百事 (PEP) 2002 Q2 法說會逐字稿

Welcome to PepsiCo second quarter earnings release conference call. All participants will be able to listen only until the question and answer session of today's call.

At that time you will be instructed how to ask a question.

At the request of PepsiCo this conference is being recorded.

If you have any objections, you may disconnect at this time.

I would now like to turn the call over to Mrs. Kathleen Luke, Vice President of Investors Relations, Mrs. Luke you may begin when ready.

Thank you, operator.

And thank you everyone for joining us this morning.

With me today are Steve Reinemund, our Chairman and Chief Executive Officer, Indra Nooyi, our President and Chief Financial Officer, and Gary Rodkin, President and CEO of PepsiCo Beverages and Foods of North America.

And joining us by telephone is Bob Morrison, our Vice Chairman and Chairman of Quaker.

Our earnings were released this morning and for purposes of this call, we assume that you all have read the release.

Before we begin, I have a couple of housekeeping matters to attend to.

First, this call is being webcast and can be accessed at pepsico.com, the call will also be archived for 90 days at streetevents.com, and at companyboardroom.com.

The tapes replay will be available until the close of business on Friday, July 26th by dialing 888-873-2087. International callers should call 402-220-5061, 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.

But we undertake no obligation to update any such statements. For a review of risk factors please refer to our statements filed with the Securities and Exchange Commission.

And now it's my pleasure to introduce Steven Reinemund.

Good morning, everyone.

Thank you for joining us this morning.

We appreciate your attendance.

In our earnings release we tried to make clear exactly what drove our businesses this past quarter and what we've got planned for the third quarter.

I'll assume you have that information and won't take the time to repeat each segment.

Instead we are going to do something a little bit different this morning.

Gary, Indra and I will start by posing and then answering the questions that we believe are utmost in your mind.

Then we'll open the floor up for the three of us along with Bob Morrison who is on the phone with us in Chicago and we'll take your questions.

Hopefully, this will give you the maximum insight into our business and to our outlook.

I'll start with a few highlights.

In.

Second quarter we continued our very strong operating profit and earnings per share.

Line of business operating profit grew a solid 11 1/2 and.

Margins expanded two full percentage points as a result of the quaker synergies and strong productivity at that time the divisions.

Earnings per share grew over 14% to 52 cents.

I also don't want to overlook our consistency.

We're very proud of the fact that this was our 11th consecutive quarter of double digit operating profit growth, and in a very difficult environment.

And we increased our market share in measured channels across our key U.S. businesses, that is Frito, Pepsi, Gatorade, and Tropicana.

And finally, I also can't to draw your attention to the attention our cash flow is extremely healthy, rising by $900 m million.

So in some we had a strong quarter competitively as well as on the bottom line.

Now let me turn to the top line.

Revenue was softer than we would have liked, for three primary reasons.

First, adverse foreign exchange and global economic and political macro's certainly hurt our net revenues.

The impact of foreign exchange alone was a full percentage point.

And Indra will provide more detail in a few minutes.

Second, the continued softness at Tropicana caused revenue to decline by over a point.

However, I'm confident that our new management team of Gary Rodkin and Jim Dwyer, both of whom are veterans of Tropicana, understand the business and will turn that business around.

Gary and Jim have a very experienced team of thousands of associates who are committed to getting Tropicana back on track as a growth driver of Pepsico.

Gary will share his perspectives with you in just a few minutes.

And third, an increase in trade spending at Frito-Lay reduced revenues by nearly one point and negatively impacted operating profits.

Although we're not happy with the reported revenue number at Frito, I want to point out that volume came in right where we wanted and operating profits were still healthy.

Frito-Lay has a strong innovation promotion pipeline and is still very well positioned in the exciting convenience category.

So looking at this picture, we remain confident about our prospects.

We have great products, great plans, and great distribution systems to power our boat, and we have the right people committed to driving that growth well into the future.

Now I'd like to turn to the key questions starting with what I suspect might be your biggest question.

What happened to Frito-Lay's revenue?

Let me explain exactly what happened and what we're doing about it.

We came into 2002 with lots of steam.

We had a great pipe line of innovation and marketing programs, we had an appropriate amount of trade spending and we planned incremental space with our customers to handle all of our innovation.

And our first quarter volume and revenue results were very strong.

However, volume began to soften in April because of the weakening retail environment.

It was caused by slower foot traffic, which was down in small format stores due in large part to unseasonably cool weather, and in large format volume was down as April and May were slow for these retailers with unprecedented number of store closings.

And all this was causing the category to slow and at the same time category pricing was declining as a result of several factors, but two primary factors.

First, a surge of low priced product as competitors used up their inventories of stored potato's in advance of a new crop, and second, there was more national competitive activity than we've seen in recent years.

In these situations we defend our share by targeting price actions.

As a result of these external factors, category volume and pricing were sluggish and we saw our volume begin to decline.

With the DSD system we have the opportunity to move quickly and we did.

We pulled the trade lever, but we pulled it too hard.

The net result was that our volume came back, but it cost too much.

Frankly, we could have gotten the same volume without such deep dealing.

Nobody pointed out, however, that we did get gross sales of over 5% and that's what we would have reported under the old accounting rules.

So that's essentially what happened, and we're already doing a few things differently in the third quarter.

First, we're adjusting the depth of our deals with our retail partners to get more efficient promotional activity.

Next, we're refocusing our marketing calendar.

With everything that's being said about obesity, we believe we have a great portfolio of better-for-you products.

In fact, our better-for-you products were up almost 20% in the second quarter, and we believe that momentum is growing.

For large format stores we're planning to roll out of a dedicated section within the salty aisle that highlights our entire better-for-you line.

And this section will include our current line, as well as new Lay's reduced fat products with 30% less total fat, a full portfolio of Royal Gold pretzels with several new products, new flavors of Baked Lay's and Baked Ruffles, Sun Chips, a new cool ranch flavor of Baked Doritos to add to the already popular new nacho flavored product, and of course our line of Wow fat-free products.

In the small format, we plan to capture this opportunity with dedicated shippers of new single sizes of these better for you products, which are designed specifically for this channel.

We haven't done this in the past.

Also on the product front, we're introducing new salsa flavored Doritos, we're repositioning 3-D's, we're re-emphasizing Ruffles, including a new chili and cheese flavor, and we'll have the full portfolio of our Ruffles products available in all stores.

We've also addressed some supply issues for our popular Lay's Kettle chips and we'll be driving their distribution hard.

In that same vein we've added additional capacity for Tostito's Scoops, and that will be coming on line this summer.

Scoops have been capacity constrained all yea,r and now we'll have enough product to keep the shelves full in the supermarkets, as well as take an opportunity to move the product into other channels like clubs and other sizes like super-size.

Next, we're adding media.

Our weights in the second half of 2002 will be twice as heavy as the second half of last year.

For comparison, weights in the first half of this year were 50% below the weights of the first half of 2001.

We're also working on a new campaign for Doritos behind celebrity spokesperson and will be announcing that campaign soon.

But I would tell you it will be a breakthrough type of advertising that has historically worked well for our brands.

We're also putting Lay's back on the air with a new campaign after a hiatus of several years.

So now let me roll this all together.

In the balance of the year, we expect Frito-Lay North America volume and net revenue to grow in the mid single digits.

Let me conclude by saying Frito-Lay North America is a great business.

It's fundamentally in very good shape.

And we're very clear on what we need to do.

We've already taken a number of those actions, and we'll be taking more actions in the future and we're confident that it will have results.

Now I'm going to turn the microphone over to Gary Rodkin, our new President and CEO of PepsiCo Beverages and Foods North America, and ask him to talk about Tropicana and what he's done I'll ask Gary to talk about our overall North America liquid refreshment beverage businesses as well.

Gary.

Thank you, Steve.

Let me start with some background on Pepsico's $7 billion North American beverage business.

North American beverages consistent of PepsiCo North America, Gatorade and Tropicana, and represent about 60% of PepsiCo's worldwide beverage volume.

We've aggregated volume across these divisions which better facilitates comparisons versus the industry, as well as our major competitors.

Carbonated soft drinks represent about 70% of our product mix, non-carbs make up 30%.

Juices and juice drinks comprise about 10%, and another 10 or so comes from Icatonics, five from water and about five from tea and coffee.

Overall, North American beverages are turning in solid performance.

Carbonated soft drinks are up a healthy 1 1/2% year-to-date.

Our non-carb portfolio is also doing well up 7% year-to-date, driven by strong growth in water and Icatonics.

Juices and juice drinks are sluggish, a topic I'll address shortly.

And as I'm sure you're interested in how we're doing relative to our principle competitor, we've aggregated our volume based on the 13 weeks ended July 6th.

In this time frame, North American beverage volume was up over 3%, driven by 3% PCNA growth, and 13% Gatorade growth.

Although our second quarter PCNA volume was flat on a reported basis, I want to stress that PCNA is performing well.

This is primarily a calendar issue arising from only including the months of April and May.

PCNA has a strong innovation pipeline led by Pepsi Blue and we expect that the division will deliver 3-4% full year volume growth.

Now let me get into theTropicana issues.

A couple weeks ago I jumped back into the Tropicana business and am very deep into peeling the onion.

I'm working hand in hand with the Tropicana management team led by our new president, Jim Dwyer.

We were both at Tropicana just a few short years ago and can therefore cut to the chase quickly.

No question, performance is unacceptable.

Fortunately, we have something most consumer goods executives envy, terrific brand equity coupled with a truly superior product.

These assets combined with some fundamental issues that are fixable, gives me a high degree of confidence that we'll get Tropicana back on track.

As you know, the chilled orange juice category has weakened over that last 12 months, down about five percent, while softening economy and increasingly available array of functional beverages took part, we, as market leaders, share some of the blame.

A lack of consistent advertising support behind strong coffee, and to optimal new product innovation are two key factors.

As we saw the category weaken we stepped up our trade spending to compensate.

To be honest, we went too far.

Tropicana is inherently a more trade-intensive business than Quaker Foods or Gatorade, and the systems and processes are also different.

The transition from brokers to the Quaker direct sales force naturally takes some time.

We've taken a deep dive review of the first 10 months and we're in process of making some course directions.

The net result of these factors is the current dilemma of too big of spread between our everyday price and our promotive price.

Not good for the base business, and certainly not good for profitability.

Each of these issues is being tackled as we speak.

Tropicana Healthy Kids, formulated specifically for kids nutritional needs and marketed to mom's, has just been introduced.

Advertising broke this week and we're also working on a new impactful pure premium campaign for airing in October.

We're also tackling the pricing architecture.

New processes, new control systems, and new positions are being put in place.

We're drilling down account by account with the goal of reducing our average every day to feature price gap by 25%.

This will be accomplished with less depth in discounting as well as a lower everyday price.

Our plan is to grow volume 3% in the fourth quarter with 1% revenue growth, our objective will be to go further in 2003.

I'm confident we'll turn the Tropicana business back around.

Since I know I'm on the hook for what I'm sure is the next question as well, let me get to that.

The next division we're sure you want to know more about it PepsiCo North America.

Specifically, I expect you'd like to know why our [INAUDIBLE] case sales were flat.

There's more to the PCNA story than meets the eye.

[INAUDIBLE] case sales for Q2 is only April and May.

On the front end the impact of Easter fell into Q1, shifting of that point of growth.

We along with the rest of the beverage industry fell victim to unseasonably cold weather in April and May. And finally we lacked the load-in, and the launch of our very successful Code Red, as well as the year one Sierra Mist, Sobe, and Dole-Hawaiin.

For this short quarter, CSD's declined slightly while non-carbs grew over 10%.

Year-to-date, CSD's grew about a point and a half, and non-carbs grew over 11%.

Aquafina which grew about 30% for the quarter year-to-date, was the biggest driver of our non-carb growth.

CSD's Pepsi's Twist was the biggest contributor.

The reported numbers reflect the short quarter that ended with the cold weather.

The good news is that for the first six weeks of our third quarter, [INAUDIBLE] our case sales through July 11th, were up 5%.

We're also continuing to gain market share.

We're up 6/10 of a point across the four measured channels, for the four weeks ending June 16th and plus one point, two points year-to-date.

And the story on water is even better, with the four-week and year-to-date shares up 4 points.

As we look ahead, we're very excited about the August single serve launch of Pepsi Blue. We are also very bullish in Aquafina as we continue to roll out of our 12 and 24-packs, half-liter multi-packs.

And the continued momentum of Sierra Mist, Code Red, and Twist, build our confidence in second half volume growth of 3 to 4%.

Now I'd like to hand the call over to Indra Nooyi to talk about international.

Thank you, Gary.

I'd like to talk about the performance and outlook for international businesses.

But first, let me give you some background on the international portfolio.

International as you know comprises about 40% of our worldwide volume, 30% of revenues and 20% of our profit.

[INAUDIBLE] international business, Latin America is the largest region with 40% of international volume.

Europe/Africa covers about 30% of volume, Asia-Pacific is 20%, and the Middle East is about 10% of volume.

[INAUDIBLE] markings for revenue and [INAUDIBLE] are the same, with the exception of the Middle East Asia-Pacific which are about equal in profitability.

[INAUDIBLE] regarding our expectations for the 12th line profit growth and for the most part they performed within our range of expectations.

Latin America, we expect high levels of growth, [INAUDIBLE] the high level of volatility, the top and bottom line due to the uneven natural, economic and political environment.

We also tend to look at Mexico's [INAUDIBLE] to our other Latin American businesses because we have a very operating platform in that country.

Despite the fact that they're offering a significant down cycle, our businesses performed quite well in the quarter, delivering volume growth of almost 4 1/2%.

[INAUDIBLE] International, our volumes were up over 6% in Mexico and over 4% in the balance of Latin America in the face of significant macro [INAUDIBLE].

We were able to drive volume in Mexico by shifting our emphasis more volume focused, which we typically do in tough economic times.

But the balance of Latin America, softness in our salty business results offsets a very strong performance of the Quaker foods portfolio.

In our beverage business, our volumes increased 8% in Mexico behind strong profit promotions.

The balance of Latin America was considerably softer as volumes decreased 1% due to the macro economic issues there.

For instance, decline from Argentina alone [INAUDIBLE] by almost one full point in the second quarter.

Turning to Europe and Africa, our expectations [INAUDIBLE] bottom line growth of the region.

Even though we face a tough trade in competitive environment, more of our businesses are growing as we drive for cash and gain shares with [INAUDIBLE], and we continue to gain share in carbonated and non-carbonated beverages.

In the second quarter, we clearly saw the impact of these tragedies and overall volumes were up 8%.

For [INAUDIBLE] we had terrific volume growth of 11%, with particularly strong growth in Russia, the U.K. and France.

Of course, business is performing well across the region, and our known carbonated business is driving high growth rates.

Tropicana in particular is growing impressively in France, U.K. and [INAUDIBLE].

In Frito-Lay international, Europe and Africa, volumes were up over 4% even though they were lapping double-digit from the prior year.

[INAUDIBLE] volumes increase 6% behind strong innovation like [INAUDIBLE ] highly seasoned potato chip. Great British Flavors, a line of potato chips uniquely British flavors such as [INAUDIBLE].

[INAUDIBLE ] a line of snacks that looks like soccer balls.

[INAUDIBLE] Europe's volume grew 2% as we last launched a very successful portfolio promotion.

Driven by new policies [INAUDIBLE ] in addition to economic offering performance, [INAUDIBLE] received with the U.K. and it should be approved shortly.

[INAUDIBLE ] is the leading brand [INAUDIBLE], and it's a brand particularly popular with kids.

This brand will increase our shares [INAUDIBLE] by about 10 points, increase our shares of overall in the salty category in the U.K. By 1 1/2 share points.

[INAUDIBLE] we are sure we can leverage in the growing U.K. market.

This is the type of [INAUDIBLE] we consistently sought to enhance our business.

Turning now to Asia-Pacific.

We're look to be this region a a significant driver of future growth of PepsiCo, investing the developing countries of the region to assure this, and we are seeing [INAUDIBLE] progress on market share gains.

This is the overall [INAUDIBLE] and we're up 11% in the second quarter.

[INAUDIBLE] our volumes increased 6% for the quarter, dampened by some operational challenges in Australia which have been corrected.

Has terrific results, growth of 12%, leaped by India at 25% and China in the high teens.

In these important growth markets, we expect to see continued growth over time as the GTP strengthenings and increasing number of customers can afford our products.

Now the Middle East.

As an American company, we are currently operating in the difficult political environment.

It's a affecting our operations.

Overall us our volumes were down 9% in the quarter.

Although this is a smallest of the four regions, the 9% volume decline in the region that is normally a major contributor cost over a point of growth in international.

Normally has very strong results here, volume declined 10%.

And volumes were down 5%.

Despite the problems, we continue to see the region as having [INAUDIBLE ] slow growth in the future as our products are [INAUDIBLE].

For the overall international portfolio, our international volume and kilos was up 5% in Q2, and volume in terms of [INAUDIBLE] sales increased 5% in the second quarter.

Let me put our international beverage volume in perspective.

Q2 is April and May.

If you put Pepsi International on a competitor, [INAUDIBLE ] growth is still then 5%.

Traffic performance.

The international business grew 21% for the quarter.

All in all, given the turbulent international environment, we are pleased with our international performance.

Going forward, I expect our international beverage volume [INAUDIBLE] in the mid-single digits, slower than our long-term targets and this is because we still facing the Latin American national economic issues and the Middle East situation.

Our profit expectations for the balance of the year is for this portfolio to grow in the mid teens.

The next stop is our [INAUDIBLE] we didn't spend as much as time on in our earnings meeting, the merger with [INAUDIBLE].

Overall, the merger integration is on plan.

Fortunately, particularly for [INAUDIBLE] coming in ahead of schedule.

We now expect to deliver at least 200 million dollars of synergies this year.

And we continue to gain more confidence in our 400 million dollar projection for 2005.

More importantly, the merger planning has served as a function and driving cooperation across the old PepsiCo division, which is target the operating in a defensive manner.

The savings generated here contributed significantly to the margin expansion we reported across the North American division.

As you know, most of the [INAUDIBLE] in 2002 is from cost savings, which have virtually all [INAUDIBLE] ahead of schedule.

For example, we've completed the consolidation of our corporate function.

Combined the warehouse and food service sales forces.

We implemented a category [INAUDIBLE] instructions for renegotiated a number of contracts, and we started to combine manufacturing and logistics for North American beverages.

Our revenue driven synergies are planned for 2003 and beyond.

Those areas be targeted for 2002, we've made some progress.

But still have work do, especially in the area of [INAUDIBLE].

Now utilizing the same detailed synergy planning process and building on target and activities for 2003.

These targets are tailored for each business financial and operating plans.

We remain very confident in our ability to continue to deliver or exceed our original synergy products.

Let me tell you one last question and show you I'm [INAUDIBLE] relates to our share announced this morning.

Specifically, I'd like to explain how the change came about and what it means.

Let me start at the beginning.

We had no intention of repurchasing shares because the [INAUDIBLE].

However, we recently decided as part of our normal planning process that it would be appropriate to [INAUDIBLE] possibility.

In today's environment, we felt it was prudent to run this issue by the SEC in advance, to ensure that the [INAUDIBLE] would have no objections to our treatment if we did begin share repurchases.

We approached the SEC, and they said [INAUDIBLE] repurchasing shares would not violate any food and groups.

So we can now repurchase shares without jeopardizing our treatment applies.

Let me give you some guidance about our repurchase plan.

Yesterday, our Board of Directors and regularly scheduled board meeting approved the repurchase program.

The board has given us authorization for $5 billion of repurchase over the next three years.

The amount in signing up our repurchases is based on available cash [INAUDIBLE] uses of cash and stock price.

At the current time we intend to be very active [INAUDIBLE] and we expect initiate the repurchase program next week.

To facilitate the repurchase available cash and our strong expected cash flow in quarter 3 and 4.

It's possible we may [INAUDIBLE] basis.

And if we decide to do so, we have actions to top [INAUDIBLE] commercial market with our strong single [INAUDIBLE].

Therefore, we expect any interest costs for repurchase in 2002 to be minimal.

And now I'd like to hand the call back to Steve Reinemund.

Steve.

Thank you, Indra.

Before I open up the floor to your questions, I have one final question, and I know many of you want to answer.

That's what is is our outlook?

So let me tell you what we expect.

The balance of this year, we anticipate volume growth to be the 4 to 5% range.

We expect to exit 2002 with revenues growing at a positive spread to volume.

That top line guidance anticipates several things.

Continued negative foreign exchange in places like Mexico, Argentina, Brazil, Venezuela and Egypt, continued macro issues in Latin America, as Indra talked about, softness in the Middle East, continuing in Q3 but improving in Q4. Improvement at Tropicana as the fixes take hold, and the last stage of impact from the increased rate spending at Frito-Lay North America coming in Q3.

Despite the anticipated revenue softness in the second half, we're confident that we'll deliver our 13 to 14% earnings per share growth based on the merger synergies and strong productivity.

Line of business operating profits, however, may be in the nine to 10% range into Q3, but will be 11% for the full year driven by our timing of Frito-Lay North America profits, which we expect to be stronger in Q4 than Q3.

Look over the longer term, I want to put our guide innocence some perspective.

There's no question that the world has changed since we first announced the Quaker merger.

In the U.S. The events of 9/11, the economic slowdown and the retail uncertainty have all had their impact.

Internationally, we've seen the fallout for 9/11 in the Middle East and the economic slowdown has certainly impacted this in Latin America.

All this has changed our operating environment, so that in mind, let me tell you with where believe we'll come out in 2003.

Our businesses are very healthy.

We're on track to achieve the merger synergies.

We we're now able to deploy our excess cash and share repurchases, all that leads to the following: First, we expect our top line volume and revenue to grow at mid single digits based on the strength of our innovation, great tasting convenient products, and strong brands.

Secondly, we're still confident that we'll achieve earnings per share growth of 13 to 14% in 2003.

Beyond that, we expect EPS to grow consistently in the low double digits.

We expect continued strong operating cash flow performance of over $3 billion.

And our return on invested capital should improve by 300 basis points or more, depending on the pace of our share buybacks.

In other words, we fully intend to continue generating the consistent and compelling results that we have come -- have you come to expect from PepsiCo.

Hopefully, we've anticipated some of your questions.

And now we'll be happy to open the floor for your questions and for follow-ups.

As I mentioned, when I started, we'll keep the lines open to get your questions.

Operator, we're ready for the first question.

Thank you, at this time we're ready for the question and answer session.

If you want to ask a question, please press star one on the touch tone phone.

Our first question comes from Andrew Conolly, Credit Suisse First Boston.

You can hear me?

Yes.

Hi, Steve.

First question, really, Steve, is on the Frito-Lay North American business in particular.

If you could talk a little bit about your expectations for revenue in EBIT growth, oper ecom growth, for the next one to three-year period, in particular focusing on whether you think there's been a change in category growth and in your mind has the cost of business or the cost of maintaining your growth rate gone higher?

And what do you think as you become more rational in your trade spending through the next year and a half, is there a risk that the unit volume growth we've seen Frito-Lay historically produce becomes a little less?

Andrew, I'll be happy to comment.

I would start out by saying that it's very easy when you look at a quarter like the second quarter to overreact to either asking that question or in our party answering it.

But let me back up just a bit and say it was only a very short few months ago when we were looking at the first quarter, when our volume and our revenue were quite strong.

And our business has not fundamentally changed.

And if you go back in our industry, whether it's a 10, 20, or 30-year history, we've had a pretty consistent growth in our industry of roughly 3%.

Now, clearly, the second quarter it slowed down.

We've had slowdowns in the industry in the past, and as you go back and look at those historical numbers you'll see that.

But on average, this category has been and remains a very healthy category.

That's the category look.

As it relates to our business, we clearly as I said pulled the lever on spending very, very rapidly, and frankly too deep.

So to try to project the kind of spending we had in the second quarter and to project that on to any kind of continued spending would be I think an over exaggeration by a large amount.

So as I alluded today in my question, our intention is to pull back on the trade spending and frankly we just step back and think about it, when you pull too deeply, there's two ways you can trace them.

You can do frequency and you can do depth.

We're really talking about a depth issue here.

We pulled too deep, and when you walk into an average store, you know, the incentive in our category -- there's a point when you go below that point and you don't go net incremental volume, and that's what we did with a few key committees, and that's the essence of what happened in our trade spending.

But to summarize the current situation for you, answer your question, Andrew, that the trade spending will certainly come back in the remaining part of the year, and we don't anticipate that we're going to have to be anywhere close to that going forward.

Now, what is the next one to three years growth look like?

I guess I would say the category has been at 3% over the longer term, and I think if we look back three years from now we'll find it was growing about that rate.

Now, we've historically outgrown the category and we would expect to outgrow it in the future, and that's going to be driven by the same things it's driven in the past; strong new products introductions, and effective marketing.

Both push and pull.

And we intend to do that.

So I think that's the top line answer to your questions.

And Steve, if you maintain levels of spending at a more rational level year on year, is there enough product in the business with the mix effect to continue a double digit rate of operating income growth on an annual basis for the North American snack business?

Well, we have had quite a long run of growth at 10% or more from this business.

And in termly, that would be our target.

Frankly, if we need to invest a little bit into the business to reinvigorate growth with new polls or new products, we'll do it.

I gave you a forecast for what we expect this year.

And we're going to make the out rhythm work for all of PepsiCo by investing in our businesses as we need to.

So I would tell you that fundamentally, there's nothing that's changed in our business going forward and we are very optimistic about the future prospects at Frito-Lay.

Thank you.

Our next question comes from Bill Picarillo from Morgan Stanley.

Yes, good afternoon, everyone.

Want to dig deeper on frito-lay.

One if cue help us out on the innovation pipeline in items of contribution to growth.

Are you getting what you expected this year?

The mix trade-up on the revenue line behind the promotional stand, are you getting that?

And another category, you mentioned the health and wellness issue, are you seeing an issue on the core indulgence brands and shift by consumers in health and wellness you mentioned competition and retail traffic so the secular trends behind the [INAUDIBLE] category as well as the innovation pipeline, please.

Certainly, Bill.

Let me just start with a new products.

Through the first half of the year, our new products on the salty side of the business were up over $400 million, actually $430 million.

And in the convenience foods side, it was up by about $50 million.

So in total, we had about a half a billion dollars in new products -- sales from new products this year.

And they have -- impact on pricing above one point.

So we are pleased with our new products.

Is the case any time you have new products, particularly the numbers we have, you're not going to have every one hit a home run.

But on aggregate, the numbers are right in line with what we expected out of our new products this year and what we expected the new products to do in terms of net revenue realization.

And I would add that the early forecast for our 2003 innovation pipeline is even stronger than that, in terms of expected revenue from products that we anticipate rolling out in 2003.

So from an innovation pipeline I think we're on target.

We expect to wrap up even more in the convenience foods side, and that is our intention.

And just from a ballpark perspective, we expect about 50% growth in the convenience foods side from new products next year.

As it gets to the health and wellness shift, bill, you probably can remember over the past 10 years I certainly can remember at least two specific times where the consumers have moved pretty strongly into the better for you arena.

And I think that clearly, there's an opportunity to take advantage of that move as we see the consumer today.

But we've learned before and I would certainly caution our own people as well as all of you who follow us to remember the consumer wants a balance of indulgence, as well as better for you, and if we overreact in our portfolio in either direction, we won't get the balance growth we want.

But I would say we think we have some real opportunities to do a couple things -- one, to take our current products and to selectively move some of those products into what we consider to be a better for you arena.

Secondly, we believe that within the salty category, there's -- there are several big idea opportunities for better for you and good for you products.

And then third, and the convenience arena, we think there are opportunities for us to develop products in arena, as well as to take some of the products that are already there and move them from warehouse into DSD.

So I would say that the new products arena is a strong as it's ever been.

And as it relates to the external factors, the competition and retail traffic, I believe that the retail traffic issue is one that will come back, we've seen some improvement in the small format since the end of the quarter.

And as far as the competition is concerned, we've had national -- several national competitors introduce products this year, two specific ones, and one was relatively successful, the other one I would submit is probably not going to be successful.

So I don't know, Bill, if that gives you a good picture of your questions.

Thank you very much.

Thank you.

Our next question from [INAUDIBLE] with JP Morgan.

Yeah, good afternoon, everyone.

I was wondering if you could highlight as we look at the change in promotional spending, the change in accounting from -- batch nine.

Can you highlight since we haven't been able to track this over time, the changing growth rate this year and spending against your net revenues, versus the change in spending let's say on average over the past several years.

Is it a big acceleration versus what you have done historically?

Is it that we haven't been able to track these changes before because they have been in SG&A?

So if you can give me a little guide ns on that, that would be great.

Thanks.

Well, Indra is pulling together a couple that the numerical answers.

Let me give you a couple anecdotal thoughts on that, John, as you think about it.

Frito-lay, we've gone back and looked at it, I believe 7 out of the last 10 years we've actually had increases in trade spending that were higher than the increases in sales.

So under the current accounting rules, we would -- some of this that wasn't nearly the degree that we're talking about in this quarter.

And the reason I point that out is because in a DSD environment, trade spend is a very effective cool along with pull marketing to drive a business, and it gives us two levers to move on a pretty rapid basis, and when done appropriately you can get the effective results.

So part of your question would be answered by saying yes, we would have seen some of this if we had accounting rules differently in the past.

And --

[INAUDIBLE] you just look at Q2 over the past few years, we did overspend on trade and that did depress our growth rate significantly.

We haven't looked across all of PepsiCo, John.

We want to look for Frito-Lay North America, and Q2 does not make a trend we hope.

Great.

Thanks.

Our next question comes from Mark Greenburgh Duetche Bank.

Good morning, Steve,Indra and Gary.

Just ask you to look forward, if you don't mind, in three different ways.

First, do you consider the core rate of inflation in your revenue growth targets, and if so, what kind of rates are you assuming is deflation an issue either on a category or industry basis in your mind?

Indra --.

You want me to answer that one now, or do you want to ask all three?

Okay, the next two.

The other thing is it really relates to what a lot of folks are talking about with regards to Frito and the level of promotion, just wondering if you think some of this relates to how retailers are acting in light of particularly supermarket retailers in light of Wal-Mart becoming bigger and more prominante in this category.

Do you think this is part competitive response and you know what impact if any to this business would have you from Wal-Mart becoming bigger in Mexico?

And then lastly, with regards to some of these near term challenges that you raised internationally, you think that presents more acquisitions opportunities and maybe you might spend a minute or two talking about your criteria and priorities in that regard.

Great.

What I'll do Mark is try the first one, and then hand the second on off to Steve.

Thanks.

Let's talk about the core rate of inflation and price inflation and cost inflation, so very differently.

In our categories and you know well from floating price -- in particular, for the longest time we've been in a no real price war.

The whole industry has not had pricing in 18 years, I think only the last year or so there have been some pricing.

But on a long-term basis, real prices have not gone anywhere in this category.

So this is a very, very affordable and great category for consumers.

Going forward, if you talk about price inflation, we basically are looking for flat pricing, flat normal pricing.

And the only pricing you get is really from innovation, mixed related depending on sizing or things like that.

So core products we're not looking for deflation but we're not looking for any sort of price inflation.

On the other hand, if you look at our cost base, in terms of future, depending on the cost element you're looking at, there's clearly about a 1 to 3 percentage points inflation that is inherent in the cost.

Going back to Steve's point innovation in the mix, it's important that we get some -- lift from pricing.

Alternatively, the productivity of the business has get to get a lot more higher so that we can still deliver the numbers.

And to be honest, we have equal emphasis on both.

We are focusing on -- in veto vations to be able to drive providesing and we have got the petal to the metal in terms of thinking about productivity and as I said in my remarks, the quaker merger is in fact serving as a force function and -- [INAUDIBLE ] making us think about how we do things in pepsico and questioning whether we should be as decentralized as we are, although that's the strength of the company, but looking to see where we can work together forget more for product test.

That way it's been a huge -- because we're learning from them.

But that's the answer to your first question.

In terms of international challenges, there's no question that this does pose some acquisition opportunities, and trust me, we're looking at every one of them.

There isn't an acquisition out there that we're not actively looking at --

Do you have any suggestions, send them our way.

We're looking at everyone of them.

But again, the thing that we want to take sure is that we just don't go out and make acquisitions for the sake of action decisions.

We are trying to be very disciplined in terms of making sure these acquisitions play out.

You really -- a little bit because we are now a little more familiar with the -- -- process so we can take on bigger deals and truly integrate them into the base business.

We've learned a lot from the quaker deal.

So we're able to get more aggressive on valuation.

But we still have -- financial criteria in terms of acquisition feedback, so we're approaching each acquisition cautiously and prudently.

And the other last thing, Mark, and we have talked about this before, every acquisition happened there has to be a seller.

In many of these markets, unfortunately guidance because they have the flip side of the problem, the market depressed now, maybe now is not the time to sell.

Wait for the market to recover.

So you know, we're out there, scalding every market, every product category.

[INAUDIBLE ]

Mark, to your second question, I don't think there's any doubt that all retailers are out watching every move that Wal-Mart makes.

In the united states and certainly I've seen as I've traveled around, outside the united states, where Wal-Mart is located or where they might come in.

But I wouldn't say that what we've seen in the second quarter has anything to do with that issue.

I think it's really -- we do our deals independently with each one, but it isn't really the issue I think we're dealing with in the second quarter.

Thank you.

Our next question comes from [INAUDIBLE]

Good morning, everybody.

Thank you very much.

Steve, you kind of answered -- kind of answered my question for Mark's question.

But it just seems we saw kraft with light sales number, and are you seeing retailers acting more defensively here, where you're giving them promotional dollars but they're not trying to generate foot traffic?

My sense is that you're not seeing that, but it just seems you're not the only company that's feeling the soft sales trends here.

Jeff, clearly, we're not the only one seeing it, and the economy at least from what we can see in this marketplace as we operate here every day is certainly not as strong as we would like it.

But in our category, in the -- because of the DSD nature, I'll address your question as it relates to frito-lay, because of the DSD nature of it, the deals are pretty targeted and the funding is pretty specifically directly related to the activities.

So there really isn't the same deal structure here than you have in the warehouse business in terms of the different slippage you might have.

Fair enough.

And with the synergies coming in, greater than we expected after the first quarter, for instance, how do you -- what measures do you take to ensure that these synergies are reinvested wisely so you do get the lift?

Let me just take half of question and ask Indra to take half of it.

One of things that this merge has done for us at PepsiCo is it really has given us a sense of discipline that on a cost side that has really been very healthy for us.

We are absolutely adamant about capturing every dollar.

We frankly found a sort of new way of thinking about things in some degree.

And a lot of that has come from the experiences we've gotten from Bob and the folks at Quaker.

So the reason we're seeing these synergies come up is that we're probably digging deeper and looking harder and little smarter about how we both identify and capture those savings.

And I think we talked about this some months back.

We're going out and we're going to get every dollar we can get at any time we can get it.

We may not match it up directly because we're not going to spend it unless there's a good thing to spend it again against, so the -- you know, the connection between the revenue generations, so to speak, and the spending may be -- may not be exact because we're -- we don't connect that way.

But I would tell you that from a cost side, we're very, very pleased with the discipline and the opportunities we've seen.

[INAUDIBLE] what Steve just said, the choosing of the deal, and continuing through 2003 or maybe even 4.

We're not shutting down our [INAUDIBLE].

Dwyer will now run Tropicana.

We replaced -- -- with Cindy Swanson at Frito-Lay international, who used to be a PepsiCo beverages international.

Finance executive also in operation.

And we're going to keep the team that was the merger integration office going so the constantly have these mechanisms, which track where the dollars come from and where they're being reinvested.

And we're going to keep that discipline up so we know exactly where it's coming from, where it's going, and we rede employ some excess -- to thinking about new platforms more future growth.

So this will sustain our growth for 2003, and I hope into 2004.

Terrific.

Just a final question, Bob, or for Indra as well, there's been a lot of discussion and talk about big checks being written to certain retailers to not Gatorade's competitors off the shelves.

Sizable amounts.

And I was hopeful that you could maybe comment on those actions and just clarify it because there's concerns that you're writing some pretty big checks from retailer to retailer.

Bob.

Yeah, let me just preface my answer by saying, Jeff, that look, Gatorade is having an absolutely terrific year.

And I know there has been some concerns as I've seen it written and I heard it in Coke's comments that we are reducing our prices and they are not.

The fact is as you know, last year they sharply reduced their prices.

We saw our share go down for the first time in years.

And the year before, we have raised our prices.

So we are in an environment that I think is -- what is is most important on to us is category growth.

We have never been fixated on shame we think it's much more important the category growth.

At the same time, we've got to watch our share.

We've got to be responsive to the need for more shelf space, we need to be responsive to the trade who is willing to really merchandise our business.

I will guarantee you we don't go out to anybody in the trade and try to kick out a competitor.

We respond to grocers.

There are grocers who have said to us, we think the best strategy we could possibly have is to have a very, very strong national competitor and private label.

And we would like to do that, and we'd like to really strongly merchandise your brand, and we definitely -- as we do all retailers, we have paid for performance and that is a key feature of the way quaker has done business for the last several years.

We pay for performance.

If people will give us big features, display space, we're very willing to use trade deals that way.

We don't just throw trade money out there just to throw it.

And there were a couple retailers who saw in their best interests -- this is not something we drove into -- their best interests to go to a dual brand strategy.

Not shocking, guys with an 85 share, and growing as fast as we are.

So I would be careful if he territorying what you hear.

And just are your operating margins at Gatorade, Bob, -- the last printed number we a was when they were a stand-alone company around 17% or so,.

Yeah.

Are they up or down?

First of all, as you know, Jeff, everybody's margins -- if all else were equal, every's margins tend to be up because we're a result of the post-EITF revenue relationship shun some they're lower than they would have been.

So the 17 you remember probably would have been something north -- at or north of 20.

We are not reporting profits by product line.

I will tell you, though, we have benefited tremendously from being associated with Pepsi with cost savings and so on so it's a fair assumption that our margins are up.

Terrific.

Thank you very much.

Indra, with your stock at 16 1/2 times for '03, but buy back the stock is the best acquisition you can make.

Thank you, Jeff.

I agree with you.

Thank you.

Our next question from Caroline Leavy of UBS Warburg.

Good afternoon.

I have two questions.

One is, you targeted savings of about had -- 400 million through '05, and 200 million of them seem to be on track to be realized in year one.

The implication is the incremental savings for next year might be more like 100 million than 200 million, which seems to me gives you less flexibility to drive up brand supports.

And what I'm wondering is this was the year we all expected really spectacular volume growth because of the reinvestment in the brand.

Is that actually going to dip down next year?

Don't you think we should be taking down our revenue growth assumption?

The second question, could you address the [INAUDIBLE] news coming out of Europe and what you plan to do with questions on that.

Sure, Caroline.

I'll take the first.

Let me take the first one.

Right now, we're hold to go $400 million in '05, but as I said to you in my -- one of the reasons we're over delivering on synergies is because as we went through the [INAUDIBLE] synergies it became a function of profit, [INAUDIBLE] differently about all the [INAUDIBLE] within PepsiCo.

So I suspect that as the years go on, the balance of this -- going into next year, we hope to get more than the 400 million.

So we're optimistic based on all that we're seeing that we can do better than the had [INAUDIBLE] million.

So we expect savings more robust than the 100 million you see from the mathematical back, out.

In terms of flexibility and -- support, I think this year we did reinvest the synergies -- [BREAK IN AUDIO] and as Steve mentioned, you can reinvest it in full base activities with some companies -- so a bit of both in PepsiCo in our meaning more us the first time.

So we did reinvest back in some of our key businesses.

And the reason you didn't see the spectacular growth that you said to expect was because the economic environment had been extremely challenging.

This is not something we anticipated -- I'll be honest with you, we didn't anticipate 9/11, we didn't anticipate latin American crisis would go as deep and as far as it has gone.

So some of those were mitigating factors in terms of overall growth.

So -- but the third thing is we always had revenues -- later bus we need to work through the system to see how we're going to get the revenue synergies and what is truly incremental for the base.

Let's come back to the revenue assumptions.

As Steve mentioned in his -- end of his section, we're expecting volume and revenue in the mid-single digits.

[INAUDIBLE] I think that's moderating revenue assumptions somewhat, given what we've seen in the environment today.

As for your [INAUDIBLE] the economy improved and the U.S. Economy starts come, back and sputtering[INAUDIBLE] we'll come back and give you more updates revision.

But right now we're staying with mid single digits, volume and revenue.

And Caroline, on the accrual issue, obviously this is something we watch very closely as you know, as well as I do, that it started in Europe.

It has gotten attention both in Europe and the United States, practically around the world, but at the current time it's -- the key focus seems to be remaining in Europe.

And as you know, it's a issue that's found in wide variety of foods, and in fact recently was found in coffee as well.

And I believe it's in half of the food -- top -- half of the 20 products in the food pyramid.

So it's a wide ranging issue that focuses on basically everything the consumer eats that's cooked some it's not something we should take lightly, but by the same token it can't, focused against any one individual -- product because the testing that was done and actually the testing that was done by the Swedish scientist found every product they tested had it.

And the order of magnitude of the product -- of the substance was not significantly different in the products that they found.

So to pick any one product out and to say eliminating or decreasing consumption in that one product is going to take away what might be an issue, would be a gross exaggeration some our position has been that we're going to have dialogue with all of the experts.

We're going to understand as much as about it as we possibly can.

We along with the GMA working to understand what implications this potential percentage might have, but at this point we think that it's relatively under control and we'll continue to watch it.

That's very helpful.

Can throw one quick question, Gary, who has been neglected on the call.

Your net revenue -- for case -- looks like it was up 4% in the second quarter.

If you could you talk to that and the trends for the future.

Caroline I am assuming you are talking about PCNA?

PCNA.

Yeah.

Our revenue is up for a couple of reasons.

One is our concentrated pricing that we took at the beginning of the year, and the second is our product mix, as we said more -- goods on the non-carb side benefits our revenue, so we expect to continue to see that kind of trend.

Thank you.

Our next question comes from Mark Schwarzburgh of [INAUDIBLE].

Good afternoon, everyone.

I wonder if we can talk a little more on Frito-Lay North America, try to break out some of your comments on the economic environment and how that had an adverse effect, and perhaps a core issue relating to innovation.

One could take the view not that one should that the incremental promotional spending was partly motivated by issues relating to the -- and some of other innovations.

I was wondering if you could give us some incremental data, perspective, on how you're seeing repeat purchase for key in innovations in the last six months or, so and anything else to help us understand from really from an internal perspective how innovation is going.

We heard what you said in terms of incremental contributions, but again in terms of how the key products in the second quarter were comparing to trend rates in the first quarter, for example, would be I think helpful.

Good question.

Let me say that the spending increase was not associated with spending against introducing new products.

It wasn't, for instance, as you might have suggested, that it was associated with the go snacks.

That was not the case.

And we're frankly quite pleased with that product.

It is performing at or slightly ahead of what we had expected.

We've had some new product introductions, line extensions, and we think that that product line is a good new platform for us.

If you looking at the new product introductions, there's some pluses and minuses against our expectations.

But the two products that I would say didn't meet our expectations, we had high expectations for them, were Doritos extremes and 3-D's.

And we're taking actions on both of them.

You understand that we introduce Doritos line extensions almost every year.

It's an important part of our strategy, at Doritos, it keeps the excitement in the business, and we had high expectations for Doritos extremes.

It has not performed at the levels we had expected.

All that said, through six months it did almost $70 million in volume, and that's a pretty big -- on a six movie month basis, over $100 million on an universalized base, but we expected that to be bigger than that.

And we set space accordingly, and we'll go back and adjust that.

In fact, that product line will probably have a lower position going forward.

But on the 3-D's we had priced that product.

We didn't line price it with Doritos.

So when it was on deal, it didn't get the same space.

So we're going to go back now and line price the 3-D's with Doritos, and that will we think make a big impact on that product.

And there's other products that Frank Bire introduced and they could have done even more and we had more capacity, things like the kettle chips.

We frankly ran out of capacity on that product and as you can imagine because it's a different platform it takes a little longer to get built up.

The same thing happened on scoops and we've been capacity constrained on scoops since we first introduced it late last year.

So we think that when that lines comes on the summer of scoops it will give us a lot of flexibility.

So the new products introductions are not in any way at least in my jump.

[INAUDIBLE] judgment contributing to any of the issues that we're dealing with at Frito at this point.

Can you also comment on Bistro gourmet?

Bistro was introduced about this time last year and we're overlapping the introductions of bows throw now.

And clearly, we're lower than the introduction volumes on Bistro.

The future of bistro remains to be seen.

It's still selling pretty well.

And when you talk about products, billion-dollar brands and line extensions, they're pretty big volumes.

Would think bows throws that is a place in our portfolio.

It isn't higher than it was last year, so it wouldn't categorize that as one of the best new products we've ever introduced.

It's a great tasting product.

There are a lot of consumers who like it.

And I might add that this did not require a capital expenditure.

This was not one of those new product introductions that acquired a great deal of new capital that couldn't be used to do other products.

So net and net, the Bistro product I think will have a better view of this it time next year, but it's not a disaster.

And finally, could you elaborate a little bit on some comments in terms of the promotional spend in Q3 and -- some of what you were saying, I think in terms of how you see it being as relatively accelerated levels in the third quarter and starting to moderate a little bit in the fourth quarter.

If you can add a little bit of color on would that depth issue is going to continue at this seemingly high level.

Mark, that's a good question, and you did hear me correctly.

We are a DSD company, and we can pull these levers.

Pull them and put them back.

But there is -- does take some time to do it.

These are for the most part the large format deals are all done negotiated separately with our customers.

So we have to go back in one-on-one and readjust the calendars and that's was we're doing.

And we're already one month into the third quarter, and we're in the process of adjusting.

So the comments were meant to say that we're -- we'll be out of this current situation by the end of the quarter, but we'll be in transition during the quarter.

Okay.

So sounds like perhaps this large format executing against -- DSD is more powerful from a push perspective, but sounds like they're taking just a little more money than one would have thought they would.

Well, I think that's what I suggested when I said we pull the lever a little too hard.

Yep.

Thank you.

Our next question comes from Carlos Leboy of Bear Stearns.

Good morning.

My question is for Gary.

I was hoping he could expand on some of the improvements that he sees for Tropicana, specifically on a sales integration.

Big question.

Lot of parts to as many there are a number of things that we are doing as we speak.

First and foremost, on the advertising and invasion -- innovation side, we believe we haven't been out there with enough relevant messaging and enough good innovation, so we're working very hard to do that, to help as the leader, to help the category grow.

On the sales side, we are really taking a very deep dive.

We've been in that for several weeks now, and as you know when you integrate or you move from brokers into a direct sales force, which by the way in the long-term is a very good thing for us because it's a great organization, but it takes a little bit of time.

And we are now going through much more rigorous analytics,, new systems and prophecies put into place.

New people, new conditions, more focus on Tropicana.

And we really have the sales force very charged up about going out and rebuilding the pricing architecture to bring the price gap between the everyday price and the feature price down to much more workable levels.

That will mean a lower everyday price and it will mean less depth in the discounting, and we believe there's a win all the way around because the consumer will now have a reasonable value on an everyday basis, the customer will make more money as we drive category growth, and therefore profitability.

And we're going to win as well as as we bring this into balm but it will take some time.

But I'll tell you that we are well on our way, and we expect to start to see before this year is over some of those trends improve and we'll be off and running in 2003.

Thank you.

Our next question from Mark Cohen of Goldman Sachs.

Good morning.

Steve, I wanted you to -- I think the structure conference call is great.

Addressing the issues.

Two questions, though.

One relates to pricing flexibility at Frito-Lay.

The other is relates to Quaker.

On the second one, Quaker, in your conversation with the SEC, did the issue get addressed of whether assets could be sold that will purchase, and what impact that might have on accounting.

In other words, how comprehensive was that, and would you now be in a position where you can think about asset sales out of that quaker portfolio?

If that was appropriate for strategic standpoint.

And on the pricing flexibility in Frito-Lay side, with is a bigger question, we've had issues come up here over 18 months, really, slowing back to the wait-outs last year.

Could you draw a line through or between some of the consumer issues that were on your mind last year, when you chose a wait-out strategy, and some of the trade and competitive issues that you're facing today.

Give us more granularity on how these factors are acting on business.

Let me take the first part of the question.

We only [INAUDIBLE] SEC on the share buyback.

At this point we have no plans to sell assets and we did not approach the SEC on any [INAUDIBLE] for this position.

And Mark, on the second question, the -- if I'm not answering it, come back and ask. I am seeing these as pretty separate issues.

The consumer issues associated with us making the decisions wait out was really when faced with rising cost pressures and the opportunity or the perceived need to get more pricing and without at that time the answer on a mix to take a wait-out was better than to take a bell mark price.

So that was really a consumer-related kind of a tradeoff discussion that we had internally as did that.

The trade issues today as we deal with the retailers, they really aren't dramatically different in nature than they have been.

I would say, however, though, with on consolidation of the retail trade, more of the retailers are doing their discussions on centralized national basis than in the past.

And frankly, that's an advantage for us.

Because we have the experience, we have the sales force, we have the distribution nationally, and it gives us an opportunity to have a mutually beneficial dialogue that allows us to implement programs that can be uniformly executed around the country.

And that's pretty different than it was say 10 years ago, or 20 years ago, where you really -- dealt all your negotiations -- if you go back 20, 25 years ago, it's at the store level, where that's really changed over time.

I don't know if I got at your question.

Trying to -- I guess, it was a good attempt and you -- getting some of these issues.

But I'm trying to understand the degree to which you are seeing any increase over the last 18 months, consumer resistance -- resistance to the price point where the products are put into the marketplace, and whether or not structurally there's a change in trade margin, I guess, here that is -- that's putting some challenges to the business, and how those two things -- how you thread those two things together or draw a line between them to give us a sense of how the challenges of the next few years are relative to just a couple years ago.

Let me try it again.

The answers I'm going to try to give you are related to the DSD and Frito-Lay.

The sensitivity we have to the consumer is really the belief that consumers are accustomed now not to see price increases.

They're trained not to see price increases.

They don't want to see price increases.

So we don't want to give them price increases.

On the bell mark of our products.

So that's the consumer side.

The structural changes in dealing with trade margins, that has not been as big an issue at frito-lay as it most likely is in warehouse businesses.

On -- in general, but it does vary by category, even within -- within that.

But as far as our category is concerned, and Frito-Lay, dealing with our customers, I would say broadly generalize would be difficult here because it really -- I don't think we're seeing a broad trend.

Thanks.

Our next question comes from Alec Patterson of [INAUDIBLE].

The impact of the accounting on sales and just strike to think through how we should anticipatory of how the flow through of changes in underlying costs through packaging or materials plays on that because trade --

I think you've got cut off at the beginning.

Sure.

Sorry.

Two questions.

First one, following up on John's point about the accounting for revenue recognition, and what I'm trying to get more of a flavor for is how we anticipate in the future the [INAUDIBLE] and flows of that due to the underlying changes in raw materials and packaging and that that typically affects the trade spending number and how we should anticipate during periods of deflation a lower sales number because trade spending picks up naturally, and vice versa so could you address is that an issue we should be nor anticipatory about?

The second question is pie-in-the-sky, with FD and all that, it's really becoming kind of an impediment for you guys to outline the issues surrounding [INAUDIBLE] factors, the Latin American trends, situations in the Middle East, and how you can make on a more meaningful or regular basis address the investment community's tendency to become like a year deer in the headlines, that is, they don't make any changes until they get guidance from management but there are factors beyond their control.

I was wondering, is there anything you can do to facilitate that?

Let me try to answer both and interested in Indra, Gary, and Bob's thoughts if they'd like to add to it.

I this you your first point is an excellent one, that particularly in Frito-Lay and in the second quarter, of every year, although I don't by any means want to paint over the issue we've talked about the majority of the last hour and a half, but I would tell you that as we move in frito from prop cycle, depending on were it's a long crop or short crop, it does have an impact on the cost, which [BREAK IN AUDIO] but that is clearly an issue and it's one we've dealt with many, many times in the second quarter, not to this level.

Where we've had to reduce our prices dramatically to match competitor's in the marketplace who had a long crop and who can make marginal profit by capitalizing.

So that is an issue.

It's probably through very -- in Tropicana as well.

It's fairly analogous, a lot depends on the crop of the year and there are many, many producers, particularly on the label side, so we need to obviously have that flexibility so that we can continue to stay competitive.

And I say in the past, I can't speak for Tropicana, but in the past we have in fact done that, and it wasn't something that -- sometimes we talked about it, but sometimes we didn't.

And we just absorbed it in the P&L and it didn't show up because it was gross revenue.

For your second point, this is an issue that frankly we have talked about a lot internally, because we're trying to make sure that we're as open and we're as clear with you about our direction as we possibly can be.

But not getting into the pattern that every time anything happens around the world that we're going to make a public statement and have a discussion on it, because we've got to run a base, and somewhere in the balance between -- you know, talking about every issue and waiting until we get a buckle full of them like this quarter, you know, frankly this quarter is got a whole bucket full of them.

But what we're trying to do is get into the pattern of being able to discuss with you on a quarterly basis any and all issues you have with our business, and hopefully we won't come to quarters where we have as many issues that may be small but sure add up, and as we try to think about communicating this quarter, we could have easily gotten off on any number of issues that impacted us.

We tried to stay focused on the key issues, which we thought you would be interested in.

But I don't know, is this addressing your point?

Well, yes.

I mean, I understand.

You can't stop the business every time the real drops a penny and tell us about it.

But I think there's an element of how the investment community has become a lot more in tune with a the notion you're restricted to communicate and that there's an opportunity to make an investment short or long investment environment based upon the fact that you can address on a regular basis like you used to the factors out there, foreign exchange, et cetera.

So I don't know the solution to that, but I think you're asking some sort of consideration because this quarter seemed to be particularly focused on your sales growth level, and there are a variety of factors that weren't at your control, whereas on earnings total there are more factors that you can poll to offset the sales trends at your control, so just trying to manage the expectations process out there so the deers staring at the headlights actually have the ability to blink.

Your point is one that we have debated internally a lot over the last couple weeks.

And I do think that the current regulatory situation makes it very, very difficult for us to find a question to communicate, and I think we're not alone.

Lot of other companies are trying to find a way do this fairly, not get anybody into any kind of difficult situation, and recognize we have a business to run.

I appreciate your recognition of the fact that we had a bucket full of issues.

We didn't want to sound like we were whining as we went issue by issue, but we could have spent all day talking -- walking around the world at all the issues that affected us, and my time in this job clearly the convergence of negative opportunities that have problems all converged here, and I think that's what you're reflecting.

Yeah.

And one more thing, on the assumption about foreign exchange for the back half of the year, you alluded to the fact you factored those in.

What is the impact on the international businesses?

Indra?

Let me talk about Q2.

Let me just take you back a little bit talking about the forecasting profit on [INAUDIBLE].

In Q1, we look at the Euro, everybody forecast said the Euro may in fact, well the Euro is weaker than the dollar, everybody was surprised that the Euro was weaker than the dollar.

And it took forever the Euro to strengthen and that happened only because Europe economy has weakened substantially from all the corporate scandals that came about, so everybody's forecast for the Euro was wrong. As I look at the Mexican peso, we all thought the Mexican peso should've weakened a long time ago. And it didn't. It stayed strong for a much longer time then we expected.

It's very hard, in today's environment, giving all of the traditional models, to do an accurate forecast of FX. Even the banking industry seems to be off in the sense of the timing of their, foreign exchange forecast.

But having said all that, in Q2, let me tell you the impact.

It impacted our revenues by one whole percentage point. And the reason is because we are more exposed to Latin America as I said in my international summary. 40% of our business comes from Latin America.

In the second half of the year, working through the impact of Brazil and Argentina, Venezuela, and we only planned for some recovery in Venezuela and we get the surprise that the [INAUDIBLE] is in, the [INAUDIBLE] is out. And whether [INAUDIBLE] Brazilian and Argentinean contigon are going to carry on for the rest of the Latin American economy, and how much more the Mexican peso can beat them.

So it's very hard for me to give you a net impact to PepsiCo in the second half.

But all I'll tell you is that on a currency neutral basis, we expect our revenue overall to be in the mid-single digits.

If I were do say taking current spot rates for the currencies of Latin America and globally, would the continued impact be about a negative 1% through the back half of the year?

I took the current spot -- you know, Mark, um Alec do something. Just run up PepsiCo and for the balance of the year, volume in the mid-single digits, and revenue in the mid-single digits on a currency neutral basis.

All right.

Thank you.

Our final question comes from Bill Goldner of [INAUDIBLE].

Hi.

Thank you.

I'm finally on.

Just a question about cash flow.

Cash flow is so strong, the first half of the year, there were some comments made in the press release about thing that were timing oriented.

Some of it was payables, and some of it was tax payments.

Want to get a sense of what the expectations is for operating cash for the full year.

Our operating cash flow for the full year 2002 will be slightly north of $3 million.

And this is, often we make a half a billion dollar contribution to our [BANKING PLAN], which we plan do in the next couple months.

So we are going to have [FAIRLY ROBUST] cash flow this year.

Thank you.

I think that's all the questions.

Thank you all four your time today.

Let me close by emphasizing that with the exception of Tropicana, all of our base businesses are in excellent health, and we fully expect them to deliver on the performances that you and I have come to expect.

As Gary's laid out, we're hard at work at Tropicana to bring about the turn around that we all want and know that is within our reach.

We also have a lot of flexibility in theP&L to deliver consistent bottom lines earnings growth, as Indra talked about.

Although we didn't get as much top-line growth as we wanted this quarter, we did grow more joins better than expected, and as a result delivered EPS that was above our guidance.

In the meantime, we're addressing those top lines challenges and know what we must do.

We have great employees, that are smart, specialized and committed to growing these businesses and we expect to benefit from the repurchasing of shares.

We feel our stock is a bargain right now, and we plan to take advantage of the new authorization.

So my last point, PepsiCo is in excellent shape.

We have tremendous confidence in our business and their potential, and we look forward to continued growth well in not future.

Thank you again.

And I appreciate your time and attention.

This concludes today's conference call.

All participants may disconnect.