百事 (PEP) 2019 Q1 法說會逐字稿

Good morning, and welcome to PepsiCo's First Quarter 2019 Earnings Conference Call.

(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, you may begin.

Thank you, operator, and good morning, everyone.

I'm joined this morning by PepsiCo's Chairman and CEO, Ramon Laguarta; and PepsiCo's Vice Chairman and CFO, Hugh Johnston.

We'll begin today's call with some brief prepared comments from Ramon and Hugh, and then we'll open the call up to your questions.

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

This conference call includes forward-looking statements, including statements regarding 2019 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.

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.

When discussing our financial results on today's call, we will refer to certain non-GAAP measures, which exclude certain items from our reported results.

Such items include the impacts of certain tax-related matters, foreign exchange translation, acquisitions, divestitures, structural and other changes and restructuring charges.

You should refer to the glossary and other attachments to this morning's earnings release and to the Investors section of PepsiCo's website under the Earnings Information tab to find full explanations and reconciliations of these non-GAAP measures.

And now it's my pleasure to introduce Ramon Laguarta.

Thank you, Jamie.

Good morning, everyone.

About 2 months ago, we shared with you in some detail our priorities for the business and our financial goals for 2019.

So today, we're keeping our prepared comments short, just touching on the highlights for the quarter, and then we will leave enough time to get to all your questions.

I'll just start by simply saying that we're very pleased with our results for the very -- for the first quarter.

Our rate of organic revenue growth accelerated to 5.2%, our highest rate of quarterly growth in more than 3 years.

This top line performance was broad-based with particularly strong organic revenue growth at Frito-Lay North America, which grew 6%, and our international divisions, while negatively affected on reported basis by ForEx and refranchising, delivered organic revenue growth of 8% in ESSA and 10% in both Latin America and AMENA.

We also had solid growth and continued progress at PepsiCo Beverages North America where organic revenue was up 2% -- 2.5% in the quarter.

We invested, as planned, across our businesses, and this included a double-digit increase in advertising and marketing.

And our productivity and restructuring actions were all implemented according to plan.

Our strong performance in the quarter is emblematic of a number of key strengths in the business, amongst them: the health and resilience of our categories; our leading brands; our broad-based portfolio capable of evolving to satisfy consumer tastes; our developed geographic footprint with strong positions in our largest markets; a suite of strong and relevant capabilities across the value chain; scale that allow us to run our operations very efficiently; and of course, our highly engaged and motivated associates, who execute every day in a way that enables us to win in the marketplace.

So with strong start to the year and 1 quarter under our belt, we remain confident in achieving the 2019 financial goals we shared with you 2 months ago.

Looking ahead, we're staying focused on the priorities we shared with you in February namely: to accelerate our top line growth in a sustainable way; to compete more effectively to win in most of our markets; and more rapidly evolve our capabilities to widen our advantages versus the competition.

To achieve these objectives, we're focused on becoming faster, stronger and better.

We'll become faster by being more consumer-centric and accelerating investment for top line growth and winning in the marketplace.

This means: broadening our portfolio and packaging formats to win locally; fortifying our North American businesses by investing in Frito-Lay North America and PepsiCo Beverages North America; and accelerating our international expansion with a disciplined focus on right-to-win markets.

We'll become stronger by transforming our capabilities and our culture.

This means driving savings through holistic cost management to invest in the marketplace, developing and scaling the core capabilities necessary to better understand and meet new consumer trends, strengthen our brands and improve customer service, and building a differentiated organization, talent base and culture.

And finally, we'll become better by integrating our purpose agenda into our business strategy with a particular focus on 4 critical initiatives: first, advancing farming practices to optimize crop yields, protect human rights, improve farmer livelihoods and secure supply; second, replenishing more water than we use in water-stressed areas; third, creating a circular economy for plastics; and fourth, increasing the appeal of our products by reducing added sugars, sodium and saturated fats and adding more positive ingredients.

The entire organization, from the Board to our frontline, is moving forward with urgency, and we look forward to updating you on our progress as the year progresses.

And now let me hand it off to Hugh.

Great.

Thank you, Ramon, and good morning, everyone.

I have just a few comments on the balance of year outlook.

As we mentioned in the release, we are reiterating each of the components of our 2019 guidance, namely: we continue to expect organic revenue growth of 4%; a core effective tax rate of approximately 21%; core constant-currency EPS to decline approximately 1%; free cash flow of approximately $5 billion; and total cash returned to shareholders of approximately $8 billion comprised of dividends of approximately $5 billion and share repurchases of approximately $3 billion.

With both organic revenue growth and core constant-currency EPS growth higher in Q1 than in our full year targets, that implies the growth rate for the balance of the year will be below the Q1 growth rates.

So let me address how you should think about that, starting with the top line.

First, the rate of organic revenue growth at FLNA in Q1 was extraordinary.

We don't expect that rate of growth to continue for the balance of the year.

And second, Q1 represented our easiest lap of the year so balance of year laps will be more difficult especially in the back half of the year.

From an EPS perspective, you should consider the following.

One, in Q1, we had the benefit of lapping the onetime frontline bonus from 2018; and we also benefited from approximately $50 million of insurance recoveries in the current year.

Two, over the balance of the year, we will be lapping gains from various strategic asset sales and refranchising gains and insurance recoveries, most notably in Q2.

Three, our rate of net commodity inflation, which includes the impact of transactional foreign exchange, is expected to accelerate in the second quarter.

And finally, our pace of planned reinvestments will accelerate over the course of the year, and you will see this reflected both in core EPS as well as in our operating margin performance.

Now we'll open it up for your questions.

Operator, we'll take the first question.

(Operator Instructions) Our first question comes from the line of Lauren Lieberman of Barclays.

The -- I was curious if you could talk a little bit about gross margins.

Obviously, really solid in the quarter, kind of as expected, but I was curious about, one, in the near term, kind of next year let's call it, thinking about commodity inflation environment and so on, how you might expect that to progress?

And then also longer term, as mix in the portfolio evolves, I guess category mix within beverages, price tiering, some of the things you've talked about in emerging markets, how should we think about gross margins from a longer-term perspective?

Yes.

Happy to, Lauren, the 2. A couple of things.

One, obviously, we don't give gross margin guidance, so I'll talk more conceptually than I will specifically to numbers.

We were obviously pleased with gross margins in the first quarter, but as I just mentioned, we do expect to see more commodity inflation in the balance of the year, and transactional ForEx will pressure commodities as well.

So I think in the first quarter, we saw probably, I'd call it, very strong gross margin performance.

In the balance of the year, we'll see how it plays out based on how FX and commodities play out.

Longer term, obviously, we're looking to increase gross margins over time, and that's driven primary by productivity in the cost of goods area.

Lauren, there's 3 capabilities we're working on to make sure we protect our gross margins long term, expand it.

One is net revenue management, key capability.

The other one is innovation.

And the other one is holistic cost management.

So those 3 capabilities are the ones where we'll invest in and develop in the team to make sure that we protect gross margin long term.

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

So obviously, a pretty strong quarter from an organic revenue growth perspective, particularly as you called out some of the international markets in ESSA and AMENA.

Maybe you could give us a little bit more color just in terms of what you've seen in category versus your market share in some of your key markets.

And Hugh, you commented on sort of the strength in ESSA not repeating in the back half of the year.

So maybe a little bit more color just why you don't think that, that will be sustainable in the balance of the year.

Judy, this is Ramon.

Yes, we're very pleased with the growth in international.

And really, the macros have been very, very positive, I would say, during the quarter.

We haven't seen any major geopolitical or big devaluation in any of our markets.

So with your comments on ESSA, we've been investing in ESSA for many years now in building a sustainable marketplace performance, and that's coming across.

Most of our markets are gaining share, both in beverages and snacks.

Turkey has been the only country where we're seeing some ForEx disruption, and the team is doing a great job going through that.

The same in AMENA.

We had a great Chinese New Year, very, very strong Chinese New Year.

The team prepared very well, and we're getting better at capturing that big seasonal opportunity there in that large market.

So we're seeing very positive.

Same with Mexico.

Mexico's had a great quarter, gaining share consistently already for 3 quarters and continues to be a very solid performing business.

So we're seeing good macros and good performance across most of our operations.

Yes.

And Judy, just to clarify, the only thing I'd add about the laps, my comment about the laps being tougher in the back half of the year are about the company laps, not just specifically about ESSA.

Your next question comes from the line of Bryan Spillane of Bank of America.

So I guess my question, Ramon, it's -- I know it's early in the year, but you now have the ability to begin to kind of measure or assess the efficacy of the step-up in marketing and advertising, especially in PBNA.

So I guess can you give us some color on whether you think it's: a, it's going to be enough; and b, are you beginning to see the consumer response, the lift from the investments that you're making.

Bryan, yes, of course.

Listen, it's the third quarter of growth in NAB, so we feel good about the progress we're making in NAB.

We feel good about a couple of areas.

First, I think we're really strengthening the brands.

We feel very good about how Pepsi is performing, so yes, the investment in Pepsi and some of the portfolio innovation and especially packaging innovation is working very well in Pepsi.

We're seeing an improvement in Gatorade.

The velocity of Gatorade is improving as well.

I think we have some more work to do in Dew, and we will be investing more in Dew during the year.

So we feel good about that part of our investments.

I think what we feel really good is about our innovation.

Innovation is really working very well in North America beverages.

So if you think about LIFEWTR, third year of growth, doubling velocities as we increase distribution, still, the velocity is going very fast.

We're feeling very good about Game Fuel, some of the innovation we have in the energy area.

Gatorade Zero is going to be a big incremental opportunity for us.

It's driving category growth, and it's driving share for Gatorade.

So we feel good about our innovation and some of our brand investments.

The areas where we are still working on is executional excellence, and we made the new division structure.

That's going to help us a lot in terms of becoming a much more strong and local operator whilst keeping a very good customer service to our large national customers.

So we keep investing in that area, but we feel good about the velocity of the brands, as I mentioned, the innovation.

And we'll get better execution as we invest and take maximum benefit from the new organization.

Your next question comes from the line of Ali Dibadj of Bernstein.

So I actually have 2 questions.

One is just a clarification on the one-timers.

Because as we add them up, I understand last year about the insurance recoveries and everything else, it seems like there's about $100 million swing from last year to this year in these one-timers or about $0.05 a share.

And I just want to make sure we're kind of getting to roughly the right number, as you guys think about it.

And that's probably for Hugh.

And then the broader question is about the ROI and the nature of reinvestments, not because 5% organic sales growth isn't good.

I mean, we thought you'd round up to 5%.

You ran it down to 5%, so that's all great.

But is really in North America driven more by price/mix versus volume?

So trying to understand the nature of your investments.

We would have expected a little bit more, I guess, volume-driven or demand-building type investments given the plan that you'd laid out before for marketing, et cetera.

So those 2 questions would be really helpful, please.

Yes, I'll answer -- I'll take the question around one-timers.

Depending on what you characterize as onetime, I think that's about right, $100 million swing.

In addition to that, obviously, the tax rate was higher in the quarter this year.

But I think a $100 million swing is about right.

Yes.

And on the investment, Ali, I think it's still premature to get any good readings on the return on investment.

However, we're seeing, as I said, velocity of the brands improving.

We're seeing market share recovery in a lot of the segments.

We're seeing the brand equity better.

We're seeing some of our numerical distribution and customer service KPIs improving.

So we feel good about how our investments are turning into positive operating numbers.

And we feel good about the progress we're making.

Your next question comes from the line of Andrea Teixeira of JP Morgan.

So I wanted to just follow-up on FLNA.

And volumes continue to be strong on a [tourist] snack and running about 3% in pricing the same way.

I was just wondering if you can give us comfort that you're seeing good quality on that growth?

And I think you called out in the Q on the big franchises is still running at a very high pace.

So if you can comment on how you see the progress into the goal of this 5%?

And how sustainable you see it going forward?

Yes.

Andrea, the category in savories is performing very, very well in the U.S., and I think it's a combination of our investments.

Obviously, we have a big share of this category and some other players investing.

We are obviously having a very good partnership with our customers, building -- increasing the space of this category in the stores.

So it's a compounded impact of multiple factors that is driving the category.

Within this category, Frito-Lay is improving its share performance as well, so we're seeing the double impact of that.

The -- you were referring to pricing and we're getting better at net revenue management and how we're capturing the maximum pricing of every occasion.

So I think Frito has done a great job of managing their mix to obviously maximize revenue of the demand that there is in the market.

And then they've made some operational adjustments to some of the supply chain bottlenecks that we had in the past.

And we've been able to capture some of the seasonal opportunity, especially around Super Bowl in -- I would say, in a very, very impactful way together with our beverages business as well.

So we had a very good Super Bowl.

So you put it all together and the category is healthy.

I think this category will continue to have strong tailwinds as consumers -- we've talked this in the past, consumers go into more on unstructured meals during the day.

So we have -- I think we have tailwinds.

Plus our investments, I think, are accelerating the performance of this category.

So we feel good about Frito.

Obviously, also, we're working on productivity and make sure that the business continues to generate the efficiencies to reinvest, make sure that this model is sustainable long term.

Your next question comes from the line of Bonnie Herzog with Wells Fargo.

I wanted to ask about CSDs.

There's a fairly wide delta remaining between your share performance and that of your largest branded competitor, especially in the U.S. So could you guys update us on some of your initiatives in CSDs, specifically innovation which you didn't mention any plans that I heard?

And then how successful has your stepped-up spending been in that category specifically?

And then finally, I guess, I'd like to understand how big of a priority CSDs are relative to the other beverage categories in term of the investment spend and allocation of resources?

Okay.

Good.

So listen, of course, CSD is a very critical category for us, and we talked about that.

And we need to have a balanced growth between CSDs and NCBs if we really want to make progress in this business.

So from that point of view, it's clear that we're treating both segments of the market with a very clear intention of allocation of resources, with CSDs taking a very important role for us.

Within CSDs, our first priority was Pepsi.

And we started investing in Pepsi last year.

The good news is that the Pepsi brand is gaining share of CSDs already so -- and pretty good growth compared to our cola competitor.

So we feel good about that large segment of CSDs.

Now as I said before, we're working on Dew.

Dew is also improving its performance in its core portfolio, and we have some laps that are over as of March, so you will see an improvement in CSD share.

We continue to invest against Dew.

You'll see -- I already mentioned the innovation.

There is innovation on Dew brand.

Game Fuel is one of the innovations in Dew brand.

We have other innovations coming up in this summer that you guys will be able to see in the marketplace, and you'll see some very strong activations of the brand coming up in the summer.

So we feel good about Pepsi, and it's a combination of brand, it's the combination of non-sugar doing very well, mini cans doing very well.

So the portfolio transformation we've made as well is helping us to -- for Pepsi to outgrow the CSD market.

And now Dew is the next area of focus, and I'm confident we'll see performance improvement in the next quarters in Dew.

Your next question comes from the line of Vivien Azer of Cowen and Company.

So I was just hoping also to talk about beverages and ask for an update on SodaStream.

How that's going?

And any update on your thinking on the role that will play in your broader beverage initiative?

Yes, I think we talked during the strategic review.

SodaStream is a long-term strategic bet for us, and it's in multiple dimensions.

One is we think consumers will be looking for customization of their beverages solutions at home, and I think SodaStream, it is a very good tool to provide that to consumers.

Obviously, we're going to innovate in improving the flavor experience and some other options for consumers to really capture that need.

Obviously, it is -- there is a sustainability angle to SodaStream.

And when we think that we're -- we can provide consumers with very good beverage experiences without packaging, without waste.

And that's, I think, a big, big plus for this opportunity.

The performance is good.

It's accelerated versus the past.

We're not going to disclose specifics.

But if you know the past performance of SodaStream, it is accelerating.

The penetration in most of the European countries, which is the #1 KPI we're measuring, keeps increasing.

The same in Canada, the same in the U.S. which are the largest markets for this business.

So we feel good about the operational results, and we feel good about the value that PepsiCo as a company is adding to SodaStream, especially in the areas of R&D and flavor innovation, customer relationships and some of the direct-to-consumer opportunities that this business has.

Your next question comes from the line of Kaumil Gajrawala of Crédit Suisse.

Ramon, presumably, when you first started, you developed a 1-year, 3-year, 5-year plan and such.

And as we think about that, do we think about this year's investment spending as a bit of a one and done, and the investment becomes part of the base and we're back to algorithm?

Or do you think of it as, this is the first full year, we have some critical things to do and then next year, there's a new set of initiatives that require further step-up to hold momentum or maybe even something different.

No, when we talked in February, we were quite clear I think on this is a year where we -- we're obviously taking some of our internal monies and redirecting them, that we needed some additional investments to make sure that we stepped up our performance in some areas.

And also, we are starting to create some capabilities that will hopefully drive the sustained performance in the future.

So we remain with the same investment position as we said in February.

And to add to that and just to reiterate what Ramon was saying, Kaumil, we talked about next year, we would be back on long-term algorithms.

So...

Correct.

Your next question comes from the line of Caroline Levy of Macquarie.

I wonder if you could talk a little bit about the other categories in beverages.

There's stepped-up competition coming in coffee.

We're just seeing a lot of new brands as well as the Monster coffee business is doing pretty well; and then needless to say, energy; and again, some great new brands both in sports and energy and almost a merging of those 2 categories.

So if you could talk about your approach to defending share in coffee and to growing against energy and sports against the newer players, that would be really helpful.

Yes.

Different market positions in different market segments, right?

So in energy, we're challengers, and our opportunity in energy is clearly innovate to go into spaces that the current players are not playing.

So we're addressing energy from the coffee market.

We're addressing energy from energy, like Game Fuel, with specific positionings within that, narrower but probably more functional.

And so we are challengers, and we want to have that mentality of going after existing leaders in this category and trying to get market share from that segment.

In the other 2 categories that you mentioned, our critical role is to keep building the -- make sure that those categories remain very healthy.

They keep growing above NRB, and that's what's happening with coffees and with sports drinks.

They're both growing fast.

Our biggest innovation in beverages is Gatorade Zero.

I think it's going to be a very good innovation, very incremental to the category and good for our share of market.

So we're investing big into Gatorade Zero, and we're investing big into Gatorade.

Of course, Propel is doing very well.

So we have a broad-based approach to the sports category, and we see our velocities improving.

When it comes to coffee, the same approach.

And we think our role is to continue to innovate in this category, make sure that we premiumize.

At the same time, we give value.

We cover all the different spaces where the category can go.

And we see our Starbucks coffee partnership very strong and clearly, growing above what is the average of our company, so very accretive.

Some of these players that are coming into our categories, they -- some of them, they stay for long time.

Some of them, they come in, and then 2 years later, they're not there.

So our approach to this category is sustained innovation; consumer insights to drive the category long term; keep investing; make sure that we keep driving the growth, the margin expansion of those categories long term.

Your next question comes from the line of Steve Powers of Deutsche Bank.

So Ramon, you talked at CAGNY about the importance of investing, among other areas, in more impactful science and design-led innovation.

And you've highlighted on this call, and just in response to the last question, some of the initiatives you have underway this year as it relates to beverages.

But when you step back, how would you assess the 2019 innovation and new product pipeline globally relative to what you hope to bring to market in 2020 or '21?

And where might you say you see the most room for incremental improvement there?

Yes.

Listen, we're -- as part of the capabilities we're building is this one that you referred to.

I think it's critical for us to continue to drive the growth of our categories, continue to create value for our customers in a sustained way, right?

And that's where we're investing.

We'll talk to you in the -- probably in the summer about how we're looking at innovation, and from the capability point of view.

How we're segmenting different ways of innovate.

I think it's very different how you do a local refresh innovation versus what are the big bets for the company versus how do you do lift and adapt or lift and shift globally, which is a huge opportunity, as you can imagine, from a -- for a global company.

So we'll talk more in the future.

But of the capabilities that we're investing heavily, and we're repurposing money from other cost lines of our P&L into capabilities, it is innovation, and it is especially the different types of innovation that you were talking about.

We feel good about 2019 from the innovation point of view.

And the fact that we're growing 5.2%, it is a reflection of we're growing the core, but we're also adding some new segments that are very incremental to our top line and also to our categories and our customers who we want to position ourselves as a key growth contributor to our customers through innovation, through category growth.

Your next question comes from the line of Robert Ottenstein of Evercore ISI.

A few related questions on Frito-Lay North America.

First, you mentioned that you expect the growth to slow as the year progresses.

Is that purely a function of tougher comps?

Second, can you talk about the impact of mix in the quarter, both in terms of the pricing and volume?

And third, I think it's mentioned in the 10-Q that you had double-digit declines in Santitas.

If you could talk a little bit about what's going on there?

Yes.

Robert, it's Hugh.

I'll handle that one.

Some of the commentary I gave on Frito-Lay with performance balance of the year is driven by the laps as you've anticipated.

In addition to that, we had a particularly good January as we had some tightening in areas of our supply chain.

We addressed those issues, and we really had a very big Super Bowl, bigger than we've had in previous years because we unlocked some areas of the supply chain.

So I think that was a big driver for the quarter.

Obviously, that's a onetime event.

We don't see that repeating over the balance of the year because it was much more driven by January challenges.

Regarding mix in the quarter, it was quite positive, so we certainly feel good about where Frito-Lay mix is.

Your next question comes from the line of Amit Sharma of BMO Capital Markets.

Ramon, you mentioned good macros in most of your markets during the quarter.

Can you just outline for us how do you see that evolving for the rest of the year?

IMF recently cut down global growth outlook a little bit.

Can you just talk about how you'll see that developing for the rest of the year as well, please?

Yes, happy to.

Listen, we're seeing very good demand for our categories globally.

And so obviously, I mean, we sell snacks and we sell beverages, so low-price-point product.

But sometimes, the big GDP fluctuations are driven by other components of the GDP, not so much consumption, not so much consumption of our categories.

So the way we tend to look at our business is, is employment good?

Is wages and salaries, are they moving in the right direction?

So we see that stay.

And we don't see any reasons why in the U.S. or in some of our big markets, this is changing.

ForEx is a big -- has a big impact to our P&L, especially in markets where we -- some of the supply chain comes from outside of the country.

And so far, ForEx has been good, has been stable in the ruble, the euro, the peso, Mexican pesos.

So some of our big markets, the ForEx has been good.

So our estimates are that it's going to continue to be quite stable.

Having said that, there's always the possibility, obviously, of geopolitical events or some others that might disrupt some of the demand.

So -- but at this point, we feel good about the projections for macros for the balance of the year.

Your next question comes from the line of Bill Chappell of SunTrust.

Just want to go back to North America Beverage and just try to understand your commentary.

You said you're pleased with the kind of progress of CSDs in the quarter, that Pepsi was kind of gaining share and pleased with the progress there.

But we're only kind of 2 quarters removed or, really, 1 quarter removed from changing the strategy, reinvesting and kind of taking a step back.

So trying to understand, are things moving faster than you expected?

Was advertising -- have a bigger impact than you expected this quarter?

Or are we still expect -- are there still kind of a step-change from here?

No, we are -- I think the teams are doing a great job.

And things are coming as planned, right?

So it's a combination of innovation, it's a combination of good advertising, quantity of advertising, execution in stores and Pepsi has been the focus of our execution in stores, implementing the innovation and also improving the looks of the products.

So things are coming as planned, as you said, 3 into quarters this turnaround strategy, and we're pleased with the results.

I mean growing above CSD category is -- I think is a very good output of the inputs that we put into this.

So we feel good about it.

Your next question comes from the line of Laurent Grandet of Guggenheim.

I'd like to focus my question on the profitability of your international segments.

Those increased significantly.

Could you give us more color on where the improvement is coming from?

And how sustainable that is in the coming quarters?

Yes.

Happy to, Laurent.

I mean, we saw profitability improvement across all 3 of the big segments.

We did benefit, to some degree, in both Russia and in Mexico from some insurance recoveries.

And we put all that in the disclosure so you can back those onetime items out.

That said, we saw a good solid fundamental operating profit performance improvement basically across the big segments even ex those gains.

Your next question comes from the line of Kevin Grundy of Jefferies.

First question I have is just housekeeping for Hugh.

Free cash flow conversion for the business longer term, understanding that you're ramping up some spending this year, what's the right free cash flow conversion?

And over what period of time do you think you can get a return to it?

And then the strategic question for Ramon.

I'm just trying to reconcile some of your comments on sports drinks with what we're seeing in the scan data from a market share perspective, with PepsiCo down -- or excuse me, Gatorade down 360 basis points in the most recent 4 weeks, and over the past year, down close to 400 basis points.

So when should we expect to see that get better?

I'm sure that cannot be satisfying and then not what you'd expect going forward.

When should we expect to see some of those trends get better?

And is there anything tactically you need to do differently, whether this is more advertising?

Your promos are down quite a bit.

Your competitor's is up materially.

So questions around Gatorade and anything you need to do tactically and when do share trends get better?

Why don't I handle the free cash flow question first.

We don't give specific guidance on free cash flow.

The one thing that we did comment on in the past, just as a reminder, is that we would see a step-up in CapEx this year and lesser so in the next several years.

And we would expect over the course of about 4 years for that go back -- for that to go back to something around 5%.

So as you model that out, I think you'll get to a reasonable overall cash flow number.

Nothing else should be notably different relative to the historical projections on cash flow.

It's just a step-up in CapEx.

Yes.

And with regards to Gatorade, we're investing in several areas.

We're investing in improving our communication and the amount of advertising as you're saying.

We're improving the packaging of the product.

I think there is an opportunity to improve the packaging.

And then, most importantly, we're going after additional consumers.

And Gatorade Zero is a very strategic intentional innovation to go after consumers that had left Gatorade franchise because of the sugar level, so people that still want the same efficacy when it comes to hydration but want less sugar.

From the early reads that we have on Gatorade Zero, it is performing as we intended in terms of expanding the category, capturing new consumers and driving incrementality for the brand.

So we're very hopeful that those 3 levers will help us regain growth.

The fact of the matter is that we also have other brands play in that space.

Propel is a great brand that we have in that space of sports hydration with a different positioning, but growing very fast.

And we will come up with some other innovations.

Obviously, I cannot disclose for competitive reasons, but there is new innovation coming up that hopefully will attack some spaces in the current sports overall category where we probably are weaker.

But that's the way we're approaching.

This is a very important business for us.

It's part of our management conversations quite often.

And I think we will, as I'm saying, we will improve the performance of our sports set of brands and products in the coming quarters.

Your next question comes from the line of Sean King of UBS.

I guess now that you've closed the CytoSport deal, how do you see the -- I guess, do see any incremental channel or category innovation opportunities to build on that investment?

Yes.

Sean, this is Hugh.

I think you'll see us now that we sort of have control of the brand there, combined with the Gatorade shakes business that we have, sort of craft a premium and mainstream approach to that business and to clearly appeal to different consumer segments.

And we think by virtue of owning that business, we'll be able to have more success with both of those brands.

So more to come on that, but that's sort of the broad thinking behind the move that we made.

Yes.

And we think there is, obviously, executional opportunities with these brands, but most importantly, we think that this category, it's going to grow fast in the coming years.

And we want to make sure that we have full ownership of the full value chain so we can innovate both, as Hugh was saying, with multiple brands, to make sure that we cover all these spaces, more functional, more lifestyle, more premium, more value.

So there's a lot of -- I think there's a lot of ways how we can help accelerate a category that has a lot of consumer tailwinds already.

So it's a good strategic acquisition for us and make sure that we drive this category to its maximum.

Okay, so this is the last question.

Thank you, all of you, for your time and participation in this morning's call.

To conclude, just a summary.

We're pleased with our results for the first quarter.

We're executing against our key priorities with a very high sense of urgency.

We remain on track to achieve our 2019 financial goals.

And lastly, we thank you for your confidence that you've placed in PepsiCo with your investment.

Thank you.

Thank you.

This does conclude PepsiCo's First Quarter 2019 Earnings Conference Call.

You may now disconnect.