百事 (PEP) 2012 Q1 法說會逐字稿

Good morning, and welcome to PepsiCo's first quarter 2012 earnings conference call.

Your lines have been placed on listen only until the question-and-answer session.

(Operator Instructions)

Today's call is being recorded and will be archived at www.pepsico.com.

It is now my please to introduce Mr.

Jamie Caulfield, Senior Vice President of Investor Relations.

Mr.

Caulfield, you may begin.

Thanks, Jackie.

With me today are Indra Nooyi, PepsiCo's Chairman and CEO, and Hugh Johnston, PepsiCo's CFO.

Indra will lead off today's call with a review of our overall performance.

Hugh will cover the financials and our balance of year outlook and then we'll move on to Q&A.

Before we begin, please take note of our cautionary statement.

This conference call includes forward-looking statements including statements regarding 2012 guidance based on currently available information.

Forward-looking statements inherently involve risks and uncertainties that could cause our actual results to differ materially from those predicted in such forward-looking statements.

Statements made on this conference call should be considered together with cautionary statements and other information contained in today's earnings release and in our most recent periodic reports filed with the SEC.

Unless otherwise indicated, all references to revenue, EPS growth, and division and total operating profit are on a core basis.

To find disclosures and reconciliations of non-GAAP measures that we may use when discussing PepsiCo's financial results, please refer to the Investor section of PepsiCo's website under the Investor Presentations tab.

And, now, it's my pleasure to introduce Indra Nooyi.

Thank you, Jamie, and good morning, everyone.

Our first quarter results came in right in line with our expectations.

The major economies we do business in, consumer behavior, the competitive landscape, and commodities were all in line with our assumptions.

Our focus this quarter was, first and foremost, to make sure we got our pricing into the market.

And, we are pleased with the level of pricing we achieved across each of our businesses.

In addition, it was important to gain traction on the brand building, innovation, execution, and productivity initiatives we communicated to at our investor meeting on February 9.

And, we have made good progress on each of these with momentum building as we enter the second quarter.

Before I discuss our progress on these initiatives though, let me quickly review the financial highlights of Q1.

Our financial results were right in line with our expectations.

Core EPS was $0.69.

Net revenue grew 4% and was up 5% on a constant currency basis and reflected strong price mix across all of our businesses.

Globally, price mix was up 5.5% and this pricing helped offset the impact of about $300 million in commodity cost inflation.

We had revenue gains across each of our four business units on an organic basis.

Global snack revenue grew.

Global beverage revenue grew.

And, in our nutrition portfolio, which is a subset of global snacks and global beverages, we saw a 10% revenue growth.

Emerging markets, revenue growth was particularly strong, up 13% in a constant currency basis, led by strong, double digit organic revenue growth of 21% in India, 13% in Brazil, 33% in Saudi Arabia, and 26% in Egypt just to name a few.

And, division and operating profit declined 2%.

Again, in line with our expectations and a solid result given the magnitude of the commodity cost inflation we absorbed in this quarter.

Hugh will take you through the financials and outlook in a few minutes.

But, overall, our Q1 results are encouraging and indicate that we're off to a good start and on track to deliver our full year financial targets.

So, let me now turn to the progress we are making on our key initiatives for the year.

We are focused on five big areas, brand building, innovation, execution, productivity, and driving cash returns.

So, let me walk you through each.

On brand building, when we met with you on February 9, we said we would do three things.

First, increase our investment in advertising and marketing from 5.2% to 5.7% of revenue this year.

Shift more of our spending from nonworking to working dollars.

And, focus are A&M investments against our 12 global mega brands to drive greater scale and impact with our spending.

And, I'm pleased to report that we made good progress on all of these initiatives.

We significantly stepped up on media in key markets in Q1.

For example, in the US alone, our media spending was up 25%.

And, for the full year, we expect to achieve our targeted level of incremental investment.

We're also being much more productive with our so-called nonworking dollars which is an incremental social funding for stepped up media investment.

One of the major drivers of this productivity is the rationalization of our agency partner relationships where in North American beverages, for example we reduced the number of partners from roughly 150 in 2011 to about 50 today.

And, this rationalization is also driving better alignment in our brand messaging and marketing execution.

As we execute our brand building initiatives, our expectation is to see our brand equity scores strengthen over the course of the year, building off of a solid base.

And, this should begin to translate to incremental top line benefits later this year and into 2013.

We'll share with your our brand equity score card results during the second quarter earnings call this year.

Our second focus area is innovation where our goal is to double the contribution of our new products to our total net revenue.

And, our Q1 results in this regard are encouraging.

Our innovation is targeted on specific channel cohort and occasion opportunities with a particular focus on emphasizing our mega brands.

For example, Pepsi NEXT, which offers a great cola taste with 60% less sugar is off to a good start.

And, initial feedback is that the brand is sourcing volume from other categories, consistent with our objective of bringing back lapsed cola users.

And, while it's very early, the results are ahead of our launch expectations and we've already achieved nearly 1 value share point.

Packaging innovation plays an important role in our innovation plans as well.

And, we made good progress in this area.

We are encouraged about the national launch of our differentiated 24-ounce can for regular and diet Dew and this is showing positive customer and consumer responses in test.

We believe this product plays well to young males who are loyal Dew consumers.

Building off the success of the Brisk 1 liter package, we launched the Brisk iced tea gallon jug in 4 flavors in Q1, and the launch is off to a good start.

In the first 12 weeks, Brisk Jug achieved almost 2.5 points of volume share of ready to drink tea in grocery and drove total Brisk brand volume growth of 14% across all channels in the United States.

Growth accelerating our premium innovation to drive higher net price utilization and we're increasing focus on opportunities at the value end of the spectrum to capture incremental sales and keep value oriented consumers engaged in our categories.

For example, on the premium end, Quaker Medleys, offered in a convenient single serve bowl, allows consumers to have a premium breakfast anywhere there's hot water or a microwave.

It's made from a premium blend of hardy rolled oats and whole grain with tasty chunks of real fruits and nuts.

Medleys targets busy adults who are seeking healthy choices that will set them up for a successful day.

The other example is Stacy's Gingerbread and Stacy's Cocoa, which deliver a differentiated snacking experience by providing seasonally relevant flavors to consumers.

And, Stacy's Pita Crisps will attract new consumers to the Stacy's franchise.

And, in the more value-oriented offers, Lay's Stax delivers a great tasting stacked potato chip at value price points.

Snacks grew net revenue 13% in the quarter and gained 2 points of value share in the stacked potato chips category.

And, we expect to see continued momentum as we launch new Hispanic inspired flavors in Q3.

And, we're launching Taqueros in the US, which is a value-oriented, indulgent, thick and hardy tortilla chip that addresses the Hispanic relocation.

We're also accelerating our ability to lift an shift platforms and products around the globe.

For example, we continue to leverage the success of our Do Us A Flavour campaign that originated in our walk ups business in the UK.

The program promotes consumer engagement by having consumers propose new players that are then voted online.

With the winners being launched as new products.

We've successfully expanded this concept to markets as varied as Holland, Saudi Arabia, and the United Arab Emirates.

And, we continue to expand our Quaker business globally.

For example, in Australia, we launched a range of new products, including hot oats and healthy bars and cookies under the Quaker trademark.

In Russia we're using our extensive oats expertise to provide healthier offerings by launching oats based products under the locally relevant Wimm-Bill-Dann Chudo trademark.

Our Quaker efforts are delivering solid results overall, with double-digit revenue growth in markets like the UK and China.

And, finally, we're leveraging our big brand into new product platforms giving us access to incremental cohort and channel opportunities.

For instance, with Doritos we launched Doritos Jacked, the ultimate extreme snack that recently debuted at the South by Southwest festival.

Jacked is everything consumers love about Doritos only jacked up for a bigger experience.

It's 40% larger in size and thickness and offered in Enchilada Supreme and Smoky Chipotle barbecue flavors.

And, it's supported by absolutely great advertising.

Doritos Dinamitas offers consumers everything they love about Doritos rolled in a taquito-like shape with explosive flavor.

And, we built upon our beverage relationship with Taco Bell to jointly launch Doritos Locos Tacos.

Doritos Locos Tacos was introduced nationally on March 8 with approximately [$60 million] in media support from Taco Bell.

Over 60 million units have been sold to date which is over 1.5 million tacos per day.

Already, new line extensions are under way to build on the success of this partnership.

So, in innovation, we had a good level of new product innovation that began to launch in Q1.

And, you should expect to see the pace of innovation accelerate as we move through the year with great new products across the full spectrum of our portfolio in both snacks and beverages globally.

Now, let me turn to execution.

We are measuring and driving execution across every element of the value chain to increase efficiency, quality, and service to Best-in-Class levels.

And, we're seeing good results across our functions and businesses.

For example, our sales organization just gained Family Dollar as a new partner for our beverage business, opening up more than 7,000 new points of distribution for our products in North America.

And, the Papa John's conversion was one of our fastest ever with 3,000 outlets converted to PepsiCo products in three weeks.

Overall, our sales organizations drove 6% growth in food service with gains of 4,500 new local food service accounts in Q1.

We are seeing strong execution in our DSD systems.

For example, in our launch of Pepsi NEXT in the United States we achieved over 90% in ACV distribution in GDMX in 3 weeks.

Which is truly great execution.

Our DSD system is driving terrific results in the C-store channel in North America.

Our net revenue across snacks and beverages was up 8% in the convenience channel in Q1.

And, we were the number one contributor to the C-store channel's entire growth in the United States.

And, the final example I'll point to on execution is on our integration of Wimm-Bill-Dann.

We achieved higher than planned synergies ahead of schedule, and virtually all Wimm-Bill-Dann functions have been fully integrated with our one Russia operating model within the first year of the acquisition.

So, that's on execution.

Let me turn to productivity.

As we shared with you in early February, we're targeting more than $1 billion in productivity this year, and $3 billion in total over the next three years, which includes the restructuring program we announced early this year and other productivity initiatives.

Our productivity programs for 2012 are locked in and we are very confident in delivering the targeted savings.

We made substantial progress against our productivity plans in the first quarter.

Because most of the restructuring actions began in mid-Q1, the financial benefits of the restructuring will accelerate in Q2 and as we move through the year.

In addition to the restructuring program, we've also accelerated other productivity initiatives.

We are driving hard against reducing the capital intensity of our business and we are already seeing results in reduced capital spending.

We're implementing programs like GES in Frito-Lay to improve the efficiency of our product distribution.

And, we're increasing automation in our plants to drive higher labor productivity.

Finally, we're doing a better job leveraging global capability and know-how.

By sharing best practices and implementing Best-in-Class processes, we're improving the operating performance of each of our businesses.

So, we are encouraged by the pace and progress of our productivity plans.

Then, we're taking steps to drive higher returns on our invested capital and cash returns to shareholders.

We reduced our net capital spending in Q1 by $122 million.

And, reduced our net CapEx as a percentage of sales over the last four quarters by 80 basis points.

We're achieving this both by driving high utilization of our assets, and by reducing the cost of replacement and growth capacity through value engineering and through enhanced global procurement management.

And, we remain committed to returning cash to our shareholders in.

In first quarter, we returned almost $1 billion in cash to our shareholders through dividends and share repurchases.

And, we expect to return more than $6 billion for the full year, an increase of approximately 12%.

Our dividend will increase again this year with the June payment, making this our 40th consecutive year of dividend per share increases.

To recap, we are focused on brand building, innovation, execution, productivity, and cash returns.

We've made good progress in Q1.

We expect momentum to build as the year progresses and we are confident in achieving our 2012 goals in these areas.

Finally, let me comment on the alliance with Tingyi that we announced on March 31 after the end of our Q1.

The PepsiCo Tingyi beverage system will provide Chinese consumers with some of the country's most popular beverage products including Pepsi, China's top selling cola, Mirinda, China's top selling flavored carbonated soft drink, Gatorade, one of China's top selling sports drinks, China's top selling tea and water brands sold under the Tingyi's Masterkong brand and China's second largest juice portfolio.

Overall, this combination has created the number one LRB manufacturing network in China by a wide margin and relative market volume share of 1.6 times the next largest competitor's position.

In addition to creating this terrific combined brand portfolio, we also expect that this alliance will allow us to do the following.

Bring innovative new products to market faster.

Improve operating efficiency and reduce costs by combining local and global expertise in manufacturing and distribution.

Provide better service to PepsiCo's retail and food service customers in China through Tingyi's superior distribution expertise and network.

Support new opportunities to develop local economies in interior and Western China.

And, significantly accelerate the national distribution of PepsiCo's brands in a capital efficient way, using Tingyi's extensive manufacturing and distribution network.

We are absolutely delighted to have established this partnership with Tingyi.

Both Tingyi and PepsiCo have a long history of successful partnerships with other companies.

And, we believe this alliance will significantly enhance our beverage business in China in the near term, while maximizing our future potential in the second largest, and one of the fastest growing, beverage markets in the world.

Q2 will be the transition quarter for our China beverage business.

And, we expect to see the benefits of this alliance accelerate in the second half.

The integration is well under way and progressing very nicely.

And, we look forward to updating you on our progress with the China beverage business.

With that, let me turn the call over to Hugh Johnston.

Hugh?

Great.

Thanks, Indra, and good morning everyone.

As Indra mentioned the quarter came in in-line with what we expected.

Reported net revenue was up 4%.

Constant currency net revenue increased 5%.

Net revenue included a 1 point FX drag and less than a point of M&A benefit with the net revenue contribution from Wimm-Bill-Dann largely offset by the re-franchising in Mexico where we no longer consolidate bottling revenue.

We realized 5.5 percentage points of effective net pricing with increases across each of our divisions.

Core gross margins were down 218 basis points driven by higher commodity costs in the quarter.

And, core division operating margins were down by 91 basis points with productivity in SG&A helping to offset a substantial portion of the commodity inflation.

All in, this resulted in a 2% decline in core division operating profit and a 1% decline excluding a 1 point drag from currency, in line with our expectations.

Core corporate unallocated expenses increased in the quarter.

There is also a $12 million change in corporate unallocated expenses related to our mark-to-market of deferred compensation balances.

But, this is offset by a credit of roughly the same amount in net interest expense related to our hedges on the deferred compensation balances.

Net interest expense was $175 million in the quarter, an increase of $12 million over Q1 of 2011, which is a function of both higher average debt net -- net debt balances, and slightly higher rates on our borrowings, offset somewhat by the deferred comp credit that I mentioned earlier.

And, our core tax rate for the quarter was 26.7%, which is 70 basis points higher than the rate of Q1 2011, driven by country mix and the favorable resolution of some tax items in Q1 of last year.

So, in total, below the line items mainly corporate expenses, interest, and tax rate, drove 5 points of deleverage from our core constant currency division operating profit decline of 1% to our core constant currency EPS decline of 6%.

Turning to our outlook.

Consistent with the outlook we shared on February 9, we expect our core constant currency EPS to decline roughly 5% for the year.

We anticipate continued strong effective net pricing which will contribute to net revenue growth but will likely negatively impact volumes.

We expect continued commodity cost pressures.

Our estimate of approximately $1.5 billion of commodity inflation for the full year, which is about a 7% increase year on year.

We expect that the rate of inflation in Q1 will be the highest of the year, with the rate of inflation abating somewhat each quarter as we work our way through the year.

We anticipate productivity of more than $1 billion this year, which represents a substantial increase versus our historical productivity target.

The incremental productivity is largely driven by the restructuring program that we announced on February 9.

A majority of the restructuring actions took place in the first quarter, and we expect the remainder will take place over the course of this year.

So, the productivity benefits will accelerate as we move through the year.

We're investing more in A&M this year to support our brands and we're making incremental marketplace investments in routes and racks.

We expect A&M as a percent of sales to increase by approximately 50 basis points on a full year basis.

We began to put more media in the market in quarter one, but the impact of the A&M expense in the P&L will be more pronounced in the back half based on how the accounting curve of the expense works.

Below the division operating profit line, we expect an increase in corporate unallocated expenses, reflecting higher pension costs related to the change in the discount rate, and investments in productivity capability.

Net interest expense is expected to be higher, driven by higher net debt balances and higher rates as we term out some of our debt.

And, we expect our core tax rate to be approximately 27% for the full year, but with some variability each quarter.

Based on current ForEx market consensus, currency translation would have approximately 2 points unfavorable impact on our full year core EPS.

As you model out the year, you should be mindful of three structural changes in particular.

First, we re-franchised our Mexican beverage business early in Q4 of 2011.

Second, we adjusted our ownership in our joint venture with Almarai, such that we are now in the minority.

And third, we entered our alliance with Tingyi, which closed on March 31.

In each of these transactions, the accounting result is that we will no longer consolidate a substantial portion of the revenue.

Including the impact of these transactions, we expect our core constant currency net revenue growth to be in the low single digits.

Excluding the impact, we expect our core constant currency net revenue growth to be mid-single digits, which is exactly what we communicated on February 9.

As we report out the remaining quarters, we'll provide visibility into the impacts of these structural changes.

From a cash flow standpoint, reported cash used for operating activities was $690 million, which includes a $1 billion discretionary pension and retiree medical contribution.

Net CapEx was down $122 million, and down 80 basis points as a percentage of sales on a rolling four quarters basis.

Management operating cash flow, excluding certain items, was $79 million, which is a slight increase versus Q1 of 2011.

We returned about $1 billion to shareholders in Q1 through dividends of $816 million and share repurchases of $142 million.

For the full year, we expect to generate more than $6 billion in management operating cash flow, excluding certain items.

And, return more than $6 billion in dividends and share repurchases including our previously announced increase in our quarterly dividend that will take effect with our June dividend payment.

Net-net, the quarter came in pretty well exactly as we expected.

The pricing picture was positive.

And, our outlook for the year for earnings, cash flow, and cash returns is completely consistent with what we shared with you on February 9.

And now, we'll open the line for your questions.

Thanks, Hugh.

Jackie, we'll take the first question.

Thank you.

(Operator Instructions)

Bill Pecoriello, Consumer Edge Research.

Good morning, Indra and Hugh.

Good morning, Bill.

Question on Frito-Lay.

One was the -- you talked a lot about the initiatives on the premium and value side.

When do you expect to see that begin to impact the share trends?

What do you estimate the volume and value share did in Q1?

And then, on the profit performance in the quarter at Frito, was that 2% profit growth also impacted by that new year shift that you quantified on the volumes there?

Thanks.

So, Bill, you know, P3, P4, we're already beginning to see share start to come back.

In fact, if you look at the IRI data that's coming out today, you're already beginning to see Frito share improve steadily.

I think the most important thing, what he with told all our businesses, focus on getting the pricing into the marketplace first.

And, then we can start slowly figuring out the revenue management to make sure there's a good balance.

But, we had to get the pricing in as early as possible.

And, Frito did exactly what needed to get done to cover commodity cost inflation.

In terms of the impact on profitability, for sure, the 53rd week had an impact on volume, revenue, and profitability.

Yes, Bill, I think what you can extrapolate from that is we said the volume impact was about 2 points.

I think you would put the profit impact in a roughly similar place.

So, the 2 points they did would be closer to 4.

And, remember, this is the heaviest of the commodity impact for Frito-Lay in Q1.

So, as we get through the year, the commodity impact on Frito-Lay will be less impactful.

So, that's tying back to where you would expect Frito-Lay to be roughly normal.

And, the improved share performance that you're seeing now is that coming from the initiatives on the premium value side or is it on all the core innovations in the mainstream segment?

I think it's coming from all three, Bill.

Yes, Bill, you're going to, as Indra said, you're going to steadily see those things impact positively during the course of the year.

Both core as well as the new products.

Great, thank you.

John Faucher, JPMorgan.

Thanks.

Good morning.

Hi, John, good morning.

Thanks.

In looking at your commentary on the North American beverage industry you talked about maintaining share in LRBs.

Which at least from a reported results standpoint we're not seeing.

So, a couple of questions on that in terms of can you talk to us about what you're seeing that may not be showing up in the reported results?

And then, similar to what you talked about with the Frito piece, how should we judge your momentum in terms of market share as we go through the year?

Thanks.

So John, good morning again.

In Q1, ex-53rd week, if you looked at like for like Q1, in measured channels, GDMXC, which is really what we see from an IRI perspective, we gained a tenth of a value share.

We have to use measured data because that's an objective data set that we can measure ourselves by.

Now, when we talk about additional investment and changing the innovation model and really recommitting to this business in a different way, the results come steadily and over the years as we talk to you early in February.

What was very encouraging was in the first quarter we began to see positive results.

And, if you look at the P4 IRI data, one more time in GDMXC, we gained value share.

So, North American beverages, we look at those numbers and we say we're making great progress.

I think the other aspect of the share numbers that made us very encouraged about the progress on the business was the cold channel value share.

We made tremendous progress in that whole cold channel business which is really the best part of the whole beverage business.

And, we feel good about the progress we've made there and the successes we've had in the cold channel business.

Frito-Lay, ditto, period one, period two, we put the pricing into place.

Started end of last, we put it into place.

And, today's IRI data, period four IRI data is beginning to show the positive momentum from all five initiatives.

As Hugh mentioned in his opening comments, and I did in my opening comments, as the year progresses, quarter by quarter you'll start seeing the business strengthen.

And, we're really watching for the steady improvement in the business as the year goes on and make sure we do it the right way.

Not try to jerk the business around by pushing for volume in one quarter and trying to do something else in another quarter.

But, steadily build the brand, steadily build the business, and focus on value share in the measured channels in North America because that's the only objective measure that exists.

If I can ask a follow-up on the cold drink stuff.

So, we've seen strength from other manufacturers in convenience and gas and a lot of it's been pricing driven.

I guess, so two follow-ups here.

The first would be can you talk about units versus pricing in convenience and gas.

And then, secondly, can you try and give us an idea how much of weather has been a positive impact versus gas prices being a negative impact if you have some thoughts on that.

I think that weather was, and gas prices have netted out, John.

The convenience channel has been pretty strong in the first quarter.

And, we are, I'd say, cautiously optimistic on the outlook for the convenience channel.

And, in terms of units versus pricing, don't have the numbers right now off the top of our head.

But, Jamie or somebody will make sure that we get back to all of you on this question.

John, the thing I would say is that we're seeing both price and feeling good about volume as well.

Obviously, in a world where everyone's trying to interpret what's going on with the economy generally, certainly the convenience channel and the way it's held up well bodes well for both economic signals but also for our business.

So, we certainly feel good both in terms of volume but we feel good competitively as well as to what's going on in that channel.

Great.

Thanks.

Dara Mohsenian, Morgan Stanley.

Good morning.

Good morning, Dara.

I was hoping to get your perspective on the pricing environment in the US CSD category and your confidence that price increases will hold here as we head into the summer.

Yes, Dara, why don't I jump in on that one.

What we've seen in the pricing environment is all of the players in the industry being very steady about pricing.

Haven't seen a whole lot of discounting, occasionally they'll -- a skirmish will pop up into the drug channel or something like that.

But, the broad indications are that the pricing we saw in Q1 continues to stick.

Okay.

Thanks.

Bryan Spillane, Bank of America.

Good morning.

Good morning, Bryan.

Just a question on the Europe segment.

And, I was surprised by how weak the margins were in the first quarter.

And, I understand, I guess, there's some -- an accrual or a reversal on the trade receivables.

But, is there something else that's going -- that was specific to the first quarter that drove the profitability so low and the margins so low sequentially?

And, if you can talk a little about maybe the outlook there, just in terms of the profitability in Europe?

Yes.

So, in terms of generally how Europe came in, Bryan, it was very much in line with our expectations and plans.

There's a couple of factors to consider in that regard.

Number one, the trade accrual fall-out and fall-in year-over-year in the context of full year it was relatively nominal.

But, in a two month quarter, and in a business where the profitability is obviously quite low in the first quarter, I think it was $81 million in Europe for the quarter, it has market impacts relative to the impact on the year.

Relative to margins, the other thing to consider is in last year's numbers we only had Wimm-Bill-Dann for one out of the two months.

And, we only owned 77% of the business for that one month.

And, Wimm-Bill-Dann obviously is a lower margin business.

So, that certainly presented something of a drag for the quarter.

But, we obviously don't give guidance on a sector level basis, but even in the environment that's as weak as it is in Europe, I think we've got to plan for it correctly.

And, it's certainly trending in line with our expectations.

You know, Bryan, the other thing I'd tell you is, even the team will tell you, that first quarter's a small quarter, as Hugh said, only two periods.

But, as we go into P3, P4, the business is looking good and very much in line with what we expected and the Russia business, in particular, looking very, very good.

We did great on CSD share.

And, the way we are rearchitecting the juice business to be more disciplined about pricing.

Not chase volume at any cost and build the whole profitability of the business.

The team is doing an absolutely superb job.

And, the Wimm-Bill-Dann dairy business is doing exceedingly well.

So, really looking at the overall Europe business and feeling good about how our team is managing through what I would characterize as a mixed economic environment.

Indra, if I could just follow up.

One of the things that we've heard through this earnings season has been, maybe I don't know if improvement, but at least that Eastern Europe and Russia especially, the consumer may be stabilizing.

And, in some pockets maybe even a little bit better.

Just the macro environment not as depressed or not moving in the wrong direction.

Can you comment on that at all?

Is that -- have you seen any, broadly, any stabilization or any signs of improvement in that region of the world?

I'd say that region of the world is looking good.

And, as we looked at upping our investment in Russia a year ago, the fundamentals of that region of the world are good because you've got huge oil reserves in Russia.

You've got a well-managed economy on many economic fronts.

And so, we look at that part of the world and say the prospects for the whole Russia, CIS, east European cluster, if you want to think of that as one cluster, is very strong.

And, again, strong is a relative term, but it's good.

So, in this world today where you've got GDPs ranging from negative to high single digits, this Russia, east Europe cluster is looking like a solid 2% to 4% GDP growth.

That's very good today.

And, we're feeling good.

Yes, Bryan, one comment I'd add to Indra's comments as well.

In Eastern Europe and Russia we've probably got the broadest portfolio that we have anywhere in the company.

And, one of the benefits of that is when the economy's a little bit tougher, we have products that sell well.

When the economy is going well, we have premium products that tend to sell well.

So, we certainly feel good about the way that we positioned ourselves strategically in that area.

And the power of one helps us enormously there because we can flex the distribution systems.

We can load up the trucks with products that cube out, weight out.

I think the Russia, east Europe, CIS cluster is probably our best example of power of one.

And, that's what's working so well right now.

Okay, thank you.

Kaumil Gajrawala, UBS.

Hi, good morning, everyone.

Good morning, Kaumil.

Can you speak a little more specifically on how Mountain Dew and Pepsi did in the quarter?

And, I believe the 24-ounce launch is in progress.

If you could maybe just talk about how we should think about that?

So, Mountain Dew had a terrific quarter.

Feel great about where that brand is and we obviously have new products coming out against that.

The 24-ounce can for regular and diet Dew is going along very, very well.

It looks like a real premium innovation that's going to create incremental revenue and margin for us.

The Pepsi business is going to steadily improve over the course of the year.

A couple of things to consider in that regard.

Number one, the Pepsi Max business continues to chug along very well.

Number two, Pepsi NEXT, as Indra mentioned, has really exceeded our expectations coming out of the gate.

Number three, the media that we've significantly increased in the first quarter, if you watch much TV I'm sure you've seen lots of Pepsi ads out there.

And then, number four, we've got lots of new marketing coming against Pepsi that we'll talk about a little bit later this year.

So, I think what you're going to see with Pepsi is just a steady progression and a steady improvement in that business during the course of this year.

And, as we exit into 2013 we expect to feel pretty good about it.

Kaumil, the other thing is, this is a business over the years that has been characterized by price discounting, dealing, back and forth trading share at the margin.

With all the commodity cost increases, it was critically important we put in place deliberate increases in pricing.

And, manage this business very steadily and responsibly.

And, that's what we've been doing.

So, our goal is to look for steady share improvement through the year so that we hold value share in LRB as the year ends.

And, to make sure that we don't do anything silly, just to go after any sort of a value gain.

So, value share is really our focus.

Got it.

Maybe in thinking about NEXT, some innovations have a halo effect on the core, others are cannibalistic.

Where would NEXT fall?

Interestingly, NEXT is sourcing from outside the cola category.

In fact, it's even sourcing from outside the CSD category which means that lapsed cola users are coming back into the cola category.

Now, I want to make sure that you hear the appropriate caveat.

It's too early to call this brand and say it's a gigantic success.

But, what's surprising to us is a few weeks after the launch it's now almost 1 share point which has not happened in a long time in any new product launch.

So, we are watching every metric very, very carefully.

And, every quarter we'll update you on the progress of Pepsi NEXT.

But, it's really bringing back lapsed cola users.

Which is what's surprising.

So, not terribly cannibalistic.

Not much at all.

Got it.

Thanks, guys.

Judy Hong, Goldman Sachs.

Thanks.

Good morning.

Good morning, Judy.

First question is just in terms of bridging to the EBIT decline in the first quarter, I guess I'm just trying to better understand different components.

You've got the commodity inflation.

You talked about the brand investment.

But, maybe if you can just give us a clarity on how much the brand investment step-up occurred in Q1?

The allocation by different segments, as best as you can.

And, just give us clarity on bridging to the EBIT decline.

And then, how some of those components get phased out as we get into the back half of the year?

Yes, Judy, actually if you go to what we shared with you on a full year basis, it was actually pretty consistent with two exceptions.

The curbing of the A&M has less impact in Q1, which is what we had shared earlier.

And, that's purely due to the curbing.

We're being very specific about saying we're going to increase by 50 basis points on A&M during the course of the full year.

But, we curb that with volume and then you're dealing with the curb of the prior year.

So, that had a little bit less of an impact in the quarter.

And then, offsetting that, as we shared with you on Feb 9, the commodities had a bigger impact in the quarter relative to the impact of the full year.

Other than that, everything else was pretty consistent with what we shared with you back at the Feb 9 meeting.

Okay.

Hugh, the unallocated corporate expense, though, just even including the pension step-up, just seems like you had a big step-up.

Was there anything going on in that line item in?

No, I mean, nothing in particular.

Corporate unallocated can be a little bit choppy but there was nothing of note.

We indicated what we expect out of that for the year.

So, I wouldn't change how you're thinking about that for the year.

There's no big news there.

Okay.

And then, Indra, just going back to Frito-Lay and you talked about improving share performance in period 3, period 4, and you talked about innovation around the premium and the value segments.

But, maybe if you take a step back and look at Frito and maybe including Quaker in the context of the broader macro snacks.

And, you're seeing growth in some of the adjacent categories like snack bars, maybe, exceeding salty snacks.

How are you thinking about positioning Frito and Quaker to really better address the faster growth adjacent categories?

And, are you thinking about perhaps focusing on stepping up innovation and spending around that arena?

Judy, you captured in your recent note what we've been telling all of you for the last couple, three years.

That the growth in all these categories is coming from fun for you, better for you, and good for you.

It's critically important PepsiCo places its bets in all three.

And, let me tell you what our strategy has been and let me refer back to what trends you're seeing in the marketplace.

In the fun for you category, there's still growth, especially in salty snacks, value growth.

And, what we have to make sure is increase the permissibility of our fun for you products by reducing the salt levels, going to heart healthy oils.

That is our, quote, health and wellness portion of the fun for you category.

And, we've been doing that over the last few years.

The second leg of the strategy is dialing up our baked snacks, whether it's Baked Lay's, whether it's Quaker Light snacks.

Which is a big snack.

Making sure we dial that up.

That's what we've been doing.

And, the third is really investing behind the good for you snacks.

Because the growth rate of good for you snacking and good for you products across the world is about two or three times that of fun for you and better for you.

And, in fact, our nutrition business in Q1 grew revenue 10%.

So, those categories are growing exceedingly rapidly.

So, what we're doing with Quaker, as the quarter progressed, period 3, period 4, the Quaker trends are looking positive.

But, using the Quaker trademark, we're looking to launch more healthy snacks.

But, what we don't want to do is to launch much lower margin commodity healthy snacks.

We have to play in the value-added healthy snacking.

What we're looking for is new innovation to play in the value-added healthy snacking.

A new twist on bars, new ways to marry dips with chips, so that the dips are very healthy and can provide a great source of a mini-meal.

So, that's really what we're working on.

For example, our Sabra hummus dips are just flying off the shelf.

That's an example of a healthier accompaniment to any snack that you want.

Our Stacy's business is doing very, very well.

I think the name of the game for Frito-Lay is slowly and deliberately building the business, rather than jerking the business around to gain short-term share.

I feel good.

Look at the IRI data for this period 4.

You see very nice, steady progress across the board.

Great, thank you.

Ali Dibadj, Bernstein.

Hey, how are you?

Good morning, Ali.

Good morning.

A few things.

One is, we asked you this back on February 9 t at the strategy reset, and again at CAGNY, about Frito-Lay North America and the growth in margins and the growth in top line.

I just want to make sure you're still on the same page in terms of for this year, despite what we see in this quarter from margin and from a volume perspective, but for this year you're going to be able to price away commodities, you're going to be able to hold or grow volumes, and hold or grow margins.

Is that still the expectation?

Yes.

So, Ali, what we're really focused on is ensuring that we are both getting the pricing through and we will, and certainly expect, to hold or grow margins.

The volume, obviously, in Q1 was down 2%.

But, we also said that we saw negative 2% impact from the 53rd week.

As the innovation gets out the door, we certainly expect to see all of the metrics from Q1 improve.

And, to focus on value share.

Yes.

Okay, okay.

I think that's helpful because I think that's a yes.

That's good that's still consistent.

Shifting gears a little bit.

And, this is more of a philosophical question and maybe it's just me being confused again, but whenever we talk about shares in the beverages business, we're always refocused on LRBs versus just CSD.

You guys consistently talk about LRB shares.

But, doesn't that muddy the waters a little bit?

And, isn't that manifested in what we saw this quarter?

You had pretty good non-carbs at plus 1%.

CSD was down 2%.

In the end you had a negative 1% in PAB.

So, how do you think about that balance internally?

I know you're communicating it as an LRB and I can understand why.

How do you think about that balance internally in funding the non-carbs piece versus the CSD?

Because you have to be successful in CSDs, obviously.

Ali, I guess a couple things.

One, we think about the LRB category because we know consumer behavior at the end of the day is such that people cut across LRBs.

It's a repertoire category.

It's certainly been that way for a while.

The one thing that we point to is something of an exception in that regard is energy because it's such a unique category from so many dimensions.

In terms of how we manage, do we have expectations for CSDs as well as for individual non-carbs and Gatorade and Tropicana and SoBe LifeWater and all those things?

Yes, absolutely we do.

Do we see ourselves in a position where we would want to lose large amounts of value share in any of those categories, certainly not.

We would not want to see that.

But, we do have to also recognize and acknowledge the fact that it is a repertoire category.

Certain of the sub-categories have more tailwinds than others.

And, certain of them we have better brand positions, primarily in non-carbs.

So, we're going to look at our funding opportunities based on where we think the best value creation comes from.

And, that value creation includes a recognition of we need to manage value share effectively.

But, LRB we do think is the right way to think about it because of the repertoire nature of consumer behavior.

Ali, if I look at overall North American beverage volume, if you look at about the 20 billion 8-ounce cases that are sold, I've been tracking this industry for a long time, it use to be 60/40 carbs/non-carbs, shifted to 50/50.

It's now shifting the other way.

Consumer behavior is shifting.

That's one.

Second, the way we look at this business, we look at profit per case across each of our categories.

And, we make sure the combination of businesses drives the best profit per case result for us.

And, that's what we do each division of the company, by brand.

And, we do that over the year.

That's helpful.

But, your portfolio is still very much skewed certainly in North America to carbonated.

So, you have to win, you have to be successful in CSDs to win in LRBs.

It's tough for me I guess to differentiate those two somewhat.

I think actually you just made your point and our point, which is given CSDs are such a substantial portion of our portfolio, we've set out as an objective hold or grow value share.

And, we can't allow CSDs to do poorly if we intend to do that.

I agree with your point, it's an end game, not an or game.

We have to be able to do both.

Okay.

And, Ali, key thing is look at CSDs as a whole.

Look at LRBs as a whole, look at CSDs as a whole Because what happens is we start with LRB.

Then we quickly come down to CSD.

Then we quickly come down to colas.

Then we come down to regular colas.

Then we start defining the market too narrowly.

Clearly, we look at overall LRB.

And, you're right, to gain -- I mean to hold value share in overall LRB, you've got to do well in CSD.

But, CSDs as a whole.

We've got Mountain Dew which is doing very, very well.

Parts of the CSD portfolio are doing well.

The challenge is to play a deliberate, profitable game in the whole CSD category which is really what we're focused on.

That helps a lot.

One last one to shift gears.

If you could remind us a little bit more about where the productivity is coming from specifically.

So, how much is in North America DSD, how much is just broadly GS or overhead?

Just, if you could help us bucket that overall productivity, that would be helpful.

Yes.

So, in terms of -- we haven't really broken out the specifics of exactly where the $1 billion plus money is going to come from.

But, certainly you can expect more of it to come from the North American businesses.

And, both the Frito business and -- or the PAF, North American businesses as well as the PAB business in North America.

And then, probably the next biggest area where you'll see it come from is Europe.

EMEA will probably be the smallest of the four for all the reasons you might expect.

Ali, you know what I feel good about?

We put in place a restructuring program, we put in place a $1 billion productivity program.

We announced it right after the February 9 meeting.

Our teams did a terrific job making sure they delivered on the restructuring program.

And, they did it flawlessly and they did it with great sensitivity.

So, I'm actually feeling good about how well this was done without disrupting the business.

Sounds good.

Thank you.

Thank you.

Mark Swartzberg, Stifel Nicolaus.

Thanks.

Good morning Indra, good morning, Hugh.

Good morning, Mark.

I was hoping we could spend a minute or two, a few minutes here talking about EMEA a little bit more.

Because as you point out in the press release, and has been evident for a while now, it's really been a stand-out region for you even in the more difficult recent years.

Can you speak a little bit -- and markets are a factor here, right, just the dynamics there.

When you think about the strategy you've deployed in that market can you speak a little bit to how relevant it is to your efforts to sharing best practices in other aspects of PepsiCo?

And, maybe use that as a platform for talking to this larger subject of learning from each other, so-to-speak, within the larger PepsiCo company.

Mark, great question.

EMEA clearly is riding the wave of GDP growth, all of these economies east of the Middle East.

I think what we shouldn't forget is our EMEA business has performed well in spite of all the geopolitical issues they've had to handle, the natural disasters that happened in EMEA.

So, we have a resilient EMEA team and a good business in all of EMEA.

So, that's the good thing that I'll tell you about EMEA.

Now, let me talk about the business model in EMEA.

I think you've got a mix of developed, developing, and emerging markets in EMEA.

It's a unique region, besides the regional and cultural diversity.

You can argue that Japan, Australia, fall in the developed markets, Korea, all of those countries.

Then you've got parts of the Middle East that are more developing markets.

Then you've got China and India which fall more in the emerging market category.

So, for each of these clusters, what we have to do is sit down and think about what model can we take from the proven PepsiCo model, adapt it for the local countries, but then more importantly, how can we evolve local models which play to the local cost structure.

And then, bring it back to the developed markets.

I'll give you an example.

We opened a value innovation center in India a year ago.

And, what we told them was rather than take our Western equipment and Western approaches and cost reduce them, start clean sheet of paper in India.

Whether it's a cooler, a food service equipment, whatever it is, start clean sheet of paper.

And, tailor that piece of equipment for the economics of the business in India.

And then, let's see how we can ruggedize it to bring it back to the west.

It reduces the cost base significantly.

The initial results of this value innovation center are very encouraging.

And so, I think piece by piece we're looking at EMEA, not just as a growth engine for the company for many years, because the population of -- the percentage of young people in that part of the world is very, very high.

So, we have years of growth there.

But, we're now looking at it as an innovation source.

So, that we can do reverse innovation, bring products and ideas from there at a very different set of economics back to the developed world, for the value consumer or for whoever else.

So, it's a great learning lab and a growth source.

That's helpful.

And, in terms of -- so, there's an opportunity there and then, of course, unlocking it is another exercise.

In terms of your ability to unlock that in whatever market might be appropriate and whatever sector might be appropriate, whether it's in North America beverage or Latin America snack, in terms of unlocking, having that organizational capabilities, where are you, in your opinion, in that exercise?

We're making progress.

It's a big market, it's growing, changing.

So, the journey is never going to end there.

I think the strength of PepsiCo is the power of one.

Because with snacks and beverages and the fact that we have a diversified portfolio, we're able to attract very good talent to our businesses in EMEA.

And then, we're able to give them extremely wide range of experiences, move them from beverages to snacks and back and forth.

And, people love coming to work for PepsiCo.

I'll be honest with you, even people who get recruited out of PepsiCo, within 60 days or six months are always calling saying can I come back.

That's the strength of the company.

So, I think our teams that are all local, Mark, I'd say almost, no export, everybody there is local.

So, we have the benefit of local knowledge.

And, we have the benefit of getting those people to come to the developed markets and transfer some of their knowledge back to us.

So, I think EMEA's going to be a growth engine for many, many, many years.

And, our models are going to evolve.

Our partnerships are going to evolve in EMEA.

But, we're going to have to play the game for each of those local markets, not export our model there.

Great, that's helpful.

Finally, on China, you just called out the 500 ML and also of course the Tingyi transaction closed, or I guess shortly after the end of the quarter.

To what extent was Tingyi a factor?

And, what did the -- what was the beverage performance there in the quarter?

And, what's going on in that market?

You know, the first quarter in EMEA, the China volume was impacted because of the 600 ML to 500 ML tradedown.

So, unit growth was robust.

But, volume growth was impacted.

Ex-China, volumes in EMEA grew spectacularly, in double digits.

So, we had a very good quarter in EMEA.

I think the real benefits of Tingyi you'll start seeing in Q3.

Because Q2 is a transition year -- a transition quarter.

And, we want to make sure the business transitions the right way, we build all the disciplines and really work with our partners in Tingyi to make sure this is an excellent transition to them.

They're a great company, incidentally.

But, starting Q3 I think you'll start seeing tremendous ramp-up in performance.

So, we look at the prospects for this business, we look at their relative market share to the system is going to have in China, which is going to be the second largest LRB market in the world, and we're feeling good at this point.

Great.

Thank you, Indra.

In closing, Q1 marked good progress against a clear focused game plan that allowed us to compete effectively today.

And, also positions well for sustainable long-term growth and value creation.

You have my, and our entire leadership's, commitment that we'll continue to act with great urgency to deliver against our 2012 target and our strategic objectives.

So, let me close by saying thank you to all for joining us.

And, for the confidence you've placed in us with your investments.

Have a great rest of the day.

Thank you.

This concludes PepsiCo's first quarter 2012 earnings conference call.

You may now disconnect.