百事 (PEP) 2001 Q1 法說會逐字稿

Ladies and Gentlemen. Thank you for standing by. Welcome to the Pepsi Cola fourth quarter earning meeting Conference Call. At this time all participants are entered with an only mode. Later, we will conduct a question and answer session. At that time, if you have a question, you will need to press the one followed by the four on your telephone. As a reminder, this conference is being recorded Monday, February 5, 2001. I would now like to turn the Conference over to Kathleen Lukes, vice-president of Investor Relations. Please go ahead now.

Thank you operator, and thanks to everyone for joining us this morning. With me are Steven Reinemund, President and Chief Operating Officer of PepsiCo, and Indra Nooyi, our Chief Financial Officer. We have a lot of brave men who report upon all of our divisions, both for the fourth quarter and the full year 2000. Steve will start by talking about the fine performances turned in across all of our businesses, and why we expect that performance to continue. Indra will then roll up the financials and give you the corporate algorithm. After that, Steve and Indra will take your questions. Before we begin, I would like to repeat some information about this call, which is also being Webcast and can be accesses at www.pepsico.com. The call will be archived for 90 days at the following web site: www.pcdn.com. and www.vcall.com. A taped replay will be available until the close of business Wednesday by dialing 800-633-8625. International callers should dial 858-812-6450. The reservation number is 1764-8339. Let me also take a moment to point out that PepsiCo's fiscal year ends on the last Saturday in December. So

every five or six years, our fiscal year includes 53 instead of 52 weeks, and our fourth quarter contains 17 instead of 16 weeks. The year 2000 was one of those years, and so, in order to help you compare our performance in 2000, to our performance in 1999, we're presenting information on comparable basis. Specifically, we've ignored the incremental inpass of the extra weeks for both the quarter and the full year. We also have presented results for 1999 on proforma basis. Assuming that the transactions involving bottling operations occurred in 1998, an extra opinion reported in 1999. Finally, I would like to read our safe harbor statement. This conference call may include forward-looking statements based on our current expectations and projections about future events. Our actual results could differ materially from those anticipated in any forward-looking statements. But we undertake no obligation to update any such statement. In addition, the proforma results do not necessarily represent what our results would have been, had certain transactions been completed as of the dates indicated nor they give any fact to any other event. For a review of [written factor], please refer to our statement filed with the Securities Exchange Commissions. Now, it is my pleasure to introduce Steve Reinemund .

Good morning everybody, and a thanks for joining us. I'm pleased to report that we had a terrific year last year. 2000 was PepsiCo's best in recent memory. It's actually the strongest that I have seen in my 16 years with the company. I say that not just because of the overall results, which I do believe were excellent, but because every single one of our businesses consistently contributed to our success in the US and internationally. I also say that because we delivered on the promises that we made. We have the right

strategies as a convenient food and beverage company, and we are focused on executing consistently against them. We stay focused even while executing last years M&A program, which included Quaker and SoBe. That is why we are so excited about the future. Our businesses are well positioned to take advantage of the consumer trend toward convenient consumption, and our major platforms good for growth make us confident that we will be successful in meeting our goals, to continue to report this kind of solid financial performance in 2001, and the years to come. Now let me give you some highlights of our excellent performance in the fourth quarter and for last year. Let me start with the fourth quarter. Earnings this year grew 15% to 38 cents a share on a 16-week basis. This was our fifth consecutive quarter of double-digit earnings growth, demonstrating the strength of our underlying businesses. Now including the impact of the 53rd week, we would have added three more cents, to 41 cents per share. Every division gained volume, which drove net sales up 8% to over $6.1 billion, and operating profits also grew very strongly across all our divisions, increasing over 12% to $984 million. And finally, net income grew 15% to $567 million. A strong quarter contributed to what I consider to be a terrific full year. On a 52-week basis, earnings per share grew a strong 17% to $1.45 compared to $1.24 in 1999. And with the 53rd week, EPS was $1.48. Net sales grew 8% to over $20 billion. Operating profits grew 13% to $3.5 billion. And the

return on invested capital improved even more than we had expected, by 250 basis points, to 23%. Again, we are particularly proud of the fact that these strong results came from excellent performances by each of our operating divisions. Now let's take a look at each one of them, starting at Frito-Lay North America. Frito-Lay North America achieved double-digit profit growth for the eighth consecutive quarter increased revenues of 6.5% and 4% volume growth. Fourth quarter profits came in at $539 million and revenues were $2.5 billion. For the year, Frito-Lay North America's revenues rose 7% to $8.4 billion, and profits were up 10% to $1.8 billion. Frito-Lay is truly an exceptional business and we expect their strong performance to continue throughout 2001. We're comfortable that operating profits will continue to grow at around 10% for the year based on revenue growth in the 5% to 7% range. Now let me come back to volume for a minute, specifically, the impact of Frito-Lay North America's wait-out action. Now it's simple, but also it's complicated, and therefore I have asked Indra to walk you through the details of this pricing action. Indra .

Thanks Steve. First, let me review: we expect 5% to 7% revenue growth and 10% profit growth from Frito-Lay North America in 2001. While we brag on Frito-Lay North America is $8.4 billion company with a portfolio cover that includes 40 snacks in both take-home and single serve sizes, dips, meat snacks, cookies, crackers and nuts. Our business is not only the DAV business in the US; it includes Canada, and a fairly significant vend

food service business. In the snack business, we have key price forms, for example, 99 cents for single serve, and $1.99 or 2 for $5.00 for take home size promotion. These price forms appeal the consumers and we want to maintain them. When we take visual pricing, we could lose the appealing price point, or in the case of promoted price points, end up giving the price increase back through announcements to give to our customary promoted price points. So we need to be very careful about taking visual pricing action. Now the weight out action itself. When you think about our weight out action, think of it as a cost reduction that we're using to offset inflation. The weight out is not across the board. The weight out affects only specific NKUs; mostly larger, salty snacks take home sizes. It impacts the single serve up and down the street before, to a much lesser degree, and does not impact any of our Canadian business, or vend food service. Therefore, it can be a little difficult to explain. With all that said, here are some rules of thumb to use to go forward. There is typically a difference between our revenue growth and pound growth, resulting from product mix changes, price changes, and promotional changes. For 2001, for FLNA as a whole, you should expect revenue growth to exceed pound growth by 3 to 4 points as a result of the weight out. This is up from the 2 to 3 points we usually report. Any change beyond the 3 to 4 points would be attributable to product mix changes, promotional changes, or size mix changes; the specific

details of which would be very hard to forecast at this point. When you look at IRI data, revenue would likely exceed pound growth by 4 to 5 points, as a result of a weight out for two primary reasons: 1. The channels read by IRI, which are less than 50% of our business, have a higher rate of take home sizes with a weight out at a higher impact. And 2. The IRI numbers don't have the up and down the street channels, and price not impacted by the weight out, such as a bag of meat snacks, crackers, cookies, and nuts. As Steve said, it's simple but complicated. And hopefully, with these rules of thumb, there won't be any confusion going move forward. Now let me turn it back to Steve.

Thanks Indra. Let me just say one more thing about Frito-Lay North America's performances. Just to add that we are extraordinarily proud of the performance that they've had last year and particularly the way they have been able to consistently deliver excellent results over the past 8 quarters. Moving beyond North America, Frito-Lay International also had another terrific quarter and continued to grow in salty volume at double-digits. Salty volume was up 12% with that group coming across all of our regions. In fact, we gained market share virtually every single market. For the fourth quarter, revenues grew about 10% to $1.3 billion with operating profits up 11% to $155 million. Profits would have been 4 points higher but for the adverse impact of unfavorable foreign currency exchange rates. For the full year, revenues accelerated a solid 14%, $4.3 billion with profits up 19% at $483 million. Sabritas and

continue to perform well, as well as Walkers, our UK business, which grew 9% for the year and gained 3 share points. Walkers had a terrific year and profits were up 12% in local currency, but unfortunately profits were impacted by unfavorable for-ex. After the Big 3, our businesses performed well all over the world. For example, our European and Latin American joint ventures saw double-digit volume increases last quarter, and Turkey had extraordinary volume gains, as well as our Brazilian snack operations Elma, which init..., which initiated its value strategy in the fourth quarter and is doing quite well. And Australia continued to build momentum in the grocery and the vend channels. So we're pleased with the strong performance of Frito-Lay International all across the world. And for the full year 2001, we expect operating profits to grow in the mid-teen range. Now let's take a look at Pepsi-Cola North America. Pepsi-Cola North America finished this successful 2000 with a very strong performance in the quarter. Revenues were up 15% and profits over 13% for the quarter. In each case easily exceeding our high, single digit guidance. Concentrate shipments rose 2.7% for the fourth quarter, driven by the introduction of Sierra Mist. Now bottler case sales were not as strong as expected, and that was due to severe competitor pricing actions in December. But bottler case sale did advance more than 1%. As you look at BCS, I would like to remind you for comparisons sake that our reported BCS volume does not reflect any sales of our Tropicana products. For the full year Pepsi-Cola North America's net sales increased 8%

to $3.3 billion and profits were up 9% to $820 million. Now we're confident that Pepsi-Cola North America will continue to produce balanced growth in 2001. First we see building momentum in carbonated soft drinks. Second Aquafina is continuing to show strong growth. And third, we have new products lined up such as Pepsi-Lemon Twist, and new Mountain Dew increase that we're calling Code Red. What we're looking forward to the sell in of our new Dole products. And lastly, we have a very strong promotional calendar. Based on all of this, we see bottler case sales growing approximately 3% for the year. Our profit outlook for the full year is high single-digit growth. Now the impact of the SoBe acquisition should add about 1 point to that number. Now we turn to another division that delivered a fine performance for the quarter by single-mindedly pursuing its strategy, and that is Pepsi-Cola International. Their volume was up 4% for the quarter, led by a strong performance in countries like India, China, and Russia, just to name a few. And revenue in the quarter, although it was down 4%, it reflected the negative impact of foreign currencies and competitive pricing issues in some markets, as well as the load-in last year for the millennium. Operating profits broke even, and this is a big win in this seasonally low quarter and a $7 million, better than last year's performance. For the full year, bottler case sales were 5%, reflecting strong performances around the world. Net sales were up 3% for the full year, to $1.8 billion primarily due to volume gains and higher pricing. Operating profits for the full year increased

37% to $148 million due to the higher pricing and increased volume. As you can see, Pepsi-Cola International continues to make tremendous progress. And the outlook for 2001 remains strong. Consistent with our guides from last year, we expect Pepsi-Cola International's volume and revenue to grow to mid single-digits with profits growing in the mid-teens. Now, I will turn your attention to Tropicana. Tropicana's phenomenal growth story continued as they posted another quarter of strong volume gains. Equivalent volumes grew 11% for the quarter, right by more double-digit growth from Pure Premium, our flagship "not from concentrate" brand. Net sales in the quarter increased 8% to $761 million, and operating profits increased 16% to $63 million due to the volume gains. Now for the full year Tropicana grew volume a robust 8%, and that is more than double the growth rate of the previous year. Net sales increased 6% to $2.4 billion, and operating profits grew an outstanding 30% to $220 million. And I might add that's double the operating profit level of 1998, the year that we acquired Tropicana. Tropicana's focus on its fortified nutritional trends fueled growth in 2000, as did the introduction of the new 128-ounce Pure Premium package. Tropicana pioneered the clinical trial that allowed it to make additional health claims because of the potassium actually found in our product. Driven by this news, Tropicana's market share rose to almost 35%. Now looking ahead we have an exciting product news pipeline in 2001 as well and will continue to focus by extending Pure Premium's reach with various category

development programs. We expect both volume and revenue to grow in mid single-digit range for the full year, and we expect profits to grow the low teens the full year and below that for the first quarter as they overlap last years' phenomenal 70% growth rate in Q1. And now I would like to turn it over to Indra to roll up the numbers and to give you a corporate look at our algorithm.

Thanks Steve. First I'd like to say how proud I am of our strong and consistent performance turned in by every PepsiCo offering division, not only in the fourth quarter, but throughout the year 2000. Let me take a few minutes talking about the corporate leverage that has gone now to our 17% EPS growth for the year. First, corporate unallocated expenses, which increase, to $319 million in 2000. Several items grow this increase. Deferred compensation costs, which were higher than prior years due to our strong stock performance, investments behind our product 1 activity, increased contributions to the PepsiCo Foundation, and some foreign losses. Equity income grew 52% to $125 million. This group was driven in particular by the outstanding performance delivered by the Pepsi Bottler Group. Net interest expense for the 52-week-year declined 12% over the proforma prior year to $142 million, reflecting significantly lower average debt levels that were partially offset by higher average interest rates. I also want to spend a few minutes on the number of shares we have outstanding. As you will remember, we announced in December that we rescinded our share repurchase program in connection with our acquisition of free For the full year

2000, prior to dissolving our program, we repurchased 78 million shares, proforma was dropped 1.4 billion, bringing our average number of shares outstanding, on a fully diluted basis of year end to 1.475 billion shares. I am also very proud of the cash flow performance we turned in. Operating cash flow, which we define as net income excluding op interest, brought changes in the working capital, less capital spending on our balance sheet changes, grew 33% to $2.7 billion last year. Lastly, we come to invested capital. We had and continue to handle the gold. The improvement of ROIC by 50 to 100 billion points a year. But this year we did even better than expected as a result of our strong net income performance. This year ROIC grew by 250 basis points to 23% and we are very proud of that accomplishment. As I think you can tell, we are very pleased with these results, and based on our outlook for the coming year, we expect to continue to deliver consistently excellent performance. Let me explain. First, we expect revenues from our snacks and beverage businesses to grow 6% to 7% for the full year. Second, we believe we can grow business earnings from our existing businesses 7% to 11% for the year. Third, we expect to generate another 2% to 3% from corporate incentives, to give an easier growth rate of 12% to 13% for the full year. And finally, we expect to improve ROIC another 50 to 100 basis points this year. Let me return to Corporate Leverage. We are absolutely committed to getting 2 to 3 points of leverage below the operating profit line. But how we get it will be slightly different in 2001 than 2000. Let

me explain. Going into 2001, we expect corporate unallocated expenses to be relatively flat to 2000 on the full year basis, although individual quarters may be higher or lower than prior years. We expect equity income to continue to benefit from solid performances by our anchor bottlers, although our cannot be as outstanding as it was in 2000. The single biggest challenge in 2001 will be the laws of leverage, resulting from our shared repurchase activity. As I mentioned earlier, in connection with the Quaker transaction, which will be accounted for in the we rescinded our share repurchase program. Eventually, our shares outstanding will go up for several reasons. One, we will be issuing 15 to 20 million tainted shares before that transaction closes, although your stock option exercises will continue to be added to the base, as 315 million additional shares of PepsiCo stock will be issued to Quaker shareholders to conclude the merger. Nevertheless, as I said before, we still expect to get 2 to 3 points of Corporate Leverage. In 2001, you can buy the implementation of various tax strategies. A PepsiCo stand-alone Corporate Tax Rate will go up 1 full percentage point to 31%. We expect to maintain this tax rate going forward. This reduction in tax rate will help us offset the laws and leverage of the rescinded share reverted program. Let me close by reiterating PepsiCo's algorithm, which relates only to our existing portfolio businesses. Revenues will grow 6% to 7%, line of business earnings will be up 6% to 11%, full year EPS growth will be up by 12% to 13%, and finally, we expect to improve

our ROIC another 50 to 100 basis points. Now let me turn it back to Steve, who will give you the update on the Crystal transaction.

Thanks, Indra. And as you know, we've entered into a merger agreement with the Quaker Oats Company. While today I have been talking about the performance and outlook of our existing snack and beverage portfolio, our goal of sustained growth will not change as to the Quaker merger, in fact, that's one of the reasons the merger is so attractive. Because Quaker creates growth opportunities across so many parts of our existing business, and it expands our platforms for growth into the future. As we work out the details of new integration plans, we continue to feel very, very positive about our ability to successfully complete the deal and achieve the synergies that we spoke to you about last December. We believe the transaction is on track to close sometime in the second quarter, and this transaction planning is well under way, and we have received clearance on our preliminary filings with the SEC. Now I know we have gone through a lot of information this morning, but I would like to make sure I close on a couple of key points. And that is first, we have a great fourth quarter that capped off, what I think was a terrific year. Secondly, we achieved such good performance because all of our divisions, all of them, were highly focused on consistent performance against their objectives. And finally, our outlook is simple. More of the same. At this point, Indra and I would be happy to entertain any questions you might have. Gentlemen, if you have a question, please press the 1 followed by the 4 on your telephones. You will hear a three-tone prompt acknowledging your request. If your question has been answered, and you wish to withdraw your phone request, you may do so by pressing the 1 followed by the 3. If you are using a speakerphone, please hook up your hand set before entering your

request. The first question is from Bill Pepperio of Penford-Bernstein.

Hi Steve and Indra . How are you?

Good.

Hi Bill.

Given the weight out strategy of the tactic in '01, can you talk about any concern you haven't realized in 1% or 2% increase in revenue propelled beyond '01, maybe getting more from mixed trade up rather than front line pricing. Also, if you can talk about the key drivers of growth in the non-measured channels such as food service and C&G. And in the last part of Frito, status on some of the initiatives like the pre and is there any deceleration in terms of the profit contribution from some of those cost initiatives that you see in the next 12 to 18 months?

Let me, let me start Bill, and first of all on the growth, we we feel very good about the product portfolio, both in our core products, line extensions, as well as in new products. Just for example, we have a good portfolio of flavor extensions in Duritos and in the Ruffles flavor rush, and, as well as in Rold Gold and in Cheetos, so we think that the basics of five introductions for next year is supported by strong advertising and good execution will work. Secondly we have some new products that are more than just product line extensions. I think the Lays' Bestro product which is really our entry into a harder bite potato chip with terrific flavoring systems, is going to be an excellent addition next year, and we have several other new products that are more than product line extensions. So we feel good about the growth of the base business in 2001. Beyond that, I would tell you that our innovation portfolio are both in our core business of salty snacks, as well as outside the core, is getting stronger all the time, and frankly that's where Indra

and I spend the majority of our focus in Frito would be on encouraging, supporting, and helping the innovation pipeline. And I'd like to ask Indra if she...

It's just that I add a couple of points to the. If you recall, one of the things we have been talking about is that in 2000 we spent a lot of time revamping the whole innovation process of Frito-Lay North America. Starting in 2001, we are beginning to implement these new innovation processes and beginning 2002 should have seen the fruits of all these process modifications. So I think you will start seeing in 2002 much more integrating color and freedom in North America expressing the add more area. The second thing I think is worth mentioning here is when we did the Quaker transaction, if you recall in the road show, we talked about the fact that the Quaker bars and the rice cakes, in fact, did some wonderful things for us which is, it added a couple of hundred million dollars of revenue, actually three hundred million dollars of revenue, and gave us tremendous freedom in whole add more area. Looking out through the Quaker business and add to it all the innovations that are happening in Fritomania add more area, I think we are opening up a whole new area of growth of Frito-Lay North America, that in fact will give us years of growth beyond 2002. That's why we feel pretty bullish about the growth prospect beyond 2001.

Just to add one last comment on that point, the Quaker acquisition is particularly helpful to us in the snack area because it gives us legitimacy with the consumer in the areas outside of salty snacks. So that's really, the Frito-Lay business is great, but it's really a base from which we can grow because we now have a legitimacy. Secondly, it gives us capabilities in the product development area. , as simple as it might sound, the capability for developing a product outside of our core salty snack is different. And with the Quaker addition to the portfolio

we bring that human resource, that talent, to develop those products. So we feel pretty good about the innovation pipeline, and frankly we recognize that that's critical to our future growth. Your second point, in the up and down the street business, it's similar to our Large 4 method, in the sense that the basics of the business, value, variety, visibility are important, but that's really where we have our strength. I mean our up and down the street business allows us to have our sales people in the stores every day merchandising the products. And we have focused a whole lot more attention in the last 12 to 18 months on developing products specifically for the up and down street business. And so we feel that we will be able to capitalize on that even more going forward. Your third question on prefict we have certainly continued to focus our attention on rolling out those prefict and bulk 24. We've gotten some new insights in the last year on how to make it even stronger, particularly in the area of getting to the rural area where we have been, and we have got some interesting ideas on how to do that, which we frankly didn't have when we first started the project. So there is a lot of enthusiasm continuing on reinventing ourselves in this whole improvement of our distribution area, so there certainly nothing but encouragement as far as I'm concerned on continuing this process which we've been on for on for a couple of years.

Thank you. The next question is from John Boshay of J.P. Morgan.

Yeah, good morning guys. Just a follow-up on Bill's question. If you're looking for a greater percentage of your revenue growth for Frito to come from pricing, in 2001 versus 2000, theoretically we should be seeing, it seems like, slightly faster operating

profit growth rate in 2001 especially given some of the productivity you mentioned previously. Any thoughts in terms of, you know, is there potential upside to sort of the 10% number that we saw in 2000 given the higher pricing level?

John you know, as Indra made in her comments, said in her comments, it really isn't pricing, it's cost reduction but all that said, in the outsides that that we have, and obviously our internal plans in all of our businesses are different than maybe the commitments we might make, but we want to continue to reinvest in our businesses so that we can provide the consistent performance year after year. That's really our intention, so I would certainly tell you we are comfortable with what we are telling you, and we expect to deliver that.

Okay, I guess the question then becomes if started, sort of believe this, but if generally companies see greater leverage from pricing as opposed to volume, so looking at how the weight out works and understanding that you, in a similar way, see greater leverage from a profit stand point from the weight out than you do from similar amounts of volume growth in terms of contributions to the top line versus contribution to the bottom line.

John, look, weight out is a short-term strategy and not a long-term strategy so this is a one year weight out program and again, it's strictly, should be viewed as a cost reduction effort, as a way to offset any inflation we had in our cost structure, okay? Anything left over will just be increment coming out from the weight out cost reduction over inflation will be reinvested back in the business to fuel the whole innovation pipeline so we can make sure that we don't over deliver Frito-Lay for the

year, and so sacrifice the future. So our goal is to make sure we fund the innovation pipeline at Frito-Lay North America to get 5% to 7% revenue growth and 10% profit growth on a consistent basis. And again, let me remind you John, we're talking of $8 1/2 billion revenue business, with a couple of billion dollars flat on bottom line, so when you start talking 10% profit growth, we talk about huge numbers. So, we want to make sure that we are running a business that delivers these sort of top line and bottom line numbers consistently. And that is why we have managed our investments to make sure this lasts forever and ever.

Okay, great, thanks. The next question is from Andrew Conway of Morgan Stanley Dean Witter.

Hi Steve and Indra . Two brief questions. First, in 2001 I think you are going to see some accelerated operating margin expansion; last year 65 basis points, it looks like you could be up close to 80 basis points this year. Beyond 01, Steve or Indra, could you talk about what you think the Frito-Lay North American revenue and operating income gross rate would be, how much basis of margin you think is a normalized approach to the business. And , secondly please, could you talk a little bit about your expectations for growth versus in North America this year please?

Sure. We don't expect to continue to drive Frito-Lay's operating margin at the same rate that we have, that we did last year and that we will probably do this year. But as we outlined several years ago when we first talked about the rollout of the new distribution system, actually the meeting we had in Dallas, we talked about the fact that we want to operate, we want to manage the business for long-term consistent growth and from year to year we may flash the margins in order to achieve that. But long-term, it's not our

objective to drive margins. Now, the margin expansion we've seen has come from, from good productivity efforts that we believe are the right thing to do in business. And we'll continue to try to do those kind of things but Frito-Lay is a balanced company where we want to grow the top line and that's where our major focus is. Indra, I don't know if you want.....

Yeah, I would like to add to that, Steve. Andrew, just based on the math, you know, revenue growth rose 5% to 7% and in operating profits rose 10%, there is some expense in the margin that comes with that algorithm. The thing to realize is, the Frito-Lay business as I mentioned earlier Andrew, has got such an incredible complex array of products, and now add in all the new add more products coming in from Quaker, what you are going to see long term is that the fundamental modern characteristics of these businesses would likely change and the pricing is going to be different, the profit characteristics are going to be different. The going out in the future we think core salty with the base business that we have at Frito today, that 5% to 7% top line growth, 10% operating profit growth, with the resulting operating profit margin improvement will continue. As the new products come in, operating profit margins profile they change somewhat, but then it's too early to talk about that right now.

And to your second question on the ESP growth. There are probably two major categories or reasons why we believe that the growth will be stronger this year. First is innovation. We are going to be putting a lot of focus as you probably heard from Craig's talk last week, behind wild cherry Pepsi, which we think is a terrific product, grew well last year. Secondly, we have lemon Pepsi coming out this summer, which we're very enthusiastic about and we think

that the urban marketing programs that we're putting a lot of emphasis behind this year, will also move our business. And on top of that, Mountain Dew, we have expectations this year that Mountain Dew will have a strong year behind the introduction of Code Red. So all in all, between the product line introductions, and focus on innovation combined with the second aspect which is really more an equilibrium in the pricing. You know last year we went through an industry pricing change and we think that started to settle out and we expect that to be a favorable factor this year. So it's really those two issues, pricing and innovation.

Thank you Steve. The next question is from Duane Marter of GE Investments.

Hi, good morning. Can you um talk about price mix a little bit at PCNA and help me get from 3% um concentrate shipments to 50% revenue growth. And then next talk a little bit about SoBe, uh in 2000 both in terms of revenue and operating income and what you expect in 01, and how you expect to expand uh distribution there this year. Thanks.

Yeah, hi Duane. Let me take this question. Um as we said concentrate shipments grew about 3%, then we have the concentrate price increase which was effective last year which gave us about 7-7 1/2 points bump up. Then we had the Dole products, which you know is being sold into a bottling facility for star shipping in January, that contributed about a point and a half. Uh Aquafina and royalties contributed slightly over a point. Um, and then there's a bunch of other things contributed another couple of points leading to the 15% revenue growth.

Okay, got

it. The next question is from Doug Lane of Merrill-Lynch.

Good morning Steve and Indra. Question, first one on foreign currency, which uh apparently impacted the core. Do you have an aggregate number of what the foreign currency impact would have been to operating profits or EPS um across all your divisions, and what's your outlook for currency in 2001? And one is um on your profitability. And then the second question is getting back to the Frito-Lay volume forecast for next year where 4% to 5% has been the number recently that Frito has been pretty consistently hitting. How much should we expect, a point below that, should we be looking for 3% to 4% or 2% to 3%, if you could just help us on volume specifically for Frito in 2001.

Let me take the Frito one, and I'll let uh Indra deal with the for-ex issue. As Indra made, said in her comments, we expect the revenue to be in the 5 to 7 range at Frito, and if you back off from that, um 3 to 4, uh, 3 to 4 points than you can sort of back into the traditional volume as we know it. I would say that as difficult as it is to follow that for this year, um, we believe that a better tracking mechanism for this year, and we certainly never, I think this a long-term way of tracking the business, but I think this year a easier way to track the business is really along revenue lines because prior to the end of the accounting period where we can explain it to you, I think revenue is probably going to be a closer proxy for the help of the business.

Now regarding the for-ex. I mean, you could have stepped right foreign two pieces. One is the calculations office that counts because of foreign

within a business. And then the transaction losses that come which came recorded at the corporate level. I don't have the exact number of the or PCI, Tropicana International, but that isn't the calculating. We will get that to you offline. But with the transaction site, which is once recorded below the line in corporate, for the fully efforts of our

inaudible DOUG Okay, thank you. The next question is from Mark Collin of Golden Sachs.

Hi Steve and Indra . Can you hear me?

Mark?

Can you hear me?

You faded out a little bit.

Okay. Um I just wanted to, I know you, you um ,we, we, a few of us have returned to this question on Frito-Lay's growth, but Indra , I'm having a hard time myself just understanding how um how you really work your way to sustaining the kind of revenue and profit growth rates that you are talking about beyond 01. Um, if indeed these price points that you are talking about are, are so substantial, it would seem that you'd be faced with a situation where you know, any kind of price leverage in the salty snack business, you know, a year or two out from now is going to be very hard to come by, so um, it's possible that you're talking about the add more products being much higher priced and therefore, lower percentage margin products, but, but I'm having trouble with the clarity of that, and I wonder if you could just elaborate on that just a little further, for us.

Well Mark, let me, let me take a stab at it. I think inherent in the strategy that we outlined several years ago was that we anticipate the volume in Frito-Lay to go up as we get the capability to deliver more products, and we get the staple of products outside the core into Frito-Lay. And that really is what we're looking at. So, it's too early for us to give you a specific guidance on

that volume but clearly that is our target, to increase the volume and as you said very well, the dynamics of the products outside of our core salty business may be different that the one that we traditionally give, when in fact we know that they will be, and the margin structure will be different.

Let's just clarify. Like when you say, expected volumes to accelerate, are you talking the volume growth rate to accelerate? Test Page 14

Yes.

Okay. And then can you please just talk a little bit about how important these price points are going to be? I mean, how much of a real inhibitor are they to price growth going forward? Will, you know will you now be able to put the same kind of price growth into the algarism that you were able to do for the last several years because of those price points?

Well we constantly look at the price points in a marketplace, and uh it's something we're very conscious of, we're very sensitive to, we learn this lesson all over the world, we just this past year we reintroduced pricing structure in Brazil, and it's just catapulted the business ta to much, much better performance, so we we recognize in our category, pricing is critical. All that said, there'll be a point time when we have to break through price points. We're not prepared to talk about that today because we have a lot more work to do. We don't plan to do that in near term, but that may well end up happening sometime in the future. So I don't think that this issue is insurmountable. But at this point we have given you our best thinking. Next question is from George Thompson of Prudential Securities.

Good morning. Um, Steve, can you talk a little bit more about what you expect from specific channel growth in terms of both the snack food business as well as soft drink business? And secondly, you talked about a re-acceleration of the

carbonated soft drink business, does that mean a re-acceleration of the Pepsi brand, uh, I mean it almost seems like you'd have to do that given it's size.

Well let me start with the cycle one then George. Clearly the Pepsi brand is critical to our future and that's why we've talked about earlier the pipeline extensions on Pepsi with the wild cherry Pepsi, and the lemon product because we do have a focus on rejuvenating the Pepsi brand trademark. So clearly Pepsi has to grow for CSEs to do well in our portfolio, and we clearly intend to focus on that and that is the top priority. Secondly, as far as channel growth is concerned, it's different somewhat by product category, but in general the mass merge channel has been a very strong growth channel for us and our products and quite frankly for most of our direct and indirect competitors. We also think that the up and down the street category is a tremendous competitive advantage for us, things like this urban market program where we're very enthusiastic about because we've seen terrific performance when we get together in the tower of one. We can individually observe the markets. We think there's great opportunity there. And just as we talked about the need for Pepsi brand, Pepsi to grow, obviously the supermarket channel has to grow, and we focus a lot of attention on making sure that we are bringing new programs to that category as well. Indra mentioned in her comment the vent food service channel, and that's been a very exciting channel for us. We've been focusing more and more of our attention on that channel across all of our businesses. We're working together in very interesting ways between our divisions to capitalize on the vend food service channel, so we're very pleased with that

channel as well. So I think in summary I would tell you we expect every channel to grow. We review the channel performance by company and across tower of one, every period with the division presidents because we know that we have to have constant innovation across all the channels in order for our business to be successful.

How do you expect to get, the supermarkets channels to grow for both Frito-Lay and the soft drink business? Can you qualify that for us?

I don't have the exact numbers here George, but I will tell you that, you know, we spend a lot of our programming time making sure that we have the programs for the individual channels. Actually this year, we're going deeper than that. We're going by customer within channel with specific customer focus marketing plans and execution plans, and at least a number of them will be across PepsiCo live power of one specific customer plans.

Okay, thank you.

Now let us go back to a question that Duane Marter asked about SoBe. I'm sorry we didn't address it when you asked it Duane. Um, you asked the question about SoBe 2000 revenue and income impacts. Again, as you know, we closed on the SoBe deal with part of January, but we're quite excited about SoBe. The overall growth rate for the year 2000 in terms of profits were 22% for SoBe and we think SoBe coming into the Pepsi system will start collectively moving out of its distribute movement, distributing and start moving into the Pepsi bottling systems. In fact, we have a couple of starting this period with CBG and Um, we think SoBe will generate a lot of points and profits look for 2001, and with the guidance given earlier, we didn't talk about

the facts of SoBe, so the SoBe numbers would be incremental to the number we gave you earlier. Next question is from Tim Swanson of A.G. Edwards.

Yes good morning. Two non-operating issues that I wonder if you could go a little bit deeper into. First, can you give some more specifics on the tax reduction strategies that will lower your tax basis by a hundred or a hundred basis points. And also, in terms of your corporate expenses, um, I looked back at 99 and recalled the IT, the additional IT spending, and then 2000 you said it was a compensation issue. Uh, looking at 2001, what is it that that leads you to believe that it would be flat and not lower um for the year? If you could just address those two issues.

First of all, I mean, we don't end the details of our tax strategy to lower the tax rate, but just rest assured that once the activity has started in 2000 did in fact result in a whole point of tax reduction for the company which will sustain itself. Just as PepsiCo's stand alone, going forward. Let me now talk about the corporate and activity expenses. You're right, in 1999 we did have a bunch of IT expenses. In the year 2000, we had a couple of to number. One, as I mentioned to you, we contributed more than normally did to the PepsiCo Foundation. We set up our investments behind the power of line activity. We had some point losses. And, as the stock price went up, our differed compensation cost went up. Going to the year 2001, at this point we've said it's going to be flat. I mean, our goal is to manage anything that is of corporate down. But this point extends flat. And let me tell you why I believe that point is prudent to plan for it to be flat. Um, you know, I hope our stock price goes up. I believe it should go up significantly, so that should certainly affect the differed compensation costs. It's a good thing that

would certainly affect that. Um, we've continued to invest behind power of one, and we are seeing all the benefits coming in from the power of one activity, and we're even expanding into some of our international markets. Um, we intend to continue our contributions to the PepsiCo Foundation, and right now all our planning is done based on certain for-ex numbers for the Europe Pound and the Peso, which you know is they turn the right way could give us some up side. At this point, we plan for it to be, you know, in a number that is full ended year 2000. As we go to the quarters, we will give you direction if we think those numbers are coming down.

Okay, so just to clarify on the for-ex. You, you are, you're saying that you believe it's going to deteriorate, or do you think it's going to stay level with where it was fourth quarter?

You know, through the year it degenerated, and we plan for it being on the level that it was in December. If you look at the foreign striates on the Euro-pound especially goes to a right now, you would say there is some upside to the for-ex. But you know what? This is just one period. Going forward, we still don't know what the differential productivity matrix that will be between the US and these economies, and therefore, what the resulting for-ex is going to be. It's just too, too early to predict any outsides in that line of expense.

Great. Thank you. Next question is from Jeff Ronchik of RCB Investment Management.

Okay, um, could you review, I'm just curious, are you considering or is there any possibility that you're going to change the accounting treatment of the Quaker Oats acquisition from a pooling to a purchase given some of the the changes going on in the accounting world? And secondly, you know, hypothetically speaking, if so, how would that change the sort of the post deal portfolio, you're thinking on that?

Well let me, let me take a stab at that. Indra's dying to answer that question. We have no

intention to change our strategy that we are on now, to consider this as a pooling transaction, and we have no plans or intentions not to have all the businesses that are part of Quaker today become part of our business at the end of this. With that preface, let me turn it over to Indra.

That's exactly right, Steve. It's a floating transaction and the portfolio stays exactly as you know we mentioned in the road show, we have no plans to direct any assets.

But let me ask the question again. Um, wh what are the reasons against changing to a purchasing which would give you complete flexibility on the forth below as well as being able to continue the stock repurchase? Seems like there's a window here that what didn't exist that you could do what you might have wanted to do originally?

Okay, let me um, let me restate what we said during the road show. The minute we stretch from pooling to any other accounting treatment, um, we become the in charge for cash EPS. Now, I'll be honest with you, at this point, PepsiCo's not willing to be the for cash EPS. Given, there are currency or equities that you know, getting to be very valued, we believe that the currency that looks very attractive in any sort of a deal with a company like Quaker Oats. Where this point, given the status of you know, how fast people proceed in the market and from where we've come in the past, we feel very comfortable that staying with pooling is the best way to account for the Quaker transaction. Regarding flexibility on asset sales, you know, Quaker is an integrated organization, in terms of the sales form, how it goes to market, etc. Even if we switch from pooling to budget, to involve what sales immediately any last year would be very distrusted of the Quaker Oats company. So, we need to take a young approach to really study the business and make sure that if we ever have a need to do any further added projections,

it has, it gets done in a very thoughtful, and non-destructive way. Given that we don't have a burning need to do asset transactions because we feel it would be destructive to the base operations. We don't see a need to switch from pooling to accounting at this point.

If you wanted to become a poster child, I promise you I'd hang it up in my office. Thank you very much.

Ha, Ha. Thank you. Next question is from David Palmer of UBS, Warberg.

It's actually Caroline Leavy. Good morning everybody. Um, I'm wondering if you could help us understand on the volume growth, about all can volume growth of 1% in the fourth quarter, versus I think original expectations of nearer 3, where the short form might have been, if it was on the Pepsi branch, if it was Sierra Mist, um it sounds like Aquafina had a great quarter. And um second question on the beverage side, how do we factor in pricing, how do we look at revenue growth knowing that you are looking for 3% volume growth. How would revenues look in 2001?

Okay, on the um the volume piece, when we spoke to you last, uh, we had a great expectation back then. The volume was going to come in where we thought, and then in December, all that we had very strong growth, it wasn't where we thought it would be, it was based on very aggressive pricing, in the market place by our competitor. So, that's the fact. It actually hit pretty much across all our branch with the exception of Aquifina, and it was probably equally distributed if you looked at it on a weighted basis.

Can we now talk about the revenue growth for going into 2001. Um, Caroline, are you aware that, you know, that the gap between ECS and shipment, you know, they don't sync for every quarter. So let me just give you some of the full year guide,

and um, full year plan is for you know, about 3% shipment growth. In some of that you have the price increase. And then on top of that, you add any royalties that come from Aquafina, and products that don't get reflected when the shipment numbers. And if you add all of that in, revenue will probably be in the high single-digits.

And don't you think there should be room for margin expansion? That way your profits could grow faster than revenue?

That's possible. I would tell you that one of the things that's difficult as we move as a category from CSEs that was predominant factor in some years not too long ago, where we are today, where a lot of the growth is coming from non-carbs. The way that translates in the traditional method of measuring volume is very difficult, and I know it's got to be confusing for all of you. But if revenue, it used to be in the old days, shipments and revenue from our perspective were pretty close to the same, and that is truly not the case going forward. We have royalty income, we have joint venture income, we have other income from companies like SoBe which we own and don't go through the distributor network of the traditional bottlers as well as the traditional shipment. So, it is a little bit more confusing. We're trying to put some time and attention on trying a better way to communicate that with you. But it is difficult, and I hope you all understand that the struggle we have in the communicating. All that said, the good news is that we are very very enthusiastic about being a total beverage company. We're very pleased with the portfolio products that we have, both in CSEs as well as in our non-carbs. And we expect that in the future that we can drive the growth of the beverage business through innovations, across all the categories. That would be very exciting for our shareholders and for our

people. But in the meantime, it's probably little bit confusing.

Caroline, just one other point. The guidance that I just gave you for the full year of revenue of SoBe, which is incremented with that number.

If I may just ask Steve if you could comment on what's going on with Pringles cause it looks like the volumes are falling off a cliff in IRI.

Well, we noticed the same thing. It has been, I think driven by pricing, I mean they've that this the deep discounting that traditionally has been part of that brand has not been seen during the past year, and that may well be the major reason for the for the fall off.

Thank you.

Um, we have time for one last question.

But Steve, before we get to that question, can I just comment a little bit on the IRI reported number for Frito-Lay North America?

Of course.

cost a better consternation with you guys. Um, you know, if you've been wanting the recent IRI numbers from Frito-Lay sales in the US Food, Drug, and channels, you may have expected something lower than the 4% volume growth number. We report for Frito-Lay for the fourth quarter of 2000. In fact, there's a reason why the IRI comparison numbers could be confusing. So let me try to explain this. It has to do with the distributor of in our system 2000. What contributes does is that shifts the calendar by weeks, making the comparison very complicated. The first week of our fiscal year 200 actually began on December 26, 1999, when sales were building in advance of the millennium celebration. That was a big week for us. Understandably, IRI considered that the last week of 1999. You can see how a four-week basis that made from it's leading comparison, and it certainly did that in the fourth quarter. Unfortunately, because of the week

movement, the one-week movement, this issue was continued throughout the year, and we'll try to provide guidance to you as we go through the year. With that, the last question.

Thank you Indra . And the last question is from Art Cecile of T-Low Price.

Warren, the pressure's too great having to do the last question because it's not a very good one, but um, I was just wondering if you could give us some numbers trying to exclude how the Quaker thing is going to affect things with respect to interest expense, average shares outstanding, capital spending. And then finally when Quaker comes in to the fold, I guess their earnings are going to come in as the same 31% saturated, is that right?

Well, Art, all four of those questions I'm going to turn over to Indra.

Okay. Let me start one. All the direction we gave today Art, was on PepsiCo's stand-alone.

Okay.

Let me walk you through the pieces. Um, in terms of capital expenditures, let me go back, in terms of soft line growth. PepsiCo stand-alone, the portfolio that we have today will grow revenues of 6% to 7%.

Right.

The operating profit growth will be 10% to 11%.

Right.

We will get 2 to 3 points from corporate leverage, since we cannot repurchase shares, we will get it through the 1% reduction in the tax rate, so just the sole of the leverage shifts from re-depositing the shares to the tax rate, but we will still get the 2 to 3 points from the corporate leverage resulting in EPS growth of 12% to 13%.

What should interest expense be, Indra?

Um, the interest expense for 2001 will essentially be flat with 2000. That's how we planned it for the year 2001. At first we thought that alone.

Why would be flat since you don't have to

spend any money on buying back stock?

In we cannot trade on a question. Go ahead then.

Pardon me.

Our treasurer Mack McKinna is going to answer that question for you.

The year 2001 is going to show an increase in some capital expenditures and acquisitions, some of which were negotiated and signed up late last year, such as the SoBe transaction, but won't close until this year. But the cost of funding those acquisitions will be shown entirely in the year 2001.

Okay. Without, Indra, without the Quaker Oats transaction, what would your average shares do?

Um, again, our average shares, let me give you the exact number. Our average shares outstanding would have actually gone up between 2000 and 2001, one because of all the stock option and exercises. And also because as the total price goes up, you see the number of shares we'll have to buy back to get an average also goes down.

How much should, how much should we add to the 1475 of this year?

It goes up to 1490.

Okay. And then capital spending, do you have number.

Understanding we are managing it within the 5 1/2% to 6% of sales

Okay.

And that's a number that still comes for PepsiCo stand-alone.

Okay.

Now what it does not include is many additional acquisitions we may do in our base business. So this is just ongoing having expenditure for our base business.

Okay. Is the 31% tax rate, is that new news, or have you been saying that all along?

That's brand new news.

Okay, thank you very much.

INDRA INDRA You're welcome.

Thank you everybody. Have a great day.

That does conclude your conference for today. You may disconnect, and thank you for participating.