百事 (PEP) 2002 Q1 法說會逐字稿

Good morning and welcome to the Pepsico Q1 earnings release conference call.

All participants will listen only until the Q & A session. You will be instructed on how to ask a question.

At the request of Pepsico it is being recorded. If you have objections you may disconnect now.

I will turn the meeting over to Kathleen Luke. You may begin.

Thank you.

Thank you everyone for joining us this morning. With me today are Steven Reinemund, Chairman, CEO, and Indra Nooyi, President, CFO, Director.

And via phone, we have Bob Morrison, our Vice Chairman and President of Quaker. Our earnings were released this morning and for the purposes of the call we will assume you have read it. Before we begin I have a couple of housekeeping matters.

First this call is being web cast and can be accessed at pepsico.com. The call will be archived for 90 days at streetevents.com.

A taped replay will be available until the close of business on Tuesday, April 30th, by dialing 888-562-0519.

International callers should dial 402-998-1417. And the reservation number is 12588.

Next, 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. So we undertake no obligation to update any such statement. For a review of risks, review to our statements filed with the SEC. Finally, we will try to keep formal remarks brief to devote most of our time to questions.

I will introduce Steven Reinemund.

Good morning.

Thanks for joining us today. I am very pleased to report this morning we had another strong quarter in the Q1, with topline volume and revenue growth at 5%. And our 10th consecutive quarter of double digit earnings growth. Our 14% growth, is as you know, at the high end of our previous guidance.

These results come on top of a difficult global macro economic environment, and the fact we are lapping a very strong Q1 from a year ago. When as you probably remember, we grew volume 5%, revenues were up 8%, division operating profit was up 12%, while EPS grew a strong 15%. In the earnings release we issued this morning we tried to give visibility in what drove our business this past quarter and probably more importantly what we have got planned for the Q2.

I am not going to repeat all that. Instead, I will turn the call over to Indra Nooyi to give you an insight into what the divisions are doing and insight on the corporate items below the operating profit line. And then Indra Nooyi, Bob and I will be joined by Gary Rodkin and several corporate officers here in New York that will be happy to entertain your questions. So now let me turn over the program to Indra.

Thank you. Let me go through the divisions, starting with Frito-Lay North America. Gatorade came out fast, 6% volume growth, and 11% operating profit growth. But half of that volume growth came from Frito-Lay's existing business and half came from the new products we mentioned in the release. These new products also drove a positive mix shift, some of which was offset as consumer traded up to value sizes.

This is consistent with consumers increasingly doing grocery shopping at mass merchandise stores. The excellent profit results also reflect the productivity initiatives, such as Prepix supply chain management and purchase to pay we have spoken about in the past.

We expected to see leverage from these initiatives through 2002, and into 2003.

Frito-Lay International, their quarter was impact the by the difficult global macro-economic situation and by very tough comparisons with Q1 of 2001, when profits grew a whopping 27%.

Driven in part by another successful Pokemon promotion. The impact of foreign currency exchange rates dragged down revenue growth by 1.5%, but improved profit by about 3.5%. Our businesses in Mexico, where the peso strengthened, have higher margins. Given the continuing macroeconomic challenges in Argentina and Venezuela, Frito-Lay's volume growth for the full year, may be somewhat softer than our 89%. Turning to the beverage businesses, starting with Pepsico North America, they had a strong quarter with bottle case sales up 4.5%, revenues up 7%, and operating profits up 15%.

I would like to draw your attention to the fact that these numbers on top of a very strong Q1 of last year, when volume was also up over 4%, revenues grew a record 21%, and operating profits grew 15%.

In the Q1 of this year, CSDS grew over 3.5% and contributed about 3 points of growth to BCS. Non-cards grew over 12% and contributed a point and a half of growth for the quarter.

Concentrate shipments and equivalents were over 4% for the quarter, generally tracking bcs growth.

We were particularly pleased that trademark Pepsi showed growth of 2% driven by Pepsi Twist and Diet Twist and also by growth in Diet Pepsi. And our biggest performer was Mountain Dew, which is benefiting from Code Red as most of you know, one of the most successful new product introductions ever.

I would also like to point out that we gained share for the quarter, and that is on top of our outstanding share gain last year, when we gained over a full point of shares, relative to our largest competitor, and for your information, that is more than we volcano done in the last decade. And remember that when we talk about BSC for Pepsico North America, we are not including the growth from Gatorade or Tropicana.

That growth, however, is included in the total worldwide beverage serving symbols which grew over 4% for the quarter.

Just to be clear, we report BCS on a monthly basis.

The BCS quarter benefited from the timing of Easter, which fell in the Q2 of last year.

That impacted our BCS growth by about a point, and will obviously make the Q2 just a little bit softer. Looking forward, we are extremely comfortable with our bcs growth guidance of 3 to 4% for the full year.

Turning now to international beverage operations, in spite of the challenging macro environment, Pepsi beverages international had a good quarter, with BCS up 4%, and operating profits up 9%.

On a currency neutral basis, profits grew 20%. Looking forward, we expect it to grow 4 to 5% for the year as it focuses on driving topline opportunities in its key markets through new product introductions of carbonated soft drinks and on non-carbs. However, Q2 will continue to pose challenges for PBI, as we continue to face a difficult global macroeconomic outlook, especially in Argentina and Venezuela. We also face a tough comparison with Q2 of 2001 when profits grew over 59%, partially reflecting sale of land in Japan. At Gatorade, Tropicana North America, the Q1 was in line with our overall expectations, with very strong results for Gatorade but weak results for Tropicana. Now, I know there has been a lot of focus on the functional beverage business at GTNA, so let's look at this division.

Beginning with Gatorade, Gatorade achieved significant growth in all channels, including supermarkets, drugstores, mass marts and convenience stores. Both volume and net revenue grew 20%.

Let me repeat. Both volume and net revenue grew 20%. A remarkable accomplishment, since it was also a tough comp.

Last year, revenues grew 17% in the quarter and profits were up very substantially as well.

Importantly, as you have noted in the tracking services, our share has bounced back in the grocery channel after being under pressure for the second half of 2001.

In the quarter we introduced several new items, among them Gatorade Ice. Our new clear [sub] line available in three refreshing flavors.

Strawberry, orange, and lime. We have just begun to add some great new advertising features Mia Ham that "should freeze the coolness of Ice" into consumers' minds.

We have also introduced another flavor to our popular Gatorade line.

It is a light refreshing new blend of fruit flavors. And finally, we launched Gatorade Extremeo, our new offering targeted to Hispanics.

They are available in three flavors, mango, tropical and one others. We are excited about the potential of this new line.

In addition, in the Q1 we began our national expansion of Propel, our vitamin fortified fitness water from the makers of Gatorade.

From its small regional [space], it added a couple of points of growth to Gatorade's stellar 20% growth in this quarter.

In April, we began a national print and TV ad campaign to introduce it to consumers across the country.

We are excited about this potential in the functional beverage category. We are making significant progress with synergies, as we combine purchasing, selling, and overhead functions with the resources of Tropicana and Pepsico, Gatorade is enjoying cost savings. As a result, despite greater marketing spending, we are happy to report that Gatorade's operating margins continue to expand in the Q1.

To sum it up, our Gatorade business is off to an exceptional season start. Our new products, our aggressive brand building, our new advertising and our instore merchandising programs are geared up to tackle another winning season.

Tropicana on the other hand continues to have a tougher go of it. Its Q1 volume declined 2%, due to continued softness in the chilled, premium juice and shelf stable categories. Some very aggressive pricing actions by competitors.

The declines also reflect our tradeout of Season's Best for Dole juices in the chilled from concentrate category. We are about halfway through that tradeout and expect it to be completed around the end of Q2.

The Tropicana's trend in the Q1 and we are taking specific actions to get the business back on a profitable growth track. Product innovation, equity spending and cost controls are a part of that plan. Specifically, to combat consumers trading down to lower quality, reconstituted juices, we have increased our marketing and brand building spending.

These actions should promote a high quality, bring down the price to consumer and increase visibility at retail.

To bring meaningful consumer news, we introduced a new individual serve package which allows consumers to take the premium not from concentrate juice with them on the go.

Initial reactions are very positive. We are introducing a healthy kids' product this spring. Using Tropicana's superior cash and flow, through [calcium] and antioxidant vitamins, it boosts kids' immunity and build strong bones.

Consumer feedback from moms tells us this is important news to bring to category.

We will continue to communicate with consumers about health and nutrition news from this leading brand, as we recently did with the Cleveland Clinic study on orange juice and blood pressure reductions.

In combining the Gatorade and Tropicana numbers, look at functional beverages, revenues grew only 3%. This reflects the weighting that heavily favors Tropicana as a first product for Gatorade is viewed as off-season and relatively small.

This weighting had a similar impact on profit growth. Gatorade profit growth far exceeded the strong 20% revenue growth rate, while profits declined for Tropicana, reflecting increased marketing support to get our premium juices back on a growth track. As a result, combined Gatorade-Tropicana North America income increased only 3% in the Q1.

Looking ahead, we expect the juice category softness to continue through the current quarter.

We also believe the actions we are taking will help improve our results as we move through the balance of the year and as of continued gatorade strength we can hit our target of 8 to 9% volume growth for functional beverages in total. I would like to comment on the North American Quaker food business. Volume and revenue both increased a full percent, driven by a longer reporting period, for Quaker foods Canadian operations, which moved from a two-month calendar in the Q1 of 2001 to three full-week fiscal periods in the Q1 of 2002.

Apples to apples, the growth for the quarter would have been about 1% without this change. This shift in timing will impact Quaker Food North America's quarterly results, but not its full-year results. The Canadian timing has little impact on profits, foods delivered a whopping 25% increase in operating profits, thanks in large part to supply chain initiatives quaker implemented-over the past year, as well as synergies created by the Pepsico merger.

Overall, the food business is holding its own, with innovations and cost savings planned for the remainder of this year.

We are on track to deliver 1 to 2% volume growth for this year. In summary, most of our businesses had an excellent quarter, and we are working to get Tropicana back on a steady growth track with solid innovation, marketing and sales plans in place.

Plus the benefit of having a portfolio like ours. Softness in one division can be made up in another.

And the team is executing very well. So, I am sure you can all see why we, in spite of these challenges, that we are facing, are so proud of our operating performance. Now, let me take a minute to talk about the corporate leverage that got us to our 14% EPS growth.

Starting with corporate unallocateds. For the quarter, corporate unallocated represented about 1.8% of total revenues, somewhat above our long-term guidance of 1.45. However, let me remind you that the guidance for the full year and there will be fluctuations between quarters For 2002 we expect corporate unallocated expenses to be roughly 1.45% of sales.

Equity income from to your bottlers is up 31%. Due to the excellent performance of our bottling system and also reflecting the strong Mexican peso. For the full year 2002 we anticipate strong growth in the equity line, although not at the same rate as we saw in this quarter. Q1 net interest expense decreased over 40%, primarily due to lower average debt levels and higher investment balances. Because the amount of debt that is denominated in floating rates, it is approximately equal to the short-term investment balances. For 2002, you should expect interest expense to be roughly flat, or slightly slower than the 2001 number. Regarding operating cash flow, we are off to an extremely good start, and believe we are on track to deliver over $3 billion in cash flow this year. Our shares outstanding remain essentially unchanged.

This reflects the issues of shares as a result of option exercises, as well as a 13.2 million shares issued in April 2001, in order to satisfy accounting requirements in connection with the quaker acquisitions.

These shared issuances were offset by reduction in outstanding options and by the shares repurchased in September 2001 during the window opened by the SEC for companies using pooling accounting following the events of 9/11. For 2002, we anticipate that our average shares outstanding will increase somewhat through the year. That is how we got to our eps of 38 points for the Q1.

And I want to repeat that this is at the top-end of our 13 to 14% alogorythm. I would also like to point out that on a reported basis, our EPS was 36 cents shared which was also a 14% increase.

Before I get to our 2002 full-year guidance let me spend a moment on the Quaker integration.

We are pleased with how things are going. The integration is solidly on track, and the synergies are starting to flow through, as you can easily see, the Quaker Food North American numbers.

As we said in the release this morning we expect to realize up to $175 million in synergies by the end of 2002.

And we are solidly on track to achieve that number. As I said at least once or twice before, to the extent that incremental synergies become available, they will be [bullishly] reinvested in growth driving opportunities.

Let me review the outlook for the full year 2002. We are confident that for the full year we can deliver 5 to 6% volume growth, 11 to 12% operating profit growth and 13 to 14% earnings per share growth. We expect that the revenue number will likely be impacted by the volatility in foreign currency exchange rates and by the fact that trade promotions decrease revenues under the new accounting rules. You should focus on volume instead of revenues as the best measure of topline sales. A note on EPS, which I said will grow 13 to 14% this year, let me translate this into cents per share. Because we came in at the very high end of our guidance range, our EPS for this quarter rounded up to 38 cents per share.

Now I know you are all dying to throw that extra penny through and take up our guidance for the full year. We would like to keep you in our range of 1.93 to $1.96 for the full year which is 13 to 14% alogorythm. For the q2, 13 to 14% growth would give us 51 cents to 52 cents per share, which is right where you all should be.

To sum it all up, we had a terrific quarter. Both on the top and the bottom

line, and we feel good about full year 2002. Let me now turn it back to Steve.

Thank you, and thank you to all our associates around the world who were responsible for the excellent performance that indra just reported.

I would be happy to entertain

questions you might have.

At this time, we are ready to begin the question-and-answer session.

If you would like to ask a question, press star 1 on your phone. You will be announced prior to asking your question.

To withdraw, press star 2. Our first question comes from

Bill Pecoriello of Morgan Stanley Dean Witter.

My question is on the reinvesting of the Quaker synergies and the strategy for reinvesting.

If you slowed the full 175 through you would have up to 400 bases points of profit growth but you only promised a hundred bases points of profit growth from the synergies. How does that flow through the revenue line versus the SG&A line? How are you balancing between market spent on new products versus core brands on the reinvestment strategy?

Bill, I hate to give you that much detailed guidance, but roughly speaking, and we talked before, how we plan to handle the synergies.

We think of synergies almost in three buckets, okay?

The first one is reinvestment in the base businesses, to defend our market share. At times when you go through an acquisition or merger like we have been through, there is stepped up competitive activity.

So, a portion of this synergies we will reinvest to make sure that we don't lose ground in the marketplace.

That is one portion of the reinvestment. The second portion of the reinvestment is to accelerate initiatives that divisions had already in their pipeline for the next two years, we can pull forward so we can in fact guarantee or improve topline growth rate going forward. The third bucket is really new incremental growth opportunities, either at the topline or productivity initiatives to guarantee, or to assure ourselves about 15 topline growth rate, our earnings performance once the quaker synergies dry up.

What we are doing is flowing a hundred basis points through to the bottom line and taking the other 300 bases points and reinvesting it back in these three buckets.

If you can clarify on the full year with the part that gets reinvested that impacts revenue line due to the new accounting classifications would that impact 50 bases points on the line the way it flows?

It is hard to say exactly what the reinvestment fees was versus what we would have done on an ongoing basis normally, it is hard to break up the pieces in the individual buckets.

Thank you.

Our next question is from Jeff Cantor of Prudential Securities.

Good morning.

I was hoping we could get Bob into the conversation. And is there a way, Bob, you could quantify what type of lift both Quaker snacks and Gatorade has -- you know, has reaped from being part of the Pepsi system if there is a way you can talk about that?

Have you seen volumes accelerate, or is it just simply better cost cutting?

Bob? Is Bob on mute?

I am showing his line is active and open. It sounds like he just disconnected.

Just a minute. We are trying to get bob.

Okay.

We will go to the next question and come back to [Jeff]. We won't forget you.

You still believe, though, that this 7% -- you know, this 7%-plus topline growth is achievable, although, based on your comments, it doesn't seem like that may be -- you know, it may be more of a 2003 type of event rather than an '02 event?

I am on now, too. We got cut off.

I will answer that question and then turn it to Bob. In the Q1, when we were reporting out our year-end numbers, I said at that time that for this year our algorythm of 7-plus was really more likely going to be 6 to 7 due to the macro economic issues primarily on the international basis, although I would tell you it has impact the our North American business as well. And also the competitive situation and pricing situations that we find ourselves in, in our U.S. businesses. So, we still believe that the 6 to 7 number is probably the right number for revenue for this year.

Our expectations beyond 2002 is still in the 7-plus, and we believe that the reinvestments that we are making will help

us realize that opportunity.

We said at the beginning of the year that we expected the first half to be slower than the second half, and that it would pick up in the second half and that is still our expectation.

So I believe we said in the Q & A in the last call that we expect it to be 5 to 5.5 in the first half of the year and pick up the remaining in the second half of the year. We still believe that.

That is how we planned the year.

Yes. Okay. Thank you. And just, Bob, again, if you could just talk about what type of lift you have seen from your old business being a part of the new Pepsi business.

You asked about two things.

One Gatorade, and one our snacks business. First of all, stepping way back and not trying to dissect reasons for it, as some of you may remember, we were pretty consistently giving guide answer to the street that our long-term expectations for gatorade growth were high single digit, probably 7 to 9%.

We hit 20% in the Q1, we are planning on hitting probably mid-double digits over the year as a whole.

So that we are clearly stepping up growth expectations.

Very little of that traces to operational changes, on the gatorade side other than we are seeing good growth in our food service operation that is something we couldn't quite achieve prior to the merger.

What has helped us a lot, though, obviously, and this traces back to a comment that indra made, is the fact that given all the synergies we have, we have had the ability to continue to deliver very strong profitability, and at the same time make sure we had enough to invest.

We increased our advertising very substantially in the Q1, and we will for the course of the year. We have increased our merchandising spending in the grocery channel, although I point out again, as I heard Indra emphasize, our net revenue on Gatorade was up 20% just as volume was, so we, in about a third of our business, which is grocery, we did have some things that affected our pricing but our total mix of channels ended up not seeing any [deg] days of revenue.

We are doing well on Gatorade, some traces to operational changes, traces to our ability to make sure we are driving volume with well delivered spending.

On the snack business, we are seeing far more growth than we ever had seen before. And a good part of that, I think traces to the focus that is now on the business having -- keep in mind that snack business still goes through our warehouse sales organization here, but also we are starting to get some of our businesses into single serve DSD opportunities.

And food service is growing very, very, very fast under this new organization.

So in both cases, we are growing at faster rates than we were prior to the merger.

It doesn't all trace to the operational changes, but they are certainly making a contribution.

The plan is still to go into the large format stores through the warehouse?

Yes.

Okay. Okay, because we have seen Kellogg have success with going through [Keelers'] DSD system. Okay.

Haven't seen it in shares.

Fair enough. Thank you.

Our next question comes from Andrew Conway of CS First Boston.

Thank you.

Two brief questions. First on the Frito-Lay business outlook for the year, indra talked about half coming from core and half from new products. Could you talk about your rate in mix outlook for the year? Will that be partially offset by increasing promotions which now are affected above the net revenue line. I am wondering if Gary can just touch base a little bit on the success of Pepsi Twist.

It seems to be a little bit more incremental to the cola

franchise than first thought, as well as his outlook on non-carb growth in his business this year, please.

Andrew, I will take this Frito-Lay question first. We believe the outlook for frito-lay is clearly within the guidelines that we have previously stated and in the q1, we -- you might have expected to see a little higher net revenue.

Right.

And I would tell you that we did do a little more promotional spending than we had planned, but the majority of the difference between what you might expect and what we realized was really in the mix that - it was in several places. One is a tradeup to larger bags, and secondly the mix in the products between the core base products, and the new products.

And I would say that the mix

through the remainder of the year would probably stay about the same. I wouldn't anticipate a major move from that. We are pleased with the balance the way it is right now.

You are pleased with the channel mix, as well?

Yes, we are.

We are actually performing -- we like to perform better in every channel, in every business, but the balance is -- has been quite good and we are

pleased with it. Gary?

Yes, Andrew, twist has been a very positive impact on our business.

It has grown the Pepsi trademark, really the biggest growth in the trademark from a quarter standpoint since the introduction of Pepsi One. It right now is about a 1.4 share, we are benefiting from both a good positioning of the product where we really found that people wanted a splash, and therefore the name Twist of Lemon rather than a strong overpowering lemon taste and the product quality took a long time to get right.

We did get it right, putting out a regular and diet has been a big plus, and the [repeats are] very strong.

So, we are very bullish on Pepsi Twist. The second part of the question was on non-carbs, and again, led by extremely strong growth on Aquafina, we are bullish on the non-carb portfolio.

With Aquafina, we have the rollout of multipacks and essentials coming in June so we feel good there.

We just launched Brisk Lemonade, which is off to a very, very good start.

And we just feel good about the entire portfolio. We just also launched Double Shot from Starbucks, so we have

innovation in the pipeline on non-carbs across the year.

In your mind, mid-teens growth for that business is reasonable?

Yeah, I would hope so.

Thank you.

Once again, if you would like to ask a question please press star 1 on your phone.

If you are using a speaker phone told, please pick up your handset and press star 1.

We have a question from Caroline Levy of UBS Warburg.

Good morning.

I was wondering if you could elaborate. You had mentioned unexpectedly competitive pricing in the U.S.. Are you referring there just to the juice business, or the Gatorade business; if you could elaborate on that? I also wanted to touch back on the revenue growth rates story, because I think to get to 6 to 7 for the year, you need to do 7 to 8 in the second half, and just to ask if that is a reasonable expectation?

Bob, you want to take the first part of the competitive pricing?

Yeah, I think what Indra was referring to, I think she was talking about the juice category, and her comments were largely focused on that.

We have seen considerably lower prices through -- I think as you know, Caroline, the whole category is down about in grocery stores about 5%, and I think everybody is responding to that.

And what used to be fairly unusual, too, for $4 or even two for $3 features now are becoming far more commonplace.

So, it is definitely getting more competitive out there.

We have got to get the category changed -- turned around. We think that increasing advertising as we are doing on Tropicana behind this blood pressure message which starts tomorrow in media, is the kind of thing that we are really going to need to do in addition to innovation with new products, to get this category back the way it always has been growing.

And to get out of any kind of a price merchandising cycle. So, I think the comment was really focused on juices.

On the revenue question, to get to a full-year number which is more in the 6 to 7 range, you are right, Q3 and Q4 are more in the 7% to 8% range and that is exactly where we are now.

Thank you.

May I finally understand something? Bob, maybe you can help me with this. On Gatorade, if revenue grew as much as volume, trade spending I think you have said was up in grocery, but your shelf presence across the board in all channels seems just very, very strong.

Are you saying that spending was not up that much in the upper channels and it offset

the grocery?

Yeah, that is what I am saying.

It isn't quite as simple as that, Caroline. I hate to get into so much detail to confuse everything. We have, for instance, our powders are not up as much as our liquids. Powders don't carry the same revenue per reconstituted gallon as do liquids. There are things like that have some very small effect. The basic message is that yes, our spending has been higher on trade merchandising in grocery, a third of our business, you have seen it in the pricing as recorded in the tracking service.

We are the club channel. We are almost all the mass channel, our pricing is actually up in communion stores, you will see that in the Neilsen data so that on balance, the primary explanation and the simplest is that we are making it up in other channels.

Excellent. Thank you.

Our next question comes from John Faucher of j.P. Morgan.

I want to ask a question following up on revenue growth for Gatorade and Tropicana, if you do an average there is something different going on in terms of how revenues are reported.

It sounds like we had something similar happen with the Quaker Foods business, so this could be more housekeeping, but can you highlight us going forward over the next couple of quarters, are there additional sort of weird reporting dates, differences that we need to be factoring in as we map out revenues?

Go ahead.

I understand, although I was not a party to it, that in the tutorial that Indra and others did for a lot of you, it was explained that Pepsi has been on a four-week period basis in their accounting.

We have always been on months.

And we had a choice, in the Q1, whether to go, make us three months and have probably a week and a half more time in hours than Pepsi with three periods or to go two months.

We elected to go two months, last year's quarter was reported on that basis.

Proforma of looking backwards. So this year is only two months for us. Whereas in Canada, since we are really combined much more with the rest of the Pepsi operations there, we have gone to a period structure there.

So they are on a three or four-week period difference.

Gatorade is not only low in seasonality but had only two months, missing a bigger month, March. That is why we have -- saw such a weighting on Tropicana in the Q1. The only difference coming up at all is the reversal of that advantage we had with Canada in the Q1.

In the next quarter, we will actually see that reverse out where they will have another three-period quarter, we will have a three-month quarter.

We will go two months, three months, three months, four

months for our quarters, and Pepsi will be on a 13, four-week periods.

They are four -- Indra, your Q4 is four, four-week periods?

That's right.

And that matches up, as closely as it can to our four-month quarter.

I might add, John, we are working towards getting the whole company on four-week reporting periods.

I think you can imagine the difficulty in the -- getting the alignment on the

information technology. We expect to have that done in 2003. So, we will have all the rest of the former quaker businesses on our standard four-week accounting basis.

I guess the question I have, the specific question, then, is Gatorade will be able to contribute sort of a full quarter's topline volume growth, et cetera, to next quarter for Gatorade Tropicana North America as opposed to two thirds of a quarter we saw.

That's right. And it will be a bigger seasonal quarter. In addition to that.

Great.

Hi, it is Marc Greenberg. I am wondering if you can just walk us through from a new product perspective, how do you see the market opportunity for Propel in channel opportunity and how that might different from Aquafina essentials, and if there is overlap between audience between Gatorade and Aquafina, how do you handle cannibalization?

Bob will talk about Propel, and Gary can talk about Aquafina, and we will try to clarify the differences here.

Propel is really intended largely at a target that is probably 60/40 women, and probably 80% people who are active people, maybe not the strong, vicious competitors that we tends to portray to with Gatorade, but people who are fitness conscious, people who go for walks to get their cardiovascular rates better.

They might go to fitness centers.

The people, right now, that you see carrying a bottle of water around often with them while they do things. So that is our target. It has fewer calories than gatorade, it has got b vitamins which are important, and we are going to be probably heavily skewed to grocery stores with our volume as this business develops.

We are expecting it to be a big success, we have new advertising that went on the air, and I will stop there before we get to how we rationalize it with the Aquafina essentials.

And we would come at it from a different perspective, our target would probably be 2 to 1 women.

Very nutrition-oriented, a key difference being no artificial, you know, sweetener. We have got 40 calories, the product would not be as sweet, but it is all natural and it will be more cold channel oriented at first, as we come out with single serve and later bring the take-home product.

It will be under the aquafina umbrella.

There are a couple of differences, the target will be different and the positioning.

We will be much more athletic in our positioning on the propel line than aquafina essentials will be. Secondly, given the nature of the two distribution systems we will find a lot more pressure at the places dsd can get Aquafina essentials on that product, probably a higher proportion of Propel will be in large format where the warehouse system works effectively.

Thank you.

Just a follow-up. Indra, you noted the slightly lower guidance on Frito-Lay international. Can you give us granularity on how, if at all, the

consolidation of SVE factored into that and the outlook for both volume growth and profit from that now consolidated part of [FLI]?

The SV numbers it impacted profit margin a little bit, Marc. It didn't really affect the profit growth rate or revenue growth rate. The SV numbers, you know, very small impact on our overall numbers.

The real issue in [FLI] is this year speaking to. Your question is we are lapping a terrific year from last year, where we had Pokemon operations that were humming all around the world.

And on a two-year bases, it looks fine. On a year-over-year basis unless you have another Pokemon that hits this year it is hard to duplicate the effects. On top of that add the macro economic turmoil in some of our key South American markets and currencies being weak it impacts both volume and revenue numbers. Where we make up in profits is that our synergy numbers are -- [INAUDIBLE] the integration of Quaker Foods into Frito-Lay International is going exceedingly well, and Mexico is doing very, very well at this point. Because the Mexican business is higher margin our profit flow-through is solid.

Overall across FLI they are doing terrific things, tightening the belt and making sure the real structure of the cost for the local markets get over this economic upheaval.

For the year, we feel very good about fli's profit outlook. Clearly the topline, volume and revenue, are being impact the by the overlap to last year's successful Pokemon promotion and the fact we have got these macro economic challenges in some of our PFLI markets.

Thank you.

Our final question comes from Sarah Gurkin of lehman brothers.

Your line is open, please go

ahead.

If Sara comes back on, we will deal with her separately, but thank you very much for joining us this morning.

I want to close by expressing my confidence again in all the associates of Pepsico around the world and the management team.

We have tremendous opportunities ahead of us. I am confident that we will be able to capture all of them. We intend to focus on the

exciting growth opportunities that we see out there and we look forward to getting together again with you next quarter. Thanks for joining us.

Thank you.