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Pepsi Bottling Group Q4 2007 Earnings Call Transcript

January 29, 2008 | about: PBG

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Pepsi Bottling Group Inc. (PBG)

Q4 2007 Earnings Call

January 29, 2008 11:00 am ET

Executives

Mary Winn Settino - VP of IR and PR

Eric Foss - President and CEO

Al Drewes - CFO

Rob King - President of North American Operations

Analysts

Bill Pecoriello - Morgan Stanley

Lauren Torres - HSBC

Judy Hong - Goldman Sachs

John Faucher - JP Morgan

Mark Swartzberg - Stifel Nicolaus

Bryan Spillane - Banc of America Securities

Ann Gurkin - Davenport

Justin Hott - Bear Stearns

Christine Farkas - Merrill Lynch

Presentation

Operator

Welcome to the Pepsi Bottling Group's fourth quarter Earnings Call. (Operator Instructions).

Please note the company's cautionary statement. Statements made in this conference call that relate to future performance or financial results of this company are forward-looking statements, which involve uncertainties that could cause actual performance or results to differ materially. PBG undertakes no obligation to update any of these statements. Listeners are cautioned not to place undue reliance on these forward-looking statements, which should be taken in conjunction with the additional information about risks and uncertainties set forth in the company's annual report on Form 10-K for the year ended December 29, 2007.

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

Mary Winn Settino

Thank you. Okay, thanks everyone for joining us today. Eric Foss, our President and CEO; Al Drewes, our CFO; and Rob King, President of our North American operations, are on the call today. Our call is being recorded and will be available for playback. We're also broadcasting the call on our website at pbg.com.

Please keep in mind that all references to volume are on a constant territory basis. In addition, 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 attached to the press release we issued this morning.

As we have asked of 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 just read.

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

Eric Foss

Thanks, Mary Winn, and good morning to everyone on the call. We appreciate you joining us today as we wrap up the 2007 fiscal year and begin 2008. Many of you had the opportunity to spend some time with us at our Investor Day in New York in December. At that time, we discussed the factors that have fueled our success as a company.

Today, I'd like to resume our discussion by briefly taking you through our 2007 results. I will also outline our priorities for 2008 and the opportunities ahead. Now, we will offer a more detailed financial breakdown of the fourth quarter and full year, as well as review our 2008 guidance. We'll then be happy to take your questions.

Quite simply, 2007 was an outstanding year for PBG. We achieved record earnings in cash flow. We also successfully delivered against each of the three priorities I shared with you last January. We demonstrated strong revenue and margin management that allowed us to cover significant commodity cost. We achieved worldwide net revenue per case growth of 6%, registering gains across all of our geographic segments, and with gross profit expansion in each of our countries.

We also delivered against our commitment to improve operational excellence by achieving significant productivity gains and over $100 million in cost savings, and we continue to invest for future growth. We have built new plants in Moscow and Las Vegas, added dedicated water lines in the U.S., and further enhanced our overall capabilities through new tools, technology and training initiatives.

You heard me talk in the past about what it takes to be a great bottler. Our 2007 results show that a combination of great plans, a great go-to-market system and great people gives us a leg-up in the marketplace. It's what has enabled us to consistently meet or exceed the expectations of our stakeholders who matter most, be it customers, employees, communities, or shareholders.

We evaluate our success of satisfying these stakeholders in several ways. With customers, our objectives are to improve our selling, service and execution at the moment of truth. We achieved our highest ever customer satisfaction scores in 2007 by serving our customers on schedule, ensuring that we are in their stores during the busiest times, and reducing on-stocks to maximize revenue opportunities for both of us.

With employees, we focused on building a culture of respect and creating a better place to work. And I am proud to say that our employee satisfaction scores have never been higher. We continue to invest in training and development, yielding a motivated top line with an unquenchable spirit for results. We foster inclusion at all levels of the organization creating a diverse workforce that mirrors the diversity of our customer and consumer base. We are commonly known as one of the best companies in America at promoting employee health and wellness, as evidenced by the C. Everett Koop National Health Award that we received last year.

We also never lose sight of the importance of giving back to the communities where we work and live. This includes a major focus on environmental stability, where our priorities are water conservation, energy efficiency, recycling, and waste reduction. We believe that a greener PBG is a better PBG, and we'll continue to make improvements.

And finally, we remained focused on creating shareholder value over both the near and long term, which we certainly did in 2007. We delivered record earnings with operating profit improvements of 8% and EPS, up 16%. We also had a cash flow improvement of 14% to $597 million. We continue to make progress on returns with the 20 basis point improvement in ROIC to 7.8%.

Collectively, these results represent our best performance in five years. With all of that in mind, let me share with you our plans to continue last year's success and optimize our performance in 2008. We'll focus heavily this year on leveraging our global operating platform to deliver solid results.

I'll start with the U.S. and Canada, where we will concentrate most on driving profitable top line growth. Our big-brand bets will be in the areas of hydration, refreshment and invigoration. The hydration segment will be the biggest contributor to overall LRB category growth in 2008. And therefore, it is our top volume opportunity.

We'll capitalize on that opportunity by segmenting our brands across purity, purpose and performance. In purity, the largest segment of hydration, Aquafina, is the top-selling water brand in America, and gives us a great platform on which we can grow and expand our overall hydration portfolio.

In the purpose segment, we are very excited about the re-launch of SoBe Life Water, a brand that is growing at three-times the rate of the enhanced water category. Our stepped up commitment, Life Water, makes it our biggest growth bet in hydration. Life Water has been reformulated with natural sweeteners, healthy herbs and fewer calories than its major competing brands. It also boasts new look packaging, and our brand-building efforts will focus on creating awareness and driving trial with consumers, and we will kick off an aggressive new marketing campaign next month. We believe Life Water and the recent re-launch of Aquafina Alive gives us a powerful platform in the vitamin water segment.

Lastly, in performance, we have added G2 and Propel to the cold drink distribution. We are particularly enthusiastic about the potential of G2, Gatorade's biggest launch ever, as it fills an unmet need in the marketplace for a low-calorie sports drink. With only 25 calories per serving, it immediately becomes the top choice for athletes looking to hydrate off the field. You will see G2 formally introduced to the public in a big way this weekend during the Super Bowl ad.

So in summary, we have a powerful hydration portfolio that addresses all the consumer needs of purity, purpose and performance.

When it comes to refreshment, there are still good opportunities for us to build our CSD business. We are excited about the return of Pepsi Stuff, the biggest promotion ever, which has already received a lot of interest in advance of its launch later this week. Pepsi Stuff will bring free music to consumers unlike ever before, and Sunday's Super Bowl ads starring Justin Timberlake will build great buzz in the marketplace.

There will also be news behind Mountain Dew driven by the democracy program that will allow consumers to elect the flavor of our next line extensions, and we will look for new opportunities in Diet with creative new advertising for Diet Pepsi Max, which will debut during Sunday's game. We will also air the premium CSD space during the first half of the year with the launch of Tava, a four to five, zero calorie, low carbonated beverage that will be available in multiple flavors.

In teas, we have the number one and fastest growing trademark with Lipton. Our volume was up over 20% in 2007, and we'll create new growth opportunities across our three tea platform in 2008.

There are three key elements of our tea strategy. While our portfolio is doing extremely well, we have an opportunity to increase household penetration. Our tea portfolio only has about 20% household penetration. So, our focus is on creating more awareness and trial. We are also expanding our packaging platform to attract the broader set of consumers. To give you a few examples of this, we'll further roll out our 1.5 liter multi-serve package, as well as begin testing of a single-serve can package and a new jug package.

Lastly, we are looking to increase our in-store presence. With Brisk, Lipton Iced Tea and Pure Leaf, we have the leading share in the value, mainstream and premium segments of the category. We believe we can leverage this position of strength to improve availability across retail locations.

When it comes to invigoration, we are focused on making Mountain Dew AMP our flagship energy brand. Our first order of business is to increase consumer awareness and trial, and we are taking a number of steps to do so. We will exploit the unique positioning of AMP that it enjoys, as Mountain Dew's heritage is a huge asset to the brand. We'll bring more innovation to the marketplace than ever before. Consumers are looking for longer lasting energy, as well as functional benefits, and we'll be launching three new products in this brand that meet these needs. Most importantly, we'll leverage AMP's sponsorship of Dale Earnhardt Jr., the centerpiece of the brand's 2008 marketing efforts. In fact, Dale Jr. will play a prominent role of promoting AMP during the Sunday Super Bowl advertising bullets.

So, wrapping up our outlook for U.S. and Canada, these initiatives across hydration, refreshment and invigoration make us feel good about our ability to deliver profitable top-line growth this year. Of course, solid revenue and margin management will play an equally important role. We took our 2008 pricing actions during the fourth quarter as we've done consistently in the fourth quarter, the past several years, and we have seen those actions stick in the marketplace.

We also plan to test a number of different packages that provide greater value to the consumer. Our ability to manage price mix and consumer value is unmatched and we are going to continue to leverage that capability and expertise in 2008.

Let me now turn our attention to Europe, where our operating profits have doubled in the past two years. Our biggest focus in 2008 will be on fully capturing the growth potential in Russia, where we are most focused on three strategic planks. First, creating an advantage brand portfolio; second, making sure we extend our selling and service advantage by expanding our DSD footprint, building scale in Siberia, and further enhancing our sales capability; and third, we'll build operational excellence with timely investments in the areas of manufacturing, warehousing and information technology to increase capacity, add quality and enhance productivity.

With regards to our advantage in brand portfolio, there are several things to look forward to in 2008. Starting with CSDs, we have an exciting marketing calendar driven by a strong innovation pipeline. We have plans to bolster our Pepsi trademark, re-launch 7 UP and introduce line extension across our Miranda and Mountain Dew brands. By leveraging our promotional platforms across music and soccer, we believe we'll be in a good position to capture growth during the summer selling season.

In hydration, we'll continue to benefit from higher margin water segments with Aqua Minerale Beauty and Aqua Minerale Active, both enhanced with functional benefits. We'll take steps to leverage our strong tea position, by focusing on our better-for-you green platform, as well as launching further innovations behind functional teas. And we'll strengthen our leadership position in energy with Adrenaline Rush as a category leader.

Russia is a country with strong macros and we think our prospects are bright. We have outstanding leadership in place, great capabilities, great brands, and the will to win.

Without a doubt, our Mexico business has faced challenges. But that doesn't change the fact that Mexico is one of the world biggest beverage markets. We are in the midst of a comprehensive review in Mexico to assess our business profitability by brand, package, channel, and geography. We are taking a very pragmatic approach to improving the business this year, with our number-one priority to improve our profitability.

There are three key components to our approach to Mexico in 2008. First, we'll improve in the area of revenue and margin management. We've already taken appropriate pricing actions that will help us meet our 2008 goals. And we'll continue to implement our segment profitability insights in Mexico to make sure that we are increasing our profit potential.

Second, we are looking for additional costs and productivity gains. It really hinges upon further development of the right organizational structure, maximizing right efficiencies and drop sizes, and increasing output per employee. And third, we'll focus on profitable brand-building activities across our portfolio, lead by innovation that will extend across cola and flavored CSDs, as well as waters and non-carbs.

In summary, we have solid plans in place for 2008, and we have tremendous operating capabilities across our geographies. We have a disciplined approach to revenue and margin management, and we have a strong partnership with PepsiCo, whose exciting marketing and innovation plans will allow us to continue building an advantage brand portfolio.

At the same time, I, like most CEOs, recognize that we are facing a challenging economic environment. The combination of softening consumer confidence in retail sales numbers, plus uncertain commodity costs makes it critical that we remain flexible and nimble to adapt to market conditions as needed. We believe we have the right strategy in place to do so, which is why we are maintaining our full year guidance.

Now, let me turn it over to Al for more insights into our results and our outlook. Al?

Al Drewes

Thank you, Eric and good morning. Let me add a couple of additional highlights about our 2007 results, as well as discuss our 2008 outlook, including our expected calendarization.

I want to reinforce what Eric said about 2007 being a great year for PBG. Our full year results came in at the high end of our revised guidance. We had record earnings and record operating free cash flow, and we continue our strong track-record of returning cash to shareholders.

During the latter part of last year, we told you about the substantial tax upside we recognized in Q3. We also told you that it was our intention to spend that upside against productivity initiatives, as well as on improving the return on our full-service vending business.

When we discuss comparable operating results, we are excluding the tax upside, and the charges associated with the productivity in vending initiatives. Additionally, in Q4, we had a net $10 million tax upside due to statutory changes in Mexico and Canada. Reconciliations of these items to our comparable results are included in our press release.

So, let's now turn to our fourth quarter results. As you read in our press release, ForEx was more pronounced in our previous quarters and added 3 point to our revenue of COGS and SD&A and it netted a 1 point benefit to our operating profit growth. Our revenue growth was 7%, right in line with our full year. Our focus on revenue and margin management resulted in a 9% improvement of gross margin per case. Our comparable operating profit growth was 2%.

In the quarter, we had the flexibility to achieve the high-end of our EPS guidance, and we consciously invested to jumpstart our hydration initiative. This spending will drive distribution of our hydration portfolio through incremental merchandise and equipment placements and space gains at retail.

As I mentioned to you on our last earnings call, our effective tax rate in Q4 was lower than other quarters. The comparable effective tax rate was 23% in Q4. Our full year effective tax rate, excluding the items affecting comparability, finished the year at the low end of our guidance at 33%, due to effective tax rate planning initiatives.

So to sum up, 2007 was a great year. We had 7% top line growth, coupled with excellent cost productivity gains. These results help drive 8% operating profit improvement, 16% EPS increases and 14% operating free cash flow growth.

So now, let me turn to our full year 2008 guidance. Our guidance is unchanged since our Investor Day in December. While our guidance is unchanged, the external cost environment for oil and corn has become more challenging in the last few weeks. So as we look to the components of our guidance, we continue to expect worldwide top line growth between 6% and 7%, with volume growth of 2% to 3% and net revenue per case growth of 3% to 4%.

Due to the external cost pressures, we now expect COGS per case to grow at the high end of our 5% to 6% guidance range. Gross profit per case is expected to increase about 2%. SG&A is expected to increase about 4% to 5% and this reflects substantial productivity initiatives, and at the same time continued investments for the future.

Operating profit growth is expected to be in the range of 4% to 6%. For 2008, we expect our full year effective tax rate to be between 33% and 34%, including the impact of the tax law change in Mexico. Full year EPS is expected to be in the range of $2.30 to $2.38, and operating free cash flow will likely be greater than $620 million.

So now, let's turn to the calendarization of our earnings outlook. A couple of facts just impacted our calendarization. First, as our international business becomes a larger portion of our results, and contributes more to our overall growth, the seasonality of our business becomes more pronounced. The majority of these geography's earnings were in the third quarter, while their profitability is seasonally well in the first quarter. Therefore, our profit growth will be even more biased towards Q3.

The second item affecting calendarization is that we expect the impact of raw material costs to be greater during the first half of the year. We expect volume growth on a worldwide basis to be approximately 2% during the first half of 2008. Our volume growth outlook for the U.S. is flat to up 2%, and that's for the first half. For the first quarter, there will be benefit between 1.5 and 1 percentage point, due to our volume growth in the U.S. during the shift of the Easter holiday from the second quarter of last year to the first quarter of this year.

Worldwide net revenues per case should be consistent at 3% to 4% throughout the year, with the U.S. in the same range. Comparable operating profit growth is forecasted to be up in the low single digits for the first half of the year. Comparable first half EPS will be in the range of $0.87 to $0.91. For the first quarter, we expect comparable EPS to be in the range of $0.10 to $0.13 with an operating profit decline in the low-double digits.

Operating profit growth in Q1 will be negatively impacted by the seasonality of our international business, as well as by a negative 4-point impact, due to the accounting for the Russian JV. As for the prior quarters, the JV accounting will have no impact on EPS. The EPS range for the first quarter is $0.10 to $0.12.

Okay, with that, I'll turn it back over to Eric for your questions.

Eric Foss

Thanks Al. And we'll now be happy to take any questions that you might have.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. (Operator Instructions). Our first question today is coming from Bill Pecoriello at Morgan Stanley.

Bill Pecoriello - Morgan Stanley

Good morning everybody.

Eric Ross

Good morning, Bill.

Mary Winn Settino

Hi, Bill.

Bill Pecoriello - Morgan Stanley

Question on the international, if you could just give us some more color on the weakness in Spain, Turkey and Mexico in the quarter? What you are seeing in the overall beverage category versus any competitive activity and share loses you were experiencing, anything more macro going on there? Thanks.

Eric Ross

Sure, Bill, it's Eric. Well, first of all, let me start in Europe. We had an exceptional year in 2007 in Europe as I know, you all know. Volume growth was 4% up. Operating profit is up 50%. Our share performance was actually good in all of our European countries with the exception of Spain. I'll come back to that in a minute. Again, I think the way to think about our European businesses, Bill, is Russia is the top growth market for us, no ifs, ands or buts, and in 2007 with volume up 17% and total top line growth north of 35%, we were extremely pleased with our performance in Russia. We actually grew our LRB share in Russia and we are very happy.

In Q4, again, I want to make sure everyone understands that our volume performance in Russia was strong, up double digit and we feel obviously great about a double-digit volume performance year in Russia.

I think the Spain issue is one of a couple of things. One, I think it's pretty important as you look at the way we are trying to manage our portfolio of countries, to understand in countries like Mexico and Turkey and Spain that it's extremely important that we focus on improving our returns in our margins and that's the game we played in 2007. And I think as I mentioned earlier in Mexico, you can expect us to continue to play that game.

So, overall, I feel great about the year we had in Europe. Again, as you look at our performance from a share standpoint, it was strong, the exception being Spain, which is largely driven by the no-sugar category and again, we are confident about the volume growth outlook for 2008 as well.

Bill Pecoriello - Morgan Stanley

And Eric, also on Turkey, the same thing, is it the margin focus?

Eric Foss

It is. Yeah. If you look at these businesses, I think it's really important to us that we make sure we are making progress on the return in margin front. And Turkey has the potential as we get that equation calibrated properly to be a great growth engine for us. But it's very important in the bottling business to make sure you are focused on stronger returns and the right margin structure. And that's exactly what we did in 2007. We are very pleased with the progress we made in Turkey in 2007. I think we still have more to do. But largely speaking, I want to make sure that everybody understands that in a country like Mexico, in a country like Turkey and in Spain that is our primary focus.

Bill Pecoriello - Morgan Stanley

And then just on the shares on Mexico, any change in share trends there with your volume down slightly?

Eric Foss

Yeah, in Mexico, Bill, that's a good point. Sorry, I didn't touch on Mexico as much as you may have wanted. In Mexico, our share performance was quite mixed that it actually was positive in modern trade, it declined in traditional trade. And again, let me say that 2007, our performance in Mexico was below our expectations. Again, if you look at the COGS inflation in Mexico was huge, more so than I think any other country we faced. And we did show good progress on revenue and margin management.

I think that number one, our turnaround situation in Mexico is a major priority for us and the actions to do that are really focused on this segment profitability learning, to make sure we've got the right margin structure in place, real focus on taking our operating cost down by improving our productivity and addressing the cost opportunities across the supply chain. And then third, in sequence, is improving our volume but making sure we do that by introducing innovation that is profitable.

Bill Pecoriello - Morgan Stanley

Thank you very much.

Operator

Thank you. Our next question today is coming from Lauren Torres at HSBC.

Lauren Torres - HSBC

Good morning.

Eric Foss

Hi Lauren.

Lauren Torres - HSBC

In the fourth quarter, volumes were a bit light and that was I guess coming at the expense of some rate improvements. For this year, I was just hoping if you could talk a little bit about your expectations for rate increases in the U.S. And will you continue to be somewhat aggressive on price increases? And does this necessarily have to come at the expense of volume growth I guess in the U.S.?

Rob King

Lauren, this is Rob. Let me give you a sense for where would be in the U.S. So, I think consistent with what we talked about in December at our Investor Conference, we think that we'll have balanced top line growth in 2008 and that will be a better combination of price growth and volume growth than what we were able to deliver in 2007. I think I told you at the Investor Conference that we believe pricing will go up about 3 to 4 percentage points in 2008 and that will balanced between rate mix, about 75% rate and 25% mix. And we think that's the right strategy in 2008.

And then from a volume perspective, we still see LRB category growth in the low-single digits. We think that we have a strong volume building strategy in 2008, primarily based on investments in hydration, energy, tea and then some exciting news in our CSD business. And so, we think that 2008 will look a little bit different than 2007, but we think we have got the right balance between price and volume.

Eric Foss

And I would just say, Lauren, it is Eric that we think our balance track record is pretty good. I think if you look at the balance we demonstrated in North America in 2007, I think we faired well versus any bottler out there on that dimension.

Lauren Torres - HSBC

Okay, great. Thanks.

Operator

Thank you. Our next question today is coming from Judy Hong at Goldman Sachs.

Judy Hong - Goldman Sachs

Good morning, everyone. I was just wondering if you can spend a little bit of time talking about in the fourth quarter where you saw the margin decline in the North American business. Al, I think you alluded to the spending going up with the upside and in terms of the investment behind the hydration portfolio. Al, perhaps if you could just quantify how much of that increase was in the fourth quarter? And Rob, as you kind of think about the hydration roll out, can you just give us an early read on your distribution gains on Propel and G2? How much additional shelf space are you getting as you kind of think about the entire hydration portfolio?

Al Drewes

Yeah. So, Judy, to your point, we knew we were doing pretty well in terms of meeting our earnings objectives for the year. And so in Q4, we did spend this money to kick start the hydration initiative. And so, our comparable operating profit growth in the quarter was about 2%. And if we haven't had spent that money, the profit growth would have been pretty consistent with our full year number of around 8% or so. So, that was the entire delta on that.

Obviously, in order to get the compliment, we have to work for those reconciliations that are in the tables. But the information is there. And if you need to talk to Mary Winn or somebody about that to get all the details tied out, we can do that too. But at the end of the day, the profit growth in Q4 would have been consistent with the full year number.

Rob King

And then, what I will tell you, this is Rob, regarding hydration I think it's consistent with what we talked about in December as well, is that we feel good about our progress on hydration. We launched G2 and Propel really in December, picked up distribution broadly on both brands, late November early December. So, we've got about 60 days under our belt. And we are building distribution rapidly. Our customers are excited about the initiatives. Our sales representatives are excited about it. And we're making the right type of progress on distribution, merchandising and volume that we thought we would make.

On the base brands, the SoBe Life Water, Aquafina Splash and Aquafina Alive, the repositioning of SoBe Life Water, new flavors, new packaging, reduced calories and the addition of herbs has really resonated with our customers and initially with consumers as well. So, we feel very, very good about that. We think that that is going to help us achieve our growth objectives in hydration throughout 2008 and beyond.

Judy Hong - Goldman Sachs

Can you qualify how much that added in the fourth quarter, G2 and Propel?

Rob King

Well, G2 and Propel was very small. Very, very small to the point of, I'd say, nominal contribution to our performance in the fourth quarter, given, we only had it for about 30 days and then we only had it in a very, very small segment of our business for that amount of time. So, negligible.

Judy Hong - Goldman Sachs

Okay. Thank you.

Operator

Thank you. Our next question today is coming from John Faucher at JP Morgan.

John Faucher - JP Morgan

Yes, Good morning and thank you. I was wondering if you look at your comments on pricing in terms of the 3% to 4% bounce by rate and mix. Are you seen anything interesting on the competitive side? There have been some thoughts that the Coke system would be a little bit slower to take pricing and might be taking a little bit less than what you guys were looking for. So, any update on that?

Rob King

So, yes, consistent with what we talked about in the fourth quarter, we published pricing post Labor Day. We think that's the right time of year. We have done that consistently over the past years and it allows us to establish the right rate and margin proposition going into the calendar year. I believe our competitor on their earnings guidance announced that they would be taking pricing post Super Bowl. I can't comment specifically on actions that they are taking, but all the signals that we have in the marketplace and what we are seeing from observed pricing, indicate that there is a rational pricing environment and we assume that that's going to continue from 2007 into 2008.

John Faucher - JP Morgan

Okay. So, is it safe to say that you guys were operating a little bit of disadvantage than over the last couple of months? And do you think that netted out into any volume losses or share losses, or was it something that was sort of made up for with maybe a little bit more promotion here and there?

Eric Foss

Well, John, this is Eric. I think what I would say is you know as well we tend to take pricing post Labor Day and we tend to do that in a fairly disciplined and rational way. I believe that is the right thing to do for the industry. I think it allows us to get a sense of will it stick and how will it translate to the consumer and how will the customer and competitor react. So, I think our track record speaks for itself and we've done in a variety of marketplace conditions over the last several years and I think that discipline is one that we felt passion about keeping.

Having said that to Rob's point, we have yet to see our competitor match us. Although, it looks like they are planning to do that post Super Bowl, excuse me. So, I think again, it was the right thing to do, given the time of year and given what we needed to do to put that pricing strategy in place and we are continuing to monitor it closely. But again, I think as we come out of the Super Bowl activity this weekend, I think to Rob's point, the pricing environment is very rational as we look forward.

John Faucher - JP Morgan

Okay. Thanks.

Operator

Thank you. Our next question today is coming from Mark Swartzberg at Stifel Nicolaus.

Mark Swartzberg - Stifel Nicolaus

Thanks and good morning everyone. Perhaps Al, on the cost of sales you have for the year, this 6% number you just implied here, whether being up more in the beginning of the year than the latter part of the year. I guess firstly, did I hear that right? And then secondly, if I did, can you give us an idea of kind of what band or range we are talking about when we are talking about 7 to 8 versus 3, 4, are we seeing 6, 7 versus 5, 6. But just what's the band between the high and low as you move through the year as you see it?

Al Drewes

You are talking about first half versus second half. Is that what you are talking about Mark?

Mark Swartzberg - Stifel Nicolaus

Yeah.

Al Drewes

So, as far as the high end for the full year, that's around 6% being the high end. It will be a little bit higher than that in the first half of the year.

Mark Swartzberg - Stifel Nicolaus

So, we are not talking about dramatic, I mean are you talking about 6 for the full year?

Al Drewes

Around, high end of 5 to 6. So, it's around 6. And I would say it will be somewhat higher than that early in the year and a little bit lower than that.

Mark Swartzberg - Stifel Nicolaus

Okay, so no major difference there, just a little higher and then --

Al Drewes

I would put that way, yeah.

Mark Swartzberg - Stifel Nicolaus

Okay, great. Thank you.

Operator

Thank you. Our next question today is coming from Bryan Spillane at Banc of America Securities.