PepsiCo, Inc.

Good morning and welcome to PepsiCo's third 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. Ravi Pemnani, Senior Vice President of Investor Relations. Mr. Pemnani, you may begin.

Thank you, Operator, and good morning, everyone. I'm joined this morning by PepsiCo's Chairman and CEO, Ramon LaGuardia, and PepsiCo's Vice Chairman and CFO, Hugh Johnston. We'll begin with some brief prepared comments from Ramon and Hugh, and then open up the call to your questions. Before we begin, please take note of our cautionary statement. We will make forward-looking statements on today's call, including about our business 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 excludes certain items from reported results. Please refer to today's earnings release and 10-Q available on pepsico.com for definitions and reconciliations of non-GAAP measures and additional information regarding our results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements. And now, it's my pleasure to introduce Ramon LaGuardia.

Thank you, Ravi. Good morning, everyone. Before we get to our results, I would like to congratulate Ravi on his recent appointment to Senior Vice President of Investor Relations. Ravi has been with PepsiCo Investor Relations since 2012. Most of you know Ravi very well. We're very pleased to have Ravi advance to lead the IR function. Jamie Caulfield was recently appointed CFO of Free LA North America. And we're glad that he'll continue to play a very important role in PepsiCo's finance organization and in the Frito-Lay business. Now, moving on to the results. We're very pleased with our results for the third quarter and year to date. Our top priorities entering 2019 were to accelerate our full year rate of organic revenue growth and to position the business for sustained future growth. And we have good evidence that we've made solid progress on both fronts. In the third quarter, organic revenue increased 4.3%, lapping very strong 4.9% organic revenue growth during the third quarter of last year. And year-to-date, our organic revenue growth stands at 4.6%, an acceleration from 3.4% a year ago. So given the strength of our year-to-date performance and the solid momentum we're seeing in the business, we now expect to meet or exceed our 4% organic revenue growth target for the full year. Our strong performance in the third quarter was broad-based, with organic revenue growth generated by each one of our divisions. Peter Lane North America grew organic revenue 5.5%, driven by volume growth and net price realization. Importantly, the business is not only growing, but winning in the marketplace versus competition. In the quarter and year to date, Frito-Lay is growing value share in salty, savory, and macro snack categories. Investments we've made in innovation, marketing, and consumer insights, and manufacturing and go-to-market capacity are providing benefits across the brand portfolio. with strong net revenue growth in our large mainstream brands like Doritos, Cheetos, Ruffles, and Fritos, and double-digit growth in our smaller premium brands such as Bear and Off The Hidden Path. The breadth of our growth was also evident across every key retail channel, with gains in grocery, mass, club, convenience, food service, and e-commerce. Turning to PepsiCo Beverages North America, We're very encouraged by the 3% organic revenue growth we generated in the quarter due to my solid net price realization, the result of effective revenue management execution. Our third quarter growth accelerated sequentially from the second quarter and was on top of 2.5% organic revenue growth achieved in the third quarter of 2018. The business is benefiting from improved local market focus and execution driven by our streamlined field structure, increased go to market capacity, and significant stepped up advertising support and innovation. We're especially pleased with the performance of Gatorade, which generated mid single digit net revenue growth and improved sequential market share performance. Innovation has played a big role in Gatorade's performance. led by Gatorade Zero, which has surpassed a half billion dollars in retail sales since its launch in May of last year. And we recently launched Ball 24, a new functional beverage that supports athletes around the clock by providing advanced all-day hydration. Other key parts of the business also continue to show progress. Trademark Pepsi posted its fifth consecutive quarter of net revenue growth And bubbly has continued to post very strong growth and is gaining share in the flavor sparkling water category, aided by packaging and flavor innovation. Other notable highlights include double-digit net revenue growth for live water and Propel, and high single-digit net revenue growth for Pure Leaf Tea and Starbucks. Rounding out our North America performance, Quaker Foods delivered net revenue growth in the quarter propelled by our light, snacks, on-demand syrup and mix, Roni and Near East businesses. With our advertising and marketing having increased in the quarter and year to date, we remain focused on accelerating growth at Quaker Foods. Before we move on to international, I want to note the terrific work our supply chain and customer teams are doing in North America with our snacks and beverages businesses. receiving the two-top ranking in the 2019 U.S. Advantage Survey for Food Multi-Channel Report. This is one of the annual surveys where retailers across multiple channels provide feedback on how suppliers are performing with respect to strategy, people, category development, marketing, supply chain, customer service, and e-commerce. Moving beyond North America, Each of our international divisions delivered solid organic revenue growth in the third quarter, despite ongoing macroeconomic volatility in certain markets. Notably, organic revenue in our developing and emerging markets increased 7%. This included double-digit growth in Mexico, Saudi Arabia, China, Turkey, and Pakistan, and high single-digit growth in India, Egypt, Poland, and Colombia. Our international results reflect the benefits of our increased investments as we continue to leverage our global capabilities to drive higher per capita consumption and improve market share while executing in locally relevant ways. PepsiCo's performance to date gives us confidence that the strategy we laid out in February to become faster, stronger, and better is working. Importantly, we're balancing our investments to both drive results in the short term, and position our business for sustained long-term performance. Becoming faster is about winning in the marketplace, being more consumer-centric, and accelerating investment for top-line growth. For example, we've increased our investment in advertising and marketing by 12% year-to-date. This investment spans across many of our big brands and geographies, as well as support for innovation and emerging brands, which we will continue to develop over time. We're investing to increase the capacity and reach of our go-to-market systems with substantial investments in new routes, merchandising racks, and coolers. And we're investing in additional manufacturing capacity to remove bottlenecks and expand growth capacity for our brands. This includes investments in new plants, new lines, and added distribution infrastructure. Becoming stronger is about transforming our capabilities, cost, and culture by operating as one PepsiCo, leveraging technology, and winning globally and locally. For example, we're making significant investments in capabilities like data analytics and systems to digitalize the company to achieve precision at scale, which is to execute in every store with precisely the right products, at the right price, To do so, we're capturing and analyzing more granular consumer-level data to build true consumer intimacy, that is, understanding the consumer in a much more personal way, to move from thinking of consumers in groups of millions to understanding them at the household or individual level by leveraging robust data from multiple sources. Using this information, we're increasingly structuring personalized communication and satisfying demand at the store level. We also continue to strengthen our omnichannel capabilities, particularly in e-commerce, where our retail sales are expected to be nearly $2 billion in 2019. We're building on this success by investing further in our go-to-market and supply chain systems to capitalize on more opportunities in today's dynamic retail environment. And we're elevating our talent and fostering a culture where employees act like owners with a greater sense of empowerment and accountability. To fund these investments in capability and culture, we're driving efficiency throughout the enterprise, and we remain on track to deliver our target of $1 billion in annual productivity savings in 2019. And finally, becoming better reflects our aspiration to integrate purpose into our business strategy and brands. With this in mind, we're embracing a set of focused initiatives to help build a more sustainable food system. And I'd like to spend a little extra time this morning to share with you what we're focusing on. First is advancing environmental, social, and economic benefits to farmers and communities by promoting more sustainable agriculture. Through our sustainable farming program in 2018, we achieved a key milestone with over half our farmers source agricultural raw materials, like potatoes, whole corn, oranges, and oats, verified as sustainably sourced. Our aim is to reach 100% by the end of 2020. Second is improving water stewardship across our businesses and in the regions where we operate. We're striving to improve water use efficiency and aiming to replenish 100 percent of the water we consume for manufacturing in high water risk areas by 2025. Third is delivering our vision of a world where plastic packaging need never become waste. We recently unveiled a new target to reduce 35 percent of virgin plastic content across our beverage brands by 2025. given by increased use of recycled content and alternative packaging materials. Fourth is improving choices across our portfolio by continuing to reduce added sugars, sodium, and saturated fats in many of our products. We currently offer several choices that address this objective, including Pepsi zero sugar, laced baked, mercury multigrain, Tropicana whole fruit, and Sunvite's veggie harvest. and we will continue to expand our offerings of more nutritional options. Our fifth focus area is mitigating the impact of climate change by curbing greenhouse gas emissions across all our value chain with an ambitious goal to reduce absolute greenhouse gas emissions across our value chain by 20 percent by 2030. And lastly, we're working to support our associates and society by advancing respect for human rights, promoting diversity and inclusion in our workplace, and increasing the earnings potential of women in our communities. This is a journey with a lot of work ahead of us, but we want all of our stakeholders to know that advancing sustainability and being a more purposeful company will play an essential role in PepsiCo's future. For more details on how we're integrating sustainability into our business and our brands, we encouraged you to read our most recent sustainability report.