Pepsico (PEP)

Q3 2011 Earnings Call

October 12, 2011 8:00 am ET

Executives

Jamie Caulfield - Senior Vice President of Investor Relations

Hugh F. Johnston - Chief Financial Officer

Indra K. Nooyi - Chairman and Chief Executive Officer

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

Carlos A. LaBoy - Crédit Suisse AG, Research Division

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

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

Dara W. Mohsenian - Morgan Stanley, Research Division

Kaumil S. Gajrawala - UBS Investment Bank, Research Division

William Pecoriello - Consumer Edge Research, LLC

Mark Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

John A. Faucher - JP Morgan Chase & Co, Research Division

Presentation

Operator

Good morning, and welcome to PepsiCo's Third Quarter 2011 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.

Jamie Caulfield

Thank you, operator. With me today are Indra Nooyi, PepsiCo's Chairman and CEO; Hugh Johnston, PepsiCo's CFO; John Compton, PepsiCo Americas Foods CEO; and Zein Abdalla, CEO of PepsiCo Europe. Indra will lead off today's call with a review of our overall performance. Hugh will cover the financials 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 2011 guidance based on currently available information, and our actual results could 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. To find disclosures and reconciliations of non-GAAP measures that we may use when discussing PepsiCo's financial results, please refer to the Investors section of PepsiCo's website under the Investor Presentations tab.

Now it's my pleasure to introduce Indra Nooyi.

Indra K. Nooyi

Thank you, Jamie, and good morning, everyone. This morning, I'd like to give you my perspective on our third quarter performance and share with you my thoughts on our progress against our key priorities. So let me start with our performance in the quarter. We grew global volume in both snacks and beverages, which, combined with strong pricing, drove net revenue growth of 9%, excluding Wimm-Bill-Dann. Our global nutrition portfolio, which is a subset of our snacks and beverage business, grew revenues 8%, excluding acquisitions. Core division profit was up 6%, and core EPS was up 7%. We are encouraged by these volume and revenue gains. We implemented incremental pricing actions in the quarter as planned, and the net pricing and volumes were in line with our expectations.

As a company, we remain committed to our 5 strategic imperatives. So let me review our performance against each of them, starting with snacks. Global snacks volume rose 8%, and excluding Wimm-Bill-Dann, revenue increased 12% with steady growth coming from our larger, more developed markets and even faster growth in emerging markets. In our largest snack business, Frito-Lay North America, we delivered 4% revenue growth and 6% operating profit growth on a 1% volume gain. We achieved positive price realization, largely as a result of the pricing actions we implemented, and we are pleased with the consumer response. It's a testament to the strength of Frito-Lay's brands and product portfolio and to the organization's ability to execute.

In fact, we delivered top line growth in most of our largest snack brands. Lay's, Doritos, Cheetos and Ruffles each posted solid revenue growth, driven by strong core innovation. And our growth in our potato chips business, in particular, is worth a comment. This segment grew net revenue mid-single digits on the strength of our Ruffles Bold flavors sub-line and Lay's Kettle innovation. Lay's Kettle revenue was up over 20% in the quarter, and year-to-date, we outperformed all other kettle competitors in both volume and value share growth. Our performance across channels is well balanced, with growth both in retail and food service channels.

Within retail, small format performance was especially good with mid-single digit volume and revenue growth in our single-serve packages. Our growth in C&G has been driven by innovation, where we have 6 of the top 7 new food items in the channel. I'm proud to note Frito-Lay's 50th anniversary in business. The company was founded in 1961 through the merger of the Frito Company and the H.W. Lay Company (sic) [H.W. Lay & Company]. At the time, we had 4 brands with combined sales of just over $100 million. Today, we've grown to be a $30 billion global leader in snacks with 7 billion-dollar snack brands and the #1 global food brand, Lay's. So we're very proud of this business.

Turning to international snacks. We increased snacks volume in 8 of our top 10 international snack markets and delivered double-digit revenue growth in 19 of our top 20 snack markets, with especially strong performance in emerging markets. Specifically in the quarter, China snacks volume grew 31%. India grew 26%. Saudi Arabia grew 24%. Egypt was up 15%, and Turkey grew 22%. And in Russia, excluding the Wimm-Bill-Dann impact, snacks revenue has grown more than 70% over the past 2 years. It's clear that innovation is fueling our international snack growth. For example, in the United Kingdom, we've had the biggest category launch in 10 years behind Walkers Crinkles, a savory, rich potato chip, which has already achieved 25% household penetration.

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