PepsiCo, Inc.

Good morning and welcome to PepsiCo's second quarter 2019 earnings conference call. Your lines have been placed on listen only until the question and answer session. In order to ask a question or make a comment, please press star followed by one on your touchtone phone at any time. You may remove yourself from the queue by pressing the pound key. 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 I'll open the call up to your questions. Before we begin, please take note of our cautionary statements. We will make forward-looking statements on today's call, including about our plans and 2019 guidance. Forward-looking statements inherently involve risks and uncertainties and reflect our view as of today, and we are under no obligation to update. When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results. Please refer to today's earnings release and PENQ available on pepsico.com for definitions and reconciliations of non-GAAP measures and additional information regarding our results and for a discussion of factors that could cause actual results to differ materially from forward-looking statements. And now it's my pleasure to introduce Ramon Maguarta.

Thank you, Jamie. Good morning, everyone. Just four things we'd like to highlight before I move on to a brief recap of the operating sector's results. First, we're very pleased with our results for the second quarter. Organic revenue grew 4.5% overall, with each of our six operating sectors contributing to the growth. I believe the solid growth we had in the second quarter is a good indication of the strength of both our product and geographic portfolios, And it also gives us confidence that the plans we share with you at the beginning of the year are being very well executed. Second, we continue to make progress on our productivity agenda and remain on track to achieve a full year productivity target savings. Third, we're on track with our investment priorities, amongst which We've stepped up our brand investments, which is evident in the increase in A&M in the first half of 56 basis points as a percent of net revenue. We invested in advanced data and analytics to enhance our consumer and shopper insights and sharpen the precision of our execution. We invested in increased go-to-market capacity and capability, including routes, other front-line selling resources, and e-commerce. We invested in increased manufacturing capacity with additional lines and plans to support our fastest-growing brands. We invested to drive greater global systems harmonization and standardization. And we took steps to transform our culture to become more effective by being more consumer-centric, nimble, and collaborative. And fourth, we're reaffirming our full-year guidance. So let me move on to the sector's results, starting with PWA North America. FLNA continued to post strong growth in the second quarter, with organic revenue up 5% and solid market performance. We delivered good net revenue growth in our key trademarks, including Lays, Doritos, Cheetos, and Ruffles. In addition, we posted good growth across all channels in the U.S., led by high single-digit growth in convenience and dollar stores. We continue to invest across the business with the aim to drive sustainable, better-than-industry growth, and this includes investing in plant and warehouse capacity, routes, sales technology, enhanced consumer and shopper data and insights, and brand media. To this point, in the second quarter, FLNA's A&M was up high single digits, with investments across our portfolio of brands. And we're pleased to know that Ethylene A was once again the largest contributor to total food and beverage U.S. retail sales growth in the quarter. PepsiCo Beverages North America delivered 2% organic net revenue growth with solid benefit from net price realization. Trademark Pepsi and Trademark Mountain Dew showed sequential volume improvement and our ready-to-drink coffee and water volumes grew in the high and mid-single digits, respectively. A&M's spending was up strong double digits for the quarter. Beyond brand investment, we're also directing investment on innovation to address new category entrants and to drive success in higher growth category segments. And this is evident with innovations like Mountain Dew Game Fuel, Gatorade Zero, and Gatorade Ball 24, live water, bubbly, new variants of Propel, and extensions within our successful Starbucks and Pure Leaf tea lineups. We're encouraged by the steady improvements we've seen in the business, and we believe that as we execute our planned investment agenda, we'll see a return to sustained competitive performance. Rounding out North America, the second quarter was Quaker's strongest quarter of organic revenue growth in three years, with organic revenue up 3%, driven by net price realization and modest volume gains. We've restored brand support across the Quaker portfolio, and we've returned to volume growth in on-demand and ready-to-eat cereals, each of which deliver mid-single-digit volume growth. Now, moving on to international, despite ongoing microeconomic volatility in a number of key markets, and poor weather in parts of Western Europe, each of our international divisions delivered solid organic revenue growth in the second quarter. Notably, developing and emerging market organic revenue increased 8%, driven by particularly good growth in a number of our key markets. Mexico and Russia were up high single digits. Brazil was up more than 20%, in part reflecting the benefit of LAPI in last year's transport strike. China grew strong double digits, and India increased mid-single digits. These results are a reflection of the benefits of increased investments we're making in the business and reinvigorated emphasis on marketplace execution, driving local relevance and local affordability, expanding our global brand portfolio, and leveraging our global capabilities to drive higher per capita consumption and market share gains.