百事 (PEP) 2012 Q4 法說會逐字稿

Good morning and welcome to PepsiCo's fourth-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 pleasure to introduce Mr. Jamie Caulfield, Senior Vice President of Investor Relations.

Mr. Caulfield, please go ahead.

Thank you, operator, and good morning, everyone.

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

We will lead off today's call with a review of our fourth-quarter performance and 2013 outlook, and then we will move on to Q&A.

In an effort to get to as many analyst questions as possible within the hour, we're going to have a one question limit so we can hopefully get through the full queue of your questions.

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

This conference call includes forward-looking statements, including statements regarding 2013 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 the 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 EPS and total operating profit growth are on a core basis, and all references to volume exclude the impact of an extra week of results in 2011.

In addition, references to organic revenue results in this call exclude the impact of acquisitions, structural changes, foreign exchange translation, and the extra week of results in 2011.

To find disclosures and reconciliations of non-GAAP measures that we may use when discussing PepsiCo's financial results, please refer to the glossary and other attachments to this morning's earnings release and to the Investors section of PepsiCo's website under the Investor Presentation tab.

And now it is my pleasure to introduce Indra Nooyi.

Thank you, Jamie, and good morning, everyone.

Because this is our year-end call, I intend to provide a broader context today on PepsiCo's journey, our progress to date, and our expectations for the coming year.

As we entered 2012 I shared with you that we needed to use the year to reinvest in PepsiCo.

Our business strengthened during the course of the year, with the fourth quarter looking particularly good.

We are well positioned to compete and create value as we enter 2013.

Let me look back on the year, and I think we made good progress on several fronts.

First, we delivered on all of our financial commitments.

Our 2012 organic revenue growth was clearly in the middle of our long-term target range of mid single digits, with growth of 5% both in the quarter and for the full year, reflecting a good balance between volume growth and net pricing.

We grew organic revenue growth across each of our businesses both for the quarter and the full year, with particularly strong growth in emerging and developing markets.

We also had a very solid growth in a number of our large, developed markets businesses like Frito-Lay North America, where organic revenue was up 5% in the quarter driven by strong volume growth, and it was up 4% for the year.

We stepped up investment in our brands by increasing our advertising and marketing support by 50 basis points of net revenue, exactly on target.

We delivered our earnings per share directly on target.

We exercised very disciplined cash management.

Our capital spending was 4% of net revenue for the year, below our target of 4.5%, a 20% reduction from our 2011 CapEx investment level.

We also saw improvement across each of our key working capital metrics, particularly a decrease in inventory days and increase in payables days.

All of these contributed extremely healthy cash flow for the year.

Our management operating cash flow increased 3% even with a $1 billion after-tax discretionary pension contribution and cash payments related to the major restructuring actions we implemented in 2012.

Excluding the pension and restructuring cash outflows, our management operating cash flow increased 20% or by more than $1.2 billion compared to 2011.

This cash flow performance enabled us to return $6.5 billion to PepsiCo's shareholders through a combination of share repurchase and dividends, a 16% increase from 2011.

Just as importantly, we leveraged our 2012 investments to strengthen the competitiveness of our businesses across a number of key dimensions that will drive long-term value creation.

First, we enhanced the equity of our global brands.

We increased our spending across geographies and across both the food and beverage businesses.

Importantly, these increased investments were made across the spectrum of our brands, from expanding our media spend in Good for You product platforms like Quaker, to ensuring the competitiveness of our large Fun for You brands like Pepsi and Doritos.

And we not only stepped up the level of investment in A&M but we also took steps to improve its efficiency and effectiveness by better leveraging our global scale, and driving consistent brand positioning, and coordinating advertising, creative, and production activities.

By doing this we made our investment dollars work harder, allocating a greater percentage of the investment to what we refer to as working A&M; that is, media and other consumer-facing activities that drive greater awareness and regard for our brands.

We are seeing positive results already from our increased investment, both in higher brand equity scores and in market share results that are beginning to improve nicely.

Second, we stepped up our game in innovation by bringing to market more balanced offerings, from line extensions that bring additional locations to our existing products and to new product platforms that are truly transformational.

I am particularly pleased with both the number and breadth of our new product platforms, as these typically have higher, greater staying power and offer the opportunity for consistent growth over a number of years.

For example, just in the last year or so we have introduced Quaker Real Medleys, a high-quality oatmeal with real fruit and nuts, which was just named Breakfast Product of the Year for 2012; Pepsi Next, which delivers real cola taste with 60% less sugar and achieved more than $100 million in retail sales in its first year; Starbucks Refreshers, a 60-calorie sparkling beverage that provides a delicious boost of natural energy from green coffee extract and real fruit juice; and Gatorade Energy Chews, a convenient form of carb energy to fuel athletes prior to athletic competition.

In snacks, Doritos Locos Tacos sold more than 325 million shelves, contributing to the most successful product launch in Taco Bell's 50-year history, and expanded our presence in the foodservice channel.

We are gearing up for year two of our Doritos partnership with Taco Bell with even more exciting products.

And Quaker Yogurt Bars, originally launched in Canada, were a great example of our lift-and-shift model as we successfully introduced them in the United States, driving recent US share gain in bars.

And we believe we are still in the early stages of reaping the benefits of our investments in R&D over the past several years.

During 2012, we continued to invest in the R&D platform that will drive our future innovation, and we will continue to do so in 2013.

Now, our R&D investments are highly focused.

We are investing in technologies and capabilities that will enable us to deliver differentiated taste, functionality, packaging, and other benefits to consumers over the next five years and beyond, all of which we believe will enable us to create differentiated product platforms that result in incrementality both at the top and bottom line.

Third, we delivered on our productivity commitments.

We executed a comprehensive restructuring program and accelerated our productivity efforts across the value chain -- how we make, move, and sell our products.

We delayered the organization and improved efficiency; we reduced our headcount; and we rationalized our supply chain to reduce cost and investment in fixed assets.

As a result of these efforts, we delivered in excess of $1 billion in productivity in 2012.

We are continuing to drive productivity across the entire value chain and across all of our businesses.

We have a robust pipeline of projects, from leveraging best-in-class supply chain activities around the world to increasing automation across the value chain, from raw materials handling through to the route truck, to implementing new processing technologies that enable us to both increase asset utilization and reduce input costs.

Now, much of this is enabled by the IT investments we made over the past several years, giving us greater visibility into our performance metrics across the globe.

The sum of these changes, from small actions repeated millions of times to utilizing new technology that changes the overall cost of key processes, both of these give us high confidence that we will achieve our three-year $3 billion productivity target through 2014.

And even more importantly, we have already begun to work on our next big tranche of productivity.

Fourth, we stepped up our execution game in 2012.

In North America, we continued to drive cross-category in-store programming to increase the frequency with which our snack and beverage products are purchased in the same basket, resulting in increasing in our share of our cross-category core purchases in the United States.

So while we have a great deal of opportunity to sharpen our capabilities in brand-building, innovation, productivity realization, market-based execution, I believe that 2012 marked a turning point for PepsiCo.

We truly stepped up our game and created the foundation for continued improvement and competitive advantage.

Now let me turn to our businesses and comment briefly about them in five buckets.

I am going to talk to Frito-Lay North America, North American Beverages, other developed markets in a group, developing and emerging markets as a group, and our Good for You nutrition businesses.

Let me start with Frito-Lay North America.

Frito obviously plays a critical role in the PepsiCo portfolio.

It still enjoys terrific leadership in the growing savory snack category, with lots of room to grow in the overall macro snacking market here in the United States and North America as a whole.

Specifically, Frito is focused on generating steady, predictable growth and value creation by sourcing locations from other macro snack categories, growing into the premium segment of snacks, and selectively competing in the value tier of the category.

And doing all of this in a sensible, margin-accretive, competitively advantaged manner.

As you saw in the fourth quarter and for the full year, Frito-Lay North America generated very healthy organic top-line growth, which is an encouraging sign that our strategy and execution are both working.

As we look to 2013, we expect continued steady top-line growth, and because we have returned to a more normal commodities environment with lower inflation, we expect the top line to have more balance between volume and pricing.

Our goal is to gain value share in a sustainable way over the long term through iconic brands, differentiated, targeted innovation, and flawless execution from farm to shelf.

This is what the teams are focused on, and I am pleased with their progress.

Let me now turn to Beverages North America, and let me start by giving you my perspective on the CSD category.

To begin, there is still growth potential in carbonated soft drinks outside of colas.

Evidence the fact that Mountain Dew, our second-largest CSD trademark, grew volume in North America in 2012; and we continue to innovate behind Dew, as you saw with the launch of Mountain Dew Kickstart earlier this week.

However, colas have been under pressure for some time now.

Colas have declined as consumers have increasingly sought greater variety in their repertoire of beverages.

For this reason, we diversified our portfolio in North America.

Actually this began in the early 1990s when we embarked on a strategy to be a total beverage Company.

As a result of multiple steps in this diversification, today we have the leading position in liquid refreshment beverages in measured channels in North America.

Almost 40% of our North American beverage volume is noncarbonated, and only a fifth of our North American beverage volume is full-sugar cola.

Our noncarbonated portfolio is very strong, with great brands in isotonics, juice and juice drinks, ready-to-drink teas, ready-to-drink coffee, and waters -- all of which have good growth prospects.

And we continue to innovate in every one of these categories.

So what is our approach on colas?

Simply put, we would like to lead disruptive innovation.

The industry has not had truly meaningful innovation colas since the introduction of diets in 1960s.

Our research indicates that consumers still love bubbles; they love the cola taste, but would like to lower their caloric intake without the taste of artificial sweeteners.

So as we shared with you over a year ago, we have been developing new natural sweeteners and flavorings aimed at reducing calories with no compromise on taste.

We have some promising projects that are currently going through the FDA review process, that once commercialized could potentially alter the trajectory of our cola business in a meaningful way.

And in the meantime, we are just going to continue to appropriately invest behind trademark Pepsi with marketing and innovation in order to maintain consumer excitement in the brand.

Now besides our work on disruptive innovation, across the entire North American Beverage business, we continue to optimize our supply chain to reduce costs; we are implementing price backed strategies to maximize revenue realization; and we are exploring a variety of potential structural alternatives to improve profitability and return, and to drive further value creation.

Early next year we will report our progress on these initiatives which will allow us to further unlock value from the PepsiCo North American Beverage portfolio.

Other developed markets.

You know, these businesses are relatively well positioned.

We have very strong leadership positions in salty snacks in many of these markets, and our beverage portfolio is strategically well positioned with a highly developed zero-calorie carbonated soft drink and noncarbonated beverage portfolio.

Even in a relatively difficult macro environment, our major West European markets as a group grew snacks and beverage volume in 2012.

Moving on, we continue to see very good growth in our developing and emerging markets, with organic revenue growth of 9% in the fourth quarter and for the full-year 2012.

Over the past five years, we have deliberately invested to increase the significance of our emerging and developing markets within our total portfolio, so that we could provide a more attractive growth profile to PepsiCo overall.

We are growing in these important markets by driving greater penetration and frequency of consumption through tailored distribution models and by offering locally relevant innovation and a broad spectrum of value-added offerings -- value-oriented offerings.

These markets still have relatively low per-capita consumption and therefore provide sizable runway for future growth.

Within the major developing markets, let me speak to a couple of key countries.

We have a terrific position in Russia, where we are the number-one food and beverage business by a factor of 2. In the fourth quarter, our organic revenue growth in Russia was 10%, demonstrating our ability to leverage our brands, scale, and product breadth to drive growth in this important market.

A second developing market, Mexico.

We have a powerful snacks business with clear leadership in both salty snacks and biscuits.

We have combined our salty and biscuit businesses into one unit, driving greater synergies and growth.

Just over a year ago, we strengthened our Mexican beverage business through the consolidation of our bottling system under a new joint venture that increased our scale and stepped up our operating capability.

Our snacks and beverage businesses in Mexico continue to find new ways to work together on joint promotions and creative channel development initiatives.

The strength of our operations in Mexico was evident in the fourth quarter, with organic revenue growth of 7%.

Moving on to our emerging-market businesses, which are largely centered in our AMEA sector because AMEA is predominantly an emerging-markets business because we have relatively small presence in countries like Japan.

Within the Asian emerging markets, we have strong salty snack leadership.

Our China beverage business was recently strengthened by our formation of a partnership with Tingyi, giving us a [system] relative market share advantage of 1.5 times.

In India, we recently further consolidated our bottling network, which will drive greater scale and advantage in that market.

In the Middle East, we enjoy a 5 times relative market share in snacks and a 3 times relative market share in beverages.

Reflecting the strength of our business across AMEA, we enjoyed double-digit organic revenue in 2012 with especially strong organic revenue growth in Saudi Arabia, India, and Pakistan.

Let me now turn to our nutrition business.

Over the years we have built a strong, Good for You portfolio across the key platforms of fruit and vegetables, grains, and sports nutrition.

We have strong, well-positioned brands like Tropicana, Quaker, Gatorade, Sabra, and Stacy's.

We are innovating with differentiated products that are worth paying more for.

We are increasingly leveraging these brands and product portfolios globally.

And we are intelligently addressing gaps in our portfolio, as we did with protein through the value-added dairy platform of Wimm-Bill-Dann in Russia and through our capital-efficient Muller and Almarai joint ventures that leverage both PepsiCo's and our partners' unique capabilities.

Now, these Good for You products are in attractive categories with strong growth tailwinds and good margins, and offer the potential for continued value creation for many years to come as consumers migrate more of their beverage and snacking habits to include more protein, fruit and vegetable and grains, and value-added dairy products.

Because consumers are both very loyal and willing to pay a price premium for products in these categories, we continue to see the opportunity to create a great deal of value through investing behind Good for You innovation and expect that we will continue to accelerate our efforts in this attractive space.

Overall, we feel good about the state of the Company, our execution capabilities, and the caliber of our associates.

Now, on to our outlook for 2013.

I don't have to remind you there are still considerable unresolved economic and political issues in the United States and Europe, and there are a number of emerging and developing markets that are also subject to economic and political volatility.

So it is against this uncertain macro backdrop that we are providing our outlook.

Hugh will provide a lot more color on the financial outlook in a moment, but in summary for 2013 we expect mid single-digit organic revenue growth with contributions from each of our divisions, driven by continued relatively strong growth in developing and emerging markets.

We expect 7% core constant-currency EPS growth, reflecting the earnings associated with solid organic revenue growth and our continued focus on productivity and strategic investments.

So let me wrap up my comments before I turn it to Hugh.

We believe we have a stronger business as a result of the investments we made and the actions we took in 2012.

We are well positioned as we head into 2013, with lots of runway for growth in the future.

We have strong presence in attractive and highly complementary growth categories.

Our product portfolio has broad appeal across dayparts, need states, cohorts, and occasions from indulgent products to nutritious Good for You offerings.

Our global footprint is balanced with well-established positions in virtually every emerging, developing, and developed market in the world, with strategies and business models tailored to maximize our performance in each market.

We have an enviable portfolio of well-defined brands that consumers know and love.

Our advantaged supply chains enable us to achieve superior reach with greater efficiency.

And we have deep offering capabilities in every aspect of our business.

Most importantly, we are not content with status quo.

We will continue to work hard to strengthen our brands, accelerate innovation, and drive relentlessly for productivity and excellence in every aspect of our business.

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

Thanks, Indra, and good morning, everyone.

I'll spend just a minute covering the 2013 outlook in a bit more detail and then we will open the lines to your questions.

For 2013 we expect core constant-currency EPS growth of 7% off a core 2012 base of $4.10.

We expect organic revenue growth of mid single digits; core constant-currency operating profit growth of approximately 6%; and approximately 1 point of leverage below the operating profit line driven by share repurchases, offset somewhat by higher net interest expense of approximately $90 million from higher debt balances.

We expect our core effective tax rate to be approximately 27% for the full year.

Within these expectations, we assume positive price mix; low single-digit commodity inflation; productivity of $900 million; and A&M growing at least in line with our net revenue growth.

We continue to manage our commodities using a systematic hedging program; and at this point we have more than half of our commodity exposures covered for the year, with more coverage in the close-in quarters.

And the level of coverage will ramp up as we move further into the year.

We expect the rate of inflation to be fairly consistent across the quarters in total, and that rate of inflation will be more pronounced in foods than in beverages.

Our productivity assumption is completely in line with the three-year $3 billion program that we launched last year, and the savings will be used to help offset inflation as well as provide funding for investment back into the business.

One of our key investment areas is supporting our brands with advertising and marketing, where we will grow our A&M investment at least in line with net sales, meaning you should expect A&M spending of at least 5.7% of sales, which was our 2012 baseline investment.

In addition, we are also accelerating our investment in research and development and innovation.

We anticipate foreign exchange translation to have up to a 1 point negative impact on our net revenue, operating profit, and EPS for the full year.

And this includes the impact of last week's Venezuela devaluation.

We also expect an approximate $100 million non-core charge related to the devaluation of our monetary assets in Venezuela in Q1.

We anticipate structural changes, primarily bottler refranchisings, will have a negative impact on our full-year net revenue growth of approximately 1 point.

As you model out the first quarter, we expect foreign exchange translation to have a negative 2 point impact on EPS.

Revenue in the first quarter will have an estimated 3 point negative impact from structural changes and a negative 1 point impact from foreign exchange translation.

From a cash flow perspective, we expect management operating cash flow excluding certain items of more than $7 billion.

We will continue to drive cash flow through even more efficient working capital management and continued tight controls over capital spending.

For 2013, we expect to see continued improvement in our key working capital metrics and to manage net capital spending to $3 billion, which is well within our long-term target of less than or equal to 5% of net revenue.

From an M&A perspective, consistent with our past comments, we believe the portfolio is largely where it needs to be; and consequently we do not see the need for any large-scale M&A.

As a result, we will continue to return strong cash flow to our shareholders.

We just approved a new three-year $10 billion share repurchase program to succeed the current program that expires in June of this year.

And our Board has approved a 5.6% quarterly dividend increase beginning with our June payment.

In total, we expect to return approximately $6.4 billion to shareholders in 2013 -- $3.4 billion in dividends and $3 billion in share repurchases.

Net, our outlook for 2013 is consistent with our long-term targets for net revenue, operating profit, and EPS.

We expect to drive improved margins and improved net ROIC.

And we expect to generate and return cash flow to our shareholders, and that remains a top priority for the Company.

With that, I will wrap it up.

And, operator, we will take the first question.

(Operator Instructions) John Faucher, JPMorgan.

Thanks, good morning, everyone.

A question on Frito, which is -- if we look at the track data, whether it is the absolute level of sales or even the market shares, the results today are better than I think we would have expected.

So can you talk a little bit about what you are seeing maybe in the non-tracked channels there?

And then if you think about the market share issue, how should we be thinking about Frito's share within salty snacks, and then how that is going to work in the broader context of the whole Frito-Lay business?

Thanks.

John, good morning.

Brian Cornell is right here, so let me have Brian talk about the Frito-Lay business.

Hey, John, I think we saw very balanced results in the quarter.

I think the overall investments we have made in brand-building and innovation, our focus on productivity and execution really played out well in the fourth quarter.

I think you saw that equate to growth in our value share, our volume share, and also improvement in unit share.

So we are very pleased with the execution in the quarter, and we would expect that to continue as we go into next year.

Bryan Spillane, Bank of America Merrill Lynch.

Good morning.

Excuse my voice.

Could you talk a little bit about the progress you have made on the integration of Wimm-Bill-Dann in Russia and just where you see that business today versus what you were expecting at the beginning of the year?

And just some more color in terms of the underlying performance and trends there, please.

Indra Nooyi Yes.

The integration has gone exceedingly well, Bryan, and the business is performing at CapEx levels.

I have here Zein, who was the architect of the Russia business.

So Zein, why don't you answer this question?

Yes.

As Indra said, Bryan, the integration has gone exceptionally well.

As we did the due diligence on the whole Wimm-Bill-Dann acquisition, we realized that we were buying a business with very strong brands and a very strong management team.

And obviously those two things really do support your ability to integrate.

I think the other thing that we would really call out is that as we have merged these businesses, it has given us the opportunity to really strengthen our go-to-market systems across our total businesses.

Again, as we have told you about many times, when you think about Russia -- with its multiple time zones, the immense geography -- that the strength that you have in reach across that country, as a result of the scale of your operation, is critical.

And Wimm-Bill-Dann has given us a real step up in that.

I guess the final thing we would call out is that the innovation opportunity that it brings to really strengthen our snack and beverage approach by getting us into that morning daypart and our ability to leverage our assets into a whole new daypart has really proven out as well.

So we are just immensely pleased with both the top- and the bottom-line performance, the synergies that it's brought into the business, but also the growth potential that it's opened up for us in Russia.

And the Wimm-Bill-Dann is a great team.

The team is excellent.

Ali Dibadj, Bernstein.

Just want to get a better sense of -- I guess your thought process on the returns of the investments you made this year and have manifested in your 2013 EPS guidance.

Because the 7% core number sounds a lot like other CPG companies; but most other CPG companies didn't go through a big reinvestment year and a negative 7 EPS type number.

So I totally get the macro challenges here.

But could that growth trajectory suggest that they are not just macro challenges, but there may be structural challenges in the business versus other CPG companies?

How do you gain confidence that that is not the case?

Why don't I take that one?

Good morning, Ali.

When we set out the long-term guidance that we shared last year, we set that out within the context of making those investments.

So what we were doing with the investments in 2012 was certainly known to us when we said mid single digit on revenue and we said high single digit on EPS.

So I don't think that should come as a particular surprise.

In addition to that, as we talked about, the investments we were making were in brand-building, they were in innovation, and they were in execution.

And obviously, the returns on those things are not an immediate one-year flip-the-switch type of return.

What they are really geared towards is strengthening the franchise and extending the duration of performance of the Company.

So as we put our numbers together -- and it all really goes back to the fact that we broadened our product portfolio, we expanded our geographic portfolio, and then we felt like at that moment we had a good opportunity to so-call fuel up the race car to basically deliver an extended period of mid single-digit revenue and high single-digit earnings per share by virtue of strengthening our innovation, our brand-building, and our execution capabilities.

I think from those moves that we have made in 2012, even in an uncertain environment you are seeing us come forward with guidance that is in line with what we projected for the long term.

And we feel good about that guidance.

Ali, if I can just add something to what Hugh said, if you go back to 2012, the big reinvestment we made in the Company and the down earnings is because we had extraordinary commodity inflation.

All of it was not reinvestment; commodity inflation was extremely high.

Going into 2013, we are not seeing massive commodity deflation.

We are still seeing inflation; it is just that it is at a lower level.

And we have a very uncertain macroeconomic environment.

So I think it is critically important we take all of that into account while we manage this very large Company, and not try to get ahead of our skis.

And that is what we are trying to do.

Dara Mohsenian, Morgan Stanley.

Good morning.

Hugh, there is not much gap between your 2013 mid single-digit organic top-line growth guidance and 6% profit growth.

So can you discuss your expectations in a little more granularity around margin performance in 2013, and why you wouldn't see greater margin expansion with both the strong productivity as well as fairly benign commodity costs and flat ad spend as a percent of sales?

Sure, happy to, Dara.

Obviously there's a lot of variables that go into a $66 billion P&L.

We talk about productivity.

We talked about the low single-digit commodities.

We talked about A&M being at least 5.7%.

And we also talked about making investments in R&D and innovation.

All of those are factors.

In addition to that, as you certainly know and is common across CPG companies, the faster growth comes from developing and emerging markets; and there is a bit of a margin drag out of the faster growth in those markets.

Obviously over time the margins will increase in those markets, but it takes a bit of time for that to happen.

So as we put all of the numbers together, risk-assess the plan, we felt like going from 5 revenue to 6 op profit to 7 EPS was the right guidance for 2013.

Okay.

Then just following up on the R&D comment, Indra, you touched on innovation that could eventually impact your beverage business in a meaningful way.

We have heard similar comments in the past.

It sounded a little stronger to me today.

Are you closer to commercialization on the beverage side of the business?

Can we expect something there in the short to medium term?

We are just waiting for the FDA approval, Dara.

And that is not in our hands; it is in the government's hands.

Once we get the FDA approval, we'd be launching posthaste.

Bill Schmitz, Deutsche Bank.

Good morning.

Hey, can you talk about the update on the US DSD system?

I think you said at the Analyst Day it was 12 to 18 months to decide how it was progressing.

So can you just give us an update on, relative to the plan you put in place last February, how you think things are progressing there, and if anything has changed on the strategic alternatives front?

Well, as we talked about on the script, we are doing a lot of things with our North American Beverage business.

We are investing in brands; all the brand equity scores are trending up nicely.

We are optimizing the supply chain to reduce costs, doing a lot of work on price-pack strategies.

And while doing all that, we are looking at structural alternatives, sensible structural alternatives to improve profitability and returns.

Bill, early next year we will report our progress on these initiatives.

And we want to make sure that as our disruptive technology all comes to the marketplace we don't do something in the short term to really lose out on big value-creating opportunities in the long term.

So stay tuned.

We will be back to you early next year.

Judy Hong, Goldman Sachs.

Thanks.

Good morning.

I guess I just wanted to get your perspective on pricing outlook in North America across both snack and beverages.

In the context of just the CSD category as a whole being a little bit sluggish, consumer a little bit still challenged, and in snacks with more benign commodity environment, can you just give us your confidence level in achieving some type of price realization in 2013 to be part of that 5% or mid single-digit revenue growth algorithm?

Yes, Judy.

This is Hugh.

Why don't I take that one?

From the standpoint of the foods businesses, I think what you can expect to see for the year is modest pricing.

Obviously the numbers that you are seeing right now don't reflect that, but as we get toward the end of first quarter I think you will start to see modest pricing come into place inside of the food businesses.

In the beverage business, we have got our North American pricing in place.

We are satisfied with the pricing that we have been able to get out into the marketplace, and we think it is consistent with the algorithm we provided.

And we are comfortable with that in the context of the [commodities] environment that we are facing in 2013.

Caroline Levy, CLSA.

Good morning.

I would love you to just bring us up to date with what is going on in China, how your volume looked in the quarter, and what your strategy is in terms of the portfolio of CSD versus non-carbs.

I think you are starting to get a little bigger in juices; sports drinks are growing there.

If you could just talk a little bit about that.

Caroline, ever since the refranchising of our beverage business to Tingyi, the business has strengthened quarter after quarter.

Our business in China, especially as we are going through the Chinese New Year as we speak, is looking very strong.

Remember, the refranchising to Tingyi was done from a position of strength.

They brought to the market teas, some juice and juice drinks.

We brought to the market some juice and juice drinks, and we brought a very strong CSD portfolio.

So the combination created a business that is 1.5 times the size of the next player.

As I look at the business today, February, second week, and year-to-date, and looking back over the last couple of quarters since the refranchising, the business is strengthening.

Usually in the December period in anticipation of Chinese New Year, you start seeing some weird volume numbers.

But the best way to look at it is through Chinese New Year.

We are in the middle of Chinese New Year season as we speak, and I would say that through this Chinese New Year our volumes are looking extremely attractive at this point.

The market is robust, and I think we have ourselves a good business in China.

Jonathan Feeney, Janney Capital Markets.

Good morning.

Thank you very much.

Indra, I wanted to follow up on the impact of the US macro environment on both the snacks and beverage business.

Because it occurs to me that -- it seems like for most of the past couple years you've had a depressed environment for those key channels and some of your higher-margin channels.

And now with -- there's countercurrents going on.

You have a little bit -- it seems better consumer confidence; but at the same time you are getting hit with this payroll tax.

Would you say the fourth quarter was a better sequentially from the third quarter as far as your takeaway on performance in those macro-sensitive channels?

And looking into 2013 do you see sustained improvement in those channels for your products?

Thanks.

Jonathan, you are asking the question of the impact of the economic environment on the retail channel.

In a quarter that is usually the most difficult quarter to read -- because Q1 is full of storms in the East Coast, storms in the Midwest, and retail activity is influenced by all of these weather-related activities which have nothing to do with the underlying performance.

All that I'd tell you is, as we came out of Q4 going into Q1, notwithstanding the fact that we've had all these weather-related issues and we are overlapping a very warm winter from last year, retail trends are okay.

By and large, holding up.

Week to week there are some changes, but overall, they are holding up.

And our business is holding up, too.

This year it is more about volume.

Last year it was more about price.

We are still seeing foot traffic, and gas prices haven't gone up too much.

So on balance, our retail activity still seems to be holding up and our business is holding up.

But again, as I said, Q1 is probably the most difficult quarter to extrapolate from, especially January and February, because the weather plays havoc on traffic, business, and overall performance.

So we plan accordingly.

Ann Gurkin, Davenport.

Good morning.

One of the great prospects for me for Pepsi was always the potential for increasing snack sales and penetration outside of the US.

So I was wondering if you could update us on the potential for that strategy.

And then returning to the US, the CSD category is getting a lot of pressure on sugar drinks, obesity.

And I was wondering how Pepsi plans on attacking those claims.

Is there a need for increased spending?

Ann, thank you for asking the question.

Internationally, as we said in our script, our snack business is doing very, very well.

Mexico, Latin America, all over Western Europe, East Europe, Middle East, you name it, Asia Pacific.

There is not a country in the world that our snack business is not doing well.

More importantly, many, many, many countries of the world the snack business piggybacks off of our beverage business very nicely.

We take talent from our beverage business, put them into the snack business; in many cases they even share a common distribution system.

So our snack business is looking good.

Low per-caps in many countries, so we have lots of room to grow going into the future.

So good prospects.

Turning to sugared beverages in North America, as we said in our script, a couple of decades ago we started to diversify the portfolio.

We are the number-one liquid refreshment beverage company in measured channels in North America, and we have a very diversified portfolio where 40% of our volume in North America comes from non-CSD.

So we feel good about the portfolio.

Yes, there is a lot of talk about sugared beverages and some negative conversations going on about it.

Diversification of the portfolio is one thing; investing in disruptive technology, as we talked about, is the second thing.

And we started to do both several years ago -- diversification a couple decades ago, investment in disruptive technology about three to four years ago.

And we have been very consistent in talking about it for the last three to four years, because we anticipated this market trend a couple or three years ago.

So -- and I think we are in a good position.

The challenge is not to do anything stupid in the short term, in terms of chasing share just in order to maintain some sort of a volume share.

That is not the way to play this game.

I think we are playing it in a very sensible way.

I feel good about our North American Beverage business.

That was our final question.

Now I'll turn the floor back over to management for closing remarks.

Let me just close out our call this morning.

Again, we made great progress in 2012 and delivered on our commitment.

We are entering 2013 a stronger business as a result of the investments we have made and the actions we have taken.

Third, we have a great business, with so much to be proud of and upon which we can continue to build and grow.

And, finally, we remain unwavering in our focus to deliver results, create value, and doing what is right for the short-, medium-, and long-term health of the business.

Thank you all for joining us and for the confidence you placed in us with your investment.

Have a good day.

Thank you.

This concludes today's conference call.

You may now disconnect.