’s contributions, we wish her nothing but the best in her new role. Mary Winn, thank you very much and all the best.

We’d now be happy to take any questions, Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is with William Picarello with Consumer Edge Research.

William Picarello - Consumer Edge Research

Good morning, Eric and Al, and congratulations to Mary Winn. We’re going to miss you.

Mary Winn Settino

Thanks, Bill -- same here.

William Picarello - Consumer Edge Research

A question -- if you could kind of update us, since the quarter ended in the middle of June on industry pricing trends and volume trends, we saw promotions heat up a little bit on the fourth but how much of that was retailers investing behind the category and then also a lot has been written about the weather in the northeast but how was the more important July 4th holiday? Any change in trends there? Thanks.

Eric J. Foss

Sure. Let me ask Rob to talk about July fourth and your weather question.

Robert C. King

So Bill, what I’d say is just first on your pricing question that this year the pricing environment has been rational, and I’d say that’s consistent through the holiday as well. We feel good about the Fourth of July. I think that trends as we look at the holiday were favorable. CSD business continues to be strong and the retailers provided very solid support for our category. We don’t have the scanner data yet for the holiday so I can’t give you an indication of overall category and share performance but certainly internally we feel good about the momentum we had going into the holiday.

Eric J. Foss

And Bill, I would just comment, as we think about the pricing environment going forward, I mean, you know us very well, you can expect us as we come out of summer post Labor Day to initiate price increases like we have each and every year I think PBG's been around.

I think another encouraging note is relative to your volume question is we actually, as you know, our quarter -- second quarter ends at the end of May with our international markets and the reality is is that our Europe and Mexico volume in June, while they did pick up a trading day, we actually saw our volume slightly positive, which was a fairly significant change from what we had experienced.

Mary Winn Settino

Operator, we’ll take the next question.

Operator

Thank you. Our next question is with Judy Hong from Goldman Sachs.

Judy Hong - Goldman Sachs & Co.

Thanks. Good morning, everyone. Eric, you’ve spoken about the improved carbonated soft drink trends and I’m wondering if you could give us a little bit more color in terms of what did the category do in the second quarter versus the first quarter, how did the category behave by channel, so cold drink versus take home? And then just lastly, your comment about taking post Labor Day pricing, I’m just wondering how we should think about that in the context of 2010 raw materials that are likely to be down, so you’re taking pricing up when your costs are actually becoming a lot more favorable. So if you can help us with that.

Eric J. Foss

Sure, you bet. Let me comment, I’ll also ask Rob to add some color commentary. First of all, Judy, if you think back on PBG as a publicly traded company, I think with both commodity headwind and commodity tailwind, we’ve taken pricing. Again, the way it’s probably worked best in the most balanced way is to take two to three points of pricing and to get low-single-digit volume growth. So my comment on post Labor Day pricing is obviously we’ll look at all the variables, what’s happening relative to consumer value, what’s happening relative to commodities, what’s happening relative to competition but I do think consistent with each and every year, years where we had both commodity tailwind and headwind, we will take pricing post Labor Day.

Having said that, on the volume performance year-to-date, I think again we are very, very encouraged. The category is down, LRB is down about 3% year-to-date. The CSD category though is performing better and if you think about our second quarter business, I mean, we had very good performance across our CSD portfolio -- flavors, diets, trademark Pepsi was flattish, and year-to-date the same thing. So -- and we actually grew our share, as I mentioned in my comments but let me ask Rob if he has any additional thoughts.

Robert C. King

You know, our CSD business was in fact strong in the second quarter and up about 3% versus prior year. Our cold drink business in CSDs, Judy, is solid in the retail channel, so in small format, which includes convenience stores and dollar stores, we saw a continued growth in our CSD business there and then also in our large format channels.

I think overall the channel trends are relatively consistent throughout the year though, and that is retail channels continue to perform well and then away-from-home and food service continued to be under pressure. So consumers are certainly trading in and that’s helping our CSD business in those classes of trade.

Mary Winn Settino

Operator, we’ll move on to the next call, please.

Operator

Thank you. Our next question is with Lauren Torres with HSBC Securities.

Lauren Torres - HSBC

Good morning. First I want to thank Mary Winn also for all of her help. And I guess maybe somewhat more of a general question, if you want to address in the U.S. or maybe even more so outside of the U.S. with respect to the consumer environment, it obviously seems like there are still pressures but I was just curious because of the initiatives you have taken, be it by brand or by package or channel, you know, if you feel that there is some signs of recovery, if any sentiment has improved in your view, or just outside of easy comps, do you think we’ll see some progression as we go through the second half?

Eric J. Foss

Well, I guess -- let me take a cut at that, Lauren. I think -- let me start in kind of the U.S. and Canada. I think in the U.S. and Canada, we are starting to see some bottoming. I still think the reality is across our geographies, there are going to continue to be macroeconomic pressures. But having said that, I think what’s very encouraging, as you well know in North America, is the performance of the CSD category, which has improved fairly significantly in our portfolio, which is outperforming the category. So I’d say the U.S. and Canada business is probably closest to some type of a recovery.

As Al mentioned in his comments, I think Mexico and Europe were later to feel the full impact of those economic pressures, and so as we think about 2009, I think the category will continue to be under pressure but having said that, I do think we’re seeing some signs of stabilization. I think, as I’ve mentioned, our June volume was dramatically different from what we’ve seen the last couple of months in both Europe and in Mexico.

Mary Winn Settino

Operator, we’ll move to the next question, please.

Operator

Thank you. Our next question is with John Faucher from JPMorgan.

John Faucher - JPMorgan

Good morning and as well, thanks again, Mary Winn. A quick question about the bottle water category -- can you talk about maybe the retailer shift in focus towards warehouse and away from CSD and how you see that impacting the business over the next couple of quarters? It appears as though with CSD doing better that bottled water is a pretty sizable drag here, and is it something where you say you know what, we just have to give up that volume because that’s the way the retailers are moving? Thanks.

Robert C. King

I think there’s two dynamics worth considering in the bottled water business. First in just a tough economic environment, one of the first things that a shopper can decide to do is consume tap water as opposed to purchasing bottled water, and I think we are seeing just a pretty dramatic change in the growth trajectory of that category over the past couple of quarters, and we are assuming that that’s going to continue certainly for the foreseeable future, so that’s number one.

Number two, there has been certainly a deterioration in the pricing environment in case pack water in the marketplace and there has been some growth at the low-end of the category. That being said, we still look at our Aquafina business as a viable business. We believe that DSD does provide value to our retailers and that as we continue to talk to retailers about how to have a broad successful LRB category, that we are having good conversations on how we can continue to build not only our Aquafina business but our entire LRB business with our retailers leveraging our strength at the point of sale.

Eric J. Foss

And John, I would just add that I think it’s probably less about a move away from DSD water and the warehouse water and it’s probably more about just pure price, which is probably moving maybe away less national brands and more private label. Again, I’ve made this point before but I’ll make it now -- at $2.99 or $3.99 water, the economics are challenging for anybody, whether you are a national brand or private label, whether you are DSD or warehouse. Obviously having said that, given how challenging the economics are, we need to look and everyone will need to look at trying to make sure we are taking costs out across the supply chain, given the challenged economics.

Mary Winn Settino

Operator, we’ll move on to the next question, please.

Operator

Thank you. Our next question is with Kaumil Gajrawala.

Kaumil Gajrawala - UBS

Thanks. Also from me, Mary Winn, thanks very much for your help over the years. It’s very much appreciated. Good luck in the South.

Mary Winn Settino

Thank you very much, Kaumil. My pleasure.

Kaumil Gajrawala - UBS

Regarding the CSD trends, can you talk a bit to the sustainability of these trends? Are there specific drivers behind it? And maybe Mountain Dew within that context, I believe that’s probably the brand that’s sticking out as being the strongest within the category.

Robert C. King

There’s a number of things at play in the CSD category and I think if you look at what we’ve talked about over the past couple of quarters, between PepsiCo and certainly PBG there has been a recommitment to revitalizing the CSD category and I think it starts with ensuring that the brand portfolio is enhanced, and so certainly the efforts this year from our partners at PepsiCo on the Pepsi brand, the Mountain Dew brand, and Sierra Mist have certainly started to build traction and move that business forward.

And then clearly our efforts to establish a leadership position in the fruit-flavored CSD business has helped propel not only our business but we think the category as well, so we think the combination of brand building with a strong focus on innovation and then solid execution at the point of sale, and then ensuring that we’ve got the right value and packaged mix management strategy is not only the right strategy for this year but we think that that over time can reestablish health in the category and we are optimistic about the CSD business going forward.

Operator

Thank you. Our next question is with Alton Stump from Longbow Research.

Mario Montoya - Longbow Research

Good morning, guys. This is actually Mario Montoya sitting in for Alton. Real quickly, can you put some numbers up in regard to the high margin cold drink and take home volumes? And then comment on what you are seeing in regards to CNG, with regard to gas prices inching up of late -- I mean, what trends you are seeing as far as consumer traffic? Thanks.

Eric J. Foss

So in the U.S., I assume you’re asking, our take-home business in the quarter was up modestly versus prior year and our cold drink business was down mid-single-digits. The CNG business, I think as I mentioned before, is -- our CSD business in the CNG business is healthy but the overall CNG category still has some softness and is under some pressure. Overall if you look at channels across the United States, take-home channels are outperforming channels for any type of away-from-home consumption. So that’s been a pretty consistent trend over the last three quarters and still exists in the marketplace and more than likely will for the foreseeable future.

Mary Winn Settino

Operator, next question, please.

Operator

Thank you. Our next question is with Damien [Wykowski] with Cavelli & Company.

Damien Wykowski - Cavelli & Company

Good morning. First off, Mary Winn, thanks for all your help. You’ll be missed. And my question is just on what are we seeing on the private label side, forgetting bottled water, just what trend are you seeing in the soda category? And also on the cost of goods sold, I don’t think you’ve mentioned it but I assume you’ve been, over the course of this year, hedging some of the raw material costs as well for next year.

Eric J. Foss

Al, do you want to take the cost of goods?

Alfred H. Drewes

Sure, I’ll start with the cost of goods. So the approach we’ve taken to cost of goods for several years now, which I’ve discussed in the past, is we just average our costs in over time, so we leg into position what we would like to be for next year is be largely locked when we get to our planning season, which is in the fall, so we’re just averaging on our costs and that’s what we’ve been doing for the last couple of years.

Eric J. Foss

And on private label, as we’ve said many times, I mean, this is a segment within CSDs that tends to be somewhere between a 10 and a 13 share of volume and a little bit less, relative to its value share. Again, the characteristics where private label tends to have a lot of success are in categories that are very fragmented, categories where there’s very low brand loyalty, categories that lack innovation and that is not the case with CSDs or even beverages more broadly.

From our vantage point, every time we’ve seen private label grow its volume, it is far more a retailer phenomenon than a consumer phenomenon, and what happens is even though they can grow their private label volume, because they can’t get to the two loyal cola users interested in the category that are heavy, heavy users, they cannot grow their category. And so for a retailer to achieve growth and profitability in CSDs, they need national brands. And so again, as we’ve said, our CSD business is up year-to-date, our CSD business grew share and we continue to not ignore it and focus and watch and monitor price gaps. But I think the reality is that private label will continue through this time frame as it has historically as its role is very much in that 10 to 13 share range.

Mary Winn Settino

Operator, next question, please.

Operator

Thank you. Our next question is with Mark Swartzberg with Stifel, Nicolaus.

Mark Swartzberg - Stifel, Nicolaus & Company

Thanks. Good morning, everyone and Mary Winn, also thank you for all the help over the years -- you’ll definitely be missed.

Mary Winn Settino

Well, I’ll miss you all too, Mark, so we’ll stay in touch.

Mark Swartzberg - Stifel, Nicolaus & Company

Eric, I wanted to make sure I heard you right about international -- did you say volume in each of your international, or your combined international markets was up in the month of June? And if I did hear right, how much of that is compares in your opinion and how much is other stuff you’ve done?

Eric J. Foss

Well, Mark, first of all, what I said was -- and again, I want to make sure I am clear -- we did pick up an additional trading day both in Europe and Mexico. What I said was our business in June was up slightly in those two geographies and again, I think it’s a combination of just maybe a slightly better environment and as well as some of the initiatives we’ve put into the marketplace. But I don’t want to -- my intent is not to have one month become a trend. My intent was to make the point that when Bill asked the question earlier about our performance, I wanted to in addition to talk about North America, share what our international geographies were doing.

Mark Swartzberg - Stifel, Nicolaus & Company

Great. Thanks, Eric.

Mary Winn Settino

Operator, do we have anymore questions at this point in time?

Operator

We have no more questions at this time.

Eric J. Foss

Great. So let me again summarize that we are very pleased with the strength of our first half results. We are on track we think to perform well the remainder of 2009 and as we talked about, we are going to continue to make significant investments in our future that will enable us to continue to achieve success.

Again, many thanks to Mary Winn and all our best wishes and thanks, everyone, for joining us. Everybody have a great day.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

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