Earnings Call: Q1 2016

Apr 18, 2016

Summary

Q1 organic revenue grew 3.5%, with core constant-currency operating profit up 12% and EPS up 11%. FY guidance was reaffirmed amid macro uncertainty, FX pressure and anticipated raw-material inflation.

Good morning, and welcome to PepsiCo's first quarter 2016 earnings conference call. Your lines have been placed on listen-only mode 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'll lead off today's call with a review of our first quarter 2016 performance and full-year outlook, and then we'll move on to Q&A. We've kept our comments brief this morning and intend to conclude the call by 8:45 A.M. Before we begin, please take note of our cautionary statement. This conference call includes forward-looking statements, including statements regarding 2016 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. All references to free cash flow exclude certain items. In addition, references to organic revenue results in this call exclude the impact of acquisitions and divestitures, structural changes, and foreign exchange translation. To find disclosures and reconciliations of non-GAAP measures that we use when discussing PepsiCo's financial results, you should refer to the glossary and other attachments to this morning's earnings release and to the investor section of PepsiCo's website under the Events and Presentations tab. As we discuss today's results, please keep in mind that our first quarter comprises the 12 weeks ended March 19 for our North American operations, and it is a short quarter for international businesses reflecting the two months of January and February for most of our operations outside of North America. Also, please take note that we have reclassified certain functional support costs from SG&A to cost of sales. Prior period amounts have also been reclassified, and the details are footnoted on pages A1 of the Q1 earnings release. These changes do not impact PepsiCo's overall revenue, operating profit, net income, or earnings per share. Now it's my pleasure to introduce Indra Nooyi. Thank you, Jamie. I am pleased to report that 2016 is off to a good start with very strong operating results in the first quarter. Global snacks organic volume increased by 1.5%, and global beverage organic volume increased 3%, the highest rate of quarterly beverage volume growth in three years. We delivered 3.5% organic revenue growth, led by high single-digit growth in Latin America and AMENA, and 4% growth at Frito-Lay North America. Our five largest segments, Frito-Lay North America, North American Beverages, Latin America, ESSA, and AMENA, each had both positive organic volume growth and positive net pricing. Core gross margins expanded by 130 basis points, and core operating margins expanded by 165 basis points, driven by the positive net pricing and continued execution of our productivity agenda, including the implementation of our Smart Spending program. Core constant currency operating profit grew 12%, and core constant currency EPS grew 11%. It is noteworthy that we delivered these results in a volatile and uncertain macroeconomic environment. Most of the developed world outside the U.S. is grappling with slow growth. GDP growth in developing and emerging markets is also challenged, with many D&E markets experiencing significant political unrest and high unemployment. Key energy-producing countries are dealing with significant budgetary gaps, and high levels of local inflation in many of these markets are eroding disposable income and dampening consumer spending. It is a difficult environment indeed. Despite these macro challenges, we performed well. Our developing and emerging markets businesses grew organic revenue 7%, with double-digit growth in China, Saudi Arabia, Egypt, and Turkey. In the developed markets, we grew organic revenue by 2%, led by performance in the U.S., where we grew revenue 2.5%. In fact, in the first quarter, PepsiCo was once again the largest contributor to food and beverage retail growth in the U.S., accounting for more growth than the next 17 largest manufacturers combined. We have performed well because our approach to operating in this environment is and has been to execute well against what we can control and to retool our business models and operating system to cope with what we believe could be sustained volatility and uncertainty. This is really what we are doing. First, we have accelerated our innovation agenda utilizing our proprietary Demand Spaces framework. This has led to our new products being more incremental and has contributed significantly to our overall organic revenue growth. We have increased the efficiency and effectiveness of new product launches by leveraging our global scale. We are more quickly and effectively lifting and adapting successful product launches from one market to another, driving more rapid expansion of our largest brands as well as our future billion-dollar brands. For example, in the first quarter outside of North America, Lipton Ready-to-Drink tea grew 10%. Mountain Dew grew volume 9%. Gatorade grew 9%. Naked Juice grew 60%. Sunbites grew 42%, and Cheetos grew 9%. We have continued to generate strong net price realization, even in a sluggish consumer environment, through enhanced revenue management capabilities and data analytics. We have introduced new price pack combinations tailored to much more targeted shopper and consumer locations. For example, in North America, over the past five years, we have shifted approximately 6% of our carbonated soft drink volume mix from traditional two-liter and 12-ounce multi-pack packages to higher margin, more profitable single-serve and alternative multi-serve packages. These efforts have been driving higher net price realization for us and our retail partners. We've also been future-proofing our product portfolio, reshaping it to capitalize on consumers' increasing interest in health and wellness. Just to give you an idea, we track two sets of numbers. First, what we view as everyday nutrition, which includes products that provide positive nutrients like grains, fruit and vegetables, and protein, plus those products that are naturally nutritious, like water and unsweetened tea. These products account for almost 25% of our portfolio by revenue. Second, what we view as guilt-free products. These include the everyday nutrition products, plus diet beverages and other beverages that are below 70 calories per 12 ounces, and snacks with low levels of sodium and saturated fat. Guilt-free products account for approximately 45% of our portfolio by revenue. The growth of our everyday nutrition products, which accounts for a quarter of our global net revenue, is outpacing the growth of the balance of the portfolio. We've had a significant amount of activity underway to transform our portfolio. Just to give you a few examples, we've broadened our beverage portfolio to lessen our reliance on colas. Today, we have the leading non-carbonated beverage portfolio in the U.S. In fact, globally, just 12% of our revenues comes from trademark Pepsi, and less than 25% comes from carbonated soft drinks on a global basis. We've invested in R&D to create advantaged sweetener solutions and lower-calorie products, and we're aggressively moving our portfolio to package and product combinations with fewer calories. Mountain Dew Kickstart, with just 40 calories per 8 ounces, is a great example of our execution in this area. Now in its third year, Kickstart generated more than $300 million in estimated retail sales in 2015 and posted a 34% volume growth in the first quarter of 2016. We've also been shifting more of our beverage A&M to lower-calorie products in order to accelerate growth in strategically advantaged subcategories. We've increased the nutritional profile of our snacks and foods through the introduction of products like Smartfood Delight, which grew volume over 75% in the first quarter; reduced-fat Doritos, the top-selling Frito-Lay snack brand in schools, which grew volume 30% in the first quarter; and gluten-free Quaker Oats, just to name a few. Net-net, we feel pretty good about our portfolio transformation efforts. Next, we are building and investing in new capabilities to win in high-growth channels. To capitalize on increased out-of-home food and beverage consumption, we have consolidated our food service resources into one team, enabling us to creatively leverage the breadth of our product portfolio with our customers and consumers. In the U.S., food service now represents approximately 14% of our total revenue, and the first quarter outpaced the growth of the balance of other channels combined. This year, we will be increasing the out-of-home availability of our everyday nutrition products, both snacks and beverages, through the targeted placement of approximately 20,000 Hello Goodness vending machines across North America. Our advertising and marketing has also become more impactful. First, we've stepped up our level of investment from 5.2% of sales in 2011 to 6.3% of sales in 2015. In the first quarter of 2016, our A&M expense increased by a further 65 basis points as a percentage of sales versus the prior year quarter. At the same time, we have increased the effectiveness of our A&M investment by shifting more dollars into consumer-facing working A&M and by more effectively integrating social and digital media in our marketing campaigns. We have also accelerated our productivity programs, contributing to consistent core margin expansion and providing investment funding for growth initiatives. Since 2012, we have generated approximately $1 billion of annual productivity savings, and we are on pace to do so again this year. In addition, we have fully implemented our zero-based Smart Spending program across the enterprise. We are already seeing significant expense reductions in the areas targeted, and our organization is fully mobilized to identify opportunities to drive even greater levels of productivity. We have stepped up our marketplace execution by working in creative new ways with our retail partners, like unique joint execution of sports and entertainment properties. Development of new and innovative merchandising and fountain equipment, execution of coordinated consumer promotions, and leveraging the combined power of the PepsiCo product portfolio. For example, with 7-Eleven, Doritos, and Super Bowl all turning 50 this year, in the first quarter, we teamed up to offer consumers NFL experiences and prizes, including a trip to Super Bowl 50. When consumers purchased a golden combo of any size, Doritos, Pepsi, Slurpee, or grill item, they could scan their 7-Eleven app to receive a code to unlock prizes from teamupforgold.com. At Albertsons, we executed a joint promotion across PepsiCo's entire product portfolio in the All for Super Bowl Sweepstake. It was a massive blitz of in-store displays, in-circular advertising, and online promotions. When consumers purchased 2 or more participating products in one transaction, they qualified to enter to win $50,000, one of 50 NFLshop.com gift cards every week during the promotion period. These examples are by no means the exception to the rule. They are just a couple of demonstrations of how we are working creatively and collaboratively to deliver value to the consumer and be an indispensable growth partner for our retailers. The actions we have taken and the investments we have made to strengthen our capabilities, our innovation, revenue management, portfolio transformation, customer service initiatives in particular, is what helped us deliver impressive operating results in the first quarter. We continue to achieve healthy net revenue realization, and new products continue to be an important contributor to our sales growth. Next, in the context of an interesting macro backdrop, we feel good about the state of our business, and we are off to a good start in 2016. We believe we have the right plans in place. We have great people. We are executing well. We are investing in capabilities that will propel our future growth. We will continue to leverage our considerable advantages, our scale, geographic presence, product portfolio, and power of one synergies to succeed in this environment. We are well-positioned to achieve our 2016 financial targets. Many of our investors have commented to me that they value PepsiCo because of our sustained, reliable performance. As stewards of this remarkable 50-plus-year-old enterprise, we are managing and investing in the business to extend the duration of performance while achieving returns above our cost of capital. We are committed to ensuring that our best years are ahead of us. With that, let me turn the call over to Hugh Johnston. Hugh? Thank you, Indra, and good morning, everyone. As Indra mentioned, we are pleased with the financial results for the first quarter, and having a good start to the year with one quarter behind us gives us added confidence in achieving the financial targets we shared with you in February. As you saw in this morning's release, we reaffirm those targets. Specifically, we expect approximately 4% organic revenue growth, excluding the impact of the 53rd week. We expect 8% core constant currency EPS growth, excluding the impact of deconsolidating our Venezuela operations, and 6% when including the Venezuela impact. Notwithstanding our strong Q1 results, the macro outlook remains highly volatile and uncertain, and for this reason, we are maintaining a cautious stance on the external factors that influence our business. Balancing a positive view of our execution against a more negative view of the macros, we arrive at the conclusion to keep our revenue and earnings guidance unchanged. We expect foreign exchange translation to negatively impact both revenue and EPS by approximately 4 percentage points, which is also unchanged from the full-year estimate we provided to you last quarter. As a reminder, we base our foreign exchange translation forecast on consensus rates. I know a number of you use spot rates, which currently lead you to a less significant impact. Clearly, as the year progresses, this gap will resolve itself, but we are holding to our outlook at a negative impact of 4% for the year for both revenue and EPS. As a result, we continue to expect 2016 core EPS of $4.66. Our outlooks on the other metrics we provide remain unchanged and are set out in this morning's release. For the analysts on the call, as you update your models, I would ask that you consider the following factors. We have a more difficult core constant currency operating profit growth comparisons in the upcoming quarters at both Frito-Lay North America and North America Beverages. We anticipate a slower rate of gross margin expansion versus Q1 as we expect raw material inflation, which includes the impact of transaction-related foreign exchange, for the balance of the year compared to modest deflation in Q1. We will continue to invest in our business to drive sustainable long-term growth, including a planned increase in advertising and marketing expense as a percentage of sales for the full year. While we expect lower corporate expenses for the full year, primarily driven by lower pension costs, there will be quarterly volatility in this line item due to timing, and you should not expect to see the rate of decline that we had in Q1 for the full year. The reinvestment of the 53rd week benefit will occur over the balance of the year. Finally, we will be lapping Venezuela earnings of approximately $0.03 per share in Q2 and $0.06 per share in Q3. Taken together, we expect balance-of-year EPS growth to be disproportionately weighted toward the fourth quarter. With that, operator, we will 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. Hi, good morning. Obviously, a tough macro environment, as Hugh mentioned, Indra, and organic sales in the quarter was slightly below your full-year guidance. I was just hoping for an update on your level of visibility. You can hit 4% organic sales growth for the year, particularly as pricing moderates internationally with less FX pressure, and you lap over some of the pricing changes in potato chips and NAB beverages theoretically moderates a bit. Also, if you could just comment specifically on the North American carbonated soft drink pricing environment, the 1% NAB result is below what we saw last year. Has anything changed from a competitive standpoint? Thanks. Okay. In terms of visibility for balance of the year, Daryl, we can talk about what we control. Our innovation pipeline is looking good. Remember, the first quarter is not really the season for international because it is only 2 months. We are really entering the season now. Based on the innovation pipeline, based on the execution capability of our businesses, and knowing what we have sold into customers around the world, both on retail and food service, at this point, we feel optimistic about our revenue guidance for the year. Again, this is based on everything that we can control and based on our assessment of the tough macroeconomic environment as we see it today. I would say as the year progresses, we will know more, but we feel reasonably optimistic about our 4% earnings guidance for the year. Revenue. Revenue, sorry, revenue. Pardon me. Let me now turn to the North American pricing. Again, when we look at 1% pricing here, it is really rounded down. It was closer to 1.5%. We are just now entering the season. Based on what we have seen in the marketplace, we actually see quite a lot of discipline in pricing. Our hope is that given the dynamics of the CSD category in particular, that there will be continued discipline based mostly on revenue management and careful mix management. That is really what we are focused on, and our goal is to make sure that we do not do anything crazy on pricing because pricing actions do not really drive volume growth. We are just making sure that we focus on mix management and revenue management to keep getting the positive price realization going through the year. Dara, to be also specific on CSD pricing, IRI showed 2.5% CSD pricing for the quarter. LRB was about 1.8%, which is consistent with what we have been seeing. I think we continue to view the pricing environment as quite rational. Your next question comes from the line of John Faucher of JP Morgan. Hi, John. Thank you. Good morning, everyone. Good morning, Indra. It was interesting, I realized that corporate expense was a little more favorable, which you mentioned in the call, but we saw a little bit less of an investment in SG&A this quarter versus what we've been seeing, let's say, over the past year and a half and really since the rebase back in 2012. Can you talk a little bit about where you think your investment levels are versus where you need to be and the balance between sort of reinvestment and margin expansion as we look out over the next couple of years? Thanks. Yeah. Hey, John, this is Hugh. I'm not sure exactly how you're measuring less investment in SG&A, so it's probably worth a conversation offline on that. What I can say is, number one, A&M was up 65 basis points year over year. We continue to see a strong push into A&M. Number two, we do continue to invest in capabilities that enable globalization of best practices, and that's having a profoundly positive effect on both the innovation as well as the productivity of the company. What I suspect you may be seeing is the impacts of Smart Spending, which is off to a very successful start as of late last year and into this year. Certain of the big buckets that we're focused on in Smart Spending, whether it be travel or facilities, are actually down by meaningful percentages. I think what you may be seeing is the net of that reflects a less margin invested in SG&A than you've perhaps seen in previous quarters. But I don't want you to think that we're not investing in the brands and we're not investing in capabilities to drive performance. We absolutely are. Yeah, we're committed to increasing A&M. We're investing in R&D, investing in e-commerce. The capabilities on supply chain so that we can start thinking about the future, data analytics. We've got increased investment in every bucket right now. Your next question comes from the line of Bryan Spillane of Bank of America. Good morning, Bryan. Hey, good morning, everyone. Morning. Hi. Just a question about, I guess, the mix in organic sales growth between volume and price mix, and really just in North America and more sort of a question going forward. Right now, we're seeing more of a contribution through revenue management, I guess, of price mix, and you've supported that with product, with advertising. Just how sustainable do you think that is going forward over the next couple of years? I guess my question is just at some point, will we need to begin to see maybe more volume growth in order to sustain that kind of organic sales growth? Are we comfortable that we can continue to kind of have mix be a big component of the organic growth? Thanks. Bryan, I don't think there's a clear answer to that because it's like an accordion. We go back and forth. A couple of years you get volume growth, and then a couple of years you get more revenue growth because you have more opportunity to do mix management. When we premiumize the portfolio, for example, we get more revenue than we do volume because you get very good price realization on premium products. Right now, with the launch of lots of premium beverages and launch of premium products coming out of Frito-Lay, we're getting good price realization on that score. Clearly, when you do revenue management, even shifting to smaller packages, mini cans, you don't get much volume lift, but you get revenue lift. I think as I look into the future, I think you're going to see some volume growth. You're going to see effective mix management, both from a revenue management perspective and the product portfolio itself, giving us robust revenue growth. A couple of years from now, let's come back and revisit it. Right now, that's the strategy going forward. We are very judicious in where we add capacity to make sure that we look at the realities of the volume growth in the marketplace. Our next question comes from the line of Bill Marshall of Barclays. Good morning. Thank you very much. Morning, Bill. I was just curious, you've alluded to the tough macro backdrop on a couple of occasions here. Two markets in particular that jump out, Brazil and Russia. You've got fairly sizable businesses in both of those markets. I was just curious if you could give us a sense of what you're seeing on the ground, and how your business has been operating, maybe compared to the more broader challenges that we've seen from a macro perspective. Thank you. Brazil is a tough market. It's fundamentally a good market. The demographics are pretty good. When the country performs well, things are good. Recently in the last, I'd say 12 to 18 months, there's been a lot of self-induced problems in Brazil. The slowdown in China clearly has had an impact on Brazil because Brazil was the commodity supplier to the robust growth in China. It's going to take some time for Brazil to get through its issues, its own political problems, and, of course, the global commodity price slump right now. We are cautious in our approach to Brazil, focused more on value products, and where we can get some premium pricing in, we try to get it in. I'd say globally, Brazil is one of the toughest economic situations today. In the case of Russia, our core business is doing quite well because it's one of those markets where we have a spectacular portfolio, very balanced between all day parts, between good-for-you products, fun for you, better for you. It's a wonderful balance of products we have in Russia. The Russian consumer is a good consumer, and we have a scale business covering all of Russia. I think two issues are impacting Russia. One is the ruble and where it stands, because when you have dollar-denominated costs coming into Russia, clearly it squeezes the middle of the P&L, and you can't price enough to cover all of it because the Russian consumer, which brings me to the second point, Russian consumer wages are not going up as much as the cost of living bucket suggests it should go up. So there's a bit of a squeeze going on. All things considered, our team in Russia is mostly Russian, doing a very good job navigating through these issues in Russia. I must say, but for these global macro conditions, especially the strength of the dollar squeezing the cost structure, we have a good business in Russia and the team is doing a good job running it right now. Our next question comes from the line of Caroline Levy of CLSA. Morning, Caroline. Good morning, Indra and Hugh. Question on the charge you took in China. If you could just elaborate what is going on with Tingyi-Asahi Beverages and what you think for the outlook. What drove the charge? What is the environment like in China, and what do you think the outlook is for your business there? Yeah. Let me start off by saying, Caroline, that Tingyi is still the leader in the beverage market in China. It still has the most phenomenal infrastructure, widely covers China with all manufacturing technologies, cold fill, hot fill, aseptic, water lines, you name it. They are an amazing scale player. They remain a valuable partner to PepsiCo. I think Tingyi has been impacted by a couple of three issues, and they are a public company. You have seen all their disclosures and announcements. I am not going to share with you anything that you do not know. Basically, the slowdown in the Chinese market for beverages overall, driven by the macros, and some of the operational issues that Tingyi has had to cope with because of the changes they were making to make their system more efficient, has taken a short-term hit in performance. I think the read-through has been that we too took a bit of a marginal hit in beverages in our performance, as we have talked about openly in our earnings calls. Having said that, within China, we have a very good business in foods and nutrition, and our beverage business sequentially is beginning to do better. So we remain cautiously optimistic. As far as our partnership with Tingyi is concerned, look, our ownership was based on a price that we recorded when we first did the transaction. Since that time, the overall Chinese market has come down a lot. Secondly, because of Tingyi's own performance, their stock has come down quite a bit. So we felt it was prudent to mark down the value of our investment. Having said that, we remain very committed to the Tingyi partnership. Once they get through their issues, which they have to get through, we can help them, but they are a public company. We will be back to a partnership that continues to sing. Your next question comes from the line of Bill Schmitz of Deutsche Bank. Hi, Bill. Hi, good morning. Good morning. Is it safe to assume that the pricing in emerging markets is going to lap in the back half of the year? I am just curious for you in the industry, what happens when those laps take place? Then maybe if you could just sort of disaggregate the mix benefit versus the price benefit. Yeah, Bill, this is Hugh. I think it is safe to assume that we will continue to get good, solid pricing in those markets. I understand what you are pointing out is, as dollar-based commodities become less inflationary in local terms, will we continue to get the same level of commodity-driven pricing? Remains to be seen. Part of our pricing is obviously driven by commodities. Part of it is driven by what else is happening in the local economy. To the degree that pricing is less, I do expect that we will see some volume bounce back, because in those markets, when you have emerging consumers that are entering the categories, obviously as we take less price, we tend to increase adoption more rapidly. So I think we probably will see a bit more volume and a bit less price in developing and emerging markets in the back half of the year. But that remains to be seen. The outlook, as we've talked about earlier, is not overly positive. It's also quite uncertain. Regarding mix versus rate, I assume that's a North America Beverages question, because that's a tough one to answer globally. About two-thirds of the pricing benefit that we saw in the first quarter was rate, and about a third was mix. So we continue to see good balance. In fact, if anything, we probably got a little bit more rate than we have been getting in the previous quarters. Your next question comes from the line of Judy Hong of Goldman Sachs. Morning, Judy. Thank you. Good morning. So I guess on margin, if I look at the Q1 performance and then the outlook for the balance of the year, it seems like Q1 certainly benefited from very strong margin performance. Then maybe the balance of the year, you're really looking for very little margin expansion. So Hugh, I know you went to some of the drivers, but if you could elaborate a little bit more just in terms of the Q1 beat, and particularly I think Frito had very strong margins, and then how sort of that phasing works out for the balance of the year. Yeah, Judy, happy to try to add a bit more on that. As I mentioned during the prepared remarks portion of the script, commodities were a little bit deflationary in Q1 because of the overlaps, particularly overlaps around energy prices. Commodities will turn to a bit inflationary in the balance of the year. Obviously that's a drag on margins. Number two, there was certainly some timing of expenses, particularly as related to corporate expenses, as I mentioned, that gave us a big tailwind. Corporate expenses overall will be down in 2016, but they won't be down at the same rate that you saw in Q1. For the balance of the year, it will spread itself out a bit more evenly. The net of all of that is, I would expect less margin improvement in Q2 and Q3, and then you'll see stronger margin improvement again in Q4. Your next question comes from the line of Steve Powers of UBS. Morning, Steve. Good morning. Thanks. I guess two, if I could. Hugh, you mentioned the worsening macro assumptions in your outlook versus a few months ago. Could you just talk maybe about where those incremental concerns are most focused? Indra, picking up on your comments on new product innovations, could you update us on how much of your revenue is driven by new product innovation and whether that differs materially across divisions? I guess also, if there's a measure you look at to assess the longevity of new product contributions. In other words, differentiating between sort of short-term flavor extensions, and more lasting successes like Kickstart has come to represent. Thanks. Go ahead, Hugh. Yeah. I think the two places where we're probably incrementally less optimistic, number one is South America, not Mexico. Mexico, I think we're quite positive on, but the balance of South America obviously is a challenge. Then number two is Eastern Europe. Eastern Europe is obviously continuing to be challenged from a GDP perspective, and that flows through to disposable income and therefore to consumer spending on our products. The balance, I think we're probably roughly in line with where we've been. In terms of new products, Steve, typically what we look for is 9% of our revenue growth to come from new products and innovation. That's really what we targeted for ourselves this year, and we're running close to that number. Again, one quarter in innovation for the year does not make. What I'm going to give you is what we expect the year to come in at. Last year, we came very close to that 9% number. Typically what we look for within that is sort of a 75% line extensions, what we call refresh innovation, because news drives growth in this category. Then 25%, we'd like it to be sort of reframe and breakthrough, which is new platforms or substantial new packaging that can take the business to a whole new level. Again, across the world this number varies, but roughly speaking, that's what we shoot for. The thing to be careful is about Kickstart was a new platform, but after a couple of years, it becomes part of the base of the company, and then we have to rely on flavor extensions to continue to drive it. Something that's reframe or breakthrough the first year, after a couple or three years, starts to go back into the base and starts getting counted under refresh. Really how we count innovation is really stuff that's been launched and is in the market for at least two years, and we look at the performance of that business on a rolling basis. So right now we're running at about 9% and it's 75/25 refresh versus reframe and breakthrough. Your next question comes from the line of Ali Dibadj of Bernstein. Morning, Ali. Hey, guys. Three quick things, if I may. One is, if you could just tell us about the impact of the deconsolidation of Venezuela on your organic top-line growth and maybe even on your margins, if any. As you were pulling it out, what was the impact on the organics? Two is, if you could give us some more, particularly for investors who remain concerned about price irrationality coming back in the U.S. Clearly it's just a little bit of Nielsen data, one quarter of what you said rounded down. Can you give us more to those investors about why you think it needs to continue being price rational in the North American market? I field those questions all day, so I'd love to hear it from you. Then third is just as Tingyi as a jumping off point. If you can characterize the problems there that you described earlier, how much of it was macro stock market broad issues versus the PepsiCo-Tingyi partnership, that 3P, third-party type partnership, and if that means anything differently in the way you guys view the way you want to distribute on a global basis with third parties. I think specifically, for example, about Brazil beverages woes historically and ABI/SAB obviously coming together, but just broadly as well. Thank you for those. Hugh, you want to talk about impact on Venezuela? Yeah, happy to. Ali, revenue on Venezuela was a point, not meaningful on margins. Yeah. Let me talk about pricing. Ali, I can only talk about what we're going to do. Our belief is that it's very important that you really execute price rationally in the market because when you drop the price too much, it doesn't drive that much consumption growth, volume growth. I think we're at a point in the market in many of our categories where you can grow the business through premiumization, real innovation, but just playing a price game does not drive volume growth, and it actually destroys value. So that's our strategy and that's the playbook that we're going to execute. Let me turn to Tingyi. I think I gave you a pretty complete answer when Caroline asked the question, but let me just add to it. You've seen the Tingyi results. You've heard their call. You've heard all of the news that comes out of Tingyi. I'm not going to talk about a public company that announces results on its own. I'll just tell you that, from my perspective or our perspective, clearly the macroeconomics has played a role. I think Tingyi itself is trying to retool itself to become more efficient. And whenever you're going to do a transformation retooling, there is going to be disruption in the business. And finally, the PepsiCo-Tingyi partnership started off very well, and I think it'll come right back to where it was intended to be. The transition where we consolidate distribution systems, where we sort out products between PepsiCo-oriented distribution system or premium products-oriented distribution system versus a value-oriented product distribution system. That transition is taking a little bit longer, and it's a little bit more painful. I wish it could happen faster, but that's the reality of what we're living with because the slowdown in the macros has not helped either. From a Tingyi perspective, as I said, we remain optimistic, and we just need to power through this and provide the help in terms of capabilities and knowledge transfer to them so they can get through this difficult period. I don't think Tingyi is indicative of any problems on a global basis. I tell you something, we have hundreds of partners globally in the beverage business. At any point, some percentage of those bottlers go through issues. That's the same for any company in this beverage business. The strength of the franchise company is how do you help that bottling entity recover from its issues, given that we operate COBOs and we have a reservoir of capabilities. That's really what we're doing, taking people from our established COBOs, sending them into these bottler businesses to help them improve their performance. I don't see any major red flags here, Ali. Your next question comes from the line of Robert Ottenstein of Evercore ISI. Morning, Rob. Great. Thank you. Thank you very much. Good morning. A couple of questions. You noted in most of the segments that you were starting to face now some operating cost inflation. Is that primarily wage inflation? Can you give us any more details on that, please? Yeah. The biggest factor in that is wage inflation. Recall when we've talked about in the past, we have about $28 billion in operating expense. Roughly half of that is labor. Outside the U.S., labor is obviously inflationary just based on local inflation rates. Your next question comes from the line of Kevin Grundy of Jefferies. Good morning. Question for Hugh on North American profitability and margins there and your line of sight for improvement. This is kind of a broader question, Hugh, but I was hoping you could kind of briefly touch on what is the margin ambition at Frito. Can that be a 35% operating margin business over time? Quaker would seem like there is a significant opportunity there now without the Müller JV weighing on it. Can that return to a 30% operating margin business? That would seem like that could happen over a much quicker period of time without that weighing it down. Then if you could briefly touch on NAB as well, which is a bit more difficult given the vertical integration there with bottle ownership. Any commentary there, I am sorry that is a bit broad-based, would be helpful. Thank you. Yeah, happy to do that. As you all know, we do not give division-specific margin guidance. It just gets into a level of granularity and detail that is probably more confusing than helpful. That said, I would broadly say all of our North American businesses have the potential to continue to see improved margins. How are they going to do that? Number one, it will be through our broad-based supply chain productivity programs. We have continued to take cost out, particularly moving from the plant to the store. We are getting more and more efficient at operating that distribution network. Number two, Smart Spending continues to present an opportunity to enhance margins. Again, that occurs across all of our businesses. Number three, as Indra pointed out earlier, we continue to see a lot of opportunities to premiumize our products. With those premium products come good price points. Once the products are in the marketplace and the A&M has normalized on those new products, you can expect to see those earn premium margins over time. Again, I do not want to get into specific division-level margin guidance, but I do believe that all of our North American businesses will continue to see margin improvement over time. With that, thank you all for your questions. In closing, let me just say we are off to a good start. We are confident that we have the right plans in place, and we will continue to execute to the best of our abilities. We look forward to updating you on our progress as the year advances. Have a great day. Thank you. Thank you. That does conclude PepsiCo's first quarter 2016 earnings conference call. You may now disconnect.