PepsiAmericas Inc. Q4 2007 Earnings Call Transcript

Jan.30.08 | About: PepsiAmericas, Inc. (PAS)

PepsiAmericas Inc. (PAS) Q4 2007 Earnings Call January 30, 2008 10:00 AM ET


Sara Zawoyski - Investor Relations

Bob Pohlad - Chairman and CEO

Ken Keiser - President and COO

Alex Ware - CFO


Lauren Torres - HSBC

Andrew Sawyer - Goldman Sachs

Ann Gurkin - Davenport

John King - Bear Stearns


Good day, everyone. Welcome to the PepsiAmericas, fourth quarter 2007 Earnings Call. Today's call is been recorded. At this time for opening remarks and introduction, I'd like to turn the call over Ms. Sara Zawoyski, Investor Relations. Please go ahead ma'am.

Sara Zawoyski - Investor Relations

Thank you Melissa. Good morning, and thank you all for joining us today to discuss our 2007, results as well as our outlook for 2008. On this morning's call are Bob Pohlad, our Chairman and CEO, Ken Keiser, our President and COO, and Alex Ware, our CFO. Our call is being recorded and will be available for playback on our website at

Please note that throughout our call this morning we will be presenting certain forward-looking statements of expected future performance, including expectations regarding anticipated earnings per share, as well as other matters. These forward-looking statements reflect our expectations and are based on currently available data. However, actual results are subject to future risks and uncertainties, which could materially affect our performance. We undertake no obligation to update any such forward-looking statements and we wish to advise you that the risks and uncertainties that could affect our actual performance are set forth in the cautionary statements found in our annual report on Form 10-K for the fiscal year-ended December 30, 2006.

We will also make reference to certain non-GAAP financial measures in our call this morning. Reconciliations of these items to GAAP financial measures are included in our earnings release, as well as on our website. During the call today we will also be discussing volume, net pricing, COGS per unit and SG&A for 2007 excluding the impact from acquisitions as outlined in our release this morning.

Acquisition impact reflects to non-comparable territories year-over-year. Additionally, we have provided our 2008 outlook on a 52 and 53rd week basis in the release this morning. The estimated impact of the 53rd week, is expected to offset, additional special charges in the US and Hungary, which are expected to be incurred during the first half of 2008.

Our 2008 discussion today, will focus on the comparable 52 week period and the expected impacted of Sandora on those results. With that let me turn the call over to Bob.

Bob Pohlad

Thanks, Sara. Good morning, everyone. Thanks for joining our year-end call and for your interest in PepsiAmericas.

Our strength continued in the fourth quarter, completing a very good year for PepsiAmericas and for our shareholders. Revenue was up 13%, with constant territory up 7%. Adjusted EPS from continuing operations grew 26% and in fact since PAS began 2000, our adjusted EPS growth, has averaged 15%.

We generated adjusted operating cash flows of $188 million, up 8%, with significant reinvestment, and adjusted return on invested capital increased 90 basis points to 7.9%.

And while there were some external factors benefiting the number this year, by forex, our results were mainly driven by the consistent execution on all parts of our strategy.

Three things really distinguished 2007. First, our rebuild the US organization. We called it customer alignment, demonstrated its ability to manage a difficult cost environment, executing on innovation, pricing actions, and single served distribution.

Second, we made significant strides in building scale and profitability in Central Europe and added Ukraine and in part Bulgaria to our footprint.

And third, the diversity of our markets along with continued capability investment not only drove a strong ’07 performance, but importantly they drive profitability and growth in the future.

So let me first cover up on some 2007 highlights. Our US business performed well in '07 in a difficult cost environment and met our expectations. Non-carb, excluding water continued an eight quarter trend of double-digit growth and drove over 2 percentage points improvement in our overall non-carb mix.

Our US volume in total, came in at just below our full year expectations. It was down 1.4%, that's mainly due to slower Aquafina growth. Strong disciplined pricing however, drove revenue up over 4% right where we needed it to be.

Execution on the revenue strategies we laid out at the beginning of the year was the key. First, we did achieve rate increases that covered our cost, maintaining gross margins of 41%.

Second, we had a strong calendar of innovation that we executed exceptionally well and innovation added almost a $0.5 to our volume and finally, we grew our important higher margin single-serve package up 1 percentage point.

At the same time we made significant progress with initiatives to drive these efficiencies and effectiveness to capture the opportunities that exist in US. We completed year one under customer alignment, which was a complete rebuilding of our US sales and marketing teams and how they sell too and service our customer.

And the feedback from our customers has been outstanding, earning PepsiAmericas National Vendor of the Year recognition with superior execution and service from several of our largest customers including Wal-Mart, Target and Kroger.

And we made significant progress in our supply chain productivity initiative CO3 that I'll talk about shortly.

In total, the US performed well contributing the profit and cash flow we expected. It's scale, profitability and cash flow is the basis of PepsiAmericas going forward and maintaining and building the total LRB share that is essential. But the reality is, the US market is a mature, slower growing market, so the development of our international portfolio is key to our growth in the future.

Our international markets are now a $1 billion business, generating operating profits of over $100 million in 2007, it was Central Europe that really stood out. The strength of this business is evident in the full year headlines. Constant territory volume grew over 8% on top of last year's double-digit growth. Central European operating profits grew to $100 million, $80 million more than the prior year with constant territories driving more than half of that improvement.

Operating margins reached 12% for the full year. While forex contributed to our operating profit growth, our consistent strategies and our execution within our portfolio in high growth market continues to drive the majority of our profit improvement.

Emphasis on execution on fundamentals really drove our results. Our feet on the street initiative added seven new sources to increase SKU distribution in existing accounts, and importantly, helped to further our reach in the less developed traditional trade.

The flexibility of our distribution system allowed us to better utilize third parties for delivery in the more rural area. The results were double-digit growth in the traditional trade channel with double-digit single serve growth.

The expansion of our product portfolio in the last couple of years is performing well. It's different than in the US, CSTs had high single-digit growth in Central Europe. Trademark Pepsi in particular was strong and all categories grew. Our non-carb portfolio mix grew double-digit year-over-year led by Lipton.

In east Central European market we have a strong number one or number two position in this fast growing ready-to-drink tea category. All of our Central European countries are growing but Romania and Poland are two largest, grew double-digits last year.

Acquisition complemented our strong constant territory performance. We entered Ukraine with the acquisition of Sandora, which is the market leading juice company in the joint venture with Pepsi. Ukraine has the seventh largest population in Europe with almost 47 million people and is equal in size to our US consumer base. We also extended our footprint to include Bulgaria, with 7 million people, with a 20% JV interest that would likely build to a 100% over the next several years.

2007 was a good year for PepsiAmericas. It was good not only by the numbers, but also because of the meaningful progress we made in our foundational initiative. Building capabilities, expanding products and diversifying our market. It's those same three things that give us confidence as we began 2008, because we do have greater capability in the US, led by customers alignment and CO3.

Our development in our global non-carb portfolio positions us well to capture our share of that category's growth and to have a strong, diversified portfolio of market.

So, for 2008 we expect worldwide revenues to increase 13% to 15% with Sandora adding 7 points. Adjusted EPS growth of 7% to 10%, which is $0.77 to a $0.83. Adjusted operating cash flow should be in the range of $200 million, and we expect further improvement, in adjusted ROIC to 8%.

In 2008, we will continue execute the strategies that are already in place. We will capture share and cash flow opportunities in the US, while maximizing, the top line and profit opportunities in Central Europe. Now, admittedly, we do have conservative bias to our EPS growth expectation. But, we are very confident, in the fundamental growth of Central Europe.

One of the most significant changes with PepsiAmericas over the last year is the changed role of our US business, which is now dependable, profitable and provides cash flow. So, in my opinion 7% to 10% is conservative because Europe is going to continue to perform well. But, being conservative at this time of the year is prudent.

Now, in the US non-carb growth, innovation driving single serving and our pricing strategy support our topline growth by 45%. First, we expect our non-carb volume mix of 20%, to grow two to three points with strong initiatives in tea, energy and hydration.

Specifically, it will strengthen our already leading share position in ready-to-drink tea with strong programs and innovation against our three-tea strategy, with Pure Leaf, Lipton Iced Tea and Brisk. We will utilize NASCAR icon Dale Earnhardt Jr., promote a stronger focus on Mountain Dews and with innovation in marketing adding to that brand strength.

In hydration, we have a strong multi-brand strategy with the re-launch of SoBe Life Water and Aquafina Alive, new innovation in Propel, and the new G2 in the important CMG channel. This combination gives us the strategy to compete in a category getting lots of attention. We are off to a good start, gaining both pace, space and distribution.

Our growth in non-carbs, plus our expectation that the CSD will decline in line with 2007 result in US volume that would be flat and down 1%. We do have a strong CSD calendar, which could been some upside to our volume, most notably this Pepsi stuff, which is a big collect and get reward program against the entire Pepsi trademark. It's providing good consumer value helping to offset the impact of higher prices.

In addition, we expect continued rollover benefits in '07 CSD innovation, most notably Diet Pepsi Max and we expect an equally exciting 2008 CSD calendar. DEWmocracy should perform well because of our high share Mountain Dew markets, in all of this along with our own PAS localized marketing support and drives single-serve growth.

With pricing, we will take ways to cover the higher costs of good sold. But we do expect pricing increases to be less than that of '07. As of today, 85% of our pricing is in the marketplace and the balance will be in effect after the Super Bowl this weekend. We continue to see a rational pricing environment.

Our initiative to build capabilities and improve productivity helped us in 2007 and will continue to contribute in 2008. This year, we'll build from 2007 customer alignment work, to improve our category management capabilities, leverage our new revenue management structure for even more targeted pricing opportunities, as well as our focus on sales training.

Our major supply chain productivity initiative CO3 should contribute positively in '08, so let me give you an update.

We completed the rollout of our demand planning and forecasting tools in 2007, driving a 30 percentage point improvement in forecasting accuracy in meaningfully reducing out of stocks. Our new Power Presell handheld technology should be completely rolled out before the peak summer season, improving our selling effectiveness.

And lastly the rollout of warehouse processes, including voice pick and ASM technology should be completed by year-end driving powered accuracy to over 99.9%. These are substantial improvements.

We have also expanded our supply chain initiative to include formalized SKU rationalization, route optimization through more centralized dispatch centers and warehouse standardization, all driving to greater productivity.

It's the combination of these capability investments, and the productivity initiative, as well as our continued overall cost discipline, and favorable cost overlaps that allow us manage forecasted SD&A costs in the 2% range in 2008.

Though in US in '08 success depends on innovation, pricing, productivity and execution to build share and grow cash flow, while Central Europe drives majority of our top and bottom-line growth. Central Europe continues to have significant top line growth opportunities with growth rates range in the mid-to-high single-digit.

Like 2007, the growth this year should be broad-based with all categories contributing, Market macros should continue with growing GDPs, driving increased consumer spending. Additionally, these markets remain fragmented with regional players accounting for the majority of the beverage category.

So we start from the good place, high growth and fragmented markets with both channel and category opportunities. First, even with our portfolio growth in '07 there are still opportunities in putting potentially adding CSDs, water, tea and juices in key markets by Ukraine, Romania, and Poland.

Second, we continue to invest in advertising and marketing to build brand equity, which is particularly important as we differentiate our products in this fragmented category.

And third, traditional trade in own premise continue to be a very big opportunity for us. We continue to invest in selling resources in capabilities against such as eat-on-the-street, to further our reach and to drive new equipment placement. We acquired new accounts and additional space and distribution.

Because of this growth, we are investing in needed capacity with a new accepted client in Poland, an improved logistic center in Hungary, and a new plant in Romania. At the same time, our integration plan at Sandora is going very well, as the business responds inline with our expectation delivering double-digit volume growth.

Ukraine is an important market that had diversity in scale to our geographic portfolio. Sandora is a big business and share leader, bringing diversity to our products and should add a meaningful 7 points to our worldwide topline growth. It provides opportunities to further expand our product portfolio, and while we don't expect it to be accretive in '08 because of forex, it is strategically important and a great platform going forward.

Just three years ago, our Central European business operated in four markets, generated $6 million in operating profit and represented 2% of our global profit mix. Today this business operates in 11 countries, generates over $100 million in profits and contributes 23% of our profit and it's on track, to deliver 35% to 40% of operating profits by 2010.

So 2007, was indeed a good year for PepsiAmericas. We built capability, broadened our product portfolio, added scale and diversity and Europe. And we delivered our strongest EPS growth ever. We are confident that 2008 will be another strong year. There are more challenges and significant opportunities are in front of us, as '08 brings another year of cost of good increases, and another year of pricing.

But our US business brings dependable profitability and cash flow. Now we have the size, strength and diversity of Central Europe to grow.

But most important, we have an organization that is talented, experienced and committed to success. Let me close with two examples of what I mean.

In Central Europe, look where we began just a few years ago, and where we are today. On that one, an upset. In the US, consider the complete rebuilding of our selling and delivery structure that began one year ago and then consider that PepsiAmericas won the vendor of the year awards from Kroger, Target and from Wal-Mart.

Now, I get to report you the good news. The good news is that our organization did all the work they made it happen. We will do our best again, to build on the success in 2008. So, with that I will turn it over Alex, who will give more detail on the financials.

Alex Ware

Thank you, Bob and good morning everyone. Our fourth quarter was driven by those things that have worked for us all year. Solid pricing across all geographies, offsetting continued cost pressures, strong Central European volume, fueled by an expanding category.

A lower effective tax rate, our productive, our diversification strategy, with forex coming on top of these operational improvements. As reported, top line grew 14% in the quarter with adjusted operating profit growth of 8% with acquisitions and organic growth each contributing equally. Adjusted earnings per share from continuing operations increased 14% to $0.33 in the quarter, up a significant 26% on a full year basis.

Let me take you through some of the Q4 highlights, and then I will turn to our 2008 outlook. To begin, these Q4 numbers reflect constant territory growth and include a continued forex impact raising revenue and SD&A by 2.5 percentage points adding 1.5 points to carbs and lifting adjusted operating profits by 8 points to$ 7.7 million or 7.7 million.

We ended Q4 with worldwide volume of 0.6, above our full year increase of 0.1. 2007 came in a bit below our beginning of the year expectation of 1% plus, driven mainly by slowing growth in the US take-home water category.

Net selling price driven by rate, mix and forex gains finished strong in the quarter, up 6%, driving us to 6.5% for the year. Solid US pricing of over 5% for the full year enabled rate to cover our costs increases. And our focus on single-serve, allowed mix to contribute a point to pricing, an important reversal from '06.

Worldwide COGS per unit was up 2.9% for the fourth quarter, below our 5.3% increase for the full year. US COGS per unit increases moderated to 2.3% in the quarter due to procurement savings and the lapping of high raw material COGS in '06.

Turning to the SG&A line, worldwide COGS were up 12% in the quarter and almost 8% for the full year in line with our expectations. SD&A cost in the US increased to almost 11% in Q4, due to the difficult lap from a year ago, higher variable compensation costs, the reversal of the fuel hedge favorability, as well as the increased marketplace investments.

Continued brand and marketplace investments in Central Europe, along with forex, also drove Q4 and full year worldwide COGS higher. We recorded $2.2 million special charges in Q4 related to our warehouse consolidation in Hungary, and the relocation impact of the domestic business realignment.

As we move to items below the operating income, interest expense was in line with our expectations at $109 million for the full year. A lower tax rate of 30.8% for the quarter and 34.3% for the full year, primarily reflect favorable country mix with our strong performance in Central Europe.

We finished the year with an adjusted return on invested capital of $7.9%, up 90 basis points over '06. We closed the year with adjusted operating cash flows of $188 million, up 8% from prior year. As we've discussed in previous quarters, our strong performance allowed us to accelerate our investments in cold drink equipment and plant capacity, especially in Europe, to enable our top-line growth, driving CapEx to $265 million or 5.9% of sales.

Now, let me turn to the outlook for 2008, which I will review on a comparable 52 week basis, and inclusive of acquisition and forex impacts. We expect out worldwide top line to grow in the 13% to 15% range, with acquisitions driving roughly 7 points, and the remainder driving organic volume growth in the 2% to 3% range, and net pricing growth of 4.5% to 5.5%.

In the US, we expect revenue growth in the 4% to 5% range, similar to 2007 with volumes flat, to down 1%, and price increases in the 4% to 5% range. Rate is again expected to cover our costs, with mix contributing roughly a point driven by the new hydration portfolio and single serve growth.

Customer alignment continues to particularly benefit pricing, driving greater visibility to pricing opportunities across our markets, channels, brands and packages.

We expect organic Central European revenue to grow almost 15%, with volume growth in the high single-digits, as we continue to build the awareness and availability of our brands, with the remainder driven by favorable mix and forex. Caribbean revenue is planned to rise by 10% with volume growth in the high single-digits.

Turning to cost, we expect worldwide COGS per unit increases in the 6% to 7% range, due mainly by sweeteners, PET and concentrate, with forex and mix adding roughly 2 to 3 points. We have very good visibility to our input cost for the full year, but for the PET rise in the US which will vary in part with oil prices.

We expect our selling, delivery and administrative expenses to increase in the range of 8% to 9%, with acquisitions adding about 4 points, and the remainder due to forex, higher fuel and ANL offset by tight cost management and productivity gains in the US, reflecting the benefits of our CO3 and customer alignment initiatives.

forex benefited us in 2007, we expect net forex head-wins in 2008 due to Euro based cost in Ukraine, and to the Romanian lei, which has in the recent market volatility given back most of its '07 gains. Please note that our guidance does include these OI headwinds, totaling 14 million at current forward rates.

Specifically on Sandora, we expected to add ten points to worldwide volume, reduce pricing by two points, raise SG&A by four points and operating profits by 5% to 6%. While our operating performance in Ukraine is solidly on track, our carbs purchases are negatively impacted by forex, as our juice and fruit purchases are typically Euro based.

While our revenue in Hryvnia is pegged to the dollar. Also keep in mind, that Pepsico’s 40% interest, needs to be taken out of Sandora net income contribution and reflected as minority interest expense. So, the net Sandora impacted EPS, is a dilution of $0.02, due to forex.

In total then, we would expect operating profits to grow in the 8% to 10% range, with acquisition driving a five to six point improvement, and forex driving a three point reduction. Our algorithm, calls for modest profit growth in our US business driven by continued discipline pricing strategies and productivity initiatives, offsetting the higher cost of goods sold.

As in '07, we expect the majority of the profit growth in 2008 to come from our Central European markets, despite the forex head-wins, as we continue to execute our strategies to capture topline growth.

Moving to the below the line items, we expect interest to be roughly a $115 million as the acquisition borrowing impact will be partly offset by lower interest expense on our variable rate debt.

We are pleased with our debt levels, with debt to EBITDA back to roughly 3.5 times just months after our Sandora acquisition reflecting a strong cash flow. Going forward, ex-acquisition activity, we continue to target the 3 to 3.5 times level, and we expect to return free cash to shareholders by a repurchase activity and dividends. Although, our forecast is that buybacks will be offset by option exercise and equity grant dilution in '08.

We expect the tax rate in 2008 of 32% to 33%, about a point lower than '07, due to country earnings mix as we continue to benefit from our European diversification strategy. All-in then we expect adjusted EPS in the $1.77 to $1.83, up 7% to 10% on a comparable 52 week basis, in line with our long-term growth targets.

From a calendarization perspective, we anticipate that the bulk of our earnings growth will fall on the back half of the year, with low single-digit EPS gains in the first half due to the Sandora dilution effect largely hitting during the slow winter months, and the Q4 holiday shift into Q3 in the US.

Turning to cash flow, we are projecting adjusted operating cash flow to be in the $200 million range, with CapEx in the range of $250 million to $260 million. While we ended 2007 at a peak capital spending rate, we will expect 2008 and the next several years to be closer to 5% of sales.

Adjusted ROIC, based on continued strong operating performance offset by acquisition impact, is expected to increase by 10 basis points to 8% by the end of 2008. So in summary we are very pleased with our 2007 results and are confident in our 2008 plans.

We have a vibrant business, with a more diversified product and geo portfolio than ever before, providing the leverage we need to continue building earnings and value.

With that let me turn the call back to Bob.

Bob Pohlad

Thanks, Alex. I don't have any further comments. Operator, we are ready to take questions.

Question-and-Answer Session


(Operator Instructions)

We'll go first to Mr. Lauren Torres with HSBC.

Lauren Torres - HSBC

Good morning.

Bob Pohlad

Morning, Lauren.

Lauren Torres - HSBC

Hi. With respect to your 2008 guidance, you did touch upon this in your prepared remarks, but I was just hoping you could a talk a little bit more about your expectation for US volumes to be flat to down one. Now coming off of a weak year this year and with non-carbs still doing well and becoming a greater percentage of mix, I was just wondering if this is conservative here and kind of what are your thoughts behind that?

Ken Keiser

Lauren, this is Ken. Let me make some comments on that. As we mentioned, we are guiding to flat to down 1%, which has been the range that we have been in traditionally over the past four to five years. We're basically anticipating that CSDs will decline at the same rates in 2007 in the rate we've seen historically.

Given how we ended up Q4 with our CSD trends actually improving that could be on the conservative side. But we think, at this point, that's the prudent way to think about our business. And in total, the big difference would be we're looking at a much more modest outlook for water growth, particularly against the take-home water, case pack water business.

So, with that being said, I think as we look at 2008, we are optimistic about the quality of our marketing and innovation. As Bob mentioned, the Pepsi Stuff has the potential to be one of the best consumer programs we've seen in some time. There is a lot of excitement about hydration, our tea platform and energy.

So you could argue that it is a conservative approach. But I think given the history of where we have been in the past four or five years we think it is at an appropriate level. And when you consider the pricing that we anticipate in the marketplace, it does give us to the 4% to 5% revenue growth where we think we need to be.

Lauren Torres - HSBC

Okay. And also too, just thinking about the pricing environment here in the US, I guess you did mention you expect it to be favorable, particularly heading into the summer selling season. So I was just curious, and I think once again you did touch upon this, but your thoughts. It's primarily rate this year, rate versus mix, and then also as far as your pricing opportunities outside of the US, any color there would be helpful?

Ken Keiser

Well, in the US, as we talked about in our last call, we announced our pricing in November. As we sit here today that pricing is a factor of approximately 85% in the marketplace. And where we are competitive, the balance of that will be in place post Super bowl. We think the pricing that's in the marketplace today is sufficient to cover our cost for the full year, and we are anticipating that mix will comprise about 1 point to our price algorithm given the strength of CSDs and hydration.

And as we look at our international business, I think again the pricing that we have in the plan is marginal on rate. There is almost no rate built into our pricing plans. The pricings are all built on very strong mix, which we historically have done in the last couple of years through our strong single-serve initiative. So I'd say, Lauren, overall we feel pretty comfortable about the pricing we have in the marketplace across our system and that's sufficient to get us where we need to be. And I will classify the pricing environment in the US to be very rational.

Lauren Torres - HSBC


Bob Pohlad

I would just add into that. The other side of the equation is that the expectation is the rate will cover our increases in carbs. And we've got very good visibility on what our carbs are and have had that visibility for a long enough period that we were able capture all of that into our pricing plans.

Lauren Torres - HSBC

And that visibility is good because of why, hedges, or what's the comfort level there?

Bob Pohlad

We've got just with our basket of costs and working with global procurement we've been able to insulate ourselves and get pretty good visibility across the basket. The one exception would be on to PET resin in the US where we expect to see some volatility with oil prices. But the magnitude of that volatility should be relatively contained.

Lauren Torres - HSBC

All right. Thank you.


We'll go next to Andrew Sawyer with Goldman Sachs

Andrew Sawyer - Goldman Sachs

Hi. Good morning, guys. I was just wondering if you could talk a little bit and you reiterated the target of getting Central and Eastern Europe up to 35% of 40% of EBIT by 2010 now. I was wondering if you could square that three-year budget versus the conservatism you're talking about for 2008. I mean is the 2008 figure below the trend line that you need to get to for that 2010 target. I was wondering if you could square those two dynamics up for me.

Alex Ware

Sure. Andrew, it's Alex. Good morning. 2008 is a bit below because of the forex impacts. Frankly, the volatility we've seen on the currency side in the 30 days has been much more than what we anticipated. And specifically, the Romania Lei has really given back all of the '07 favorability in the last 30 days or so. So we have factored that downside into our plans.

In addition, on the Ukraine side with the Hryvnia effectively fixed to the dollar, pegged to the dollar, but many of our carbs are purchased there in euro. So we're facing that headwind as well. So those factors are dampening the '08 result. However, the longer term trends for these economies we continue to believe is very, very favorable relative to Western Europe as well as relative to the US. So we continue to believe in the underlying fundamentals and strengths of these countries and their currencies.

Andrew Sawyer - Goldman Sachs

Just turning quickly to the US, looking at your guidance, is it fair to think that you guys are looking at roughly flattish operating profit for 2008 in the US, give or take?

Alex Ware


Andrew Sawyer - Goldman Sachs

Modest growth?

Alex Ware

Modest growth in the US and this is conservative. I think it's consistent with the stance that we've taken in that we are being quite realistic in terms of our profit growth expectations on the US and really looking for our international markets, Europe in particular, to drive the profit growth.

Andrew Sawyer - Goldman Sachs

On the US side, I guess, you guys are probably in the process of implementing whatever price increases you guys are going to put in the spring. We've heard Coke, their [CDs] particularly talking about taking a bit less pricing this year, have you seen any pushback from retailers based on what Coke's doing?

Ken Keiser

Andrew, this is Ken. As I just mentioned to Lauren, our pricing is in place. 85% of it is in place as we speak. We are competitive in the marketplace and we expect the balance to be in place post Super Bowl. So at this point, we consider the environment very rational. There is no reason to believe that it will change.

Andrew Sawyer - Goldman Sachs

And then just quickly: any early read on G2 or Propel as they've come into your system?

Ken Keiser

We just introduced it, Andrew, in the first week of December. Other than the fact that we feel comfortable with the portfolio of products that we have, we have executed well against our space in cooler and barrel replacements. And we'll have all those completed in the next couple of months. And I think as we talk to you in the first quarter we'll be able to then give you real good read of how successful it has been and the potential this portfolio has.

Andrew Sawyer - Goldman Sachs

All right. Thanks a lot, guys.


We'll take our next question from Ann Gurkin with Davenport.

Ann Gurkin - Davenport

Good morning.

Bob Pohlad

Good morning.

Ann Gurkin - Davenport

Just wanted some more detail on your comments regarding increased channel focus in emerging markets, can you comment on how you'll further penetrate this channel?

Ken Keiser

With regard to our feet on the street initiatives, in particular in Europe, this is an area that we've been putting significant focus on in 2007. We're going to continue that in 2008. So that's expanding our sale force, its investing beyond expanding cooler replacements to drive our single-serve and our on-premise business specifically.

So, really looking to drive the growth in the higher margin channels of opportunity, as well as in the traditional trade side of the business, which also is a relatively higher margin segment of the European business. So, putting our effort and resources and people beyond those channels are going to drive greater profitability.

Ann Gurkin - Davenport

Okay. And there have been some reports that it's more difficult to get labor in Eastern Europe. Are you having any difficulty of paying, having to pay more for labor in Eastern Europe?

Ken Keiser

We're seeing some creep, particularly in a country like Poland which is having strong economic growth. But overall, the labor environment is still very favorable for us.

Ann Gurkin - Davenport

Great, thanks.


[Operator Instructions]

We'll go next to John King with Bear Stearns.

John King - Bear Stearns

Hello, guys. I had a quick question on the single-serve cold drink channel in the US. Can you talk a little bit about what's been driving growth in that segment in the US and what do you see the outlook looking like in '08?

Ken Keiser

John, as we ended up '07, as we commented, our total single-serve business was up about 1% and was pretty equally balanced between the convenience and gas channel that are on-premise business. In '07 we had, again, a very strong set of market plans and innovation plans in space and merchandising initiatives.

And so, as we go into '08, we think the plans are equally as strong, if not stronger. And while there potentially are some headwinds in the C&G channel, we are seeing some reports of slower traffic to the stores. We feel confident that with the activity we have, the opportunities that we have in our on-premise business that we'll continue to see single-serve growth kind of in that 1% range.

John King - Bear Stearns

Great. Thank you. One more question on regards to the cash flow. It appears that it will be a little bit lower in '08, your cash flow from operations versus '07, can you talk a little bit about that?

Ken Keiser

We actually generated $188 million of cash in '07 and projecting in the $200 million range for '08.

John King - Bear Stearns


Ken Keiser

So about an 8% to 9% increase year-over-year.

John King - Bear Stearns

Got it. Thanks.


And it appears we have no further questions at this time.

Bob Pohlad

Okay. Thank you everyone for your interest in PepsiAmericas, and we look forward to talking you after the end of our first quarter. And we will begin 2008 with a great deal of confidence in building on the success we saw in 2007. So again, thank you very much for joining us.


Once again, that does conclude today's call. We do appreciate your participation. You may disconnect at this time.

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