The Pepsi Bottling Group, Inc. F3Q08 (Qtr End 09/06/08) Earnings Call Transcript

Executives

Mary Winn Settino – VP IR & PR

Eric Foss – President & CEO

Alfred Drewes – Sr. VP & CFO

Rob King – President PBG North America

Analysts

Kaumil Gajrawala – UBS

Judy Hong - Goldman Sachs

Lauren Torres - HSBC

Mark Swartzberg - Stifel Nicolaus

Bryan Spillane – Banc of America Securities

John Faucher – JP Morgan

Alec Patterson – RTN Capital Management

[Damian Witkowski - Cabelli & Company]

Alton Stump – Longbow Research

The Pepsi Bottling Group, Inc. (PBG) Q3 2008 Earnings Call September 30, 2008 11:00 AM ET

Operator

Welcome to The Pepsi Bottling Group’s third 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

Thanks everyone for joining us. Eric Foss, our President and CEO; Alfred 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 www.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.

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 and thank you for joining us today. This morning I’m going to provide greater insight into our third quarter performance as well as update you on our business outlook for the remainder of the year.

I’ll then turn it over to Alfred for a discussion of our financials and an update on our guidance before we take your questions.

As I’m sure you all saw in this morning’s press release PBG delivered solid earnings per share growth of 8% in the third quarter. We also raised the low end of our full year EPS range and now expect to deliver $2.32 to $2.38 reflecting the confidence we have in our ability to meet our 2008 financial objectives.

PBG continues to demonstrate an ability to deliver solid financial results despite a challenging set of marketplace conditions. We also remain confident in the long-term health of the business having repurchased about 3.5 million of our shares in the third quarter and returned roughly $600 million in cash to shareholders year-to-date.

PBG continues to demonstrate the characteristics of a great operating company and what I believe is the best set of bottler fundamentals in the industry. It’s these fundamentals combined with the strength and diversity of our portfolio that have enabled us to deliver throughout the year.

As evidence of this our worldwide net revenue per case grew 9% in the third quarter. In addition we achieved over $50 million in cost productivity gains in Q3 having already exceeded our target of $100 million in cost savings this year.

And we continue to manage our capital spending very effectively. Now any discussion on third quarter performance must begin with the discussion of the current state of the liquid refreshment beverage category.

In the US category weakness has been pronounced due to the macroeconomic conditions facing both the country and consumers. Year-to-date in measured channels the category is down 2%. This is lower then the 2% category growth that had been expected and the two main contributors to this softness are non-carbonated beverages and water.

Non-carbs are down 3% this year while the water segment is up 2%; both significantly below category forecasts for growth in the high single-digits. The carbonated soft drink segment at down 4% has actually performed roughly in line with our expectations.

Now given this category backdrop let me tell you how we faired. Our CSD portfolio is down 4% year-to-date so we really mirror the overall category performance. Our non-carb volume is down 2% which is slightly better then the category and the biggest discrepancy is in water, where our volume is down 6%.

A large portion of this reflects a conscious decision we made not to chase aggressively low price points for our unflavored take-home water business that produces low margin and deteriorating profits.

In third quarter our net revenue per case in our US and Canada segment was up 5%. Volume was down 6% reflecting the category issues I just mentioned. In the third quarter we also started to see signs that these challenging macros across the US are being felt globally.

This is creating category softness across geographies, something you see reflected by the Q3 volume declines in both Europe and Mexico that we reported in today’s press release. In Europe the category got off to a good start in the first quarter of the year, began to slow a little bit in second quarter and this slowdown continued in third quarter due to a variety of macroeconomic factors ranging from near-term economic volatility and food inflation in Russia, to fall out from the real estate situation in Spain.

Similarly the macroeconomic environment in Mexico has been slowing. Cash remittances from the US are down for the first time in over a decade and consumer confidence has declined every quarter this year.

In light of these global category pressures we continue to focus on controlling what we can control; that’s our rate and margin improvements combined with our cost and productivity gains that has really allowed us to maximize our opportunities in an otherwise challenging marketplace.

We continue to drive profit growth in Europe driven again by Russia and Turkey. Our net revenue per case performance illustrates our success growing 9% in local currency in the quarter. Operating profit in Europe grew 4% for the quarter and has increased 28% year-to-date.

In Mexico we continue to make progress to bring our business to solid financial footing. Our third quarter profit was up over 30% as we’ve been able to enhance our revenue and margin management capabilities and reduce our operating costs.

We did experience high single-digit volume declines largely due to the aforementioned macros and we also made segment profitability in improving underperforming parts of our business a top priority. A good example of these efforts is in our jug water business where we raised pricing outside of Mexico City and actually exited some unprofitable geographies.

These decisions impacted our volume by about two percentage points. In all of our geographies our operating discipline and our ability to manage our revenue, margin and cost in an effective manner distinguishes PBG from others.

We also believe that this make us a more successful company once the category rebounds. So, that’s where we are today. But the more important question is where are we going.

Now while the challenges of the moment are serious, they aren’t permanent. We believe that the category will ultimately return to growth and our strategy is designed to strengthen PBG so that we can take full advantage of the opportunities that lie ahead.

There are really three core elements of PBG’s current plan for the future. First, continuing to adapt to the marketplace challenges. Second, pursing growth opportunities and finally expanding globally. Let me talk a minute about adapting to the marketplace challenges.

For the reasons I cited earlier today’s environment requires companies to transform their cost structures, enhance their productivity, and excel at the point-of-sale. An ability to do these three things well is what will distinguish great operating companies from the rest and I believe this is an area where PBG’s capabilities are unmatched.

Earlier this month I outlined our vision for step-changing our cost structure in a way that will generate multi year savings. To that end we’re focused on three specific areas of opportunity. First, optimizing our manufacturing costs, by that I mean light-weighting our packaging, self-manufacturing our PET Pep bottles, improving our capacity utilization and taking other steps to maximize efficiencies across the entire production process.

Second, we’re transforming our warehouse capabilities. This involves leveraging a range of innovative technologies that greatly improve everything from storage and retrieval to loading and shipping.

Third, we’re maximizing our go-to-market effectiveness. You’ll see us make improvements in the way we manage our delivery, merchandising and selling activities as well as continue to take a disciplined to G&A spending.

All three of these initiatives will not only improve our cost and productivity performance but they will also support our unwavering commitment to be the best service provider in the industry. We’re not interested in making any cuts that will adversely impact our customers.

In fact, the plans I just outlined will actually increase our customer service capabilities in most instances.

The second element of the plan we’re currently executing is to pursue growth opportunities. This starts with strengthening and diversifying our brand portfolio by doing three things; filling portfolio gaps, entering white space, and pursuing scale opportunities.

PBG is committed to competing in every LRB segment that is growing and profitable with an end goal of being number one or a strong number two in each segment.

We took some important steps forward during the third quarter. The addition of Crush enhances our position in the fruit flavored CSD category. It’s an important category where we historically lagged behind the market leaders.

The strength of the Crush brand immediately changes that, opening the door for us to be the number one or number two player in this space over time.

We also completed our deal with PepsiCo to add Lebedyansky to our portfolio in Russia clearing the way for us to pursue a scale opportunity in our largest growth market. There are a number of synergies between our business and that of Lebedyansky, specifically in the areas of manufacturing, merchandising and go-to-market and our current focus is on tapping into those synergies in a way that benefits everyone involved.

While Crush and Lebedyansky are good additions to our brand mix, you’ll also see some exciting things from our existing brand portfolio in the weeks and months ahead.

Another component of our growth strategy is to re-conceptualize our price and pack architecture. As some of you heard me talk about earlier this month, we’re currently exploring new package solutions designed to deliver against three core objectives; improving consumer value, increasing our volume and expanding our margins.

Without question the revenue and margin management strategy we’ve implemented to date has served us very well, a fact that’s reflected in our ability to consistently cover commodity increases and deliver solid net revenue per case growth.

However the time has come for us to think about new ways of delivering value to consumers in the US and that’s why we’re testing a variety of new packaging solutions across single-serve, our take-home can business and our multi-serve PET business.

These tests should teach us a lot about what consumers want and our findings will form the final price and pack architecture that we expect to implement in late 2009 or early 2010.

We also continue to look for opportunities to expand our geographic footprint. Just last week we announced plans to acquire Lane affiliated companies; the eighth largest bottler in Pepsi US network. The deal, our largest domestic acquisition since PBG became a publically traded company in 1999, will extend our reach across territories in Arizona, New Mexico and Colorado.

And finally the third element of our plan is focused on international growth. Our international business represents 30% of our revenue and profits but from 2005 through 2007, it accounted for 50% of our revenue growth and 60% of our profit growth.

Given the positive long-term outlook for markets like Russia, Turkey, and Mexico we fully expect these geographic portfolio shifts to continue.

In Russia, while I mentioned that there has been some near-term uncertainty and financial market volatility, it remains an attractive place for PBG to play over time. Turkey is another country that has a positive set of demographics with a population that’s large, young and growing.

About 50% of Turkey’s 75 million people are under the age of 30, so there’s a clear opportunity to grow our business. And in Mexico, we remain committed to the financial viability of this business and we believe that our performance will continue to improve as we act on the findings of this year’s strategic review.

Taken as a whole, these three countries provide clear opportunities for sustainable success. Now before I turn the call over to Alfred, let me sum up.

While the short-term pressure on the LRB category may continue, it does not erase the long-term potential that exists. At PBG we’re demonstrating an ability to deal with the near-term marketplace conditions effectively and at the same time we’re making smart investments that will strengthen our business for the future.

Alfred Drewes

Thanks Eric and good morning everyone. I’d like to take a few minutes to provide you with additional commentary on our third quarter results and I’ll also update you on our outlook for the balance of the year.

As Eric mentioned PBG delivered a solid quarter in light of the current marketplace conditions. Eight percent EPS growth reflects our successful efforts on revenue and margin management and cost productivity as well as our share repurchases.

Our efforts resulted in a 9% increase in net revenue per case, a 7% increase in gross profit per case and $50 million of cost productivity savings in the quarter.

Excluding foreign exchange movements our net price per case was up 6% while our gross margin per case was up 4%.

The impact of FOREX on operating profit was favorable adding about three points of growth in the quarter to each line of our P&L through operating profit. Near the end of the quarter the dollar strengthened and this resulted in a $5 million transactional FOREX expense which is reflected below the line in other non-operating income and expenses. This lowered EPS by about $0.01.

Another item to update you on is our annual impairment testing. Accounting rules require that we annually evaluate the carrying value of our goodwill and intangibles. This year we’ve moved our impairment review to Q3 so that our analysis is more closely tied to our business planning process.

In Q3 we completed this assessment with the exception of intangibles in Mexico. We have no impairment on the items for which we’ve completed the evaluation. On previous calls we’ve told you that we’ve undertaken a strategic review of our business in Mexico. That review will be completed in Q4 and we will complete the intangible review at the same time.

I’ll share those results when they’ve been finalized.

Turning to our full year guidance, Eric mentioned that we’re raising the low end of our 2008 earnings per share range and now expect to deliver EPS of $2.32 to $2.38 for the year. This represents growth of 5% to 8%; a very good performance in this environment.

The remainder of our full year guidance is consistent with what we’ve shared previously. We expect to see top line growth in the mid single-digits, operating profit growth in the low single-digits, and net revenue per case growth of 6% to 7%.

All of the P&L line items in our outlook include about a two percentage point impact from foreign currency translation. Our COGS per case outlook excluding FOREX continues to be about 6%. FOREX is likely to add an additional two points.

Our full year tax rate is unchanged at 33% to 34% and we’ve reduced our capital expenditures to reflect the current marketplace challenges. Our 2008 CapEx will be in the range of $750 million to $775 million which is about $100 million lower then last year.

We continue to forecast operating free cash flow of around $620 million, however there are some modest risk to this forecast due to the strengthening of the dollar. Our cash from the peak selling season in Q3 is typically collected in Q4 and a strengthening dollar may result in a somewhat lower operating free cash flow.

Looking specifically at our guidance for the fourth quarter we expect to deliver comparable EPS of $0.35 to $0.41. We’ll show solid operating profit growth in Q4 but EPS growth will likely be impacted year-over-year due to the timing of our effective tax rate.

One thing I’m frequently asked about is how we prioritize our uses of cash. We have three priorities. First, we invest in the growth of our business, second, we look to expand our geographic footprint through bottler acquisitions, and third we return cash to shareholders through dividends and share repurchases.

We’ve made substantial progress in all of these areas in 2008. The scope of our acquisition activity is particularly strong with the Lebedyansky, Lane and Sobol deals totaling about $750 million. We’ve also returned about $600 million in cash to shareholders so far this year through dividends and share repurchases.

All this shows a company that is great a maximizing our cash and capital structure to drive shareholder value.

Let me now make a comment about 2009, in early September we gave you a preliminary outlook for our 2009 COGS per case. Consistent with that outlook we continue to expect COGS per case to be up in the mid to high single-digits. Obviously commodities have been volatile and we’ll continue to monitor the situation closely particularly as it pertains to oil and corn.

We’ll provide a much more detailed 2009 outlook in December as we do every year, and we look forward to talking about all of this with you further at that time.

So to wrap up, the underlying financial performance of this business is sound; we’re on track to achieve the full year earnings objectives that we shared with you last December. We continue to build upon our track record of operational excellence, strong revenue and margin management, cost productivity and prudent capital spending.

And as Eric mentioned, we’re doing all of this while improving our competitive position over time. So with that I’ll turn it back to Eric.

Eric Foss

Thanks Alfred, let me make one point before we open the floor to your questions, you know as I talk to people about our business I often get asked, “How is PBG doing?” And I like to tell them that that question is best answered in three parts; today, tomorrow and beyond.

Are we operating with the discipline and precision necessary to offset the macroeconomic softness of today? Are we taking appropriate steps to improve our competitive position tomorrow? And finally do all of these things combined to paint a promising picture of PBG over the next several years and beyond?

And I believe our performance in third quarter again shows that PBG can confidently answer yes to all of these questions; something that continues to fuel my strong belief in our ability to deliver value to each of our key stakeholders over time.

With that we’ll be happy to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Kaumil Gajrawala – UBS

Kaumil Gajrawala – UBS

On price mix, it feels that the industry as a whole is a little more realistic perhaps on volume expectations now for LRB and I think that makes pricing more of a priority then it had been in the past and so assuming that’s the case and we’re going into a maybe stabilized COGS environment, are we looking like we’re going to leverage like we had in the past where you’re looking at almost three times impact on profits if you were to take pricing versus volume and then how aligned are you with PepsiCo on an idea of pricing over volume and then does this change your long-term views on CapEx?

Eric Foss

First of all I’d say our over-arching objective continues to be to drive a balance to the top line. I think the reality of the marketplace in which we’re competing today though where commodity increases continue to go up, you’ve heard me mention before that we’re big believers that we want to cover those commodity increases with pricing and make sure we insulate our per case margins.

Having said that, I think we’ve been successful in implementing post-Labor Day price increases and I think the environment is pretty rational but one of the things that we’re doing as I mentioned is we’re focused on this re-conceptualizing pricing and package and we actually believe there are three objectives to that; better consumer value, better volume performance for the category and improved margin.

So I think the reality is, is that we continue to be aligned with PepsiCo on what actions we and they are taking to deal with the marketplace challenges but I believe right now its very important given the commodity increases that we, as you’ve seen us do this year, we’ve taken the pricing necessary.

Alfred Drewes

Obviously you heard me say we’ve cut our CapEx by about $100 million this year versus last year and I think it’s pretty important in this environment to have a real sharp pencil around CapEx and that’s something we’re going to be doing as we build our plans for 2009.

Kaumil Gajrawala – UBS

Can you talk, you’ve got about $1.3 billion in debt coming due next year and the credit markets look a little different then they have in the past so can you talk about any contingency plans and just how you feel about that?

Alfred Drewes

Let me just make a comment about the credit markets in general and then I’ll talk specifically about the bond we need to refinance. At the end of the day we have a very strong balance sheet. We AA 2 rated, our CP program is A-1/P-1. Our leverage is pretty modest at 3X, our debt to EBITDA ratio is 3X and obviously we have strong cash flow. So we start from a pretty strong balance sheet position and I’d add to that over the last few weeks we’ve done a very comprehensive review of our exposure to some of the firms that have been in the press over the last month or so.

We’re pretty comfortable that we’re all over that one as well. So we start from a position of strength. We’re still looking to refinance that bond, pre-fund that bond and do that in Q4 of this year. We’re working with banks on doing that and I’m optimistic that that’s going to go out in the fourth quarter of the year. If it doesn’t, we have the ability to bridge ourselves until the market stabilizes. So we’re still going to go out and try and get this thing done. We think we can get it done at favorable rates. But it is a volatile situation certainly.

Operator

Your next question comes from the line of Judy Hong - Goldman Sachs

Judy Hong - Goldman Sachs

If we look at that non-carb trend in the third quarter, it looks like the growth did slow down more meaningfully and it looked like it was across several non-carb categories. Could you just talk more about what you’re seeing? Whether this is just all really macro driven and in that context I think the last time you talked about the LRB growth outlook long-term, you’re still sort of looking at 2% long-term whether in the context of LRB the non-carb slowing down, whether that is still realistic and a lot of the actions that you’ve talked about, the price pack architecture etc. seems to be more aimed at the carbonated soft drink part of the category so what are the steps to get the non-carb growth going again?

Eric Foss

There’s a couple of things. I think as you take the broad bucket of non-carbs, ex unflavored water, I think it’s important to note that with the exception of the tea category, largely speaking that business gets sold one at a time and is highly dependant on how your single-serve cold drink business performs. And so what I’m saying is is that the non-carb category ex unflavored water is probably a little more prone to being more impacted by the difficult economic conditions that exist right now in the US and I think you’ve seen that reflected in our cold drink business over the last couple of quarters.

So that I think as the economy recovers I think non-carbs will recover in kind as will single-serve. I think in the case of unflavored water again, part of this is a conscious decision where we have made a real conscious decision to not chase the low margin, low profit water business particularly the case pack water business and that’s something that I think you’ll see us continue to do. And the impact of that in the quarter, our pricing was up about 5% and it had about a two point impact on our overall volume.

Judy Hong - Goldman Sachs

And then I think you said with the exception of tea, so can you talk about the tea category and from a category perspective and from a competitive perspective as well?

Rob King

Our Lipton Tea business was actually up about 2% in the third quarter. We feel actually terrific about our Lipton portfolio. The overall tea category did slow down but we feel good about Lipton and you should know that we continue to work with [PC&A] on expanding our leadership position in tea. We did announce recently that we’re going to have a competitive entry in the super premium segment with the partnership on [Tazo] and then we have a variety of initiatives that we’re working on with Lipton to drive that business not only through the balance of this year, but next year as well.

We’re really bullish on Lipton.

Operator

Your next question comes from the line of Lauren Torres - HSBC

Lauren Torres – HSBC

You touched upon it in your prepared remarks but I was hoping you could talk a bit more about your efforts in Mexico. Where are you with respect to your product and your package mix and also do you believe that there are opportunities or more opportunities for rate increases in light of comments you made about weakening consumer confidence in that market, so what are your plans there going forward?

Eric Foss

Let me start, I think we’ve been pretty consistent, certainly been consistent all of this year on what we’ve been trying to get done in Mexico and so I think we’re doing exactly what we said we were going to do. We continue to make good progress to put this business on better financial footing. As I mentioned our third quarter and full year year-to-date profits are up double-digits and one of the things that was very important to us was, because we went in and did a deep analysis of our profitability by brand, by channel, by package.

We ended up focusing on addressing some specific opportunities; I’ll mention two of those. One is the jug water business where outside Mexico City, we found that our ability to make money was impacted by either our current pricing architecture that needed to be higher so we have initiated pricing actions outside Mexico City. And actually in some instances we were just at a point where we needed to exit certain geographies that we didn’t think we could get a decent level of profitability and return.

And so the moves we made in that area again affected our volume in the third quarter in Mexico by about two points. Another example was on our multi-serve CSD business, again we took some pricing actions that we felt we had to take and so I think what you’re going to see is that game will continue to get played out over the next quarter or two.

With regard to your question as we’ve seen the second driver of our volume softness in the quarter was more the macros, again you’re seeing food and beverage inflation of high single-digit and so I think we’ll have to keep an eye on that and be flexible accordingly.

Lauren Torres - HSBC

But your ability to take further pricing as you see the market changing, you have that worked into your plans at this point where you feel you may not be able to fulfill your initial expectations with respect to pricing?

Eric Foss

No I don’t think so. I think again if you think about what I just said relative to some of the lower margin, lower return, SKUs in our portfolio, we’ve initiated that pricing. In some instances we initiated it earlier this year and so some of this is we’re just continuing to see that play out. So I think as we look to the near-term, the next quarter or two, we will continue to see that play out.

Operator

Your next question comes from the line of Mark Swartzberg - Stifel Nicolaus

Mark Swartzberg - Stifel Nicolaus

On Europe, that’s really been driving your operating income performance for the year and certainly currency is part of that but you’re definitely seeing a big improvement in margin and overall profit levels local currency-wise in Europe so with the third quarter being your most important quarter profit-wise for the region we’ve seen volumes beginning to decline there, margin was down year-on-year, I’m just trying to get a sense of where your head is about the level of margins we’re at today which again are a lot higher then where they were a year ago, and how this volume situation is likely to impact them going forward?

Eric Foss

One point I’d make is first of all I think you’re right on Europe’s progress; I would also give some recognition to Mexico and the role that that’s played as well. But specific to Europe, I think we are seeing some of these macro concerns extend to Europe. They definitely had an impact across countries and across the categories in Europe in third quarter.

I think the way to think about it, Russia has been a big driver of our success over there and again, we continue to see double-digit top line and double-digit profit growth but we have seen a shift in the category. I think the category if you looked at it the last couple of years, it’s been low double-digit. If you look at that on a year-to-date basis now in Russia, it’s kind of something in the 3% or 4% range.

So what you’re seeing us do is one, take some steps to strengthen our position. Evidence of that is the Lebedyansky transaction, the [Kavos], Sobol, and I would just say that overall this is definitely the right place long-term for us to be and we would expect while there may be some near-term uncertainty, I think that again we would expect our Europe business to continue to be very accretive to our growth both top line and bottom line going forward.

Mark Swartzberg - Stifel Nicolaus

Am I right in thinking on a pre-Lebedyansky basis you feel pretty comfortable with the level of margin you’re at presently which is well above where it was a year ago?

Alfred Drewes

Yes, I think we’ve talked over time about having double-digit profit growth in Europe in the coming years and I don’t see any reason why we’d deviate from that and that’s exactly what we’re looking to do.

Operator

Your next question comes from the line of Bryan Spillane – Banc of America Securities

Bryan Spillane – Banc of America Securities

There’s been some talk about your competitor overlaying some of what was done, what they’ve done in Mexico in terms of packaging and pricing architecture and implementing that potentially in the US and also maybe moving towards an incidence pricing model on concentrate. So I guess the question is given your experience in Mexico first, are there some lessons to be learned about the way that packaging and pricing is done there and is it relative to the US? And then if that were to happen, how would PBG respond to that?

Eric Foss

Well let me start, I think you’ve heard us be pretty clear on this topic before, I really do think that we view ourselves as the leader relative to pricing so I would say that you can expect us to continue to monitor what happens competitively but you can expect us to continue to play our game and I think the evidence of that is in our strong track record where we’ve tended to deliver very consistent price performance margin improvement and probably on balance, very balance top line.

So I think the point about incidence-based pricing is the way this works in normal times, concentrate companies take in 2% to 3% concentrate increases and bottlers take in 2% to 3% net revenue per case. What you’ve seen happen the last couple of years is because of commodities that number has moved up and so I don’t buy into a change in the concentrate model being the savior to what we both need to do, both bottlers and concentrate companies, which is get to a more balanced top line.

I think the US is a very sophisticated leading market from my vantage point. I would tend to look to the US as more of a leading indicator of price pack sophistication. Certainly we share best practices across country borders and some of those come from the US to Mexico. Others come from Mexico to the US. But there’s really nothing in your question that leads me to believe there’s going to be any dramatic change.

I think what is going to be dramatic is, is price pack architecture I think is going to get redone and as you know we plan to play a leading role in where that ends up.

Bryan Spillane – Banc of America Securities

When you think about price pack architecture is it more important in take-home channels in your view or is it more important in the convenience and gas or media consumption channels? With the idea that the 20 oz. package is an important profitable package and seemingly at least from our perspective poses the most risk if that package is compromised where maybe there’s more opportunity on profitability in take-home channels.

Eric Foss

I would say if I had to prioritize, the thing that will get the most needs to be addressed in terms of consumer value to impact more positive category volume, to give us margin runway would probably be on take-home cans. The reality is as we look at it today, it’s important that we have the right entry point. If you think about that today on a feature-ad week, the consumer can enter the category for about $3.00 per 12-pack. During non-ad week, if she wants to buy our products its more like $4.50 or $5.00 and so if we can, through a new price pack architecture, give her more opportunities to buy at $2.00 or $2.50 during an ad week and $3.00 during an off ad week, I think that delivers against the three objectives.

So the starting point for me is to get better performance across those three objectives on our take-home can business. I would say in today’s economic environment entry price point is critical and so we are doing more on both take-home and single-serve.

Operator

Your next question comes from the line of John Faucher – JP Morgan

John Faucher – JP Morgan

On the cash flow piece, so with the CapEx numbers coming down, share buybacks going up, it looks like there’s going to be a mix of slightly lower net income and then also working capital driving the [inaudible] to the lower CapEx from a cash flow standpoint. Can you talk a bit about how you see that playing out from a working capital perspective through the fourth quarter and then in the financing section you had a big impact from minority interest distribution, can you talk a bit about that and how we map that out going forward?

Alfred Drewes

Our operating free cash flow for the quarter was right on what our forecast is and obviously was internally and obviously we’re maintaining our full year OSCF guidance of about $620 million. Probably what you’re talking about in terms of working capital is our accounts payable line year-over-year is somewhat unfavorable and that’s really due to some timing around tax payments and also some trade payments that are multi year.

And so you’re going to see some continuation of that unfavorability when the close the books for Q4. Now with respect to the below the line, the relates to the way the funds flow on the Lebedyansky transaction between us and PepsiCo and there are various nets up and down the balance sheet on this and PepsiCo’s contribution so it’s kind of complicated. But that’s what that relates to is the Lebedyansky transaction and our minority position in it and PepsiCo’s stake in it.

John Faucher – JP Morgan

Will that payables trend sort of, unfavorable year-over-year continue? Does it reverse in the fourth quarter or is that something we’d expect to reverse in 2009?

Alfred Drewes

It’ll get a little better in the fourth quarter but you’ll still continue to see an unfavorability and then as you go into 2009, the timing effects will be a positive.

Operator

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