Q2 2012 Earnings Call
July 25, 2012 8:00 am ET
Jamie Caulfield - Senior Vice President of Investor Relations
Indra K. Nooyi - Chairman and Chief Executive Officer
Zein Abdalla - Chief Executive Officer of PepsiCo Europe
Hugh F. Johnston - Chief Financial Officer and Executive Vice President
Brian C. Cornell - Chief Executive Officer of Pepsico Americas Foods
Albert P. Carey - Chief Executive Officer of Pepsico Americas Beverages
John C. Compton - President
Saad Abdul-Latif - Chief Executive Officer of PepsiCo Asia, Middle East & Africa
John A. Faucher - JP Morgan Chase & Co, Research Division
Dara W. Mohsenian - Morgan Stanley, Research Division
Bryan D. Spillane - BofA Merrill Lynch, Research Division
Kaumil S. Gajrawala - UBS Investment Bank, Research Division
Judy E. Hong - Goldman Sachs Group Inc., Research Division
Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division
William Schmitz - Deutsche Bank AG, Research Division
Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division
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Good morning, and welcome to PepsiCo's Second Quarter 2012 Earnings Conference Call. [Operator Instructions] 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. With me today are Indra Nooyi, PepsiCo's Chairman and CEO; and Hugh Johnston, PepsiCo's CFO, as well as a few of our operating executives. We'll lead off today's call with a review of our second quarter performance and our balance-of-year outlook, and then we'll move on to Q&A.
Before we begin, please take note of our cautionary statement. This conference call includes forward-looking statements, including statements regarding 2012 guidance based on currently available information. Forward-looking statements inherently involve risks and uncertainties that could cause our actual results to differ materially from those predicted in such forward-looking statements. Statements made on this conference call should be considered together with the cautionary statements and other information contained in today's earnings release and in our most recent periodic reports filed with the SEC.
Unless otherwise indicated, all references to revenue, EPS and division and total operating profit growth are on a core basis. In addition, references to organic results in this call exclude the impact of acquisitions and divestitures and, beginning this quarter, foreign exchange translation. To find disclosures and reconciliations of non-GAAP measures we use when discussing PepsiCo's financial results, please refer to the glossary and other attachments to this morning's earnings release and to the Investors section of PepsiCo's website under the Investor Presentations tab.
And now. it's my pleasure to introduce Indra Nooyi.
Indra K. Nooyi
Thanks, Jamie, and good morning, everyone. Our second quarter results came in right in line with our expectations. The major economies we do business in, consumer behavior, the competitive landscape and commodities were all in line with our assumptions and expectations. Net revenue in the quarter grew 5% on an organic basis, supported by organic net revenue growth in each of our 4 business units. This is a solid result, reflecting balanced revenue management, which led to a healthy price mix benefit.
Our organic net revenue growth was 5% year-to-date, and we're on track to deliver organic revenue growth of mid-single-digit for full year 2012. Our organic net revenue growth was ahead of our reported revenue growth, owing to structural changes and to the negative impact of translating our international revenues with the strengthened dollar in Q2. The structural changes included refranchising our bottling operations in Mexico in the fourth quarter of last year and, in China, with the transaction with Tingyi at the beginning of Q2.
As a consequence of entering to new franchise agreements with our highly capable partners, we no longer report bottling revenues in these markets. From a strategic standpoint, these transactions strengthen our operations and are expected to improve our operating margins and key efficiency metrics, including revenue and EBIT per employee, improve our returns on capital and reduce the capital intensity of PepsiCo's operations in these markets.
Importantly, in addition to very solid organic top line growth in the quarter, we continue to gain traction on the brand building, innovation, execution, productivity initiatives that are key elements of our 2012 plan. Before I discuss progress on these initiatives though, let me quickly review the financial highlights for Q2.
Our financial results are right in line with our expectation. Core EPS was $1.12. As I just mentioned, organic net revenue grew 5% and reflected strong price mix across all of our businesses. Globally, price mix was up 4%, and this pricing helped to offset the impact of about $350 million of commodity cost inflation. We had growth in both global snack revenue and global beverage revenue on an organic basis. And emerging and developing markets revenue growth was particularly strong, up 9% on an organic basis, led by strong double-digit organic revenue growth in key emerging markets.
Results were generally strong across our 4 business units, and each business unit posted organic revenue growth and achieved solid productivity gains to help offset inflation. Within PepsiCo Americas Foods, Frito-Lay North America executed very deliberate channel and revenue management strategies that drove very good net price realization revenue growth, especially in the C-store and foodservice channels, and positive unit growth overall, while they delivered volume performance that was even with prior year. We could have employed different volume-oriented tactics, particularly in large format channels, but they would have been detrimental to our overall channel mix and net pricing objectives, and we are comfortable with the channel, pricing, unit and volume balance we achieved.