PepsiCo Inc. (PEP)

Q3 2010 Earnings Call

October 7, 2010 8:00 am ET

Executives

Lynn Tyson - SVP, IR

Indra Nooyi - Chairman and CEO

Hugh Johnston - CFO

John Compton - PepsiCo Americas Foods

Massimo d'Amore - PepsiCo Beverages Americas

Eric Foss - Pepsi Beverages Company

Zein Abdalla - PepsiCo Europe

Saad Abdul-Latif - PepsiCo Asia, Middle East and Africa

Analysts

John Faucher - JPMorgan

Bill Pecoriello - Consumer Edge Research

Kaumil Gajrawala - UBS

Judy Hong - Goldman Sachs

Christine Farkas - Bank of America Merrill Lynch

Presentation

Operator

Good morning and welcome to PepsiCo's third quarter 2010 earnings conference call. (Operator Instructions)

It is now my pleasure to introduce Ms. Lynn A. Tyson, Senior Vice President of Investor Relations.

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 overall performance, and then Hugh will review our third quarter operating and financial results.

We will then move to Q&A, where we we'll 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 review 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, which we launched last quarter is to give additional context to our quarterly results and long-term strategic initiatives. I welcome your feedback on this document.

Our fourth quarter activities Indra speaking in December at Beverage Digest Future Smarts Conference in New York. And in November, she will present at the Morgan Stanley Conference which will also be held in New York.

During today's call, unless otherwise noted, all references to net revenue growth are on a constant currency basis, and all reference to EPS growth and division operating profit growth are on a core constant currency basis. Please read our Q3 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

Thanks Lynn, and good morning everyone. I want to highlight three significant takeaways from PepsiCo's performance this quarter.

First, in a very challenging macro environment, we delivered great results for Q3 on the top-line, bottom line and cash flow. Second, while delivering these strong results, we are investing in both innovation in brands and these investments are already yielding returns. And third, consistent with what we shared with you in March, we are making strategic investments to transform PepsiCo in specific ways that we believe will enhance our competitiveness, solidify our growth and expand the value of the company well into the future.

So let me turn to the first key takeaway, our strong results. As we've discussed in recent calls, there's been very little improvement in the consumer and economic environment. Looking at the markets in which we operate, there is no doubt that economic uncertainty and high unemployment levels are keeping a consumer-led recovery at bay in many regions, especially in developed markets like the United States and Western Europe.

We expect these conditions to persist, and are planning accordingly with a keen eye on delivering value to customers with an efficient cost structure to ensure that we remain competitive and grow profitably.

Our ability to accelerate profitable growth this quarter in both developed and developing markets demonstrates our ability to control costs, while levering the significant advantages provided by the scale and breadth of our portfolio.

In the quarter, volume in our global snacks portfolio was up 2%, and volume in our global beverage portfolio was up 11%. That growth fuels a 41% increase in net revenue, and a 29% increase in division operating profit.

Core constant currency EPS grew 15%. Year-to-date, management operating cash flow, excluding certain items was up 29% to $5.3 billion. And this strong cash flow allowed us already to achieve our 2010 target of repurchasing $4.4 billion of stock by the third quarter.

And while developed countries are challenging, we are seeing healthy consumer spending in emerging countries, with strong GDP growth in countries such as China, India and Brazil, as well as those that are improving like Russia and Turkey. In fact, in our emerging markets, snacks volume grew at a high single digit rate, while beverage volumes grew at a mid-teens rate.

Throughout the world though, consumers remain very value-conscious. This is where the advantages that PepsiCo possesses, in granular management of productivity and local execution in the market drove differentiated performance this quarter. For example, at Frito-Lay we've launched a new urban program that targets close to 100,000 underserved retail partners.

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