Highlights From PEP's Q3 Conference Call: Net Revenues Rose 9% on Growing Volumes From Snacks and Beverages

PepsiCo, Inc. (NYSE: PEP) reported Q3 EPS of $1.31, $0.01 better than the analyst estimate of $1.30. Revenue for the quarter came in at $17.6 billion versus the consensus estimate of $17.25 billion. Shares are up 3.36%

Highlights From PEP's Q3 Conference Call:

• (Indra K. Nooyi) We grew global volumes in both snacks and beverages, which combined with strong pricing, drove net revenue growth of 9% excluding Wimm-Bill-Dann.
  
• Our billable nutrition portfolio, which is a subset of our Snacks and Beverage business, grew revenues 8%, excluding acquisitions.
  
• Core division profit was up 6% and core EPS was up 7%. We are encouraged by these volume and revenue gains.
  
• We implemented incremental pricing actions in the quarter as planned and the net pricing and volumes were in line with our expectations.
  
• Global Snacks volume rose 8% and excluding Wimm-Bill-Dann, revenue increased 12% with steady growth coming from our larger, more developed markets and even faster growth in emerging markets.
  
• In our largest Snacks business, Frito-Lay North America, we delivered 4% revenue growth and 6% operating profit growth on a 1% volume gain.
  
• In our growth in our Potato Chips business in particularly is worth a comment. This segment grew net revenue mid-single digits on the strength of our Ruffles Bold Flavor sub line and Lay's Kettle innovation. Lay's Kettle revenue was up over 20% in the quarter and year-to-date, we have outperformed all other kettle competitors in both volume and value share growth.
  
• Turning to International Snacks, we increased snacks volume in eight of our top 10 international snack markets and delivered double-digit revenue growth in 19 of our top 20 snack markets with especially strong performance in the emerging markets. Specifically in the quarter, China snacks volume grew 31%. India grew 26%. Saudi Arabia grew 24%. Egypt was up 15% and Turkey grew 22%. And in Russia excluding the Wimm-Bill-Dann impact, Snack's revenue grew more than 70% over the past two years.
  
• Global Beverages: We delivered 4% volume growth and excluding Wimm-Bill-Dann, 6% revenue growth. We achieved strong net price realization, largely through pricing actions to partially offset commodity inflation. Top line growth was well balanced across markets. We achieved volume and revenue growth in both our developed markets and in emerging markets.
  
• Across many emerging markets we saw double-digit beverage volume gains. Just to mention a few, India grew volume 19%, Turkey grew 16%, Saudi Arabia grew 12%, and in China we delivered double-digit revenue growth and very strong unit growth behind our introduction of a value oriented 500 ML package, which largely replaced our 600 ML offering in that market. In our developed markets as a group also achieved steady volume and revenue growth in beverages.
  
• North America: First, we gained LRB volume share in the United States in the quarter and we remain the LRB share leader in measured channels.
  
• Second, we've largely completed the integration of PBG and PS into PepsiCo. We have achieved synergies above our original targets and ahead of schedule. Importantly, we have not had any disruptions to the business as a result of the integration.
  
• Third, our strategic three stages of Gatorade and Tropicana have shown good results and the performance of these two key trademarks gives us confidence that they are moving in the right direction.
  
• The Trop 50 line grew volume 50% in the quarter. That's on top of that 37% growth we had in the third quarter last year.
  
• Gatorade continues to perform very well with volume up 9% in the quarter lapping 15% growth last year. All elements of the Gatorade plan are continuing to grow.
  
• (Hugh F. Johnston) Core EPS was up 7% in the quarter, reflecting 6% core division operating profit growth and approximately one point of corporate leverage.
  
• Core division operating profit growth was driven by strong top-line growth.
  
• Our third quarter pricing actions were implemented as planned and the elasticities we've observe so far are largely in line with what we'd modeled.
  
• Looking out to the fourth quarter, we've reaffirmed our full-year target for high single-digit core EPS growth on a 52-week U.S. dollar basis. Our outlook for commodities for the balance of the year has not changed since the time we spoke to you on the Q2 call and that's because by mid year we had the full calendar year substantially locked in through our hedging programs.
  
• Currency will not provide the full year benefit we anticipated on the Q2 call given the recent strength of the U.S. dollar and for that reason we've called down our estimate of the full year FX benefit from two points for the full year to one point for the full year.
  
• On share repurchases, we're on track to share purchase target of $2.5 billion for the year with over $1.9 billion in share repurchases completed year-to-date through the third quarter.
  
• (Guidance) Now looking ahead, here's what we will be focusing on for the balance of the year.
  
• First, we're going continue to support our brand building and consumer facing initiatives. With the pricing we've put in the market, it's more important than ever to clearly communicate the value of our brands and to keep our consumers engaged in our products and categories.
  
• Second, we're staying committed to our emerging markets initiatives especially those extending our go-to-market reach and increasing our level of consumer engagement.
  
• Third, we'll continue to carefully balance pricing and value as we manage through commodity inflation. We're doing this through pricing, price pack architecture and providing products that appeal to the broad consumer spectrum from the value conscience through premium seekers.
  
• And finally, we're exhilarating and intensifying our productivity agenda across our entire compressible cost structure. We're reducing packaging cost, energy use, empty miles to name a few.
  
• (Q&A) Can we just talk about Russia a bit. I think you mentioned it was up 70% over the last two years. Can you maybe comment on how Russia's done a bit more recently? And then also with how much you've invested in that market over last year's it sounds like you may have withdrawn some television advertising through the end of the year, so if you could just talk about some of the context on that decision? (A) Look, it's always an absolute pleasure to talk about Russia. As you know, it's one of our largest businesses globally and a market that we really believe has an enormous long-term potential. The fundamentals in Russia are very strong. It's one of the countries that has got, I think, a very robust set of economic indicators, low debt ratios, good foreign exchange reserves and strong and obviously continuous leadership. Nonetheless, it has gone through some short-term challenges as we have seen our commodity inflation and disposable incomes have challenged some of the consumer markets. And also Russia has experienced some of this on local inflation. If you'll all recollect in 2010, they experienced a very hot summer that had a detrimental impact on their agricultural programs. And certainly things like wheat and potato costs and basic commodities went up quite radically in terms of price. But against that backdrop, I have to say we're delighted with the performance of our business. Competitively very strong. We've continued to manage our pricing carefully to protect gross margins and to continue to drive revenue growth. And that's across all of the diverse categories in which we operate. Now clearly, there will be a few more challenging months still ahead in Russia. And this is where scale of your operating business and the strength of your operating businesses really counts. At more than two times the scale of our nearest competitor with this very diverse operating model, across a diverse set of categories. And really, just a tremendous Power of One model, both in terms of the supply chain that we operate across the geography, the strength of our go-to-market systems, both in traditional trade and in organized trade. So, yeah, very strong performance competitively in Russia. Now let me just turn to the comment you made about advertising. I mean, clearly in these type of volatile conditions and in a developing market, one of the key things is to stay agile with where you make your investments. We've continued to make investments in Russia, but we have emphasized now our investments in go-to-market systems in our selling capability. We've expanded significantly the number of routes in 2011. We've put more than 250 new routes to support that very broad-based business. And we continue to invest very strongly in coolers and racks because driving our single-serve business, driving our traditional trade business and having a platform to leverage all of those categories across is critical to our long-term future. So we're pleased both with the short-term performance. We are maintaining investment, but with a slightly different emphasis in the shape of that investment.

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