Earnings Call: Q4 2014

Feb 11, 2015

Summary

2014 targets were met or exceeded, with 4% organic revenue growth, 9% core constant-currency EPS growth and $8.3B free cash flow. 2015 guidance targets 7% core EPS growth before an expected ~7-point FX drag, alongside continued productivity and shareholder returns.

Good morning, and welcome to PepsiCo's fourth quarter 2014 earnings conference call. Your lines have been placed on listen only until the question and answer session. In order to ask a question or make a comment, please press star followed by one on your touch-tone phone at any time. You may remove yourself from the queue by pressing the pound key. 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, Laurie. With me today are Indra Nooyi, PepsiCo's Chairman and CEO, and Hugh Johnston, PepsiCo's CFO. We'll lead off today's call with a review of our fourth quarter and full year 2014 performance and 2015 outlook, and then we'll move on to Q&A. We've kept our comments brief this morning and intend to conclude the call by 8:45, and we'll do our best to get to as many of your questions as we can. Before we begin, please take note of our cautionary statement. This conference call includes forward-looking statements, including statements regarding 2015 guidance and our long-term targets based on currently available information. Forward-looking statements inherently involve risks and uncertainty 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 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 EPS and operating profit growth are on a core constant currency basis. All references to free cash flow exclude certain items. In addition, references to organic revenue results in this call exclude the impact of acquisitions and divestitures, structural changes, and foreign exchange translation. To find disclosures and reconciliations of non-GAAP measures that we use when discussing PepsiCo's financial results, you should refer to the glossary and other attachments to this morning's earnings release and to the investors section of PepsiCo's website under the events and presentations tab. As we discuss today's results, please keep in mind that our fourth quarter comprises the 16 weeks ended December 27th for our North American operations and the months of September, October, November and December for most of our operations outside of North America. Now it's my pleasure to introduce Indra Nooyi. Thank you, Jamie, and good morning, everyone. We are very pleased with our results for the quarter and for the full year, especially in light of the significant macroeconomic volatility being experienced in so many markets around the world. We performed well in this challenging environment, largely on the strength of our brand and product portfolios and diversity of our geographic footprint. While certain markets were hit with political disruptions, economic downturns, or significant currency devaluation, other markets in our portfolio not experiencing these issues were able to offset their impact to deliver overall strong results. We made a lot of progress in 2014, and I'd like to recap some of those achievements, starting with our financial performance. I'm pleased to report that we met or exceeded each of the targets we communicated at the beginning of the year. Organic revenue grew 4% for the full year and 5% in the fourth quarter. Core gross and operating margins expanded for the quarter and the full year. We delivered our productivity target for the year. Free cash flow exceeded $8 billion. Our focus on capital allocation discipline resulted in another year of significant core net ROIC improvement. We increased our annual dividend for the 42nd consecutive year, and we returned $8.7 billion in total to shareholders in the form of dividends and share repurchases, which is a 36% increase over 2013. Just as importantly, we strengthened the foundations of our company. First, we continued to invest in our portfolio of iconic global brands. In 2014, we sustained our increased A&M investment and focused our spending on our biggest brands. Additionally, we increased the impact of our investment by directing more of the spending to consumer-facing activity. We launched our largest-ever global campaign for our two biggest brands, Pepsi and Lay's, with coordinated package graphics, use of sports and entertainment properties, point-of-sale material, ad copy, and promotions. We expanded our engagement in social and digital marketing. For example, Doritos Crash the Super Bowl received nearly 5,000 consumer submissions from 29 countries around the world. Our Lay's Do Us a Flavor campaign garnered more than 14 million submissions. Programs like these drive phenomenal consumer engagement, are highly complementary to our broader marketing efforts, and are extremely financially efficient. Our investments are translating to tangible results with solid improvements in brand equity scores and market share performance in our priority markets for our global brands. Second, we continue to strengthen our innovation engine. We've built a robust and sustainable innovation pipeline, perhaps the strongest in our history. Over the past two years, innovation as a percentage of total net revenue has climbed by 150 basis points and now stands at 9%. We're innovating across our portfolio. For example, to meet the growing demand for nutritious products, we introduced Naked Kale Blazer and Gatorade's new Whey Protein bars. We bolstered our food service business with the introduction of Pepsi Spire fountain equipment in over 30 markets, giving our customers the choice of flexible and cost-effective equipment and allowing our consumers to create more than 1,000 customized beverages with just a touch of a screen. In snacks, we leveraged our global scale by lifting and shifting successful new products like Doritos Jacked and Deep Ridged chips from the U.S. into a number of international markets. And as a testament to the durability of our innovation, a number of our recent product introductions like Tostitos Cantina, Mountain Dew Kickstart, and Pure Leaf, generated double-digit estimated annual retail sales growth in 2014 after achieving over $100 million in their launch year. So that's innovation. Third, we stepped up our marketplace execution. As evident, in 2014, we were the largest contributor to U.S. retail sales growth among all food and beverage manufacturers. Based on IRI data, in all measured channels, we contributed nearly $1 billion of retail sales growth, more than the combined sales growth of the next 27 largest manufacturers. In food service, we executed customized Better Together programs like the pairing of Doritos Loaded and Mountain Dew Solar Flare, and we secured attractive new businesses, such as the Disney Park in Shanghai, leveraging the strength of our combined beverage and snack portfolio. Fourth, we've taken productivity to a new level. We successfully completed our three-year, $3 billion productivity program launched in 2012, and we're entering our next phase of productivity with a new five-year, $5 billion program. And we have a robust pipeline of productivity projects focused on increasing efficiency through automation, optimizing our global manufacturing footprint, advancing the competitiveness of our go-to-market models, and utilizing shared services. These programs collectively are geared to deliver our targeted savings of approximately $1 billion per year through 2019. At the same time, we have significantly evolved our organization structure and operating model to enable us to more fully capitalize on our scale, global presence, and deep capabilities. And lastly, we've driven increased capital allocation discipline throughout the organization to drive higher returns on investment and increase cash returns to our shareholders. So that's a summary at a high level of our accomplishments. So let me comment briefly on the performance highlights by business sector, starting with the Americas. PepsiCo Americas Beverages had a terrific fourth quarter. 3% organic revenue growth translated to 11% core constant currency operating profit growth. The profit growth is especially notable given the fact that we also increased A&M in the quarter by high single digits. We have seen the business gain momentum behind the efforts we've been making in marketing, innovation, and execution. And this has resulted in not only improved financial results, but better marketplace performance too, especially in our largest market, the United States. Clearly, our Latin American beverage business has had its challenges with the Mexico tax and deteriorating macros in Venezuela. Despite these challenges, our Latin American beverage business was a positive contributor to PAB's overall organic top line and core constant currency bottom line results. Frito-Lay North America delivered strong performance. Frito delivered 3% organic revenue growth for the full year and 3.5% in the fourth quarter. And 6% core constant currency operating profit growth both for the quarter and the full year. Market share results have shown steady improvement, and we gained savory snack value share in the fourth quarter. Latin America Foods performance both for the quarter and full year was solid. For the full year, Latin America Foods delivered 10% organic revenue growth and 9% core constant currency operating profit growth. Quaker Foods North America performed well with some challenged categories. Despite the category challenges, core constant currency operating profit was up 8% in the quarter, and we gained value share for the full year in each of our core categories, hot cereal, ready-to-eat cereal, and snack bars. So very strong performance by our businesses based in the Americas and the U.S. in particular. As I mentioned earlier, our portfolio collectively was the largest contributor to retail food and beverage growth in the U.S., both in the quarter and for the full year. This is a distinction we are very proud of. Moving across to Europe. As you know, the majority of our European business is located in Eastern Europe and Russia in particular. Clearly, the currency picture and macros in Russia have made operations more challenging. While the Russian consumer has been quite resilient, at least for our business, the currency situation has led to significant inflation because of the transaction Forex on the materials we source from outside of Russia, resulting in significant input cost inflation. Despite these significant headwinds, Europe generated full-year gains in volume, organic revenue, and core constant currency operating profit. All things considered, solid performance for Europe. Lastly, AMEA. Again, good results despite some political and macro volatility in many parts of the region. For both the quarter and the year, we had solid volume and organic revenue gains, while full-year operating profit performance was impacted by efficiency investments made in 2014 and by lapping the Vietnam refranchising gain we had in 2013. Most of the global volatility has been concentrated in the developing and emerging markets. However, as a group, even our developing and emerging markets grew organic revenue 10% in the quarter and 9% for the full year, so they continue to be major contributors to our growth. As I mentioned earlier, we have a terrific geographic portfolio, and this allows us to balance challenges and opportunities in a way that tends to produce consistently good results overall, and we believe the fourth quarter and full-year 2014 results are a reflection of this. Now, Hugh will take you through the financial guidance in some detail in just a minute, but I want to highlight just a few key points. As an operating company, we absolutely manage the things that are within our control: marketing, innovation, marketplace execution, and productivity, and we expect to continue to perform well in these areas. However, we expect to face continued headwinds related to macros, in particular, weak currencies in a number of our key markets and the impact of low oil prices in countries whose economies are highly dependent on energy. Obviously, these are outside our control, but we adjust the businesses to weather through the challenges as best as we can by controlling costs, adjusting our raw material sourcing, and executing balanced pricing actions. As we balance all these factors, we've concluded that our outlook for 2014 will be within our long-term financial goals. With that, I'll turn the call over to Hugh. Hugh? Thanks, Indra, and good morning, everyone. I will start out with a recap of the financial scorecard for 2014 and then move on to 2015 guidance. We are pleased to report that we met or exceeded each of our financial goals for the year. We targeted mid-single-digit organic revenue growth, and we delivered 4%. We targeted core operating margin improvement, and it increased by 30 basis points. We targeted $1 billion in productivity savings, and we delivered it. We targeted 7% core constant currency EPS growth with our initial guidance and delivered 9%, which is right in line with the increased target we communicated to you in October. We targeted core net ROIC improvement and delivered 110 basis points. Our core net ROIC now stands at 17.5%. We targeted free cash flow of more than $7 billion and delivered $8.3 billion. We committed to return $8.7 billion of cash to shareholders, which is what we did. So overall, good performance, meeting or exceeding each of the targets we communicated at the beginning of 2014. We are particularly pleased with our cash flow management. Our free cash flow as a percent of our core net income exceeded 100% for the year and over the past three years, so we are converting earnings to free cash flow very efficiently. Two big contributors to this performance are, first, the discipline and productivity we have on capital spending, where we have successfully held CapEx to less than 5% of net revenue since 2012. Second, the improvement we have driven in working capital, where we have shortened the cash conversion cycle by 50% over the past three years and have generated cash from working capital of over $2 billion in aggregate over the past three years. It is this strong cash generation that is enabling us to provide attractive shareholder cash returns. Let me spend a few minutes discussing our outlook for 2015, which is in line with our long-term objectives. We expect another year of mid-single-digit organic revenue growth. We expect core operating margin expansion as organic top-line growth and productivity should offset negative geographic mix and cost inflation. Below the division operating profit line, we expect corporate costs to be down an approximately 25% core tax rate and a reduced share count. All in, we expect core constant currency EPS growth of 7%. Foreign exchange is expected to negatively impact revenue and core earnings per share by approximately seven percentage points each, based on current market consensus rates. As you saw in the release, during the fourth quarter of 2014, we adopted the SICAD-1 rate of 12 bolívars per US dollar, and we have assumed this same exchange rate for 2015. The currency exchange picture in Venezuela continues to be quite volatile, so I wanted to be absolutely transparent about what we have assumed in our 2015 guidance. Putting it all together, taking our core 2014 EPS of $4.63 and applying our guidance implies 2015 core EPS of approximately $4.63 as well. Our outlook appropriately factors in both tailwinds and headwinds. To the positive, we expect to generate approximately $1 billion of productivity savings in 2015, which will offset operating cost inflation. We feel very good about our innovation agenda, which should enable us to sustain our organic revenue growth rate. Our share count will benefit from continued share repurchases, although we will not recognize the full benefit of 2015 repurchases within 2015, as they will be made throughout the year, with some of the impact of the share count reduction falling into 2016. Our core tax rate is estimated to come in for the full year at approximately 25%, even with 2014, and we expect to be able to sustain this rate for the foreseeable future. In terms of headwinds, we anticipate commodity cost inflation in the low single digits. Keep in mind that because of our forward buying strategies, our commodity cost changes will lag what you see in the spot market. I believe our expected inflation rate is a bit higher than what a number of you have modeled, and this is because we are seeing more pronounced inflation in our non-market traded commodities, including certain packaging and agricultural raw materials. In addition, we will see an inflation impact from transaction Forex in many of the markets whose currencies have weakened against the dollar. Foreign exchange translation will be a significant drag on our USD earnings. Finally, as you model out the quarters for 2015, please note that a number of our international markets' currencies significantly weakened in the back half of 2014, so the currency laps are most difficult in the first two quarters. Our long-term goals remain intact. Mid-single-digit organic revenue growth, core operating margins expanding 30 to 50 basis points per year, high single-digit core constant currency EPS growth, free cash flow growing roughly in line with earnings, and core net ROIC improving 50 basis points per year. We intend to responsibly manage the business for top-line growth, drive productivity, and reinvest appropriately to position PepsiCo for sustainable growth for the long term. We plan to remain highly disciplined toward capital allocation with the vast majority of free cash flow after capital spending being returned to shareholders in the form of dividends and buybacks. First, we are increasing our dividends per share by 7%, beginning with our June 2015 payment to $2.81 on an annualized basis. This represents the 43rd consecutive year of annual dividend increase and an approximately 60% payout ratio based on the 2014 core EPS. At yesterday's closing stock price, it represents a 2.9% yield and will bring our 10-year annualized dividend per share compound annual growth rate to 10%. We expect to return an additional $4.5 billion-$5 billion in cash to shareholders through share repurchases. While doing so, we expect to maintain Tier 1 commercial paper access, enabling us to retain low cost, highly accessible financing. Combined, these actions will result in cash returns to shareholders of $8.5 billion-$9 billion and will bring our cumulative 10-year cash returns to shareholders to $65 billion. As many of you know, we have stated disciplined capital allocation as a top priority for our management and our board, and we trust these actions will again be seen by our shareholders as tangible evidence of this commitment. Thank you, Hugh. Before we open it up to questions, I want to take this opportunity to share with you how excited we are to be entering 2015 despite the challenges that we face, because this year marks the 50th anniversary of the coming together of Pepsi and Frito-Lay in 1965. We set the foundation for what is today one of the world's most iconic and successful companies. This year, we celebrate five decades of growing our business and creating substantial value for our shareholders, customers, consumers, and communities. It was a phenomenal vision of Don Kendall and Herman Lay, the architects of this combination, which set the stage to grow from $510 million in revenue in 1965 to almost $67 billion today. Of the companies in the Fortune 500 in 1965, just 79 remain today. Over this timeframe, we've generated extraordinary shareholder returns. In fact, $100 invested in PepsiCo in 1965, with dividends reinvested, would be worth over $42,000 today. PepsiCo's success over the past 50 years has not happened by chance. It happened because throughout our history, PepsiCo has repeatedly adapted and retooled, always with an eye to the future. More importantly, we have kept integrity at the heart of all we do, running the company responsibly to generate sustainable long-term value. This is a formula for success that our current team will continue to apply. With that, let's open it up for questions. Thank you. Once again, in order to ask a question or make a comment, please press star followed by one on your touchtone phone at any time. Our first question is coming from the line of Bryan Spillane of Bank of America Merrill Lynch. Good morning, everyone. Morning, Bryan. I've got a question, I guess, about reinvestment rates. If you look at 2014, you really balanced a pretty good. Being able to generate a 4% organic sales growth rate in this environment is a pretty big achievement. And my sense is at least partially related to just your choices you're making in terms of reinvestment dropping to the bottom line. When you look at 2015, is there anything you're thinking differently about how much you want to reinvest, especially in sales growth in 2015, just given some of the volatility you have in developing and emerging markets? And I guess related to that, given kind of the wide range of outcomes that could happen just because of the macros, are you looking for any more flexibility as you're planning in 2015 in terms of reinvestment rate? Trying to get your sense for the choices between top line and bottom line in 2015 as you're looking into it. Brian, 2014 was a tough year, too. The market was quite volatile, and as the year went on and we got to the second half of the year, we started to really experience all the volatility. I think between geopolitical issues, the oil price impact, other macroeconomic factors, we had our share of volatility. And I think we now have a playbook where we appropriately balance top line growth, share, and profit performance. Because the challenge in these sorts of volatile environments is not to over-invest and not to get the return or to under-invest and lose too much share. So we are constantly balancing top line growth, market share, and profit performance. And I think over the year, we've developed a fairly good playbook, which we're really going to put into action through 2015. Hugh, did you want to add something on this issue? Yeah, I completely agree, Indra. Brian, I guess I'd approach it from two perspectives. From a P&L perspective, we do feel like we found the right balance now between the productivity that we're driving, and the investments that we're making in R&D, the investments we're making in innovation, the investments we're making in providing growth capacity through the P&L into the business. From a capital perspective, each of the last couple of years, we've started with a budget of somewhere between 4% and 5%. Each of those years, we've landed at a little bit over 4%. The reason for that is we really do apply quite a bit of rigor to the investments that we're making. We're not afraid to invest in long-term growth, quite the opposite. I would argue both in R&D and in capital, we have been investing in long-term growth. The focus here is sustainable value creation. I think with the reinvestment rates we have right now, we will be able to deliver that sustainably. Brian, if I can add to what Hugh said. In things like R&D spending, we cannot cut because that's real spending on innovation, and it doesn't matter what the volatility in the market is, these are long-term projects, and we have to make sure we keep investing to get this innovation engine moving. In terms of A&M, again, we want to make sure we put the appropriate A&M in the market, but we also watch to make sure that we're getting a return on investment on A&M in volatile environments. Our goal is to hold those relatively sacred and then work the other levers in the P&L. Our next question comes from the line of Amit Sharma of BMO Capital Markets. Hi, good morning, everyone. Morning. Indra, just given the recent resolution of really a very public disagreement with a shareholder, should we expect that the company would probably focus a little bit more on some of the strategic other initiatives, which might have been not neglected, but probably not in front focus? In terms of perhaps M&A in some markets or looking at your emerging market portfolio where some of the things can be realigned? Amit, I tell you something, there was never a time that we did not focus on running the company for all shareholders. I think between the senior management and the board, we have constructive conversations with all our shareholders as we did with certain particularly outspoken shareholders. But there was never a time, I'd say over the last few years, that we've ever taken our eye off long-term investments to make our portfolio stronger. If we see an opportunity that creates tremendous shareholder value, we'll certainly look at it. We've looked at a lot of things, but given the price expectations and given our assessment of what kind of value we can derive from these properties, we haven't seen the need to make any major investments in new M&A activities. But if something comes up that creates spectacular value, we'll be back to talk with you. Our next question comes from the line of Caroline Levy of CLSA. Thank you so much. A couple of questions. Morning, Caroline. Good morning, Indra. Good morning, Hugh. Morning. Just a couple of questions. I noticed there is news out of Venezuela, and how do you assess the risk of having to go to the 52 exchange rate? That would be the first one. The second one is in Europe, you had spectacular volume growth in both snack and beverage in the fourth quarter, considering the environment. I am trying to understand if that is sustainable, if you think that the underlying business is healthy enough that that is a real number we can look forward to going into 2015. I'll talk to Europe and then Hugh, you've lived Venezuela, so you talk about this. The Europe team is executing well. There's good innovation. Our portfolio is a bit more skewed towards products that the consumers want. For example, a lot of what we sell in beverages in Europe is low or zero-calorie beverages. We have a lot of baked product offerings in Europe. Even the Tropicana lineup we sell in France and the U.K. is a very different lineup than we sell here in the U.S. because the juice business evolved very differently there. On top of that, even a country like Russia, because our categories are in juice and dairy, stuff that the Russian consumer really needs, the businesses have been quite resilient. Now, we have to wait and see how 2015 shapes up, but I'd say for our categories and the nature of the products that we offer them, the portfolio has remained quite resilient, even going into 2015. But let's watch and see what happens. The other thing, too, is in Western Europe, the countries that we are in, I think we have a slightly better skew to countries that are not in deep trouble. I think that's helped us, too, in Europe. The team is very good. A lot of depth of talent there. Europe's a good performer for us, especially given the incredibly difficult environment that they're all operating under. Hugh, what about Venezuela? Yeah. Regarding Venezuela, Caroline, just a couple of comments. First, as you know, we spent the better part of the year at 6.3 last year, and then moved to 12 in November. So the average for the year was 6.84. Our planning assumption right now is to be at SICAD-1, which is 12. Obviously, there was news based on yesterday's press conference out of Venezuela from the government talking about exchange rates. There was a lot of information mentioned there. It still isn't really clear because the details haven't been published as to what it all means yet. In general, the fact that they seem to be going to a more market-based supply and demand currency environment does suggest, I think, long-term positives for us. In terms of the implications in the short term, we did hear that SICAD-1 would continue to exist. We will wait till we see more details on that, and then we'll come back to investors with details as they emerge. But in the long run, it seems to me, it is probably encouraging, based on what we heard yesterday, in terms of being able to move currency and cash around more freely. Our next question comes from the line of Judy Hong of Goldman Sachs. Morning, Judy. Good morning. How are you? Very well, thank you. I guess maybe just a little bit of color, just in terms of how you are thinking about your ability to price, particularly in markets like Russia or Latin America, where it is hyperinflationary. Indra, you have talked about Russia being resilient, but as you think about 2015, how much pricing have you taken already? Hugh, you have talked about some of the commodity headwinds. Can you just talk about how you are looking for sort of the profit impact as the inflation comes up in those markets in the context of your ability and your flexibility to take price? Both Russia and Venezuela, oil-dependent countries. Russia has its own set of additional issues. I think what the local teams do, they look to take as much pricing as they can to cover inflation. Then they assess the consumer demand, and then they judiciously balance pricing and demand to make sure that we have a business that is in balance, and we are not losing too much share or trying to gain too much share and destroy the P&L. On top of that, Judy, we do not stop there. The Russian team is restructuring its business to make sure they tighten the belt, restructure our footprint there so that we can become more productive in the middle of the P&L, so that we can actually deliver profits in this difficult environment. The Venezuela team has been doing this now for five or six years. Sure. In a way, you can take the playbook from Venezuela. In fact, the playbook moved from Mexico from a few years ago to Venezuela today, or Brazil from a few years ago to Venezuela, now to Russia. This playbook is now becoming quite important as we navigate through currency volatility and economic volatility. Each country, it is the team that has to balance pricing, the elasticity in that marketplace, and how much cost controls they can put in place so that taken together, you deliver whatever we have agreed with them is the right financial profile for that market. Is there anything else you want to add, Hugh? Yeah, I think that is exactly right. The only thing I would add as a rule of thumb is, in most markets when we have run into these issues, we have sort of been able to price through somewhere between two-thirds and three-quarters of the inflation impact. As Indra said, the rest of it, we tend to handle through restructuring and productivity initiatives and things like that. Russia is obviously a more profound example of that, but I think the rules of thumb will generally apply in that regard. What it leads you to more broadly is the power of the PepsiCo integrated food and beverage portfolio and the size of the geographic portfolio. As a few developing and emerging markets run into challenges, such as Russia, such as Venezuela, we also have markets like India, markets like Turkey that are performing very well. The PepsiCo portfolio and the scale that food and beverage brings in each of those countries actually works quite well. Our next question comes from the line of John Faucher of J.P. Morgan. Good morning, John. Yes. Good morning, Indra. A follow-up question on that. We have seen a lot of Latin American pricing across the consumer staples complex over the past couple of quarters, and it is mostly FX driven. As you look out to 2015 with your mid-single digit organic revenue growth targets, can you talk about what you have built in there for Latin American pricing? You talked about this with Caroline's question, but what is your view of the efficacy of that as true organic revenue growth? A second question would be on the COGS guidance. Can you talk a little bit about including transactional, ex transactional in terms of what you are seeing on a general raw material basis? Thanks. John. Hugh, you want to take this? Yeah, sure. John, in terms of both of those questions, regarding Latin America, you will see us take fairly significant pricing again. Inflation is obviously running in the high single to low double digits down there. As I mentioned earlier, we will probably wind up pricing through somewhere in the neighborhood of three-quarters of that. The rest will drive through restructuring and productivity. Regarding the transaction impact on commodities inflation, we talked about the fact that we are at low single digits for commodities inflation. About 40%-50% of that is driven by transaction FX. No, I think the other thing that helps, too, Hugh, if I may add. Across Latin America, many of our businesses have a wide range of the portfolio from value to premium products. So you can actually price the portfolio differently. That helps, too, because sometimes in the premium products, you can take more pricing, and it can stick. While the value products, you want to make sure that you do not get that pricing equation too much out of whack. So the teams have gotten pretty good at playing this revenue management game in a very careful way as they navigate through Brazil or Argentina or Venezuela or Mexico. Our next question comes from the line of Ali Dibadj of Bernstein. Hey, guys. Morning, Ali. How are you? Very well. A couple questions. One is around marketing spend, and where you are on that. I only see in the quarter it listed up for LAF and PAB. I just wanted to get a sense of where you are overall as a percentage for the year, and how do we think about that going forward, as well as how we should think about the shift you mentioned from pure marketing spend to growth to net, I guess, to consumer facing. So that's one entity of a question. The other one is Ali, just one second. May I stop you? What is the first question again? What's the word you used? The marketing spend, sorry. No, the previous one you said on LAF and PAB, what did you ask me specifically? LAF and PAB are the only places in the report, in the release, where we see marketing spend as mentioned as going higher. Okay. Overall, wanted to get a sense of marketing spend on the quarter and for the year. The other question is actually around currencies. You guys have always had a very much more aligned impact of currencies on your top line and your bottom line. So there is no multiplier for you guys. I want to better understand the mechanics there. A lot of your peers have a bigger impact on the bottom line than the top line, and try to understand, where there are hedges, are there natural hedges, how that flows through. So thanks very much on both those, if that is clear. Thank you, Ali. I will let Hugh answer the currencies. I think on the marketing spend, overall, if you look at our A&M as a percentage of sales, we said we are going to hold it at 5.9% of sales, and we are staying with that number. What happens is that in certain regions of the world, we shift the A&M depending on what kind of return we are getting for A&M spending. More importantly, we have been focused a lot, Ali, on working versus non-working spending. We are shifting a lot more to consumer-facing programs. That is really what we were talking about because we believe that the more we focus on shifting the spending to working A&M away from G&A-type A&M, the more bang for the buck we get. In every part of the world, we are trying to put in place playbooks and best practices to increase the A&M that is consumer facing. Overall for the company, again, as we have said many times, we are holding to the A&M as a percentage of sales. But where we see an opportunity to increase it, we look for ways to reallocate it, and every moment, we measure the return on investment on our marketing spend. With that, let me turn to Hugh to talk about the currencies in the top and the bottom line. Absolutely. Indra, just to add one more point around marketing spend to Ali's question. For the year, we had marketing spend equal to the rate of sales growth. So we held as we committed to at the beginning of the year. For the quarter, A&M grew faster than sales. So A&M as a percent of sales went up in the quarter and obviously that was a bit of a margin drag in the quarter. Regarding your question comparing us to other companies in terms of our ability to equalize revenue and earnings FX impacts, I cannot speak to what other companies are or are not doing. What I can tell you is, number one, we do hedge transaction out several months. It varies from country to country based on what is economic. As you know, in developing and emerging markets, the hedges tend to get expensive when you go out more than a couple of months. So we make good economic decisions in that regard. Number two, I suspect the difference between us and most of our peer set is more of our costs are likely localized because we do produce in so many countries. Our products do not ship as well as, in particular, HPC-type companies. So I suspect that may be the difference, but I do not know that for a fact because I have not studied their cost structures that closely. I think it's also where we have our revenues and our margins. Latin America, higher margins, and Russia, for example, are lower margins, so the revenues get hit more. Right. Overall, I think we have an aligned top and bottom-line impact. Your next question comes from the line of Bill Schmidt of Deutsche Bank. Hi, good morning. I want to try to pull a fast one and sneak two or three questions in here if I could. Morning, Bill. Good morning. Thanks. Did you say what Russia was up in the quarter? I was wondering if there's any sort of pre-buy ahead of big looming price increases, which are probably coming this year or early this year. Then just on the Frito-Lay front, I think it was a great outcome this quarter. This is the first quarter in the last 12 where you've actually seen share gains. Do you think this is an inflection for Frito-Lay in terms of market share? Then maybe, are you surprised that the category isn't accelerating faster given what's going on with gas prices at the pump and obviously, a much better employment outlook and maybe even some nascent wage growth in the U.S.? Hugh, on pre-buys. Yeah, pre-buy. Bill, we don't see a lot of evidence of that. Two things obviously work in our favor in that regard. One is just the fact that our products don't tend to last as long as perhaps other packaged goods companies' products. The stale-out factor matters, so it's difficult for people to pre-buy very far in advance for a lot of our products. That combined with the DSD system enables us to manage that. So we don't think a big impact from that perspective. Frito-Lay, obviously, we did see good performance in the quarter. We expect continued momentum out of Frito-Lay. In terms of the impact of gas prices, I think what we see happening is consistent with what we've seen in the past, which is it takes a number of months before the consumer fully spends back the so-called benefit from lower gas prices. I think you're going to see that over the course of six to eight months rather than an immediate change in consumer behavior. It just sort of assimilates over time. I am optimistic from the perspective that consumers right now, their personal balance sheets are pretty healthy. Most consumers have delevered pretty well. As a result of that, I do think that money will make its way back into the marketplace. As a company that sells more than a small amount of product through gas stores and C stores, I think we'll benefit from it. The category keeps growing at this current rate. It's pretty good for us. Absolutely. Let me close by reiterating that we are pleased with our results for the quarter and for the full year. We are confident that our plans are working, and as a result, our outlook for 2015 is within our long-term financial goals. We want to thank you all for your time and questions this morning, and more importantly, for the confidence you've placed in us with your investment. Have a wonderful day. Thank you for participating in PepsiCo's fourth quarter 2014 earnings conference call. You may now disconnect.