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PepsiCo, Inc. (NASDAQ:PEP)
Q2 2018 Earnings Conference call
Jul. 10, 2018,11:45 am ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to PepsiCo's Second Quarter 2018, 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 touchtone 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.

Jamie Caulfield -- Senior Vice President of Investor Relations 

Thank you, operator. With me today are Indra Nooyi, PepsiCo's Chairman and Chief Executive Officer (CEO) and Hugh Johnston, PepsiCo's Chief Financial Officer (CFO). Will lead off today's call with a review of our second quarter performance and full year 2018 outlook, and then we'll move on to Q and A. Before we begin, please take note of our cautionary statement. This conference call includes forward-looking statements, including statements regarding 2018 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. 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 Security and Exchange Commission (SEC).

When discussing our financial results on today's call, we will refer to certain non-GAAP measures which exclude certain items, such as the impact of the U.S. Tax Cuts and Jobs Act and other tax-related items, foreign exchange translation, and acquisitions, divestitures, structural, and other changes from our reported 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 to find full explanations and reconciliations of these non-GAAP measures. Now it's my pleasure to introduce Indra Nooyi.

Indra Nooyi -- Chief Executive Officer 

Thank you Jamie and good morning everyone, and thank you all for joining us. We will start off with an overview of second-quarter performance and a discussion of each of the operating sectors within more detail, and then Hugh will cover the full-year outlook.

For the quarter, we delivered $16.1 billion of net revenue driven by 2.6% organic revenue growth and core earnings of $61 per share, a 7% increase on a core constant-currency basis.

Overall, we are pleased with our operating and financial performance in the quarter, especially given continued commodity inflation and other headwinds in the quarter such as the Brazil transportation strike. In the quarter, organic revenue growth accelerated sequentially from the first quarter. The majority of our businesses performed very well, with particularly strong performances by Frito-Lay North America and each of the international sectors, and North American Beverages (NAB) posted another quarter of sequential improvement in both organic revenue and operating profit performance.

Frito-Lay North America delivered balanced volume growth and net price realization driven by great marketplace execution, innovation, and creative brand marketing. For example, to address consumers' desire for greater flavored and product variety and single-serve multi-packs, we launched a 20-count family fun mix that includes an array of products from Lay's to Cheetos to Ruffles with an expanded mix of flavors, and this clearly helped drive 10% net revenue growth in our overall variety pack business.

We launched Ruffles Mozzarella 'N Marinara, our latest bar food-inspired flavor, to meet the expectations of existing fans and capture the attention of new consumers seeking a unique and fun flavor experience, and this contributed to Ruffles' 10% net revenue growth in the quarter. And Doritos Blaze, launched earlier this year, were the most talked-about Super Bowl add. Continues to perform well above our initial expectations and contributed to 6% net revenue growth in trademark Doritos in Q2. So, overall, we are feeling very good about Frito-Lay North America's performance and momentum.

Turning to North American Beverages, the marketplace remains highly dynamic but generally rational. With this as a backdrop, we're encouraged by the trending improvement in both net revenue and operating profit performance. After a slow start in the earlier part of the second quarter, both for the category and North American beverages, we saw momentum improve and a return to net revenue growth in the back half of Q2.

Within the business, trademark Pepsi continued to make progress toward most stable performance. As we mentioned last quarter, we have stepped up media support on trademark Pepsi, under the Pepsi generations campaign. As a result, in the second quarter, we began to see improvements in a number of key brand health metrics, that is leading to better net revenue performance as the year progresses. So, we intend to stay the course, increasing investment behind brand support in the second half of the year, with the aim of driving further top-line improvement.

At the same time, we remain laser-focused on higher-growth categories with appropriate brand investment and robust innovation. For example, Bubly, a cleverly marketed new entrant in the fast-growing sparkling water segment launched earlier this year, and it continues to perform exceedingly well.

Gatorade Zero, our latest hydration innovation with zero sugar and all the electrolytes of Gatorade just launched and is off to a great start. More importantly, trends on overall Gatorade performance have also recently accelerated, and we're excited about the return of Mountain Dew Baja Blast, our summer limited time offer that just hit the shelves. So, overall, we have seen sequential quarterly improvement at NAB, and we expect to see continued acceleration and top-line performance in the third quarter.

At Quaker Foods North America, our hot cereal business posted its fourth consecutive quarter of market share gains, and delivered mid-single-digit retail sales growth supported by a new ad campaign, highlighting the functional benefits of oatmeal. In addition, Quaker light snacks had double-digit retail sales growth in our on-demand pancake business, grew both retail sales and market share for the seventh consecutive quarter.

Turning now to our sectors outside of North America. We are pleased with the more than 6% organic revenue growth we saw in our developing and emerging markets as a group. Strong market-based execution combined with stable macro conditions have led to continued solid growth across many of our key international markets. Though growth was negatively impacted by the 11-day transportation strike, that broadly disrupted commerce in Brazil.

Within Latin America, organic revenue grew 3.5% driven by mid-single-digit growth in Mexico and double-digit growth in Argentina and Colombia. We estimate the Brazil strike depressed overall net revenue growth for Latin America by approximately two percentage points. In our Europe Sub-Saharan Africa sector: Russia, Poland, and South Africa; each grew organic revenue high single digits, and Turkey had double-digit organic revenue growth.

Even within the developed markets of Europe, we saw mid-single-digit organic revenue growth in the UK and high single-digit growth in France. In AMENA, we had strong double-digit organic revenue growth in China and Egypt, high single-digit organic revenue growth in Pakistan and Australia, and solid mid-single-digit organic revenue growth in India.

This strong top-line performance translated into impressive bottom line results, with core constant currency operating profit, up 12% in our international divisions as a group, fueled by fundamental operating performance, and the game this year, from the Thailand re-franchising, partially offset by lapping the gain from our sale of Britvic shares in 2017.

The international results are in part a reflection of our efforts to increase we lift and shift's successful initiatives from one market to many, and innovating on our big global brands in locally relevant ways. For instance, in Latin America, we're innovating with Quaker Super Foods. A new premium platform with differentiated ingredients such as oats are dry, amaranth, flaxseed, and quinoa.

In Asia, we have lifted and shifted off the even pass, a premium range of plant-based snacks from the U.S. to the United Kingdom. In AMENA, we have taken our successful Sunbites platform from the U.S. to Australia by launching Sunbites Greenleaf Plus, with the goodness of Australian whole grain corn, wheat, and oats, plus beetroot, and sweet potato. At the same time, we've also launched in the U.S. Red Rock Deli, one of our most successful brands in Australia.

Net, we're encouraged by the momentum we're seeing across many of our key international markets. NAB is making steady improvement and Frito-Lay North America is performing well. Importantly, as we manage the business was strong performance today, we're also taking steps to enable us to continue to perform well in the decades ahead. We are pleased to report that in the coming days we will publish our most recent sustainability report, discussing our progress against and commitment to our sustainability goals.

We encourage you to read the full report. But I'd like to take just a few minutes this morning to provide you with the highlights. We are in millions of pantries and refrigerators worldwide. So, we know we have a tremendous opportunity and responsibility to use our scale to make a positive impact on the world. Our customers, employees, and partners feel good knowing that we'll share the journey of sustainable transformation -- making our products more nutritious and more resource-efficient, dialing up taste while reducing our environmental footprint.

Our investors can feel good knowing this makes us a stronger business over the long term and that we can also do well while also doing good. Twelve years ago we embarked on a journey of PepsiCo that we call performance and purpose. Since then much has changed. At PepsiCo and around the world. But the underlying principles behind performance and purpose remain.

Much of our early work on performance and purpose required us to think differently about our business and make the kinds of long-term investments from researching and developing new more nutritious products, to finding ways to reduce water and energy use across plants and farms that could help us deliver on the vision of making our growth, our operations, and our impact more sustainable. Sustainability has been defined as: Meeting the needs of the present without compromising the ability of future generations to meet their own needs.

Over the last dozen years, we've tried to meet the needs of the present while strengthening the ability of future generations to meet the years. Integrating that aspiration into our goals for products, planet, and people. Let me briefly comment on each. When it comes to products, we built in our legacy as the first company to voluntarily remove trans-fat from our snacks by reducing added sugars, sodium, and saturated fat in many of our products. Launching a revolutionary nutrition focused vending option, Hello Goodness, and growing our portfolio of what we define as, good for you and better for you options. From about 38% of revenue in 2006 to roughly 50% last year.

We also teamed up with others in our industry to form the Healthy Weight Commitment Foundation, removing 6.4 trillion calories from our food and beverage products surpassing our collective pledge by more than 400%. Through Food For Good we provided 80 million nutritious servings to low-income U.S. families since 2009. Regarding planets, we raised the bar for what it means to be a responsible corporate water steward. Running the prestigious telecom industry water reward. We invested more than $40 million in 2006, to provide safe water access around the world benefiting nearly 16 million people in some of the planets most water-stressed regions.

We've also made our delivery fleet more energy efficient, eliminating the need for over one million gallons of diesel fuel since our electric vehicle initiative began in 2010. The equivalent of keeping more than 2,000 passenger cars off the road per year. While also making a beverage coolers and vending machines, 60% more energy efficient. We're one of the world's largest purchasers of recycled PET. In fact if more recycled PET were available, we would buy it. We've also launched the first 100% compostable cheap bags in test markets, while diverting more and more of our waste from landfills. Approximately 95% as of 2017. For people, we have reimagined what it means to support our associates.

For measuring on-site and near-site child care campuses around the world, to expanding PepsiCo University's online course offerings to help associates upgrade their skills to navigate a rapidly changing world. We've also helped lift up the communities we serve, playing a critical role in disaster relief efforts: from Texas to Florida, and Puerto Rico, Mexico to Ecuador, and China to the Philippines.

While we still have work to do in certain areas, we're incredibly proud of the progress we've made. Our aspiration of being a good company, good ethically, and good commercially, continues to come to fruition using a broader, more lasting impact than we ever imagined, and setting a standard at companies across our industry and beyond, aspire to meet.

Looking ahead, we will continue viewing our work through both a microscope and a telescope, focusing on the most granular details: grams of saturated fats, parts per billion of greenhouse gas, the number of women in management roles, as well as the larger ambition of building a business that acts in accordance with our values. Each of us trying to do what's right for the company and what is right for our communities. Because at the end of the day, there is no separating the two. With that, let me turn it over to Hugh.

Hugh Johnston -- Chief Financial Officer 

Thank you Indra, and good morning, everyone. I'll just provide a quick update on the outlook, and then we'll move to your questions. From a macro perspective, we maintain a fairly positive view overall. However, within this broadly positive picture there remains risk of volatility, both in geographic markets as we saw in Brazil in the most recent quarter and in currencies as witnessed by the recent sharp rise in the strength of the U.S. dollar.

From an industry standpoint, we continue to see pretty challenging conditions including a dynamic retail and consumer landscape, a very competitive environment, and ongoing commodity inflation. So, putting this all together and considering our year-to-date performance, our guidance for 2018 remains unchanged. Specifically, we expect organic revenue growth at least in line with our 2017 growth rate or 2.3%.

As we move through the year, our expectation is that we will continue to see some levels of gross margin compression from inflationary input costs. Normally, you would expect to see the gross margin contraction offset with that SG&A productivity, but as we have stated previously, with the benefit of a lower effective tax rate in 2018, we are making investments to fortify the business as well as having funded the U.S. front-line bonus.

These investments will largely offset productivity-driven margin improvement. We expect our core effective tax rate to be in the low 20s. We expect core earnings per share of $5.70 or a 9% increase compared to 2017 core earnings per share of $5.23. We expect to continue to generate strong cash flow and to exercise disciplined capital allocation with prudent reinvestment into the business.

For 2018, we continue to expect free cash flow of approximately $6 billion which includes approximately $9 billion in cash flow from operations including a $1.4 billion discretionary pension contribution made in the first quarter, and net capital spending of approximately $3.6 billion.

We continue to expect to return approximately $7 billion to shareholders in 2018, with cash dividends of approximately $5 billion, reflecting a 15% increase in the annualized dividend per share, that began with the June payment, and share repurchases of approximately $2 billion.

Finally, as you update your models I'd like to highlight the following. We expect our rate of earnings growth to be substantially higher in the fourth than in the third quarter. This is due to the timing of investments and the lapse associated with last year's natural disasters. In addition, we expect the previously announced refranchising of our Czech Republic, Hungary, and Slovakia business operations to benefit our fourth quarter earnings. Finally, based on market consensus forecast, we expect foreign exchange translation to negatively impact both net revenue and operating profit in the second half of the year, reversing the forex benefits that we had in the first half. With that, operator, we're ready to take the first question.

Jamie Caulfield -- Senior Vice President of Investor Relations

Hi, it's Jamie Caulfield. We appear to be experiencing some technical difficulties and having your questions fed also. So, I could ask you just to remain patient for a minute while we sort this out. Thank you.

Questions and Answers:

Operator

Ladies and gentlemen, if you'd like to ask a question, please press star one. Your first question comes from the line of Dara Mohsenian of Morgan Stanley.

Indra Nooyi -- Chief Executive Officer 

Morning Dara?

Dara Mohsenian -- Executive Director -- Morgan Stanley

Hey, good morning. So clearly, there's been a lot of investor focus around a number of pressure points in the CPG industry in terms of pricing power, brand demand fragmentation, et cetera. Basically, that some of the traditional advantage is the larger CPG companies are breaking down.

In that context, I was hoping you could give us some perspective on if there are areas of significant investment or operational changes at Pepsi going forward beyond what you've already done to help position the company versus some of those industry challenges and how realistic a long-term high single-digit earnings growth algorithm beyond 2018 is if you need to reinvest against some of those pressure points.

Within that answer, I was hoping specifically you could touch on price mix. You've obviously had strong pricing realization the last few years with the inflationary commodities and the trade and tariff risk. I'd love some updated thoughts on price mix also within that. Thanks.

Indra Nooyi -- Chief Executive Officer 

Thanks, Dara. First of all, I think you asked me about 10 questions within one question, but given that we had this technical difficulty, I guess you're entitled to ask me 10 questions. I think you asked a set of very, very interesting questions. I think the changes we're seeing in the industry are quite interesting.

I think the changes that we're seeing benefit companies that have already invested to build scale built an international footprint, and have the right partnerships around the world. I think now's not the time for companies to go and plant flags in new countries, and try to start-up businesses.

So, I'd actually observed that the advantaged CPG companies are small, niche, single-country companies with small brands, who grow to certain level and then flip it, or very large establish scale companies who have built businesses in multiple geographies. I don't mean just planting the flag, actually build scale. I think PepsiCo is one of those few companies that have actually, over the years, invested to build scale, put the right partnerships in place, built a diversified portfolio, and actually solidified our presence.

We made all the investments over the years. So, that part of the investment is behind us. This next accounts of investments relate to digitalization. Thinking through more automation in our plants, in our go-to-market systems. Figuring out how we can unleash more productivity, but more efficiency and effectiveness.

Not just efficiency, efficiency and effectiveness so that we can serve the changing retail world in more efficient and productive ways. Because retailers are going to go through their own changes, and they're going to look at a few players to be the anchor suppliers to them while they handle with all kinds of changes with a large portion of the CPG world. I think PepsiCo with DST systems, and with its a high velocity categories, it's brand portfolio and most importantly, innovation becomes a very valuable partner across the world.

I mean, I've often said this to you. When we had just snacks or beverages going to large European retailers, we were like 37 and number 50 on the list. Now with our combined approach in a power of one approach, we're in the top five or top seven suppliers driving a lot of the growth. They look at us and say, "There are these large companies that drive a lot of growth in our anchor suppliers that we should just have great relationships with, leave them aside while we focus on all of the other players that we need to either prune the portfolio or figure out how to make them more efficient."

So, we're making investments in digitalization, more automation plants, rethinking our innovation process, and making sure that we fragment our segment, our innovation between premium, mid, and value, and deal with each country in each marketplace with that sort of an architecture. Then, we're getting better and better at lifting and shifting across the world. So there, I don't think that a big burst of innovation required, all that we're doing is investing as we go along.

I think Hugh talked about the fact that we've been making investments in the business. We've been doing that deliberately and carefully over the years. We will continue to do that. We're going to look for ways to unleash productivity and every time we have productivity we're going to see how we judiciously reinvest in the business so that we can keep this engine going.

In terms of price-mix, innovation is a big driver of price-mix as is revenue management. We're improving our revenue management skills all the time, applying more digital tools. When it comes to innovation, we are thinking more and more about segmenting our innovation, and we're also thinking about how to incubate.

A niche company within our big company. That's what we're focused on in every big region of the world. So overall, we feel very comfortable with our overall strategy.

Operator

Our next question comes from the line of Andrea Teixeira of JP Morgan.

Andrea Teixeira -- Managing Director -- JP Morgan

Hi! Thank you and good morning. So, I appreciate your answer to that, but I was hoping if you can update us on your outlook for NAB since the last call as you are considering strategic alternatives. In light of this combined approach, with technologies mentioned using the European example, I would appreciate if you can elaborate, thank you.

Indra Nooyi -- Chief Executive Officer 

I'll provide some opening comments, Andrea, and then to add some tissue to give more color. What we told you in the last call is that, you should expect to see sequential improvement in North American beverage performance. That's exactly what we're focused on, that's what we're delivering. Every part of the business in North American beverages is showing sequential improvement.

In the second part of Q2, we saw significant improvement in performance, and as we go into Q3, we feel good about the trend rate. We are playing a very responsible game in terms of advertising and pricing. With commodity inflation, we will continue to take a responsible position in this marketplace by pushing through pricing.

So, at the end of the day our North American beverage business, which participate in a highly competitive category, needs to be managed very, very carefully, especially at a time when there are changes in the marketplace from lots of competitive activity. There's always going to be short-term perturbations when competitors go through major changes in their business models. Our challenge is to maintain a very steady hand and make the PepsiCo portfolio vote for us, and that's what we've been doing. I don't know if you if you want to add anything to this.

Hugh Johnston -- Chief Financial Officer 

The only thing I would add Andrea is- and hopefully, you all have seen that this management team is always focused on creating value both in the short-term and long-term, and achieving the right balance between the two. As we look at all of the businesses, that is our most significant focus, and I think we will continue to do that just as we have.

Operator

Your next question comes from the line of Pablo Zuanic of SIG.

Indra Nooyi -- Chief Executive Officer 

Morning Pablo?

Pablo Zuanic -- Senior Equity Analyst -- SIG

Thank you. Good morning and good morning everyone. Two quick questions. One, I understand that you're reinvesting and other tax benefits, but can you clarify whether that's more heavily geared to reinvesting in beverages or is it pretty much evenly across the business?

The second question which is related to that, when you see the success that Coca-Cola has had with the diet coke, new products, and with Coca-Cola zero sugar, any thoughts in terms of how things will be done different from the Pepsi side of things? The reason I ask that is that, if the brands themselves haven't been improved in terms of innovation, how much is reinvesting in new modern marketing going to help? Thanks.

Indra Nooyi -- Chief Executive Officer

Pablo, we reinvested tax benefits and additional media for NAB, and wherever the business has needed investment, we put it in. The idea is not just to invest, it's to reinvest judiciously so that we get a return from investments. We also reinvested some of the tax benefits in our frontline bonus. So, that especially people in the United States where the tax benefits are really accrued can benefit from the upside.

Now, when it comes to our North American beverage business, we're investing in CSDs especially trademark Pepsi. We're investing more than trademark Pepsi because we saw stepped up investment in media from our competition, so we are doing that. When it comes to the Zero Sugar portfolio, both between Diet Pepsi and the Pepsi Zero Sugar, Pepsi Zero Sugars, growing extremely well, extremely well. I hate to use the word, "Flying off the shelves", but is doing exceedingly well.

When it comes to Diet Pepsi, Diet Pepsi is also back to good performance. I've tell you the flavor portfolio on Diet Pepsi and whatever competition launched, you might want to look at the numbers in a little bit more detail because I think it's a mixed bag. We have to be careful not to throw too much innovation to this marketplace and obfuscate the numbers. From our perspective, Zero Sugar portfolio, but in Diet and Zero Sugar is doing well, and is doing well on a sustained consistent basis.

We're playing the long game, Pablo, in terms of overall liquid refreshment beverages. We think that that's the right way to play this beverage game, and we feel good about where we're headed.

Operator

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

Bryan Spillane -- Managing Director Equity and Research -- Bank of America

Hey, good morning everyone?

Indra Nooyi -- Chief Executive Officer

Morning Bryan.

Bryan Spillane -- Managing Director Equity and Research -- Bank of America

Hugh, I just wanted to pick up on you made a comment in terms of the forward guidance about gross margins still being under pressure in the second half. So, I guess couple of questions, I guess that implies we should expect that gross margins might be down in the second half, and then maybe what some of the pressure points are, what sort of inflation and I guess also maybe transactional effect? If you could just kind of walk us through what's going to drive that pressure on gross margins in the second half and maybe what mitigation you might have as we look forward into '19?

Hugh Johnston -- Chief Financial Officer 

Yeah Brian, happy to do that. So, a couple of comments. When I say gross margins under pressure, I'm talking about relatively nominal pressures we've seen over the last several quarters. A combination of a couple of factors on gross margin, No.1, obviously, commodity inflation has picked up a bit. Certainly, we've seen a bit more in oil and in addition to that, in aluminum. Second, transport costs have also been under some pressure with the driver shortage in the United States. Then, third, in international markets, as you know where we have seen some inflation, we do tend to price a bit behind inflation and trying to drive productivity in order to offset that.

Then, obviously, we're reinvesting the tax benefit in the form of new capability, so you don't see the productivity flow through as you normally might in SG&A. So, those are the several factors that are driving it. Overall, as I said, we expect a full year to be on the 9% that we originally committed to and we're balancing the internal workings of the P&L to make that happen.

Operator

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

Indra Nooyi -- Chief Executive Officer 

Good Morning, Ali.

Ali Dibadj -- Senior Vide President -- Bernstein

So, just wanted to ask a little bit more about the sustainability of your results going forward along three dimensions. First is the sustainability of one-timers like Thailand, and Britvic, and then coming up on Czech Republic here in your core results. Should we continue to expect things like that to be a consistent part of your algorithm going forward? How much more of those types of things you have to sell? Second, in terms of pricing, it continues to be a big driver I see for Latin America and you're willing to sacrifice a little bit of volume there again. How much longer do you think that's sustainable? Then, third, on NAB Improvements, very pleased that they're on track, both you and I.

Can you give us more about whether you believe that was actually driven by advertising increases? Was there an advertising increase in particular in NAB overall as opposed to just Pepsi, 'cause you call it Pepsi, but I don't see it in the release for the segment NAB? Or is there something else that drove that improvement? So, will that improvement you guys believe continue, not just going to this quarter, but going forward? So, that's it.

Indra Nooyi -- Chief Executive Officer

I'm going to take the third one and then Hugh, I'm going to toss it to you to talk about the first two, OK? NAB improvement, again, Ali, as I mentioned, we're playing the LRB game. We're looking to improve our position in the liquid refreshment beverages category because we play in pretty much every category in LRB, most of them with very, very strong brands. In terms of A&M spending, we increased A&M spending on trademark Pepsi as we mentioned we were going to do. Because the A&M gets curved in, you'll see the benefits flowing through in Q3 and Q4 more as we go through. We are seeing the improvement in brand health metrics and we are seeing a sequential improvement in the performance of the business.

So, believe me, we are focused maniacally on tracking the performance and the result of all of our increased spending. What we're seeing in the results that gives us confidence to tell you what we told you on the call today.

So, on balance we're feeling good about the NAV performance trends. Now let me turn it to you to talk about the one-timers and pricing, especially in countries like, regions like Latin America.

Hugh Johnston -- Chief Financial Officer

Happy to, Ali. In terms of one-timers. If you look at our record over the last four or five years, we've always had some one-timers and whether it's refranchising of businesses or sales of businesses or assets. So, that's going to continue to be a factor as it has been. In terms of Latin America, without a doubt, where you have high inflation environments, we've tended to price through the vast majority of that inflation and as a result it's improved our revenue results sometimes at the expense of volume. As you see, the inflation rates come down in those countries obviously our pricing will diminish. But we do expect that our volume will pick up as a result of that and we expect to continue to see strong results out of Latin America and other places that have historically had high inflation where the numbers have come down a bit.

Indra Nooyi -- Chief Executive Officer

I think the most important thing on one-timers, Hugh, we don't do one-timers to deliver earnings. We do one-timers because we think it's the right business model for those countries. What we're trying to do is to strengthen the core business so that they have the right partner to boost the performance of that beverage business on certain markets. We'll franchise it to them and if we think we are better off operating it, we'll do that. So, I think we used one-timers in a very judicious, strategic way to improve the overall performance of the company.

Operator

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

Judy Hong -- Managing Director -- Goldman Sachs

Good morning. So, I guess I just wanted to get a little bit more color on the Gatorade performance. Trends have gotten a little bit better recently, the comps are getting easier so maybe that's also helping. But just wanted to also get a better sense of maybe some of the brand health metrics that you talked about as it relates to maybe that was more of a Pepsi trademark comment but on Gatorade, specifically. Then, as you think about Gatorade Zero, a little bit more color just in terms of the positioning of that particular line and how much marketing investments that you're making on that line. Thanks.

Indra Nooyi -- Chief Executive Officer 

Gatorade is actually doing very well. This weather is helping for sure. But the underlying Gatorade trademark is very, very strong. Gatorade always attracts new players into the marketplace and they come in with either lower prices or they try to come in and build distribution and they might take a few share points in any quarter or two. But then overtime if you look at it over a period of five or seven years, the Gatorade franchise has been extremely resilient and has basically held on to its leadership position. We've innovated to build shoulders with the Gatorade recovery drinks, the Gatorade choose before you start exercising, and then we have segmented along flavors, and then across different sports. Many of our consumers wanted a Gatorade Zero for the light exerciser who didn't want the carbohydrates that real athletes needed. So, we launched Gatorade Zero. Even though there's Propel also, they wanted to be seen with the Gatorade. So, we launched Gatorade Zero. We keep advertising along the entire trademark, and we have never wavered from advertising to athletes, and to active exercisers, and that's going to be the continued focus of Gatorade. It's a very strong resilient franchise and we feel good about where it is and where it's headed.

Operator

Your next question comes from the line of Lauren Lieberman of Barclays.

Indra Nooyi -- Chief Executive Officer 

Good morning Lauren.

Lauren Lieberman -- Managing Director -- Barclays

Good morning. Thanks. I was curious you'd mentioned sort of two different types of comments around brands and innovation. So, one bucket we've heard of the discussion of lift and shift continuing to support and build your biggest franchises. Then Andrea, you also mentioned the idea of incubating niche, brands, or companies within markets. So, I was curious if you could put those two together and in particular what I've been most curious about is how PepsiCo is thinking about a small brand strategy if you want or need to have one in the beverage business because when I look at some of the work you've done in the last two years, Lifewater, bubbly, it's very much a strategy of drive a blockbuster when not build something slowly and patiently through single-serve and discovery. So, I just was curious your thoughts around the viability of a small brand strategy within PepsiCo, and if that was something you were focusing on. Thanks.

Indra Nooyi -- Chief Executive Officer

It's a great question Lauren. If I look back especially the last five years of beverages, we've had some spectacular new products which for any small start-up company would have been a blockbuster. But for PepsiCo because we put it through DSD system, understood reaches the scale of a Lifewater or bubbly in the first 12 to 18 months. We can't support it because many times, the space has to come out of the core cooler or the core isle. So, we look at differential velocities and then the DSD system tends to kill it. If I look at products like Lemon Lemon from last year, it was rated the best new product launch of last year. It reached a pretty impressive level of sales yet on the DSD system, it didn't do that well because it was cannibalizing space from a core CSD category. So, what we have created now is this new entity within PepsiCo called 'The Hive'. It's a separate group just like we did with e-commerce. We've taken it out of the core headquarters. It's going to be an entrepreneurial group, that's going to take some of the best new products that we launched and reached a certain size, but we never really allowed us to thrive in the DSD system.

We're going to nurture and incubated it in whatever distribution system they think is the best for it. If we reached to a certain size, we can decide whether it should come into the DSD system or not. This group is also going to look at other venturing bands they can bring in, and we want to create an environment where we have a business within a business. A small entrepreneurial sort of agile group that's thinking about the new age consumer that loves discovery brands, while allowing the big brands to thrive in the overall mother ship. This is not new to PepsiCo North America. We're doing something like this in Europe also. It's a very local business, so we have to be careful not to make it global. It's a very local business, and we're going to play with these businesses because, there is a consumer that is willing to pay for this company brands, and they can reach a decent level of growth. So, we're going to go off and see how to make it happen. We're feeling excited about what we've just launched. Let's see what happens the next few months and years.

Operator

Your next question comes from the line of Steve Powers of Deutsche Bank.

Steve Powers -- Equity Research Analyst -- Deutsche Bank

Hey, good morning. Thanks. So, going back to North American Beverages for a minute. It does indeed look like we're on track for a return to growth in the second half which is great. I'd just love a little bit more context about what you might feel are the top success factors in that path, whether it's key launch like Gatorade Zero, better-realized price mix as inflation builds more of an inflection in core Pepsi, or just are there one or two priorities on your scorecard that you could call out for us. That will be great.

Then secondly, as you've been open about your ongoing assessment of strategic options for the bottling utility, as you called it, whether that's constantly a stand-alone entity or putting in the hands of multiple franchisees or keeping it as part of PepsiCo. I'm just curious as to whether or not you've narrowed in on any subset of those options? Or what the time frame might be for you be in a position to communicate your path forward to the market? Thanks.

Indra Nooyi -- Chief Executive Officer 

Hugh.

Hugh Johnston -- Chief Financial Officer 

Yes, Steve, happy to answer those questions. First in terms of the priorities, if nothing else what we saw last year and we've certainly seen in this year. We need to be able to both make sure the big businesses are on track in North American Beverages. Those big businesses obviously are Pepsi, Mountain Dew, and Gatorade.

What we've seen over the last couple of quarters is certainly a strengthening in the Mountain Dew business both the core green bottle business, as well as the innovation with ice, and now the return of Bob Last, which has always been a Mountain Dew fan favorite. Second obviously is Gatorade. Gatorade certainly is a business that's now back on track, and we're very excited about the innovation, Gatorade Zero really meets a very unmet need for the lapse Gatorade user because they- as Indra pointed out earlier, they just don't want the calories but they want the Gatorade brand.

And then Pepsi, where we knew we needed to increase the advertising. We knew we needed to have a good campaign this year that obviously takes longer to do. The quantity is easier to turn on, but just getting into consumers' minds takes a period of time. So, first sort of big priority is making sure that big businesses are doing well. Second is continue to execute against the innovations in the newer categories, whether it's bubbly, or continuing to execute life water, or continuing to make sure newer brands like Kavita do well.

That's the additive that sort of creates the growth in the business, the core brands grow at it at a certain rate and all of those new innovations create the incremental growth. So, I think we need to be able to do both. North American beverages, obviously a big nuance complex business and we need to do more than one or two things well, we need to do most things well for that business to perform and that's what you see happening. Regarding strategic options, nothing new to report on that we'll continue to look at options, to create value not only in that business but across all of our businesses.

Operator

Your next question comes from the line of Bonnie Herzog of Wells Fargo.

Indra Nooyi -- Chief Executive Office

Hey Bonnie, good morning.

Bonnie Herzog -- Managing Director -- Wells Fargo

Hi. Good morning. So I wanted to talk about Frito-Lay North America. Your growth really has been impressive both on the top and bottom line. So, how sustainable is this from a long-term perspective? And then, could you guys walk through for us any productivity initiatives that you specifically implemented in Frito-Lay that you possibly could implement across the rest of your businesses? Thanks.

Indra Nooyi -- Chief Executive Officer

The reason the growth is impressive is because Frito-Lay plays in salty snacks and the entire macro snacks pace is there for the taking, and so Frito-Lay focuses on the core, and then interest out of the core by taking occasions from the rest of macro-snacks, and the innovation engine is very geared to going out and building both frequency and penetration, and picking up more and more snacking occasions, and as long as they keep doing that, they should be able to deliver the growth.

The DSD apparatus is an extremely impressive machine, and that actually helps sustain Frito-Lay's growth. In terms of productivity initiatives, we've talked about GES, Bonnie. GES is now rolling out to multiple locations. It's doing two things, one is delivering more productivity, but more importantly is debottlenecking the system because it's allowing us to put more skews and be more customer-specific in our picking. And so, GES has actually been a big benefit for us. And then, deploying more digital technologies across Frito Lay is actually delivering more productivity.

The good news is as North America tools that North American Beverages develops goes to Frito-Lay, and what Frito-Lay develops comes to North America. And so, we have a wonderful transfer of knowledge and tests that's happening between the two businesses, and so we can take the customer-base, both traditional trade, up and down the street and big organized accounts, and figure out how to serve them better with whether you call it geo bulk set, our beverage business or GES in Frito-Lay.

There's a lot of information exchange going on, and overall I think both businesses are high-velocity businesses and they're able to unleash productivity to reinvest to keep this growth engine going. Do you want to add anything, Hugh?

Hugh Johnston -- Chief Financial Officer

No, I think you've captured it very well.

Operator

Your next question comes from the line of Amit Sharma of BMO Capital Markets.

Amit Sharma -- Vice President -- BMO Capital Markets

Hi. Good morning everyone. A quick clarification, you did say you expect to get pricing in NAB CSDs. Can you talk about how quickly we should expect you to do a lot of pricing, and to what extent? And then another one, gas prices are now a multi-year high.

Are you seeing any change in consumer behavior especially in the C-store channel?

Hugh Johnston -- Chief Financial Officer 

Yeah. To answer your first question first. I think you'll see incremental pricing benefit in the third quarter and then you'll see more in the fourth quarter. Regarding gas prices, convenience channel was up about 3%, I believe, overall for the second quarter. So, I think, given the healthiness of the overall economy, that's more than offsetting the gas price increases.

Operator

Your next question comes from the line of Mark Swartzberg of Stifel.

Mark Swartzberg -- Securities Analyst -- Stifel

Thanks. Good morning. Hugh, just if you could, on CapEx, could you remind us why the 3.6 billion is higher than it's been historically, and how representative you think that is of future CapEx either in absolute terms or relative to sales?

Hugh Johnston -- Chief Financial Officer 

Yes. So, our previously discussed long-term guidance is equal to or less than 5% of net revenue. No update on that right now. Bigger investments in a couple of places. Latin America, we've seen capital spending go up as we've implemented some of the GES solutions that Indra's mentioned on the previous question. No. 2, we're investing more in Frito Lay because we're identifying projects to drive continued growth and productivity, and No. 3, North America Beverage as the single-serve strategy has continued to be successful. We're adding capacity in certain places.

Operator

Your next question comes from the line of Robert Ottenstein of Evercore.

Robert Ottenstein -- Senior Managing Director -- Evercore

Great. Thank you very much. In the past, you've given us a little bit more color in terms of market share gains and value share gains, and clearly you're doing very well outside of the U.S. Can you perhaps give us a little bit of sense of where you're gaining share in important international markets and where things are more challenging. Then, secondly bubbly off to a great start. Perhaps if you could maybe stand back a little bit and give us a sense of where you see yourselves taking your water strategy and what percentage of the business it is right now. Thank you.

Indra Nooyi -- Chief Executive Officer

In terms of share gains internationally, I think, overall salty snacks globally, I think, in 75% of the markets, we are holding or gaining share. Remember internationally we also have a lot of local low-cost competitors. In spite of that, I think 70, 75% of the markets we hold or gain share. I think it's 60% of the markets, we're gaining share and about 75% we either hold or gain. I'm giving you rough numbers, Robert.

In terms of beverages, again, in many of the markets that we participate as PepsiCo, about 50 or 60% of the markets, we're actually holding or gaining share. Then, the other markets, we go in and out. One quarter, we may gain share, one quarter, local competitor or a global competitor may gain shares. So, we trade shares on a quarterly basis based on what we are lapping or what's specific blockbuster marketing initiative is being implemented at that time.

But, overall what we're focused on is on an annual basis, how do we make sure that we don't do anything crazy just to gain share? We participate in a very responsible way and somewhere between 60 and 75% of our markets, if we can hold or gain share, that's a very sustainable deliberate strategy.

That's really what we're focused on globally, both the snacks and beverages, and now more and more in our nutrition businesses, which we are trying to figure out what the relevant marketplaces, and how do we calculate a fair market share number. So, that's roughly speaking where we are on share.

Hugh Johnston -- Chief Financial Officer 

On water, I'll finish Robert's question. It's about 12% of our volume, Robert, round numbers. And in terms of water strategy, obviously, we have a case pack water business that provides baseload volume, and then we are increasingly segmenting that business, whether it be with flavored still waters, whether it be with flavored sparkling waters in the form of bubbly, whether it be in the form of LIFEWTR, which obviously appeals to a large consumer segment and one that continues to grow well for us. So, I think you'll continue to see us segment the water category into profitable niches to go along with the large-scale case pack water business.

Operator

Your next question comes from the line of Nik Modi of RBC Capital Markets.

Nik Modi -- Managing Director -- RBC Capital Markets

Yeah. Good morning, everyone, good morning. So, Andrew, hoping you could provide some of the logic behind the various refranchising initiatives PepsiCo has undertaken in international markets, and how any early learnings could inform the beverage strategy in the U.S. and I guess the main question is, is it even translatable? That would be really helpful to understand.

Indra Nooyi -- Chief Executive Officer 

You know Nik, I'll tell you that's a good question, and let me just offer some points. When we refranchise, it's usually to somebody who already has a portfolio of beverages. Because Pepsi, internationally in many markets, we don't have a full lineup of beverages. We participate only in a small lineup, be a partner with somebody who has their own LRB products, and together we cover the entire line. An example would be something like a Postobon in Colombia, that has their own line of non-carbs, and then we come in with our portfolio, and together, we have a fantastic leadership position in Colombia. What we're looking at, and you talked about our Czech Republic, Hungary, and Slovakia beverage operations. We're refranchising with a partner who already has a lineup of LRB, and we complete the portfolio.

So, our system actually is much more robust than people realized. Because as a system, we are much stronger than just PepsiCo, in the international beverage business, and that's why we feel good about the beverage business. The early learnings are, makes sure if you're going to refranchise, refranchise to somebody who knows how to run the beverage business, and they have a portfolio, that together the one plus one is a three, not detracting from our own performance. So, that's all we're going to focus on going forward and those are the learnings from our beverage refranchising.

Operator

Your next question comes from the line of Bill Chappell of SunTrust.

Bill Chappell -- Managing Director--SunTrust

Thanks. Good morning. Question on just the momentum on NAB that you talked about as it's kind of started slow and had good momentum at the end. That tracks with kind of what we saw in North America weather in terms of cold and wet late March, April, early May, and then came back roaring, and then very hot. So, trying to understand what do you see that makes you feel that it's beyond weather? Lifting the whole category, are you seeing kind of market share especially in CSD. Are you seeing some things stabilized? Or what gives you so much confidence that carry through as we get to kind of normal weather and albeit easier comps in the back half?

Indra Nooyi -- Chief Executive Officer 

Weather is clearly a factor. I would be lying if I didn't tell you that talk about that helps the beverage business. But I think on top of that, our brand health metrics are all trending the right way. The business is trending the right way, and pretty much all of our franchises, we're seeing sequential improvement in performance. So, even businesses that had difficult laps, we're seeing sequential improvement in performance. So, I think if this continues, this bodes well for NAB. So, thank you all for your questions.

Let me summarize. The business overall is performing well in a highly dynamic environment, and we remain on track to deliver our financial goals for the year. We remain highly focused on driving better operating performance from North American Beverages, and we're encouraged by the sequential improvement we've seen in NAB. Just as important, even if you remain highly focused on performing well in the current and coming quarters, we remain committed to continuing to transform the business, to strengthen its sustainability and durability to perform well far into the future. Thank you for joining us this morning, and thank you for the confidence you've placed in us with your investment. Thank you.

Duration: 63 minutes

Call participants:

Jamie Caulfield -- Senior Vice President of Investor Relations -- PepsiCo

Indra Nooyi -- Chief Executive Officer -- PepsiCo

Hugh Johnston -- Chief Financial Officer -- PepsiCo

Dara Mohsenian -- Executive Director -- Morgan Stanley

Andrea Teixeira -- Managing Director -- JP Morgan

Pablo Zuanic -- Senior Equity Analyst -- SIG

Bryan Spillane -- Managing Director Equity and Research -- Bank of America

Ali Dibadj -- Senior Vide President -- Bernstein

Judy Hong -- Managing Director -- Goldman Sachs

Lauren Lieberman -- Managing Director -- Barclays

Steve Powers -- Equity Research Analyst -- Deutsche Bank

Bonnie Herzog -- Managing Director -- Wells Fargo

Amit Sharma -- Vice President -- BMO Capital Markets

Mark Swartzberg -- Securities Analyst -- Stifel

Robert Ottenstein -- Senior Managing Director -- Evercore

Nik Modi -- Managing Director -- RBC Capital Markets

Bill Chappell -- Managing Director--SunTrust

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