PEP
#Thank you, <UNK>, and thank you all for joining us this morning
We will start off this morning with highlights for the third quarter and a discussion of each of the operating sectors' performances in a little more detail; and then <UNK> will cover the full year outlook
For the quarter, we delivered revenue, operating profit, and EPS growth in what continues to be a volatile macro environment
Organic revenue was up 1.7% for the quarter and 2.3% year-to-date with solid net price realization operating margin expansion in most of the sectors
Although we have moderated our full year organic revenue growth outlook, we now expect full year core EPS of $5.23, which is 2 percentage points or $0.10 higher than our previous expectation
This improvement is being driven by the strength of our year-to-date results, coupled with an improved outlook on foreign exchange impact
Each of our operating sector’s performance came in on or ahead of expectations with the numbers showing sequential topline acceleration, with the exception of our North American Beverages business, where net revenue and operating profit declined
So, let me start with that
While North American Beverage performance was below our expectations, I will tell you upfront that the issues are temporary and we believe we have taken the necessary actions to improve the performance of this business beginning in Q4. So, what happened? From an industry perspective, weather was comparatively negative, both temperature and precipitation, following record hot summers in 2015 and 2016, and there was a marked slowdown in the C-store channel in Q3. Now given this as a background, our performance did lag the industry, no question about it
First, Gatorade, which accounts for approximately one-fifth of our Q3 volume declined following two sequential years of terrific Q3 growth
In fact, Q3 volumes were up a total of 18% over 2015 and 2016. Relative to other beverage categories, this is one that is both much more sensitive to weather and more exposed to the C-store channel
So the broader weather and C-store industry themes I just mentioned had an outsized impact on Gatorade
Second, we underperformed the industry in carbonated beverages
This summer, we directed too much of our media spending and shelf space to new low-calorie, much smaller brands at the expense of our Pepsi and Mountain Dew trademarks
While our plans for the summer were consistent with our continued and deliberate strategy to transform our beverage portfolio
Clearly, we redirected some big brand space to these new products as opposed to focusing on new incremental space
We view both of these conditions as temporary and not structural, and we fully expect topline performance to improve in the coming quarters
We have a good handle on what happened, and we are making immediate adjustments to get the business back to growth
We are stepping up marketing spending on Pepsi and Mountain Dew, including our zero and low calorie products under these trademarks
We are reallocating and securing incremental shelf space in this place for our existing and new products to drive better overall velocity
We are tweaking our consumer communication with sharper brand messaging on pack, at point of sale, and through traditional social and digital media
We have more innovation directed at our biggest trademarks, including low and no calorie products that will hit the market starting in early 2018, and we're executing our programs responsibly to ensure that we're driving profitable growth
With the expected improved topline, we also expect improved profit performance as we realize both mix and scale benefits from the improved sales trajectory
To be clear, our beverage transformation initiatives over the longer term have been very successful in shifting our mix to faster growing subcategories and providing more low and zero sugar options
Since 2010, we have increased our mix of non-carbonated beverages by 7 percentage points
Over the decades, we have established and maintained leadership positions in many of the most attractive noncarbonated categories, and we have successfully introduced many offerings to appeal to consumers' increasing demand for zero and low calorie offers
So, make no mistake about it, we remain squarely on strategy and having made a few course corrections, expect NAB to return to growth in the coming quarters
Moving on to Frito-Lay North America, we had another quarter of very strong results, with a good balance of volume growth, net price realization, and operating margin expansion
We feel very good about the business with innovation, pricing, execution, and market share performance all on target
We are particularly pleased with the continuing strength in organic sales growth, which is being fueled by effective price pack management and innovation backed by great marketing
Take Cheetos as an example
We drove 6% net revenue growth for the trademark in Q3 with new products, such as Cheetos Paws, Jalapeño Cheetos, and our SIMPLY line, and Mac n' Cheetos also contributing to the growth
The innovation is well-supported by creative consumer engagement that included our award-winning Cheetos virtual museum campaign that asks, "What do you see in your Cheetos?" The program garnered 100,000 online consumer submissions and countless earned media impressions
Ruffles, which grew net revenue 11% in the quarter benefited from innovations such as Spicy Jalapeño Ranch and Flamin' Hot that appeal to consumers' increasing desire for both flavors
And beyond our largest trademarks, we saw impressive double-digit net revenue growth in premium and better-for-you offerings such as SunChips, Smartfood Popcorn, and Miss Vickie's and in our variety multipacks that provided great assortment of our top brands in convenient single-serve packages
At Quaker Foods North America, we are pleased with the sequential acceleration in organic volume, organic revenue, and core operating profit performance, and we continue to feel positive about the trends in the business
Our activations of portable breakfast innovation, namely Breakfast Flats launched in 2016 and Breakfast Squares that were launched in the first quarter are yielding positive results
And our second quarter launch of Overnight Oats Cups, capitalizing on the growing trend of preparing chilled oats using a variety of healthy ingredients is also gaining traction with consumers
Taken together, our innovation and other programming drove mid-single-digit volume growth in our base oatmeal portfolio
To wrap-up North America, I'm pleased to report that year-to-date through the third quarter, we generated more retail food and beverage revenue growth in the United States measured channels than all other 5 billion plus manufacturers combined
And in the third quarter, Frito-Lay on a standalone basis was once again the number one contributor to total U.S
food and beverage retail growth among all 5 billion plus manufacturers
Turning now to our sectors outside North America
In Latin America, we continue to see very challenging macroeconomic conditions and geopolitical instability, which dampened consumer spending
As we enter our fourth quarter, the devastating impact of the Mexico earthquakes and hurricanes in the Caribbean and Puerto Rico are clearly adding to these challenges
Within this context, our businesses in the region performed well in the third quarter, posting 5% organic revenue growth
Mexico, our largest market in the region, had high single-digit organic revenue growth, while Brazil grew organic revenue mid-single-digits
Similarly, we have continued to experience macro challenges in a number of markets throughout our Asia, Middle East, and North Africa segment, including the significant currency devaluation in Egypt and the economic impacts in a number of markets across the Middle East stemming from persistently low oil prices
However, we have been adjusting our business to address these challenges
We are pricing to cover the increased cost of doing business and we are going more aggressively after productivity to reduce our overall costs
As a result, we saw a noticeable improvement this quarter as AMENA delivered 9% organic revenue growth driven by double-digit organic revenue growth in China, Pakistan, Philippines, Egypt
And turning to Europe and Sub-Sahara Africa, we had very good results across the region, with organic revenue growth in each of our top four markets, along with six of the next seven key markets and a sequential acceleration overall, which translates to margin expansion and 12% core constant currency operating profit growth
Organic revenue growth was well balanced across snacks and beverages, which grew high single-digit and mid-single-digit respectively, driven by strong product innovation and in-market executions
Russia, our largest market in the region, had mid-single-digit organic revenue growth and very strong operating margin improvement
Among our other key markets, we delivered double-digit organic revenue growth in Turkey, mid-single-digit organic revenue growth in France, Poland and Germany, and low single-digit organic revenue growth in the U.K
Now as we mentioned last quarter, across our businesses, we're pleased with the progress we're making in the e-commerce channels, and I say channels, plural, because we're addressing growth opportunities across eGrocery, pureplay, urban grocery delivery, direct-to-business and direct-to-consumer models
Our success is underpinned by the significant investments we've made in attracting talents to and building capabilities in our dedicated global e-commerce business unit
So today, we have a team of roughly 200 e-commerce professionals supporting our businesses to capture growth in the rapidly emerging e-commerce channels
It's made up of seasoned e-commerce and tech professionals, combined with our best entrepreneurial talent from within PepsiCo and we're managing this unit more like a tech company than a traditional CPG from how and where they work, the risks they can take, to how they are compensated
And we continue to fortify and enhance the full suite of capabilities that we believe will enable us to win in these channels from data analytics to specialized e-commerce supply chain knowhow
Importantly, we're increasingly collaborating with our retail customers to make our e-commerce capabilities yet another point of differentiation in our value-added relationships with them
For example, using big data and predictive analytics to shape real-time marketing messages, dynamic merchandising, and tailored offers, our team is enabling us to drive greater purchase instrumentality and higher basket size for our customers online
As a result of these efforts, we have a business that's approximately $1 billion in annualized retail sales with impressive growth in key e-commerce markets
For example, this year, our e-commerce retail sales are projected to be up 80% in the United States and nearly double in China
In many cases, our online share exceeds our offline share and we are gaining online pretty much across the Board
While overall penetration of food and beverage remains relatively low compared to most of the categories, it is growing fast and its development is sure to be highly dynamic, and we believe we are well-positioned to win in this space
Despite the many macro challenges, we continue to feel good about the state of our business
The fundamentals we have been focusing on and discussing with you remains solidly intact
We have a leading product portfolio and deep capabilities
We continue to drive growth, product innovation, exceptional marketing, and innovation
We continue to transform our portfolio to capitalize on evolving consumer trends and we have a robust productivity agenda that is enabling us to continue to invest in the business, while delivering attractive earnings growth
And finally this quarter demonstrated that the PepsiCo portfolio does have the capacity to generate topline and bottom-line growth even in the occasional quarter where we see a downturn in a particular sector
And it is the resilience of the portfolio that is also enabling us to increase our earnings outlook for the year
With that, let me turn the call over to <UNK>
Look, we have gone deep on the business to understand what is environmental factors that contributed to our performance and what is our own execution aspects that contributed to performance, and I’d tell you that, roughly speaking, my assessment is about 70 -30 in terms of what the weather, the precipitation, what the C-store slowdown caused to the business, and what we could have done differently
And as I said in the script, Judy, Gatorade is a big part of our business and we were lapping 18% over 2015 and 2016, and with a slowdown of C-stores ---+ C-store traffic and the weather patterns in Q3, clearly Gatorade was impacted because the weather has an outsized impact on Gatorade
That was the first one
The second is CSDs
We've been embarking on a deliberate strategy to shift the portfolio to lower calorie offerings and they tend to be more non-carbonated beverages, and that's why we shifted about seven points of the portfolio to non-carbs
We have a lot more lower calorie and zero calorie innovation in CSDs, and we actually have it even under the big brands, the Pepsi and the Mountain Dew brands
So, what we're going to be doing going forward is taking the big brands and doing a lot more low calorie and zero calorie offerings under that brand
So, I tell you if I looked at this quarter, the only two that we need to focus on is getting Gatorade back to growth, which we're already beginning to see and tweaking our advertising spending against Pepsi and Dew
The thing to be very careful about is we are focused on responsible growth
During the quarter, as we saw the trends, we could have very quickly hit a promotional lever and tried to drive growth, and we tried our best not to do that because we think that once you go down this promotional spiral, it's never-ending
So, our team is focused on profitable growth, responsible growth, and we are all focused on getting CSD trademarks and Gatorade back to growth
Good morning <UNK>t
Let me give my comments and then <UNK> step in with yours
I actually believe ownership of the bulk of the bottling system is an advantage because you can actually do two things
One, you can flex them quickly and second is that you can extract more productivity from a bigger base
So, I actually believe it's a good thing
During a period when a refranchising is going on, what happens is that you have funds that you can use to deploy against the market
But that is a temporary situation and that is going to get exhausted very soon
So, we have to be careful that while the marketplace might have extra funding during a refranchising activity, we don't overreact by hitting a promotion lever to get short-term value ---+ volume in the business
Having said that, what are the structural issues we see? One, we see a continued decline in full-sugar beverages
We see consumers shifting to lower calorie and zero calorie beverages
And we do see a lot of little competitors coming into the marketplace with interesting new beverage offerings, some of which stick, many of them don't stick
So, what we have to do is create an entity within our company that does smaller brands, but smaller brands that stick and grow into medium size and bigger brands, we have to create that capability, which we are doing; and second is that the big lesson from Q3 is that it is an and game, not an or game
When we launch new products, we have to go for new shelf space
The core shelf space, especially in C-stores for the big brand, we have to protect the hell out of it and that's what we're going to do
And <UNK>, do you want to add anything to it?
But you know, <UNK>, it's also safe to say that, as a leadership, we are focused singularly on value creation, shareholder value creation and we spot trends and if we think we have to make changes in our business, we do that
So, at this point, we think our strategy is the right strategy
And in terms of overall cost management, we put in place a Smart Spending program about one year ago
And as the months go by, we just get better at being smarter and smarter with Smart Spending
And what you're seeing, because right here in corporate, we drive Smart Spending very, very seriously and that's where you're seeing the reduction in corporate cost
Good morning <UNK>
<UNK> good morning
I'll answer the second answer, and then, <UNK>, you should take the first one and talk about what's changed
I think that the thing to be careful about is not just the reinvestment, it's how much and in what
It's better to invest in pull activities than to hit the pedal on push activities
Because when you start getting into this competitive battle of more and more promotions, we've been there, done that, I don't think that's a way to create long-term, strong businesses
So, we've tended to focus more on innovation and pull-related spending, more A&M spending
The shift to digital is a question mark because I don't know what the ROI on digital is as yet
And we're relooking at all elements of our marketing spending to see exactly which method of spending gives us the best ROI by brand
So, that's a piece of work we are doing
What we want to do over the next few quarters is look at our brand portfolio and see how best to do trademark advertising, so we can focus on the big brands and still drive lower calorie products
The thing to be careful about is this industry should not escalate to going from push spending to pull spending and everybody throws a lot of money into this business
It's going to be a judicious management of this business, where you've got the right amount of A&M spending and judicious execution, so this business remains profitable going forward
I think that's where ownership of the bottling business is going to make a huge difference because we can work all of these levers very carefully
So, the next few quarters, watch and see what we do to tweak our spending and what the benefits are
We feel reasonably confident
Good morning <UNK>
So, <UNK>, we're not a talking about any long-term algorithm or guidance at this point
We usually do that in the February meeting
But let me tell you in broad shapes, our focus is on innovation, our focus is on portfolio expansion, our focus is on shift to Better For You, Good For You products
And our focus is on productivity and stepped up levels of productivity
The whole goal is to marry our innovation capability with our productivity programs
And we've had remarkable success over many, many, many quarters
This one quarter was a bit of a [Indiscernible] on North American Beverages, and I call it [Indiscernible] because there were many external factors that caused this
And believe me, we are all over this business and we will be back
There is no issue
So from a long-term algorithm, just wait until February next year when we do give you the guidance
But all I say to you, our focus is on balanced top and bottom-line growth
Invest in the topline; make sure the right productivity to deliver the bottom-line growth
Make sure that you invest in all the new capabilities needed and generate the productivity to invest in new capabilities
That is a tried and tested playbook, and we're not backing off of that
<UNK> good morning
You want to take the first part, <UNK>?
And talking about NAB trends
When you're looking at weather and you're looking at precipitation, you don't plan for a cooler weather or higher levels of precipitation
So, we fully expected that this summer would be a normal summer, not a flaming hot summer, but we thought it'd be normal summer
And so we kept investing behind the brands like Gatorade, but then when the weather completely turned south and ---+ not literally, but it was cooler and a lot more precipitation, that advertising spending did not give us much lift as we would've liked the business to get
Now, if we have not been lapping the 18% growth, it's a whole different ballgame
The problem is the combination of lapping the 18% growth for the last two years in Gatorade, plus the fact that we had a cooler summer this year, when it's our seasonally big quarter is what caused the issue
And one of the things we've told our businesses is that don't do anything in the short-term which will have no lasting impact for the long-term
Many years ago, we use to just hit the promotional spending lever
And I think what we're doing very carefully now is saying don't hit the promotional spending lever because that won't last for the long-term
So, the weather was a big factor
And we hate to use weather as an excuse, <UNK>, but the weather was a big factor
And we didn't make all the changes anticipating poor weather, we just kept playing our playbook and that's what caused the issue
Again, it's temporary, we're taking the actions and we are all over it
Good morning <UNK>
Well, I'm going to talk about the pricing question and then <UNK> is going to give you a good answer on the rest of it
As I said, <UNK>, at least two or three times, and thank you for asking the question, we are focused on responsible growth
The goal is not to hit the promotional lever and try to just buy short-term volume
And that's the message that's been made very clear to our entire North American beverage Business, and Al and Kirk and the team are singularly focused on that
So, you will see PepsiCo executing a very responsible strategy going forward, balancing push and pull spending so that it's profitable growth
In terms of productivity and the plans for cost reduction, <UNK>, why don't you just provide the answer for that?
Good morning <UNK>
<UNK>, do you want to take that? So, let me give you some of the ---+ what we're seeing in some of the geographies
We're actually seeing a strong lift in European business
All of our business ---+ actually West and East Europe, we're seeing tremendous strength
All our businesses are doing well
We have a wonderful portfolio in the ESSA market
And we have the right marketing programs, the right pricing programs in place and that's why you're seeing such a stepped up growth rate in the ESSA market, both East Europe and Western Europe
And our Russia business in particular is doing very well, and so we feel very, very good about that
In the Middle East, which is another big market for us, clearly this year we saw the impact of the lower oil price, the tax on CSDs, all of that went into place
Again, we have taken all the appropriate actions to implement more productivity, start to shift the product portfolio
And while we took a short-term shock to the system, we're coming out of that
And we think that the Middle East, North Africa still represents a very, very good market with lots of consumers is still in coming into the peak consumption years
So, we feel good about that market
The prospects for recovery in those markets are good
As I look at China and the Asia-Pacific region, our business in China is doing well, especially our Snacks business is doing very well
Our Quaker business is doing exceedingly well in China
The team is a good team
Our e-commerce business is on fire in China and doubling in size every year
And it's becoming a learning lab for us to learn how to do e-commerce for the rest of the world, so we feel good about China
The wonderful thing about the rest of Pacific Rim is that you've got many markets; all these little tigers are recording pretty good GDP growth
The markets may not be big as a China or India, but each of these markets contributes positively to our performance, and we've been doing well on those markets and gaining share in all of those markets
We have good bottling partners
Our own operating businesses are very good
Good leadership teams
Those businesses are doing well
We don't see much of a concern in those markets, even though they've gone through some political ups and downs
In the South Asian subcontinent ---+ India, Pakistan, Nepal, Sri Lanka, we face the normal upheavals from GST, the demonetization ---+ or remonetization, I should say
We are through all that now
And hopefully the business will start to steadily recover in India
But Pakistan has been a big success story for us
We have a good business there and it's growing very nicely and profitably
Latin America is a big question
We have strong businesses in Mexico and Brazil in Central America
Clearly, Latin America has gone through its share of geopolitical issues, and recently, the earthquakes have really had a devastating impact in Mexico; and the hurricanes that swept through the Caribbean and Puerto Rico have a really decimated those islands
In spite of that, the teams have performed well
And our Brazil business is doing very well and our Mexico business is doing well across both Snacks and Beverages
So, in those markets, I would say we're holding in Latin America, doing exceedingly well in the ESSA region
Our AMENA sector is, in spite of all the issues, coming back very nicely
North America is our core, and we remain positive about the North American business
Now and then, there will be a quarter where some business has a hiccup or a toast up
The resilience of our overall portfolio is what allows us to deliver the numbers we're delivering
So, overall, we still feel quite confident about our prospects and we are buckling our seatbelts and saying, "There will be geopolitical instability, there will be weather-related issues, we just have to build a portfolio that can weather that and somehow profit through and deliver the performance
Good morning <UNK>
<UNK>, great question
First of all, we always get pushback from retailers and everything
I think the real thing is that from PepsiCo's perspective and DSD company, we have big brands and our brands have high velocity
So the combination of those three yields tremendous profitability for retailers
And clearly, some upside brands have come in and taken a lot of shelf space
Our challenge is not to just say, "Hey, give us more space for core CSDs," it's how do we provide the right innovation to go after those upstarts who are taking a lot of space
I tell you one of the issues I would say, and I take full responsibility for this, maybe in a couple of cases we were slow to respond to some of these newcomers who have taken a lot of space
And believe me, we will fix that
And going forward, the agility and speed of response from our company will go up significantly
Sometimes when you have too many big brands and too much success under your belt, you lose a little bit on speed, and we are working to fix that
So, I think you'll find that the retailers actually welcome the DSD suppliers to keep their shelves looking good going forward and that's what we provide with our beverage portfolio
In terms of the third leg, we've tried to build it organically with success, Wimm-Bill-Dann was the last big acquisition we made, and except for the Russian ruble that went through its own share of challenges after we bought Wimm-Bill-Dann, coming out of that, the business has performed exceedingly well
It's an ideal portfolio
I think what we have to be very, very careful about ---+ if we went off and built that third leg through acquisitions, we have to think hard whether they're shareholder value creating, what kind of a premium do you pay for any acquisition and how do we realize the benefits of that deal enough to offset the acquisition premium
And believe me, the stuff we've looked at so far, we don't see a clear path to that
And so as we've said many, many times to all of you, we want to make sure that any major acquisition we may ---+ minor or major, I'm sorry; any acquisition we make has a clear path to value creation
And if we don't see that, we typically do not make the acquisition
We try to do things organically
It may take longer, but they create much more value over the long-term
<UNK>, did you want to add anything on that?
<UNK> good morning
Don't know
Don't know, <UNK>
You know what I think with our revenue growth rate, they're still up there in the top performance in the Whole Food and Beverage space
And so it's an environment that requires us to modify our model, our innovation model, our retail, our outreach model
And you know what, when you go through these sorts of transformations and you're tweaking part of the business model, there will be issues along the way
If we focus on the year and looked at our performance versus other people in the space, I think we stack up pretty well, both on the top and the bottom-line
And so will we lean harder on productivity, we will always lean harder on productivity, because we believe that we ought to take out any cost that is not value creating and put it back into investments in the business or flow it through to the bottom-line
And that has been our modus operandi
So, productivity will always be paramount in PepsiCo
As we get better at it, we will keep doing more of it
But we're not taking our focus off of growing the topline
To us, growing the topline is really the right way to grow the company in a very, very balanced way
So, we are redoubling our efforts to grow the topline
We're looking to see how to spend the A&M that we put out in a much more efficient way
To me, that's the Holy Grail
We all spend a lot of money on A&M, how do you spend it in an efficient way so we get the appropriate lift from the A&M? But you know it's interesting times in the entire CPG world globally
And we have the size, scale, capabilities, the brands to be a very, very important player in this business and a top performer and that's what we're focused on maniacally
And <UNK> let me just close by saying; personally, I'm completely committed to this company because 50 time my salary is in PepsiCo stock
And with that level of ownership, believe me, this is something <UNK> and I focus on 24 hours a day
Good morning <UNK>
<UNK>, good morning
Yes, good morning <UNK>
Yes, look even in Europe, our categories have had private label penetration, but not to the extent that many other HPC or other categories have had
Having said that, we are not complacent about any of this
Basically, I think, as we look forward, we're still looking at retailers, if they want to deliver margin growth in a period in which they're seeing price compression, they have a couple choices
They can do private label or they can get more efficient or they can get innovation to the stores from the big manufacturers that drive more traffic and velocity
So, I think what could happen ---+ <UNK>, this is just my perspective, is that you could see a bifurcation
You could see big brands, big companies taking the burden off of retailers through DSD and by bringing our own label into the store and driving more velocity and traffic through the big brands and innovation
And then you could see on the other end, a combination of small brands and private label that flanks it on the other side
What could be squeezed in the middle is sort of the mid-size brands
Now, this is just my perspective, and we've been looking at all of this really hard
We think that could be a possible scenario going forward
So, from our perspective, doubling down on big brands, making sure innovation is ---+ making sure execution is perfect; our whole system is aligned, so when we have to make changes, we can do it fast
And then within our company, making sure we have enough levers on productivity so we can get more and more efficient deploying automation and other tools to be able to put it back on innovation, driving the topline growth, whatever we have to do
I think that's going to be the game going forward
As we said in the last call, this is going to be a period of brilliant disruption over the next three to five years and we're going to approach it with pessimism or optimism
We actually think this could be a time when a lot of competitor balances could be reset
And as perhaps the largest U.S
company in food and beverages and the second largest food and beverage company in the world, believe me, we will play an outsized role in this resetting of the competitive balance
Good morning
Go ahead <UNK>
So, thank you all for your questions
And let me just summarize by saying we are pleased with our year-to-date results for the third quarter with strong results across most of our sectors and we expect our topline performance to accelerate in Q4 as performance at NAB recovers
And we're on track to deliver our fifth consecutive year of at least 9% core constant currency EPS growth
And we believe we are well positioned to continue to perform well over the long run
As always, thank you for joining us this morning and for the confidence you have placed in us with your investment
