Earnings Call: Q2 2014

Jul 23, 2014

Summary

Q2 organic revenue grew 3.6%, with adjusted core constant-currency EPS up 9% excluding prior-year Vietnam items. FY14 core constant-currency EPS growth guidance increased to 8%, supported by productivity and strong first-half execution.

Good morning, and welcome to PepsiCo's second quarter 2014 earnings conference call. Your lines have been placed on listen-only until the question and answer session. In order to ask a question or make a comment, please press star followed by one on your touch-tone phone at any time. You may remove yourself from the queue by pressing the pound key. Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Jamie Caulfield, Senior Vice President of Investor Relations. Mr. Caulfield, you may begin. Thank you, 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 second quarter 2014 performance and outlook, and then we will move on to Q&A. We have kept our comments brief this morning and intend to conclude the call by 8:45 to be respectful of your time during a busy earnings week, and we will 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 risk 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 investors section of PepsiCo's website under the events and presentations tab. As we discuss today's results, please keep in mind that our second quarter comprises the 12 weeks ended June 14 for our North American operations and the months of March, April, and May for most of our operations outside of North America. As we mentioned in our earnings release this morning, core operating profit growth rates are impacted by lapping a $137 million gain from the refranchising of our Vietnam beverage operations in the second quarter of 2013, partially offset by incremental investments of $46 million made in the prior year quarter. Now it is my pleasure to introduce Indra Nooyi. Thank you, Jamie, and good morning, everyone. Thank you for joining us this morning. We are pleased with our second quarter and our first half results. Despite operating in what continues to be a challenging and volatile macro environment, we've been consistently meeting or exceeding our financial goals over the last 2 and a half years. I believe our results reflect the hard work we've done over the last several years to position our business for sustainable success, specifically our investments to strengthen our brands, innovate more effectively, expand our geographic footprint with strategic acquisitions, drive better execution, and operate more efficiently by leveraging our global scale and complementary product portfolio. Today, these actions and investments are producing consistent, tangible results. Based on the strength of our first half results and our outlook for the remainder of the year, we are increasing our full-year core constant currency 2014 EPS growth outlook to 8%. Let me share with you some of the performance highlights for the second quarter. Organic revenue grew approximately 4%, with global snacks up 5% and global beverages up 2%. We managed the business responsibly, achieving 3 points of effective net pricing through effective price pack revenue management. Each of our four business units delivered organic revenue growth, led by high single-digit growth in AMEA and mid-single digit growth in Europe and PepsiCo Americas Foods. Developing and emerging markets posted solid 8% organic revenue growth, led by low double-digit growth in China, high single-digit growth in Brazil, and mid-single digit growth in Russia. Innovation continued to play an important role in our top-line growth and accounted for 9% of our net revenue. Core gross margins improved by 60 basis points. Excluding the Vietnam gain net of incremental investments from the second quarter of 2013, our core constant currency operating profit rose 6%, core operating margin improved by 65 basis points, and core constant currency EPS grew 9%. On a rolling four-quarter basis, our core net return on invested capital improved by 30 basis points and now stands at 16.5%. In the first half of 2014, we've returned $4 billion to shareholders in the form of dividends and share repurchases, a 46% increase versus last year. As we previously announced, we expect to return $8.7 billion to shareholders in 2014 in the form of dividends and share repurchases, a 35% increase over our 2013 cash return to shareholders. Importantly, we achieved our targeted productivity savings in the quarter and remain on track to achieve our full-year target of $1 billion, which represents approximately 3.5% of our operating cost base, excluding commodities and A&M expense. This year, we expect to successfully complete the three-year, $3 billion productivity program we launched in 2012. We are now focused on our next generation five-year, $5 billion productivity program through 2019, announced earlier this year, which is really centered on four key areas. First, embedding more automation in our operations to replace labor with capital. 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 returns on invested capital. With that as a backdrop, let's take a look at how the business has performed starting in North America. The North American consumer picture continues to be weak, with retail sales among the top 30 food and beverage manufacturers roughly flat in the quarter, a slight deceleration from the first quarter. In this challenging environment, PepsiCo grew sales at retail across each of its North American snacks and beverage businesses and was the largest contributor to retail sales growth among the top 30 manufacturers. Frito-Lay North America performed well, with organic revenue growth of 2% and core constant currency operating profit growth of 5%. Net price realization was somewhat muted in the quarter as we benefited from commodity cost deflation. Core operating margins expanded 80 basis points, despite an increase in advertising and marketing and reflected savings from our productivity efforts. Our top-line growth was driven by strength across most of our largest trademarks, with Lay's, Doritos, and Cheetos each posting revenue growth in the low to high single digits. Our broader macro snack offerings are also doing well, with strong performance in shelf-stable dips, crackers, our line of Smartfood snacks, and the Sabra line of refrigerated hummus, dips, and spreads. As we look to the second half, we are encouraged by the strength of our innovation and consumer engagement programs, leveraging some of our biggest brands. In April, we launched Doritos Jacked mystery flavors with nationwide distribution. Consumers voted for their favorite mystery flavor online. Earlier this month, we revealed the three flavors, Spicy Street Taco, Chocolate Chipotle Bacon, and Caribbean Citrus Jerk. Spicy Street Taco was the consumer-voted favorite, and we launched it this fall as a permanent Jacked flavor. We've also brought back to the U.S. the highly successful Lay's Do Us a Flavor campaign. We've received more than 14 million consumer submissions, nearly four times the submissions we received for last year's campaign. On July 17th, we announced the four finalists among consumer-submitted flavors, Cappuccino, Cheddar Bacon Mac and Cheese, Mango Salsa, and Wasabi Ginger, and these products are now hitting store shelves. Our consumers will now have the opportunity to vote for their favorite new Lay's flavor. And we're especially excited about the progress we're making in food service innovation. On July 2nd, we launched Doritos Loaded exclusively at more than 5,500 7-Eleven stores nationwide. Doritos Loaded is a delicious hot snack filled with melted nacho cheese and encrusted with Doritos. Our launch of Loaded created a great deal of traditional and social media buzz, generating more than 750 million impressions to date. It was also featured on "Jimmy Kimmel Live". Each of these programs is a strong demonstration of how we are leveraging our culinary center to create unique, great-tasting new products and driving excitement and awareness through creative consumer engagement. Turning now to Quaker Foods North America. Despite continued challenges across most center store food categories, we gained value share at retail in each of Quaker's key categories, hot cereal, ready-to-eat cereal, and snack bars, both in the quarter and year to date. Core constant currency operating profit rose 5% in the quarter, with operating profit margins expanding 155 basis points. We are pleased with the performance of our recent innovation in 2014. We launched Quaker Express Cups, which provide Quaker instant oatmeal in the convenient on-the-go cup. We also introduced the first of its kind hot cereal, Quaker Warm & Crunchy Granola, which delivers both the wholesome goodness of Quaker oatmeal and the satisfying crunch of multi-grain granola. Finally, we are continuing to build on the success of our Real Medleys platform, this time in a ready-to-eat cereal form. In North American beverages, we are encouraged with the continued progress we are making. In the second quarter and in the first half, we gained U.S. LRB value share and achieved positive net price realization at retail. Notably, PepsiCo has held or gained relative U.S. LRB value share in measured channel versus our closest competitor in each of the last five quarters. In the quarter, we also achieved greater net price realization at retail than our primary competitor and the category overall. Within the LRB category, we held or gained value share across a number of important subcategories, including CSDs, sports drinks, ready-to-drink tea, and chilled juice. We grew retail sales in measured channels in the U.S. for regular CSDs, led by trademark Mountain Dew, which was up mid-single digits, and within our non-carb portfolio for Gatorade, Lipton Tea, Starbucks Coffee, and Naked Juice. In the quarter, PAB grew both organic revenue and core constant currency operating profit, with core operating profit margin expanding by 25 basis points. We're also excited about the progress we're making on the innovation front. In the second quarter, we introduced Pepsi Spire, our state-of-the-art beverage dispensers that allow consumers to create more than 1,000 customized beverages with the touch of a screen while providing our food service partners flexible, cost-effective, reliable equipment that best fits their needs. Pepsi Spire is currently available in select U.S. locations and will continue to roll out through the rest of the year. On May 5, we also brought Mountain Dew Baja Blast to the shelves for a limited time, leveraging on the success that the fountain brand has had at Taco Bell. Mountain Dew Baja Blast is the second largest and fastest growing fountain beverage sold at Taco Bell, and we're now expanding the reach of this fan favorite brand. Concurrent with the launch of Doritos Loaded, we introduced Solar Flare, our tropical punch take on Mountain Dew exclusively at 7-Eleven. We're leveraging the high purchase coincidence of Dew and Doritos with joint advertising, on-shelf communication, and promotions. We are pleased with the performance of our expanded package offerings, with strong double-digit growth in mini cans as well as 12 ounce glass bottles in the second quarter. These new packages have enabled us to realize new price pack revenue benefits while maintaining flexibility for price competitiveness. That's the North American story. Western Europe performed well with organic revenue up 3% in the second quarter in a difficult retail and competitive environment. Turning now to developing and emerging markets. In Mexico, we continue to navigate through the new taxes on certain foods and beverages. As a reminder, we've taken pricing in snacks and our bottler has taken pricing in beverages to pass the taxes through to the consumer. In the quarter in Mexico, our volume decline in snacks moderated sequentially, while beverage volume returned to growth as consumers began to adjust to the higher prices and our system drove beverage share gains through improved marketplace execution. We will be dealing with the tax-driven price increase throughout the year and expect some quarterly volatility to continue, but results so far are in line with our expectations. In Venezuela, we are managing through high inflation, political unrest, supply chain disruptions, and continued uncertainty regarding the applicable exchange rate. Despite all the challenges, our businesses in Venezuela performed very well in the quarter, with revenue up strong double digits across both snacks and beverages. Brazil delivered high single-digit organic revenue growth, led by double-digit organic revenue growth in beverages and high single-digit organic revenue growth in snacks. We did a particularly effective job leveraging our global soccer properties in this market during a time when soccer was very much top of mind. Our integrated campaign featured an impressive roster of the world's premier soccer players and included television advertising as well as digital, out of home, in-store, and point-of-sale marketing. In Russia, organic revenue rose mid-single digits with double-digit growth in snacks and low double-digit growth in beverages. We saw strong organic revenue growth in a number of other East European markets, including high single-digit growth in Turkey and low double-digit growth in Poland. Moving across to AMEA. Organic revenue growth was led by Thailand with strong double-digit organic revenue growth, followed by Egypt and the Philippines, which also grew double digits. China organic revenue grew low double digits, driven by strong growth in our snacks business. The productivity restructuring program initiated by our bottling partner in the first quarter has achieved solid progress. Our partner has taken a well-planned, deliberate approach to execute the program to ensure that our entire system is positioned to capture its full long-term efficiency and effectiveness benefits. We remain committed to the developing and emerging markets as we believe they have a long runway for growth, driven by increasing demand for our convenient, on-trend, affordable products, supported by a rapidly growing middle class. We believe we are well positioned to capitalize on these opportunities. To conclude, we are off to a terrific start in 2014 with the pieces of our complementary portfolio working together to generate healthy top line and bottom line performance as we also step up returns on investment and cash returns to shareholders. Clearly, there are a number of challenges around the globe, but the shape and resilience of our portfolio, combined with strong execution and aggressive productivity, should enable us to navigate successfully through the current environment. Let me now turn the call over to Hugh. 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 earnings per share outlook for 2014. First, for Q2, organic revenue grew 3.6%. On a reported basis, net revenue was up half a point versus year ago, reflecting 3 points of unfavorable FX translation and a slight negative structural impact, primarily from the refranchising of our Vietnam bottling operation. Commodity costs had low single-digit inflation. Our core gross margins improved about 60 basis points and core operating margins rose 10 basis points. Core operating margin rose 65 basis points when excluding the gain from refranchising Vietnam, net of incremental investments from last year. Core constant currency operating profit grew 3% and approximately 6%, excluding the Vietnam gain and investments from last year. Our core effective tax rate was 26.3%, 2 percentage points above Q2 2013. Our fully diluted share count declined 2%, reflecting the benefits of our ongoing share repurchase program. Core constant currency EPS grew 3% and 9% when excluding the Vietnam gain and investments from last year. We returned $4 billion to shareholders in the first half in the form of dividends and share repurchases, which was 46% above year-ago levels and reflective of our commitment to return cash to shareholders. Now turning to guidance. As Indra mentioned, based on the strength of our first half results and our outlook for the balance of the year, we have increased our full year core constant currency EPS growth target to 8%, up from 7% previously. Our other targets remain unchanged. 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 three percentage points and core earnings per share by four 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 2014 core EPS of approximately $4.54. As many of you know, the foreign exchange picture in Venezuela is very dynamic at the moment, with three different exchange rates and the possibility for a converged mechanism. Our second quarter results were translated to U.S. dollars at 6.3 bolivars to the U.S. dollar. Our current FX forecast, which is based on current market consensus rates, assumes a blended rate of approximately nine bolivars to the U.S. dollar for the balance of the year. As you model out the third quarter, I would ask you to consider the following. We expect foreign exchange translation to have an approximate two-point unfavorable impact on both third quarter revenue and third quarter EPS based on current market consensus rates. We do expect to ramp up advertising and marketing expense in the quarter. Below the division operating profit line, net interest expense is expected to increase in the third quarter versus last year, 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 should approximate $3 billion, which is well within our long-term target of less than or equal to 5% of net revenue. We expect to return approximately $8.7 billion to shareholders in 2014, a 35% increase over 2013, through a combination of $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 8% from 7%. We expect to drive improved full year margins and net ROIC. Disciplined capital allocation and returning cash to our 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 one on your touch tone phone at any time. Our first question is coming from John Soche with JP Morgan. Thanks. Good morning. Morning, Indra. I wanted to follow up on the Frito results. From an organic revenue standpoint, it is the weakest quarter you guys have put up in a while. You had some promotional activity or give us a flavor in the year ago period. I guess, can you talk a little bit about what you are seeing in the general environment out there? How much of the weakness quarter was what you saw generally in FDM in Q2? As we look to the back half of the year, you talked about maybe a little bit more new product activity, et cetera. What is the confidence level in terms of Frito volumes and/or organic revenue improving in the back half of the year? Is the promotional environment getting any worse, given some of the weakness in volumes we have seen across the food industry? Thanks. Thank you, John, and thank you for your question. We are not particularly concerned about the Frito-Lay performance. Clearly, the North American retail environment saw an abrupt slowdown in period five, and we were very careful to manage this business responsibly and not hit the promotional lever in order to just drive revenue or volume growth. We also delayed one marketing activity from Q2 to Q3. We are already beginning to see a ramp up in performance. So at this point, based on all the trends we are seeing, the strength of the marketing calendar in the second half, our A&M spending that we are expecting in the second half, the productivity programs, we feel pretty good about Frito-Lay. Our next question comes from the line of Bryan Spillane with Bank of America. Hey, good morning. Morning, Bryan. As we looked at the gross margins for the quarter, can you just parse out for us how much benefit you gotten from gross margins from just pure pricing, and how much of it was maybe just from commodity cost inflation coming down? Just trying to get, I guess, an understanding as we're pacing forward, if there's more momentum here on gross margins. Go ahead, Hugh. Yeah. Good morning, Bryan. Obviously, it was a combination of a couple things, Bryan. Number 1, the commodity inflation environment right now is relatively muted. It was in line with our expectations because of the previously discussed forward buying program that we have for commodities. At this point in the year, we are about 85% bought for 2014. So we are comfortable with what our outlook is on that front. Number 2, without a doubt, particularly in more inflationary countries, we are getting some pricing, and we expect to continue to do that. In businesses where we do not see a lot of inflation, we are not taking a whole lot of pricing. We are taking a bit, but where we have commodity deflation, we do not feel forced to do that. Number 3, I would point out is, the fact that innovation continues to ramp up. It is about 9% of sales. Innovation does allow us to realize net effective pricing. So, without parsing all of the individual pieces, they are all contributors, and I think we expect them all to continue. So I think you are going to continue to see good gross margin improvement. Our next question comes from the line of Ali Dibadj with Bernstein. Hey, guys. Morning, Ali. How are you? Very well, thank you. Wanted to ask a little bit about the sustainability of these clearly good results that we have seen so far. In particular, when you look at each of the segments, Europe is the only segment out of the six where you call out advertising and marketing being up. In fact, a couple times you say lapping of incremental investments. This is now the second quarter in a row where we see kind of a similar narrative. I am trying to get a sense from you guys of what is overall happening to advertising and marketing in the first half of the year, because it seems like it is going down as a percent of sales. Do you view that as sustainable going forward, or do you expect there to be a ramp-up on advertising? As you talk about that, which is the core question on sustainability, if you could throw in a comment about Russia, I think there is some concerns about that. We have heard that from some other companies for sure in your sector and the sustainability there, as well as your Latin America growth being driven by Venezuela and Argentina, where there is a question mark. Advertising is the main question and the other two add-ons, if you could please. Ali, it is a great question. One of the things we have said, and we have been very clear in this, even within our company, is that whatever we have set out as an A&M goal for the year, we will not cut it. We will spend it based on the marketing calendar and to make sure that it is spent properly during the year. We are not going to cut A&M budgets for any year. When we took the big A&M step up in 2012, we made a commitment to ourselves and to you that A&M is something that we will hold as a percentage of sales. We are going to keep that number through the year. You should feel very comfortable that across the company, the number is going to remain at 5.9%. 5.9. Ali, it has not been cut at all. It rises with sales. It hasn't been cut, and that'll stay that number. It'll rise with sales, and it'll stay that way. That's true for every segment. Let's talk about Russia and Latin America, all of the questions. Russia, clearly there are some geopolitical issues. Our business is doing just fine at this moment, but we are basic food and beverage, and the Russian consumer still needs to eat and drink. Except for the FX issues, the business seems to be doing okay. Hugh, I don't know if you want to comment about Venezuela. Yeah. Certainly, the Latin America environment is an inflationary environment. The good news from our perspective is that we do have strong market positions in the snack food business, and our beverage business is doing actually quite well down there right now. As a result, we are able to get the pricing to cover the inflation that we're facing down in that market. As a result, we feel comfortable with the trajectory of the Latin American business. To tie all of that together, Ali, your question around the sustainability of the results, obviously we contemplate the volatile world that we live in. We contemplate what's happening inside of the company. We've made commitments around R&D and A&M and not cutting those things. As a result, we feel comfortable raising the guidance, in spite of all those volatile factors, and that's why we did raise the guidance for the year. Our next question comes from the line of Bill Schmitz with Deutsche Bank. Morning, Bill. Can you guys just take a stab at why you think the categories, especially in the U.S., have been so weak recently? Then maybe, what you think it's going to take to kind of get them accelerating again? Because obviously they're trending way below trend. Bill, I think overall food and beverage has decelerated from years ago. People are consuming differently. I think there's been a trend towards fresh produce, fresh grocery products, more making your food at home as opposed to buying packaged foods and beverages. I think people have also been eating out, so food away from home is doing just a little bit. I think from PepsiCo's perspective, the strength of our brands, the strength of our innovation, strength of the complementarity of the portfolio, and the fact that we have very powerful distribution systems into the retail stores is what's enabling us to be the largest contributor to growth among the 30 largest manufacturers in the U.S. retail environment. I think as long as we keep innovating and leveraging our distribution system and really helping the retailers offset some of their labor costs through our DSD systems and high-velocity categories, we should be able to drive growth. On the food service side, now with the culinary centers, both in beverages and snacks, and all the work we're doing on complementary offerings between snacks and beverages, is beginning to drive a lot of excitement in food service, whether it be Buffalo Wild Wings or 7-Eleven food service or Taco Bell. I think more and more food service customers are coming to us and saying: "What can you do for us to drive traffic and to drive tickets?" It doesn't matter if somebody comes in to buy a product from the C store, can they also be attracted to stop by the food service side and pick up something for immediate consumption? That's really what we're working on, taking a relatively low-growth North American retail environment and positioning ourselves to be the highest growth food and beverage company. That's really our strategy, and I think our portfolio, the fact that we have high-velocity categories, is making us a very valuable partner to retailers all across the country. Our next question comes from the line of Dara Mohsenian with Morgan Stanley. Good morning. Morning, Dara. Clearly, at the corporate level, you realized significant pricing in Q2. It drove most of the organic sales growth. I am just wondering how comfortable you are going forward that that strong pricing can continue given the moderate commodity environment as well as the challenged consumer. Then secondly, Hugh, we have really started to see a turn in the operating margin performance for the company in the last couple of quarters here, if one strips out the Vietnam gain. I was hoping you could also give us an update on the key drivers behind that year-to-date performance and sustainability going forward as we look to the back half. Yeah. In terms of pricing, remember, pricing is, as Hugh mentioned earlier, it is not an across-the-board pricing we just implement. It is done very surgically. Innovation helps us drive pricing. In countries where we believe that inflation is high, we take pricing to cover the inflation to the extent we can. We do a lot of revenue management in order to get pricing. Pricing is something we realize through surgical management of innovation, in-market pricing, revenue management, and very careful execution based on the different channels. For balance of the year, we feel comfortable that we can sustain pricing. Our goal is to focus on value share always, because I think in categories that are slowing down, in particular, a focus just on volume is an unhealthy trend. We are very careful to make sure that we very carefully balance pricing with volume growth and not try to go for volume at all costs. That is what is really allowed us to get good revenue growth and get good pricing realization. Let me turn it to Hugh to talk about the operating margin. Sure, Darragh. Obviously, we saw very good operating margin accretion in Q1, and then in Q2, the number was 65 basis points. I think you will continue to see good operating and margin improvement year over year as we progress through the coming quarters. I do not know that it is going to stay quite at the levels that we have seen in the first two quarters of the year, but I do think you are going to continue to see good operating margin improvement. The big driver behind that, of course, is the $1 billion productivity program that we have put out there. That productivity program directly attacks the $28 billion operating cost structure that we have. As we work through the productivity program, you are seeing it, in fact, flow through to the bottom line, which is why you are seeing good leverage from revenue down to EPS. Our next question comes from the line of Steve Powers with UBS. Morning, Steve. Morning, thanks. I guess maybe on the margin a little bit more. Overseas and really outside of the Americas, you have made good progress on the profit growth and margin expansion this year in Europe especially, a bit less so, though, in AMEA, even adjusting for that Vietnam gain. Can you talk about the puts and takes there in each region, perhaps, if you could, differentiating between progress in snacks versus beverages in each region? Maybe as you do, given that we have seen you refranchise beverage businesses in China, Mexico, and Vietnam recently, what is the likelihood that you might pursue similar efforts in other geographies, whether Western Europe, Russia, or India, where you still hold the bottlers? Thanks. Thanks for your question, Steve. Again, we do not get into the puts and takes by region, but broadly speaking, Europe has been relatively stable. Even though the retail environment is difficult, geopolitically, it has been stable year-over-year. We have put through productivity programs. We have become more efficient in terms of how we run the whole region, and that is why you saw improving margin trends. We have been one of the strong performers from a top-line basis in Europe. Again, the complementarity of our categories is really helping drive traffic and top-line growth at many retailers. I just had a series of top-to-tops with many European retailers, and I must say, looking at the numbers, we have outperformed same-store sales at many of those retailers by a significant factor. So I feel pretty good about the European trends. In the case of AMEA, there are parts of AMEA that are going through significant geopolitical issues. The Middle East has got significant issues. We've had The Hama issue in Saudi Arabia. The reason you're seeing a little bit muted margin trends in AMEA is because we've had to power through those geopolitical issues. Coupled with the fact that, as we mentioned in our script, in China, we are going through the transition of our system into Tingyi, and we want to make sure we don't rush it. We want to make sure we do it responsibly. We want to make sure we do it right, because at the end of the day, we are trying to build a very efficient and an effective system. We're making sure that we work constructively with our bottling partner, Tingyi, to end up with a system that really plays at its strength, which is in almost 1.6 times the size of the next competitor. So that's really why you saw better margin expansion in Europe. In terms of refranchising our business, where we think it makes sense, where we think our partner is stronger, and where we think we have a partner where we refranchise the business to ensure the continued health of the business, we will look at it. But if we believe that refranchising could jeopardize the business, we will not refranchise it. So we look at it on a case-by-case basis. In Vietnam, you saw that we did refranchise the business. Mexico, we did. The business is performing very well. Vietnam. Countries where it makes sense, we do it. So, stay tuned. As we find interesting opportunities, we'll be back to talk to you. Our next question comes from the line of Judy Hong with Goldman Sachs. Thank you. Good morning. Morning, Judy. I just wanted to go back to maybe North America beverages and talk about the pricing environment. Clearly, I think some of the industry participants have become a little bit more rational in terms of the pricing strategy. We're going to start to lap the pretty heavy promotional period you saw a year ago around Labor Day. Just your thoughts on the competitive environment and the pricing outlook in North America CSD. Then secondarily, just thinking about the diet trends, and we're lapping a big decline that you started to see in a year ago period. What are you seeing just in terms of now more consumer perception around the diet portfolio and your efforts to perhaps address that issue? NAB pricing environment is just fine. I think that we have rational pricing, and we've always said we were going to price responsibly, and we've continued doing that, and we're glad the industry is being responsible, too. On the diet trends, you've seen the numbers, Judy. We continue to see declines in diets and this is something that seems to continue. Our next question comes from the line of Amit Sharma with BMO Capital Markets. Hi, good morning, everyone. Morning, Amit. Indra, just wanted to quickly talk about Mexico, especially the beverage performance. Pretty encouraging. Is that in line with expectations that you will see year-over-year growth so soon after the higher tax implementation there? Does this reduce the threat of similar taxation efforts in the U.S. or what you will be modeling if some similar tax is adopted here? On the Mexico beverage performance, I think when we refranchised our business to the combination of Polar and Jayco and created GEPP, that company is performing very well. In market, execution is excellent, and they are doing a very good job. I think the reason we are growing the business is because of superior execution. In the case of taxes in North America, the good news, Amit, is we have a total portfolio of carbonated, non-carbonated, full sugar, low sugar, all kinds of products. From a consumer perspective, if they shift from one category to another, there is always a PepsiCo product they can have for any need state, for any sugar level, for any taste, for any flavor. I think that that is the advantage of the PepsiCo portfolio. Incidentally, they can also pair it with a great snack. We feel good about the complementarity of the portfolio, the breadth of the portfolio in North America. Our goal is to make sure there are no discriminatory taxes, but to work constructively with state governments and other organizations to make sure that whatever is done is done responsibly. Our final question comes from the line of Mark Swartzberg with Stifel Nicolaus. Thanks. Morning, Indra. Morning, Hugh. Morning, Mark. Obviously, you are not going to change the company's view on a breakup in this call, but there are two data items I wanted to ask you about. One is on the corporate unallocated and how it is built up. Do you intend to share that buildup? The second one is on the subject of dis-synergies. It has been a couple years now since you put a number out there. You put the $800 million to $1 billion number out there, talking about separation-related dis-synergies. Is that still a number you abide by? Do you have any plans, if it is a number you abide by, to share that buildup? Mark, I was hoping you would talk about the good quarter. Having said that, corporate unallocated, we have given you the number. We have said that if you look at the total corporate cost, about half of it is compliance cost, which is about the lowest of any company. The other half is either division costs we carry at corporate because we want to manage the volatility. For example, like pension costs or Commodity mark to market. commodity mark to market. The other is a smaller bucket, which is centrally driven capability cost because we want to make sure that we protect those costs and build the capabilities. The numbers we put out remain unchanged. In terms of dis-synergies, there's no reason for those numbers to change. We've spent an incredible amount of time kicking the tires on this, and this is a conservative estimate, and this company is engineered as one. We feel very comfortable about the rigor with which we analyzed the proposals, and we stand by our $800 million to a billion-dollar number. Thank you for the question. Let me close by reiterating that we are pleased with our results for the first half. We are confident that our plans are working and believe we are on track to deliver our financial targets for 2014. I want to thank you all for your time and questions this morning, and more importantly, for the confidence you've placed in us with your investment. Have a wonderful day. Thank you. This concludes today's PepsiCo's second quarter 2014 earnings conference call. You may disconnect your lines at this time, and have a wonderful day.