Earnings Call: Q3 2012

Oct 17, 2012

Summary

Q3 core EPS was $1.20, with 5% organic revenue growth and results in line with expectations. FY12 core constant-currency EPS was still expected to decline 5%, as investment in brands and productivity continued.

Good morning, and welcome to PepsiCo's third quarter 2012 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, please go ahead. Thank you, operator. With me today are Indra Nooyi, PepsiCo's Chairman and CEO, and Hugh Johnston, PepsiCo's CFO. We will lead off today's call with a review of our third quarter performance and our balance of year outlook, then we will move on to Q&A. In an effort to get through as many analyst questions as possible within the hour, we are doing two things today. First, we have shortened the amount of time for management's prepared remarks. Second, we are going to have a one-question limit so we can hopefully get through the full queue of analyst questions. Before we begin, please take note of our cautionary statement. This conference call includes forward-looking statements, including statements regarding 2012 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 our 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 revenue, EPS, and division and total operating profit growth are on a core basis. In addition, references to organic results in this call exclude the impact of acquisitions and divestitures and foreign exchange translation. To find disclosures and reconciliations of non-GAAP measures that we may use when discussing PepsiCo's financial results, please refer to the glossary and other attachments to this morning's earnings release and to the investor section of PepsiCo's website under the investor presentations tab. Now it is my pleasure to introduce Indra Nooyi. Thank you, Jamie, and good morning everyone. I am pleased to report that we continue to make progress against the plan we shared with you earlier this year. Let me give you the headlines on our progress for the quarter. Our AMEA division had an excellent quarter across the board. Europe delivered solid results with very good pricing. Frito-Lay North America and Latin American foods had good volume growth and net price realization. Within Pepsi Americas Beverages, we gained value share in carbonated beverages while executing a much needed cleanup of unprofitable segments of our non-carbonated portfolio. Across our businesses, we continued our stepped up brand investment programs, heightened focus on innovation, productivity, and execution, and cash returns to you, our shareholders. Our financial results for the quarter were in line with our expectations. Core EPS was $1.20. Our 5% organic revenue growth reflected organic volume growth of 1% and positive price mix of 4%, which helped offset steep commodity inflation. Our organic net revenue growth for the quarter is right in line with our year-to-date performance, and we are on track to deliver the mid-single-digit organic revenue growth target we shared with you at the beginning of the year. Overall, our results for the quarter and year to date, as well as the outlook for the remainder of the year, are right on track. Let me comment on each of our business units, share what is working and what we are pleased with, and what aspects of the businesses we are still making progress on but remain work in process. Frito-Lay North America delivered a strong quarter. We saw 3% organic revenue growth in the quarter, and our brand equity scores continued to strengthen. Our premium products gained share in the quarter, and the increased advertising behind our mainstream products is strengthening our performance. Our value share trends have sequentially improved throughout the year, and Q3 was no exception. As we enter Q4, we are seeing that trend continue. Our Quaker Foods business also had a good quarter. We are gaining share in hot cereal, driven by both increased advertising and breakthrough innovation with Quaker Real Medleys. The oatmeal category is very much on trend, both in the U.S. and globally, and you can expect us to leverage our global groups to take innovation like Real Medleys around the world. Our Latin American foods business delivered strong volume and double-digit organic revenue growth, and we continue to invest in routes and racks to support the robust growth in these markets. In Europe, we had strong performance with organic net revenue up 7% on six points of net price realization, despite a challenging macroeconomic environment. Our performance was a result of both the portfolio strategies that we have executed, including our move to strengthen our presence in the faster-growing Eastern European regions, coupled with good operating execution to capture growth opportunities. Our AMEA performance for the quarter was outstanding, with strong volume growth, double-digit organic revenue growth, and 14% core constant currency operating profit growth. The strong results were across both our snacks and beverages businesses. For example, in India, our snack volume grew 12% and our beverage volume grew 23%. In Pakistan, our snack volume grew 27% and beverage volume grew 25%. Beverage volume grew 34% in Vietnam, 10% in Saudi Arabia, and 7% in the Philippines. In China, the Tingyi integration is substantially complete, and we have seen volume growth accelerating every month since June. The fourth quarter is off to a strong start, with CSD volume up 15% in the month of September. Our North American beverage performance was mixed, some positives, and a few areas that are works in progress. As we look at Q3 performance, keep in mind that we had one fewer trading day due to the timing of Labor Day, which impacted volumes by one percentage point. On the positive side, I am pleased with the discipline we have maintained on pricing. We achieved three points of positive price mix in the quarter. We are pleased with our carbonated soft drink performance. Based on the IRI all channel data, we gained both value and volume share in the quarter. Even with higher pricing at retail, we grew our volume share. Our brand equity scores are strong, and our brand-building investments are working. Our non-carbonated beverage performance in North America was more challenged, driven by three factors. First, we cleaned up our juice portfolio by pulling out of unprofitable juice drinks. Second, we made deliberate decisions not to compete in case pack water at unprofitable pricing levels. Third, Gatorade's performance was off this quarter, which is really a function of competitive pricing actions and an inventory outage at one of our major accounts. Q4 is off to a good start, and we expect the business to be positive for Q4. We are being deliberate about where we're choosing to compete and about maintaining disciplined pricing. Our objective is to grow beverages profitably in North America, and we're making the right decisions for the long-term health of the business. Across PepsiCo, we continue to make good progress on the brand building, innovation, execution, productivity, and cash return initiatives that are key elements of our long-term plan. From a brand perspective, we continue to increase the level of effectiveness of our advertising through our global campaigns by directing more of our spending to consumer-facing media. We are seeing positive results already, but as we've mentioned in the past, these investments typically take a year to fully take hold. We are six to eight months into the program, and I'm pleased with our steady improvement in brand building initiatives. We'll be back to you on the fourth quarter call with another update of the specific brand equity performance, just as we did on the second quarter call. Innovation has been solid across our businesses and was a key driver of our organic net revenue growth in the quarter. Our global beverage, snack, and nutrition groups are having a positive impact. We are making good progress in refresh, reframe, and breakthrough innovation, and that's reflected in the solid top-line growth we've seen over the past few quarters and the fact that our innovation as a percentage of net revenue is now running at approximately 8% of sales. In particular, I am pleased with breakthrough products like Quaker Real Medleys, Pepsi Next, and Gatorade Energy Chews, which have continued to steadily build during the quarter. We're on track to deliver in excess of $1 billion in productivity this year and to deliver our three-year target of $3 billion. We're driving productivity across the entire value chain, across all our businesses, and have a robust pipeline of projects that span from best practice sharing to increased automation to new processing technology, which all give us confidence that we will achieve our three-year target. We continue to execute well. A good example is our activation of our partnership with the NFL. We are building on our 28-year relationship with the NFL, one of the world's most valuable sports properties. We are integrating our execution activities from national advertising to localized packaging, in-store activities, and promotions. The national ties between the NFL and PepsiCo are happening across our portfolio, from Gatorade to Pepsi and Lay's to even Quaker. We're leveraging them both using traditional and social media. At the local level, we're bringing them to life in the marketplace with team-specific packaging and merchandising displays in 22 of 32 team markets. We also have retail store manager incentives and player appearances right through to the stadium with beverage and snack tie-in promotions. In short, the connection between the NFL and PepsiCo is bigger and better than ever and enabling us to convert fans' passion for their teams into passion for our products. We'll cap off the season's partnership with the NFL by having Pepsi as the official sponsor of the Super Bowl halftime show. Just yesterday, we announced that Beyoncé will be the featured artist. It'll be a performance you just don't want to miss. This is just one of the many examples of our sharpened execution and is one of the reasons why we are making steady progress on improving our share results. Finally, we are making progress to drive higher returns on our invested capital and enhance shareholder returns. We're delivering our earnings goals, and we're converting them to stronger cash flow. We've reduced our net capital spending this year by $565 million year to date. We've returned $4.8 billion to shareholders through dividends and share repurchases year to date, a 12% increase over the comparable prior year period, and remain on track to return more than $6 billion for the full year. Overall, in a cautious consumer and retail environment in developed markets and generally strong consumer conditions in the developing and emerging markets, we continue to build our businesses in a fundamentally sound, focused, consistent manner. Our balanced portfolio of fun for you, better for you, and good for you products positions well with consumer trends. Our investments in brand building, innovation, and execution are working well, enhancing both our competitiveness and capability for margin-accretive sustainable growth in the future. To recap, we are pleased with our year-to-date progress in this reinvestment year and are executing well against our plan. Overall, our Q3 and year-to-date results give us confidence that we're on track to deliver our full-year financial targets for 2012. Just as important, our growth is balanced and reflects the successful execution of our strategy. With that, let me turn the call over to Hugh Johnston. Hugh? Great. Thanks, Indra, and good morning, everyone. As Indra mentioned, the quarter came in in line with what we were expecting. Organic net revenue growth increased 5%, while our reported net revenue declined, reflecting the structural changes, including Mexico and China, which reduced the reported number by approximately five points, and by negative currency translation, which was a five-point drag on the reported net revenue. We realized one point of organic volume growth and four points of effective net pricing globally. Core gross margins rose 56 basis points, driven by our effective net pricing and productivity initiatives offsetting commodity inflation. Core division operating margins were down by 13 basis points, reflecting a substantial increase in advertising and marketing investment to grow our brand equity. All in, and in line with expectations, this resulted in a 3% decline in core division operating profit on a constant currency basis and a 6% decline in core division operating profit on a USD basis, reflecting a nearly 3-point drag from currency. Core corporate unallocated expenses increased in the quarter, reflecting higher pension-related costs and a deferred compensation charge that was offset by a corresponding credit reflected in net interest expense. Net interest expense was $181 million for the quarter, a decrease of approximately $28 million over Q3 of 2011. The impact of higher debt balances was more than offset by lapping a debt tender premium included in the prior year and by the deferred compensation hedge credit I just mentioned. Our core tax rate for the quarter was 26.3%, which is 90 basis points higher than the rate in Q3 of 2011. Finally, our fully diluted share count was down 2% in the quarter compared to the prior year period, reflecting the impact of our share repurchase program. So in total, below-the-line items, mainly pension-related expenses we record at the corporate level and a higher tax rate offset somewhat by the benefit of reduced share count, drove about 1 point of deleverage from our core constant currency division operating profit decline of 3% to our core constant currency EPS decline of 4%. Turning to our outlook. From an earnings perspective, consistent with our previous outlook and what we've been saying since February, we expect our core constant currency EPS to decline 5% for the year. We're on target to increase our investment in advertising and marketing to 5.7% of revenue this year, an increase of 50 basis points over our investment level last year. Now, I realize that EPS for the first three quarters came in a bit ahead of consensus estimate, but you should not flow that through to the bottom line as you update your full-year models. Our intention is to reinvest any upside into the business to support and accelerate our brand building, innovation, and productivity initiatives. Based on current ForEx market consensus, currency translation would have approximately 3 points unfavorable impact on our full-year core EPS, and we expect the core tax rate to be approximately 27% for the full year. As you update your models for the fourth quarter, you should be mindful of a few items in particular. The impact of structural changes will have an approximate 2.5 point negative impact on revenue. ForEx is expected to have an approximate 1 point negative impact on revenue and operating profit. We anticipate both commodity inflation and price realization to moderate somewhat in the fourth quarter from the level we saw in Q3. We're lapping several divestiture gains from Q4 of 2011, most notably the sales of several unrelated businesses within QFNA and LAF and the sale of our interest in a bottler in AMEA. Corporate unallocated expenses in Q4 are expected to be higher than in Q3 due to the fact that Q4 is a longer reported period, so we have four additional weeks of cost in the fourth quarter as compared to the third quarter. Net interest expense is expected to be higher year-on-year in Q4, given higher debt balances and higher rates. From a cash flow standpoint, year-to-date reported cash generated by operating activities was $5.1 billion, which includes a $1 billion discretionary pension and retiree medical contribution that we made in Q1. Reflecting our capital spending productivity initiatives, net CapEx is down $565 million year to date and down more than 120 basis points as a percentage of revenue on a rolling four quarters basis. In addition, our operating working capital also improved year to date, with net working capital on receivables, inventory, prepaid expenses, and payables improving by $685 million year on year. Our management operating cash flow, excluding certain items, improved by $670 million to $4.9 billion year to date. For the full year, we expect to generate more than $6 billion in management operating cash flow, excluding certain items, and return more than $6 billion in dividends and share repurchases. Net, the quarter came in where we expected, the pricing picture and volumes overall were positive, and our outlook for the year for earnings, cash flow, and cash returns is completely consistent with what we've shared previously with you. Operator, we'll 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 touchtone phone. Our first question is coming from Bryan Spillane of Bank of America. Hi, good morning. Morning, Brian. Just a question on America's beverages. Just want to understand the drag that you saw in the quarter in the non-car portfolio relative to the inventory outage, I guess, on Gatorade, and also culling some SKUs. Does that also continue into the fourth quarter in 2013, or is that just a 3Q effect? It's a 3Q effect. Your next question comes from the line of Dara Mohsenian with Morgan Stanley. Good morning. Morning, Dara. I was hoping for more detail on your progress so far with the Tingyi alliance, and specifically, I am curious for how much progress you have made in terms of expanded distribution so far, and how distribution expansion plays out going forward over the next few quarters. The Tingyi deal was closed in the early part of second quarter. And through June, July, and August, we went through the integration process. And starting June, July, we started seeing the volumes pick up because the integration activities were completed. And in September, we actually saw the CSD volumes grow 15%. Now, September is the first month in Q4, so it is not in the Q3 numbers. We have not yet started to reap the benefits of the increased Tingyi manufacturing footprint because we have not yet put the Cola lines in the new Tingyi plants. So the benefits we are seeing now is just the benefits from our own brand equity and our focus back on the business now that the integration activities are over. On a reported number, you saw volumes in AMEA up significantly, that is because some of the juice volume that we have transitioned to Tingyi and everything got rebranded as Tropicana. You will start seeing an acceleration of our non-carbonated beverage business starting Q4 and going into 2013. As we have mentioned before, the alliance between PepsiCo and Tingyi creates the largest beverage company in China with a 1.5 to 1.6 relative market share versus the next largest competitor. Between us, we will basically cover the entire country and have over 70 plants between the two of us in China. I think going into 2013 and forward, this business is going to look very, very good. Your next question comes from the line of John Faucher with J.P. Morgan. Yeah, good morning. Thank you. I just want to ask about Frito. As we look at this, you are getting a little bit of volume growth, a little bit of positive price mix. From what we can tell from the scanner data, you are losing a little bit of share within the category. Can you talk about what you are willing to do in terms of going after the higher end and in terms of getting the shares up? How much do you view Frito as, "Look, we will take the top line and the share growth is less important," or do you feel like you need to fight back a little bit more aggressively to stem some of the share declines? Can you also comment on shares in C&G relative to shares in large format? John, I am just going to give you some overall comments and then toss it to Brian Cornell, who is here. Frito-Lay, as we mentioned in the script, we are seeing sequential improvement in shares, Q2, Q3, and in Q4, we are actually in the positive territory, so we feel very, very good about it. Second, we talked about the premium business, the value business, and the mainstream business. The good news is in premium, we are now gaining share. Mainstream, the share is stabilized and now getting into positive territory. We want to make sure we crack the code on the value business in a responsible way without diluting anything we are doing in the mainstream business. We are focused on share. We do not intend to lose share on a consistent basis. We are the category, so we are looking at ways that we can keep the share progression and remain in the positive territory. Let me turn to Brian to give you a little bit more color on Frito-Lay and also talk about the convenience trends. Sure. Well, John, as Indra mentioned, we really felt like Tom and the team delivered very strong results in the third quarter. That team is focused on balancing both profit volume and growing share. I think some of the investments we've made in the first half of the year really started to pay dividends in the third quarter. Our investments in brand, in innovation, our continued focus in execution delivered 1% pound growth. We saw that translate to 3% in revenue. Despite a 41% increase in our advertising expenditures, we grow our NOVA by 1%. We're starting to see that deliver stability in share. As I look at our share over the balance of the year, we expect to see sequential improvement continue. We were very pleased with our share performance at P10, both from a value standpoint, but importantly from a volume standpoint. That increased pound growth is turning into an increase in our overall volume share. We feel like we're on the right track. We've taken a very disciplined approach at Frito. We got our pricing in the first half of the year, but we're now seeing pound growth, revenues increase, and stability and share improvement from a volume standpoint. I really feel like we're on track at Frito, and we expect to see sequential improvement in the fourth quarter. John, you also asked about some of the overall trends. Before I just jump into C&G, why don't I just give you a general sense for the food and beverage landscape in the third quarter. Overall, we did see food and beverage trends soften in Q3. If you remember the second quarter report, as we started to talk about these new MULO+C results, the overall food and beverage growth was 3.9% in the second quarter. That softened to a growth rate of 2.4% in Q3. That was largely driven by soft trends in grocery. We did see grocery soften to only a 50 basis point growth rate in the third quarter. That was down from growth of 1.4% in Q2. C-store continues to outperform the overall food and beverage trends. Again, in the third quarter, C&G was up 4%, so continuing to outperform the overall food and beverage trends. As Indra mentioned, we continue to see big growth in that value segment, and dollar continues to drive very strong growth. It was up 16.1% in the second quarter and actually increased its growth rate in Q3 to 18.3%. Overall at Frito, we feel like we are on the right track. We are looking to balance our focus between maintaining and growing our position in the mainstream. Indra mentioned we have been focused on accelerating our performance in premium, and in a category that grew 16%, our performance in premium was up 17%. We are building share in those important categories, and we are focused on our portfolio performance in the value segment. Overall for Frito, a very solid third quarter. We feel like we are building sequential performance as we go into Q4, and we are balancing that with the changing retail landscape. Your next question comes from the line of Kaumil Gajrawala with UBS. Hi. If I can ask also about China and maybe a two-part question. The first is if you would like to give just some context on what you are seeing from a macro perspective. Then second, your results are quite different from what we are seeing with some other companies in the region. Can you talk maybe about the sustainability of the strength you are seeing in China? Then maybe, was there anything that was short-term, maybe incremental distribution or anything in 3Q that may not continue forward in the next year or so? Kamel, I am going to start with the last question you asked and then work my way backwards. First, there was nothing in Q3 that was a result of increased distribution because we have not even begun to reap the benefits of the increased distribution that, as I said earlier, will come in the first quarter of 2013 and forward. What you are seeing is just the strength of the brand and our innovation in China. That is the first observation. Second, both our snacks and beverage businesses are growing very nicely. The snacks business was always growing well. The beverage business for a quarter or two went through its transition pains, but we are through with that and the business is back to growth. We feel good about our China business overall. Being in partnership with Tingyi has really strengthened our franchise massively and given us instant access to the whole country. Once we've put the right manufacturing lines in Tingyi's plants, remember, we only had about 20 plants in China. Tingyi's got over 50 plants. The combination gives us complete coverage of China. The combination, when once we put the Cola lines in Tingyi plants, is going to give us a real boost in the coverage in China. Let's talk about the macros in China. I've been there three times this year, Kaumil, and I'm back in China next week. If you are on the ground in China, you don't really sense the slowdown. GDP slows down from 9 or 10 to 7 or 8%. From a country's perspective, when you're trying to get more and more people out of unemployment into employment and when trying to address underemployment, it matters a lot. But from a consumer product perspective, especially on small ticket items, which are very basic food and beverage products, you don't really see the impact in our categories. In every city that I've been in China, and I've crisscrossed the country, there is buoyancy. There is a certain optimism in the country. Of course, everybody would like the growth to go back to 9 or 10 in China, but at 7.8%, I still think China's performing at the peak of its game versus all of the other countries in the region or in the world today. Macro is a bit slow, but certainly not impacting our categories at this point. Your next question comes from the line of Judy Hong with Goldman Sachs. Thanks. Good morning. Morning, Judy. Indra, I just wanted to go back to the Frito question. Pricing has also moderated. When we hear you say you're on track with Frito, I'm just wondering what kind of organic revenue and profit growth that is really realistic for this business to deliver in more normalized inflationary environment. Is it sort of 3% revenue, 5% kind of profit growth, or can we get back to mid-single digit, 6%, 8% kind of profit growth that we saw in prior years? What is really needed to get Frito to that position? Judy, Hugh's going to take this question, and then Brian, you can chip in with any additional comments you might have. Yeah. Judy, why don't I start on the questions you're asking specifically about Frito's algorithm going forward. As we've talked about in the past, we don't share division-specific algorithms. We think we wind up getting into a level of conversation that frankly isn't productive for everyone as we get to quarters. That said, in general, I think you can expect to see, as commodities normalize, you can expect to see Frito go back to a more normal type of an algorithm. Obviously, it's been more price-driven as we've seen exceptional commodity inflation. As we see commodities normalize, as the business both does well in mainstream and continues to gain share in the premium segment, you can expect to see an algorithm that's a little bit closer to what we've traditionally delivered in the past in Frito-Lay. Brian, I don't know if you want to add any color to that. Yeah. I think you've captured it. I think as we go forward, you're going to continue to see us take a very balanced approach. We recognize the importance of growing pounds. We want to continue to make sure we're managing pricing appropriately, and we think that'll yield, through our productivity initiatives, expansion of our NOBUT margins. As we go forward, you'll continue to see our strategy focused on building our mainstream portfolio. Our investments in brand and innovation are going to continue to solidify that position. We believe we can accelerate our position in premium. You're seeing that take place today, and we're very pleased with the performance of brands like Stacy's as we move into the fourth quarter. We'll continue to make sure that we participate appropriately in the value segment. We're going to stay very focused on executing that agenda, continue to invest in our brands, in innovation, making sure that our execution continues to improve at the point of purchase. It's a company that's very focused on its productivity initiatives. A very consistent strategy as we go forward. Your next question comes from the line of William Schmitz with Deutsche Bank. Good morning. Morning, Bill. Morning, Bill. Hey, can you just give us an outlook on Pepsi Americas Beverages, when you think volume growth is going to resume? I mean, will it be as easy as when the pricing starts to lap, volumes should come back, or has there been a change in some of the elasticity curves? Can you just tell us what Gatorade grew in the quarter? Yeah. Bill, why don't I start, and then Al is here with me, and he can add a bit as well. In terms of determining when volume growth is going to resume, again, we're getting back to sort of division-specific guidance, which is a place that we really don't want to get into on a broad-scale basis. I do think that we look at the volumes, we look at our portfolio. As commodities normalize, we think the category still overall, LRB probably has a little bit of growth in it. In terms of our portfolio, there's no reason that we wouldn't be able to hold share in that environment. A lot of the question of when is going to be driven by commodities and what happens there. But I do think that we think the category has got a little bit of volume growth in it, and I think our portfolio positions us well to hold share within the category. I should add another thing, Hugh, in that we've always said we want to grow this beverage business profitably. Right. This year was a big reinvestment year. We invested significantly, and there was commodity inflation. Going into next year, we want to play this game in North American beverages very responsibly and make sure we're generating profit growth. It's important we don't chase unprofitable businesses or unprofitable categories. For example, bottled water. There was a hell of a price war going on in bottled water. So we chose not to play in the unprofitable segments of bottled water. We did a real portfolio scrub, and we said, "Hey, terribly unprofitable businesses," which were chased many years ago for the sake of volume share, which everybody was maniacally focused on as opposed to responsible volume share, we got out of. Very painful decisions, but we got out of that. Gatorade was down high single digits in the quarter. I would say a bulk of that was an inventory problem at a certain customer. As we go into Q4, we are already in the positive territory. Again, what we want to make sure on Gatorade is that we don't make the mistakes that we made in the 2004, 2005, 2006 time frame, where we grew it as a general hydration product as opposed to a sports nutrition product. Because if we go back to that strategy of just selling it as every man's hydration and just another beverage, we are again renting volume. We've been there, done that. So we want to make sure we're going after the active thirst occasion, going after the athlete, sustaining our pricing, and then flanking our core Gatorade product with innovation. So that's the strategy we're going to pursue in Gatorade, and we're going to focus on the overall beverage portfolio going into 2013 as opposed to looking at one category or the other. The good news is we started with carbonated soft drinks. It's going well. We are holding volume share and value share. So we're feeling good about that. And now we'll start working the other parts of the portfolio. Did you want to add anything? I'll just add just a quick thing. Our overall Pepsi-Cola business, our overall beverage business on our bottling system, our company-owned as well as our franchise bottling system, was actually right in line with Q2. And our CSD trends are actually better with an improved share. Now, the Gatorade business was the big drag on our non-carb business in Q3. Some of that we knew was going to happen because we were lapping a time when we put DSD Gatorade out on our route trucks in the drug and the dollar channel, so we ended up having to lap that business, and we knew that would probably happen. But we also chose to not participate in some deep discounts that we had on Gatorade from a year ago. And while it was painful, this is a year we're trying to clean up that portfolio, where we're not renting share and getting into promotions that we really can't sustain the volume. So right after the summer was over with, our Gatorade business has moved back to a growth territory. And the way we think about Gatorade right now is it can grow through three steps. One is what I call solid hybrid EDV pricing, where we're competitive, but we're reasonable on the shelf every day. The second thing is advertising that's effective, and I think if you look at this RG3 advertising that's being played out on a lot of the NFL shows and also on the baseball playoffs, that's the kind of advertising that works for Gatorade. We're getting very good consumer response from it. And then finally, product news, and these new chews are doing a terrific job, but they're small. We have plans next year for improved product news on the base Gatorade business that I think will add some growth. So all in all, it was a short-term blip for Gatorade, and I expect that that business will be solid for the balance of the year. Your next question comes from the line of Ali Dibadj with Bernstein. Hey, guys. Morning, Ali. Morning. I have one quick clarification on the core question. Just a quick clarification, is in terms of the stuff you pulled out, in terms of cleaning up the juice and not playing in water, why that's just a Q3 effect versus going forward. But the core question is, if you take all of the explanations at face value from a PAB volume perspective in this quarter or even FLNA and how you're thinking about that, and you translate that forward, do you think you're going to have to invest more in this category to get the results you're getting now? Or do you think you're at the right level of investment for the types of growth you're seeing in those categories, underlying, taking away all these outages on inventory and all that sort of stuff? Ali, our belief is that we are investing at the right amount in this business. What we talked about is stepping up our advertising from 5.2% to 5.7% this year, and then we said over the next three years, we're going to increase that steadily. At this point, we feel good about where we are. The other thing we're doing is, advertising money that sat with our bottling partners, our joint venture partners, we're making sure that's also being deployed the right way, and that's not even included in the 5.7% numbers. I think taken together, all the marketplace investment that we have in the marketplace today, the fact that we're shifting more non-working media to working media, and that we're focusing our portfolio down to 12 muscular brands, I think all of that is really driving results for the business, and we feel good about the progress. Now, all of this is for naught if we don't back it up with good innovation. Our global groups are focused on innovation and not just rifle shot innovation, more platform innovation and focusing on refresh, reframe, and breakthrough. I think this sort of a deliberate focus on innovation, deliberate focus on execution and brand building, is beginning to yield results. What we have to make sure is that we don't chase, or we don't try to chase volume growth at all costs. I think historically, the strategy has been for many people in this industry to go after volume growth at all costs. So bottled water was fair game. Going after value snacks without regard to responsible portfolio management was sort of the right thing to do for the segment, for the category. I think going forward, especially large companies like ours, branded companies like ours, we have to think through carefully which parts of the portfolio we actually add value. That's why I think we are playing a much more focused, deliberate, and differential game going forward. Your next question comes from the line of Mark Swartzberg with Stifel Nicolaus. Thanks. Good morning. Morning, Mark. To continue the conversation on America's beverage, could you give us the actual numbers for carb and non-carb in North America? Then more qualitative perhaps for you, Al, still on track for your plans to decrease promotions around key holidays and using the fourth quarter to kind of lay the structural foundation for that for next year? Yeah, Mark, this is Hugh. The numbers on sparkling and on non-carbs. Sparkling was down 2, but as we talked about, we do have a timing difference in terms of the quarter. In terms of the impact on that, when you work your way through that timing difference, the down 2 is closer to flat once you sort of take out that trading day piece. So we think on carbonated, we were basically in line with primary competition. Non-carbonated was down 7, which is obviously a much deeper number, and the reasons were exactly the ones that Indra shared earlier. Number one, we made some changes in terms of some unprofitable juice drink businesses that we had. Number two was there were some pretty aggressive case pack water deals out there that we chose not to participate in. And then number three was the Gatorade issue that we've been talking about. Going forward, the Gatorade issue is behind us. As Al's referenced, we're back to growth in the fourth quarter. In terms of the unprofitable juice, I think we're largely past that now at this point. That overlap is also largely behind us. Case pack water, as Indra mentioned, our stance is going to be consistent on that. We're not interested in chasing unprofitable case pack water deals. So given all of that, we'd certainly expect to see the non-carb numbers pick up on a go-forward basis, and that's how we're thinking about it. Mark, the other part of your question was about the tremendous amount of volume done on promotion in the category. It's not just us. I think it's the overall category. The answer is, we're moving to what I call a hybrid EDV pricing strategy. It's a tricky thing to implement, so you can't do it overnight. But I think towards the end of the fourth quarter, you'll see more of that, and certainly in 2013. That'll benefit, we believe, pricing flow through within the PepsiCo P&L. We think it's the right strategy. Your next question comes from the line of Caroline Levy with CLSA. Good morning, everybody. Morning, Caroline. Good morning. A couple of questions. Thank you for sharing insights on China. It is very helpful. I am actually going to ask about your thinking in North America Beverages. First, I think you had said that you will examine all underperforming assets, and you have done that with Mexico, done it with China very successfully. Can you update us, Indra Nooyi, on your thinking on North American bottling, ROIC, et cetera? Separately, energy drinks are taking market share in CSDs, and they seem to be, to some degree, the drink of the youth today. What is your position on energy drinks? On energy drinks, I think, the way we would like to play the energy drinks is in a more responsible way. Maybe I should use that word. We have some interesting launches that we have next year on the cards, which plays it in a way that is consistent with our product portfolio and consistent with where we think consumers want to go with energy. I think, there is a right strategy for energy, and you will see some of those launches coming into the marketplace next year. There is no question energy drinks took share from mainstream players, but I think that is not a strategy that any of the big companies could have deployed and been successful at. We are going to take a more responsible and a disciplined approach in energy drinks going into next year. Let us talk about our thinking on North American beverages. What we told you earlier this year was that in North American beverages, we were going to improve our execution significantly. We were going to invest behind brand building. It was going to take a year or 18 months to start to see the results, and we are very steadily executing on the game plan that we outlined for you in the early part of February. Meanwhile, we also have seen some interesting results come up from our technology investments. Our hope is that by this time next year, we should start seeing the benefits of a lot of the technology bets we placed, whether it is natural sweeteners, enhancers, whatever, that will allow us to go in and create real differentiation in our product portfolio, especially in carbonated soft drinks, so that we can actually offer to the consumers in 2014 and beyond, a product portfolio that consumers love. They love bubbles, they love the caffeine, they love cola taste, but addresses any barrier that might exist in the areas of sugar in the portfolio or artificial sweeteners. We are optimistic about the results of our R&D investments, and we are hopeful that towards the end of 2013, early 2014 and beyond, we can actually launch differentiated innovation in some of our core categories. Our North American beverage business, our reinvestment activities, our turnaround activities are all on track. We will keep giving you updates every quarter, but believe me, we look at everything about this business, and we look at improving the returns of the company on an ongoing basis. Indra, if I can add one more comment to that. Just going back to the energy drink question, I want to take one thing off the table very explicitly. We do not have a strategy or an intention to deploy significant M&A capital into the energy drink category. Absolutely. I want to make sure we are crystal clear on that so that it is well understood by all. Your next question comes from the line of Jonathan Feeney with Janney Capital. Good morning. Thank you. Morning, Jonathan. Indra, I thought it was interesting on the AMEA business, not only the great volume performance, but really the margin performance. I wonder if you take a step back and you talked about China, is there an opportunity over time to raise the margin of that business, through positive price mix, over time? I think we are trained to thinking about emerging markets businesses as lower gross margin. I think that is true in most cases. But have we hit an inflection point at China or other major emerging markets where your volumes are good enough, the consumer healthy enough that you can really start to up margin those markets over the next couple of years? I think overall, AMEA, our Middle East business is very strong. Great volume growth, revenue growth, margin growth, margin expansion, profit growth, no issues. I think markets like South Asia, you get tremendous volume growth, you get revenue growth, but we're also investing heavily because the market is growing 15%-20%. We have to put in tremendous investment to keep the growth going. The good news is once the growth starts moderating, and I hope it takes many years before it moderates, the business starts to yield very, very attractive returns. But in the short term, we have to keep growing the business through investments, both P&L and on the balance sheet. In China, absolutely, once the Tingyi deal is up and running, which we hope will be going into 2014 and beyond, you should start seeing margins in the beverage business improve. But again, we want to reinvest that back in the snacks business and keep growing the overall portfolio. So basically what we are focused on is PepsiCo as an overall portfolio. AMEA will always be a big growth engine. We will always keep investing in AMEA. The slow growth markets will be the source of investment for areas like AMEA. Taken together, this portfolio should be able to deliver for PepsiCo along the lines that we talked about. Your next question comes from the line of Lauren Torres with HSBC. Good morning. Morning, Lauren. Morning. It's been great to hear that you've been able to confirm and I guess, reaffirm guidance for this year throughout the year. But as most of us are thinking about next year, Indra, I was curious to get your confidence level, if you think we could return to your long-term growth goals in 2013. I'm going to have Hugh talk to that. Hugh? Hi, Lauren. We'll talk about 2013, specifically in February. We've given long-term guidance to give you an indication as to how you should model out multiple years. But with the world as volatile as it is, we think just as a practice, the right answer is to give guidance in February as we do our Q4 call. So, no indications, positive, negative, or otherwise, in terms of 2013. We'll get to that in the course of a couple of months. Your final question comes from the line of Damian Witkowski with Gabelli & Company. Good morning. Morning. As we're 6 to 8 months into the incremental advertising spend here in the U.S., just curious, how do you measure its effectiveness? Is there a way of measuring shorter term versus just looking at it from a long-term perspective? Then, any media that's performing better than the other, whether it's for beverages or snacks, that's sort of standing out? We did talk about the fact that we are going to be measuring brand equity, especially of the 12 big brands that we outlined in our February meeting. We're doing two things. We're looking at what we're doing in process, and then we're looking at sort of tailpipe metrics. In process, we're looking to make sure that we are shifting more non-working media to working media, and then we're also making sure we are investing more in the 12 brands and slowly start to cull the tail. So we are making progress on that, and we track that almost on a monthly basis. From a tailpipe metric, it's brand equity. Now, typically, brand equity scores take 12, 18 months to really show improvement, sustained improvement. Interestingly, as we shared with you in our Q2 scorecard, and we're going to show you again, the next scorecard in Q4 as part of our Q4 call, we are beginning to see improvement across most of the brand portfolio. The programs we have in place, the additional investment, and the fact that we're doing a 360-degree activation, not just spending money on television advertising, but in the digital world, executing better, doing the right promotions, all of that, we are seeing is beginning to drive the brand equity scores in the positive territory. Let me make sure we all understand. Our brand equity scores for these 12 brands is already pretty high. We wanted to make sure that we continue to hold it or increase it in an advertising environment that was extremely cluttered. I think the efforts that we're undertaking, we're already beginning to see some results, which is very comforting to see. I think as the quarters go on, you'll see even more benefit, and that'll then translate to higher value share. We are watching this virtuous circle very carefully and making adjustments as we go along. It's happening both in beverages and snacks and our nutrition products, and it's across all 12 brands. With that, let me just say in closing, Q3 marked good progress against a clear, focused plan. As we said earlier, our AMEA region had an excellent quarter across the board. Europe delivered solid results behind good pricing and marketplace execution. Americas Foods had good volume growth and net price realization. Share trends in Frito-Lay North America are encouraging. North American beverages, we gained value share in carbonated beverages while executing a cleanup of unprofitable segments of our non-carbonated beverage portfolio. Our stepped-up brand-building investments are beginning to pay off. Innovation performance is improving. We are executing in a disciplined way in the marketplace. We are on track to deliver our productivity commitment and on our cash returns to you, our shareholders. In short, we are executing with great focus to drive results and do what's right for the short-term, medium-term, and long-term health of the business. With that, let me just say thank you to all of you for joining us and for the confidence you've placed in us with your investment. Have a good day. Thank you. This concludes today's PepsiCo's third quarter 2012 earnings conference call