百事 (PEP) 2002 Q3 法說會逐字稿

Good morning, welcome to the PepsiCo third quarter earnings release conference call.

All participants will be on listen only until the question-and-answer session of today's call.

At that time, you'll be instructed on how to can a question.

At the request of PepsiCo, this call is being recorded.

If anyone has any objection, they may disconnect at this time.

I would now like to turn the meeting over to Miss Kathleen Luke, Vice President of Investor Relations.

Miss Luke you may again 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 Financial Officer; and Gary Rodkin, President and CEO of PepsiCo Beverages and Foods North America.

Our earnings were released this morning and for purposes of this call we will assume that you have all 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 www.pepsico.com where a link will connect you.

The call will also be archived for 90 days at our website and also at streetevents.com.

A taped replay will be available until the close of business on Tuesday, October 15, by dialing 800-879-1572.

International callers should dial 402-220-4706.

And the reservation number is 12588.

Next I'd 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 at the Securities and Exchange Commission.

Now it's my pleasure to introduce Steve Reinemund.

Good morning, everyone.

Thanks for joining us this morning, and as Kathleen said, we are assuming that you have seen our earnings release and we tried to make as clear as possible exactly what drove our businesses last quarter and what we have planned for the balance of the year.

So at this point, indra and I have just a few other thoughts we would like to share with you, and then Gary will join us and we'll answer your questions.

Let me start my comments by repeating the headlines from this morning's release because we really think that they're much too important to be lost.

First, the earnings per-share growth was up 14 percent at 56 cents, beating consensus.

Secondly, this was our 12th consecutive quarter of double-digit earnings per-share growth, and I might add that in our opinion, these earnings were quality earnings.

Our volume rose 4 percent for the quarter with Pepsi, Frito-Lay, Gatorade and Tropicana all gaining share.

Net revenue grew 4 percent, as well.

And on a currency-neutral basis, revenue grew ahead of volume.

We're working to close the gap and we are still very confident that we'll get to a positive revenue-to-volume spread as we exit the year.

Our operating cash flow year to date is a robust $2.8 billion, and that is significantly ahead of the $2.1 billion we generated over the same time period last year.

Year to date, our margins have expanded over 150 basis points, and that reflects strong productivity at the divisions and from synergies resulting from the Quaker merger.

Let assure you that the integration of Quaker is clearly on track.

And as we forecasted, Frito-Lay incremental promotional activity was rolled back by Labor Day.

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

We have great products, terrific brands, and great distribution systems to power our growth.

And most of all, we have the right people committed to driving that growth well into the future.

It's with this confidence that we reaffirm our guidance that we expect full year 2002 earnings per-share growth to be in the 13 to 14 percent range.

In fact, we expect to be at the high end of that range.

Now let me turn to the key questions, and I know most of those center around Frito-Lay North America.

I want to start by saying that the Frito team delivered very sound results and Frito's performance actually improved over the course of the quarter.

For Frito-Lay, the focus is clearly on the top line as you would expect.

Some questions that I know you have and that we have been asking is, when is the incremental promotional activity going to end?

How will volume grow without additional trade spending?

And will we take pricing [INAUDIBLE] to revenues?

Let me address those issues.

As I'm sure you saw in our earnings release, the promotional overlay that was implemented in the second quarter has now been rolled back.

The Frito team achieved that by Labor Day as we had forecasted during our previous call.

In fact, in the third accounting period in the quarter, our volume and revenue growth rates in the US were virtually equal.

And we fully expect to meet our goal of a positive spread by the end of the year.

Let me spend just a minute more on that incremental trade activity.

As we said before, the problem with the overlay was that it was inefficient.

It really didn't drive volume.

It just gave customers already buying a deeper discount on the products that they were already going to get.

And now that it's rolled back, we have a couple of weeks of results that were not included in the release.

This is actually early 4th quarter results and the volume has not been affected.

In fact, with a couple of weeks in the quarter under our belt, we are beginning to see that our volume growth is above 4 percent, actually well above 4 percent.

And we intend to continue to drive that volume through a combination of marketing and innovation.

On the marketing front, we have a strong calendar lined up for the fourth quarter and that includes as we laid out in our release new advertising as well as three Power of One promotions that we have scheduled with Pepsi.

These Power of One promotions are an example of our unique ability to leverage the strength of our portfolio to get more out of our marketing news.

We also have outstanding innovation capabilities.

We set out much of that innovation that is scheduled for the next quarter in the release so I won't go over that this morning except to say that we do have a strong balance of the year plan that we think will move our business.

We have proven our ability to innovate in our core indulgent portfolio with truly new ideas like Munchies Snack Mix and Go Snacks, which contributed significantly to the new product growth.

In fact, on an annualized basis, we expect to sell more than $130 million of Go Snacks this year.

And we brought that innovation capability to our portfolio of better for you and good for you snacks as well and we call those Sensible Snacks.

In the third quarter, our Sensible Snacks grew 50 percent faster than our indulgent portfolio.

In fact, our line of Baked chips was up almost 30 percent.

Now, as for pricing, we do not have any significant price increases planned either through visual pricing or through a weight-out.

We will, however, take minor and targeted price actions as we see the competitive opportunities.

But the principal way we expect to get pricing is through mix.

As we introduce new differentiated products we can charge a premium for that innovation and drive a positive spread between revenue growth and volume growth.

I know there are also some questions about Frito's bottom line; specifically, about our cost outlook given the recent runup in commodity costs as a result of the drought.

And also about our productivity outlook.

So let me address those issues, as well.

In the third quarter, we did not suffer from increased commodity costs.

And we are fully covered for the year 2002.

And I might add, contrary to some rumors that seem to be circulating, we do not expect our commodity costs to increase in 2003.

In fact, we're fully covered through the first half of next year, and we're approximately 80 percent covered for the entire year.

As we stand right now, we have not yet locked in the prices for corn in the fourth quarter of next year.

However, that exposure will be covered by new contracts with farmers well before that quarter begins.

Any increase in oil costs that we might experience will be more than offset by other costs decreases that we already have planned.

Similarly, we expect to continue to improve productivity.

This is an ongoing focus at Frito-Lay as you know.

And everyone in the organization is involved.

Next year's plan is shaping up to have aggressive but very achievable targets.

We'll also benefit from the major productivity initiatives that we have discussed with you many times in the past; specifically, we continue to expect to reap gains from our pre-pick and our supply chain programs.

And we've already started work on the next generation of productivity and we'll share more about this project when we firm up some more of the details.

So to wrap it all up, I hope that you can see that we are very confident about Frito-Lay's future, both on the top line and on the bottom line.

Going forward, we expect that Frito-Lay will continue to grow volume roughly in the 4 to 5 percent for the full year, although any one quarter might fall slightly below that.

And we expect revenue to grow faster than volume.

We expect profit growth to be in the high single digits for the fourth quarter and for the full year 2003.

Net-net, Frito-Lay remains one of the best consumer products companies in the world, and we have every confidence in our performance for the balance of the year as well as 2003.

Now let me turn to our North American beverage operations.

I'm sure you notice from our release that starting in the first quarter of 2003, we'll report our North American beverage operations as a single operating segment.

That will bring our reporting into line with how Gary and his team will be overseeing the business.

It also brings us into line on how our competitive reports -- competitive reports volumes so that we can have, uhm, comparisons that will be easy to make.

We'll continue to break out the volume performance of our carbonated and non-carbonated portfolios and we'll make sure there's transparency into the key trends and drivers of the business.

Let me start out by re-emphasizing that overall, PepsiCo's North American Beverage business is doing very well.

Total servings were up 5 percent for the quarter and 4 percent year to date.

Pepsi-Cola North America as well as Gatorade were both excellent are volumes growth of 4 percent and 16 percent, respectively, while Tropicana's volume was flat, which as you know is an improvement over the last couple of quarters.

In addition, as you saw from our release, our North American beverage businesses all gained share in measured channels for the most recently reported quarter which ended on September 7th, as well as on a year-to-data basis.

Now let me just take a minute to walk through the pieces of this business.

At Pepsi-Cola North America, we had a robust 4 percent volume growth.

We did benefit from a shifting in timing of the Labor Day holiday that will make next quarter comparatively a little more challenging.

But we're very pleased with Pepsi-Cola North America's performance for the quarter as well as the overall health of our business.

Carbonated soft drinks grew 2 percent while Pepsi-Cola North America's non-carb portfolio grew 18 percent.

On the CSD front, trademark Pepsi grew over 1 percent reflecting the continued success of Pepsi Twist as well as the introduction of Pepsi Blue.

And we believe that Pepsi Blue is doing what we had hoped it would do and that is to reinvigorate teens and young adults interested in the CSD category.

Take-home packages of Pepsi Blue will be coming out later in October as we had originally planned.

Our other core CSD trademark Mountain Dew also continued to grow driven by the continuing success of Code Red and now Diet Code Red and Sierra Mist continued to show momentum.

Now moving to non-carb's at Pepsi-Cola North America.

First Aquafina growth has been extremely strong and we increased our hold on the number one water brand, and Lipton Brisk Lemonade has exceeded our expectations.

Staying with non-carbs at Gatorade/Tropicana North America, Gatorade has also had a very strong growth at 16 percent.

And we have now gained back those few share points that we lost last year.

Gatorade's volume was driven by great marketing as well as innovation, with new flavor offerings including Gatorade Ice as well as Extremo! lines, as well as the new all-star 12-ounce PET six packs in flavors designed specifically to appeal to kids.

And this is also been aided by our rollout of nationally Propel Fitness Water.

At Tropicana, volume was essentially flat which was an improvement over recent trends.

And this volume reflected relatively strong growth in Tropicana Pure Premium driven primarily by the nutritional lines as well as the Dole brands.

It was also boosted by the introduction of Tropicana Pure Premium Healthy Kids which was designed specifically with the nutritional kids' needs in mind.

This growth was offset by softer performance in our ambient and our from concentrate juice businesses.

We are working hard to reinvigorate growth at Tropicana and we are making progress.

We continue to work to shrink that gap between the everyday price and the promoted price for Tropicana Pure Premium, we think this is critical.

And we have recently appointed Margaret Stender who successfully ran our ready-to-eat cereal business to oversee the creation and the implementation of a new comprehensive ambient juice strategy.

So in summary, we had an excellent quarter at PepsiCola Beverages North America.

Looking forward to the next quarter, we see a challenge for PepsiCola North America, given the CSD pricing actions in the marketplace, as well as a shift in the Labor Day timing, plus a difficult comparison with the fourth quarter of last year.

We expect Gatorade's momentum to continue, however as you know, Gatorade will be moving into a lower seasonality period and that growth won't have as much impact on Pepsi-Cola's overall or PBNA's overall growth for the quarter.

And Tropicana is making progress on its issues and we should see continued improvement in Tropicana.

We understand these challenges and we have confidence in our business.

We have great brands and great go-to-market systems to go along with our strong marketing and innovation track record.

Turning to the balance of our businesses, I'm going to let Indra take you through the international and corporate results in just a minute.

But for the sake of time, I won't go into a lot of detail on Quaker Foods' business, although either Gary or I will be happy to field any questions you might have about this division.

But let me say that this division's operating profits grew a strong 14 percent, reflecting lower costs from synergies as well as productivity.

And we continue to feel that these are healthy, viable businesses with upside growth potential and that generates a great deal of cash for our company.

At this point, let me turn the phone over to Indra.

Thanks, Steve.

I'm going to spend just a few minutes on our international businesses and then turn to a couple of corporate items.

First, it will come as no news that the international macro environment continues to be tough.

Latin America is still troubled.

The Middle East on boycott of American products continues and the outlook for the Mexican peso is still questionable.

However, I want to emphasize that in the face of these very difficult circumstances, the overall performance of our international divisions has been truly superior.

Collectively for our international businesses, servings grew 4 percent for the quarter and 5 percent year to date.

Net revenues grew 2 percent for the quarter and year to date.

On a currency-neutral basis and adjusting for the Gatorade transfer to our bottlers, net revenues grew over 4 percent for the quarter and 5 percent year to date.

This top-line growth drove operating profits up a very healthy 17 percent for both the quarter and year to date.

On a currency-neutral basis, operating profits grew 16 percent for the quarter and 19 percent year to date.

Let me now give you some more details.

At Frito-Lay International, we saw strong growth in Mexico especially at Gemesas well as Sabritas and at walkers in the United Kingdom and we saw double-digit volume growth in the key developing countries like Russia and India.

Volume across our snack businesses was driven by incremental innovation including new products such as Sensations in the United Kingdom and [Mediterranias] in Europe.

[INAUDIBLE] adversely impacted revenues at Frito-Lay International by about 3 percentage points and Frito-Lay's strong operating profit results, they were up 21 percent versus year ago reflects the relative strength of volume in countries with high margins, just Mexico and the united Kingdom.

PepsiCo Beverages International saw particularly robust volume growth in developing markets like Russia, China and India.

CBI's soccer promotions successfully leveraged the World Cup play.

And our non-carb portfolio which includes juices, isotonics and water also saw excellent double-digit growth.

As for Frito-Lay International, volumes were depressed in South America and the Middle East.

CBI's flat revenue reflects the flat rev news 4 franchising our existing Gatorade business to bottlers in certain countries as we now report concentrate revenues into the full good revenues for those businesses.

Added to that the Middle East boycott and country mix contributed to PBI's flat revenue trend.

Nevertheless, PBI delivered excellent operating profit growth of over 10 percent for the quarter.

And let me say again, these two divisions each turned in an excellent performance especially given the challenges they had to overcome.

Now let me turn to a couple of corporate items.

First, the corporate unallocated line increased due two items that I set out in the earnings release.

Let me focus for a second on the higher pension costs.

As you know from our call last quarter, we have been reviewing the liability assumptions, funding level alternatives and our investment strategy for our pension plan.

While looking back our pension plans have delivered double-digit returns, we felt we needed to lower our expectations for the future and to invest more conservatively.

Based on a comprehensive review, we have essentially done three things.

First, we decided to change our investment allocations.

Second, we decided to reduce our rate of return assumptions for the US plants by about 150 basis points to 8.25 percent.

And based on our analysis of peer companies, we believe this number is at the low end.

Finally, we completed a full midyear actuarial review that updated other actuarial assumptions and made all these changes effective Q3.

As a result, our pension expense increased by 12 million in the third quarter.

And this review caused to us increase our previously announced pension plan contribution from $500 million to approximately $750 million.

This funding was completed in the fourth quarter and should leave our qualified plans fully funded.

We believe these actions were prudent and conservative and as a result, we are positioned well for the future.

I also want to emphasize that in spite of this increased pension contribution, we continue to expect our operating cash flow for this year to be approximately $3 billion.

Now let me turn to the equity income line which increased in the third quarter due to the resolution of some contingencies related to Gemex, our Mexican bottler will, as well as solid results turned in by our various bottlers.

We do not expect a material gain or loss on the sale of our Gemex shares to PBG which we assume will be completed by year end.

We have also received a number of inquiries as to the status of our share repurchase program.

We believe our stock is significantly undervalued based on a DCS basis.

So we have been fairly active in the market.

As of the end of last week, we have repurchased about 47 million shares for almost 2 billion.

That's a weighted average purchase price of $40.94.

Let me talk to one final item and that's the synergies we have achieved from the Quaker acquisition.

Yes, we are ahead of our original plan.

Of the $400 million we promised by the end of 2005, we expect to achieve over $200 million in synergies this year.

And we expect to get the balance over the next two-years plus, which is ahead of our original schedule.

We think this is a terrific achievement strengthens our financial position and reflects the success of the Quaker transaction.

Wrapping it all up, we believe that especially in this difficult economic environment, we have had very solid operating results.

We have recorded strong volume growth and superior bottom-line performance as promised.

And I would like to repeat Steve's point that this is our 12th consecutive quarter of 12 percent-plus earnings per-share growth.

In sum, we are very proud of our performance.

Now let me turn the call back over to Steve.

Thanks, Indra.

Before I open up the floor to your questions, I have one final issue that I'm sure you want me to address, and that is the outlook for the fourth quarter and beyond.

I'll start by reiterating what we shared with you on our second quarter call.

This year, we expect total PepsiCo servings to grow in the 4-5 percent range, and we expect full-year 2002 currency-neutral revenue to have a positive spread to volume.

Moving down the P&L, we continue to expect line of business operating profits for the full year 2002 to increase at the high end of the 10 to 11 percent guidance, with earnings per share for the full year also to grow at the high end of the 13 to 14 percent guidance range.

As Indra mentioned, even after the $750 million pension contribution, we expect full-year 2002 operating cash flow of about $3 billion.

We're on track to achieve the merger synergies, and the addition of Quaker has made PepsiCo a much better company.

And finally, we're well ahead of the pace on our promised return on invested capital improvement of of 50 to 100 basis points a year.

I'll also confirm our long-term guidance on mid single-digit volume and currency-neutral revenue growth and low double-digit earnings per-share growth.

However, for 2003, the impact of share repurchases and the expectation of a slightly lower tax rate gives us confidence that next year's earnings per share will grow in the 13 to 14 percent range.

Let me sum it up.

Our portfolio works well.

Taken together, our businesses are very healthy and they allow to us deliver superior financial performance.

In my opening remarks, I noted how consistent our bottom-line performance has been over the past couple of years, and we fully expect to continue that consistent growth well into the future.

In order to give you more visibility into our businesses, we plan to have a conference for you highlighting our North American businesses in February of next year.

We're still trying to get an exact date.

So we'll be following up with you in the next few weeks to give you the details and to nail down that date.

And we do hope that you'll all be able to join us so that we can spend more time together.

Hopefully, we've anticipated some of your most pressing issues on our prepared remarks, and now I'd be happy to open the floor to any of your questions.

Thank you, sir.

At this time, we are ready for the question an answer session of today's call.

If you would like to ask a question, please press Star 1 on your touch-tone phone.

You are going to be announced prior to asking your question.

To withdraw a question, it's Star 2.

Once again, to ask a question, please press Star 1 on your touch-tone phone now.

Our first question comes from Jeff Cantor of Prudential Securities.

Good morning, everybody.

You said that you're not doing a weight-out.

But that runs contrary to concerns voiced in C-stores.

Can you explain this with respect to Frito?

Certainly, Jeff.

Let me make it very clear.

We're absolutely -- I say again, absolutely not taking prices up by implementing a broad-based weight-out across our portfolio.

It's always true that there might be adjustments in back sizes for particular products at any given time, and we'll respond to the marketplace and the competitive opportunities.

But that's just a question of getting the right price in response to consumer or the competition.

For example, in order to bring our bag weights into line with regional competitors, in the Northeast, we're taking a quarter ounce out of our XXL bag of Lay's.

And this action will have a minor impact on our revenue per pound for Frito-Lay.

And I would say that there might be similar actions like this, but clearly, it will be a what like to call micro-pricing opportunity.

And it is not a general price increase.

And we expect next year that the positive pricing that we have alluded to will come primarily from product mix and not from pricing.

And we have a good portfolio of products that we are going to be introducing next year that will allow us to do that.

I hope that's put that to rest.

Yeah.

It certainly does.

Thank you very much.

Uhm, and in the second quarter, you said that your inefficient promotional spending I think it was cost you about a point to revenues, uhm, which worked out something to the extent of around $60 million, if I remember my math and if my math is right, uhm, what were the levels, uhm, in the third quarter as far as how much it cost the top line?

Is that quantifiable?

No.

It's really pretty hard to give you an exact number on it at this point, Jeff.

The one thing we could say, Steve, it was a higher impact in Q3 because we had two full speeds of the promotional spending that went through, and it took until Labor Day to unwind it.

Okay.

Fair enough.

And just Indra, the lower tax rate, what should we be expecting for '03?

Jeff, you know, early 2003, we will tell you exactly what to expect.

We're still working through those details.

Okay.

Fair enough.

Thank you.

Thank you.

Our next question comes from Bill Pecoriello of Morgan Stanley.

Good morning.

You had mentioned that the Frito volume was running 4 percent plus after the promos were pulled back.

When you look back on some of the key drivers that began to slow the Frito volume down, in April/May, in terms of store closings, retail activity, contribution from innovation, what are you seeing across those variables that the volume is actually improving as you pull back on the promos versus the April/May period?

Great question, Bill.

I'm not sure I can give you a quantified answer to that because it is clearly something as we talked about in the last conference call that we were going to be looking very carefully as we pulled this back to see what was going to happen to the volume.

But I think that we have a better balance of more indulgent products along with better for you portfolio in the marketplace than we probably did in April.

I think we have probably a better portfolio of new products in the marketplace and I'll give you an example.

The Tostitos Scoops would be a great example that we were capacity-constrained earlier in the year.

And frankly, I would say the extraordinary focus that Frito has had, particularly in the last quarter, to get our portfolio right and get our volume moving has certainly helped.

But, you know, Bill, I guess I take this opportunity in your question just to reiterate my confidence in Frito by pointing out a couple of things we have talked about in the past. -- that I think are certainly valid now.

And that is, Frito is competing in a great category, and if you go back and I've alluded to this in the past, but if you go back 30 years and look at the category, we have had about 3 percent growth.

And I know that many of you have looked over the last couple of years and seen that this growth has slowed down.

But I might tell you that many of you as well as we look at IRI data, and that IRI data really doesn't measure 50 percent of our sales, and it doesn't cover 80 percent of our growth.

So when you think about the slowdown, I think the rumors of a slowdown have been greatly exaggerated.

And in fact, I believe the categories is as strong as ever.

And if you go down to some of the other things about Frito that I would like to point out, we have an unbelievably strong scale position with a 60 share in the market.

And what does that do for us?

In an economic environment like we're dealing with today, we're one of the few categories where private label share has actually declined and it's declined from a lower base to begin with.

Year to date, we're down about 1 percent in private label consumption -- private label share.

And about 5 percent on a year-to-database in volume.

And I guess the third one I would make is that we have a terrific track record of innovation and, yes, maybe at the beginning of the year, we came out with a product in Doritos that wasn't right on the mark.

But we were able to quickly respond because of the capability of DSD, and we have a long track record of many, many years of good innovation, development at Frito.

And when you see changes in consumers' trends like we're beginning to see now, with an increased interest in better for you, it gives us a great opportunity to use that innovation to our benefit.

And we have certainly seen this in our current portfolio.

And I'd say also that in an environment like this where the retailers are struggling, we bring the retailers great profitability, strong profit growth, strong sales, and probably one of the most important things is that is a lot of cash.

So, uhm, you know, I'd say when you look back, we're capable of doing a whole lot in Frito-Lay, and there's been some recent question about our movement outside of salty snacks as a indication that we believe salty snacks may not have growth.

I would just point out that 4 years ago in an analysts meeting we had with you all, we told you that we were going to continue to grow the core and that we were going to add more.

And with Quaker, we have had the opportunity to start bringing those products into our portfolio and we're very pleased with the results.

So our movement outside of core salty has nothing to do with our lack of confidence in salty but, rather, an opportunity to leverage this strong DSD system that we have invested a lot of money in modernizing outside of just core salty.

And I would just say one last piece, and that is that the productivity efforts that Frito-Lay has had for many years, it gives us great confidence as we go forward that we are going to continue to have a strong business in Frito-Lay.

Thank you very much.

Thank you.

Our next question comes from Mark Greenburg of Deutsche Banc.

Good morning.

On the Frito front, recently Wal-Mart detailed an aggressive store rollout plan, both domestically and overseas.

Aside from the obvious impact to volume loss that other retailers face when Wal-Mart comes into town, many continue to suggest that pricing may be a casualty.

I'm wondering if on a long-term basis, you guys have any internal analysis of what happens, you know, in a region or an area when Wal-Mart comes in, uhm, in other words, you -- maybe you get the volume back in terms of the business at Wal-Mart, but do you typically see the same improvement in revenues?

And on that same note, I know it's early days with some of the Quaker snack businesses, but along the same lines, can you discuss how some of your competitors such as General Mills, Kraft and Kellogg's are positioning themselves relative to the acquired businesses?

Thank you.

let me take a craft at the first one and I'm going to ask Gary if you want to take a shot at the comparison of the other two issues.

But... first, for Wal-Mart, there is no question that Wal-Mart is having an impact on retailing as we know it.

And that the focus on everyday low prices in Wal-Mart is clearly being watched by every retailer and every manufacturer in the country.

But I would say from the Frito business as well as the rest of our portfolio, we are not seeing a different policy in managing that business pre- and post- the entry of Wal-Mart.

The different retailers have different strategies.

They are high-low strategies.

They are everyday low price strategies and different retailers will adapt what they think is important in the marketplace.

But we have not seen Wal-Mart as anything but a positive for the category as well as for our business.

And, uhm, Mark, I think that the question was on - was it on the snack side?

Yes.

I'm sorry.

Could you state your question again, I'm sorry.

Yeah.

I know it's early days of the acquired cake Quaker snack businesses but I was wondering if you had any general commentaries with regard to competitive positioning, you know, for Kellogg, Mills and Kraft in the new categories.

Well, you know, I -- I think we have seen a couple of products coming into the salty snack aisle from our national competitors this year.

And frankly, we take every competitive entry seriously.

But we feel pretty good about our ability to perform against those product introductions this year.

And, you know, we believe that the future for our ability to grow in our category is strong.

As we move outside our category, as I mentioned earlier, we're clearly going to be competing against a number of national competitors and we're going to have to pick our territory carefully, make sure our products are advantaged and valued, and we're doing that.

And frankly, I think the marketplace will be a more -- maybe more disciplined in some of these new areas that we are going into than in the past.

Steve, I just might add that as we look in healthy snacks, Quaker has the absolute best name in terms of nutrition and that's, you know, evidenced by many, many studies.

So we think we're advantaged as we move towards the better for you snacks compared to our competition.

Mark, if I can add one other thing, PepsiCo comes from a snacking heritage and an impulse heritage and our DSD system really drives products up and down the street.

I think what you're going to see more from us is leveraging the great brand name that Quaker had, using all our snacking consumer research insight to develop products that are really impulse oriented and can be sold up and down the street.

So I think that's our unique advantage, and that's where we expect to grow our business significantly.

We are not going to forget the large format and sells for the warehouse because we now have a scale warehouse system but I think our unique advantage is going to be the whole up and down the street distribution.

Just one last comment.

Gary made mention of this.

But in some recent research we did, among many manufacturers in the marketplace, many of the usual suspects, Quaker came out on top in terms of consumer confidence in the ability to introduce healthy and good for you snacks.

Good for you foods.

And so we think that, you know, over the years as we have tried to move out salty snacks and leverage the DSDsystem, we have struggled because we didn't have the legitimacy and we certainly believe that Quaker brings that to us and our early results with the products we brought to market has really helped that.

And I would add that Tropicana is right up there with Quaker in terms of the reputation with the consumer.

Thank you very much.

Thank you.

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

Thanks.

I have a request and then also a question and the request, which is I have gotten from a couple of clients is whether, as much as I love Brittany can we get a second song to play while we're on hold? [ Laughter ] And did want to ask the question about Trop.

As we look at it it seems as though the volume improved sequentially and the pricing improved sequentially as well but they are still not where we like to see it.

Can you talk about some of the activity within the orange juice category and when you think we can get to sort of a flat pricing number on Tropicana?

Great question, John.

Let me ask Gary to answer that.

John, I think we're making a lot of progress on Tropicana.

And you referenced it, pricing architecture is clearly job number one and we are having good success.

We're starting to get some traction as we sell in this new pricing architecture to our key customers, which basically shrinks the gap between the everyday price and the promoted price.

And we have evidence that that is going to help turn the category.

And that is aided by a possible shorter crop coming next year, which should raise the cost a bit on oranges.

So that's a good story to put together as we go to the marketplace.

So we are starting to see some traction there.

And I would venture say that as we move through the fourth quarter and into next year, we're going to continue to see a shrinkage in the gap between our volume and our revenue hopefully positive next year.

We're also making great progress on our sales force integration where we are getting much more focus on Tropicana and a real alignment between our field sales and our Trop management and we also have new advertising under development that should break before the year is over.

And we also have some innovation starting with Healthy Kids which is off to a very good start, but we're also looking at a few more things that could potentially hit for next year.

Great.

Thanks.

Thank you.

Our next question comes from Carlos Laboy of Bear Stearns.

Yes.

Good morning.

I was hoping could you expand a little bit on Frito-Lay International.

Maybe more specific on what is driving the efficiency gains in Walkers, Sabritas, Gamesa and the magnitude of improvement in those businesses.

Also related to that, I don't know if you expect any write-offs in any of your South American businesses this year and how that's shaping up.

Carlos, good questions.

Let me ask Indra to comment on those for us.

Carlos, let me take your second question first.

We constantly look at all our businesses to see if anything has to be written off, and I can tell you comfortably that based on our analysis so far, there is absolutely no need to write off anything in Latin America for this year or the foreseeable future.

Let me now turn to your first question --

Let me just add something there, Carlos.

You know, obviously, everybody is concerned about the business in South America.

We are, as well.

But one of the things that it's a great advantage to us, we talked about this on previous calls, and it's not something that we want to have to call into play all the time, but we have a great experienced management team that have been through difficult times in these economies before.

And we know how to adjust our businesses and to flex those businesses and continue to grow capabilities even in the face of difficult economic times and that's exactly what they are doing this year.

None of us are pleased with the economies in several of the South American countries, but I would tell you that we are not short-terming the business there and, in fact, I believe when the economies turn, we'll have even stronger businesses throughout South America.

And as you know, we have a scaled operation in almost every South American business in the snack side, and we have great partners on the beverage side.

So, you know, despite the fact that we're struggling and it's not particularly a great year in Latin America, we feel very bullish about the future.

Coming back to your first question, Carlos, while the economies are struggling, I think our business has been pretty good.

In fact, spectacular, I may add.

But let me speak specifically to Walkers in Mexico and I think they are two very different stories.

Walkers has had, you know, great quarter and that's because they have had terrific innovation that's come into the market.

We talked about Sensations which is a Kettle style potato chip which was launched in the Period 3.

They had a potato chip which is a Great British Flavor, like marmite, which only the English can eat.

Or even know what it is.

And footballs which is an extruded product shaped like a soccer ball and snacker Jacks which is a rice cake type product.

All of these products help drive, you know, price per pound.

Without affecting the core portfolio that exists already, where your price per pound is managed to stay within an affordability umbrella, so I think Walkers has turned in great results because they have managed their portfolio of innovations and co-products exceedingly well.

Mexico, on the other hand, clearly the economy is slowing down a bit.

But our Sabritas/Gamesa businesses are complementary.

When the economy slows down, Gamesa picks up because it's got more food value and then Sabritas comes back and picks up again.

So the two businesses are very complementary.

We have had strong innovations on the Gamesa side.

We've had affordable and strong innovations on the Sabritas side, but more importantly both businesses have really worked to improve the productivity of the core businesses so that we can in fact sustain a fairly decent level of profitability on and on going basis.

So overall I think as Steve said, our chaps in FLI really know how to manage ups an down.

They have made that a fine art.

That's the result you're seeing in the bottom line today.

Thank you.

Indra, do you expect Power of One programs for Sabritas and Gamesa to increase significantly over the next year?

You know, they have been going up every quarter, Carlos.

And I think you will continue to see an increase in the activity because the results from that increase are fairly, you know, spectacular.

We see tremendous volume growth and I think you'll continue to see more of that.

And Carlos, let me add that you know, I'm very optimistic about the Power of One and particularly in Mexico because we have had such great success with our bottlers and certainly PBG leading that effort in the US.

And now that PBG will have, you know, a larger portion of our Mexican business, you know, I think the activity in Power of One between Sabritas and Pepsi will substantially step up.

Thank you.

Thank you.

Our next question comes from Bryan Spillane from Banc of America Securities.

Hi.

Good morning.

I have a quick question to Indra, I guess, it would be on the pensions.

And if you could just walk me through we have now an incremental $250 million in contribution, so it will be $750 million.

And do we book -- or do you book a return on that of 8.25 percent?

So there is a gain that's associated with that, that may offset the increased expense relative to the reduction in the return on asset assumption?

Bryan, Peter Bridgeman our Controller is going to give a complete answer on that.

Okay.

Bryan, yeah, this is Peter yes, that's how the accounting and the rules say.

So whatever funds you put in, you look at the total asset value that you then have in the plan and you apply your assumed rate of return to those assets.

However, Bryan, when the stock market did go down in Q3 and Q2, our basic pension plan in fact took a hit.

So this funding only gets us back to a funded situation.

So it's not as if we are putting in more money and recording an item that shows return.

So then just to follow up on that, is there a tax shield for the full $750 million that you are contributing?

Yes.

Yes.

Okay.

And then going forward, if I look at the -- I guess the corporate unallocated -- I just want to make sure I understand where these things are flowing through.

Mm-hm.

Would the benefit that you get from, you know, booking the return on the higher cash contribution also flow through the corporate unallocated line?

Let's pause on that, Bryan, because one is a return on asset assumption, okay?

Mm-hm.

Which is applied to the whole funded base.

Okay.

The second part is the actual return and remember, first of all, we have taken the return asset assumption down to 8.25.

Right.

So that's actually a pension expense for us.

Correct.

The second part is the actual return.

We have no idea what the stock market is going to do.

Okay?

And how the actual return ends up, uhm, you know, being will actually determine that line of our pension expense.

The third part of the whole liability calculation and the discount rate news for the liability, right now we're using a long bond, a AA corporate long-term bond.

And at the beginning of this year, the long-term bond rate is about 7 1/2 for our US plant and by September 30, that rate had fallen to 6.75 percent.

So that's the rate that we use for the actuarial evaluations that drives our liability costs, which is our 2003 expense.

So if you tumble that all together, for 2003, we expect our pension expense to be in the range of 140 to $150 million for the year.

And that's actually about a 40 to $50 million increase from 2002.

Okay.

That's very helpful.

Thank you.

Anytime.

Thank you.

Our next question comes from Andrew Conway, Credit Suisse First Boston.

Steve, as you look out into 2003 and 2004, in the context of your algorhythm for Frito-Lay North America's revenue and profit outlook, is it reasonable to anticipate given the fundamentals of your business that 2003's revenue and profit outlook should be similar to how you see the fourth quarter and also, I'd value your perspective on as Frito becomes more successful at gaining mix improvements, how would you prioritize where we should watch Frito achieve the mix, either channel, package, or product, please?

I think, Andrew, in my comments, I said that we were going to exit the year in the mid single digits in volume and a positive spread.

And that's our forecast for next year, as well.

As it relates to products and channels, we usually don't break out the channels specifically as it relates to products, I would just say that we expect to continue to have a balance across our portfolio of what we would call more indulgent products as well as Better For You products.

We'll have targeted products for ethnic and demographic basis.

So, you know, as we go forward, we think that a balanced portfolio of new product development and supporting our existing products with great advertising will be our method of growth.

And clearly, when there are trends out there like better for you is right now, we'll take advantage of those trends.

Thank you.

Thank you.

Our next question comes from Caroline Levy, UBS Warburg.

Hi.

It's actually David Palmer for Caroline Levy.

Could you help us with just determine comparisons in the convenience and food service channels for the fourth quarter?

We know you're -- that quarter will overlap with the fallout from September 11.

Those channels, we are getting the impression that those channels were going to be lapping high single-digit declines for the beverages for the soft drinks.

Is that -- is that, uhm, about right?

And is that true for snacks, as well?

David, we don't normally discuss specific channel performance.

But I'd say directionally, your comment would be correct.

Okay.

Thank you very much.

Thank you.

Our next question comes from Alec Patterson, Dresdner RSCM.

[ pause ]

Alec?

Can you you hear me?

No.

We can't hear you.

Go ahead.

Sorry.

Hang on.

I think I should be able to do this.

We hear you now.

Can you hear me?

Yes.

Sorry about that.

Uhm, referring to the Tropicana cost you outlined for next year and how that will help drive some higher prices in the marketplace,... [ pause ]

What was the question again?

Alec?

(Pause) Alex? (Pause) Alex, we lost you halfway through the question.

Operator?

I'm sorry, just one moment. (Pause) Mr. Patterson, is your line open?

Yeah.

Can you hear me?

Alec could you try again?

All right.

I apologize.

I don't know what went wrong.

Let me start again.

Tropicana costs based upon the orange crop issue you highlighted for next year, and the I implication for higher prices, I just wanted to get a sense that you perceive yourselves having a better cost position than your competition in that environment.

Gary?

Yeah.

We do believe that we will be advantaged in terms of our costs versus competition.

This will also enable us to, you know, have credibility with our story in terms of why we need to shrink that gap and bring that feature price up to a more reasonable level.

So again, if the crop -- and I don't think it's going to be severely short.

But it should impact our competitors more than it will us.

Okay.

Just want to be clear on that and secondly, and I apologize, this is something that always confuses me when you guys do the bottler case sales figure and the concentrate and CSE number, one was up 4 the other one is up 2.

The flow-through on your revenue number of up nearly 7 percent in PCNA is a reflection of the concentrate CSE number up 2, correct?

Yes.

Our revenue is based solely on our concentrate shipments and obviously, the bottler case sales is what our bottlers sell.

The key difference is timing.

We measure our bottler case sales on a monthly basis because that's the way our system works.

We measure our shipments which our revenue is based on, on a period basis and that accounts for the difference between the two.

Right.

And I guess I wanted to get at the implied mix revenue per case trend of nearly up 5 percent?

Yes.

That's a reflection of our concentrate pricing that we took the beginning of 2002 of 3 percent as well as a product mix as we sell more full good revenue finished products like Sobe, Dole, Frappucino,et cetera.

And so that's a pretty good number going forward at least into the fourth quarter?

For this year .

The revenue price mix number?

Mix number should hold for this year.

Okay.

Great.

Thanks.

Our next question comes from Karen Young of Strong Capital.

Your line is open, Ma'am. [ Pause ]

Karen? (Pause) Karen?

Miss Young, if you are on a speaker phone, could you check your handset? (Pause)

Operator, we might want to move to the next question because we are not getting anything from Karen.

Our next question comes from Art Teisel, T. Rowe Price.

Good morning.

Good morning, Art.

Hello.

Uhm, as far as the commodity cost picture for Frito-Lay, I just wanted to establish that you all are covered through September of '03 for commodity costs.

Art, we're covered completely for next year with the exception of corn.

With that, it's covered up to September.

We expect to close that during the course of the year.

But our expectation is that even if corn were to have an unexpected second bad year, that we have enough productivity in packaging both flexible packaging and our other packaging costs that we would most likely be able to make up for that cost.

Steve, have you gone out longer in your commodity coverage than you normally have or normally would?

Is this fairly normal to be out this far?

Yes, we are normally out this far, Art.

We have certain grid that is we buy on, and all of our commodities -- in fact, all of our purchases.

And you know, it would vary from time to time, but when you are in the grid, you are covered.

And it would be, you know, from my experience at Frito, it would be normal to be this far out.

Okay.

On the long-term EPS growth rate, is low double-digit, which to me is 10, 11, maybe even 12, and next year you are talking about 13 to 14.

I just wanted to see if, can we attribute all of that premium increment to the tax rate picture even though you don't want to give us any specific guidance on the tax rate right now?

No.

But, uhm, let me ask Indra to be a little clearer on that.

Yeah.

Good morning, Art.

Hi.

How are you?

I'm fine.

How are you?

Very good, thanks.

I should point out that normally, Wall Street is replete with congratulations to companies that turn in these kinds of numbers, it seems to me and I haven't heard that this morning.

So... [ Laughter ]

Art, we're all waiting for you!

Let me be the first.

Thank you.

Don't make me take it back next quarter. [ Laughter ]

We'll do our best!

Art, I think the bulk of the benefit actually comes from the share repurchase activity that we did this year.

Mm-hm.

And the flow-through from that.

Mm-hm.

The tax rate impact is going to be minimal.

And the tax rate going to come down just a tad.

Okay.

So the bulk of the premium over your long term we can look at is an average shares reduction?

That's correct.

And then finally, could you spell out again post-Labor Day -- and we have, you know, sort of 30 days of numbers I guess under your belt for the fourth quarter already -- uhm, you know, exactly what has happened to the Frito-Lay volume in revenue picture post-Labor Day when you cut off the promotional overlay as you call it?

Can you specify that again for me, please?

Art, we don't normally talk about this.

But for you...

[ Laughter ]

And at the risk of setting expectations that may be beyond what we're going to deliver for the quarter, let me just say that we're -- we expect and we're still tumbling the numbers because we literally just closed the accounting period of four weeks, we're expecting our pound growth to be right at slightly above 5 percent, revenue a point higher than that for the period, which is very, very good.

We don't expect to do that for the quarter.

Okay.

Well, listen, thank you very much.

I appreciate it.

Oh, one other thing.

Back in September, the 23rd, to be exact, there was this big article in the Wall Street journal about PepsiCo challenges itself to concoct healthier snacks.

I'm just curious, is that -- they made it sound like a really major development at Frito-Lay.

Is that something that's part of these numbers, or when can we expect to see a real seismic improvement in Frito-Lay as a result of that sort of thing, or is this -- did they overblow what you're trying to do?

I think it was a good article about that segment.

But I would say that, you know, we still believe and we've always believed a couple of things.

One, all products have to taste good whether they're better for you or not better for you and that has to go without saying.

But on top of that, the indulgent products in our product mix, uhm, clearly will have an important role in the future as they have in the past.

And that article, you know, took -- discussed one side of it which is better for you.

I would point out that you know, we have been on this quest at Frito for over 10 years to develop products that fall into that category.

And we had, you know, starting with pretzels in '93, moving into Baked Tostitos and Baked Lay's and the Wow product.

And this is a continuation of that effort.

And maybe given the current trends in the marketplace, we have stepped it up a bit.

But this isn't a new effort.

And it's clearly one that we think will be very appropriate for a portion of the population, specifically for the aging baby boomers as well as for kids and we're, you know, we're optimistic that we can develop this segment and do it very profitably and continue to focus on a wide portfolio.

Well, I wouldn't be disappointed if you made the broccoli piece the last introduction.

[ Laughter ] Thank you very much.

Thank you, Art.

Thank you.

Our final question comes from Jeff Cantor of Prudential Securities.

You said that your better for you portfolio was growing or grew 50 percent faster than the indulgent.

Can us just give us a sense what your better for you portfolio is growing at Frito relative to the indulgent side?

I mean, is the indulgent growing, I mean with all these concerns about what Art was talking about the it the Journal and the [Cremolite] and everything else.

It is growing.

You know, obviously the better for you is a smaller piece.

And specifically, it's driven by our Baked products.

But the potato chip category has been growing, as well.

And as well as tortilla chips.

So we are happy with the fact that the total portfolio is moving.

In fact, we could -- given the size of the better for you products, if they were growing at that rate and the rest of the portfolio was not growing, we couldn't have turned in the numbers that we had because the size just would be dwarfed.

Okay, so the core -- the core stuff that everybody thinks about with Frito-Lay, the corn chips, that's still in positive territory?

Yes.

Okay.

Thank you very much.

I think that's all the questions.

And thank you for your time today.

Let me just emphasize that overall, our business is in excellent health and we fully expect to deliver the financial performance that you and I have come to expect.

Yes, there are challenges out there globally both on the economic and the political front.

But we believe that we understand both the top and the bottom line challenges and we know exactly what we need to do.

We have great teams all over the world that are smart, experienced, and committed to growing these businesses.

And in sum, we have tremendous confidence in our business with strong brands and distribution systems and proven ability to innovate year after year.

And we look forward to continued growth well into the future.

Thanks for your time.

And we look forward to being with you again early in the year.

Thank you.This concludes today's PepsiCo conference call.Participants may disconnect at this time.