Earnings Call: Q3 2018

Oct 2, 2018

Summary

Q3 organic revenue growth accelerated to 4.9%, while international results were strong and North America beverage profits faced cost and marketing pressure. FY guidance calls for at least 3% organic growth and $5.65 core EPS; SodaStream acquisition closing was expected by January 2019.

Good morning, and welcome to PepsiCo's third quarter 2018 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, operator. With me today are Indra Nooyi, PepsiCo's Chairman and CEO; and Hugh Johnston, PepsiCo's CFO. We will lead off today's call with a review of our third quarter performance and full year 2018 outlook, and then we will 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 2018 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. 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. When discussing our financial results on today's call, we will refer to certain non-GAAP measures which exclude certain items, such as the impact of the U.S. Tax Cuts and Jobs Act and other tax-related items, foreign exchange translation, and acquisitions, divestitures, structural and other changes from our reported results. You should refer to the glossary and other attachments to this morning's earnings release and to the investor section of PepsiCo's website under the events and presentations tab on full explanations and reconciliations of these non-GAAP measures. Now, it is my pleasure to introduce Indra Nooyi. Thank you, Jamie, and good morning, everyone. Thank you all for joining us. As most of you know, we announced in August that I am stepping down as CEO of PepsiCo after 12 years in the role, effective tomorrow. Today will be my final conference call with you. Actually, my 75th and final, if you also include the calls I participated in as CFO. After we complete the primary business at hand, reviewing the results and outlook and taking your questions, I would like to ask for your patience and allow me to make a few concluding remarks at the end of the call. Moving on to business. For the quarter, we generated $16.5 billion of net revenue, driven by 4.9% organic revenue growth, and delivered core earnings per share of $1.59, a 9% increase on a core constant currency basis. Overall, we are pleased with our operating and financial performance in the quarter. The organic revenue growth represents another quarter of sequential acceleration and the highest rate of organic revenue growth in 12 quarters. The majority of our businesses again perform well, with particularly strong performances by our international sectors and solid performance by Frito-Lay North America. While North America Beverages profit performance was impacted by inflation and a double-digit increase in advertising expense, the sector posted 2.5% organic revenue growth with a good balance between volume growth and net price realization. Frito-Lay North America delivered balanced volume growth and net price realization driven by strong innovation and brand marketing. For example, in June, we launched Stacy's Cheese Petites. Inspired by French cheese puffs, these bite-sized cheese snacks have real cheese baked inside, creating a sophisticated snacking experience. In fact, cheese is the primary ingredient. Petites are a good source of calcium and have 6 grams of protein per serving, and they come in a resealable pouch, making them great for a convenient on-the-go experience. Over the summer, Doritos and Mountain Dew partnered on our Worlds Collide program to appeal to our Gen Z consumers who thrive on exhilarating experiences. The program highlighted the brand's recent innovations, Doritos Blaze and Dew Ice, and rewarded consumers to purchase both products with merchandise and experiences. The 8-week media campaign supporting the program spanned social media channels and was also featured on Pandora to reach our consumers listening to music. Tostitos growth was fueled by new products such as Roasted Red Pepper and Black Bean and Garlic. To support the product launches, we created a program to drive trial during the summer get-togethers. Our Buy, Ride, Get Together Already program allowed consumers to scan a code on specially marked bags to redeem a $5 Lyft credit, making it even easier for our consumers to get safely to and from summer parties. Cheetos benefited from the launch of Cheetos Flamin' Hot Chipotle Ranch earlier this year, appealing to consumers' growing desire for intense flavors. Cheetos further benefited from our Cheetos Museum Win What You See campaign. It was our first-ever Cheetos promotion supported by TV commercials, directing consumers to winwhatyousee.com, where we invited our fans to find and submit unique Cheetos shapes to have a chance to win what they see. We garnered more than 80,000 submissions, and the program has now been localized and rolled across seven additional countries and counting. Turning to North America Beverages. While the marketplace remains highly competitive, we are encouraged by improving overall category growth trends and a generally rational pricing environment. We had another quarter of sequential organic revenue performance improvement. Organic revenue growth of 2.5% is the best we've seen at NAB in eight quarters, and was driven by retail sales growth in Starbucks Ready-to-Drink Coffee, Lipton Ready-to-Drink Tea, Gatorade, our water portfolio, Pepsi and Mountain Dew. Certainly, strong innovation across the portfolio is contributing to the improving performance. For example, LIFEWTR continues its journey advancing and showcasing sources of creativity with the launch of our series six bottles themed diversity and design. LIFEWTR achieved more than $150 million in measured retail sales in 2017, which was its introductory year, and is on pace to achieve more than $200 million in measured retail sales in 2018. bubly, our new flavored sparkling water that has no artificial flavors, colors, or calories, which we launched in February of this year, continues to perform exceedingly well and is projected to exceed $100 million in measured retail sales in its first year. Mountain Dew's performance is benefiting from the launch of Mountain Dew Ice, another launch which should surpass $100 million at retail in its first year from launch, and from the return of Mountain Dew Baja Blast as our summer limited time offering. In June, we launched Gatorade Zero. With zero sugar and all the electrolytes of Gatorade Thirst Quencher, Gatorade Zero is providing hydration options for more athletes in more occasions and is off to a strong start. We believe our stepped-up advertising and marketing, particularly on trademarks Pepsi and Mountain Dew, are also starting to contribute to improved performance as we saw sequential net revenue acceleration in both trademarks in the third quarter. Commodity inflation, operating cost inflation, particularly in transportation costs, product mix, and a stepped-up advertising expense each pressured our profit performance in the quarter. However, we expect that our recently implemented pricing actions will improve profit performance in the coming quarter. At Quaker Foods North America, our hot cereal business posted its fifth consecutive quarter of market share gains, supported by a marketing campaign highlighting the functional benefits of oatmeal and innovation like Simple & Wholesome organic hot cereal, a multigrain hot cereal with no artificial colors or preservatives. In addition, Quaker light snacks gained market share with high single-digit retail sales growth, and our Aunt Jemima pancake business grew retail sales for the eighth consecutive quarter. To close out our conversation on North America, we are pleased to report that in the third quarter, PepsiCo was the largest contributor to food and beverage growth at retail in the U.S. Turning to our sectors outside of North America, we are extremely pleased with the 10% organic revenue growth we saw in our developing and emerging markets as a group, which is a continuation of the strength we experienced across many of these markets in the first half. Strong marketplace execution led to continued solid growth across many of our key international markets. Within Latin America, organic revenue grew 10%, driven by high single-digit growth in Mexico and double-digit growth in Argentina, Brazil, and Colombia. The LatAm team is doing an excellent job building our business and growing our market share in key countries in the region. In our Europe Sub-Sahara Africa sector, Russia and South Africa each grew organic revenue high single digits, while Turkey and Poland had double-digit organic revenue growth. Even within the developed markets of Europe, we saw mid-single-digit organic revenue growth in the U.K. and France. Again, continued good performance from this team. In AMENA, we had strong double-digit organic revenue growth in China, Saudi Arabia, India, and Egypt, and high single-digit organic revenue growth in Australia. Excellent results from our AMENA team. This strong top-line performance translated into impressive bottom-line results with core constant currency operating profit up 12% in our international divisions as a group. The international results reflect our initiatives to continue to expand distribution of our big global brands and to innovate in locally relevant ways. For example, we continue to drive international growth of our zero sugar Pepsi Black and Pepsi Max trademarks with the introductions of lime and cherry flavors across Eastern Europe, lime in the Nordics, and lime and vanilla flavors in the Philippines. We are driving growth in Doritos internationally, whether through expansion to new markets like China, where the brand just celebrated its first anniversary since launch, to innovation in existing markets like India, where we launched Doritos Heatwave. The Quaker trademark continues its global expansion, from the launch of Quaker Super Foods in Mexico, to our launches of Quaker Kids and Quaker Multigrain Instant Oatmeal platforms in China. Finally, during the quarter, we reached an agreement to acquire SodaStream. As we said on the day of the initial announcement, we believe PepsiCo and SodaStream are an inspired match. Daniel Birnbaum and the rest of the SodaStream team have built an extraordinary company that is offering consumers the ability to make great-tasting beverages while reducing the amount of waste generated. That focus is well aligned with Performance with Purpose, our philosophy of making more nutritious products while limiting our environmental footprint. Together, we can advance our shared vision of a healthier, more sustainable planet. SodaStream will also add to our growing water portfolio while accelerating our ability to offer personalized in-home beverage solutions around the world. From breakthrough innovations like Drinkfinity to beverage dispensers like Spire for food service, and Aquafina water stations for colleges and universities, we are finding new ways to reach consumers beyond the bottle, and the SodaStream acquisition is fully in line with that strategy. As we previously announced, the acquisition was unanimously approved by the boards of both companies. The transaction is subject to a SodaStream shareholder vote, certain regulatory approvals, and other customary conditions, and consummation of the transaction is expected by January of 2019. Net, we are encouraged by the momentum we are seeing across many of our international markets. In North America, Frito-Lay continues to perform well. North America Beverages is making steady improvement, and our recently implemented pricing actions will help improve profit performance in North America. Finally, we are excited about the new opportunities that the pending SodaStream acquisition represents. With that, let me turn it over to Hugh Johnston. Thank you, Indra, and good morning, everyone. I will just provide a quick update on the outlook, and then we will move to your questions. After considering our year-to-date performance and other factors, we have updated our guidance for 2018. Specifically, we now expect at least 3% organic revenue growth for the full year. We now expect our core effective tax rate to be between 19% and 20%. We continue to expect core constant currency EPS growth of 9%. However, we now expect core earnings per share in U.S. dollar terms of $5.65, which reflects a one-point headwind from foreign exchange translation based on current market consensus rates due to the recent strengthening of the U.S. dollar. This is an 8% increase compared to 2017 core earnings per share of $5.23. We continue to expect strong cash flow and to exercise disciplined capital allocation with prudent reinvestment into the business. For 2018, we continue to expect free cash flow of approximately $6 billion, which includes approximately $9 billion in cash flow from operations, including a $1.4 billion discretionary pension contribution made in the first quarter. We now expect net capital spending of approximately $3.3 billion. We continue to expect to return approximately $7 billion to shareholders in 2018, with cash dividends of approximately $5 billion, reflecting a 15% increase in the annualized dividend per share that began with the June payment, and share repurchases of approximately $2 billion. Finally, as you update your models, I'd like to highlight the following items to consider for the fourth quarter. Frito-Lay North America is lapping 5% organic revenue growth from the fourth quarter of 2017. We expect operating profit to decline in our AMENA division as we lap strong results and a refranchising gain in Jordan from the fourth quarter of 2017. We expect the previously announced refranchising of our Czech Republic, Hungary, and Slovakia business operations to benefit ESSA operating profit in the fourth quarter. Finally, based on market consensus forecast, we expect foreign exchange translation to negatively impact both net revenue and operating profit by approximately 3 percentage points in the fourth quarter. With that, operator, we're ready to take the first question. Thank you. Once again, in order to ask a question or make a comment, please press star followed by one on your touch-tone phone at any time. Our first question comes from the line of Dara Mohsenian of Morgan Stanley. Morning, Dara. Hey, good morning. Congratulations, Indra, on an illustrious career at Pepsi, and best wishes for you in the future. Thank you. The quarter itself, clearly you saw a large acceleration in the organic sales in emerging and developing markets. That is in contrast to some of the fears out there over slowing macros. I was just hoping you could give us some more detail there on what drove the sequential improvement. Do you think it is more category growth accelerating or Pepsi market share picking up? Maybe some of the key countries behind that. Then most importantly, just are those drivers sustainable as you look going forward beyond Q3 as you think about the strength in the business in the quarter? Hugh? Yeah, Dara. From an international perspective, I think we saw remarkably broad-based results. The list of countries that had a strong quarter is probably too long to enumerate on the call. We would use up our entire time doing that. Maybe most notably, I think we saw strong volume growth both in snacks and in beverages. Snacks were somewhere between 4% and 5% volume growth, beverages between 3% and 4%. I think it really does sort of demonstrate that both the power of the portfolio and then in addition to that, the relatively broad-based strength of economic performance around the world. I think we do expect international to continue to perform very well. I think the portfolio is sturdy and well-insulated. Look, at any given time, as countries are disrupted, we always have some exposure to those disruptions. But by and large, I think we have a remarkably powerful international business. And our execution also picked up quite a bit. Yeah, absolutely. Your next question comes from the line of Kevin Grundy of Jefferies. Morning, Kevin. Thanks. Good morning, Indra, and I want to extend my congratulations as well. Can we start on the North America Beverages business results improving, so congratulations on that. But coming at a cost when we look at the margin pressure year-over-year and understanding that freight and commodities are playing a part, you are also picking up your advertising and marketing spending. So maybe you could touch on the ROI on the spend, if you are satisfied at this point. Then two, maybe touch on the necessity to maintain higher levels here into Q4 and even next year, particularly behind CSDs and sports drinks, as we look at some of the market share trends we see in the Nielsen data in order to maintain this level of growth. Thank you. Yeah. Hey, Kevin, it is Hugh Johnston. A couple of things on that. You are right, the P&L was negatively impacted by two things. Number one was cost pressure. Both transport costs and aluminum were up. Number two, it was the increase in advertising and marketing spend across a number of our businesses. Maybe it is useful to step back a little bit in terms of the way that we think about advertising and spending levels. Our intention, generally speaking, is to be competitive on advertising and spending levels, but not to accelerate beyond competition. Our goal is to win based on the quality of our advertising and the execution that follows that advertising, rather than the level itself. So I think we will maintain levels of spending that are competitive but not beyond competitive. Regarding the input cost inflation, whether it is transport or whether it is aluminum, our history has always been to price through inflation, in our developed markets. We will look to do that here. We did that post Q3. It is fairly unusual to take pricing in the middle of the summer. So despite the fact that we felt some of that pressure in the summer, we did not take pricing until September. I think you will see the profit picture improve in Q4 as a result of that pricing. Your next question comes from the line of Bryan Spillane of Bank of America Merrill Lynch. Hey, good morning, everyone. Indra, I just want to wish you the best going forward. It's been a pleasure the last 20 years covering you. Thank you. Thank you very much. I guess the bigger question I would have is just, as you're looking at the business today or in this year, right? We've seen some increase in investment for advertising and marketing. We've also seen SodaStream as relative to some of the acquisitions you've done in the past, a little bit bigger, which sort of suggests that there's just more of a need to sort of invest to continue to drive the top line. I guess, Indra, if you could just sort of address, are we at a point now where there's just a need to spend more, whether it's operating expense or M&A to sort of drive the top line? Or was this year sort of more of an anomaly? Yeah. Hey, Brian, it's Hugh. Those are two fairly different points, so let me address them separately. In terms of capital allocation broadly, no change in policy here. We've talked about $500 million a year in tuck-ins. That continues to be our stated policy. SodaStream, in a lot of ways, is a unique asset in that it gets into a completely different market that we really weren't touching at all, which are consumers who prefer to prepare beverages at home, whether they be just sparkling water or whether they be flavored beverages. So I would view that one as a unique opportunity that in trend. Regarding, is the cost of doing business going up more broadly, particularly in terms of driving top line? I actually don't think so. I wouldn't interpret our increase in advertising and marketing in the beverage business as anything more than a response to a competitive increase. That's a competitive increase that remains to be seen as to where it goes in the future. I think our expectation, as we've said before, is we want to compete on execution, we want to compete on the quality of innovation, and we want to compete on the quality of our marketing. We think we're well positioned to do that, particularly with our integrated system. Your next question comes from the line of Ali Dibadj of Bernstein. Hey, guys. First, Indra, very sorry to see you go. You've really transformed the company and frankly, the whole industry. So you should feel very good about yourself. Would love to hear what made you decide to go after 12 great years, and maybe that'll be in the closing remarks, but we'd love to hear that either now or later. Then more specifically about the quarter. Clearly, your top line's been very good. The margins seen a little bit of pressure, and we understand both the advertising increases as well as some of the commodity and other costs that are in there. But historically, you've been able to insulate a lot of that through the billion-dollar a year cost savings plan that we've seen here. Where do you think you are on that? Are you towards the end of that, and that's why we're seeing a little more pressure on the margins, or do you think that has legs to continue for many more years and continue to insulate you guys from what we're seeing, for example, this quarter and the most recent quarters on margin pressure? Thanks. Ali, why don't I handle your second question first? In terms of productivity going forward, the bucket out of which we drive productivity, we call operating expenses, about a $28 billion bucket. It's got a natural rate of inflation, about 3%-4%, partly because the bucket is more tilted internationally, where inflation rates are higher. I do think we've got years and years of productivity to come in the future. I'm not here to announce a specific new program right now beyond what we've announced, but I do think we have lots of opportunity out there for further productivity. Regarding your question on whether we can continue to drive growth through the P&L funded by productivity, I think broadly, the answer to that is yes. In a lot of ways, I think the third quarter was reflective of the timing of our pricing decisions, where we decided to take those post Q3 rather than during the quarter, which obviously pressured margins a little bit. It was also reflective of continued investments that we're making in top-line growth initiatives, whether it's advertising and marketing, which was up about 6% in the quarter. R&D spending was up about 22% in the quarter. E-commerce spending was roughly double in the quarter. I think in many ways, what you saw was a timing issue in terms of the timing of commodity increases versus the pricing increase and continued investment in the business while delivering the short-term performance that, frankly, in many ways has been emblematic of Indra's entire 12 years in running the company and her posture in doing so over the last 20 or more years with the company. Ali, I will answer your first question in my closing comments for sure. Your next question comes from the line of Judy Hong of Goldman Sachs. Thank you. Good morning, and congratulations, Indra, and best wishes from me as well. Thank you. I guess first on the guidance, Hugh, the FX obviously came down by about 1%. The core EPS didn't change. The revenue went up. The tax rate came down. So maybe there's a little bit of additional pressure kind of between those lines, so maybe a little bit color there. Then just follow up on NAB pricing. So post Q3, the price increases. Can you just give us a little bit color, just the magnitude of the price increases and the categories that you announced the price increases and what you think the elasticity might be in terms of the pricing impact? Thanks. Yeah. In terms of the point that you made regarding the P&L, we've said all along to the degree that we have upsides from tax and things like that, we intend to deliver our guidance and invest back in the business. You just heard me articulate a few of the areas that we've been investing in. Regarding pricing in the marketplace, what we've said broadly is the pricing will be somewhere in the low to mid-single digits, and that pricing is basically in right now in the beverage business. Your next question comes from the line of Lauren Lieberman of Barclays. Morning, Lauren. Great. Good morning. Thank you. Indra, I was hoping to just take this opportunity to ask you, as you look forward and you think about what are the biggest opportunities you think that are still ahead for PepsiCo, what do you think some of the biggest challenges are? There is a lot that has been built under your watch, the continued development, for example, of DSD in the U.S., yet we have these dramatic changes in retail. If you could just give us some thoughts on opportunities, but then also some of the challenges and adjustments that might need to be made in the business model going forward, as you set to your retirement from the company. Thanks. Thanks, Lauren. I think PepsiCo has the scale and scope to remain one of the most successful food and beverage companies well into the future. I think over the years, we have assembled a portfolio that is very synergistic, has tremendous growth potential, and more importantly, we have built out a geographic footprint, which is quite impressive. Going forward, I think there is still tremendous amount of growth available in emerging markets. I think there is growth available in rethinking some of our businesses as platforms rather than just products. For example, we still have not fully exploited how snacks can be mini meals. What we can do with the combination of our snacks and dips, that is something our teams are looking at very seriously. How do we look at sports beverages more as a holistic sports nutrition or a sports fuel platform? Our teams are looking at that. Our growth prospects, whether it is the developed markets or the developing markets and emerging markets, is actually what we imagine it to be, not necessarily what the reported numbers are. That is the first top-line opportunity. I think the wonderful thing about PepsiCo is that we reinvent ourselves constantly, whether it is rethinking innovation and top-line new capabilities we need to invest behind, or if it is rethinking the cost structure. As I have said to many of you, I think there are lots of technology-driven disruptions that are coming down the pike that are going to force us to rethink many, many parts of our cost structure. But we started that work several years ago, and I think over the next year or so, you will start seeing a lot of these taking root. How we implement these in the company and reshape our cost structure for the new realities is really going to separate the great companies from the not-so-great companies. I am confident PepsiCo is among the great companies, and we will reshape our cost structure using technology as a big driver. I think we will also use data analytics and insights to think about innovation a whole lot differently. So I feel good about where we are. We have made a lot of the investments. The trick now is to keep investing in the company judiciously so that we deliver a good balance of short-term results and make investments to keep this engine going into the future. Your next question comes from the line of Bonnie Herzog of Wells Fargo. Morning, Bonnie. Good morning, and congratulations from me, too, Indra. We all wish you really the very best in the future. I had a quick question on your guidance. Your outlook for organic sales is now slightly higher for the year, but it implies a sequential deceleration in Q4. Could you guys first reconcile that for us? Is there something else going on? I was also hoping to hear an update on your current thinking on the strategic options you are exploring for your beverage business in North America. I am wondering if you guys have made any more progress in determining the right path for this business and really what your latest thoughts are on potential benefits of refranchising. Thanks. Yeah, happy to jump in on that. Number one, I would remind you that the Q4 lap on revenue is more difficult than Q3 was. While the guidance does imply a sequential slowdown in Q4, some of our thinking is driven by that. Frankly, the guidance we have laid out there is at least 3%, so we will see how the quarter comes in. Regarding North America Beverages and refranchising, nothing new to report on that. We have said we would look at it as we always do. The one thing that I would say generally is, we do think the integrated system does make us more innovative, it does make us faster to respond to customer needs, and it does make us more cost competitive. Those are the hurdles that we would have to overcome if we were to see some benefit to refranchising in the future. Your next question comes from the line of Caroline Levy of Macquarie. Hello, Caroline. Good morning. Hi, Indra. Congratulations. I really cannot wait to see what you are up to next. You have been a great role model for many women, so congratulations. My question is on Frito North America, where the margin growth has not been as robust this year as it has historically, and I am wondering how you are thinking about the fourth quarter, which has a very difficult lap. I know you had some one-time payments in the first quarter on bonuses. As Frito has always been such a great driver of growth for the total company, Frito North America, is there a point at which the margin expansion story, thinking longer term, maybe needs to slow as you invest in new opportunities? Yeah. Hey, Caroline, it is Hugh. I think the answer to your question is no, because we think that that business is so strong in its ability to leverage new ideas and new technology and to scale them relatively quickly to provide increased margin over time. In terms of the short-term numbers that you are speaking to, one of the factors affecting Frito-Lay this year is transport cost. Transport in Frito is more heavily internal relative to beverages, which uses more common carrier. So beverages has been more exposed to the driver shortage and the impact in terms of transport cost. But Frito-Lay is not immune to that. It does use some common carrier. There is some wage inflation in the driver pool as well. One of the things you will see Frito-Lay do is take some pricing in the fourth quarter, particularly in single serve, which I think will mitigate the impact of the inflation, and you'll see their margin performance return to a more normal margin improvement. Your next question comes from the line of Andrea Teixeira of J.P. Morgan. Hi. Thank you. And Indra, thank you for making history in CPG. Best wishes for you and Ramon as well. Thank you. Thank you. My question is related to NAB. While we are encouraged to see the volumes return to positive, the trends continue to decelerate on a two-year stack. How should we think about volume performance on a sequential basis as you move through the fourth quarter? I am assuming that you are going to have some of the results of your increased investments and also execution at the trade. Thank you. Yeah. Andrea, I do not want to get into guidance on a division-specific perspective and on a division-specific quarterly perspective, particularly not. I would view it as the business is both improving, but it is improving in a broad-based way. Watching volume alone may not be as meaningful as watching the combination of volume and revenue, particularly in light of the fact that where we are seeing the best growth is oftentimes in non-carbs and premium products, which are obviously, they move the needle less on volume, but they move the needle on revenue in a substantive way. Again, I think the message here in terms of North America Beverages is continued sequential improvement in the overall business. The pricing will obviously help in Q4 as well. We think we are getting that business back on track with the investments behind advertising and the innovation that we have. Your next question comes from the line of Steve Powers of Deutsche Bank. Morning, Steve. Great. Good morning. Good morning, and congrats, and thank you from me as well, Indra. Thank you, Steve. I guess I had a question on, I guess, the question that Bryan asked earlier on SodaStream, but from a different perspective. If we step back and look at what has happened over the course of this summer with the official creation of KDP, with the alliance between Nestlé and Starbucks, with Coke purchasing BodyArmor and then Costa Coffee, and your own action with SodaStream. It feels like there is a tremendous amount of activity and change all across beverages right now. I would love your thoughts as to why there is so much activity right now, and what does it say about the future of the LRB category and PepsiCo's role in it amidst all this change? Thank you. Go ahead. Yeah. Steve, I agree with you. There is a large amount of activity right now, and you just cited a couple of competitors coming at it from a couple of different angles. I do not want to speculate on their strategies. Those are questions probably best asked of them. I do think you have people using different approaches to reach for growth and to reconstruct their portfolios to some degree. From PepsiCo's perspective, by and large, we like the construction of our portfolio right now. It has been built over the better part of the last two decades, and we think it is well-positioned to compete, well-positioned to innovate on as we build on the platforms that have existed here for a long time. SodaStream, I would not compare to the other things that you cited. I think it is an exception to the rule because it actually gets into a market that we were not playing in at all up until now, and frankly, I do not think any of the other people that you mentioned are playing in a substantive way at all either. I would not compare our move in SodaStream with some of the other competitive moves, because I think it is driven by a new opportunity for us as opposed to getting into categories that some of those folks are already in, they just were not scaled up in. Your next question comes from the line of Vivien Azer of Cowen. Morning, Vivien. Good morning, Indra, and congratulations. One of the things that I think has rung through your tenure at Pepsi, and it is certainly coming through loud and clear on this call, is the focus on innovation and how that really helps differentiate the story. With that in mind, I was wondering whether you could speak at all to how Pepsi is thinking about an opportunity in cannabis-based products, and specifically non-psychoactive cannabis as an additive to non-alcoholic drinks. Thanks. Really, I do not have anything to say there. Hugh, I do not know if you want to add something there. Yeah. Obviously, I think it is fair to say we look at everything, but I think that the difficulties in investing in that category, particularly in the U.S., where federally these things are still not legal, are quite a considerable challenge. So we look at everything, but certainly no plans at this point to do anything. Your next question comes from the line of Amit Sharma of BMO Capital Markets. Morning, Amit. Hi. Good morning, Indra, and very best wishes for you after the time in here. Two questions, if I may. One, Hugh, to your response on the NAB refranchising, and perfectly acceptable answer. Just wanted to look at it from when you look at your potential partners from a bottling side, is that also a consideration in your decision to keep the current structure intact? Then second, as we look to the end of this year or next year, there is a ton of contribution from below the line in terms of EPS. As you look at next year, how much room do you have in that below the line in terms of flexibility, or should we expect operating profit to be generally in line with earnings growth next year? Yeah, Amit, happy to answer both of those. In terms of the potential bottling partners, we have a lot of high-quality bottlers in our business, so that's not a factor in the decision. The factors are the ones that I mentioned earlier. Regarding your question on 2019, we're always quite disciplined around not talking about guidance for 2019 or even things that potentially impact guidance until we get to that year. So we'll talk about that in February. Your next question comes from the line of Pablo Zuanic of SIG. Pablo. Thank you. All the best, Indra. All the best. Two quick questions, if I can. A bit forward-thinking in terms of snacks. It seems to me that, yes, Frito is very strong in salty, but a lot of the innovation, it is more on the savory side, I would argue. We are seeing a lot of food companies coming into snacks. Just help us frame how Pepsi fits in there, because from my perspective, the company obviously protects its very strong salty franchise and delves into adjacencies very lightly, maybe perhaps not to dilute the core, but the market seems to be moving and shifting away from salty into those other categories. Is that a concern? How should we think about that? The second, very brief. Is there room for a closer collaboration with Starbucks in the case of coffee? Obviously Starbucks now is doing things with Nestlé overseas and in the U.S. Is there room for Pepsi to do something with Nescafé, for example? If you can comment on that. Thank you. Yeah. Hi, Pablo, it is Hugh. Regarding Frito-Lay, I think we have continued to inch out of salty into savory really over the course of the past decade or more. Whether it is our Sabra joint venture or whether it is Stacy's, there is a lot of examples where we have gotten beyond salty and into savory. I think the good news is the combination of our consumer insights, which are broad-based around how people consume snacks, I think leads us into savory in a fairly effective way. The reality of it is consumers do not think in these industrial terms like salty or savory. They think about occasions, and they think about what they feel like eating. Frito-Lay's insights, I think, are extremely well-positioned to pick the right areas to go and to develop the right products to take advantage of those consumer opportunities. In addition to that, the scale of the Frito-Lay operation once a decision is made to enter a new subcategory, I think allows us to be very successful very quickly. The scale being from the perspective of brands, from the production systems, from the distribution systems. I think you will see Frito-Lay continue to be very successful in the savory area. Regarding your second question around Starbucks. Look, we have had this Starbucks partnership now for the better part of 20 years. It has been remarkably successful for both of us. I think you will continue to see us expand and build on the relationship with Starbucks. The only thing we're not going to do is get into the restaurant business. Correct. With Starbucks. Correct. Your next question comes from the line of Robert Ottenstein of Evercore ISI. Oh, you're welcome. Great. Thank you. Good morning, and congratulations. Two questions, Indra. A little bit more big picture. First, a few years ago, you described, and I think you were talking more about the U.S. consumer, as somewhat confused on health and wellness issues, in terms of how they were viewing sugar and artificial sweeteners. I think this was probably three years ago. I would love to get an update in terms of your thinking about how the U.S. consumer is looking at the health and wellness space, and particularly with regards to sugar and artificial sweeteners. Then the other question is perhaps maybe give us a little bit more insight into your successor. Obviously, he has done a fantastic job on the international front. But maybe a little bit of thought of kind of the things that he has done in his past that could be very helpful with the rest of the organization. Thank you. Yeah. I will just speak to the U.S. consumer. What we have been seeing over the past three years is that even though there is occasional confusion on are artificial sweeteners good for you or not, why not real sugar, what is wrong with high fructose corn syrup, those kinds of questions. There is a general trend towards health and wellness. Whether it is consumption of more zero-calorie flavored waters or drinking diet products or lower-calorie products. There is definitely a trend towards whole grains, closer to nature. That trend might vary in speed year over year, but the trend is there. As the millennials age, I think they are driving this trend more and more. And the availability of more healthy products, whether it is ready prepared meals or home delivery of anything that is healthy, is actually taking away any barriers to buying a healthier product, whether it is Better For You or Good For You products. I think you are going to see an acceleration towards that trend as the years go by. Ramon is just an outstanding executive, and you will get a chance to get to know him over the next few weeks and months. The good thing is a lot of the trends we are seeing in the U.S. have already happened in Europe, whether it is retail consolidation, whether it is trends towards health and wellness, competition amongst all of the European food and beverage companies where warehouse delivered products really have to negotiate hard with the retailers. All of those trends, Ramon is a veteran of, and he is going to bring all those skills to the United States. Second, as you know, over the last year as president, Ramon has been leading the productivity program for the company, been leading innovation. I think he is uniquely suited to bring a fresh pair of eyes to everything we do here in North America while preserving his knowledge of the international markets. Finally, he is just a good guy. I think you will find his mix of operating expertise, plus his ability to think about customers, consumers, and bring the two together to be refreshing. So get to know him. I think you are going to be very happy with what you see. Our next question comes from the line of Laurent Grandet of Guggenheim. Hello, Laurent. Hey, good morning, Indra. Good morning to you. Indra, let me first congratulate you for having been at the forefront of consumer goods company with Performance with Purpose, your vision that really define, I think, the company role in society and embrace, I mean, the new reality of consumer mindset. Thank you. Having seen this from the inside, I can only relay your passion and commitment were second to none. Thank you. Maybe something you will cover in your closing remarks, what would you have done differently should you have the opportunity to rewind time? More in the business right now, your campaign, Pepsi Generation, and increased A&M behind the brand did probably enough to stabilize the brand Pepsi this year. We could think that the campaign was probably pleasing the boomers with some nostalgia retro pack. Not sure it is attracting new consumer into the franchise. Could you please share with us, I mean, Pepsi specific, I mean, brand KPIs, especially as in regards to millennials consumers, please? Yeah. As you might imagine, the KPIs on Pepsi are the ones that you would traditionally look at. First, at the highest level, market share performance and velocities in the stores. From a consumer perspective, we tend to look at purchase intent, regard, relevance to consumers. A lot of this stuff is done through survey work. And we have seen over time, the metrics that we measure, while they may not be immediately responsive, they do tend to prove out over time, sales trends, both positively and negatively. And the good news is, what we are starting to see are, given the increases in advertising, early green shoots of improvement in those performance metrics that again, do over time tend to correlate with sales performance. Thank you all for your questions. Just let me make some closing comments. After 12 years at the helm of the company, today is my final day as CEO. It ends my 24-year career as a PepsiCo executive. I've been blessed to have had the opportunity to lead such a great company and work with such incredible people, including our outstanding board, executives, and other associates, our customers and other partners, our shareholders, and all our other stakeholders. 12 years is a long time as a CEO, and even though I have a lot of fuel still left in my tank, I wanted to do something different with my life, spend more time with my family, and give the next generation at PepsiCo a chance to lead this great company. Throughout my tenure, however, we have strived to achieve a difficult balance between attending to short-term pressures while managing for the long term. And I leave today proud of the work our team has done. We were pioneers in business sustainability and social responsibility and embedded a sense of purpose in everything PepsiCo does, guided by our Performance with Purpose philosophy. We have transformed our product portfolio by growing our Good For You and Better For You options from about 38% of revenue in 2006 to roughly 50% in 2017. We more than doubled our investment in R&D to expand our more nutritious offerings and minimize our environmental impact. We became an even more valued partner to our retail customers. We were selected as the number one food and beverage supplier in the U.S. in the most recent 2017 Advantage Report and named Best in Class Manufacturer by Kantar for the second year in a row. We made positive contributions to communities around the globe in which we operate through our support of access to clean drinking water, human rights, nutrition, agricultural programs, and many more initiatives. And we invested significantly in new capabilities in areas like design and e-commerce to better position our company for a successful future. In the midst of managing the business for the long term, we also delivered strong and consistent financial performance. Specifically during the period 2006 to 2017, net revenue grew more than 80%. We added a new billion-dollar brand almost every other year. We returned $79 billion to shareholders through dividends and share repurchases. Our market capitalization increased by $68 billion. Dividends per share nearly tripled from $1.16 to $3.17. We generated total shareholder return of 162%. Finally, and very importantly, we have been on Ethisphere's list of most ethical companies for the past 12 years. For all of this, I am grateful to my outstanding PepsiCo associates who gave so much to PepsiCo and me over the past 12 years. Now I am handing the reins to Ramon Laguarta, who becomes PepsiCo's sixth CEO. Ramon is a terrific executive with a long and proven track record of growing businesses. He has a deep understanding of the changing preferences of consumers and other critical trends unfolding around the world, and he has demonstrated that he knows how to navigate them successfully. He has been a critical partner to me in running the company, and I am confident he will lead PepsiCo to new and greater heights in the years to come. The potential for PepsiCo is enormous. Finally, I want to thank you, our investors and analysts. During my time as CEO and CFO, I have had a lot of spirited and fascinating conversations with many of you. I have always valued your perspectives, even in those instances when we may have disagreed. You often challenged me, offered your opinions, and provided different perspectives. My interactions with you over the years helped make me a better executive and helped make PepsiCo a better company. Thank you all for your time today and your engagement through the years. Thank you for the confidence you have placed in us with your investment. Thanks. Thank you. That does conclude today's PepsiCo third quarter 2018 earnings conference call. You may now disconnect.