百事 (PEP) 2002 Q4 法說會逐字稿

Good morning and welcome to the PepsiCo fourth quarter earnings conference release.

All participants will be able to listen only until the question and answer session.

At that time I will instruct you on how to ask a question.

At the request of PepsiCo this call is being recorded, if you have any objections you may disconnect at this time.

I would like to turn the meeting over to Kathleen Luke, vice president of investor relations.

Ms. Luke you may begin.

Thank you operator and thank you everyone for joining us this morning.

With me today are;

Steve Reinemund, our chairman and CEO, Indra Nooyi, our president and CFO, and Gary Rodkin, chairman and CEO of PepsiCo food and beverages.

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

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

First, this call is being web cast 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 www.streetevents.com.

A taped replay will be available until the close of business on Friday, February 14th by dialing 800-569-9796.

International callers should dial 402-344-6815.

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 with the Securities & Exchange Commission.

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

Good morning everyone.

And thanks for joining us today.

In the earnings release we issued this morning we tried to make as clear as possible what drove our businesses in the fourth quarter and for the full year.

And I'm not going to walk through the entire release.

Instead I want to put 2002 into perspective and then touch on a few items that I'm sure you want a little more detail on.

Let me start by saying that I believe we had a very good quarter and a solid year overall.

It was good I believe in absolute terms, and I believe it was even better in relative terms.

I don't think there were very many consumer products companies that have turned in the kind of performance that we had in 2002.

In fact, I want to repeat just the headlines of this morning's release because I don't want us to lose the context in which we have this call.

First, the bottom line.

Comparable EPS grew 15% for the fourth quarter, and a strong 14% for the full year.

This was the 13th consecutive quarter of our earnings per share growing 13% or better.

And I might add that in my opinion, our quality of earnings was quite good.

It didn't come from one-time gains or from favorable overlap.

And these results reflect the power of our portfolio.

Strength across our businesses allowed us to deliver strong combined performance.

Our volume rose 4% for the quarter and for the year; with Frito, Pepsi, Gatorade, and Tropicana all gaining share in IRI measured channels for the full year.

Net revenue grew 4% for the quarter and for the full year.

And as we promised revenue was growing faster than volume as we exited the year.

On a currency neutral basis, revenues grew ahead of volume for both the quarter and for the full year.

Division operating profit growth was in double digits growing 10% for the quarter and 11% for the full year.

And for the full year, our division margin expanded by 140 basis points, reflecting strong productivity at the divisions and synergies from the Quaker merger.

This is a powerful productivity story and I'm going to be coming back to that point in just a few minutes.

Return on invested capital improved over 200 basis points to 28% calculated on a comparable basis.

And finally our operating cash flow was a very robust $3.3 billion dollars.

This performance was significantly ahead of our $2.6 billion that we generated in 2001.

And just to be clear, this number is after capex, after taking out merger related payments and after total pension contributions of over $800 million.

This also reflects approximately $250 million in tax refunds that we received this year.

Looking at this picture I hope you can see why we're proud of our financial performance and we achieved these very good results in a difficult environment and in a challenging retail landscape.

Now, let me just step back for a minute and try to put all this into perspective, as I look at 2002 as a whole.

Aside from the strong financial performance, the three most important things that I want to take away from 2002 are as follows.

First, the strength of our total portfolio and the benefits of that portfolio.

Second, our flexibility to deliver bottom line results through a combination of growing the top line, judicious cost management and continuing to improve productivity.

And third, that there was no fundamental change in secular trends, in fact consumer trends are still very much a wind at our back.

We have a collection of great businesses that have unique capabilities and operate in growing categories.

At any given moment some of these businesses will be reinvesting to drive growth in the long term, while others will be reaping the results of earlier investments.

For example, while Tropicana suffered from a weak chilled juice category and they worked to reset their pricing architecture, Gatorade compensated with strong news in terms of both innovation and advertising that drove both the top and the bottom line.

The beauty of our financial strength is that we can use our flexibility and our portfolio to deliver bottom line results as well as reinvesting in the business for the future.

As I said there was no fundamental change in secular trends last year.

Yes, the economy was weak.

And yes, the traditional retail trade was under pressure from newer channels like mass and club.

But the consumer, the consumer trends are still very much with us.

In fact, they helped us succeed when economic weakness derailed others.

Consumers still want great tasting, convenient snacks and beverages and they want them in more and more varieties.

I'm not going to go into detail now, but we'll spend a lot of time, in fact most of our time at our conference next week taking you through the landscape and the secular trends that you'll see and why we're so confident that we can continue to grow.

We have great products, great brands, great distribution systems to power that growth, and most of all, we have the right people committed to driving that growth well into the future.

That's 2002 in a whole.

Today we'd like to take just a few more minutes to talk about a few specific business issues, and Indra and Gary and I will take you through those and let me take you first through Frito-Lay North America.

I want to start by saying the Frito team delivered very strong results.

I know there was concern the last time we were together about what would happen when we pulled back on our promotional spending.

And the question was, would volume disappear?

Well, it didn't.

And while the 3% volume growth we had in the quarter wasn't at the high end of our historical range, it was a solid performance.

And we rolled up to 4% volume growth for the full year which is a very good number.

As we laid out in more detail in our release, this growth was driven by a strong performance in both our core salty business as well as in our add-more macro snack portfolio.

Frito-Lay's 7% profit for the quarter reflected the year-end, specifically December's volume weakness which I would want to make sure you know has turned around very well in the first part of 2003.

And it also reflected some incremental investment in the business.

Specifically, we increased the number of district sales leaders, to be sure that our selling systems are fully staffed, as we handle the innovation pipeline that we've planned.

We also accelerated a couple of customer-delivery system conversions and these are the pre-pick and bulk 24 conversions that we've been talking to you about for the last couple of years.

And together this caused our selling and distribution expense to increase faster than our net revenues.

Since there's been a lot of speculation about commodity costs lately, let me mention that we did get leverage from holding down commodity costs.

They were flat to slightly down over last year.

Normally I'd spend some time talking about the innovation pipeline that we have scheduled for the next quarter and the next year.

But I prefer to let you see and taste it for yourselves next week.

We have plenty of innovation on display at our meeting and I believe you will be very, very pleased with what you see and I'm confident that as you leave the meeting next week you'll be very confident of Frito-Lay's top line capability through innovation.

To wrap this all up, Frito-Lay remains one of the best consumer product companies in the world, with great tasting products driving the top line, and cost savings and productivity driving the bottom line.

And I have every confidence in their ability to deliver excellent financial results in 2003 beyond.

Now, I want you to hear more about the North American beverage performance, so at this point, let me turn the conference call over to Gary.

Thanks, Steve.

Let me start out by reemphasizing that the overall PepsiCo North American beverage business is doing well.

Total servings were up 1% for the fourth quarter and 3% for the full year.

In addition, as you saw from our release, all of our North American beverage businesses gained share in measured channels for the full year.

Gatorade had a fantastic year.

Volume grew 17% and even with some incremental trade spends, profits grew very well aided by synergies.

In fact, the strength of Gatorade helped mitigate the depth of the pricing issue in Tropicana.

In the fourth quarter with the colder weather Gatorade is out of season so Gatorade simply could not pull up the overall Gatorade Tropicana number.

The decline in the GTNA operating profit reflects the Tropicana trade spend that we've been talking about all year but the good news is that the Tropicana volume turned positive, and that was our second consecutive quarter of sequential improvement.

And the better news is that we've sold in our new Tropicana pricing architecture into most of our major accounts.

And you'll start to see a real improvement in the first half of this year.

Now, let's turn to PCNA for a moment.

As I believe you expected although up 2% for the full year our bottler case sales declined about .5% for the fourth quarter.

This reflected the shift in the timing of the Labor Day holiday and the difficult comparison with the fourth quarter of 2001 when we launched code red and take-home packaging and took Pepsi Twist national.

We were also lapping some extremely aggressive promotional activity by Kmart in the fourth quarter of 2001 and frankly, Pepsi Blue wasn't as successful as we'd hoped and we couldn't make up all the difference.

But, as Steve pointed out we had great leverage from our P&L and delivered 13% profits for the quarter and 12% for the full year.

And that's a really strong performance.

We're going to spend quite a bit of time next week at our investor meeting taking you through our business, and how we intend to grow the top line, and the bottom line. and while for obvious competitive reasons I may not tell you exactly what we've got planned I will give you a peek into why we are so confident in our future.

Now let me turn it back over to Steve.

Thanks, Gary.

Let me take you through the performance of our international businesses but first I'd like to comment on the release that we put out this morning announcing some management changes.

Rogelio Rebolledo and Peter Thompson have made enormous contributions to our businesses and the will be missed when they retire.

But I'm pleased they'll be working with us for the next 12 to 18 months to ensure a smooth transition.

Peter and Rogelio will leave many, many personal stamps on our business but none bigger and more important than the great people they have attracted and developed over the years.

They have personally been responsible for literally hundreds of career success stories and they will last for many years.

Now, most of you know Mike White, who's been in Europe for the past few years and he was a CFO before that.

I've worked with Mike for over ten years and he knows both the snack and beverage businesses and he's a tested and proven leader.

Now let me get to the business.

It will come as no news that the international macro environment continues to be tough.

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

In the fourth quarter for our international businesses collectively, servings grew 6% and net revenues grew 5% or 9% on a currency neutral basis.

Our operating profits grew a healthy 33%.

For the full year 2002, servings grew 5% while net revenues grew 3% or 6% on a currency neutral basis; while operating profits grew a strong 21%.

Now let me give you just a few details.

At Frito-Lay International for both the fourth quarter and the full year we saw good growth in Mexico, especially at Gamasa, which was very strong.

Volume also grew well at a our Quaker Foods businesses as well as Walkers in the U.K.

And we saw double digit volume growth in 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 U.K. and Lay's Mediterraneous in Europe.

Foreign exchange reduced revenues at Frito-Lay international by about 5 percentage points for quarter and 3 points for the full year.

And Frito-Lay international's strong operating profit results reflect the relative strength of our volume in countries with high margins such as Mexico and the U.K. and the offsetting impact of the currency movements in these countries.

At PepsiCO beverages International we saw particularly robust volume growth in the developing markets like Russia, China and India.

Innovation in carbonated soft drinks, such as Pepsi Twist, Pepsi Light, Mountain Dew and line extensions of miranda contributed to that growth.

And our non carb portfolio, that includes juices, isotonic and waters, saw excellent double digit growth.

This growth came even as volumes were depressed in Latin America as a result of the tough, macro political and economic situation there.

Pepsi beverage International's revenue growth reflects country mix offset by the impact of franchising our existing Gatorade business to our bottlers in certain countries.

As we now report concentrate revenues instead of full goods revenues for those businesses..

Nevertheless Pepsi beverages international delivered strong operating growth for both the quarter and full year.

So you can see that the fundamentals of the businesses are in place to drive growth.

But I know there's some questions about the Peso so I'm going to turn the call over to Indra and let her take you through a couple of the financial matters and our outlook for the Peso as well.

Thank you.

I'm going to spend just a minute on 4X and then turn to a couple of corporate items.

I know there as been a lot of speculation about the weakness of the Mexican Peso and its impact on our business.

Honestly, the recent movements in the currency markets in the Peso as well as the Pound and the Euro have surprised all the experts.

At this point, if the Peso continues to hover around 11, I believe that with judicious cost management we can cushion the impact of the softer Peso.

Especially if the pound and euro continue to be stronger than expected.

However, if currencies move significantly in counterintuitive ways we'll take a good look at the situation very, very soon.

What gives me comfort is that I know we have a team who can do just that.

We have the same people in place who have done such a great job in softening the impact from currency changes in Argentina, Venezuela and Brazil.

Now, let me turn to a few corporate items.

First, taxes;

We mentioned last quarter that we expect our tax rate to decrease this year as a result of our new concentrate plant coming on line.

We have now quantified that a bit more and we expect our rate to come down by about 70 basis points, to approximately 30.5% for the full year 2003.

Next, the equity income line.

As you saw in our release we took an impairment charge of approximately $35 million, relating to our Latin American bottling investment.

Obviously this was taken as a result of the poor macroeconomic conditions in Latin America.

As Steve said for 2002, our cash flow was extremely strong coming in at a better than expected $3.3 billion.

And it's after capex, after cash payments for merger and restructuring charges and after pension contributions of $820 million.

That cash flow does reflect tax refunds of approximately $250 million.

And let me just mention that the $820 million pension contribution is slightly higher than the $750 million we announced last quarter.

That's because, in addition to funding the qualified plan, we had to put in pension expenses in our nonqualified plan.

I also want to spend just a minute on return on investment capital, which we've continued to calculate on a comparable basis.

For 2002, our ROI improved approximately 2 percentage points to 28%.

Next, share repurchases.

As you can see from our earnings release, we have been active in the market.

Last year, our board authorized us to buy back up to $5 billion of our stock over three years.

At the end of 2002, we had approximately $2.8 billion available under that authorization.

We have repurchased another $5 million shares so far this year, that's as of this past Tuesday, for a total outlay of approximately 209 additional dollars -- $209 million I should add.

And we should continue to buy back stock on an opportunistic basis.

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

Yes, we are ahead of our original plan.

In fact we have achieved approximately $250 million of the $400 million we've promised.

As we said in our third quarter conference call we now expect to get to that $400 million by the end of 2004 which is a year ahead of our original schedule.

I expect we'll get about half of what's left in 2003, and the other half in 2004.

We think the fact that we've captured the synergies ahead of schedule strengthens our financial position and reflects the success of the Quaker merger.

Wrapping it all up, we believe that especially in the difficult economic environment we've had solid operating results.

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

And I'd like to repeat Steve's point that this is our 13th consecutive quarter of 13% plus earnings per share growth.

In sum, we are all very proud of our performance.

Now let me turn the call back to Steve.

Thanks, Indra.

And before I open the floor to your questions, I have one final point that I'm sure that all of you want us to address, and that is our out look.

There has been a lot of discussion about companies that have backed away from giving any guidance.

And their decisions have been applauded by some, because they feel it allows them to focus more on the long term growth and not to manage quarter by quarter.

However, it's also been criticized because it allows companies to escape from being accountable for articulating their growth expectations.

And I would say it's always tricky to change habits and practices, certainly in today's environment it's particularly risky.

However, I believe there couldn't be a better time for us to change, because we're very confident about our business.

So let me tell you about where we came out on this debate.

Going forward, we won't be giving quarterly guidance or guidance for any particular year.

At the same time, I want to confirm that we're very comfortable with the current consensus on an annual basis.

And we can consistently grow our volume, and revenues, in the middle single-digit range and EPS in the low double digits.

So to sum it up, our portfolio works well, taken together, our businesses are very healthy and allow us to 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.

Hopefully we've anticipated some of your most pressing issues in our prepared remarks but at this point we'd be happy to entertain any questions that you might have.

So the floor is open for questions at this point.

Thank you.

If anybody would like to ask a question please press star 1 on your touch tone phone and I will announce you prior to asking your question.

To withdraw your question, please press star 2.

Once again if anybody would like to ask a question please press star 1 now.

Our first question comes from Bill Pecoriello from Morgan Stanley.

Good morning, everybody.

A question on Frito-Lay domestic.

As you're moving into some of the new platforms and new aisles, you've got the organic line, Lay's stacks, Quaker stacks, even new products like baked Doritos.

What impact does that have on your R&D, your capex, advertising, buying shelf space, so in terms of the returns on the business, the margins as you're moving into these new segments?

Bill, it's a good question.

And let me just say that you've touched on a number of points and I'll try to cover as many as I can.

But I just would sum it up by saying that we are committed, as we have been, to innovation.

And I think you'll see next week that we have what I believe is the best balanced set of innovation that we've had at Frito-Lay in a long time.

And you can judge that yourself next week.

But I really feel very comfortable that we have a good balance between our core, investment in our core salty business, which we know is absolutely critical.

And even within the core we're balancing that between our core indulgent business, along with the better for you portfolio, and that's a careful balance and we think we understand that quite well.

And then as we look at the convenience foods we're making investments in that as well.

So if you'll just look at innovation overall I think you'll find that we clearly have stepped up and with a step-up in investment, in innovation obviously there will be an increased investment to make that happen.

But if you go back a couple years, to the meeting we had in Dallas, we talked about at that time that we were going to be taking costs out of the system by investments in our distribution that would allow us to fund this increased growth and investment in innovation.

And that's exactly what we've done.

So we've been able to increase the margins in the business as well as increase the spending to grow for the future and that's exactly the formula that we plan to follow.

And I think you'll see again, next week, not only will you see innovation but you'll also see the next stage in this productivity effort that will allow us to have the money to fund those issues that you raised, Bill.

And I won't go through the ones individually one by one but just in general, that -- we do plan to invest more, but we don't plan to invest more at the expense of our overall margin in the business.

Thank you.

Next question comments from general Jeff Kanterr from Prudential securities.

Steve, just to be clear, the guidance; you're comfortable with where consensus is in 2003, that $219, $220 that is out there, that's the range of estimates, is that correct?

$219 is the consensus, I think.

That's the number, it's not you're comfortable with the range?

What I'm trying to say is that we want to judiciously move out of giving specific guidance.

And we think that now is as good a time as any, because we are comfortable in the business.

We're not trying to send a signal that we're down -- down grading our confidence in the future of the business.

But we do believe it's prudent for us to step away from trying to manage to the precise nature that we have let ourselves get into over the last couple of years, by being specific on actual quarter numbers, and within the quarter by business unit, and within the business unit by top and bottom line.

I mean, frankly, this is taking up too much time and it's too precise and it doesn't take into account the value of our portfolio.

Because in the end we're going to balance the investment short term and long term to grow this business.

And you'll see this next week.

Absolutely, you'll come away from the meeting next week understanding the opportunities that we have to invest in our portfolio, and if we get so tied up in specific numbers on a quarter by quarter, business by business, top and bottom line, I think we're doing a disservice to all of our constituencies and we don't think there's a better time to back away from it than now.

That's where we are.

Fair enough.

This incremental spending that you talked about at FLNA in the quarter, can you give us a sense of the magnitude, is it kind of over or --

What I said was, we can go through the P&L, we're not going to but we could, and I could explain each one of the points on the P&L.

But I felt that given the fact that this is the number that I know is lower than where everybody had come out, what I was trying to say was, we made a decision to invest on the S and D line in two major areas, one is in people, to fill positions, to fully staff the sales organization, and two was, the investment into the pre-pick and bulk 24.

And you know, in any one quarter, it is really hard for us to measure just exactly when we're going to invest in a DC or to move from one system to another.

And we decided in the fourth quarter we had an opportunity to absorb that in our portfolio and we did it.

But those two decisions are, you know, conscious decisions.

They're not accidents.

We did make those conscious decisions.

And you know, they could have not been made.

Where I believe they were the right things to do.

So to answer your question, will we do something like that again?

We might do something like that again but it's to invest in the long term success of the business.

It wasn't an after-the-fact realization of spending that we didn't have under control.

And just real quickly finally, I know that you want to wait, you know, for next week to talk about FLNA but your investors obviously don't want to wait that long, looking at the stock here.

You know, how do we think about -- how do we think about volumes at FLNA in 2003 with all this innovation coming, should we see a step up, or kind of this three to 4%, you know, constant type of volume growth, can you just give us a hint because not too many people seem like they want to wait for next week, today.

You could help us a little bit.

I feel for your -- the concern that you relate.

But I really believe that it's in our long-term best interests to stay the course to the commitment we made.

I will say, however, that if you look back at 2002, which is history, we had very good volume performance in 2002.

In fact if you go back in the history and look at our volume, we had stronger volume growth in 2002 in Frito-Lay than we've had since 1998.

So you know, we talked a lot about Frito-Lay last year but I think we ought to step back and say, hey, the category is solid, our growth within the category was strong, we had a good year.

Now, why would we believe that that will be different in 2003, particularly if we're going to step up the innovation, which we are going to do.

And you know, I'd be happy today to take time going through the innovation.

I'm excited about it.

I've spent a lot of time with the team and Al and his group looking at the innovation.

I just don't believe it is a good use of the time we have this morning to do it.

But if the group wants to do it we'll go through it product by product for next year because you'll see it next week anyhow.

I just think that when you walk away next week, you'll find a very good comfort level between core indulgent investment and our base businesses with line extensions, new products like stacks which is a terrific product, and you'll have a chance to look at it, taste it, see it, natural product line, some of you have seen that on the shelves already, it is a great line of new products that has a new spot in stores.

We have a great portfolio at Frito next year, so it is always a risk when you talk about innovation, will the consumer buy it.

But I've been involved with the Frito business a long time.

I couldn't feel better about the innovation that we have for the year than I do at this point.

Next week can't come soon enough.

Thank you very much.

Our next question comes from Christine Fergus from Merrill lynch.

Thank you very much.

A question for Gary and then I'll jump back in the queue.

PCNA enjoyed strong pricing in the fourth quarter.

Can you break down at all how much really came from rates and how much came from mix and were there any other factors contributing to the strong increase?

Really I'm not sure if you're referring to the pricing in the market which would really be from our bottling system.

If that's the case, you need to speak to them.

If it's our revenue on PCNA it's really mix.

You know we have concentrate increase for the year and the mix of our products helped us to grow our revenue maybe a little bit better than our volume.

Okay, terrific, thanks a lot.

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

Steve, I'm wondering if I could ask a question for Gary, if he could give us his impressions and report card on the health of the Pepsi trademark and maybe shed some light on, aside from what we've seen as successful innovation from Twist, what are some of the key innovation planks as he moves to perhaps better support regular brand Pepsi which is always considered to be a youthful brand, a very large part of your volume base.

So what type of innovations can we expect to see to perhaps accelerate the growth of your largest cola brand?

Andrew, that's a good and a tough question.

We, as you know, refer to trademark Pepsi, it in no way diminishes our interest in the core-base regular blue can brand which is still, you know, the biggest brand we've got.

We really look toward packaging innovation, great customer and consumer marketing, as well as a step up in our away from home, particularly the fountain business for that brand.

But as a trademark, we also need to recognize that we've got some very good pieces under the Pepsi name, we're very committed to making the full second year of Twist a success.

We also have good momentum on Diet Pepsi and we intend to really step it up in terms of the resources we devote there.

Wild Cherry Pepsi is another good story for us, and we've got some sleepers in there, in that portfolio as well, like our caffeine-frees.

So overall we look to trademark Pepsi as the way to grow the business as the biggest piece of our CSDs.

And your report card just on the health of the trademark as we enter 2003?

If you look from a consumer standpoint it is very healthy.

We have key performance indicators that indicate very positive things in terms of the impression of Pepsi but we know we've got work to do.

We know we've got to turn this volume around, and we've got many things in places I just spoke to, to try and do it.

But again, remember, this is one piece of our portfolio, even as you just talk about CSDs, it's one piece, one very important piece.

But there are a hot of packaging and channel things we have in place to try and fix that.

Thank you.

Thank you.

Our next question comes from Caroline Levy from UBS Warburg.

Good morning, everyone.

Again a question on beverages.

I'd like to understand at Pepsi-Cola North America, just how the leverage on the operating income occurred, in order to understandwhether this is an ongoing thing or if it had to do with something specific to the fourth quarter and similar question on PCI, there was a $29 million swing in profits first quarter, first time you've made money in the fourth quarter and quite a bit of money relative to the size of the business.

Was there something specific there or was this the new level at which we should work off?

Caroline, we do, you know, really look for leverage in our P&L.

And we've been very prudent and effective and efficient, I think, in balancing the different pieces of our A and M to really try and get that leverage.

Additionally as we spoke before, the mix of our products is something that we look at carefully to try and make sure we get the most leverage off of the volume.

So that combination, I wouldn't say in any way reflects, you know, a one-timer.

That is the way that we are trying to look at the by.

Can you just help me understand, what mix shift it was that drove that?

Say in PCNA?

Well, within PCNA, clearly, if you're selling more of the full goods, the non-carb products and Aquafina as well, as we said the profitability in Aquafina, you know, for the whole system is better than it is on CSDs.

But the shift towards non-carbs clearly helps from that product mix standpoint.

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

John, excuse me for just a minute.

Before we get to the next question let me let Indra talk about the second half of Caroline's question and then we'll come right back to you if that's all right.

I won't take it personally.

Caroline, just going to your question on Pepsi beverages International volume and profit performance.

First of all PBI's volume was up robustly in Q4, and that always helps the profit picture.

The growth in volume which was up 6% in the fourth quarter definitely had a flow-through impact.

Secondly, the reason profits were up, two reasons, one, it is a very, very small quarter so the law of small numbers works.

Last year it was negative 1.

And any improvement from that always shows you a big growth number.

Secondly, because this was a small quarter, I mean a small quarter overall, the mix of countries always have a major impact on PBI performance.

Depending where you get the volume from if those are highly profitable countries clearly you end up with a pretty good profit picture.

And the fourth quarter we had favorable price and mix in Mexico, Brazil was very good for us.

We had good currency neutral profit growth in many countries like Turkey, Saudi Arabia, India, the U.K.

So it is a mix of countries that resulted insuch a strong profit Performance.

Again, these are small dollar numbers and coming off of a close to break even quarter, they all look like big growth numbers.

Thank you.

John, are you still on the line?

John?

Mr. Faucher, your line is open.

Thanks.

Question for Gary, Gary, as you look at the operating profit shortfall in Gatorade Tropicana, obviously you're saying to some extent Gatorade has been carrying Tropicana over the last year.

Can you talk about the key drivers, whether you want to talk a little bit more about competitive activity or category softness.

What do you think is driving the Tropicana issues, if you could give us a little more color there?

And also, how long do you think, if the category remains weak, how long can Gatorade continue to prop up Tropicana, to some extent over the next year or so?

First as you stated in Q4, Gatorade is weak seasonally because people don't sweat as much and it is strong for Tropicana as people want their vitamin C to ward off their cold and flus.

So the weighting is heavily Tropicana from a mixed perspective in Q4.

That's really important.

While Trop's volume growth improved in the fourth quarter, up by 2 points, the bottom line didn't for a few reasons.

First, we began investing in the roll out of our chilled DSD, system which is going to roll to three more markets in '03.

And we also lapped several one time balance sheet items from Q4 '01, and at the same time, absorbed some more allocation changes at Tropicana.

But most importantly, as you said trade spending is the No. 1 issue.

And I think it's really important to understand that particularly in this really competitive intense trade-spend industry, it's really locked in place with significant lead times.

And it's only now in the first quarter starting to reflect our new pricing architecture.

So it was being sold in, in Q4, but the real impact at the retail shelf isn't to be seen until about the middle of Q1.

And it will be fully in place in Q2.

So we expect that the first quarter volume is going to be modestly better but the profit improvements are really going to start to show up in Q2 and the outlook for the whole year is very positive.

So I don't think we're going to look at it as Gatorade propping up Tropicana at all this year.

Tropicana is going to hold its own and the beginnings of that improvement are already starting to be reflected.

Okay.

Thanks.

Our next question comes from Art Seifel of T. Rowe Price.

Given your discussion, Indra, about the Mexican Peso could you summarize how big Mexico is in dollar profits for the company, and dollar revenues in '02?

We don't usually give the exact dollar number.

But Mexico represents about 11% of our profits and revenues.

And as I said earlier in my script, if the Peso goes to about 11, which again would be not what the experts predicted last year, we should still be all right, especially if the euro and the pound continue as strongly as they are right now.

And if it deteriorates further, you know we have a team there in place in Latin America and Mexico in particular that really know how to restructure the business and tighten their belts to still deliver great performance.

So we'll go back and re-look at all our plans and see how we can push in the impact of the Peso.

What rate was what you used in `02, what would 11 cents compare to?

In '02 the Peso averaged about $10.20 in that range.

So the Peso has weakened significantly.

One final question, probably old news but in the release on the management changes with respect to Gary, it says the new division combined, Pepsi-Cola, Tropicana, Gatorade, and Quaker Foods, with the mandate to make PepsiCO the leader in liquid refreshment beverages.

How does Quaker Foods help you become a leader in liquid refreshment?

We said at the time of the merger that the distribution system that food participates in, which is about half of it, helps leverage the cost and the competitiveness of that distribution system.

So it clearly does have a key role in that aspect, very important aspect of the efficiency and cost structure of the distribution business.

Gary, would you want to add something to that?

Yes, I would just add that it's hard to capture all of this business in a few words.

So we also have a mandate to really be the number one breakfast company as well with the great brands that we have.

So it's -- can't quite be captured in one sentence, but we think we've got very clear mandate to March 2.

And just to add a little bit of color to this Gary, maybe you could talk about the breakfast bundling that we did that was so successful in January that's driven the volumes that you'll see soon in your reported numbers.

Yes, Steve.

It was interesting, it was like a light bulb going off when we put the division together last summer, when we took a look from a different perspective we found out that we actually were a very big, in fact leading breakfast company, across a number of different categories.

So we began to put strategies together to take advantage of that.

And for the first time, we put Tropicana and the hot cereals, the cold cereals, the Aunt Jemima product, the snack products that pertain to breakfast all together in customer events this January and really got some good leverage off of that and think we're really on to something.

So the numbers from that event early on look very good and it's the power of great brands like Quaker and Tropicana together.

Steve, I thought your comments about guidance were good and I think you are probably doing this in the right way.

But it's interesting to me that unless you think that not giving yearly guidance offers you the leeway or the flexibility to show numbers below the long-term guidance, then nothing's really changed, whether you give guidance or not.

Well, I think, Art, what I was trying to say is that the guidance we've given in terms of mid-single digit volume and revenue and double-digit EPS hasn't changed.

And as, you know, the problem is when we say one quarter, and this is totally hypothetical, but if we say one quarter, that we're going to do 13, and then, you know, we do 13.5, then the next quarter, if we do 13, it's like wait a minute, how come you didn't perform as well as you did the quarter before, and they just keep ratcheting this thing up and it gets crazy.

But on a yearly basis, forgetting about the quarter which is easy to understand, on a yearly basis unless you think you now have the flexibility to show something less than the long-term numbers, then nothing as a practical matter has really changed, because the street's going to expect you to keep doing at least that long-term guidance, yearly, not quarterly.

I agree.

I agree.

I think your assessment is correct.

I don't want to belabor that.

I think that's important, I think this is a key issue.

You know, companies are all, my peers that I know of are working through how do you thread the needle on this very sensitive issue to get it in the right balance.

And frankly, it's tough.

Because we're not trying to send a signal.

What we are trying to do is say that we got ourselves in some habits that are probably not in anybody's best interest, and we're trying to slowly and carefully work out of it, without, you know, setting anybody off.

But clearly, when I said that we were comfortable with the consensus, that consensus got there in large part by things we've said in the past.

And we are comfortable with that consensus number for the year.

Well, thanks very much.

Once again, if anybody would like to ask a question please press star 1 now.

Our next question comes from Alec Patterson of Dershner.

One question just to echo Art's point to hear it again, that annual metrics of holding you guys accountable for, you know, firm results are really important from an investor's point of view, quarterly guidance, you can drop that.

That was really kind of a waste of your time and ours.

So I would just want to reemphasize that element of it.

Secondly, just on the initiative to consolidate PBI and FLI under Mike White, are there going to be initiatives on restructuring savings programs that are part of this?

I mean what's really driving the consolidation and where's the benefit from it?

Because the offset of reduced transparency is an issue.

Well, Alec you make two very good points.

Let me say to you, as I did to Art, message received.

And I think as we balance this, we will not be disrespectful of your interests.

And it's been very helpful to have this conversation.

Frankly, not often do we have conference calls where we can actually have conversations on these kinds of issues so I do appreciate that and will take it -- take it seriously.

Secondly, on this consolidation, I don't want to over or under message this change that we made.

We're not trying to do it to lessen the transparency.

What we're doing from an internal management perspective is having one executive that can look over our international businesses and help us, country by country, region by region, find places where we can add value to the business performance.

And you know, the international business is extraordinarily complex as all of you recognize.

And there is no one formula for our kind of business around the world.

But there is advantage in keeping the kind of ownership that we've always had at PepsiCo where the divisions own their businesses, they're responsible for their businesses, they know their businesses, they have focused resources against what makes them successful.

We think we want to keep that going, and we want to add to it a touch of collaboration that will allow us to strengthen the overall performance of our PepsiCo businesses.

So this is not about slamming businesses together, taking out costs, having consolidation and restructuring charges.

In fact, we have no master plan to slam these businesses together on a worldwide basis.

That would be foolish, indeed.

We have tremendous growth opportunities in both the beverage side as well as the snack side and we want to do everything to foster that growth, not in any way stymie the growth.

And we clearly don't want to be less transparent to ourselves or to you as investors.

Again, I think you may not intend it but the result may be that it is, it's just not clear to me why, Frito-Lay globally is your growth vehicle.

And to consolidate it into your beverage operations which internationally are not, let's be frank, as strong, kind of convolutes that element of your growth story long term.

And so not having an ability to decipher how the Frito-Lay globally is doing is going to undermine the long-term return prospects from an investor's point of view.

Well, Alec, we will take this challenge not to let the transparency issue become an issue; because it was never our intent.

I will tell you from a managerial perspective you as investors expect us, as management, to make the right judgment on how to lead and grow these businesses.

I will tell you there are opportunities around the world, specific places where managing together and working closer together will bring clear value to both businesses.

I can give you examples around the world where we've already done it but it is harder to do when you have two separate autonomously operating businesses than if you have some collaboration.

We have very large businesses in countries like Mexico for both the snack business as well as the beverage business.

Working closer together in Mexico will be enormously beneficial to our mutual businesses.

There are other places where frankly the businesses are uneven in their development, and there would probably be less value there.

But you have my commitment, we're not going to become less transparent to the investors as a result of this change.

Okay.

Thanks, Steve.

Our next question comes from Ann Gurkin of Davenport.

Good morning.

Just wondering if you could discuss a little bit more the "health" of the snack category in the U.S., you said it picked up a little bit in January, if I understand correctly.

The categories numbers we don't have yet for January.

But I can tell you our performance in January was very strong.

But I want to put a caveat to that.

You know, we haven't been able to analyze it completely yet and there are always calendar over lap issues that we have to understand better.

But the first period was very strong, and we believe it was driven in large part by the product innovations that we had in the marketplace.

We did have a positive overlap of Superbowl.

If you take that out and put apples to apples we still had a very strong first period, first four weeks of the year.

So we think that the issues that we saw in the marketplace in December clearly turned around in January.

And frankly, the fourth quarter of last year for the salty snack business really was a tale of two quarters.

The first two months of the quarter we had very strong performance, and in the last month of the quarter it was weaker.

And we believe that the whole retail environment and the shift by the retailers to focus more on nonfood items, as their softness occurred, particularly in some of the mass market -- mass marketers, had an impact on our business.

And that reversed back to normalcy in January.

But as far as the categories is concerned, we'll have a better indication of that in a week or so when the category numbers come in.

Thank you very much.

Our next question comes from Cecil Godman of Highland Capital management.

Two quick housekeeping questions, one, do you have a breakdown of the depreciation that took place for the year by category yet or will that come later?

That will come in the final 10-K that we file with the SEC.

Second question was in the final 10-K you talked about the amalgamation into all the beverages.

Do we go back and add up PCNA plus Gatorade Tropicana or will you redo this for us retroactively?

For 2002 we'll still report those separately.

Right.

But when I look to go forward and do my modeling do I add those two divisions together or are there adjustments I need to make?

We'll add it back together for you.

Fine.

I just wanted to be sure there were no adjustments thank you.

Next question comes from Jim Baker of Newberger Berman.

Good morning.

I had a couple questions.

One was the table you gave us on a comparable basis where you show the operating profit breakout.

Could you give us for the quarter and the year the comparable numbers for cost of sales and SG&A for 2001, including the consolidation so we could understand how much those line items increased on a comparable basis and I had one other question after that.

I think we'll probably be able to give that to you in the 10-K so again, I think you're going to need to wait until we file that.

Okay, fair enough.

And the other question really goes to the guidance that Steve gave and he was talking about the mid single digit revenue growth and the low double digit EPS growth.

And I wanted to understand how much, you know, the role of operating profit growth and how much the role of share cost reduction might play on that on an ongoing basis.

For example, next year you'll probably have operating profit growth of 8% to 9% in order to achieve 12% EPS growth.

Because the share counts might go down as much as 3% based on recent activity.

But what would you say on a longer term basis would be your goal for operating profit growth on an annual basis?

Well, I think you have two questions in there.

Let me ask Indra to talk about the current year, because I think --

Let me talk about 2003.

As we said on the call I think a couple of quarters ago, 2003, we have a couple of investments that we're making that's going to hit the operating profit number.

One is, the fact that we are investing behind Sierra Mist, the national rollout of Sierra Mist, and that's going to be an investment we are going to make behind the brand in 2003.

The second thing we talked about was the Irish concentrate plant.

And because the plant gives us the tax benefit, the three station amortization on the plant hit the above the line numbers.

So you've got a real estate issue in terms of where you have the cost that is being incurred and the benefit that's coming through.

So on an ongoing basis since we have this whole issue of below the line and above the line, we've chosen to give the guidance at the EPS level, so that we can retain some flexibility in the middle of the P&Lto make some investments for the long term health of the business.

Okay.

And then on the longer term issue beyond sort of 2003, what would be algorithm be for operating growth be in your mind to achieve low double digit EPS?

We're going to stay with the volume and revenue in the mid single digit and EPS in the low double digits.

I know there is a sensitivity.

We're going to obviously leave this call with people concerned about this topic.

Let me just add one issue to try to add clarity here.

The reason that I said we're comfortable with the census number, you all already know the shares purchased, you know the operating guidance that we've been giving.

And with all that said, and all added up, we aren't moving off of what you believe we're going to perform at.

And that's what we're saying here.

So if there's a year where we're going to be making an unplanned purchase of shares, obviously, you would expect our EPS, we would expect and you would expect our EPS to go up.

We're not going to try to use that to cover over operating performance short fall, and that's not what we're saying for 2003 nor are we saying that going forward past 2003.

I think that answers my question.

Thank you very much, Steve.

Our final question comes from Caroline Levy from UBS Warburg.

Good morning, again, actually it's good afternoon.

Just wondering if you can comment on how you're looking at commodity costs and I understand you have special buying methodologies on potatoes and corn and so on but if potato yields are down does that affect your cost at all?

Anything on cost side that we should be thinking about.

That's a broad topic and let me try to answer that as quickly as I can and next week we'll go into more detail if we need to.

As far as potatoes are concerned, I think you know that that is something that is really dependent on the short nature of the crop and it's too early to really have a real good feel of that.

But I will tell you that you'll find out from the conversations next week from Al and his team that we have made real progress in changing the technology so that we're less dependent on the crop yield than we have in the past.

And I won't go into more detail today because I haven't the time to do it and I'm probably not the right person to do it anyhow.

But from potato perspective, all I can say is technology will be favorable to us.

As it relates to other commodities that we do buy a forward-buy on, we are covered for at least the first half of next year at Frito-Lay and feel as comfortable as we can be at this point of year as we can ever be at this time of the year that the commodity costs will not be a factor for us in the year.

So that's sort of a summary, there are puts and takes on that and we'll have the experts at the meeting next week for you to get more precise details about that.

Sounds good, thank you, Steve.

Well, thank you.

I think that's all the questions, and we'll have plenty of time next week to talk about other things that are on your mind.

Thank you for your time today.

Let me close by emphasizing 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 from our business.

Yes, there are challenges out there globally both on an economic as well as a political front.

But we believe we understand both the top and the bottom-line challenges and we know exactly what we must do.

We have great teams all over the world and they're smart, experienced and they're committed to growing these businesses.

We have tremendous confidence in our portfolio of businesses with their strong brands and go to market systems and the proven ability to innovate and improve productivity year over year.

We look forward to continued growth in the future.

Thank you very much for joining us this morning.

We look forward to being with you next week and I think you will enjoy the time with us.

We certainly hope you will.

And thank you again.

Thank you.

Thank you.

That concludes today's conference call.

You may disconnect at this time.