Earnings Call: Q3 2017

Oct 4, 2017

Summary

Q3 organic revenue grew 1.7%, and FY core EPS guidance rose to $5.23, while North American Beverages weakened. Strong snacks and international results, productivity savings and FX improvement supported the higher EPS outlook.

Good morning, and welcome to PepsiCo's third quarter 2017 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 2017 performance and full year 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 2017 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 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, and all references to free cash flow exclude certain items. In addition, references to organic revenue results on this call exclude the impacts 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 investor section of PepsiCo's website under the Events and Presentations tab. Now it is my pleasure to introduce Indra Nooyi. Thank you, Jamie, and thank you all for joining us this morning. We will start off this morning with highlights from the third quarter and a discussion of each of the operating sectors' performances in a little more detail, and then Hugh will cover the full year outlook. For the quarter, we delivered revenue, operating profit, and EPS growth in what continues to be a volatile macro environment. Organic revenue was up 1.7% for the quarter and 2.3% year-to-date, with solid net price realization and operating margin expansion in most of the sectors. Although we have moderated our full-year organic revenue growth outlook, we now expect full-year core EPS of $5.23, which is two percentage points or $0.10 higher than our previous expectation. This improvement is being driven by the strength of our year-to-date results, coupled with an improved outlook on foreign exchange impact. Each of our operating sectors' performance came in on or ahead of expectations, with a number showing sequential top-line acceleration. With the exception of our North American beverages business, where net revenue and operating profit declined. Let me start with that. While North American beverage performance was below our expectations, I will tell you up front that the issues are temporary, and we believe we have taken the necessary actions to improve the performance of this business beginning in Q4. What happened? From an industry perspective, weather was comparatively negative, both temperature and precipitation, following record hot summers in 2015 and 2016. There was a marked slowdown in the C-store channel in Q3. Given this as background, our performance did lag the industry, no question about it. First, Gatorade, which accounts for approximately one-fifth of our Q3 volume, declined following two sequential years of terrific Q3 growth. In fact, Q3 volumes were up a total of 18% over 2015 and 2016. Relative to other beverage categories, this is one that is both much more sensitive to weather and more exposed to the C-store channel. The broader weather and C-store industry themes I just mentioned had an outsized impact on Gatorade. Second, we underperformed the industry in carbonated beverages. This summer, we directed too much of our media spending and shelf space to new, low-calorie, much smaller brands at the expense of our Pepsi and Mountain Dew trademarks. While our plans for the summer were consistent with our continued and deliberate strategy to transform our beverage portfolio, clearly, we redirected some big brand space to these new products as opposed to focusing on new incremental space. We view both of these conditions as temporary and not structural, and we fully expect top-line performance to improve in the coming quarters. We have a good handle on what happened, and we are making immediate adjustments to get the business back to growth. We are stepping up marketing spending on Pepsi and Mountain Dew, including our zero and low-calorie products under these trademarks. We are reallocating and securing incremental shelf space and displays for our existing and new products to drive better overall velocity. We are tweaking our consumer communication with sharper brand messaging on pack, at point of sale, and through traditional, social, and digital media. We have more innovation directed at our biggest trademarks, including low and no-calorie products that will hit the market starting early in 2018. We're executing our programs responsibly to ensure that we're driving profitable growth. With the expected improved top line, we also expect improved profit performance as we realize both mix and scale benefits from the improved sales trajectory. To be clear, our beverage transformation initiatives over the longer term have been very successful in shifting our mix to faster-growing subcategories and providing more low and zero sugar options. Since 2010, we have increased our mix of non-carbonated beverages by seven percentage points. Over the decade, we have established and maintained leadership positions in many of the most attractive non-carbonated categories, and we have successfully introduced many offerings to appeal to consumers' increasing demand for zero and low-calorie offerings. So make no mistake about it, we remain squarely on strategy and, having made a few course corrections, expect NAB to return to growth in the coming quarters. Moving on to Frito-Lay North America. We had another quarter of very strong results with a good balance of volume growth, net price realization, operating margin expansion. We feel very good about the business with innovation, pricing, execution, and market share performance all on target. We are particularly pleased with the continuing strength in organic sales growth, which is being fueled by effective price pack management and innovation backed by great marketing. Take Cheetos as an example. We drove 6% net revenue growth for the trademark in Q3 with new products such as Cheetos Paws, Jalapeno Cheetos, and our Simply line, and Mac n' Cheetos also contributing to the growth. The innovation was well supported by creative consumer engagement that included our award-winning Cheetos Museum campaign that asks, "What do you see in your Cheetos?" The program garnered 100,000 online consumer submissions and countless earned media impressions. Ruffles, which grew net revenue 11% in the quarter, benefited from innovations such as Spicy Jalapeno Ranch and Flamin’ Hot that appeal to consumers' increasing desire for bold flavors. Beyond our largest trademarks, we saw impressive double-digit net revenue growth in premium and better-for-you offerings such as SunChips, Smartfood Popcorn, and Miss Vickie's. And in our variety multi-packs that provide a great assortment of our top brands in convenient single-serve packages. At Quaker Foods North America, we are pleased with the sequential acceleration in organic volume, organic revenue, and core operating profit performance, and we continue to feel positive about the trend in the business. Our activations of portable breakfast innovation, namely Quaker Breakfast Flats, launched in 2016, and Quaker Breakfast Squares that were launched in the first quarter, are yielding positive results. Our second quarter launch of Quaker Overnight Oats Cups, capitalizing on a growing trend of preparing chilled oats using a variety of healthy ingredients, is also gaining traction with consumers. Taken together, our innovation and other programming drove mid-single-digit volume growth in our base oatmeal portfolio. To wrap up North America, I'm pleased to report that year to date through the third quarter, we generated more retail food and beverage revenue growth in the United States measured channels than all other five billion plus manufacturers combined. In the third quarter, Frito-Lay on a standalone basis was once again the number one contributor to total U.S. food and beverage retail growth among all five billion plus manufacturers. Turning now to our sectors outside North America. In Latin America, we continue to see very challenging macroeconomic conditions and geopolitical instability, which dampened consumer spending. As we enter our fourth quarter, the devastating impacts of the Mexico earthquakes and the hurricanes in the Caribbean and Puerto Rico are clearly adding to these challenges. Within this context, our businesses in the region performed well in the third quarter, posting 5% organic revenue growth. Mexico, our largest market in the region, had high single-digit organic revenue growth, while Brazil grew organic revenue mid-single digits. Similarly, we have continued to experience macro challenges in a number of markets throughout our AMENA segment, including the significant currency devaluation in Egypt and the economic impact in a number of markets across the Middle East stemming from persistently low oil prices. However, we have been adjusting our business to address these challenges. We are pricing to cover the increased cost of doing business, and we are going more aggressively after productivity to reduce our overall costs. As a result, we saw a noticeable improvement this quarter as AMENA delivered 9% organic revenue growth, driven by double-digit organic revenue growth in China, Pakistan, Philippines, Egypt. Turning to Europe and Sub-Sahara Africa, we had very good results across the region with organic revenue growth in each of our top four markets, along with six of the next seven key markets and a sequential acceleration overall, which translated to margin expansion and 12% core constant currency operating profit growth. Organic revenue growth was well-balanced across snacks and beverages, which grew high single digits and mid-single digits respectively, driven by strong product innovation and in-market execution. Russia, our largest market in the region, had mid-single-digit organic revenue growth and very strong operating margin improvement. Among our other key markets, we delivered double-digit organic revenue growth in Turkey, mid-single digit organic revenue growth in France, Poland, and Germany, and low single-digit organic revenue growth in the U.K. As we mentioned last quarter, across our businesses, we are pleased with the progress we are making in the e-commerce channels. I say channels plural because we are addressing growth opportunities across e-grocery, pure play, urban grocery delivery, direct to business, and direct-to-consumer models. Our success is underpinned by the significant investments we have made in attracting talent to and building capabilities in our dedicated global e-commerce business unit. Today, we have a team of roughly 200 e-commerce professionals supporting our businesses to capture growth in the rapidly emerging e-commerce channels. It is made up of seasoned e-commerce and tech professionals, combined with our best entrepreneurial talent from within PepsiCo. We are managing this unit more like a tech company than a traditional CPG, from how and where they work, to the risks they can take, to how they are compensated. We continue to fortify and enhance the full suite of capabilities that we believe will enable us to win in these channels, from data analytics to specialized e-commerce supply chain know-how. Importantly, we are increasingly collaborating with our retail customers to make our e-commerce capabilities yet another point of differentiation in our value-added relationships with them. For example, using big data and predictive analytics to shape real-time marketing messages, dynamic merchandising, and tailored offers, our team is enabling us to drive greater purchase incrementality and higher basket size for our customers online. As a result of these efforts, we have a business that is approximately $1 billion in annualized retail sales, with impressive growth in key e-commerce markets. For example, this year, our e-commerce retail sales are projected to be up 80% in the United States and nearly double in China. In many cases, our online share exceeds our offline share, and we are gaining online pretty much across the board. While overall penetration of food and beverage remains relatively low compared to most of the categories, it is growing fast, and its development is sure to be highly dynamic. We believe we are well-positioned to win in this space. Net, despite the many macro challenges, we continue to feel good about the state of our business. The fundamentals we have been focusing on and discussing with you remain solidly intact. We have a leading product portfolio and deep capabilities. We continue to drive growth through product innovation, exceptional marketing, and marketplace innovation. We continue to transform our portfolio to capitalize on evolving consumer trends. We have a robust productivity agenda that is enabling us to continue to invest in the business while delivering attractive earnings growth. Finally, this quarter demonstrated that the PepsiCo portfolio does have the capacity to generate top-line and bottom-line growth, even in the occasional quarter where we see a downturn in a particular sector. It is the resilience of the portfolio that is also enabling us to increase our earnings outlook for the year. With that, let me turn the call over to Hugh. Hugh? Thank you, Indra, and good morning, everyone. Turning to guidance, we expect our full-year organic revenue growth to approximate the 2.3% rate we have achieved through the first three quarters. We expect core constant currency EPS to grow 9%, a one percentage point increase compared to our previous guidance. Based on current market consensus rates, foreign exchange is expected to negatively impact both full-year reported net revenue and EPS by approximately one percentage point, which compares to the previous market estimates of two points. As a result of the improved outlooks for both core constant currency EPS growth and foreign exchange, we now expect core earnings of $5.23 per share. In terms of other key considerations and assumptions embedded in our full-year outlook, we continue to expect low single-digit raw material inflation driven both by an increase in our basket of commodities and some pressure from transaction Forex. We continue to expect core operating margin expansion fueled by our productivity programs. Our productivity programs are on track to achieve our annual $1 billion target, and we continue to expect our core effective tax rate to be approximately 24%. Turning to cash flow, we expect to continue to generate strong cash flow and to exercise discipline over capital allocation with prudent reinvestment in the business and the majority of our free cash flow, excluding certain items, to be returned to shareholders through dividends and share repurchases. For 2017, we continue to expect approximately $10 billion in cash flow from operations, net capital spending of approximately $3 billion, approximately $7 billion in free cash flow, excluding certain items. Cash dividends of approximately $4.5 billion. Recall that we previously announced a 7% increase in our quarterly dividend that began with the June payment. This represents the 45th consecutive year in which we have increased our dividend. Share repurchases of approximately $2 billion. Finally, as you update your models, I'd like to highlight the following three items as they relate to the fourth quarter. We are lapping the 53rd week from 2016 and expect our reported revenue to be negatively impacted by three percentage points. We estimate the impact of the recent natural disasters to negatively impact EPS by approximately three percentage points, and we expect sequential improvement at our North American beverage business. With that, we are 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 Judy Hong with Goldman Sachs. Morning, Judy. Thank you. Good morning, everyone. Indra, I guess I just wanted to get a little bit more color just in terms of North America. Clearly, you've seen some volume pressure in the quarter. Maybe a little bit more details around the brand performance in terms of how much volume is down across your brands. I think you talked about some of the challenges from a weather and C-store traffic perspective, but maybe talk a little bit more about the competitive backdrop, because it does seem like there's some small brands that are gaining share. Maybe there's a little bit better execution from your key competitors. If you could just talk through those issues. Look, we have gone deep on the business to understand what is environmental factors that contributed to our performance and what is our own execution aspects that contributed to the performance. I tell you that, roughly speaking, my assessment is about 70/30 in terms of what the weather, the precipitation, what the C-store slowdown caused to the business, and what we could have done differently. As I said in the script, Judy, Gatorade is a big part of our business, and we were lapping 18% over 2015 and 2016. With a slowdown of C-store traffic and the weather patterns in Q3, clearly Gatorade was impacted because the weather has an outsized impact on Gatorade. That was the first one. The second is CSDs. We've been embarking on a deliberate strategy to shift the portfolio to lower-calorie offerings, and they tend to be more non-carbonated beverages, and that's why we shifted about seven points of the portfolio to non-carbs. We have a lot more lower-calorie and zero-calorie innovation in CSDs, and we actually have it even under the big brands, the Pepsi and the Mountain Dew brand. What we're going to be doing going forward is taking the big brands and doing a lot more lower-calorie and zero-calorie offerings under that brand. I tell you, if I looked at this quarter, the only two that we need to focus on is getting Gatorade back to growth, which we're already beginning to see, and tweaking our advertising spending against Pepsi and Dew. The thing to be very careful about is we are focused on responsible growth. During the quarter, as we saw the trends, we could have very quickly hit a promotional lever and tried to drive growth. We tried our best not to do that because we think that once you go down this promotional spiral, it's never ending. Our team is focused on profitable growth, responsible growth, and we are all focused on getting our CSD trademarks and Gatorade back to growth. Our next question comes from Laurent Grandet with Credit Suisse. Morning, Laurent. Hey, good morning, Indra. Good morning, Hugh. I'd like to ask you about something, specifically the more structural issues of the CSD business. It seems like Coke is gaining shares. Clearly, the competition would be higher next year as your competitor would be fully refranchised. What do you think about what's happening in the marketplace against your key competitors and how you think you will be able to turn this business around? I'm thinking more about the CSD business here. I know you said you will spend more on A&M, but in terms of operating more in the business, it would be interesting to understand. Okay. Let me give my comments and then, Hugh, step in with yours. I actually believe ownership of the bulk of the bottling system is an advantage because you can actually do two things. One, you can flex them quickly, and second is that you can extract more productivity from a bigger base. So I actually believe it's a good thing. During a period when a refranchising is going on, what happens is that you have funds that you can use to deploy against the market. But that is a temporary situation, and that is going to get exhausted very soon. So we have to be careful that while the marketplace might have extra funding during a refranchising activity, we don't overreact by hitting a promotional lever to get short-term volume in the business. Having said that, what are the structural issues we see? One, we see a continued decline in full sugar beverages. We see consumers shifting to lower-calorie and zero-calorie beverages. And we do see a lot of little competitors coming into the marketplace with interesting new beverage offerings, some of which stick, many of them don't stick. So what we have to do is create an entity within our company that does smaller brands, but smaller brands that stick and grow into medium size and bigger brands. We have to create that capability, which we are doing. Second is that the big lesson from Q3 is that it's an and game, not an or game. When we launch new products, we have to go for new shelf space. The core shelf space, especially in C-stores for the big brands, we have to protect the hell out of it, and that's what we're going to do. Hugh, do you want to add anything to it? No, I think you've captured it well. The only thing I would add is, there clearly is going to be a competitive difference between the way our primary competitor is going to market and the way we are. As Indra said, we think our strategy is the right one for all the reasons that are mentioned. In addition to that, we think that structure of the industry will lead to healthy competition, not destructive competition. I think we're positioned well to see a healthy competitive environment. The consumer change is going to continue to be more towards lower-calorie options, and because of our investments in R&D, we think we're advantaged to capture those consumers as they move into the healthier options. But Hugh, it's also safe to say that as leadership, we are focused singularly on value creation, shareholder value creation. We spot trends, and if we think we have to make changes in our business, we'll do that. So at this point, we think our strategy is the right strategy. Our next question comes from Bonnie Herzog with Wells Fargo. Bonnie. Good morning. Hi, I guess I was just hoping you could drill down a little more on your full-year guidance and really what has changed now that you expect to deliver the 9% EPS growth despite your top line being slightly weaker. I know, Indra, you touched on top line for your North American beverage business improving, so I'm trying to think about that relative to what your expectations are for Frito revenue. Then I guess I'm really still unclear what the levers are that you can pull to drive the faster EPS growth in light of a more difficult cost environment. Then maybe if you could just touch on what drove the sharp reduction in your corporate expense line in the quarter, what that was from, and then how much more of an opportunity there could be for further reduction. Thanks. Go ahead, Hugh. Yeah, Bonnie, happy to answer that. Two factors. You're right. It's not being driven by aggregate revenue, and it's not being driven by tax rate, as we noted. The tax rate's the same. Two primary factors. Number one is cost we're expecting now to come in a little bit better than we had previously forecast. Number two, we expect the mix of business to be a little bit more profitable and a little bit better. Those two factors gave us about an extra point of EPS growth. In terms of overall cost management, we put in place a Smart Spending program about a year ago. As the months go by, we just get better at being smarter and smarter with Smart Spending. What you're seeing, because we're right here in corporate, we drive Smart Spending very seriously, and that's where you're seeing the reduction in corporate costs. Our next question comes from Vivian Azer with Cowen and Company. Morning, Vivian. Good morning. Indra, I was hoping we could touch on C-store again, please. I appreciated your comments on the channel sluggishness and the impact that is having on your beverage business, but it does seem like there is a disconnect, and specifically that is while beverages are under pressure, your salty snacks business actually looks to be outperforming pretty materially in that channel. If you could address that divergence, that would be helpful. Thank you. I am happy to answer that one, Vivian. A couple things going on there. One, Frito-Lay really does have a wonderful balance of core products and great execution this year, and that is certainly helping us in the convenience store channel. The truth is, Frito-Lay is actually bucking what is a broad trend of challenges across most products in that channel. In terms of what is driving the channel, volumes are down a little bit across the board in C-store. Pricing is up a little bit. Three biggest factors in challenging the channel traffic. Number one, gas prices were up, particularly in the latter half of the third quarter. Number two, construction was down a little bit during the course of the summer, and that negatively impacted traffic. Number three, we did not get the heat burst this summer in late July and August that we had seen in the previous two summers, and that negatively impacts the channel. Our next question comes from Dara Mohsenian with Morgan Stanley. Dara, good morning. Hi, good morning. If we look at the year-to-date results or your full-year guidance, it looks like versus years past, we are seeing lower organic sales growth, weaker gross margin trends to get to that very solid 9% core EPS growth. Clearly, you are relying more on SG&A leverage and cost cutting. Just a couple questions off that. First, Hugh, is there something that has changed from an SG&A or cost control standpoint where this improved pace of SG&A leverage can continue longer term, or is it more isolated to this year and some of the Smart Spending Indra mentioned? Just trying to understand if that change in trend is something that can continue longer term. Then second, Indra, you obviously made comments on the beverage business and reinvestment in Q4 and theoretically in the next couple quarters. Given the overall top-line slowdown and the industry pressure points, is there greater reinvestment in your mind that is needed back behind the business beyond just Q4 in light of the difficult industry environment, and does that pressure the typical earnings algorithm you have been able to deliver historically? Thanks. I'll answer the second question, and then Hugh, you should take the first one and talk about what's changed. I think, Dara, the thing to be careful about is not just the reinvestment, it's how much and in what. It's better to invest in pull activities than to hit the pedal on push activities, because when you start getting into this competitive battle of more and more promotions, we've been there, done that. I don't think that's a way to create long-term strong businesses. We've tended to focus more on innovation and pull-related spending, more A&M spending. The shift to digital is a question mark because I don't know what the ROI on digital is as yet. We are re-looking at all elements of our marketing spending to see exactly which method of spending gives us the best ROI by brand. That's a piece of work we are doing. What we want to do over the next few quarters is look at our brand portfolio and see how best to do trademark advertising, so we can focus on the big brands and still drive lower-calorie products. The thing to be careful about is this industry should not escalate to going from push spending to pull spending, and everybody throws a lot of money into this business. It's got to be a judicious management of this business, where you've got the right amount of A&M spending and judicious execution, so this business remains profitable going forward. I think that's where ownership of the bottling business is going to make a huge difference because we can work all of these levers very carefully. The next few quarters, watch and see what we do to tweak our spending and what the benefits are. We feel reasonably confident. Yeah, and happy to jump in on the SG&A question, Dara. You're right. Our gross margins were down a few basis points. Operating margin was up a few basis points. The biggest change that we've seen over the last couple of years is Smart Spending. We have about 30 big categories of spend. We've really only gotten into about five or six of them at this point. The ones that we've done are the relatively simpler ones, the travel, outside services, facilities, and things like that. The more complex areas to spend, when you get into distribution, when you get into selling, when you get into certain elements of non-working A&M, those take a little bit longer. We're working on them right now. We have plans to, and expect to see results from those areas of spend over the next couple of years. To complete the answer to your question, we do expect to be able to continue to leverage Smart Spending to deliver outsized productivity results for the coming years. Our next question comes from Bryan Spillane with Bank of America. Morning, Bryan. Hi. Good morning, everyone. I guess a question, maybe a follow-up to Dara's question with regard to the algorithm. One of the questions that we've fielded a lot this year is just whether or not the PepsiCo long-term algorithm is really sustainable given all the dynamic changes happening at retail in the U.S., category trends in beverages. So Indra, could you just give your state of the algorithm relative to all the changes that we're seeing occur in the marketplace today and how PepsiCo is just ensuring that you've still got the right resources and whether that algorithm is still right? Brian, we are not talking about any long-term algorithm or guidance at this point. We usually do that in the February meeting. But let me tell you in broad shapes. Our focus is on innovation. Our focus is on portfolio expansion. Our focus is on shift to better-for-you, good-for-you products. And our focus is on productivity and stepped-up levels of productivity. The whole goal is to marry our innovation capability with our productivity programs. And we've had remarkable success over many, many quarters. This one quarter was a bit of a toe stub on North America Beverages, and I call it toe stub because there were so many external factors that caused this. And believe me, we are all over this business, and we will be back. There is no issue. So from a long-term algorithm, just wait till February next year when we do give you the guidance. But all that I say to you is our focus is on a balanced top and bottom-line growth. Invest in the top line, make sure the right productivity to deliver the bottom-line growth. Make sure that you invest in all the new capabilities needed and generate the productivity to invest in new capabilities. That is a tried and tested playbook, and we're not backing off of that. Our next question comes from Lauren Lieberman with Barclays. Lauren, good morning. Good morning. Thank you. Two things. First was just a follow-up for Hugh on the Smart Spending conversation. You've mentioned, I think, 30 buckets or five to six in so far. I was just curious, is it sort of like a pro rata potential where these first five to six, not just a little easier to get at, but also bigger pools than kind of what's still to be explored and understand the complexities? That was one. Two was just going back again, I apologize, North America Beverages, but year to date, at least externally, the trends haven't been great, or less good than they've been in the past. So you'd also already talked about, prior to today, putting more money behind big franchises. You talked about spending more behind CSDs. If I even think back to the Super Bowl, it was Pepsi Zero Sugar that was supported. I'm just curious, has some of this redirecting spending already started? It seems on TV, I know I'm seeing a lot of Pepsi ads. Are you seeing any lift from that yet? I'm surprised the degree to which it sort of at this point in time that something went off internally to say, we need to redirect and replan, and it didn't happen earlier in the year. So if you can just address kind of what flipped the switch for you guys on thinking through this a bit differently. Do you want to take the first part, Hugh? Yeah, I'm happy to handle that one. Lauren, in terms of the buckets, I would characterize our timing of them, not about size, but just about complexity. Travel is obviously a relatively simple bucket to get after. When you get into distribution and selling and things like that, those are just more complex buckets of spend. The size actually of the buckets that we haven't gotten to yet is substantially larger than the size of the buckets that we have already gotten to. So I would think of it as there's lots more opportunity out there, but it just takes more time to get at them. Travel and facilities and outside services and things like that are relatively simple and straightforward to get at. So that's why we're seeing those benefits more immediately, but it's not a question of running out of runway on size of opportunity. Yeah, talking about NAB trends. When you are looking at weather and you are looking at precipitation, you do not plan for a cooler weather or higher levels of precipitation. So we fully expected that this summer would be a normal summer, not a Flamin’ Hot summer, but we thought it would be a normal summer. We kept investing behind the brands like Gatorade. But when the weather completely turns south, not literally, but when it was cooler and a lot more precipitation, that advertising spending did not give as much lift as we would have liked the business to get. Now, if we had not been lapping the 18% growth, it is a whole different ballgame. The problem is the combination of lapping the 18% growth for the last two years in Gatorade, plus the fact that we had a cooler summer this year, where it is our seasonally big quarter, is what caused the issue. One of the things we have told our businesses is that do not do anything in the short term which will have no lasting impact in the long term. Many years ago, we used to just hit the promotional spending lever. I think what we are doing very carefully now is saying, "Do not hit the promotional spending lever, because that will not last for the long term." So, the weather was a big factor, and we hate to use weather as an excuse, Lauren, but the weather was a big factor, and we did not make all the changes anticipating poor weather. We just kept playing our playbook, and that is what caused the issue. Again, it is temporary, we are taking the actions, and we are all over it. Our next question comes from Ali Dibadj with Bernstein. Morning, Ali. Hey, how are you? I actually have two questions. One is, I really appreciate the conversation about responsible growth and push versus pull, but I just really want to make sure that I'm understanding correctly that the tactics going forward to improve some of the slowdown in NAB, is not going to be major increase in promotion. It's not going to be lowering price mix. I just want to kind of underline that point and make sure that's not part of the plan going forward. Then related to that, second question, I guess I'm a little confused about the margin discussion that we've been having here. Because it sounds like we're saying there are bigger pies to go after. We're going to get more savings, Smart Spending's going to be better. But we haven't really changed the $1 billion gross cost savings that we've been talking about for a very long time, and that number hasn't changed, and it's a very good number, but it feels like there's a gap between gross to net, right? This year, call it 20 basis points of margin improvement, 30 basis points on the quarter. Less, obviously, if you take away the NAB asset sale, if you take away the Britvic stake, et cetera, and you're saying you're going to have to invest more back. I guess long question as usual for the second one, but is that $1 billion gross savings going to go up? So you're going to have to spend more back, so you're getting more margin expansion? Or are you just going to spend the same amount more efficiently? Because I'm just confused because the $1 billion number hasn't changed, and I don't know if you're suggesting that's going to go up. So thanks for the pricing question and the just margin clarification for me, please. I am going to talk about the pricing question, and then Hugh is going to give you a good answer on the rest of it. As I said, Ali, at least two or three times, and thank you for asking the question. We are focused on responsible growth. The goal is not to hit the promotional lever and try to just buy short-term volume. That is a message that has been made very clear to our entire North American Beverages business. Al and Kirk and the team are singularly focused on that. So you will see PepsiCo going forward, balancing push and pull spending so that it is profitable growth. In terms of productivity and the plans for cost reduction, Hugh, why do not you just provide the answer for that? Yeah, happy to do that. I think, Ali, the confusion that you are experiencing is a result of timing. My comment earlier about we think there is a little bit more cost benefit, is a way of explaining why the 9% EPS growth for this year. Regarding the longer term, my broader points there around Smart Spending were just that there is lots of productivity opportunity left out there. We are not making any changes to the long-term guidance. We are not making any changes to our long-term productivity targets, and we are not talking about 2018 yet. I was really just offering some robustness to why we think we can continue to drive the productivity that we have already talked about. Hopefully, that helps. Our next question comes from Robert Ottenstein with Evercore ISI. Morning, Robert. Great. Obviously, a lot of focus on the U.S. business. Could you give us a little bit more color on what's going on outside of the U.S.? And you gave us some broad brush, but are you seeing, for instance, in Brazil, some of the other markets, some underlying stabilization and improvement that would give perhaps some confidence going forward of an acceleration? Hugh, you want to take that? Let me give you what we're seeing in some of the geographies. We're actually seeing a strong Western European business. All of our business, actually, West and East Europe, we are seeing tremendous strength. All of our businesses are doing well. We have a wonderful portfolio in the ESSA markets. And we have the right marketing programs, right pricing programs in place, and that's why you're seeing such a stepped-up growth rate in the ESSA markets, both East Europe and Western Europe. Our Russia business, in particular, is doing very well. We feel very, very good about that. In the Middle East, which is another big market for us, clearly this year, we saw the impact of the lower oil price, the tax on CSDs. All of that went into place. Again, we've taken all the appropriate actions to implement more productivity, start to shift the product portfolio. And while we took a short-term shock to the system, we are coming out of that. We think that the Middle East, North Africa, still represents a very, very good market with lots of consumers still coming into their peak consumption years. So we feel good about that market. The prospects for recovery in those markets are good. As we look at China and the Asia Pacific region, our business in China is doing well, especially our snacks business is doing very well. Our Quaker business is doing exceedingly well in China. The team's a good team. Our e-commerce business is on fire in China. It's doubling in size every year. And it's becoming a learning lab for us to learn how to do e-commerce for the rest of the world. We feel good about China. The wonderful thing about the rest of the Pacific Rim is that you've got many markets. All these little tigers are recording pretty good GDP growth. The markets may not be as big as China or India, but each of these markets contributes positively to our performance, and we've been doing well in those markets and gaining share in all of those markets. We have good bottling partners. Our own operating businesses are very good. Good leadership teams. Those businesses are doing well. We don't see much of a concern in those markets, even though they've gone through some political ups and downs. In the South Asian subcontinent, India, Pakistan, Nepal, Sri Lanka, we face the normal upheavals from GST, the demonetization, or remonetization, I should say. We are through all that now, and hopefully, the business will start to steadily recover in India, but Pakistan has been a big success story for us. We have a good business there, and it's growing very nicely and profitably. Latin America is the big question. We have strong businesses in Mexico and Brazil, in Central America. Clearly, Latin America has gone through its share of geopolitical issues, and recently, the earthquakes have really had a devastating impact in Mexico, and the hurricanes that swept through the Caribbean and Puerto Rico have really decimated those islands. In spite of that, the teams have performed well, and our Brazil business is doing very well, and our Mexico business is doing well across both snacks and beverages. In those markets, I would say, we're holding in Latin America, doing exceedingly well in the ESSA region. Our AMENA sector is, in spite of all of the issues, coming back very nicely. North America is our core, and we remain positive about the North American business. Now and then, there will be a quarter where some business has a hiccup or a toe-stub. The resilience of our overall portfolio is what allows us to deliver the numbers we're delivering. Overall, we still feel quite confident about our prospects, and we are buckling our seat belts and saying, "There will be geopolitical instability. There will be weather-related issues." We just have to build a portfolio that can weather that and somehow power through and deliver the performance. Our next question comes from Pablo Zuanic with SIG. Morning, Pablo. Thanks, Adriana, for taking the last question. Look, just two quick ones. One, I understand the idea with retailers, you will try to get space back for CSDs, that it is a case of and not or. But when I see LaCroix in some Targets having 30 feet of space, and Coke and Pepsi each maybe 5 or 6, I wonder how much is it about what you can do and about what the retailers and the consumer wants. If you can comment on this strategy on the retailers, on the retail space, I find that you could face a lot of pushback from the retailers. Number two, which maybe means you just have to double down on non-CSDs, but that is a question. The second one, I know this is going back in time, but when you bought Wimm-Bill-Dann back then, you were talking about building a third leg with this big nutrition arm. Since then, it has become more about transforming the potato chips to better nutrition and drinks and so on. Maybe things got changed because of activist pressure back then. Is this a moment to maybe think about that third leg again? Thanks. Pablo, great questions. First of all, we always get pushback from retailers and everything. I think the real thing is that from PepsiCo's perspective, we are a DSD company, we have big brands, and our brands have high velocity. So the combination of those three yields tremendous profitability for retailers, and clearly, some upstart brands have come in and taken a lot of shelf space. Our challenge is not to just say, "Hey, give us more space for core CSDs." It is how do we provide the right innovation to go after those upstarts who are taking a lot of space? I tell you, one of the issues I would say, and I take full responsibility for this. Maybe in a couple of cases, we were slower to respond to some of these newcomers who have taken a lot of space. Believe me, we will fix that. Going forward, the agility and speed of response from our company will go up significantly. Sometimes when you have too many big brands and too much success under your belt, you lose a little bit on speed, and we are working to fix that. So I think you will find that the retailers actually welcome the DSD suppliers to keep their shelves looking good going forward, and that is what we provide with our beverage portfolio. In terms of the third leg, we have tried to build it organically with success. Wimm-Bill-Dann was the last big acquisition we made, and except for the Russian ruble that went through its own share of challenges after we bought Wimm-Bill-Dann, coming out of that, the business has performed exceedingly well. It is an ideal portfolio. I think what we have to be very careful about, if we went off and built that third leg through acquisitions, we have to think hard whether they are shareholder value creating. What kind of a premium do you pay for any acquisition, and how do we realize the benefits of that deal enough to offset the acquisition premium? Believe me, the stuff we have looked at so far, we do not see a clear path to that. As we have stressed many times to all of you, we want to make sure that any major acquisition we make, minor or major, I am sorry, any acquisition we make has a clear path to value creation. If we do not see that, we typically do not make the acquisition. We try to do things organically. They may take longer, but they create much more value over the long term. Hugh, did you want to add anything on that? No, I think that was perfect. Our next question comes from Mark Swartzberg with People Financial. Mark, good morning. Hi, Indra. Good morning. Hi, Hugh. Thanks for taking the question. Continuing this line of questioning on the algorithm, of course, you're not going to give us an update, but I do wonder if we're seeing a bit of a prequel to how you'll keep delivering the algorithm, meaning, it seems that productivity and cost savings are gaining importance. While I think we all agree that 1.7 is not the right run rate, you're going to do better than that. You did take your revenue growth for the year down to at least 3% before we had the third quarter. You were doing fours and fives. Is it right to think that you need to lean harder into productivity to get to the same outcome over a series of years to come? Don't know, Mark. You know what? I think with our revenue growth rate, we are still up there in the top performers in the whole food and beverage space. It's an environment that requires us to modify our model, our innovation model, our retailer outreach model. You know what? When you go through these sorts of transformations and you're tweaking parts of the business model, there will be issues along the way. If we focused on the year and looked at our performance versus other people in the space, I think we stack up pretty well, both on the top and bottom line. Will we lean harder on productivity? We will always lean harder on productivity because we believe that we ought to take out any cost that is not value creating and put it back into investments in the business or flow it through to the bottom line. That's been our modus operandi. So productivity will always be paramount in PepsiCo. As we get better at it, we will keep doing more of it. But we are not taking our focus off of growing the top line. To us, growing the top line is really the right way to grow the company in a very balanced way. So we are redoubling our efforts to grow the top line. We're looking to see how to spend the A&M that we put out in a much more efficient way. To me, that's the Holy Grail. We all spend a lot of money on A&M. How do we spend it in an efficient way so we get the appropriate lift from the A&M? It is interesting times in the entire CPG world globally, and we have the size, scale, capabilities, the brands to be a very important player in this business and a top performer. That is what we are focused on maniacally. Mark, let me just close by saying, personally, I am completely committed to this company because 50 times my salary is in PepsiCo stock. With that level of ownership, believe me, this is something Hugh and I focus on 24 hours a day. Our next question comes from Caroline Levy with Macquarie. Morning, Caroline. Caroline, good morning. Caroline, your line is open. Good morning. Can you hear me now? Yes. Morning, Caroline. Sorry. Thank you very much. I would really appreciate your take on the changing climate of retail because that is on everybody's mind so much with Amazon buying Whole Foods. I know that you touched upon what's going on in your e-commerce business, but the other conversation that's raised its head is private label. Over many decades, we've had this conversation about will it suddenly take off and become like Europe and the U.S. I'd really love your opinion as to what e-commerce and Amazon, how they change that dynamic, because private labels really never succeeded in your categories. Yeah, look, even in Europe, our categories have had private label penetration, but not to the extent that many other HPC or other categories have had. Having said that, we are not complacent about any of this. Basically, I think as we look forward, we say looking at retailers if they want to deliver margin growth in a period in which they're seeing price compression, they have a couple of choices. They can do private label, or they can get more efficient, or they can get innovation into the stores from the big manufacturers that drive more traffic and velocity. I think what could happen, Caroline, this is just my perspective, is that you could see a bifurcation. You could see big brands, big companies, taking the burden off of retailers through DSD and by bringing our own labor into the store and driving more velocity and traffic through the big brands and innovation. Then you could see on the other end, a combination of small brands and private label that flanks it on the other side. What could be squeezed in the middle is sort of the mid-size brands. Now, this is just my perspective, and we've been looking at all of this really hard. We think that could be a plausible scenario going forward. So from our perspective, doubling down on big brands, making sure innovation is there, making sure execution is perfect, our whole system is aligned, so when we have to make changes, we can do it fast. Then within our company, making sure we have enough levers on productivity so we can get more and more efficient deploying automation and other tools to be able to put it back on innovation, driving the top-line growth, whatever we have to do. I think that's going to be the game going forward. As we said in the last call, this is going to be a period of brilliant disruption over the next three to five years, and we can approach it with pessimism or optimism. We actually think this could be a time when a lot of competitive balances could be reset. As perhaps the largest U.S. company in food and beverages and the second-largest food and beverage company in the world, believe me, we will play an outsized role in this resetting of the competitive balance. Our next question comes from Andrea Teixeira with JPMorgan. Hi, good morning. Good morning, everyone. Thank you. Thank you for taking the question. So, first on Frito. I think, going back to Caroline's question, and I think also tying into your comments, but just curious how you're seeing any competitor reaction, because clearly you have been gaining share consistently there. If you've seen anything, in terms of your DSD against one of your competitors, kind of getting out of DSD, if you're seeing any potential reaction to that, or if you're seeing that market share gains as secular and more resilient than before. Go ahead, Hugh. Yeah, I am happy to answer that, Andrea. I think what you see is more resilient, rather than temporary. A lot of what is happening right now with Frito-Lay is less driven by what competition is doing and just more driven by the fact that Frito-Lay is both running the core portfolio very well and innovating well around that portfolio with products like Stacy's and Smartfood and many of the premium products. If you look at what is going to drive Frito-Lay's growth for the future, it is going to be continuing to execute that core portfolio and continuing to innovate in premium, and that will likely result in continued share gains over time, not anything that is happening competitively. Thank you all for your questions. Let me just summarize by saying we are pleased with our year-to-date results for the third quarter, with strong results across most of our sectors. We expect our top-line performance to accelerate in Q4 as performance at NAB recovers. We are on track to deliver our fifth consecutive year of at least 9% core constant currency EPS growth. We believe we are well-positioned to continue to perform well over the long run. As always, thank you for joining us this morning and for the confidence you have placed in us with your investment. Thank you. Ladies and gentlemen, this does conclude the PepsiCo third quarter 2017 earnings conference call. You may now disconnect your lines.