PepsiCo, Inc.

Good morning and welcome to PepsiCo's fourth 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 Pamnani, Senior Vice President of Investor Relations. Mr. Pamnani, 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 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 2020 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 in 10-K, 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 finally, as disclosed in our earnings release this morning, we are now reporting four international divisions versus three previously. This reflects changes made to our management reporting structure. Therefore, certain international division results have been restated for the full years 2017, 2018, and 2019. Specifically, our former Europe Sub-Saharan Africa division has been reclassified as Europe and will no longer include Sub-Saharan Africa. And our former Asia, Middle East, North Africa division has been reclassified into two divisions, Africa, Middle East, South Asia, or AMISA, and Asia Pacific, Australia, New Zealand, China, or APAC. There are no changes to the remaining divisions or our consolidated results. And now, it's my pleasure to introduce our chairman and CEO, Ramon LaGuarta.

Thank you, Ravi, and good morning, everybody. Approximately about a year ago, we embarked on a plan to make PepsiCo faster, stronger, and better. We've made very good progress against these initiatives, and I'm pleased to report that we met or exceeded each of the two-year financial targets that we communicated to you about a year ago. Most notably, organic revenue growth accelerated to 4.5% in 2019, our fastest rate of growth since 2015. Our organic revenue growth was very broad-based across all divisions, with Frito-Lay delivering its fastest rate of growth since 2013, and BB&A delivering its fastest rate of growth since 2015. Our developing and emerging markets also delivered high single-digit growth, despite ongoing volatility and uncertainty in certain parts of the world. We invested in becoming faster by increasing our global advertising and marketing spending by more than 12% for the full year, reflecting investment across snacks and beverages, and in both our large and established brands and our emerging brands. Expanding our market presence by increasing route capacity, adding merchandising racks and coolers, and advancing the technologies that we deploy to drive greater and more precise execution, and investing in additional manufacturing capacity to remove bottlenecks and increase growth capacity for our products. This includes investments in new plants, new lines, and added distribution infrastructure. While we intend to continue to invest back into our business, we know that sustaining higher growth will require building stronger capabilities. ones which will be difficult to match by our competitors. During 2019, we enhanced our consumer and customer facing capabilities, strengthened our organizational culture, and transformed our cost management. Specifically, we invested in data analytics and other information technology to build consumer intimacy and achieve precision at scale. By capturing and analyzing more granular consumer-level data, we can understand the consumer in a more individualized way to both customize communication and execute in every store with precisely the right products, placed in the right location, and at the right price. We strengthen our omnichannel capabilities, particularly in e-commerce, but our retail sales were nearly $2 billion in 2019. To meet the growing need across channels for greater customization and faster innovation, we're investing in an end-to-end agile value chain that can deliver more precision and variety to enable us to win in the marketplace. We migrated our organizational structure closer to the market in order to improve speed, increase accountability, and become more locally focused. And we evolved our values and ways of working to foster a culture where employees act like owners with a greater sense of empowerment and accountability. We call this the PepsiCo way, which includes a set of seven leadership behaviors that have been rapidly embraced by our organization. And we took a completely holistic approach to cost management, one in which we manage all costs as an investment. In doing so, we challenged the entire cost structure to evaluate cost and benefit of our spending. In 2019, we delivered in excess of a billion dollars in productivity savings and plan to deliver this amount annually through 2023. Finally, becoming better reflects our aspiration to continually integrate purpose into our business strategy and brands. as more is expected of corporations by society. We prioritized and embraced a set of focus initiatives to help build a more sustainable food system. These include advancing benefits to farmers and communities through more sustainable agriculture. We intend to achieve 100% sustainably farmer-sourced agricultural raw materials by the end of 2020, which include potatoes, whole corn, oats, and oranges. Improving water stewardship. We're striving to improve water use efficiency and aiming to replenish 100% of the water we consume for manufacturing in high water risk areas by 2025. Circular packaging. By 2025, we intend to increase recycled content in our plastics packaging to 25% and reduce 35% of virgin plastic content across all our beverage portfolio. Improving choices across our portfolio by reducing added sugars, sodium, and saturated fats. Mitigating the impact of climate change by reducing absolute greenhouse gas emissions across PepsiCo's value chain by 20% by 2030. And finally, advancing respect for human rights, promoting a diverse and inclusive workplace, and increase the earnings potential of women to drive economic growth and increased food security. Our commitment to becoming better was most notably demonstrated by appointing our first ever Chief Sustainability Officer and by a green bond offering that generated almost a billion dollars in net proceeds to advance our sustainability agenda. To complement our faster, stronger, and better initiatives, we also made investments to fortify our portfolio for future growth, specifically We invested in our SotheStream business, which grew net revenue more than 20% last year, in order to capture an incremental growth opportunity. We announced our intent to acquire BFY Brands, the makers of the fast-growing Popcorners brand, which will enhance our premium snack portfolio. We're in the process of acquiring Pioneer Foods, which will build the foundation for future growth and scale in Africa. a key emerging market where our growth opportunities remain fast. And we acquired Sido Sport, the makers of muscle milk, which expands our presence in sports nutrition, providing opportunities for additional growth and category expansion. As we aspire to be the global leader in convenient foods and beverages by winning with purpose, we believe these investments position us well to win in the marketplace. Now, let me discuss our operating results. As I noted earlier, our organic revenue growth accelerated to 4.5% for the full year 2019 versus 3.7% in 2018, exceeding the initial target we set a year ago. All our divisions contributed to this growth, including a 3% increase in developed markets and an 8% increase in developing and emerging markets. Speedo Lane North America had a very strong year, with a 4.5% increase in organic revenue, along with an acceleration of volume growth in the second half of the year. The business gained value share in both salty and savory snacks in 2019 and improved its customer service levels. Speedo's results were driven by the investments we made in innovation, marketing and consumer insights, supply chain and manufacturing, and go-to-market capacity. This included a double-digit increase in advertising and marketing spend, additional plant, warehouse, and distribution center capacity, and additional routes, racks, and setting resources. Fritos delivered net revenue growth in all of its large mainstream brands like Lays, Doritos, Tostitos, Cheetos, Raffles, and Fritos, and double-digit growth in emerging premium brands such as Pear and Off the Eaten Pack. Our multi-type offerings also delivered very good growth as we have continuously expanded the variety of brand and flavor combinations. The breadth of our growth was also evident across every key retail channel. We increased net revenue growth in grocery, mass, club, convenience, food service, and e-commerce. And Frito-Lay was once again the number one contributor to U.S. food and beverage retail sales growth With respect to the fourth quarter, FRIDA delivered 3% organic revenue growth, driven by 2% volume growth and 1% net price realization. The deceleration in net price realization was largely a function of the timing of pricing actions taken in 2018. We expect our net price realization trends to improve over the coming months and have strong innovation and merchandising plans in place for the business to deliver very good growth in 2020. PepsiCo Beverages North America delivered 3% organic revenue growth in 2019, with a sequential acceleration in the fourth quarter, which represented its fastest rate of organic revenue growth in four years. The business benefited from improved local market focus and execution, even by our new field structure, increased go-to-market capacity, significantly stepped up advertising support, innovation, and additional selling resources. We also invested in improving our presence in the away-from-home channel by becoming the preferred beverage partner for JetBlue, Carnival Cruise Lines, and Regal Cinemas for the past year. Investing in our brands has been a big focus area for PB&A's advertising and marketing spend, increasing our double-digit rate for both the fourth quarter and full year, with increases in our large brands such as Pepsi, Gatorade, and Mountain Dew. Trademark Pepsi posted its sixth consecutive quarter of net revenue growth, with strong double-digit growth in our Pepsi Zero sugar product. Gatorade accelerated as the year progressed and ended the year on a very strong note with high single-digit growth in the fourth quarter, led by Gatorade Zero, which delivered more than $600 million in measured retail sales in 2019. Innovation played a very important role at PB&A this year, with Gatorade Zero, Bubbly, and Mountain Dew Game Fuel having cumulatively delivered more than $1 billion in measured retail sales. Other brands, including Propel and Live Water, deliver strong double-digit net revenue growth, while Pure Leaf and Starbucks deliver high single-digit growth in 2019. Finally, we have plans in place to build on our recent innovation successes. We will invest in Ball24, a functional beverage we launched last year that supports athletes around the clock by providing advanced all-day hydration. We recently introduced sugar-sugar variants of Munch & Dew and Munch & Dew Gain Fuel, which offer the same bold taste as the originals without the sugar. And we will roll out Pepsi Cafe, a coffee-infused cola beverage that will be available for a limited time offering in U.S. stores as of April. Drowning out our North America performance, Quaker Foods delivered 1% organic revenue growth for the full year, with double-digit net revenue growth in our light snacks business and Gameza Cookies, amid single-digit growth at On Jemima and Ronnie. I want to conclude our discussion on North America by acknowledging the terrific work of our customer and supply chain teams have done. Specifically, PepsiCo was awarded the number one ranking in the 2019 Cantor Power Ranking Survey, the fourth consecutive year we've claimed the top spot. and the top two rankings in 2019 U.S. Advantage Survey Core Food Multi-Channel Report. These surveys reflect our customers' view of PepsiCo as a valued partner and demonstrate the benefits of investing with our customers to help drive growth. Now, moving on to international markets, each of our international divisions delivers strong organic revenue growth in 2019. These results include strong performance across our developing and emerging markets, with high single-digit organic revenue growth for both the fourth quarter and the full year. We continue to have a long runway for growth in many international markets, and our 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. In Latin America, We grew organic revenue 7% for the full year, with growth in both snacks and beverages, despite ongoing macroeconomic volatility and political uncertainty in certain markets. Mexico, our largest market, delivered high single-digit growth for both the quarter and the full year. Our next largest market, Brazil, delivered mid-single-digit growth for the full year, with an acceleration in the fourth quarter to high single-digit growth. In Europe, we grew organic revenue 5.5% for the full year, with very good growth both in snacks and beverages. Our largest market, Russia, delivered mid-single-digit growth for the fourth quarter and the full year. The United Kingdom delivered low single-digit growth for the full year, but very encouragingly exited the year with mid-single-digit growth in the fourth quarter. Other highlights include double-digit growth in Turkey and high single-digit growth in Poland for the full year. Moving to our Asia, Middle East, and Africa regions, during the fourth quarter, we took the opportunity to think more strategically about this part of the world. We decided to split the organizational structure of our prior AMENA division into AMISA, which includes Africa, Middle East, and South Asia, and APAC, which includes Asia Pacific, Australia, New Zealand, and China. By creating one operating sector centered on the Asian consumer and another centered on the Middle Eastern, South Asian, and African consumer, we believe we can enhance our focus on accelerating top-line growth. AMISA delivered 6% organic revenue growth for the full year. This includes double-digit growth in Pakistan and Egypt and mid-single-digit growth in India and Saudi Arabia. APAC delivered 9% organic revenue growth for the full year, led by strong double-digit growth in China and Vietnam, and high single-digit growth in Thailand and the Philippines. To conclude, our priorities for 2020 remain consistent with our discussions today. We expect to deliver 4% organic revenue growth and 7% core cost and currency earnings per share growth in 2020. and we will continue to invest back into the business to evolve our portfolio and transform our value chain, build next-generation capabilities, particularly leveraging technology, to enhance our insights, speed, and precision, grow our talent and simplify our organization to be more consumer and customer-centric, invest in our brands, both large and emerging, and reduce our cost structure to free up resources to fund our investments. These priorities will always be executed with an eye towards enhancing our marketplace competitiveness and delivering, of course, long-term value creation. With that, let me now turn the call over to Hugh.