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.

Great. Thank you, Ramon, and good morning, everyone. As Ramon noted, for 2020, we expect to deliver 4% organic revenue growth and 7% core constant currency earnings per share growth. We expect foreign exchange to have an approximately negative one percentage point impact on net revenue and core EPS growth, and therefore expect our core U.S. dollar EPS to be $5.88 in 2020. For 2020, we also expect our annual core effective tax rate to be approximately 21%. free cash flow of approximately $6 billion, reflecting CapEx of approximately $5 billion. The higher rate of capital spending is associated with accelerating progress on our strategic growth priorities, as Ramon laid out earlier. We expect our capital spending to remain at or around these levels for the next few years and now expect it to moderate to 5% of sales by 2023. We expect total cash returns to shareholders of approximately $7.5 billion in 2020, comprised of dividends of $5.5 billion and share purchases of $2 billion. The expected cash returns reflect a 7% increase in the annualized dividend per share, effective with the dividend expected to be paid in June 2020. This will represent the company's 48th consecutive annual dividend per share increase. With respect to your models, please keep in mind the following. In the first quarter of 2020, we face a difficult comparison for both organic revenue and core constant currency operating profit growth at Frito-Lay North America and our international divisions. With that, now we'll open it up for your questions. Operator, we'll take the first question.

Thank you. Once again, in order to ask a question or make a comment, please press star followed by one on your touchtone phone at any time. Your first question comes from the line of Brian Spillane of Bank of America.

Hey, good morning, everyone. Morning. So I guess I got a few questions this morning about Frito and, you know, the kind of the deceleration there in this quarter and I guess what's implied in the first quarter commentary now. So maybe, Ramon, can you talk a little bit about the dynamics there, I guess lapping some price increases, and then kind of what gives you confidence that, you know, that can re-accelerate as we move through 2020?

Yeah, good morning, Brian. Yeah, listen, we feel very good about Frito, you know, performance in 19. We accelerated the highest level, I think, in the last seven years. Overall, a very good year. Volume went up. and volume across all our brands, the big brands and also the new brands that we're trying to build for the future. So very positive performance. And also, as I said, across all channels, very, very holistic, very good performance, I would say. The deceleration in Q4, as I said on this statement, is based on the pricing decision. In 2018, we took pricing Q4. This year, we didn't take any pricing Q4. It will be more of a – pricing decisions now in Q1, second half of the Q1. So that's the main difference. We feel good about especially the volume acceleration, the fact that our pounds went up almost 1% this year versus last year. It's a pretty positive to us testament that our investments are working and driving per capita consumption, which at the end is the long-term driver of the business.

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

Yes. Hey, thanks. A question actually on PB&A. As you think about the fourth quarter performance across that division and the acceleration you saw, I guess which brands or businesses perform best versus your expectations in the quarter? And as you look forward to 2020, how do you think about the trajectory there, just balancing the current momentum and against what will be difficult laps in Gatorade and bubbly, especially amidst lots of competition, and the expansion on the shelf and in the cooler of an energy category in which you're still underrepresented? Thank you.

That's a good question. Listen, we feel, I mean, if there's any division that we feel very strong about the turnaround this year, it's BB&A. We feel good about the way we're exiting the market. and also how we've driven that performance. You think about our innovation as very, very strong across the year, and you mentioned some of the successes, so Gatorade clearly driving sustainable growth by innovating in a new space like Xero. Xero has driven a lot of new consumers into the sports category, so it's not like a summer-related growth of Gatorade. It is a I would say on a structural more penetration of the brand into consumers that were not consuming Gatorade. So we see that sustainable actually, you know, it accelerated during Q4. We see Pepsi, as I said, with sustainable growth. So that makes us feel good. That's also driven by, you know, new variants like Xero, smaller packages that are driving consumption. So we see Pepsi as well, you know, driving sustainable growth. We continue to see very strong performance in our coffee business, and our partnership with Starbucks is more robust than ever. I think the kind of innovation we're bringing to the market and how we're moving that category also into new premium spaces with innovation is very powerful, very strong performance across the year, including Q4. The same with our tea categories. Pure Leaf continues to excel. to drive a lot of growth and develop the category. You mentioned bubbly. I think bubbly is just scratching the surface as a, as a brand is still very under penetrated is a brand that I think space wise also has a lot of opportunities. So, you know, I think a lot of people don't even know about the brand. I haven't tried the brand. So, and it's already, you know, a pretty meaningful size brand. So, you know, we feel part of, we feel very strong about, The way we're driving growth for PB&A is not short-term, but it's really developing the different segments of the category where we participate, expanding those categories, bringing more consumers into the space. There's another lever, I think, of sustainable growth for PB&A, which is driven by better execution. And this better execution obviously comes from you know, more focused on execution. But I think the organizational change we've made to the business where we have decision-making closer to the consumer and to the market is making us a better execution company in PB&A. I think that is, again, is not a one-year event. It's a multi-year opportunity that we're going to get better with better tools and better focus. So We feel strong about where we finished. We feel strong about the drivers of that growth, not being one-off, but being very sustainable drivers of growth.

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

Hey, guys. Just want to go back to FLNA for a second. I get the price increases in 2018, but even on a stacked basis, It looks like there's been some challenges, I think, as you can imagine, or you've probably seen almost all of us have written about FLNA and concerns about it. And I get, Ramon, that you said that you're going to see some price realization improving through 2020. But I wonder, with all the consumer work that you guys do, if you see anything at all that gives you pause from a structural perspective. So are you seeing any changes driven by the consumers, particularly around health and wellness, that are accelerating? Or... Are you seeing anything from a competitive perspective as well? We're all going to be at Cagney next week, and every food company is going to say they're a snack company, and they like your margins and they like your growth. So are you seeing anything there at all? And how does that play into, if at all, what seems to be a little bit more, I guess, subdued guidance as a company at the lower end of your long-term plan, especially after a heavy up? year like you just had.

Yeah. Hi, Ali. Good morning. Listen, good question, and I think obviously we're looking at long-term trends of the consumer and trying to adjust the portfolio to those trends. If you look at the way we're driving the growth in 2019 and the way we think we'll drive the growth in the next year, It's been across all brands. So we've seen the consumer continue to go back to our classics, Lay's and Doritos and Cheetos and Tostitos. And the truth is that we're trying to improve the way we market those brands, the way we are personalizing the messages, the way we're creating unique content for different consumers, and the way we're innovating against those large brands. At the same time, our kind of more permissible portfolio, premium portfolio, that segment of our range is growing about two times the average of the company. So if you think about the Eaton Path, Bear, Simply, Smart Foods, all those brands that you would say they are probably referred by some type of consumers that prefer more permissible snacks, They are growing two times, but the beauty of our free-to-lay portfolio, and the same would apply to our PB&A portfolio, is that we're trying to grow both our classic brands, large brands that are well-established, trying to modernize them, keep them very attractive to the consumers, and then innovate into future spaces where the consumer might move at a different speed in different parts of the country as they decide to change their consumer habits. So You know, we're evolving the portfolio. Some of the acquisitions we've made also would help us in that respect. But we're also innovating in those spaces ourselves. Of the Eden Fund is a great example. The SMP portfolio is a great example that is giving us, you know, very high penetration in those consumers that you referred to. What we're seeing, and I think we talked about it last time, is there is a trend towards smaller packages, and that might be a way – the consumer is also approaching snacking categories, you know, with portion control being a key driver of, you know, of the occasion. So we see small packs and the fact that we're moving a lot of capacity into smaller packs I think will continue to give us good growth in that space of more permissible snacking either by portion control or by new brands and products that are preferred by those consumers. We don't see a deceleration of the category, and that's That's why you mentioned there's a lot of new players that want to participate in the snacking trend, which I think is true and it's going to be here for a long time. And that would make us feel very positive about Frito because there are a lot of tailwinds to the snacking category.

Your next question comes from Alana Thera-Mosinian of Morgan Stanley.

Hey, guys. So just following up on some of the questions, I was hoping you could review a bit your visibility around the 4% corporate organic sales growth, top-line target for 2020. You're obviously coming off a solid year, so we'll have a tough comparison. There's some global volatility. So just wanted to get your perspective on the level of visibility at a corporate level. And obviously, we just covered Frito-Lay North America and PB&A. But perhaps you could also review what drove the strong momentum in D&E markets in 2019 and sustainability as we look out to 2020. Thanks.

Good morning, Derek. It's Hugh. I would say we have a good level of visibility into the revenue guidance. You know, historically, we've been pretty accurate on that, and I would expect that to continue to be the case. That said, as you sort of slightly noted, the world is certainly a volatile place. Lots of events going on in a lot of areas of the world, even as noted a bit with some of the news this morning. That said, we take the facts that we have, and we always try to plan for at least some level of volatility as a part of developing our expectations for the year because history tells us most years we'll have some volatility. So I think generally speaking, we have good visibility. Regarding developing and emerging markets at 8%, that's really a continuation, I think, of what we've seen over a number of years. You know, the per capita consumption opportunities in those markets are quite large and I think we're doing a very good job, but we're also barely scratching the surface relative to what the ultimate opportunity could be. It's one of the reasons we're investing in growth, because we think by virtue of realizing those per-cap opportunities and driving growth, we'll be able to sustain this algorithm for a very, very long period of time.

Our next question comes from the line of Andrea Teixeira of J.P. Morgan.

Hi, good morning. Thank you. So I was just hoping that if you can elaborate more on the top-line guidance being, as you said before, on the low end, and then embed your comment about 12% growth in investment in AAP in 2019. Do you think you've reached the normalized level now? And what is the growth in marketing investment that you're assuming for 2020 embedded in your guidance? And if you can kind of compare that with the one billion cost saves that you normally have, and if you can update us on that metric as well. Thank you.

Yeah, good morning, Andrea. In terms of the guidance, actually the guidance that we're giving this year is exactly the same as we gave 12 months ago. So obviously we saw a world where the investments that we were making were paid off a little bit better than we expected. And as a result, we got results and growth that were higher than that. Regarding whether we've leveled off, I don't think you'll see the same level of growth in advertising and marketing this year. It'll still grow. It might even grow a little bit in excess of the rate of sales growth. To a great degree, it's going to depend on the opportunities that we see in front of us. We've certainly funded our advertising line well going into the year, but frankly, if we see innovation taking off or if we see an opportunity in the marketplace to accelerate investment in order to capture even more growth, we're not going to be shy about doing that, and we've put room into the way that we guide to give us the ability to take advantage of those opportunities. As I mentioned, we think we're in great categories, and we think right now there's lots of opportunities to grow faster. So we're going to continue to do that, and at the same time, we're going to continue to invest in the stronger capabilities that allow us to sustain performance for a longer period of time.

And then if I may add, the way we're approaching in every market the opportunity, I mean, for 2020, we – We have, I think, very strong plans, well-funded, both on customer and consumer ideas. We're investing in additional capacity across the world. So our purpose here is to gain market share in every market where we compete. We've been doing that in 2019. We'll continue to do that in 2020. The compensation in the company is very geared to top line and market share growth. So that's the way we're starting the year. Our guidance, as Hugh said, includes the possibility of events during the year that might surprise us on the negative front. But I think the guidance reflects that positive attitude towards market share and then some uncertainty room in the overall number.

Our next question comes from the line of Lauren Lieberman of Barclays. Thanks.

Good morning. I wanted to get maybe a little bit of an update on progress in expanding some of your, as you put them, classic brands in snacking internationally. As I understand it, Ramon, one of your key priorities or areas you thought there was sort of really untapped opportunity was getting distribution of Doritos and Cheetos and these classic brands into international and emerging markets. So if you could speak directly to what's been done this year, how much that's still really more of a 2020 plan, it would be really interesting. Thanks.

Yeah, Lauren, good morning. We have a good playbook on, especially in the snack business, on how do we develop the category and what are the levers that we need to play in every market to deliver products the per-caps growth that we normally deliver in the markets. There's obviously innovation. There's brand building. There's visibility. There's value. There's many levers that we play in that playbook. To your point on brands, brands are part of that playbook. You know, we have Doritos, I would say, in, I don't know, 75% of our international markets, maybe. That's the number. We have Cheetos probably in 90% of our markets. Leitch is obviously the brand that we normally tend to lead and Ruffles, the potato business, because that's where I think we have more, you know, more differentiation possibilities with our agro programs and our flavor programs. So... But don't take it as a brand-exclusive per capita development opportunity, but it's a very holistic development opportunity that includes brands, innovation, and we're getting better at lift and shift, or lift and adapt, as we call it, taking successful products from one market and rolling them out globally. But there's a lot of work in our playbook in how we develop the point of sale and we become available everywhere, and also how we understand consumers' in their pocket money and their affordability, and then how do we adapt in every market the price levels to the pocket money of the consumer. And it's working very well. I mean, the truth is that the snacks category is growing consistently at a very high level internationally. We don't see any reason why we would not do that in 2020.

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

Hey, good morning, Raman. Good morning to you. And congrats, Raman, on a very strong first full year as a CEO. I'd like to focus on the Lipton opportunity. I mean, two weeks ago, Univer's CEO said the company was beginning a strategic review of its tea business. As we have been saying for quite some time now, we believe the acquisition of the balance of your JV with Univer will be a net positive for PepsiCo. Tea is one of the fastest growing companies. segment globally, one where you have a market share leadership. So the acquisition would make a strategic sense, but also a financial one, because you will be capturing 100% of the profit rather than just half. So could you comment on this opportunity and the role of the T segment for PepsiCo in general, especially as you are now facing a renewed competition with fuses mostly in Europe, but also in international markets? Thank you.

Good morning, Laurent. Thanks for the question. A couple of comments on that. Number one, we launched the tea venture with Unilever a couple of decades ago, and they've been a terrific partner over the course of the last couple of decades. We've built a nice ready-to-drink tea business both in the U.S. and internationally, so we certainly feel good about that. As regards to JV, we really like where we sit very much right now. We think The JVs got good balance, and I think we find the ready-to-drink aspect of tea to be attractive. So we like where we sit. Obviously, the announcement may have some ramifications for Unilever, but we think it shouldn't have substantive ramifications for us going forward.

Our next question.

We continue to do very well in the tea business, and it's a category that we see growing internationally. It's growing very fast in developed markets and also in developing. To your point on Europe, we continue to be leaders. We keep innovating there. You know, the Pure Leaf brand is doing very well. The Lipson brand is continuing to expand. We like this category. We like what we're seeing. As Hugh said, you know, we'll – We'll wait for events from Unidever.

Your next question comes from Rob Ottenstein of Evercore.

Great. Thank you very much. You announced some interesting changes, I guess, in the way you're managing the international business to capture more of the opportunities in Asia and Africa. I was wondering if you could give us a little bit more granularity in terms of how the strategy may change, any changes in tactics, investment, that you see putting behind those changes going forward? Thank you.

Yeah, that's good. Yeah, so there were a couple of reasons why we made this change in the organization. One is to manage a huge geography, like from Africa all the way to, Australia from one location, as we were doing from Dubai, was a big burden on our people, our executives. So that was not the ideal. But fundamentally, more than that, which is also important, is that there are clearly different consumption patterns, different trends, different food cultures. between, I would say, the group of countries centered around China and the group of countries centered around the Middle East and Africa. So we think that by making this change, we're going to be innovating with more local relevance. We're going to be activating our brands with more local relevance. We want to be able to have resources close to the marketplace in the critical differentiators like R&D, like technology, you know, sales execution that will help us to perform better in the market. One of the critical opportunities for PepsiCo is to develop international business, and I think Asia remains by far our number one opportunity, and China, of course, is a huge market where, you know, we have a good business. It's growing very well, as I said in my remarks, but the opportunity is much, much higher. So that's how we're thinking about you know, this new organization enabling a more sustainable and focused growth in those two parts of the world. Africa is another big opportunity for us. We're hopefully, you know, we're almost, you know, very close to concluding the Pioneer acquisition. That will give us a lot of scale in Africa, which deserves also more focus than what we had in the past. And we're also allocating additional resources to Africa, which will help us expand in that continent, which obviously has a huge opportunity for our products.

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

Great. Good morning, everyone. Ramon, can we come back to the energy drink category and kind of get more of an update on the company's strategy? It's not an area that PepsiCo has participated in in a meaningful way. The company has had a partnership with Rockstar, which is a brand which has lost share over time. Mountain Dew Kickstart hasn't really gained any traction in the category. And your key competitor, of course, has been more aggressive historically, both with investment in Monster and now the extension of the Coke brand. So the question is, is this an area of emphasis for PepsiCo, either organically or through M&A, or are you reasonably fine playing on the periphery? Thanks.

Thank you. Good question. Listen, obviously we – the consumers are looking for more caffeine. It's clear that this is an opportunity that they're looking for as the day is becoming longer and the commuting is longer. There's a lot of tailwinds to the use of caffeine. The way we've been approaching this opportunity is, as we said in the past, from multiple dimensions. We're playing in energy with Rockstar. It's a brand that we think we have the opportunity to working together with the Rockstar owners to develop and to reinvest, and I think we can do a better job there. We're also especially working in those spaces from the coffee category, and I think our partnership with Starbucks has been great. Triple shot Starbucks this year. It's been a massive innovation, and it's nothing but a very good way to consume caffeine as well. We're looking at participating in lower caffeine levels. We just announced some innovation in our Bubbly brand, some innovation in our Bolt 24 brand. So we plan to participate in the caffeine space from multiple dimensions, including doing a better job with Rockstar and our partnership there. Brands like Mountain Dew Kickstart and Mountain Dew Game Fuel are our good innovation from our own branch into that space, a bit more focused on particular opportunities, one on the morning occasion, one on the gaming occasion. They're getting good traction for us as well. So that's the way we're thinking now of participating in what is, as you said, a large opportunity and quite profitable.

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

Thanks. Good morning. Just going back to Steve Power's kind of questions on FDNA, can you quantify a little bit more what gives you confidence on, I guess, specifically Pepsi in North America and kind of the momentum this year, maybe what stage we are in different pack sizes or innovation on the horizon or something just that gets you, because the comps don't get any easier, and certainly there are other products out there. I'd love to hear what you're seeing or quantify what you're seeing to get you excited.

Yeah, we're excited. We have six quarters of growth for Pepsi continuously and we're seeing the brand equity going up as we invest more in the brand as our advertising gets better and we're able to talk to consumers in different segments with different messages and that's working very well. From the product point of view, we are we're seeing high growth, as I said last time, in smaller packs, so that's continued to help penetration in households that had stopped buying CSDs. Now they're going back with the smaller packs, so that's great. Xero is a very fast-growing brand, and for us, it's a great brand internationally. We're trying to develop it faster in the U.S. You saw our You know, our focus in the Super Bowl, our execution is quite focused on Pepsi Zero. And then Pepsi Regular is growing back again. Again, I think there is more our execution, the fact that we're able to execute with more granularity and better precision, that's helping the Pepsi brand along with the brand equity development. So That's what makes us feel very strong about Pepsi continuing to grow 2020 and in the coming years. We'll keep innovating. We've been innovating in Pepsi flavors. We'll keep innovating with Pepsi Cafe. So we'll keep bringing some news to the brand to continue the consumer engagement with our brand and our products. Yeah, that's good. Okay, thank you. I think that concludes the Q&A. Thank you for your time and your participation in this morning's call. We're very pleased with the progress we've made to date, and we're executing well against our key priorities. We look forward to updating you again on our progress throughout the year, and we thank you very much for the confidence you've placed with us and with your investment. Thank you.

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