Q2 2008 Earnings Call
July 22, 2008 11:00 am ET
Sara Zawoyski – Investor Relations
Robert Pohlad – Chairman and CEO
Kenneth Keiser – President and COO
Alexander Ware – CFO
Lauren Torres – HSBC
Judy Hong – Goldman Sachs
Ann Gurkin – Davenport & Company LLC
Marc Greenberg – Deutsche Bank Securities
[Damien Wakowsky] – Gabelli & Company
Welcome to the PepsiAmericas second quarter 2008 earnings conference call and webcast. (Operator Instructions) At this time, for opening remarks and introductions, I’d like to turn the conference over to Sara Zawoyski.
Thank you for joining us today to discuss our Second Quarter 2008 Results. 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 reference 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 Web site.
With that, let me turn to the call over to Bob.
We had a strong second quarter, completing a good first half of the year. Europe continued to provide our growth, while our U.S. profitability once again was sufficient. The balance of the year, we are well positioned to retain the first half upside and achieve additional second half growth enabling us to do two things. First, we’ll reinvest in capability initiatives in Europe and, second, we now expect to deliver full year adjusted EPS of $1.92 to $1.96, a growth range of 16% to 18% from continuing operations. More importantly, as we look to 2009 and ’10, we’re confident that our existing geography and brand portfolio, our expansion opportunities, and our revenue and productivity strategies will help offset the commodity headwinds that are rightfully top of mind today.
So between Alex and my comments, we’ll discuss each of these: Our Q2 results, balance of the year forecast, our plans for reinvestment, and how we’re thinking about 2009 and ’10. To begin with Q2: Revenue grew 12% and operating profits grew 15%, with acquisitions adding 9 points to the top line and 10 points to profit. In every geographic market, we successfully executed rate and mix to cover cost of goods increases. Operating margins expanded 30 basis points as we continue to tightly manage costs. Adjusted EPS from continuing operations exceeded our expectations growing 20% and we continue to return cash to shareholders with a combined $41 million in share repurchases and dividends in the quarter.
Our strategy continues to work. Pricing and productivity in the U.S. partially offset their volume softness, while acquisitions along with our key growth markets of Romania and Poland and currency continue to drive strong international growth. In Central and Eastern Europe, we are maximizing the top line growth opportunities across our country, brands, channels, and packages. Revenue was up 73% and constant territory up 23% with volume, rate, and mix all contributing. In every market, we are executing local currency pricing plans and driving positive mix from single serve growth. Operating profits were up 75%, generating $51.7 million in the quarter, which by the way was more than all of 2006.
Looking closer at top line performance, Romania volume was up 15% with revenue growing 24% from strong execution of our pricing and portfolio strategies. Poland volume was up over 2%, consistent with expectations as we did lap 15% volume growth from a year ago. Revenue grew 40% supported by ForEx, a strong single serve emphasis, and rate improvement. Ukraine volume was up 8%, though soft export business limited total Sandora volume to a plus 3%. Revenue, however, was up 18% over pre acquisition dollars from a year ago, which we feel very good about as the market sustained increased pricing covering higher costs. In addition, Ukraine single-serve volume was up 20% reflecting the strong execution of the single-serve strategy that was part of our acquisition plan.
On the other end, Hungary drove a negative 3-point contribution to volume in the quarter, so overall it has a relatively modest profit impact to total CEE. We are, however, implementing a pricing architecture similar to our contiguous market, which should help improve margins and profitability. CEE results in total reflect strong performance and though we had a couple of things like weather and the volume in Hungary that were unique to Q2, the strength of these markets lies in its structural-base, which is a growing product portfolio, attractive geographies, and efficient and cost effective distribution system, and a strong experienced management team.
Turning now to the U.S., revenue was down 1% on volume declines of 5.4%. Adjusted operating profit decreased 2% in the quarter with first half profits about flat to prior year. I’m satisfied with this performance. Let me explain why. To begin, and I’m only going to mention this one, PepsiAmericas is not insulated from the current U.S. environment. The category is soft and costs are high. But for the role these markets play for us, we believe the current environment has been properly managed.
Here’s how: First, we maintain pricing discipline and expanded our gross margin. Second, we continue to execute extremely well in the marketplace. We gain CSD share broadly across measured channels, drove volume growth in drug and dollar stores, and we saw single-serve trends improve with total retail single-serves actually up based on the strength of democracy. Third, we continue to control costs. We are managing headcount and discretionary costs in leveraging our CO3 platform to reduce warehouse costs for breakage, truck loading, and checkout. We’re executing centralized dispatch, which has been rolled out to six of seven divisions to improve productivity and to reduce delivery costs.
Let me take another moment on our volume. The 5.4% decline includes a little over a point decline from the Easter holiday shift, also the low margin take home water business added a point to the drop as we chose not to sacrifice margin to cover volume. Tea was also down a point. Food service drove another point of the decline reflecting a double-digit drop in vending that was largely anticipated as we execute our profit improvement initiative. These include raising vending rates over 25% and taking down commission rates. Of course, as you know, the flooding in the Midwest resulted in some temporary disruption. While these factors combined to drive our volume a couple points below where we had expected, the mix was better and, as I said, we had good share performance.
Today’s U.S. environment and beverage trend is difficult. However, we’ve been able to manage it and we believe we can continue to do so. I’m confident that we’re making the right decision to manage through the short-term as well as to position us to capitalize on growth in the long-term.
Moving ahead now to the second half of the year, in the U.S., we expect volume to be down 2% to 3%. We will take pricing as we customarily do beginning post Labor Day. We’ll continue to execute our productivity initiatives and we’ll begin self-producing energy products like Camp and further light weighting non-carb PET bottles in the next several months. With innovation, democracy will continue. We have the new launched Starbuck’s Energy Coffee, an NFL tie-in with the Pepsi trademark, the Diet 20-ounce addition to the successful Sierra Mist Cranberry Splash LTO, as well as flavored extensions to build on the SoBe, on the SoBe Life Water, AMP, and G2 platforms.
In CEE, double-digit revenue should continue in the second half of the year on more volume, pricing, and mixed benefits. Specifically we expect double-digit volume growth in Romania to continue with high single-digit growth volume growth in both Ukraine and Poland in the second half. Sandora’s integration plans are well on track and our business performing to the good. This is resulting in the acquisition now being accretive to our 2008 EPS.
Our higher 2008 adjusted EPS is based on the strength of our European business and includes an estimated mid-single-digit decline in U.S. operating profit. Our $1.92 to $1.96 range includes reinvestments in Central and Eastern Europe specifically, the earlier start of our international capability project. The objective of this cross-functionally led initiative is to design and build a structured system and the capabilities required to support the growth of this business in the year’s ahead. Our priorities will be to identify and oversee implementation of global PepsiAmericas’ best practices.
Finally, several comments on how we’re thinking about 2009 and ’10 and some of the actions we’re taking to best position PepsiAmericas. In the U.S., revenue management and productivity improvements have been key drivers for us in the past. That will continue to be our primary focus and a source of our profit stability. Recognizing the challenging cost environment, we’ll leverage our revenue management capabilities and core operating philosophies that recognize me to take pricing to cover costs. Simply put, in our more mature U.S. market, if we trade margin for pricing, our earnings will suffer. Pricing has and will continue to play a critical role in order to keep our portfolio relevant and within acceptable consumer value ranges. Every package that we have today needs to change both in configuration and size, optimizing customer value and margins, and providing further runway for pricing.
As we have in the past, we’ll continue to see good innovation from PepsiCo, but we also expect more exciting initiatives, bigger initiatives supporting our core brand. However, the entire Pepsi system needs to raise our games to deal with the ongoing commodity cost pressures and category headwinds. We’re encouraged by what we’re hearing and seeing from Pepsi to help navigate our collective systems through the next couple of years. Lastly, we’ll begin to see the full benefits from CO3 in 2009 and we’re looking at our next initiatives to enhance productivity. They include an investment in automated warehouse [inaudible] technology and remote tracking technology to drive greater productivity for offsite merchandisers and sales people. Our cost continued to be among the industries lowest. We have done a good job of managing costs in the past and you can continue to expect this from us going forward.
We feel very good about what we’re doing in the U.S. We know it issues and we know its opportunities. But let me reiterate, the role that the U.S. plays for us. It provides stable cash flow. It is not our driver of profit growth. That’s the role of Central and Eastern Europe. In total, we expect international to be over 35% of our worldwide operating profits for the full year, two years ahead of our schedule. This repositioning of our portfolio puts us in even better position as we move into next year.
We have specific strengths and strategies for growth in Europe. Number one is our strong and attractive macros. We have a diverse portfolio of 11 countries with all markets positioned for growth. Our three key markets, Poland, Romania, and Ukraine combined account for 90% of expected CEE profit. Their economies are growing with GDP growth rates greater than 5% in all of our countries with the exception of Hungary. LRV consumption rates are low. To illustrate, Ukraine’s LRV consumption rates are roughly half of Poland and Poland’s are roughly 40% that of the U.S. Now while in some countries this rapid growth means higher demand driven inflation, our growth outlook remains bullish as wages continue to grow and consumption rises.
Next, our market share opportunities: Our markets are very fragmented with the Pepsi and Coke systems accounting for only 25% of the total LRV, so there’s plenty of opportunity to grow. The depth of our brand development and advertising spending can meaningful differentiate our products from the local competition. We also have initiatives in place to capture distribution opportunities, particularly in single-serve driving growth ahead of the broader category.
Lastly, we have opportunities to broaden our product portfolio, to build them either through brand innovation or acquisition and to expand our portfolio of markets. For both, our M&A pipeline is strong with a list of over 20 companies that we are interested in that represent opportunities to both entering new markets and categories. Most of the targets are smaller than Sandora, but in aggregate represent more than double the revenue of our current CEE business. We look at all opportunities and markets, but our current list is more focused on opportunities within or adjacent to our current territories to better leverage our management resources, production infrastructure and market similarities. For these reasons, Central and Eastern Europe has and will continue to drive PepsiAmericas growth.
Finally, I want to illustrate how these strategies play out using Ukraine as an example. First, from a macro standpoint, GDPs in Ukraine are growing 7%. LRV consumption is low and it’s the seventh largest country in Europe with a population for 46 million people, equal to the population we serve here in the U.S. Second, the juice category is the fastest growing of the three big LRV categories, and we’re the most significant driver of that growth with roughly a 50 share of the category. As we ramp-up cooler replacements and design new PET packages to significantly grow single-serve and leverage innovative advertising and marketing. Third, we’ll continue to expand our portfolio in this LRV category that is reaching $3 billion. We have already begun to broaden our playing field with the launch of Lipton at the end of Q2. We are creating juice platform to compete in this fast growing segment; and in late ’09 we will begin to introduce CSDs into our portfolio. On top of this, we are aggressively building the Frito business. All in, Ukraine could be a $900 million business in 2011, bigger than our total CEE business was in 2007.
Like Ukraine, Romania and Poland will continue to be key growth markets for us. Frankly, one of our biggest challenges to this scale of opportunity in Central Europe is keeping up with it, insuring our own capacity and capability. We are therefore making the appropriate investments in both, the new aseptic PET line is up running this quarter in Poland, along with three new aseptic [inaudible] lines, one in Poland and two in Ukraine. We added a PET waterline in Czech. We’re making progress on the Romanian plant, which will be operational in 2009. In addition to support our late ’09 CSD launch in Ukraine, we’re adding the appropriate capacity. These are all in addition to the international capability initiative that I just talked about.
What we want to provide you this morning are insights on what drove our strong first half results and to provide a level of confidence about the balance of the year, but more importantly our ability to deliver growth in 2009 and beyond. The common denominator behind all of this is the people that are PepsiAmericas. They keep us steps ahead of our challenges; they bring all of our plans to life in the marketplace, and ultimately they are the ones that will continue to deliver long-term sustainable growth.
With that, I’ll turn the call over to Alex.
Today, I’ll focus my comments on our Q2 results in the context of our EPS guidance increase and then give some perspective on a few topics that have everyone’s attention, namely U.S. volume, raw materials and ForEx.
In the second quarter, revenue increased 12%, in line with the first half increase of 13%. For the full year, we expect revenue to grow in the 13% to 14% range, with acquisitions adding roughly 8%. This range anticipates a continuation of CEE’s strong first half performance, coupled with U.S. revenue growth in the low single digits. In comparison to previous guidance, we expect current ForEx rates and pricing to contribute more benefit with a bit less expected from U.S. volume.
Worldwide cost of goods sold per unit was up 6% in Q2 and is consistent with first half results. We continue to expect per unit cost to increase in the 6% to 7% range for the full year, with ForEx contributing 2 percentage points of the increase. At this point, we have virtually 100% of our full year packaging and sweetener costs locked, leaving mix and FX as the remaining variables.
SG&A was up 8% for the quarter, consistent with the year-to-date increase of 9%, reflecting the Sandora acquisition impact. We expect SG&A to be closer to a 10% increase for the full year, one-point above our 8% to 9% guided range due to higher ForEx and our investment in strategic initiatives in Europe. In the U.S., the execution of our cost reduction and productivity initiatives helped to offset fuel inflation and should reduce our full year SG&A growth to just over a point. However, in the third quarter, we expect domestic SG&A to raise by mid-single-digits based on prior year lapse.
For the second quarter, operating profits were up 15%, reflecting the Sandora acquisition, gains in Europe, and ForEx. We now expect full year operating profit growth of 12% to 13%, which assumes the continued benefit of current ForEx rates, offset in part by the strategic investment in Europe.
Turning to below the line items, there is no change in our interest expense outlook. For taxes, we expect to be at the low end of the 32% to 33% guided range based on country mix. We finished the quarter with adjusted return on invested capital of 7.8%, in line with expectations and on track to achieve our full year target of 8%. We continued with our buyback program and repurchased almost 900,000 shares in Q2.
We’re increasing our capital investments to approximately $270 million to provide more capacity for future European and non-carb growth. In addition, higher European growth will require higher working capital. As a result, we expect adjusted operating cash flow to be in the $180 million range.
Now I’d like to offer some perspective and context on how PAS thinks about the areas that are so top of mind for so many today, U.S. volume, commodities and ForEx. First, U.S. revenue will grow, but likely not as a result of volume. More importantly, our growth algorithm is built on the assumption that volume softness in the U.S. will continue. From a profit perspective, it is important to recognize the trading margin for volume does not create value; and our success is not dependent on U.S. volume performance. For example, over the last five years, our U.S. volume has declined roughly 1% per year. However, our worldwide operating income has increased almost 40%.
Second, our commodity cost volatility is being proactively managed. No question, commodity inflation is a challenge. However, we are doing more than ever to manage this challenge, and we believe that the capability and scale of global procurement puts us in an advantaged position. Global can provide value by managing risk and volatility through long-term relationships with global suppliers to insure diverse and stable sources of supply and competitive costing. As a result, we have achieved complete coverage for 2008 packaging and sweeteners.
When we look to 2009, we’re roughly 50% covered at this point, and we will continue to layer in contracts over time. So as we build our pricing plans for next year, we will have good visibility to the cost coverage needed.
On ForEx, I described for on the last call that we enjoy the benefit of a natural hedge against Euro/dollar volatility. In Q2, we gained a benefit as our local currencies, especially the Polish zloty and the Czech crown (koruna) materially outperformed the Euro. These currencies are at all-time highs versus both the Euro and the dollar. With this in mind, we have begun and will expand our hedging program for significant dollar and Euro based transactions, primarily concentrate purchases. While we will still face currency volatility, this will provide a partial offset going forward.
In closing, let me end where Bob began. Our growth in Q2 is a reflection of the diverse geographic portfolio that PAS has built. Going forward, Europe provides a clear and attractive path for growth based on the strong macros, market share opportunities, portfolio extension, and geographic expansion. The U.S. is challenged by consumer and cost pressures; however, we have the revenue and productivity capability as well as the track record to manage this environment well. At this point in the year, we find ourselves able to take up our guidance for the year, as well as to reinvest for growth in 2009 and beyond. PAS is well positioned to capture significant growth going forward and we have much to look forward to.
With that, let’s open up the call to questions.
(Operator Instructions) Your first question comes from Lauren Torres - HSBC.
Lauren Torres – HSBC
I was hoping you could be a bit more specific with regard to your pricing plans for this year. You mentioned taking that price increase post Labor Day. Any more specific you could get as far as what those plans are and maybe how much of an increase you expect?
As Bob mentioned in his comments, first of all, we’ll start taking pricing post Labor Day, and I’ll elaborate on that in just a moment. But as we have previously guided, we see pricing full year in the 4% to 5% range. We’ll probably be closer to the 4% range full year as we have some channel shift affecting our pricing, i.e., volume moving to large format relative to on premise.
So as I think as we look at pricing more broadly, I think a couple things. One is as we have suggested in the past, our philosophy, we’ll use pricing to cover cost; and we’re not going to sacrifice volume or margin for volume. Second, we’ll start initiating those price increases post Labor Day so that we get as much pricing as possible in the marketplace by the first of the year. Third, our pricing will be based on our anticipated ’09 costs; and fourth, we’ll make sure that we’re competitive. So typically our post Labor Day pricing kind of staggers in over Q4 as we need to align with retailer lead times, promotional cycles, and so forth. But the real kind of final tuning to our pricing kind of takes post Super Bowl where we absolutely know what our ’09, our following year cost exposure is and we can assess where we are in the marketplace kind of from a competitive standpoint. So hopefully that explains how we’ll think about pricing both balance of this year but more importantly as we set ourselves up for ’09.
Lauren Torres – HSBC
If I could ask one more question with respect to your channel and I guess category performance in the quarter. Were there any surprises for better or for worse with respect to how you did multi-serve, single-serve, or also carbs versus non-carbs, how that played out in the quarter?
So first all, look at our total volume growth, we anticipated that we would probably be down 3% to 3.5% as we cycle through some holiday shifts. Now we anticipated that our take home business would be most affected by the holiday shift, obviously because that’s all promoted volume. So I would say probably we would’ve been a little bit surprised by the softness in our CSDs particularly as it relates to tea.
Lauren Torres – HSBC
What were the down in the quarter?
Well, our tea business was down in the low-double-digit range and it contributed about a point of our growth decline in the quarter.
Your next question comes from Judy Hong - Goldman Sachs.
Judy Hong – Goldman Sachs
First, in terms of the volume growth, the 1% in the second quarter, the regions here you’ve seen pretty strong growth up until the second quarter, I’m just wondering if you could just talk about, give us a little bit more detail in a region-by-region basis what really drove some softness in that 1% number and why you’re still confident in sort of going forward that volume growth could pick up for the balance of the year?
So again just kind of reiterate, Bob kind of addressed this in his comments, but let’s just look at the major regions: First of all, Romania basically continued its double growth trends. Poland did soften up a little bit from its first quarter trends, and Ukraine was again was a little bit softer. So let’s just start where we are kind of year-to-date. The Ukraine, our volume is up 9%, Poland’s up 8%, and Romania is up 14%.
These trends were a little bit softer than what they had been and there’s a couple reasons. One is we clearly are cycling through; we had some adverse weather conditions and two, as we’re just laughing, some very big numbers. Kind of where we look at where we’re at year-to-date and as we look at our third quarter outlook and how we see the balance of the year regime, we feel pretty confident that our growth rates will continue.
Judy Hong – Goldman Sachs
Is there any evidence in markets like Poland or Ukraine where you started to see a little bit of softness in the quarter where consumer is beginning to be a little bit more stretched given some more inflationary pressure?
Not that we’re seeing.
Judy Hong – Goldman Sachs
Then just in terms of the profit behavior in Central Europe, if I look at, if we strip out acquisition and currency, I think your profit was actually down in the second quarter. I’m wondering how much of that was really attributable to some of these reinvestment initiatives that you’re talking about and as we sort of look out for the next couple of quarters, few quarters, how we should think about the profit behavior in these regions?
As it relates to the Q2 performance in those markets, we experienced a bit of a purchase accounting adjustment in Romania that was responsible for virtually all of the declines that we saw in profitability and for the constant territory Europe performance. We don’t anticipate that to occur in Q3, so we think we’ll be sort of back on trend to driving profitable growth and positive OI contribution there.
Judy Hong – Goldman Sachs
But, Alex, how much was that purchasing account move?
It’s about $3 million.
Judy Hong – Goldman Sachs
Then my third question just in terms of the U.S. market, I think you talked about the price increases, thinking about price increases in the U.S. and sort of looking at the anticipated commodity cost increases in 2009, could you give us a little bit more clarity in what your expectation is at this point in looking at ’09 and you’ve talked about locking up 50% of that, so maybe have a little bit more visibility than in terms of quantifying how much you think the commodities could be up at this point in ’09?
First of all, let me talk about the pricing. First of all, we’re not prepared to talk about what our specific ’09 pricing plans are for a couple reasons. One is: As Alex mentioned, we’re about half, we know about 50% of our ’09 exposure, so we don’t fully know what that is. Secondly, we’re still going through a contingency planning process to look at the cost side of the equation to see if we can use that to help offset some of the commodity headwinds that we’ll face. So more to come on that, but again we’re not positioned to talk about what our specific ’09 pricing plans are.
Judy Hong – Goldman Sachs
The 50% that you’ve locked in at this point, can you give us a little bit more granularity in terms of where those buckets are? Is it skewed to one component versus the other?
Judy, providing our visibility on the coverages, it’s more detail that we historically provide. We really did that to give you a sense that we are managing this basket of exposures very actively. We’re not going to wait. We’re going to be proactive in terms of managing the exposures and limiting the volatility that we have going forward, so the objective of quoting the number, the coverage level that we’re at was really to provide some sense of the management that we’re taking in this area less to try to drive sort of specific details around the underlying raw materials.
Your next question comes from Ann Gurkin - Davenport.
Ann Gurkin – Davenport & Company LLC
I wanted to ask, in your comments you all talked about sales were up in single-serve business, but then you also talked about food service sales were down. Can you just give some more detail on that comment in the U.S.?
So on single-serve, our total single-serve is down 2%, which as you recall is better than our Q1 trends. I think what we were saying is that if you look at a retail business or retail channels, our single-serve business was actually positive and that was driven by obviously democracy and that is virtually all of our single-serve decline was due to the softness in our un-premise channel which is primarily driven by our action to full-service vending, which Bob described.
Your next question comes from Marc Greenberg - Deutsche Bank.
Marc Greenberg – Deutsche Bank Securities
Question relates to the incremental stride spend to drive future growth, a couple questions off of that. First, are you putting incremental dollars into the Ukraine territories now with an expectation that you will have the broader Pepsi franchise in the future or should we assume that more money will need to be allocated? Secondly, Alex, if you could go into why the working capital spend is going up a little bit and causing the free cash guidance to come in, I’d appreciate it. Thanks.
So the first part is, the first answer to your question is yes that we have, we are forward-spending to start building our CSD line capacity in the Ukraine in anticipation, as Bob mentioned, of integrating CSDs into our system at the end of 2009.
On the working capital side, Mark, two primary factors are driving the working capital in Europe. One is the modern trade consolidates in that market. We’re seeing that our credit balances are rising, so AR days are higher than what you would see in the U.S.. So it’s more of our mix business moves to Europe, we’ll see our AR increase as a result of that.
Then the compounding factor there is ForEx as well is driving increase to those balances. Then I would say actually the third factor is inventory levels, just given the strong volume growth that we’ve seen, we’re having to do more pre building of volumes in order to be able to meet demand in the marketplace, so those are the three primary factors behind our working capital levels.
Marc Greenberg – Deutsche Bank Securities
I don’t want to belabor the pricing point, but it’s obviously a key issue for everybody domestically. Any concern at all that a more dramatic price increase, something that’s been talked about in the trade 7%/8% frontline retail prices will have a more precipitous impact on volume, in other words that the old elasticity model that all of us use are no longer valid?
Marc, I think, again, I think Bob talked a little bit about this in his script, I mean your concern, the concerns are mutual. But I think that’s why I think it’s vitally important that our industry and each of us individually have to totally retool the way we think about packaging from what it is today. Bob used the line that every package in terms of size and configuration needs to change. We endorse that and we think that that is going to be vitally important to again reposition our products in the marketplace that continue to have the kind of consumer value we’re used to.
But more importantly, again, are done in a way that provide run way to deal with the future pricing needs. So if you just leave it the way it is today, you’re absolutely right. But if you do it differently and think about it differently, I believe that we can find a way to, again, to reposition our-self in a different way.
If I could just add to that, Marc, that as we look forward, we believe that at some point the volume will change. That from a marketing standpoint, the Pepsi system will figure out how to bring some energy back into the whole thing. Along with the kind of packaging and that kind of rather broad change that has to occur, that can be a very good thing. In the short-term, however, our volume, we have been living with a U.S. volume decline.
That’s why we have taken the actions strategically in Europe that we have. That’s why we hear us talking to the extent we do about Europe because that’s really where the opportunity is. We have a very clearly defined role for our U.S. business and it has been able to successfully meet that expectation of its role and we believe even with what we’re seeing in ’09 and hearing from the industry about ’09 and ’010 that it can continue to do so. That said, ultimately volume is important and we have to start to get some in the U.S.
Your next question comes from Damien Wakowsky - Gabelli & Company.
Damien Wakowsky – Gabelli & Company
Just a quick question going back to the non-carbonated business in the U.S, can you just give us more detail in terms of tea was obviously weak. From your perspective are you losing share or is it just an overall weakness in the category as well as in [inaudible] and Propel and G2 and Tiger as well as Energy, how they’re fairing in this sort of a tough environment. The second part is any clarity in terms of when you might actually see the new product innovation with the natural sweetener from Pepsi, I forget the name of it, is it stevia or whatever it’s called, is there any, are we going to see that later this year or ’09 at the earliest.
So first of all, on tea, the starting point is over 2006 and 2007 we had very tremendous growth in tea. We were up over 35% each for those two years and we really had a creative momentum with tea by creating the whole multi-pack, what we call the “fighter pack”, of fighter pack strategy. So one is just the fact that we virtually doubled the business makes it harder to sustain those growth rates.
Obviously the downside to that is that success has led to competition in the marketplace that we kind of owned that space throughout ’06 and ’07 and now we don’t. Then the third is obviously that the tea category growth rates have slowed. With that being said, we did not anticipate that our tea growth be negative. Again, as we look at the back half of the year with some other plans we have in place, we think that will moderate. But that’s the answer on tea. By the way, we still have about 50 share of the category and that’s remained fairly consistent.
As we look at hydration, looking specifically at our hydration strategy, obviously when you look at in total, it’s being affected by the decline in our base take home unflavored business being Aquafina. When you look at it individually, G2 and SoBe Life Water clearly are going to be the winners and they are performing probably better than we had originally expected. There are plenty of [inaudible] and innovations Bob described to help build that, and we think that our portfolio approach is probably the best way that we can compete against the bigger [Glasgow] business. But as you also know in general, that category has also slowed significantly from where it was a year ago. Energy actually was a win for us. It’s the first time we actually gained share in retail. Our energy is up 20% which is based on the whole innovation of our AMP three flavors as well as the NASCAR tie-in.
Relative to the natural sweetener, I would say, Damien, it would be premature for us to talk about any specific plans we have of when and how that would be potentially introduced.
It appears we have no further questions at this time.
Thank you, everyone, once again for your interest in PepsiAmericas and we look forward to talking with you again after our third quarter.
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