The Pepsi Bottling Group Q1 2008 Earnings Call Transcript

The Pepsi Bottling Group

Q1 2008 Earnings Call

April 23, 2008 11:00 am ET

Executives

Mary Winn Settino - Vice President, Investor and Public Relations

Eric Foss - President and Chief Executive Officer

Alfred Drewes - Senior Vice President and Chief Financial Officer

Rob King - President of PBG North America

Analysts

Bill Pecoriello - Morgan Stanley

Judy Hong - Goldman Sachs

Lauren Torres - HSBC

Kaumil Gajrawala – UBS

John Faucher – JP Morgan Chase

Bryan Spillane - Bank of America Securities

Carlos Laboy - Credit Suisse

Christine Farkas - Merrill Lynch

Mark Swartzberg - Stifel Nicolaus

Presentation

Operator

Welcome to The Pepsi Bottling Group’s first quarter earnings conference 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 materially differ.

PBG undertakes no obligation to update any of these statements. Listeners are cautioned not to place undue reliance on these forward-looking statements, which should be taken in conjunction with the additional information about risks and uncertainties set forth in the company’s annual report on Form 10-K for the year ended December 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, Kate and thanks everyone for joining us. Eric Foss, our President and CEO; Al Drewes, our CFO; and Rob King, President of PBG North America are on the call today. Our call is being recorded and will be available for playback on our website at PBG.com. We are also broadcasting the call live on our website.

Please keep in mind that all numbers referenced, unless specifically stated otherwise, are on a comparable basis. The items that impact our comparability are laid out in our non-GAAP reconciliation which is available on the investor relations section of our website.

As typical, we would ask that you only ask one Q&A; please try to limit yourself to the theme of questioning so everyone has a chance to ask what’s on their mind. If you would like to ask a second question, please get back in the queue.

I would ask that you take note of our cautionary statement that the operator read. With that, let me turn the call over to Eric.

Eric Foss

Thanks, Mary Winn and good morning, everyone. I am sure you’ve all had an opportunity to review today’s press release detailing our first quarter results. I’d like to spend a few minutes this morning discussing the quarter in greater detail. I’ll also update you on the strategy for second quarter and beyond, including an overview of our plans leading up to the summer selling season; and then Al will provide additional insight into our financials and our guidance for the balance of the year. Then we will be happy to take any questions.

Let me start by saying how pleased I am by the progress we continue to make in the marketplace. The strength of our brands, the diversity and strength of our geographic portfolio and the commitment and capability of our people allowed us to once again successfully balance our opportunities and challenges to deliver a good quarter.

Our focus on making the right choices allowed us to grow our volume, protect our market share and exceed both our worldwide profit and EPS objectives while also continuing to invest in the long-term growth of our business.

Our worldwide revenue grew 7% for the quarter while our worldwide volume was up 2%. All three of our geographic segments reported positive revenue gains. In addition, each segment as well as every country had positive volume growth.

In the U.S. and Canada segment, revenue was up 5% and volume was up 2%. We showed strong double-digit top line growth in Europe with revenue up 19% on a currency neutral basis and volume up 7%. Mexico also had solid top line growth, with total revenue up 9% in local currency and volume up 2%.

Worldwide net revenue per case growth was 5%, as we took pricing actions in all geographies. Each of our geographies had pricing gains in local currency. Gross profit per case was up 2% and we are well on track to achieve our full year objective of $100 million in cost productivity gains.

We delivered comparable diluted EPS of $0.13 and we remain committed to our full year guidance. We also continued our strong track record of returning cash to shareholders. Our quarterly dividend will increase for the fifth consecutive year, rising 21% from $0.14 to $0.17. The board also authorized the repurchase of an additional 25 million shares of common stock and we repurchased about five million shares in the first quarter.

Now let me take a moment to provide additional insight into our results in each of our three geographic segments. I’ll start by taking you through the U.S. and Canada, where our goal is to achieve profitable top line growth.

It’s not news to anyone that consumers are feeling economic pressures, which contributed to LRB category softness in the first quarter. In the U.S., the LRB category declined about 1% in measured tins. Overall, this category performance was below our expectations and inconsistent with the recent trend of two to 3% growth. However, we grew our volume in the U.S. and Canada across CSDs, non-carbs and water and we were able to maintain share in measured channels.

Our total top line growth in the U.S. and Canada segment was 5%, while net revenue per case was up 3%. On a currency neutral basis, net revenue per case was up about 1%, driven by a U.S. rate of 3% offset by negative mix. Volume in the U.S. and Canada was up 2% with take home growth of 4% offset by a cold drink decline of 2%. The cold drink softness can be partially attributed to the fact that about 60% of our cold drink business is in foodservice such as restaurants, travel and leisure and workplace, a channel that has been particularly impacted by the economic downturn.

Cold drink volume was also negatively impacted by the actions we took to eliminate low returning assets in our full service vending business. These actions, which we announced last year lowered our cold drink volume by about one percentage point.

A big bright spot across the U.S. and Canada was the success of our hydration portfolio, which was one of our key initiatives in the quarter. Volume increased more than 80% in the enhanced water and isotonics segments of hydration, driven largely by the successful launch of G2 and the restaging of Life Water in the U.S., as well as the momentum behind the Aquafina Plus in Canada. We are on track with our full year hydration outlook as we continue to expand distribution, drive trial and increase repeat purchases.

Let me now shift to Europe where our objective is to fully capture the growth potential that exists. We got off to a great start in first quarter by exceeding our volume and profit targets while delivering strong top line growth in each of our four countries. We delivered solid results in Turkey and Spain with volume growth in the mid single-digits. Russia was our top performer with a 13% increase in volume that was spread across all beverage categories.

On a local currency basis, we achieved top line growth of 33%, net revenue per case growth of 18% and a double-digit gross profit per case growth. In addition, PepsiCo recently recognized Pepsi Bottling Group Russia as its International Bottler of the Year for 2007. This is a testament to the quality of our management team in Russia and all of our employees in Russia who drive that business each and every day.

Looking ahead in Russia, we’re committed to strengthening our portfolio and enhancing our position in our largest growth market. We recently joined with PepsiCo to announce plans to acquire Lebedyansky, Russia’s number one juice company. We also expect to add Sobol to our existing business, a move that will enable us to expand into Siberia and eastern Russia. Both of these deals will play an important role in our long term plans.

Lebedyansky is the country’s leading juice company with a 30% market share and it’s the sixth-largest juice company worldwide. The acquisition will provide us an important platform for future growth.

Since 2000, the juice market in Russia has nearly quadrupled in terms of both volume and value. Significant growth potential remains as per capita consumption of juice in Russia is roughly half of what it is in the United States. Adding Lebedyansky’s strong brands and capable people to the powerful PBG PepsiCo partnership will strengthen our competitive advantage and enable us to be at the forefront of the continued expansion of the Russia juice category.

While smaller in size, the Sobol deal will also play an important role in our Russia strategy. Most importantly, the acquisition will jumpstart our manufacturing presence in Siberia and Eastern Russia and facilitate our expansion into a part of the country where our business has been underdeveloped. Both of these deals showcase the power of our Russian joint venture with PepsiCo to unlock new growth opportunities and position us well for continued success.

Moving to Mexico, our primary objective is to achieve sustainable profitability improvements, and we were very encouraged by our first quarter results. Volume was up 2% highlighted by 5% CSD growth and a double-digit increase in bottled water. Net revenue per case increased 7% and gross profit per case was up 4%, both on a local currency basis. We demonstrated good execution, experienced good cold drink growth and implemented appropriate pricing actions; all of that contributed to improve profitability.

At the end of last year, I mentioned to you that we would be conducting a strategic review of the business in Mexico. That review is well underway and it’s given us a detailed understanding of the margin structure of our business by channel, customer, geography and SKU. It’s also provided us with much better insights into our operating cost structure, particularly when it comes to selling and delivery expenses. This process has already identified margin and productivity opportunities which enable us to achieve our objective of sustainable profit improvement.

So as our Q1 results demonstrate, PBG’s continued focus, flexibility and adaptability to opportunities and challenges in the marketplace produced a good start to the year while also advancing our long-term growth plans.

Looking ahead to second quarter and the summer selling season, our focus is really in three key areas:

First, we’ll seek additional margin opportunities in the U.S. and Canada segment. This means capturing the rate we need to cover COGS as well as executing a mix management game plan to improve our margin performance. Part of this plan is to drive improvement in our cold drink performance and we have detailed action plans in place built around strong innovation, programming and specific foodservice initiatives.

The second thing we’re focusing on is continuing to work with PepsiCo to ensure we have a robust innovation pipeline heading into the summer selling season. We are excited about new initiatives spanning refreshment, hydration and invigoration across each of our geographies.

In refreshment, let me start with trademark Pepsi. Pepsi Stuff in the U.S. will continue to headline our CSD initiatives. With close to 1 million accounts registered, it’s already exceeded the highly successful iTunes promotion. In Mexico, the launch of Pepsi Retro holds a lot of potential for fostering further CSD momentum and we have solid marketing plans behind Pepsi Max and Pepsi Light in Russia, including the promotion tied to European football championship in June.

In flavored CSDs, we’ll launch three new flavors of Mountain Dew in the U.S. at the end of the quarter, stemming from our DEWmocracy program. The launch of Sierra Mist Undercover Orange will give us additional momentum in flavored CSDs and we are excited about the tie-in with this summer’s release of the movie Get Smart. We believe this has all the makings of a winning new product. We’ll strengthen our flavored portfolio in Mexico with the launch of Manzanita Sol Exotica.

Lastly in refreshment, we will continue to drive further penetration across our tea platform with new flavors, new take home tea offerings and cold drink packages in all three of our geographic segments.

In hydration, we’re on track to carry our recent momentum into the next several quarters. We feel especially good about our outlook for enhanced water and sports drinks. We are gearing up to launch two new flavors of Life Water and we are encouraged by the traction the brand is getting in the marketplace. We’ll complete the relaunch of Aquafina Alive, introduce four new flavors that each feature their own functional benefit: protect, energize, hydrate and satisfy.

Alive is also among the brands in our non-carb portfolio that will benefit from a new bottle design that uses 20% less plastic. The half-liter bottle will significantly reduce our packaging impact on the environment and it fits well with everything else we are doing to promote sustainability across our business. In addition to Alive, half-liter packaging of Aquafina FlavorSplash, Lipton Iced Tea and Tropicana juice drinks will also feature the new bottle.

Outside of the U.S and Canada, we’ll be rolling out a one-liter package and introducing a Citrus Lite extension of H2O under the KAS trademark, two moves that will strengthen our hydration position in Mexico.

In Russia, we will be launching Aquafina Active, a new enhanced water that we believe will accelerate our hydration lead. As for the invigoration segment, we’ll be introducing three new flavors of AMP and launching four limited edition collector series cans featuring Dale Earnhardt Jr. We’re still in the early stages of our renewed focus on strengthening the AMP brand so you can expect a lot more momentum in the months ahead.

Our third area of focus for Q2 and the balance of the year is to maintain a disciplined cost and productivity strategy to help offset the input cost pressures we’re currently facing. To that end, we’re improving our route productivity globally, capturing the benefits of last year’s restructuring program, receiving cost savings associated with our newly centralized transportation management system and eliminating underperforming SKUs in our portfolio.

Let me conclude by saying that although the economic environment in the U.S. is challenging, I feel good about our Q1 performance and our outlook for the full year. This is a company that has faced many challenges in the past and we have a great track record of managing through them. I’m confident that we have the right plans in place heading into the summer selling season to do so again this time.

With that, let me turn it over to Al.

Alfred Drewes

Thanks, Eric. Good morning. I would like to provide some additional insights into our Q1 results as well as discuss our second quarter and full year outlook. Let me start by setting some context. Recall that Q1 is a seasonally small profit quarter for us, representing roughly 10% of our full year operating profits. Additionally, we plan a profit decline in our European segment in the quarter as we continue to invest ahead of the peak summer selling season, particularly in Russia.

Building off of Eric’s comments, our financial results in the first quarter were stronger than the expectations we set during our Q4 earnings call. As you will recall, we expected a low double-digit operating profit decline in Q1. This guidance excluded the charge associated with our restructuring and full service vending initiatives. Our actual operating profit, excluding the 2 percentage point impact from these initiatives, was down 8%, which was better than the double-digit profit decline we had anticipated. Additionally, comparable EPS of $0.13 was above our guidance range.

Foreign exchange was a negative factor in our first quarter results. The euro, Turkish lira and ruble all strengthened as compared to the prior year. As you know, seasonally low volume caused our European operations to lose money in the first quarter of the year so while the strength of the European currencies added three percentage points to our revenue, COGS and SD&A, it also lowered our operating profit by about three percentage points.

Our cost of goods sold was in line with our expectations. As in forex, our COGS per case grew about 5% driven by anticipated cost increases in concentrate, sweetener and resin. SD&A on a reported basis was up 6% in the quarter including the three percentage point impact from Forex. In the U.S., our SD&A was actually flat as we continued to successfully execute our cost and productivity initiatives.

Our effective tax rate in the quarter was 43% with timing causing the rate to be higher than our full year guidance. The timing will reverse in the balance of the year and our full year tax rate guidance is unchanged at 33% to 34%.

With that in mind, let me turn to our guidance. We are reconfirming our 2008 full year financial guidance. We continue to expect comparable operating profit to grow 4% to 6%; comparable EPS to be in the range of $2.30 to $2.38 and operating free cash flow to be at least $620 million. We now expect our volume in the U.S. and Canada segment to be flat to down modestly with worldwide volume up about 1%. This volume outlook is reflective of the challenging economic environment in the United States.

Raw material cost inflation has sequentially increased as we built our plants last fall. Consequently, we have increased our emphasis on rate improvements to offset COGS inflation. Worldwide net revenue per case is expected to grow about 4%. Net revenue per case in the U.S. and Canada segment will also be up about 4%.

While we continue to face raw material cost pressures, our full year COGS outlook remains consistent with the guidance I provided in January. Specifically, it is likely that our COGS per case increase will be at the high end of our guidance range of 5% to 6%. This reflects both our fixed positions as well as current market prices for the open portion.

Turning to Q2, we expect worldwide volume to be about flat. In the U.S. and Canada segment we expect volume to be down slightly. Our comparable operating profit growth outlook is in the low single-digits. Comparable Q2 EPS is expected to be $0.74 to $0.78 as our first half EPS guidance is unchanged.

Lastly, as Eric mentioned earlier, we’re very excited about the Lebedyansky Juice acquisition in Russia. It’s an important part of our strategy to fully capitalize on the growth potential in Russia. The deal is expected to close in the second half of the year and will have a minimal impact on our earnings per share in 2008.

With that, I’ll turn it back to Eric.

Eric Foss

Thanks, Al. With that, operator, we’d be happy to entertain any questions.

Question-and-Answer Session

Operator

Our first question today is coming from Bill Pecoriello - Morgan Stanley.

Bill Pecoriello - Morgan Stanley

Good morning, everybody. If you could in the cold channel performance break apart the foodservice versus the C&G that you referred to in Q1 and then talk about kind of your outlook into the second quarter as you’ve moderated your overall volume outlook? Are you still expecting the cold channel down? If it is and that’s still impacting the mix, are you offsetting that with more rate to get that higher 4% revenue per case that you are guiding to? Thanks

Robert King

A quick heads up on cold drink. So in the U.S., I think we told you that our total cold drink business was down 3% and 1 point of that was due to the full service vending remediation program, netting us to really a base business deterioration of 2%. So foodservice was disproportionately the drag on our business, that’s 60% of our business, and our foodservice cold drink business was actually down in the mid single-digit range.

Our C&G business, encouragingly, was actually flat versus prior years so we feel pretty good based on just the overall market condition that C&G cold drink was flat and that’s clearly a sequential improvement over where we’ve been for the past couple of quarters.

We obviously have plans in place to continue to try and improve our cold drink performance ranging from better innovation in the second quarter as our innovation calendar continues to unfold, continuing to leverage execution and continuing to leverage promotion and value in the marketplace. We would assume that cold drink would still probably be under pressure for the foreseeable future and we’ve taken that into consideration as we look at our balance of the year forecast.

Bill Pecoriello - Morgan Stanley

So just to follow up on the revenue per case and the net impact of that, in this quarter you had the negative 2% mix, 3% rate to get the 4%. You were expecting less mix drag, but also some more rate over the summer?

Robert King

The answer would be yes. I think Al mentioned that our revenue per case range would be up about 4%. In December we told you that our rate would be up around 3 points. So we do look to see a little bit better rate performance in the marketplace. We’ve actually taken those actions already and we’re starting to feel good about the way our revenue and margin is unfolding in the marketplace as we speak.

Eric Foss

I think the way to think about it, if you look at the Q1 optics, to Rob’s point we got 2 points of rate, we took 3 points of rate. The mix offset partially was driven by cold drink and partially was driven by this Easter shift and take home can shift. So obviously that portion of the mix drag will correct itself.

We have taken additional rate to make sure we cover COGS. We would expect, again, on the retail side, cold drink has been better, more in the flattish range as Rob mentioned.

Does that answer your question?

Bill Pecoriello - Morgan Stanley

Yes. Thank you very much.

Operator

Our next question today is coming from Judy Hong - Goldman Sachs.

Judy Hong - Goldman Sachs

Good morning everyone. I wanted to actually follow up on the cold drink channel trend just in terms of what you’ve seen so far in April because we’ve heard from other companies that they saw trends improve in the C&G channel. So I am just wondering if that’s the similar trend that you’re seeing, whether you’re seeing more traffic or are you seeing any category doing better in the second quarter so far?

Eric Foss

I would tell you a couple of things. One, we have seen a decline in traffic in the channel. The first three weeks of April is just too early to figure out whether there’s been any reversal of that. I think as I look at the April trends, I think volume continues to be softish. I think the one improvement that we’ve seen in April is on the margin side. We have normalized the Easter-to-Easter overlap and that coupled with some of the additional rate we’ve talked about, we have seen improvement in our margin. That’s probably the one change I would highlight.

Judy Hong - Goldman Sachs

Just in terms of your performance in the non-carb segments specifically, I mean, I think the broader category was a bit weaker in the first quarter. Can you just talk about your performance specifically in tea, enhanced water, energy drinks and those non-carb channels and how they behaved in the first quarter?

Eric Foss

I’ll take the category question and then I’ll let Rob talk to the specific sub-segments of that. As I mentioned in my comments, we saw the LRB category down about 1% versus an expectation of growth of about 2%. If you think about that by segment, CSDs were down about 2%, which was pretty much in line with expectations. The water category grew mid single-digit. That was versus an expectation more like high single-digit. The actual non-carb category was down a couple of percent versus an expectation of growing mid single-digit.

So, I really believe that the category softness we’re seeing is linked to the macroeconomic environment and conditions. This category has been pretty resilient across different economic conditions and we continue to believe over time that there is low single-digit LRB growth potential for it.

Rob, do you want to comment on that?

Robert King

Judy, what I would add is that in our non-carb business, we actually had some strength and then we had a little bit of weakness in our energy business, but our tea business was up low single-digit and we gained share. Our overall water business was actually up 7%, almost two times the growth of the category. Our overall hydration portfolio, when you add up enhanced water and G2 saw not quite doubling the business, but pretty close to that.

Energy was a little bit soft, but we quite frankly attribute that to the late introduction of our AMP energy innovation; we didn’t go to market until really the middle of period 3 so we just didn’t benefit from that. We actually think our energy business trends will, quite frankly, improve dramatically as we leverage AMP flavors in the second quarter.

Operator

Your next question comes from Lauren Torres - HSBC.

Lauren Torres - HSBC

I was hoping you could talk a little bit more about your efforts in Mexico. Volumes grew I would consider a good 2% in the quarter and I think that was coming off of 86 quarters of volume declines. So with that in mind, can you talk about what you are doing differently in this market? Also comment on any general market trends in Mexico, particularly if you are seeing any weakness at the consumer level?

Eric Foss

Sure Lauren, it’s Eric. Let me start by saying we had a solid start to the year. I was pretty encouraged by our progress in first quarter in Mexico, 9% top line growth, 2% volume. CSDs were actually up mid single-digit at about 5%. You know, we had great revenue and margin management performance.

I would tell you that again, as I mentioned, we continue to further our knowledge on this business. Our top priority around improving profitability really centers on three things: taking this segment profitability knowledge and making sure from a revenue and margin management standpoint we are appropriately addressing the returns and margins by channel, package and brand.

We’ve done a lot of heavy lifting on the cost front. We’ve improved our output per employee. We’ve improved our drop size. We’ve improved our truck tonnage on the go-to-market side.

Third, it’s about profitable volume. You’re going to get that through good innovation and brand building and through great execution at the point of sale and our execution, key executional metrics distribution, cooler placements also improved.

So we have a lot of work ahead of us. I am encouraged by Q1 and I think we’re pretty encouraged by the category growth dynamic as well.

Lauren Torres - HSBC

But then thinking about what’s occurring here in the U.S. do you see any weakness transferring over to that market as far as what the consumer is thinking in their purchase activity?

Eric Foss

I haven’t seen any of it at this point, no.

Operator

Our next question today is coming from Kaumil Gajrawala - UBS.

Kaumil Gajrawala - UBS

Hi, good afternoon everybody. On the new hydration products, can you talk about how much they contributed from a volume standpoint?

Robert King

Let me give you a sense for how these brands perform. Our business for example in the U.S., total volume was up about 1 point in the first quarter. So the total hydration I would say was worth about 1 point. G2 is worth about one-third of that, Propel is about 20% of that and SoBe Life Water was worth about half of that growth.

Kaumil Gajrawala - UBS

Your GP per case from a dollar standpoint on many of these products is higher, just lower from a percentage standpoint, is that right?

Robert King

Correct.

Kaumil Gajrawala - UBS

If I could just move to Mexico. Eric, you mentioned you’ve completed the strategic review. Is there a margin goal or something we could look at long term that you are now aiming for?

Eric Foss

I think the way we articulated in the past is if you look at our profit margins that are mid single-digit, we’d like to see them up higher single-digit. So we would like to continue to make progress towards that goal.

Kaumil Gajrawala - UBS

Real quick, Al, if you can help us a bit on FX, I suspect we should see a swing from a negative to a positive as you begin making money in Europe. But could you maybe help us on how we should look at FX over the course of the year and then maybe if we need to know anything about hedging?

Alfred Drewes

So again, as you point out, these European currencies have strengthened year-to-date. I’ll tell you, we’re assuming that for the balance of the year though that there’s a relatively modest forex impact on our profitability in the balance of the year at this point. So as the foreign exchange situation evolves, we’ll update the numbers, but that’s the way we thought about it in terms of our guidance.

What was the second question?

Kaumil Gajrawala - UBS

If there’s anything on hedging that we need to know? But I guess net we should look at it as being fairly even throughout the course of entire year?

Alfred Drewes

Well, are you now talking about raw materials? Or you are talking about --?

Kaumil Gajrawala - UBS

I was talking about FX.

Alfred Drewes

We’re not hedging foreign exchange from an earnings standpoint. We hedge foreign exchange exposures where we’ve got cash balances in countries or liabilities and assets we’ll hedge those, but we don’t hedge our P&L, our accounting P&L.

Operator

Our next question today is coming from John Faucher – JP Morgan Chase.

John Faucher – JP Morgan Chase

A quick question on the pricing, you guys had talked about the Easter shift as a mix impact which makes sense if you take a look at shifting a promotional holiday from one period to the other. But as we took a look at the scanner data, it seemed as though there were two impacts on the pricing. It looked as though there was a mix shift or a timing shift of Easter from one period to the previous period, but also it looked like there was probably a lack of pricing growth.

So was there any change in the pricing strategy for Easter as it shifted? So more than just a mix impact, did you go a little bit deeper on the discounts? Looking at the volume results, it seemed as though that was what drove the positive volume in the quarter. Did it give you any concern about the ability to drive volume on CSDs going out the next couple of quarters if you were only able to get the volume going with the deeper discount, assuming that was in fact the case? Thanks.

Robert King

Let me give you quick assessment of that. So first off in the quarter we said that we got 3 points of rate on our pricing and we did have the mix drag partially due to Easter and partially due to cold drink. If you look at Easter versus Easter though and then look at it on a year-to-date basis what our pricing looks like in the marketplace, it’s actually pretty consistent that we’ve seen about 3 points of rate through Easter ‘08 versus Easter ‘07.

The big difference between ‘08 and ‘07 though is that we did have a coupon value program this Easter that we didn’t have last year. Last year at Easter we were uncompetitive from a coupon program and this year in our CDA we presented a full year holiday strategy that increased our feature activity at Easter. That clearly contributed to some of the mix compression on the price line.

But at the end of day, if you actually look at in PBG markets at scanner data, our can pricing to the consumer on 12 packs is up about 2 percentage points year-to-date. Coke is up a little bit more than that. But the entire gap is essentially what was driven by our feature frequency at Easter as opposed to a material difference in pricing in the marketplace.

John Faucher – JP Morgan Chase

Okay so that couponing shows up in the scanner data? Because the scanner data, again I apologize for getting in the weeds here, was down 4% year over year in March which assuming the timing of the Easter shift, it should have been more flat year over year. Are you saying the gap between that flat number which we would have expected the minus 4% was the coupon and that doesn’t show up in your price mix number, is that correct?

Eric Foss

The couponing doesn’t show up in our price mix numbers. The Easter shift comparison that you’re talking about is apples and oranges because of the shift in the Easter timing. The reality is that if you look at Easter versus Easter, we had more feature activity this year. We leveraged the coupon which was competitive this year, and because of the volume that you move with more feature activity, that’s what drives some of this mix shift and lower pricing.

So it’s a difficult comparison because of the Easter shift. What I would tell you is the pricing environment is rational, stable. We’re confident in the pricing outlook. To Rob’s point, if you look at the retail environment year-to-date including both Easter weeks, what you’re seeing is, I believe, our retail pricing up about $0.08 or $0.09. I think our primary competitors were up $0.11 or $0.12. That $0.02 or $0.03 difference was really driven by the volume we sold at Easter through feature activity.

John Faucher – JP Morgan Chase

I apologize. So basically what you’re saying is when you look at your promoted F&D price points, they were up year over year, Easter to Easter. There wasn’t any sort of flat promotional pricing or down promotional pricing? What we saw was more coupon related?

Eric Foss

I think for the question behind the question here is, has our pricing philosophy changed? The answer is absolutely not. Last year we weren’t competitive and this year we were at Easter so there’s no real change in our pricing posture in the marketplace and what we have been trying to do over the last couple of years.

Operator

Your next question comes from Bryan Spillane - Bank of America Securities.

Bryan Spillane - Bank of America Securities

Al, you’ve got debt now that’s coming due over the next 12 months. What are your plans in terms of refinancing? Are you going to term it out? Will you keep it in commercial paper or put it into commercial paper for a while or retire it?

Alfred Drewes

I think you are referring to that we’ve got $1 billion or so of notes coming due in Q1 of next year. We’ll be looking to refinance that probably towards the end of the year. We’ll term it out, I would assume.

Bryan Spillane - Bank of America Securities

In terms of your cost inflation expectations, for the raw materials that you can hedge out or fix, things like corn syrup concentrate obviously, are you locked in for the balance of the year? Is there still some variability on some of the inputs at some point later this year?

Alfred Drewes

On the items that can be hedged we’re about 70% locked and like I said in the script on the balance on the piece that’s not hedged at this point what we’re reflecting in our guidance is the current market prices. I think you know, unless something dramatically changes on some of those items we’ve got COGS expense done pretty good.

Bryan Spillane - Bank of America Securities

When we look at revenue per case in North America given what you’re expecting for the full year, I guess it is implies that it is going to be greater than 4% in the subsequent quarters, is that right?

Alfred Drewes

I guess that will be what the squeeze would suggest.

Bryan Spillane - Bank of America Securities

Does that mean that there is more pricing that has to be put into the market from today going forward in order for that to happen? Or has all of the rate actions that you need to get that goal already been put in place?

Eric Foss

Bryan as you know we took post Labor Day pricing. What I mentioned earlier and Rob mentioned earlier is we have taken some additional pricing actions coming out of Q1. I think at this point our pricing actions are fully in place.

Bryan Spillane - Bank of America Securities

All right. So the guidance kind of reflects actions you’ve already taken, not actions that you are expecting to take going forward?

Eric Foss

Yes. That’s correct.

Bryan Spillane - Bank of America Securities

Eric, if you could just talk a little about G2 and how you’ve been able to sell it? Have you been bundling it with other products? How have you seen it act in the market in terms of how it stacks up next to Vitamin Water? What it is doing to base Gatorade? Where do you think it’s sourcing its volume from?

Eric Foss

Well there’s a variety of questions there Bryan, let me do my best. I would tell you we’re very pleased with G2. I think we’ve executed it extremely well. It’s tended to be incremental space as part of our broader hydration space race.

I think one of the things that’s very encouraging is I think it had if not the best, one of the better trial numbers on any Gatorade intro. It’s got excellent repeat. I think if you look at the positioning of where it is in hydration as a low calorie performance beverage, I think it’s very well positioned with the consumer.

The consumer demographic tends to skew a little older than Gatorade and a little more female but again, we’re very encouraged by both the execution and the brand itself and how we think it will perform going forward.

Bryan Spillane - Bank of America Securities

So far there’s been no issues in terms of out of stocks and just the service issues or service has been fine?

Eric Foss

No. I think it’s been well executed and in-stock conditions have been very high and I think as you head into the summer selling season, we’ll be able to tell you more. But I think we’re very, very encouraged.

Operator

Your next question comes from Carlos Laboy - Credit Suisse.

Carlos Laboy - Credit Suisse

Just to expand on Bryan’s question, how are you sorting out the difficulty of selling G2 in regions where strong food brokers sell Gatorade at a big discount to where you price G2? Is this a big issue?

Eric Foss

Carlos, when you say big food brokers, what you have in the marketplace is the Pepsi bottling system with, for the most part, exclusive access to this product in C&G channels. So we’re not competing with other distribution vehicles to sell that. It is not a material issue, it is just not a issue at all.

Carlos Laboy - Credit Suisse

I mean you’ve got regions for strong food brokers who sell Gatorade at a discount to where you can price G2. Is that an issue for getting G2 to where you want it to be?

Eric Foss

No its not, it’s not. We’re achieving our selling objectives and we feel great about G2.

Operator

Our next question is coming from Christine Farkas - Merrill Lynch.

Christine Farkas - Merrill Lynch

I apologize if you’ve said it and I missed it. Did you say what the Canadian volume growth was in the quarter?

Mary Winn Settino

It’s at 6% and that was in our press release.

Christine Farkas - Merrill Lynch

6%. Okay. Thanks. And the European pricing on a local currency?

Eric Foss

European pricing is about 6%.

Christine Farkas - Merrill Lynch

I’m not sure if you can answer it this early on, but looking at the Russian acquisition I guess at the end or later this year then going into next year, in terms of scale can you just give us an idea of what kind of volume contribution that might do to your Russian volumes?

Eric Foss

I think what I would tell you, Christine, is let me just describe the juice category dynamics. I think at this point that’s probably the appropriate thing to do. Again, we think the Lebedyansky transaction is a smart investment. We think it enhances our business and our position in the marketplace. Just so you know, the juice category is very attractive in Russia, it’s about 35% of the LRB volume, it’s actually about 50% of the gross profit dollars in the country. Lebedyansky is the leader with a 30 share and again, I think this construct that we have with PepsiCo is right and so we’re expecting the deal to close probably in the third quarter and we’ll have more to say at that point.

Alfred Drewes

I have one thing Christine. That will not be consolidated either. That rate will pick up by themselves.

Christine Farkas - Merrill Lynch

Okay, so it won’t come through in your Russian volumes?

Alfred Drewes

Right.

Christine Farkas - Merrill Lynch

Okay, that’s helpful. Thanks.

Operator

Our next question is coming from Mark Swartzberg - Stifel Nicolaus.

Mark Swartzberg - Stifel Nicolaus

Rob, on the vending element of the business here in the U.S., I was hoping you could look out a little longer term for us with what you are doing here, this accelerated program of pulling some of the vending out of foodservice. I think we understand why you are doing that, but if you take a longer term view of vending, where is your head on the opportunities over a longer period of time to actually see those machines start to grow again on a per capita basis or any other basis?

Robert King

The way I would answer that is that first off, vending is a very viable business, number one. And number two, it’s an important part of our go-to-market strategy. There’s different ways to go-to-market however, with vending.

Where we had a challenge was with unprofitable full service vending assets which we were retiring from the marketplace. But we still view vending as a very attractive vehicle for us to advance our cold drink business. We just are going to strike a better balance between what is full service and then what is handled through what we call the third party operator channel.

I think that you should assume though that vending will be sustained as an important vehicle to drive our cold drink business and our overall foodservice business.

Mark Swartzberg - Stifel Nicolaus

Is it fair to think that any pickup in the pace of placement is more likely to be greater in a different environment that we’re in right now or out a year or so?

Robert King

I would be speculating to suggest anything on that right now. I mean our work right now is remediating the current full service vending business. But what I would tell you is we’re optimistic that there are profitable ways to leverage vending and we fully expect to exploit them in our business model over the next couple of years.

Operator

It appears we have no further questions in the queue.

Eric Foss

Thank you, operator. Well in summary, let me emphasize that we’re pleased with the start to the year. We feel the work we’ve done to reposition our portfolio is paying off in light of a difficult macroeconomic environment in the U.S. Let me express my continued confidence that we’ve got the right strategies and plans that are going to allow us to focus on creating long term growth and shareholder value.

With that, thanks for joining us on the call.

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