PepsiAmericas Inc. Q1 2008 Earnings Call Transcript

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

PepsiAmericas Inc. (PAS) Q1 2008 Earnings Call April 22, 2008 11:00 AM ET

Executives

Sara Zawoyski - Investor Relations

Bob Pohlad - Chairman and CEO

Alex Ware - CFO

Ken Keiser - President and COO

Analysts

Lauren Torres-HSBC

Marc Greenberg - Deutsche Bank

Anthony Bucalo - Credit Suisse

Beth Lilly - Gabelli.

Ann Gurkin - Davenport

Judy Hong -Goldman Sachs

Operator

Good day everyone. Welcome to the PepsiAmericas first quarter 2008 Earnings Call on webcast. Today's call is being recorded. At this time for opening remarks and introduction, I'd like to turn the call over Ms. Sara Zawoyski. Please go ahead.

Sara Zawoyski

Thank you, Melissa. Good morning and thank you for joining us today to discuss our first quarter 2008 result. On this morning's call are Bob Pohlad, our Chairman and CEO, Ken Keiser, our President and COO, and Alex Ware, our CFO. Our call is being recorded and will be available for playback on our website at www.pepsiamericas.com. Please note that throughout our call this morning we will be presenting certain forward-looking statements of expected future performance, including expectations regarding anticipated EPS as well as other matters.

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

We will also make reference to certain non-GAAP financial measures in our call this morning, particularly adjusting for special charges. Reconciliations of these items to GAAP financial measures are included in our earnings release, as well as on our website

Please also note that our comments today will be made on a constant territory basis for items above operating profit unless otherwise indicated. Constant territory refers to the operations excluding the impact of Ukraine, which we acquired and consolidated beginning in August of last year. Ukraine is reported on a one months lag.

With that let me turn the call over to Bob.

Bob Pohlad

Thanks Sara. Good morning everyone, and thanks for joining us and for your interest in PepsiAmericas. We're off to a good start in 2008, continuing our strong performance from last year.

In Q1, revenue was up 14% with constant territory of 6%. Operating margins improved 10 basis points to 6.4% and we delivered an adjusted EPS of $0.19 up $0.02 or 12%.

At the same time we continued our commitment of returning cash to shareholders, as we repurchased shares totaling over $81 million, and again this year we increased our dividend.

While Q1 is a seasonally smaller quarter for us, there are three things that we hope you take away from our result this morning. First, what drove our success in 2007, continued in 2008 with strong based top and bottom line results in our Central and Eastern European business.

Second, while softening economic and Industry trend challenged our US volume, we did effectively manage these businesses, keeping US operating profits to a modest decline from prior year despite significantly higher fuel cost.

And third, we are well positioned for growth with our strategy that’s centered on two premises. First, our existing Central and Eastern European market have strong economies with strong industry growth. We also believe we are on the front end of that growth curve with additional opportunities for expansion. And second, our matured high share US market can continue to provide dependable cash flow supported by ample opportunities to drive greater productivity, while we maximize marketplace opportunities. As good as I believe we are, both internally and externally, there is still so much we can do to be more effective of what we do and more efficient with what we have in the US.

Let me begin with Central and Eastern Europe, which is the source of our growth. Constant territory volume grew 10% on top of last year’s growth of 14%. Revenue was up double digit for the eighth consecutive quarter. Operating profits increased to $50 million, which is up $ 40 million from prior year with organic growth contributing more than half of that and operating margins improved over 400 basis point as we continue to cover higher cost of goods sold with rate increases and strong package mix and drive better operating cost leverage.

Our business in Central and Eastern European continues to have significant organic top line potential beginning with merging and developing economies with strong category growth rates. Beyond this, we are increasing distribution and expanding our portfolio. Single-serve for example grew double-digit as our feet on the street investments continue, further developing our traditional trade business through new cold drink placements and non-carb distribution gains. As they did in 2007, all categories grew. Our largest category CSD’s had double-digit growth with strong core brand portfolio performance and new brand initiatives like Mountain Dew in Romania.

Juice was up 6%, while teas were up over 30%. Our total share gains continued as we go ahead of the category in this relatively fragmented market. In our newest market, Ukraine, the Sandora integration is on track. We're managing the business well with a strong local management team.

Double-digit volume trend continued in Q1 staying on track with our high expectation. The attractiveness of Sandora continues to be at scale, and the potential of the strong distribution platform to expand our portfolio.

We already have a lot of activities to sustain and accelerate Sandora’s strong growth trend that includes innovative marketing to leverage the growth of the already existing juice business, a ramp up in our cooler replacements to significantly expand our single-serve presence, a new juice drink platform and expansion into enhanced waters. This is only the beginning. Deepwater is a very good and very big business, and we are doing the right things to realize all the potential in this important market.

In future calls, we will increasingly highlight our progress for you in this new important growth market with PAS. So our international platform is big, expanding and has tremendous potential. However, it is the US that is our largest profit center, and the one that will enable future investment. How we think about it, how we define success, and then how we manage this business is critical.

The scale of our US market in terms of geography, market share, and profits derives our cash flow. Even though our volume was challenged this quarter, making top line growth tough, importantly the bottom line was okay as we manage pricing, drove growth productivity and managed our costs.

Looking at volume, when you adjust for the estimated one point impact on the Easter holiday shift, the two point volume decline one below our expectations. But to give you a sense of the volatilities that holidays can create week-to-week volumes, had we ended our quarter one week earlier, we would have been up two percentage points.

Now, that said there are two main factors that did impact our Q1 volume. First non-carb growth trends slowed primarily driven by decline in our case packed Aquafina business, as that category slows and finally was strengthen. Keep in mind, however that for us this is a lower margin business. We also saw some slow down in teas as we left very strong volumes over a year ago and before most of our innovation take place.

Second, we saw some channel softness specifically convenience and gas and food service and this drove our single service business down 4%. The CSD trends, however did improve even after considering the holiday promotional benefits driven by growth in Flavors CSD's with Mountain Dew, Dr Pepper, Sierra Mist and Mug Root Beer, all contributing. So, while we saw a softer volume, we feel good about our overall share performance and see a particularly good about our execution on pricing, innovation, and cost control.

With pricing we achieved rate increases that covered our higher costs. Pricing was up 3.1% in the quarter with no net impact per mix.

Our hydration innovation, particularly around SoBe Life Water, G2 and Propel, all exceeded our expectations as we executed our spacing in marketing initiatives. Keep in mind however, that these brands have greater seasonality and the real potential won't be seen until the summer month.

In energy, good execution against AMP drove double digit increases in the category with growth trends expected to accelerate as recent innovation kicks in along with strong NASCAR promotional client. And with teas, we would expect innovation particularly the Diet Peach Papaya that was rolled out in a last few weeks in Q1, to take hold, and we expect to grow in line with that category.

Within our cost structure, our productivity initiative, and I'll talk more about these in a moment, as well as good cost control resulted in only minor increases in our domestic SD&A in the quarter. In total, our US operating profits were just below last year, illustrating the challenges in this business. We will however, continue to do the things we do well, execution in the marketplace, productivity initiative and pricing.

As we move forward, we anticipate this volume pressure to continue, but our success in the US isn't defined just by volume. That pressure can be managed by first, with discipline and consistent execution of our pricing strategy to cover cost. Second, by continued strong execution and winning in the marketplace, and finally, continued cost management and productivity initiative.

We have already under went broad measures to reduce our costs that include self producing energy products like AMP, lower and upper case cost, light weighting water and other non-carb PET bottles to maximize our combo line efficiencies, reducing packaging costs, and initiatives ranging from new high co-new configurations to reducing closure sizes on certain packages, leveraging our CO3 platform to reduce warehouse cost for breakage, truck loading and checkout, as well as our new centralized dispatch program to improve productivities for drop sizes and stops per day to reduce delivery cost, and finally, corporate cost containment initiatives that include hiding focus on discretionary cost and headcount controls.

In addition, in 2008 we are expanding cash flow as a significant metric in our incentive compensation program, expanding all geographies and extending deep within the organization. So despite volume and unprecedented higher fuel cost, we remain very confident that we can manage the US business to achieve total PAS profit expectations.

Now as a part of our overall strategy, we continue to expect international to provide our growth. So we anticipate continued strong organic growth as we execute against our innovation and marketing plans. We'll continue to invest against the cold drink business. We'll continue expanding our portfolio, selling in gaps across our various geographies and capitalizing on the significant growth opportunity in Ukraine. And finally, we'll continue to invest in productivity in Europe, bringing CO3 to this business and investing in capacity like into the aseptic line in Poland and a new plant in Romania.

So, in summary, it's difficult so far to measure the effect on our business of what is or isn't happening in the US economy. But that being said with one quarter behind us, and with what we see further into the year, we do expect to achieve the earnings target to be discussed in February.

We generate significant cash flow in the US, we know how to manage our business and maximize what is within our control, and our first quarter again demonstrates that. We made the investment in Europe at a good time and it built a strong and capable organization that is providing us with ample growth and much further potential. Again, it's this combination that has and will continue to drive our growth.

And looking at our calendarization, Q2 is a difficult lap for us, so flat to up a couple of pennies to prior year EPS is what we would expect with most of our growth coming in the back half for the year.

So with that, I'll turn it over to Alex who will give you more details on the financials.

Alex Ware

Thank you, Bob and good morning everyone. The diversity and strength of our portfolio led to a good start with operating profits up 16% after adjusting for special charges.

Central and Eastern Europe delivered volume growth of 10%, revenue growth of 28%, and 12 points of our total OI growth. The Sandora acquisition in Ukraine added a further 10 points to operating profits before minority interest. This international growth enabled us to more than offset the six point or $3.5 million profit decline in the US. The scale of our international business is now reaching the point where it can provide the ability and stability to grow our overall earnings, even with some softness domestically.

Now let me take you through the Q1 details and how these trends relate to the balance of the year. Consistent with our previous calls, the numbers discussed are on a constant territory basis and include the impact of Forex, which raised revenue and SG&A by approximately 2.5 percentage points and added nearly two points to COGS.

Worldwide volume was up 1.7% for the quarter, led by the strong international growth but slightly below our 2% to 3% guided range due to the top line challenges in the US. Despite the one point benefit of the Easter holiday shift US volumes decreased 1% due to the channel dynamics Bob discussed.

Pricing was up 5% worldwide in line with our full year guidance. We executed the rate increases we planned and all geographies contributed. Importantly, pricing covered our higher cost of goods in virtually all markets. Significantly, or specifically in the US, pricing was up 3.1% on rate with no impact from mix reflecting the single-serve softness.

Worldwide COGS per unit were up 5.3% driven by higher raw material costs and currency, but a bit better than our full year guidance of 6% to 7%. US COGS per unit were up 4.1% including a half point increase from mix, which we would expect to increase as our mix of higher cost non-carb beverages increases in our peek summer selling season. For the full year, we continue to see our COGS in the guided range, with higher PET cost in the back half largely offset by productivity and purchasing initiatives.

Turning to the SG&A line, worldwide COGS were up 5.3% just above our guided range of 4% to 5%. SG&A cost in the US moderately increased up 2% or $5 million. As an example, focused on those things we can control, all of this $5 million cost growth can be tied to higher fuel costs.

Since the beginning of the year, we have all seen oil prices rising and we now expect full year fuel cost to be more than $20 million higher than prior year and $10 million higher than planned. However, we expect our continued cost discipline and productivity initiatives to offset, that Bob mentioned to offset these fuel increases.

Let me give you an update on FX, which has improved since our last call due largely to the strengthening of the Romanian line.

Overall FX was $3.5 million better than prior year but only a million better than our outlook. The impact of the weaker dollar on our outlook has been materially neutralized in our P&L due to the national offset resulting from the addition of the Ukraine business. To the extent that FX favourability does ramp up in Romania, we will continue to assess reinvestment opportunities to sustain our CEE growth.

Turning to items below the operating income line, our effective tax rate was 34% for the quarter, however we continue to anticipate our full year effective tax rate in that 33% range with some variability expected quarter-to-quarter.

Our adjusted operating cash flow used $21 million in Q1due to primarily the timing of working capital and investments in Europe. We finished the quarter with an adjusted return on invested capital of 7.8%., a bit below our 2007 exit rate due to seasonality but inline with our expectations.

We increased our dividend by 4% in the first quarter to $0.135 reflecting a 2% yield. Continuing our buyback program, we repurchased over 3 million shares, bringing our diluted share count to $128.9 million, slightly above last years $128 million.

Both actions are consistent with our overall objective to return 100% of adjusted operating cash flow to shareholders, subject to M&A activity. And turning to the full year outlook, as Bob reaffirmed EPS is expected to growth 7 to 10% to a $1.77 to $1.83. This target will be achieved through a slightly different P&L and geographic mix then originally conceived.

A little more from Europe and bit less from the US. From a calendarization perspective, we continue to anticipate that the bulk of our growth will come in the back half of the year. Q2 will be challenging, reflecting the Easter and July fourth holiday shifts out of the quarter, which will have a two point impact to the domestic volume trend as well as our toughest buying quarter at CEE was up low to mid single digits lapping volume growth of 14% year ago.

In closing, strong execution in our Central and Eastern European markets continue to drive our growth. We are managing through a soft environment in the US with disciplined execution on rate increases and cost management, all demonstrating the ability of our organization diverse capability and geographic portfolio to deliver our EPS goals.

Now let me turn the call back to Bob

Bob Pohlad

And, that’s all of our prepared remarks today. Operator we’re ready to take question.

Question-and-Answer Session

Operator

Thank you. The question and answer session will be conducted electronically. (Operating instruction). Now I pick up first question Lauren Torres of HSBC.

Lauren Torres-HSBC

Good morning

Bob Pohlad

Good morning Lauren

Lauren Torres-HSBC

I was hoping you could just talk a little bit more about trends you've seen with your single-serves business? Obviously it's a weak quarter and I guess you highlighted towards the end of the quarter. You said the business is getting a bit tougher. Can you just give us a sense of what you've seen over the last few weeks in CMG or in the food service business? How do you mitigate some of these more macro challenges to your business? Be it through product or whatever the case is, just give us a sense of restoring growth to the channel and how do you plan on doing it.

Kenneth Keiser

First of all we are now into the third week of our new quarter. I am pleased to say that the trends in both CMG, and "I promise" have changed and improved quite dramatically from what we saw in Q1. And so clearly in Q1 as you might suspect from the reports that we got from our CMG customers, it was a decline due to the yield of field squeeze. But as we look at the trip we're going to take, as historically in our summer months, the consumers in the stores capture a bigger share of their purchase dollars. And our programs are as strong as ever. I think most importantly for us, the democracy is simply huge for us because of the big Dew business we have across PepsiAmericas. Mountain Dew is the number one selling single serve item in CMG. And so we suspect that will be big. Our Pepsi stuff has started to take hold, we have a lot of energy programs going forward.

I anticipate that, while I think the CMG channel will continue to be challenging, it will provide us with some opportunities to improve growth and we will see better trends than we saw in Q1. I should also add that we had a big space initiative, particularly against NCB, those resets were done in over the course of the quarter. So those just start to take a hold as well. So without being overly optimistic Lauren, I think we'll be realistic and I do believe the trends will be much better than what we saw in Q1.

Lauren Torres-HSBC

And also if I could just ask about pricing in the US, obviously companies are taking prices and it seems to be accepted well in the market. Do you expect that to continue particularly as we had into the summer?

Kenneth Keiser

We do and are very happy. We probably came out at Q1 and the pricing that we have in the marketplace throughout the summer months indicates that we'll be able to achieve the pricing expectations that we've talked about earlier in the year.

Lauren Torres-HSBC

Okay. Okay, thank you.

Operator

We'll take our next question from Marc Greenberg with Deutsche Bank.

Marc Greenberg - Deutsche Bank

Thanks, good morning.

Bob Pohlad

Good morning, Marc.

Marc Greenberg - Deutsche Bank

I just wanted to follow on Lauren's question on mix. In your remarks you said no net impact from mix but with culturing down for domestically. It's hard to see how there was because water was weak as well.

Alex Ware

Marc, water was weak. Aquafina was down 11% for us in the quarter. The favorable offset to the single service softness was on the non-carb side.

Marc Greenberg - Deutsche Bank

Okay.

Alex Ware

So overall non-carbs were up in the high single digit range which provided a positive on the mix side, netting back to a neutral impact for mix.

Marc Greenberg - Deutsche Bank

And then just Alex and Bob, and Ken on a follow-up on the water question, you noted increase in private label water. Can you talk about whether or not that's being retailer- driven right now or are we seeing increased promotion in the water category? And do you have some longer term concerns about the profitability of that business as a consequence?

Kenneth Keiser

Well, I think that the water category the trend that we're experiencing Marc, we've seen over the past three quarters particularly against our case pack water. Number one, the category, the survey is not growing at the rates that it was. It's all case pack water which is being driven by the emergence of private label across some key retail segments which is further putting pressure on pricing across some of our other key competitors. And clearly, we're not going to chase after that volume and sacrifice margins. That being said Aquafina is still to scale business for us; it's 8% of our mix. We do have a multitude of package sizes out there and I'll say the big thing that we're doing with Aquafina is kind of re-energizing ourselves for on single serve to make sure that without exception across every channel, every venue that we're competitive because that is [over] the package driver of this category. And so that's kind of how we're looking at the water business and like we've always said, overtime and also they way I think that water economics in this category will -- the pricing dynamics will ultimately rationalize.

Marc Greenberg - Deutsche Bank

Thanks. Just a question on Sandora, Bob you talked about the distribution opportunities and the potential for volume contribution. Maybe it is background, can you guys do mention why is the size or the key categories in terms of volume? And what kind of the market are we drilling into here in terms of the potential scale for CSD and some of the other categories besides juice which you've acquired?

Kenneth Keiser

Well, in terms of the -- as you mentioned, clearly right now we're in the juice category and we're about a half or 50% share of that category for that. That’s generating about $350 million a year in revenue, we're not currently participating in CSDs. We're not really participating in the other categories and in those categories. We are obviously very underdeveloped. The Juice category relative to LRB is about 20% of that total LRB, which means that the other 80% is open. And so clearly as we migrate into these other categories. The potential for Ukraine is quite substantial as which kind of illustrates Bob's comments. Organically, we are seeing this category grow, the juice category is growing in the double digits excluding again any innovation on all the other types of activities that we're planning.

Marc Greenberg - Deutsche Bank

So, then in the -- what's a billion dollar plus other non-juice LRB category, does coke have substantial share leadership in most of those categories?

Alex Ware

They do in CSD’s

Marc Greenberg - Deutsche Bank

Okay.

Alex Ware

But, like a little bit like Europe, it is very fragmented. There are lots of B players there. It’s not like they dominate those categories in essence.

Kenneth Keiser

Yeah, in fact the cola segment of CSD’s within Ukraine is only about 30% of the overall category. So Flavored CSD’s are dominant

Marc Greenberg - Deutsche Bank

Thank you.

Operator

(Operator instruction). We will go next to Anthony Bucalo with Credit Suisse.

Anthony Bucalo - Credit Suisse

Good morning every one

Kenneth Keiser

Morning Anthony.

Anthony Bucalo - Credit Suisse

Quick question about your customer alignment program of few years ago or I guess of last year really. Are you still seeing improvement internally derived from that program? Are you where you want to be? You talked about building new capacity in Poland and in Romania, Are you building aseptic capacity in Poland?

Kenneth Keiser

[Yeah, you're right].

Anthony Bucalo - Credit Suisse

What are the implications of that and why this was aseptic over just sort of (inaudible) line?

Kenneth Keiser

First of all the septic is the basic platform that’s used over there and we were in the hot sale and it’s simply the quality of the products and to be competitive in the market place you need to be in aseptic. So, the septic line we haven’t checked, but the line we have in checked that we put in four or five years ago is aseptic and of course the line in Poland is aseptic. So that’s just the nature of the industry and what you need to do to be competitive. Relative to Romania, we are embarking on a new plant that will break ground and it will be ready in 2009 as of current plant, we've exceeded capacity of that plant

Anthony Bucalo - Credit Suisse

Okay so you're capacity constrained at least for a little bit here?

Kenneth Keiser

We were definitely constrained in capacities in 2008 as we bought the business two years ago. We have literally exceeded the growth rates by quite some margin against all the various categories. We are supplementing that with some production from our existing CEE operations.

Anthony Bucalo - Credit Suisse

Right.

Kenneth Keiser

But again to be most effective when we have full capacity, it will be end of 2009 before that plant is opened.

Anthony Bucalo - Credit Suisse

Okay.

Kenneth Keiser

It is relative to customer alignment, you're right we're year two and as we’ve talked, it's exceeded our expectations not only among our ability in the alignment with customers but the efficiencies that we’ve got internally and the capability that we've developed as a result of customer alignment.

Anthony Bucalo - Credit Suisse

Is that more of the customer alignment program? Is that more to help you from the operational perspective or from a customer facing perspective?

Kenneth Keiser

It's on the customer prospects because again all of our key channels now are managed by customer teams. They are working through a geographic structure where each geography had autonomy in decision making relative to those customers. Those customer decisions are all made through a decision, through a centralized and single decision point.

Anthony Bucalo - Credit Suisse

Great. Thank you very much.

Operator

We’ll go next to Beth Lilly with Gabelli

Beth Lilly - Gabelli.

Good morning.

Bob Pohlad

Hi, Beth.

Alex Ware

Good morning, Beth.

Beth Lilly - Gabelli

Bob I wanted to ask a question. You mentioned something in the call about compensation being, you're bringing cash flow more into as a metric into the compensation plan could you, can you tell us more about that?

Bob Pohlad

Well, yeah and I may turn it over to Ken or to answer the part of this question, but it's a very important move for us. Just to make sure all start from the same place, we had cash flows and metric for certain the senior levels of our organization prior to this, but in 2008 we're taking cash flow as a metric and taking it across both the domestic and the international markets and far deeper into the organization, through actually out to the field levels of the organization. We're doing that to reflect and to support our overall strategy, particularly in the US, on the importance of cash flow, and certainly worldwide in order to reflect the importance of cash flow. We see that we have the ability within PepsiAmericas to generate that cash flow in order to support the investment in Europe that we've made over the past couple of years. This is critically important for positioning us for the growth we're seeing today in spite of the changes we've seen over the last several years in the US. It just all worked very well for us in this move to extending the cash flow as a incentive metric supports that strategy, and I think we will be very effective in being able to fulfill our expectation of US in particular providing dependable cash flow.

Beth Lilly - Gabelli

So, when you say you're going to bring across the business so in essence of coming a level down to -- you're pushing it down into the organization further. Is that correct?

Bob Pohlad

Yes.

Beth Lilly with Gabelli

Okay.

Bob Pohlad

So, U.S. and international and then out into the organization through the field where before it was more at the senior or managerial level.

Beth Lilly - Gabelli

Yeah. And, so what types of change in behavior do you hope to see from the organization?

Bob Pohlad

We expect to see improvements across working capital in terms of receivables, in the inventory levels and all those kinds of things. We really do believe with our focusing on that and that’s an educational piece of it. At the outset of a lot giving [ PB-up] you don't understand how it is impacted. The benefit you can have. How it drives our ultimate profitability and our shareholder value. So, that program is wrapped all around that -- okay you guys, now you're going to be responsible for cash flow. We have an education program, an orientation program, and a communication program as a part of this as we move forward.

Beth Lilly - Gabelli

So is that whole educational process started already?

Bob Pohlad

Yes, it has.

Beth Lilly - Gabelli

It has, okay. So that's going to be more metric then in '08 for their compensation, correct?

Bob Pohlad

Yes, it will.

Beth Lilly - Gabelli

Okay, that's great. Thank you very much.

Operator

We'll go next to Ann Gurkin with Davenport.

Ann Gurkin - Davenport

I just wanted to ask about G2, how is that going?

Kenneth Keiser

G2 is doing well and probably of the four hydration projects that we have, even though it is only limited to CMG in vending. I would say that G2 is exceeding our expectations. Our whole hydration strategy was to put in thousands of coolers. We pushed thousands of our cold barrels and got lots of linear's footage. I think the real potential of these products won't really be felt until we get into the more peak of summer months. I think as we get in the Q2 and Q3, we'll go to report back to you in a lot more detail to exactly what we think the potential now with G2 is that the whole hydration portfolio is.

Ann Gurkin - Davenport

Okay. And then, we see stronger Romanian lei and maybe it's little bit better, currency outlook, then we've heard about in February and experienced out. Are you changing your outlook for the year or it's just currency improvement getting masked by higher, say fuel cost?

Kenneth Keiser

Let me spend a minute here and just to give you the mechanics behind the way Forex is playing in our P&L. Since we entered into the Ukraine business, it has materially changed the way that did FX impacts our business. And that the simplest way to think about it is, our legacy CEG markets of Poland, Czech, Hungary and Slovakia are of a similar size to that of our Sandora acquisition. However, the P&L's and the cash flow or the Forex impacts of those businesses roughly offset each other. So we've got the grip now which is pegged to the dollar in Ukraine, but their costs of goods are largely based in Euros. Our core CEG markets obviously have euro based revenue, but most of their cost of goods are based on dollars. So, effectively you've got a natural offset between Ukraine and our Legacy CEG markets. And, of the $3.5 million dollar of FX upside that you saw in Q1 versus prior year, roughly $2.5 million of that was offset by Ukraine, which wasn't in our prior year numbers. So, that will really flow through. It's about a $1 million of FX upside which is Romania. So the Romania exposure if you will is the one area that will be volatile for us going forward. Certainly the currency has trended favorably there and we would expect that that favorability based on everything we see right now between fuel cost and exchange rates. We think that that FX upside in Romania is largely going to help us address some of field pressures that we see and the oil-based cost pressures that we see domestically.

Ann Gurkin - Davenport

Great, that's helpful.

Kenneth Keiser

So all in net-net, FX is going to be offsetting some of the commodity pressures and leave us right inline with our guidance.

Ann Gurkin - Davenport

Great, thank you.

Operator

We'll take our next question from Judy Hong with Goldman Sachs

Judy Hong -Goldman Sachs

Good morning. I had a couple of questions. My first one is a follow-up on your comment about the CMG and cold drink seeing improvement in April. I'm just wondering what you think is driving that improvement? Is it more traffic? Are you seeing the trend on a category wide basis or certainly categories doing better than the others? Can you just talk about what you think is dragging the improvement?

Unidentified Company Representative

Judy after three weeks we haven't seen our [IRI] numbers out yet. So, I really don't have a lot of visibility to what's going on other than the fact that the trends have improved significantly. It could be that some of the innovation that came out at the end of Q1 could be starting to take hold. Our Pepsi stuff is starting to generate more momentum. But I really don't have the information inside yet to give you anything specific other than they are better.

Judy Hong - Goldman Sachs

Okay. And then my second question is, just in terms of your input cost outlook. I know you talked about PET component of it. But if you can just elaborate on some of the other cost component, particularly in the aluminum and sweetener side of it as we've seen those commodities seeing pretty high prices recently?

Alex Ware

Yeah, Judy we've got pretty good visibility on our full year costs on our total range of commodities. The one area of volatility for us will be PET costs as they are largely pegged at oil. And obviously, we've seen our oil prices moving up here in the last several weeks. So we do expect to see some pressure for PET cost in the second half of the year. However, we expect that through our purchasing and productivity initiatives we're going to be able to due largely offset those pressures. So we've got initiatives underway, some of which Bob mentioned but in addition, we've got light weighting initiatives etcetera. That will help us to mitigate that PET pressure.

Judy Hong - Goldman Sachs

Okay. Thank you.

Operator

And, it appears we've no further questions at this time. I'd like to turn the call back to our speaker for any additional or closing remarks.

Bob Pohlad

Okay. Thank you everyone. We look forward to talking with you again in July at the end of our second quarter. Thanks for your time.

Operator

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

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