PepsiCo, Inc. Q2 2010 Earnings Call Transcript

PepsiCo, Inc. (PEP)

Q2 2010 Earnings Call Transcript

July 20, 2010 8:00 am ET

Executives

Lynn A. Tyson – Senior Vice President of Investor Relations

Indra Nooyi – Chairman & CEO

Hugh Johnston – CFO

John Compton – CEO, PepsiCo Americas Food

Massimo d'Amore – CEO, PepsiCo Beverages Americas

Zein Abdalla – CEO, PepsiCo Europe

Eric Foss – CEO, Pepsi Beverages Company

Analysts

Bill Pecoriello – Consumer Edge Research

John Faucher – JPMorgan

Carlos Laboy – Credit Suisse

Christine Farkas – Bank of America

Judy Hong – Goldman Sachs

Caroline Levy – CLSA

Lauren Torres – HSBC

Kaumil Gajrawala – UBS

Ann Gurkin – Davenport

Presentation

Operator

Good morning and welcome to PepsiCo’s second quarter 2010 earnings conference call. Your lines have been placed on listen-only until the question-and-answer session. (Operator instructions). Today’s call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Ms. Lynn A. Tyson, Senior Vice President of Investor Relations. Ms. Tyson, you may begin.

Lynn A. Tyson

Thank you. With me today are Chairman and CEO, Indra Nooyi; and CFO, Hugh Johnston. Indra will lead off today’s call with a brief overview of our results and then Hugh will review our second quarter operating and financial results.

We will then move to Q&A, where we will be joined by the CEOs of our operating divisions, John Compton of PepsiCo Americas Foods; Massimo d'Amore of PepsiCo Beverages Americas; Eric Foss of Pepsi Beverages Company; Zein Abdalla of PepsiCo Europe; and Saad Abdul-Latif of PepsiCo Asia, Middle East and Africa. After Q&A, we will end with some closing comments from Indra.

Along with our remarks today, I encourage you to read our newly improved earnings web deck. This document is already posted on our Website at pepsico.com/investors. Our goal with this expanded web deck is to give additional context to our quarterly results and long-term strategic initiatives. I welcome your feedback on this document. Our activities for the second half of this year include the Barclays Back-To-School Conference in September where Massimo and Eric will be talking about our Americas beverage business; and in December, Indra is scheduled to speak at the Beverage Digest Future Smarts Conference in New York.

During today’s call unless otherwise noted, all references to EPS growth, net revenue growth and division and total operating profit growth are on a core constant currency basis. Please read our Q2 earnings release for more details. Before we begin, please take note of our cautionary statement. This conference call includes forward-looking statements based on currently available information, operating plans and projections about future events and trends.

Our actual results could differ materially from those predicted in such forward-looking statements, but we undertake no obligation to update any such statements whether as a result of new information, future events or otherwise.

Please see our filings with the Securities and Exchange Commission including our Annual Report on Form 10-K and subsequent reports on Form 10-Q and 8-K. And finally, you should refer to the investors section of PepsiCo’s Website under financial news to find disclosures and reconciliations of non-GAAP financial measures that may be used by management when discussing PepsiCo’s financial results.

With that, let me turn the call over to Indra.

Indra Nooyi

Thank you, Lynn, and good morning everyone. I am very pleased to report that the solid performance in the quarter, we more than delivered on our first half profit tug, with EPS growth of 7%. Net revenue for the quarter rose 37% and core division operating profit grew 26%.

There are five key highlights in the quarter that show the success of our execution and the opportunities we have going forward. First, we drove broad-based growth across our global snacks and beverage portfolio, especially in emerging markets like India, where strong marketplace execution and investments in infrastructure drove double-digit volume growth in both snacks and beverages.

Second, we largely completed the integration of PBG and PAS in Mexico and Europe, and we are making great progress in North America. In Russia, for example, the integration of PBG and Lebedyansky now makes us the largest multinational food and beverage business in that country, giving us tremendous scale advantages. Globally, this bottling transaction is enabling us to fuel incremental Power of One opportunities, which I will talk more about in a few minutes.

Third, we made incremental investments in strategic initiatives to enhance our competitive position to short term, improve our earnings profile and unlock long-term growth opportunities. As you know, we have committed to spending roughly $0.10 per share this year on these investments. Year-to-date, we have spent about $0.02 a share on projects such as expanding our beverage portfolio in China where we are expanding our footprint through additional routes, coolers and expanded sales capabilities. We have also invested in long-term research and development and innovation to support our NutritionCo initiatives. And we have made investments in our sustainability initiatives like our partnership with waste management.

Fourth, we continue to drive our management operating cash flow, bringing the year-to-date increase to 26% excluding certain items. Fifth, we continue to return value to our shareholders through share repurchases and dividends, bringing the total so far this year to nearly $5 billion. And earlier this year, we announced that we have raised our annual divided by 7%.

Now, we achieved all of these results with strong marketing programs, innovation and productivity improvements. The macroeconomic environment especially in the developed markets, Eastern Europe and some parts of Latin America have not been particularly good, but our teams did a superb job navigating through these rough economic waters. And while global GDP growth is improving in some countries, the overall operating environment remains challenging as persistent high unemployment raise on consumer confidence in spending. Regardless of these dynamics, our significant and expanding thought portfolio, our broad geographic footprint, and our focus on productivity positions us well to deliver on our commitment.

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