Pepsico (PEP)

Q4 2011 Earnings Call

February 09, 2012 8:00 am ET

Executives

Jamie Caulfield - Senior Vice President of Investor Relations

Indra K. Nooyi - Chairman and Chief Executive Officer

Hugh F. Johnston - Chief Financial Officer

Albert P. Carey - Chief Executive Officer of Pepsico Americas Beverages

Saad Abdul-Latif - Chief Executive Officer of PepsiCo Asia, Middle East & Africa

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John C. Compton - Chief Executive Officer of Pepsico Americas Foods & Global Snacks Group and Member of Liquid Refreshment Beverage Oversight Council

Zein Abdalla - Chief Executive Officer of PepsiCo Europe

Analysts

Unknown Analyst

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Damian Witkowski - Gabelli & Company, Inc.

Eric R. Katzman - Deutsche Bank AG, Research Division

Presentation

Operator

Ladies and gentlemen, please welcome Senior Vice President, Investor Relations, PepsiCo, Jamie Caulfield.

Jamie Caulfield

Good morning, and thank you for attending PepsiCo's Investor Meeting. Presenting today will be Indra Nooyi, PepsiCo's Chairman and CEO; and Hugh Johnston, PepsiCo's CFO. Following the presentation, Indra and Hugh will joined for Q&A by John Compton, CEO PepsiCo Americas Foods and Global Snacks Group; Al Carey, CEO PepsiCo Americas Beverages; Zein Abdalla, CEO of PepsiCo Europe; and Saad Abdul-Latif, PepsiCo Asia and Middle East Africa.

Before we begin, please take note of our cautionary statement. This presentation includes forward-looking statements, including statements regarding 2012 guidance and our long-term growth targets based on currently available information. Forward-looking statements inherently involve risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. Statements made during the meeting 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. And unless otherwise indicated, all references to revenue, EPS growth, ROIC and division and total operating profit, growth are on a core constant-currency basis.

Finally, defined disclosures and reconciliations of non-GAAP measures that we may use when discussing PepsiCo's financial results, please refer to the Investor section of PepsiCo's website under the Investor Presentation tab. And now, it's my pleasure to introduce Indra Nooyi.

Indra K. Nooyi

Thank you, Jamie, and good morning, everyone, and thank you for joining us in person here today. My goal is to cover 5 topics this morning. I'm going to very briefly cover 2011 results and take a little journey back over the last 5 years and tell you what we've accomplished. And then we'll give you an overview of PepsiCo and outline our strategic priorities very briefly. We're then going to spend quite a lot of time reviewing the results for a comprehensive review of our businesses that we recently completed. Then we'll provide you our financial outlook for 2012 and beyond, and then introduce to you a scorecard, which we will use to measure our progress.

So with that, let me start with our 2011 performance. We issued our 2011 results this morning, and I'm not going to spend too much time going into details except to tell you that 2011 on balance was a good year. Snacks volume grew about 8%. Beverages volume grew about 5%. Net revenue was up 14%, and both core division operating profit and core EPS grew 7%.

We had broad-based gains in snack and beverage volume and net revenue. And we were able to achieve net price realization that partially offset the extraordinary commodity inflation we faced. More importantly, in 2011, we made disciplined investments in the business to generate long-term growth. We drove productivity through cost management. And more importantly, we were able to offset the impact in some of our markets, our skittish economy, natural disasters and political unrest with gains from some selective disposals of noncore businesses.

And of course, we benefited from the acquisition of Wimm-Bill-Dann, which is a critical addition to our Russia business that further strengthened our already strong position in this key developing market. Importantly, we also continue to generate strong cash flow. Management operating cash flow exceeded $6 billion. And as a result, we were able to return $5.6 billion in cash to our shareholders through share repurchases and dividends.

So that's 2011. For 2011 really caps a 5-year performance that delivered core net revenue compounded growth rate of 13%, core operating profit growth of 9% and core EPS growth of 8%. This performance also drove terrific cash returns. Dividends per share grew at 12% annually. And our cash return to shareholders through dividends and share repurchases totaled $30 billion over the past 5 years.

This is the financial scorecard. What's not evident from the 5-year financial performance is the incredible transformation that took place in PepsiCo during the same time. When I came into the CEO job in late 2006, I realized that PepsiCo had to make some bold transformative moves to remain successful well into the future. Because most of the tailwinds of the first part of the decade were not going to be around in the second half, and in fact some of them became headwinds in the second half of the decade, so we got to work.

Starting in 2007, we began to scale up our emerging and developing market business. In fact, our emerging and developing markets revenues went from $8 billion in 2006 to $22 billion in 2011, with the mix increasing from 22% of revenues to 34% of the revenues over that same time frame.

Over that period, we also addressed a number of business issues that faced us. First, we had to reconfigure our North American bottling operation in order to address the serious structural issues of not having an integrated bottling operation in this increasingly diversifying but slow growth liquid refreshment beverage market. We had to restate the Gatorade brand and return it to growth, following significant volume declines in 2007 to 2009. Then we had to restructure and refranchise our Mexican beverage operation to create a single entity with capable partner so that we can restore that business to growth.

And then to kickstart the China business to a level -- beverage business to a level that was higher than the past, we refranchised our business to Tingyi, which is now in the midst of government approval. And with this partnership, I think we really take our whole China beverage growth to a whole new level.

I think all of this creates tremendous vehicles for sustainable profit growth across many of our markets. But beyond that, we also increased our investment in R&D by 50%, boosting our core capabilities and making substantial talent additions and partnership investments in areas such as advanced retail technology; packaging, where we came out with the first 100% plants derived bottle; and equipment innovation, where we're going to be alpha testing a very exciting food service beverage dispenser in 2012.

In 2007 to '11 period, we also significantly expanded the health and wellness offerings of our portfolio. And I know some of you have expressed some concern, whether the pendulum swung too far in the direction and whether we took our eye off the core operations. What I'd like to tell you is that, the direct answer is this is an and game not an or game. We have to focus on both growing the core, which is the Fun-for-You products and the Better-for-you products and step up our investment in Good-for-You products. And I assure you that, that's what we've done and we'll continue doing. So let me provide some context on what we've done in the whole health and wellness space.

First, we increased the permissibility of our core salty-snack and beverage products by reducing sodium, frying them in heart-healthy oils, using natural ingredients and reducing sugar and reducing calories. The second thing we did was dialing up the sales of our baked products and snacks and 0-calorie beverages, which is really capitalizing on a sustainable consumer trend. And the third thing we did was to focus significant attention resources on our Good-for-You businesses to make sure that we're fully capitalizing on their global growth potential.

In North America, for example, we've been very successful in restoring momentum to Gatorade. We've made good progress with Tropicana. And the next one we have to address is Quaker Oats, especially North America. Internationally, we've had strong double-digit growth over the past 5 years for both Tropicana and Quaker, and we've expanded this well through juice and dairy acquisitions.

Importantly, we've targeted resources working on nutrition platforms globally, the benefits of which we will start seeing over the next few years. As a result of these efforts, we've enhanced our core offerings and our Good-for-You portfolio. And the Good-for-You part has now increased its share in our portfolio from 17% to 20% of our revenue over the past 5 years. So that's our narrative on our product shift.

But the other thing we did over the last 5 years was continue our investment in SAP. And we did that without taking any chance to the P&L. We just kept investing because we believe that we had to really fix the technology base of the company, so that we can have more opportunities for productivity improvement.

And beyond financial investments, we made a major commitment to start shifting the culture of the company. The first thing we did was put in place an organization structure that leverages the scale of PepsiCo in a much more substantial way. And I believe the change was absolutely necessary. Because with this shift, we've gone from decentralized silos, decentralized regional silos, to what I would call now as much more of a connected autonomy structure.

And if you look at the chart, the primacy of the P&L still stays with the regions, the geographies. And that's the fundamental principle of PepsiCo. But we begun to connect important elements of the enterprise to much more effectively leveraged ideas, capabilities and scale across the globe.

But this organization shift was just one piece of the culture change. We began to address other aspects of our culture, which absolutely had to change. We're evolving from being developed market dominant to having a truly global mindset in the company. We're also moving from a trade spending push model of selling to a more balanced push/pull model of both marketing and selling.

The other change is that emerging markets in the first part of the decade used to largely be a pay-as-you-go approach. But it doesn't work for emerging and developing markets, which take a lot of time to build. So over the past 5 years, we made deliberate choices to step up our investments in key emerging markets because, I think, it's absolutely necessary to fully capitalize on the growth opportunities and keep PepsiCo growing well into the future.

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