Earnings Call: Q3 2014

Oct 9, 2014

Summary

Q3 organic revenue grew 3.1%, with core constant-currency EPS up 11% and margins expanding 45 bps. FY14 EPS growth guidance rose to 9%, supported by productivity and planned shareholder returns of $8.7 billion.

Good morning, and welcome to PepsiCo's third quarter of 2014 earnings conference call. Your lines have been placed on listen only until the question and answer session. In order to ask a question or make a comment, please press star one on your touchtone 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 third quarter 2014 performance and outlook, and then we'll move on to Q&A. We've kept our comments brief this morning and intend to conclude the call by 8:45, and we'll do our best to get to as many of your questions as we can. Before we begin, please take note of our cautionary statement. This conference call includes forward-looking statements, including statements regarding 2014 guidance and our long-term targets 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 basis. 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 third quarter comprises the 12 weeks ended September 6th for our North American operations and the months of June, July, and August for most of our operations outside North America. As you saw in the release, we are no longer reporting PepsiCo Americas Foods as a business unit. Consistent with our prior practice, we continue to report results for the divisions that had comprised PAF, namely Frito-Lay North America, Quaker Foods North America, and Latin America Foods. This change does not have any impact on the overall results of PepsiCo or these divisions. Also reflected in our Q3 2014 core earnings results are aggregate gains associated with the divestitures of approximately $34 million and a $23 million impairment of a brand in Greece. Now it's my pleasure to introduce Indra Nooyi. Thank you, Jamie, and good morning, everyone. We are pleased with our results for the quarter and year to date, particularly given the continued macro challenges we see across the globe. Specifically, in developed markets, the consumer category demand continues to be sluggish. In developing and emerging markets, there is continued macro and political volatility, most notably in Eastern Europe, the Middle East, and a number of markets in Latin America. In other key emerging markets, China, India, and Brazil, even though the political environments are relatively stable, GDP and consumer spending growth remains mixed. Despite these challenges, our businesses performed well in the third quarter and year to date. Global volume grew in both snacks and beverages in the quarter and year to date. Organic net revenue grew at a rate ahead of volume in the quarter and year to date, reflecting execution of effective revenue management strategies and successful introduction of innovative new products. In the quarter, organic revenue grew 3.1%, with developing and emerging markets up high single digits, led by key contributions from the BRIC markets. Notably, our developing and emerging markets business has proven to be resilient with high single-digit organic revenue growth year to date, including double-digit growth in Egypt and India, high single-digit growth in China, Brazil, and Turkey, and mid-single digit growth in Russia. In North America, Frito-Lay led performance with 3% organic revenue growth in the quarter and year to date. Core gross and operating margins both expanded by 45 basis points in the quarter, aided by the benefits of our global productivity initiatives. Year to date, core gross margin expanded 50 basis points, and core operating margin expanded 35 basis points. Overall, core constant currency EPS grew 11% in the quarter, driven by the solid operating performance supplemented by responsible financial management. Importantly, these results have translated to strong cash generation and consequently, strong cash returns to shareholders. Returning capital to shareholders is a top priority, and we are pleased to report that year to date, we have returned $6 billion to shareholders in the form of dividends and share repurchases, and we remain on track to return a total of $8.7 billion to shareholders in 2014, which is a 35% increase over our 2013 shareholder cash returns. Based on the strength of our year-to-date results and our outlook for the fourth quarter, we raised our full-year core constant currency EPS growth target to 9% from 8% previously. We believe our year-to-date performance is a good reflection of the strength of our business. In today's difficult environment, Retailers value the benefits of partners with strong brands and high-velocity products that drive traffic, build basket size, and generate attractive cash flow. That is exactly why our retail partners like to do business with PepsiCo. As a company, we continue to strengthen our business to position it for continued successful performance well into the future. We are encouraged by the progress we are making in three areas in particular. First, leveraging our complementary product portfolio and global scale. Second, product and packaging innovation. Third, productivity. Let me give you a quick update on each of these areas and share some of the tangible evidence we are seeing as proof of our progress, starting with how we are increasingly leveraging the complementary nature of our products and brands. A case in point is Mountain Dew and Doritos. Dew and Doritos have extremely high co-purchase incidence. In the U.S., over 60% of Mountain Dew households buy Doritos. Both brands are deeply rooted in gaming, with legacies of high engagement partnerships and activations around blockbuster video games. In the U.S. this fall, Dew and Doritos are giving consumers access to Call of Duty Advanced Warfare. They are going to give them exclusive in-game gear, double XP, and rapid supply rewards. All of this is to dial up their gaming experience. Only Mountain Dew and Doritos consumers will be able to unlock these coveted advantages and customize their gaming experience through the Fuel Up for Battle promotion. A number of our largest customers will run Better Together programs linked to this promotion, and we are concurrently reintroducing on a limited time basis a true gamer favorite, Mountain Dew Game Fuel in original Citrus Cherry and a new lemonade flavor. Across many of our international markets, we are focused on driving greater co-purchase incidents of Lay's and Pepsi with joint packaging graphics, sports properties, point-of-sale material, ad copy, and promotions. These cross-branding activations are now taking place in many of our key markets across the globe. For example, in Poland, we created excitement for the Lay's brand by hiding coupons for 100,000 free Pepsis in bags. The promotion was supported by ads and point-of-sale material featuring the soccer great Lionel Messi. Similarly, in Colombia, we ran joint Lay's, Pepsi, and Tropicana Quaker soccer-themed promotions, offering discounts and prizes for joint purchases in the organized trade. Across the Middle East, we had great success with our joint Lay's Pepsi promotions during the Ramadan season. In addition to the commercial benefits afforded by these cross-category promotions, we continue to yield cost synergies through continued integration. For example, integrating our snack and beverage media sourcing in China, fully consolidating and integrating our administrative functions under one roof in Russia, and consolidating common carriers for snacks and beverages in the more rural regions of India. That is the Better Together story. The second area is product and package innovation. We continue to make very good progress. As evidenced on a rolling four-quarter basis, our innovation as a percentage of sales is steadily increasing and is up 90 basis points versus the comparable year-ago period. In our biggest market, the United States, we were the largest contributor to retail sales food and beverage growth, both in the third quarter and year-to-date, which really benefited from the strength of our innovation. We are seeing innovation success across brands and geographies. For example, at Frito-Lay North America, we launched our 2014 Lay's Do Us a Flavor campaign, and this followed its past success in the U.S. and 12 other markets around the globe. This year's consumer-submitted finalists are Cappuccino, Cheddar Bacon Mac and Cheese, Mango Salsa, and a Wasabi Ginger Hard Bite. This program helped drive strong mid-single-digit Lay's net revenue growth in the third quarter. At Quaker Foods North America, we have launched Quaker Express Cups to capitalize on the ever-growing demand for greater on-the-go convenience, and Quaker Warm & Crunchy Granola, which delivers both the wholesome goodness of Quaker Oatmeal and the satisfying crunch of multigrain granola. While center-of-the-store category growth remains challenged, the success of these and other new products launched by Quaker have contributed to value share gains in each of Quaker's key categories, hot cereal, ready-to-eat cereal, and snack bars, both in the quarter and year-to-date. Our North American beverage business has strong innovation in both product and packaging. Over the past several years, we have significantly increased the variety of primary and secondary package configurations. With greater packaging flexibility, we now have more tools in our kit to drive price realization and higher margin through price pack management. A case in point is our 12-ounce glass bottle, which sells at more than 100% premium to a 12-ounce can. Our innovations become increasingly more durable. For example, a number of 2012 and 2013 introductions, Tostitos Cantina, Mountain Dew Kickstart, Lipton Pure Leaf, have all achieved more than $100 million in retail sales in their launch year and have generated double-digit retail sales growth in their second year. Our beverage product and packaging innovation in the U.S. has led to improved sales, improved net price realization, and improved market share performance. We held LRB value share in measured channels in the third quarter and year-to-date, held CSDs at retail in the third quarter led by trademark Mountain Dew, and gained or held value share in a number of important subcategories, including CSDs, sports drinks, ready-to-drink tea, and unflavored water. In our international markets, we are both leveraging our global scale and capitalizing on local insights to fuel innovation. For example, within snacks, since its initial U.S. introduction in 2012, Doritos Jacked has launched in 10 international markets. We also lifted and shifted a larger and thicker-cut chip with deep ridges, which originated from our Ruffles brand and launched it into several key countries such as Russia, Brazil, the Middle East, and India under the Lay's MAXX brand. In the U.K., we launched a new range of premium potato, tortilla and pita chips under the Market Deli brand. The Market Deli brand really caters to local taste preferences with flavors such as balsamic vinegar of Modena and Wiltshire cured ham, mature cheddar and farmhouse chutney. Within beverages, the Spire family of digital fountain dispensers continues to build momentum. Currently, Spire is in the United States, Canada, France, Turkey, Ireland and Switzerland. The equipment capabilities range from pouring eight brands and four flavor shots to a maximum of 16 brands and eight flavor shots, resulting in over 1,000 flavor combinations. The global expansion of our highly successful Mountain Dew franchise continues. The brand has expanded to two new markets in 2014 and is now available in over 40 countries around the world. We have built terrific brand recognition with the continued expansion of our Dewmocracy and Dew Tour support programs. Finally, turning to productivity. We achieved our targeted productivity savings for the third quarter and year-to-date, and we are on track to achieve our full-year target of $1 billion in savings. This year, we expect to successfully complete the three-year, $3 billion productivity program we launched in 2012, and we are now focused on our next generation five-year, $5 billion productivity program announced earlier this year, which we expect will extend annual savings of $1 billion through 2019. Our next generation productivity will focus on four areas. First, embedding more automation in our operations to replace labor with capital. At the same time, removing bottlenecks from our operations, which will increase capacity utilization. Second, expanding shared services, including global financial shared services for the handling of routine back-office transaction processing. Third, restructuring manufacturing to optimize our global manufacturing footprint. Fourth, restructuring our go-to-market systems to optimize our distribution network. As a result of these initiatives, we expect to see continued improvement in net revenue and core earnings before interest and taxes per employee, as well as margin expansion and increased returns on invested capital. To conclude, we feel pretty good about our results for the quarter and year-to-date. We remain focused on generating cash and providing attractive cash returns to our shareholders, and we're encouraged by the continued progress we have made to strengthen our business, which we expect will make our performance all the more durable and reliable looking to the future. With that, let me turn the call over to Hugh Johnston. Hugh? Great. Thank you, Indra, and good morning, everyone. Let me spend a few minutes discussing the quarter and our upwardly revised core constant currency EPS outlook for 2014. For Q3, organic revenue grew 3%. On a reported basis, net revenue was 2% versus year ago, reflecting one point of unfavorable foreign exchange translation. Commodity costs had low single-digit inflation. Our core gross margin and core operating margin each rose 45 basis points. Core constant currency operating profit grew 5.5%. Our core effective tax rate was 24.2%. Our diluted share count declined 2%, reflecting the benefits of our ongoing share repurchase program, and core constant currency EPS grew 11%. On a rolling four-quarter basis, our net capital spending is 4.1% of sales, which is well within our long-term target of less than or equal to 5% of net revenue. Our core net return on invested capital improved by approximately 40 basis points and now stands at 16.9%. We returned $6 billion to shareholders in the first three quarters in the form of dividends and share repurchases, which is almost 30% above year-ago levels and reflective of our commitment to return cash to shareholders. Turning to guidance. As Indra mentioned, we have increased our full-year core constant currency EPS growth target to 9%, up from 8% previously. In addition, for the full year, we expect mid-single-digit organic revenue growth, low single-digit commodity inflation, and productivity savings of approximately $1 billion. Below the division operating profit line, we expect corporate cost efficiency driven by productivity initiatives, a core effective tax rate of approximately 25%, and a reduced share count from our share repurchase program. Foreign exchange is expected to negatively impact net revenue by 3 percentage points and core earnings per share by 4 percentage points for the full year 2014, based on current market consensus rates. Taking our 2013 core EPS of $4.37 and applying our guidance implies a 2014 core EPS of approximately $4.57. As you model out the fourth quarter, I would ask you to consider the following. We expect advertising and marketing expense to grow at a rate ahead of net revenue growth and below the operating profit line. Net interest expense is expected to increase in the fourth quarter, primarily reflecting higher debt balances and higher rates. From a cash flow perspective, we continue to expect full-year free cash flow, excluding certain items, of more than $7 billion. We will continue to drive cash flow through efficient working capital management and continued tight controls over capital spending. Net capital spending is expected to be approximately $3 billion, which is well within our long-term target of less than or equal to 5% of net revenue. And we expect to return approximately $8.7 billion to shareholders in 2014, a 35% increase over 2013 through $3.7 billion in dividends and $5 billion in share repurchases. To summarize, we have increased our core constant currency EPS growth outlook for the full year 2014 to 9% from 8% previously. We expect to drive improved full-year margins and net ROIC, and disciplined capital allocation and returning cash to shareholders remain top priorities for the company. 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 1 on your touchtone phone at any time. Our first question comes from the line of Bryan Spillane with Bank of America Merrill Lynch. Hey, good morning. Morning, Brian. A question just about the balance between reinvestment in the business and the focus on productivity and dropping it to the bottom line. If you look at this quarter's results, the results over the course of the year and really beginning last year, it has been a pretty good balance of maintaining a good relative organic sales growth relative to a lot of your competitors and peers, with also driving some margin improvement. I guess as you move into this next productivity program and also just some of the challenges you are facing, I guess, in some key markets, developing markets, at least in the next year, macro challenges. Can you just give us a sense for how you feel about that current balance of investment in A&M, in R&D, in selling effectiveness or selling systems versus dropping some of that to the bottom line? Do you feel like you have the right balance? Especially as things maybe get a little bit more challenging in some of these markets, do you feel like you might have to tweak that balance into next year? Brian, it is a great question. At this point, I would say we feel good about the balance. We increased A&M spending. We are running at about 5.9% of sales. We increased R&D spending significantly over the past three to four years because we really believe that investing in R&D in particular is critical to the future success of the company. We invested in that. We invested in food service equipment. That is why the Spire equipment has come out and is very successful today. At this point, we feel good about the investments we are making in product line transformation, media spending, advertising spending against our brands, and most importantly, long-term investment in R&D platforms. I agree with you that there is volatility in the world, and as we model out 2015 and beyond, we will come back and talk about what the outlook is for the financials. But at this point, we feel comfortable with what we've articulated in terms of a long-term algorithm for the company, and we feel comfortable about our productivity programs. So I think we have to watch and wait. Our next question comes from the line of John Faucher with J.P. Morgan. Thanks. Good morning, Indra. I wanted to follow up on some of the comments about raw materials, but also sort of start off with pricing in that context, which is, you're getting a lot of pricing in Latin America, which is helping the organic revenue number. And I guess, can you talk a little bit about what you're seeing from a real pricing standpoint in Latin America, not just related to the FX? And then as you look out over the next sort of 12 to 18 months on raw materials, we've seen some favorable movements in things like corn. Are you guys still continuing that process of trying to capture some of that benefit through the hedging? Can you talk about how we should look at that going forward? Thanks. Go ahead, Hugh. Yeah, happy to. Hey, John, it's Hugh. In terms of the Latin America numbers, we are obviously, as is everyone else in this space, benefiting from the relatively high overall inflationary environment there. What I can tell you is we are getting positive real pricing there, and it is in line with what you would see the commodities basket cost growing in those markets. So if you look at it more from a global perspective and think about commodities inflation from a global perspective, we're getting pricing in line with that on a more real basis. Regarding your broader question on commodities, without a doubt, the commodities numbers overall are coming down. The couple facts I would remind you on that, number 1, we have a very broad basket. Not one commodity accounts for even 10% of our overall commodities basket. Number 2, we do continue to follow the forward buying strategy that we've had in the past. So we tend to be about 6 to 9 months out. So as those prices come down, we will tend to see them reflected in our basket over time. We do that again because we want to give the businesses and our customers pricing predictability, and it's been an effective strategy for us over the last few years. Number 3, people tend to focus on a few market-traded commodities. Those market-traded commodities represent somewhere between 30%-40% of our overall basket. So I'm not sure oftentimes that the market-focused commodities give a full picture of it. In terms of 2015, as has been our practice in the past, we'll comment on that in February timeframe, because we think that's the right time to give guidance to investors overall, and we won't try to parse out the pieces right now because it tends to create more confusion than benefit. Our next question comes from the line of Ali Dibadj with Bernstein. Hey, guys. Morning, Ali. Your organic sales growth was about 3%, which translated to a core constant currency operating profit about 5.5% and an EPS growth of about 11%. If you look, the gaps between top-line operating profit and EPS growth rates seem to be widening more and more as the quarters progress here. Can you please give us a quantification of, first, how much of the operating profit to sales gap was negative commodities and negative mix versus cost-cutting positive and acquisition divestitures positive, which for some reason you guys keep considering core. Second, how sustainable is the operating profit to EPS growth gap driven by lower net interest expense, even though there's a little bit higher debt it looks like, but lower net interest expense and buybacks. The spirit of the question to understand sustainability of these gaps. Thanks. Thanks, Ali. I'm going to have Hugh walk you through the details. I presume the first thing you're saying is it's good that PepsiCo is delivering good results. With that, let me turn it to you, Hugh. Yes, absolutely, Indra. If you look over the last three quarters, we've seen operating profit growth on a core constant currency basis of 7%, 3%, and 5.5%. We've seen EPS growth of 10, three, and 11. I think that gap has been actually relatively constant over the course of the timeframe. What are the drivers between operating profit growth and EPS? You really have three things going on. Interest costs, without a doubt, we are getting some leverage on that. The only thing that I'd want to share on that front is we are operating right now in a zero net floating debt environment. We do have some floating debt, but that is offset by floating cash held outside the U.S. I think from the standpoint of rising interest rates, we are relatively well-protected compared to most of our peer companies in that regard. Obviously, like everyone else, we would have some refinancing over time, but I think we've adopted a relatively conservative posture on the way that we're managing fixed float within the balance sheet. Number two, taxes. Taxes are really coming in for the year right as we expected, and that's been a bit of a benefit for this year. Number three, our share repurchase is obviously lowering the share count, and that's driving some of the gap from operating profit to EPS. We won't talk about 2015 right now, but obviously, as a company, we have a long history of share repurchase, and I would certainly expect we would continue that going forward. In terms of sustainability, Hugh, our long-term guidance has been mid-single digit operating profit and high single-digit EPS. That's correct. That's really the envelope industry operating. Absolutely. Our next question comes from the line of Dara Mohsenian with Morgan Stanley. Morning, Dara. Hey, good morning, guys. Frito-Lay organic revenue growth improved a bit sequentially in the quarter, but the 3% result is still below the 4%-5% levels we were seeing over the prior year and a half before Q2's result. Do you think this level is more like a new normal here in your mind, given the difficult consumer environment? Or do you think you can accelerate that business going forward? And can you discuss Frito-Lay market share performance in North America? It looks like you're still losing slight share in track channels, and your expectations going forward from a market share standpoint. Yeah. Dara, I think overall in Q3, food industry sales in retail was challenging. And within that, Frito-Lay performed well, in fact, was the best performer in that group. And sequentially, from the first quarter of the year to the third quarter, the share loss has narrowed. Now let me be clear. The share loss is really to premium players who don't last for a long time in the market. People come in and out of the market. And Frito has to be very careful not to react to players who are not long-term players in the marketplace. So Frito has been playing a very responsible game. What we've been trying to do at Frito is to say, "Let's make the core very solid, deliver on the core, and start expanding the shoulders of the business in a profitable way." I think Frito, in this very difficult environment, has done a very good job balancing pound growth, revenue growth, and profit growth, and that's why you've seen relatively steady performance from Frito, in what I would consider is a very challenging overall retail environment for all kinds of food. Center of the store is particularly challenged, but I'd say overall, food industry sales are challenged, but Frito's been a shining star. I think overall, whether this is a new normal or not, I don't know. It really depends on the overall environment. But within this environment, Frito's been performing quite well, and the share losses have been coming down. We don't like any share losses, I'll be honest with you. But we have to make sure the business behaves very responsibly, and that's what they've been doing. In terms of addressing those premium innovation opportunities, we've been building more capability. You see products like Stacy's Pita Crisps, you see products like Smartfood Selects, all of which are entering that premium space. To date, we've been quite successful with them. So we'd certainly expect to see that aspect improving over time. Our next question comes from the line of Bill Schmitz with Deutsche Bank. Hi, good morning. Morning, Bill. Hey, the first one's just sort of like a curiosity question because currencies have obviously moved a ton in the last couple of months, but you kept your currency outlook on the EPS line. I'm just trying to figure out if it was conservative before and now it's more realistic, or how you kept that currency guidance. Then the second question is just, and it may be a tough one to answer, but do you guys have a view on some of these contemplated consumption taxes in California? They sound pretty significant. Some of them are a couple cents an ounce. It looks like there's a decent probability they're going to go through, so how you kind of operate the business in that kind of environment. I'll speak to the second point, and then Hugh Johnston will speak to the first one. I believe discriminatory taxes on certain categories are just wrong. I think we have to understand what the issue is we are trying to address and address it in a holistic way. We will make our case and hope that the voters are sensible enough to look at the right answer to address whatever issue they're addressing. With that, let me turn it over to Hugh Johnston. Yeah, Bill. Happy to answer the currency question. We take a basket of market currency rates, and we follow the same methodology every quarter. We've been consistent in taking that approach for quite a number of years. I don't think we'll change that approach. You're right. In the last couple of quarters, it's come in a little bit lighter than the original forecast, but it's the best way I know of to do it. In addition to that, as you all likely know, we do hedge some transactional effects of foreign exchange. We do not hedge translation. We don't think that's a good use of investors' money. We don't hedge accounting at all. We just take the market consensus rates, and then as the currencies flow, we report them to you. Our next question comes from the line of Mark Swartzberg with Stifel Nicolaus. Yeah, thanks. Good morning, Indra. Good morning, Hugh. A question on the, and it's also a curiosity question, but with the core earnings, you're including gains, and they're not large this quarter, but can you just speak to the principle behind including these gains on asset sales? Yeah. Why don't I handle that one, Mark? You're right. In the overall scheme of things, there are three items. There is a small gain in the Quaker business related to the sale of a small cereal brand. There is a small gain from a bottling perspective in AMEA. Then there is the write-down of a small brand in Greece from an asset impairment perspective. If you net all of those three factors, the grand total was a benefit to earnings of $11 million. So basically, less than a penny of impact overall. More broadly, we do have a consistent set of principles we apply in terms of what is core versus non-core. In the overall scheme of things, it really is not a substantive impact to earnings. What's the principle behind having them in there? Because again, it's not large in the quarter, but it could become something we're all talking about because of the principle being there, if there is a large gain at some point in the future, or for that matter, a large loss. Mark, most importantly, we publicly disclose exactly what the gains are and if there are any charges against it. So you can model out the impact on earnings from our disclosures. Yeah. So Mark, to your point, there's obviously in a company the size of PepsiCo, with $66 billion in revenue, 275,000 employees, and operating in almost 200 countries, there are lots of things that you would consider to be perhaps one time in nature. The approach that we've taken on this is we said, in terms of a test of core versus non-core, is a transaction one time? And then is it of a certain size? If we called everything above $1 million one time, we would be excluding an enormous number of items. So we've drawn a line in terms of a specific number that equates to core versus non-core. That number's been the same for years, and we apply it consistently in all of these transactions, to your point, are small, but we do disclose them to allow investors to model them any way they choose. Our next question comes from the line of Judy Hong with Goldman Sachs. Thank you. Good morning. Morning, Judy. I guess a lot of just volatility around Europe in terms of the macro and political standpoint. I wanted to just get a little bit more color from your perspective, what you're seeing in terms of underlying consumer demand in your various categories and markets like Russia and Eastern Europe. It looks like your market share in markets like U.K., despite tough competitive environments, actually doing pretty well. Maybe just talk about Russia and Eastern Europe and then separately in the U.K. in the context of the competitive and tough retail environment. Let me talk overall about Western Europe and then talk about Russia and Ukraine. I'd say when you have poor weather or when you have some macro factor, we have to worry about how we perform in that environment. For example, Western Europe volumes in beverage decelerated a bit in Q3 because the weather was poor. Otherwise, I'd say the overall Western European markets are doing quite well. Yes, we have a retail situation that's quite interesting in the U.K., but our brands are strong, and we are powering through that. When it comes to Russia and Ukraine, again, we sell dairy products, juice, as well as snacks and soft drinks. Dairy and juice tend to be much more staple kind of products for Russian consumers. Even though the Russian market is going through its challenges in terms of the devaluation of the RUB and the UAH in Ukraine, and also inflation in raw materials for dairy in particular, our top line growth is still mid-single digits. We are holding on the top line growth. The real challenge is, what is the impact to the bottom line? A lot of the products we sell in Russia are made in Russia. We source a lot of our raw materials from local suppliers. That part is okay, but anything that is imported clearly is impacted by the devaluation of the RUB, and then any translation of Russian profits is impacted by the devaluation of the RUB. At this point, we are watching and waiting to see how the Russian market evolves, but our growth is still in the mid-single digits, and we are doing okay. Our next question comes from the line of Nik Modi with RBC Capital Markets. Yeah, good morning, everyone. Morning, Nik. Good morning. So a couple questions from my end. I was just curious if maybe you can provide some context on PAB in terms of how the up and down the street channel did versus kind of the larger format. If you could provide any perspective on food service since you've been investing there so heavily. Then the second question is, Indra, just curious on your view on execution at the company-owned bottling operations and if you think that that is an area of improvement for PepsiCo going forward within the U.S. Yeah. We'll come to the performance in convenience stores. I'd say overall, we are holding share in LRB in Q3, and whether it's in CSDs or isotonics, as I mentioned in my prepared remarks, what we feel good about in Q3 is that we held LRB share in this highly competitive marketplace. I think since we bought back the bottlers, we've actually been able to do a few things. One, we've invested in food service because we put routes back into local food service. We're able to go after national accounts without any discussion of bottlers versus the parent company. As a consequence, we've been winning big accounts, and we're beginning to actually increase our share in colleges and universities and local food service accounts. So I think our food service performance is improving. Again, as you know with food service, you don't see big improvements in a short timeframe. You've got to build this business very steadily so that you balance growth with profitable growth. So, I think over the next few years, you'll start beginning to see meaningful contributions from our food service business. One, because we are fixing the core beverage food service business, which is a critical driver of food service, and then we're able to leverage that beverage food service to sell more snacks. So the Better Together really works with food service. Overall execution. Since we've bought back the bottlers, we've invested so much in terms of improving our manufacturing lines to have more packaging flexibility. We put more routes back in the marketplace. We've put in more tools, given more tools to the front line so that they can actually sell better at the point of sale. I think overall, our execution has improved substantially, and that's why you're seeing several quarters now where we're holding share in the LRB category. We're doing it in a very responsible way because we're also able to get pricing. We're getting low single-digit pricing in the marketplace in North America, and we're able to push through all our innovation. I mean, the market's fragmenting quite a bit, and you've got to have a distribution system that's completely aligned with the brand company so that you can get all this innovation into the marketplace. By removing any friction that exists in the system, we're actually able to get all of our products to the marketplace. Overall, we feel pretty good about the progress we're making in North American Beverages and how well North American Beverages and Frito-Lay are working together to really service both retail customers and food service customers to help us improve the performance of North American Beverages substantially. In terms of convenience store performance, it's ahead of overall performance by about 50 basis points. Ladies and gentlemen, we have time for one additional question. Your final question comes from the line of Steve Powers with UBS. Thanks. Good morning. I guess two more questions related to PAB, if I could. First, we saw noticeable operating margin expansion in that division this quarter, building on some initial progress made last quarter. I guess, just want to get your sense for whether or not you feel this is the beginning of a trend that can continue to gain momentum, and assuming so, what the biggest drivers will be. That's kind of question number one. Question two, related to that is, as you said, Indra, we saw again kind of 1% net realized pricing in the quarter, which is in line with the year-to-date trend and, I guess, positive relative to muted commodities. But I was wondering whether you see further upsides of that number over time. Maybe it's that individual categories are actually better than that and we're seeing some negative category or geographic mix across the division. I'm not sure, but just further details there will be helpful as well. Thanks. Yeah. I think what the beverage business is doing is focusing on revenue management and productivity in addition to innovation. Innovation is driving top-line growth nicely and getting good price realization. All of our revenue management initiatives, backed up by more packaging flexibility, is actually helping this business. Remember, all of our productivity initiatives touch the North American Beverages business, too. Taken together, the business is beginning to hit its stride. Our net realized pricing in the quarter in North American Beverages was in the low single digits. We actually feel very good about the pricing that we are able to get. Now, you asked about the sustainability of this. Look, we will continue to do the revenue management work, the productivity work, the innovation. We will continue to do everything that is in our control, and we will continue to play a very responsible game in this marketplace. We will just see how the marketplace evolves. At this point, we are cautiously optimistic about the outlook for North American Beverages. Let me just close by reiterating that we are pleased with our results to date. We are confident that our plans are working, and we are on track to deliver our financial targets for 2014. I thank you for your time and questions this morning and for the confidence you have placed in us with your investment. Have a wonderful day. Thank you. This concludes today's conference call. You may now disconnect.