Good morning and welcome to PepsiCo’s year-end 2013 earnings conference call. [Operator instructions.] It is now my pleasure to introduce Mr. Jamie Caulfield, Senior Vice President of Investor Relations. Mr. Caulfield, you may begin.

Thanks, operator. With me today are Indra Nooyi, PepsiCo’s Chairman and CEO, and Hugh Johnston, PepsiCo’s CFO. We’ll lead off today’s call with a review of our 2013 performance and 2014 outlook, and then we’ll move on to Q&A. In an effort to get to as many analyst questions as possible within the hour, we’re going to have a one-question limit, so we should be able to get through the full queue of analysts when we get to the Q&A. Before we begin, please take note of our cautionary statement. This conference call includes forward-looking statements, including statements regarding 2014 guidance and our long-term targets, based on currently available information. Forward-looking statements inherently involve risks and uncertainties that could cause our actual results to differ materially from those predicted in such forward-looking statements. Statements made on this conference call should be considered together with cautionary statements and other information contained in today’s earnings release and in our most recent periodic reports filed with the SEC. Unless otherwise indicated all references to EPS and operating profit growth are on a core basis. In addition, references to organic revenue results in this call exclude the impact of acquisitions and divestitures, structural changes, and foreign exchange translation. To find disclosures and reconciliations of non-GAAP measures that we 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 Investors section of PepsiCo’s website under the Events & Presentations tab. . Now, it’s my pleasure to introduce Indra Nooyi.

Thank you, Jamie and good morning everyone, and thank you very much for joining us this morning. As we close our 2013 and look ahead to 2014 and beyond, we have a few key themes we’d like to share with you. Through a multiyear process, we’ve largely transformed PepsiCo for sustained performance. We are executing on our plan to deliver on our stated goals. This execution has enabled us to deliver and in many cases exceed all of our financial goals in 2013. Our portfolio is complementary and our geographic and product portfolio positions us well for sustainable growth. We believe that our portfolio, as currently constructed, positions us to maximize value creation. As a result, we are not making significant structural changes, including to North American Beverages. We are extending our $1 billion annual productivity savings target through 2019. Our 2014 guidance is in line with our long term financial targets, and the actions that we’re taking to execute our strategy provide us further confidence in the long term durability of these targets. Consistent with our commitment to disciplined capital allocation, we’re increasing our cash returns to shareholders by 35% in 2014, significantly stepping up both our dividends and share repurchases to a total of $8.7 billion while maintaining appropriate capital investment in the business. Finally, and most importantly, our recently completed [all health] survey tells us that our associates are motivated, engaged, and positive about being part of, and the future of, PepsiCo. So let me walk you through each of these themes. As you know, over the past few years, we’ve had to address a number of macro trends that have reshaped and will continue to shape our industry. We made the required investments and changes to preemptively transform ourselves to capitalize on the opportunities these shifts…

Thank you, Indra, and good morning, everyone. Let me spend a few minutes discussing our outlook for 2014, which is in line with our long term objectives. We expect another year of mid-single digit organic revenue growth. We expect operating margin expansion as top line growth and productivity should offset negative geographic mix and cost inflation. Below the division operating profit line, we expect corporate cost efficiency and approximately 25% core tax rate and a reduced share count. All-in, we expect core constant currency EPS growth of 7%. Foreign exchange is expected to impact revenue and core earnings per share by approximately 3% and 4% respectively, based on current market consensus rates. Taking our 2013 core EPS of $4.37 and applying our guidance implies a 2014 core EPS of approximately $4.50. Our outlook appropriately factors in both tailwinds and headwinds. To the positive, we expect to generate over $1 billion of productivity savings in 2014, which will offset operating cost inflation. We feel very good about our innovation agenda, which should enable us to sustain our organic revenue growth rate. Our share count will benefit from stepped up share repurchases, although we won’t recognize the full benefit of the 2014 purchases within 2014 as they’ll be made throughout the year with some of the share count reduction falling into 2015. Our tax rate will be lower, and is estimated to come in for the full year at approximately 25%, which we expect to be able to sustain for the foreseeable future. And we will realize a modest benefit from pension expense, due to a higher discount rate. In terms of headwinds, the food and beverage taxes enacted in Mexico will impact both top line growth and profitability. The rate of our commodity cost inflation will be higher in 2014 than…

[Operator instructions.] Our first question is coming from Dara Mohsenian from Morgan Stanley.

On the NA beverage side, it sounds like the decision to not pursue structural options is more of a permanent one, as opposed to a decision just for now, given the current environment. That could change down the road. Is that the right way to think about the decision? And then also can you give us more insight on how you expect to turn around trends in NA beverages going forward in its current state, given you’re not making structural changes and we’re still seeing weakness here in the market share trends and profitability?

Let’s start off with the performance in 2013. It’s very important to put NAB in context. If you look at measured channel performance, because that’s where we are not disadvantaged, because in the past, clearly in food service we were disadvantaged. In [unintelligible], which is measured channels, we actually held value share versus our primary competitor in 2013. So we feel very good about that. This is focus on value share. We’ve got price realization. We’ve played the game very responsibly, which is what you do when categories are going through the volatility that LRB was going through. And importantly, in many subsegments of the LRB business, we gained share. And even within CSDs, products like Mountain Dew did exceedingly well. So I’d say that the core metrics on LRB performance are trending upwards. On food service, which is, as you know, a good size of the market, these are long term contracts, and you’ve got to enter those markets very, very carefully. And where we did bid on food service accounts, we did win them. And so we feel good about the fact that our integrated portfolio of snacks and beverages is now giving us some wins, and I think this has term run rate for growth, and we feel good about that too. So park that core performance aside. Let me now talk about our decision. We studied North American beverages and beverages in total in our portfolio exhaustively. We spent a whole year looking at this, and there isn’t a stone that we didn’t turn over. And I’ll tell you, at the end of the day, we concluded that long term value is maximized with NAB staying in PepsiCo’s portfolio. I think it’s very, very important we return to focusing on running the business, minimizing the disruption, but more importantly, I think it would help hugely if we could just let our North American beverage business employees focus on running the business as opposed to worrying about what the future is going to be. I think the study we’ve done was exhaustive. There isn’t a bank or consultant that we didn’t use that had an idea. And at the end of the day, we have to go off and run the business. It’s a great business, big, profitable. It generates a lot of cash. Yet there are segments of that business, large segments of the business, going through a secular change. We have to reinvent it with technology. We will start launching products this year with the Stevia/sugar combination non-cola products, while we test the cola products with these combinations in some markets of the world. So I think we have to allow this transformation to play out, because it’s too big a business, and too profitable a business, not to allow the transformation to play out. So the long answer to your question is, yes, the decision has been made. We’re going to go back to operating it.

Our next question comes from the line of Bryan Spillane with Bank of America.

Just a follow up to Dara’s question, I guess I would be interested to know, as you went through the analysis on North American beverages, you know, the market’s changed a lot, right? The channels are changing and blurring. Potential to sell product over the internet. Coke is going to experiment with more single serve product or potential for single serve product at home. So that, plus the potential to use technology to change the production in manufacturing, make it more efficient. How do you fit your franchise bottlers into that changing market? Is the next step here, or an important step, to really improve NAB, to make some changes with the way you interact with the franchisees, to get the franchisees to sort of come along as you kind of bring them into a different world, a more modern world? Do the franchisees become an impediment, or in some way how are you going to change the way you interact with them?

It’s a great question, and in a way, you explained why it’s critically important that you own the system, because with the amount of disruptive change coming, you’ve got to reduce the friction in the system so that you can actually go with the flow. Having said that, on the online, shipping things through various fulfillment companies, we are looking at all of that and in fact doing tests with all of them. In terms of single serve products at home, we are participating with multiple single serve home delivery product tests, and I think it’s very important that we ultimately commit and play with people where we know the technology is working. I think it’s too premature to commit without having a technology that actually works. And finally, you know, our franchise bottlers are also seeing all the changes. We have a good relationship with our franchise bottlers. I think [unintelligible] has done a terrific job building the relationships with the franchise bottlers. And they’re seeing the changing environment too. And they want to work with us to make sure that together we grow the overall franchise. So I think this is not about conflict. This is about how we work together to solve a market disruption, and that’s what we’re going through right now. The good news is that 75% of the system, we own. So we have far fewer bottlers to deal with, and they’re all smaller bottlers. We don’t have the overhang of a big independent bottler to deal with anymore.

Our next question comes from the line of John Faucher with JPMorgan.

Hugh, could you talk a little bit about your earnings target? Instead of giving a range, you gave sort of a 7% number here. So can you talk about this? Is this sort of 7% plus or minus? And then to sort of keep on the North American beverage bandwagon here, but a little more micro, can you talk a little bit about how you guys are perceiving the pricing environment, less so in terms of what we’re seeing in the market right now, but more so what you guys are building in heading into the summer selling season?

On the North American beverage pricing, we’ve said very clearly that we intend to play a very responsible game. We’ve got a couple of points of price [unintelligible] last year, and our goal is to make sure that we take the price increases that we have to, because in categories that are going through the kind of change that the cola category and CSDs is going through, particularly, it’s very important that we don’t take down pricing. Because a lot of the research is showing that just taking down pricing is not going to drive consumption. :

Obviously we give long term guidance of high single-digits in order to be as transparent as we can in terms of what we think the portfolio is capable of generating. And then as we get to the beginning of the year, we really try to give you a four quarter target as best we can estimate in this volatile, uncertain world of what we think is a likely delivery. This year, as we looked at that, we pinned 7% as the likely number, and I know it sounds specific, but I think our investors appreciate the specificity in terms of what we do. As we go through the year, we’ll update on that, as the year progresses and as the world evolves. But when we say 7%, we’re saying 7%.

Our next question comes from the line of Ali Dibadj from Bernstein.

The first is just if you could quantify the Mexico tax effects? Because if we look for 2014, better taxes, better buybacks, better cost cutting, you can kind of model commodity to currencies, but Mexico quantification we have trouble with. But the second question is a broader one. You guys today, Dr. Pepper [unintelligible] yesterday, both with guidance that was really tough on top line but very significant cost cutting, to get to kind of mid-single digit type FX growth rates. Do you think that this kind of running very fast on cost cutting, more return to shareholders, is going to become, essentially, the new norm in this industry, especially to your earlier comment that where pricing is not up as much as it probably should be? And if that’s the case, and I kind of think it is, but if that’s the case, can you give us a sense of what you think your ongoing, not just EPS growth target is, but kind of almost a TSR, so EPS plus dividend, that investors should think about in this new industry norm?

I’m going to let Hugh give you some information on the details of the question that you asked about, and then I’m going to give you some overall observations.

First, regarding your question on Mexico, obviously this is a difficult one for us even with all the information that we have to ascertain, because what it’s created is a substantial price increase to consumers in the Mexican marketplace regarding our products. Further, obviously, Mexican consumers are facing significant price increases across a broad variety of their baskets. So our traditional elasticity models just don’t extend out to the size of the price increases that people are seeing. We’ve obviously put a number in as a part of the guidance. I think what we’ll do instead of sharing specific numbers right now is, as the situation evolves, as consumers get through the sticker shock of what they’re facing and we settle into what is a new demand level, I think we’ll probably just update you quarter to quarter on what’s happening inside of Mexico. So I think that’s probably the most efficient way to communicate this, because it is a challenge right now for everyone to sort out what the likely impact is in Mexico. Regarding your broader question, I don’t think we’ve entered a new era of cost cutting alone. I think it’s always going to be a balancing act in our space. Certainly our geographic and product portfolio provide us with the opportunity to grow the top line in a pretty reasonable way, hence the mid-single digit long term guidance. That said, we will certainly always look to be more efficient with the resources that we have, some of which we’ll deliver to the bottom line, some of which we will invest in capability and invest in innovation and brand building in order to fuel that top line growth to continue the virtuous cycle. Regarding TSR, we’ve talked about high single-digit as our long term earnings per share growth target. Obviously we’ve taken the dividend up and those tend to be pretty permanent, and that’s north of 3% right now in terms of the yield. So I think that’s reasonable math for you to be working with. That’s certainly our best estimation as a management team.

And I think, just in terms of overall observation, I would say now’s the time that we have to keep growing in emerging and developing markets. You can’t back off that growth, because all the competitive positions are being established. So as you grow rapidly in emerging and developing markets, the margin profile is different, and cost inflation is very different than it is in developed markets. You have a slowdown in developed markets and you have continued [unintelligible] growth in emerging and developing markets. In terms of the overall portfolio, you’ve got to make sure that you look at the dilutive effect of the emerging and developing market growth and offset that with increased productivity so overall the portfolio works. And that’s the whole portfolio play that we’re focused on, but it’s very important that you don’t talk about it as cost cutting. Because if you cut costs for the sake of cost cutting, it’s very different than meaningful productivity programs to fundamentally change the cost basis of the company. So when we talk about a productivity program, we think, okay, we put in the SAP system starting in 2002, we now have more visibility, we can harmonize processes, so we can do shared services, or we can ensure compliance when we lift and shift ideas. So it’s got to be a very deliberate program to fundamentally take the cost structure to a new level, not just cut costs to deliver one year of earnings growth.

Our next question comes from the line of Bill Schmitz with Deutsche Bank.

Obviously 2013 was a terrific year for Frito, both in terms of growth and market share. So could you just give us some indication as to what’s coming in 2014? And then obviously a lot of that growth was driven by a terrific step up, especially North America, in marketing spending. So do you still intend to obviously increase that [unintelligible] in 2014? And then one very quick one after that. Do you have any interest in home carbonation? Obviously the Green Mountain Coke partnership was announced, and I know Bryan asked about it briefly, but I didn’t hear a response.

We’ll try to answer both your questions. The first, on Frito Lay North America, you’re absolutely right. Frito Lay North America had a terrific year, but let’s just talk about the Frito journey. From about 2011 to 2012, those years, we revamped Frito Lay. We re-looked at the insights model. We tried to understand what was going on in the consumer landscape. How should we think about our product positioning, our brands, which composition to go after, this was a fundamental relook at everything we did at Frito Lay. We re-looked at the costs, [unintelligible] really took root during that time. And in 2012, we stepped up investment behind this whole model on demand spaces and insight that we had worked on. So we’re beginning to see the benefits of that in 2013. And you’ll see more of that going into 2014, 2015, and 2016, because we have the entire macro snacks space that we can go after with our strong salty snack base. And that’s our plan, to selectively go after certain demand moments with the salty snack base that we have. The good news is that a lot of that insight work, the demand spaces work, that was done at Frito Lay we are now taking to beverages. And since 2013, we’ve been working at fine tuning the beverages insights engine so it can get to the Frito Lay North America level. So we have great optimism for how this whole North American business is going to think about consumers, brand, innovation, demand growth. I think the future looks good. Let’s now talk about in-home carbonation. The way you should think about this is another distribution channel for carbonated beverages, or sparkling beverages. GMCR is one option. Interestingly, there are multiple, multiple, multiple technologies out there. What we’ve been sorting through, I’d say for at least 12 months, is making sure that we don’t lock and load with any technology until the technology has proven out. There’s going to be one technology today that’s functioning, but it’s based on a system that’s very different than what GMCR is thinking about launching. But we have to make sure that we align with partners who we are sure will commercialize the product. So we are working with multiple people. Stay tuned.

Our next question comes from the line of Judy Hong with Goldman Sachs.

When I look at your revenue target for 2014, it’s mid-single digits, so that’s in line with your long term target, which is different than your EPS target that’s at the low end of your long term target. So I just want to get an understanding of, within your revenue growth target, you have confidence in high single to low double-digit growth that you expect to see in your emerging markets. And just maybe a little bit more color around your key markets. What are you expecting from markets like Russia, China, etc.? And Hugh, just on the currency guidance, I just wanted to understand what you’re baking in for Venezuela?

I’ll just talk to you about overall emerging and developing markets rather than individual countries. I’ll tell you, taken together, and it’s very important that we look at emerging and developing markets as a portfolio, because in any one year you’re going to see some markets go through volatility and other markets perform well. If you look over the last 10 years, that’s been the case. And so I don’t think we should pick out any individual country. When something goes up, something else goes down. So as a portfolio, in emerging and developing markets, we’ll deliver the kind of numbers that we talked about. We feel fairly confident. Barring any major crisis, which we do not anticipate, we think our emerging and developing markets will deliver the numbers that we talked about. On Venezuela?

Judy, as you know, Venezuela is certainly an interesting and challenging environment right now. You know, there are two rates out there. There’s the 6.3 rate and then the 11 rate. We haven’t seen any “official” devaluation yet out of Venezuela. The planning assumption that we’re using, based on the blend of the two rates, is 10. So that’s our operating assumption right now. Obviously, until the valuation comes, if it comes, we haven’t run it through the balance sheet yet, but that’s our planning assumption right now.

And our final question comes from the line of Mark Schwartzberg with Stifel Nicolaus.

Question about how you’re thinking about the balance sheet and the leverage. Nice to see the return of cash exceeding the free cash flow. What do you think of having some sort of EBITDA target, a 2.5 or even a 3x target? Or how are you thinking beyond ’14, treating the leverage, given the more aggressive approach to returning cash?

What we talked about, rather than getting into specific leverage targets and specific long term ratings targets, is maintaining access to tier one commercial paper. I think that’s the best way for us to think about it, because for a company that generates a lot of cash, for a company that has an excellent business rating from the various rating agencies, tier one CP access is really the thing we’ll probably manage to more than anything else. So that’s the way we’re thinking about it on a go-forward basis, rather than getting into specific leverage targets or long term ratings targets.

We have time for one additional question. Our final question comes from Caroline Levy from CLSA.

Just a question, which I think I know the answer to, but I have to ask it again. Given that you’ve got this valuable distribution system and the fastest growing carbonated drink out there right now is still in the energy category, do you still rule out the idea of acquisitions?

Yes.

Can you explain why? Because you’re not participating in this business that appears to have legs. Do you think you can go after it in another way?

Mountain Dew Kickstart is our version of the energy drink that’s right for the masses. And we distribute other energy drinks. Caroline, I’ll tell you something, we’ve looked at this category long and hard, and we look at what we can do with those businesses, and whether it’s value creating for shareholders, if we were to make any acquisition, and all our analysis says it will not. And so we’ve chosen not to do an acquisition here.

And Caroline, if I can add to that as well. From the standpoint of the energy category, I think you’re aware that we do have a distribution arrangement with Rock Star. That is a distribution arrangement that’s worked very well for them and it’s worked very well for us. And that is our play in the energy category in North America. Mountain Dew Kickstart plays around the energy space, but it’s not in the energy space, in a similar way that Starbucks Frappuccino and iced coffee and other potential innovations go down that path as well. So I think we have a full complement of products to meet the energy need space for consumers, and I think we’re positioned well.