PepsiCo Inc PEP
Q2 2011 Earnings Call Transcript

In emerging markets, we continue to grow per capita consumption frequency with locally relevant products and by expanding our distribution reach. This is leading to double digit volume growth across a number of markets. In the quarter, India grew 22%, China grew 25%, Turkey grew 24%, Saudi Arabia and Egypt, each grew about 20%, South Africa grew in the high-teens and Brazil grew in double digits.

Now to beverages; the international market performance is very good. We saw volume outside of North America grow 4.5% in the quarter and 5% in the first half on an organic basis, again, with gains across many markets and double-digit growth in key emerging and developing markets. China beverage volume grew 13% in the quarter; India grew 17%, Turkey was up 15%, Saudi Arabia was up 17%, Vietnam was up 11%, France was up 12%, German 15%. At the same time, we are seeing carbonated soft drinks volume and value share gains across a number of these important markets.

This growth is being driven by innovation and the traction we are getting from our brand building initiatives. The growth in key emerging markets like China and Russia is coming directly from the actions we've taken to build out our go-to-market reach and capacity.

We also have good start for the Wimm-Bill-Dann acquisition in Europe. I am pleased with the progress and I am monitoring it very closely. The Wimm-Bill-Dann management team and associates who are now part of PepsiCo are topnotch. The integration is right on track and we are confident we'll achieve the synergies as originally planned and the fundamental operating performance of Wimm-Bill-Dann has been rock solid. So the majority of the portfolio is performing very well.

Now, let me turn to Pepsi Americas beverages and the North American beverage category, in particular. In a difficult category environment, we are encouraged by a number of positives in the business. We are maintaining our focus on Pepsi Max and Sierra Mist with good results. Both Max and Mist grew in the quarter with Max volume more than doubling compared to the prior year. We have terrific programming against brand Pepsi for the remainder of the year, including the current Summer Time is Pepsi Time campaign and later this quarter our sponsorship of The X-Factor kicks into high gear.

Gatorade had another strong quarter of strong growth and the results in the CNG channel. We were benefiting from our move to direct store delivery earlier this year were especially strong.

Trop50 continues to perform very well with volume up 40% supported by the new carafes packaging and expanding the line into new flavors.

Taken together, the positive signs we're seeing in the brands where we innovated and executed strong marketing programs give us confidence that our brand building initiatives are beginning to payoff. However, the operating and financial performance in North America beverages was below our expectations for the quarter. Let me take you through the drivers and address what's going on here. As we knew we would, we had exceptionally high levels of commodity inflation. That said, it's the consumer and competitive picture that's become more difficult than we expected. Consumer category demand was lower than we anticipated because overall retail food traffic and basket sizes have declined and the category pricing environment was tough. These factors led to lower than expected price utilization and a delay in some of our planned pricing actions. As a consequence, our North America operating profit performance for the quarter was impacted. However, our analysis shows that our North American profit growth for the first half compared favorably with that of our primary beverage competitor on a pro forma basis.