百事 (PEP) 2003 Q1 法說會逐字稿

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

All participants will be able to listen only until the question-answer session of the call.

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

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

If you have any objections, you may disconnect.

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

Miss Luke, you may begin.

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

With me today are Steven Reinemund, our Chairman and Chief Executive Officer, and Indra Nooyi, our President and Chief Financial Officer.

In addition, we have Al Bru, Chairman and CEO of Frito-Lay North America, Dave Rader [PHONETIC], CFO of Frito-Lay North America, and Gary Rodkin, Chairman and CEO of PepsiCo Beverages and Foods.

Our earnings were released this morning, and for purposes of this call, we'll assume that you have all read the release which is posted on our website at www.pepsico.com.

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

First, this call is being webcast and can be accessed at our website where a link will connect you.

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

A taped replay will be available until the close of business on Friday, April 25, by dialing 888-484-8242.

International callers should dial 402-998-1380, and in either case the reservation number is 12588.

Second, I'd like to note that we are going to be discussing our earnings on a reported and not a pro forma basis today.

Only volume, which is not a financial measure, will be discussed, excluding the impact of divested businesses to provide a consistent year-to-year comparison.

These changes are being made to comply with Reg.

G, which was recently issued by the SEC.

Next, I'd like to note that as previously announced, we have made some changes in our reporting segments.

These changes did not effect full-year numbers, they simply adjust results by quarter and division.

We have summarized these changes in the investor section on our website at www.pepsico.com, where we have also posted adjusted historical information to prevent prior year information on the same basis as 2003.

Finally, I would like to read our cautionary 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 of these forward-looking statements, but we undertake no obligation to update any such statements.

Please see our filings with the Securities and Exchange Commission, including our annual report on form 10-K for a discussion of specific risks that may affect our performance.

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

Good morning and thank you for joining us today.

Let me start off by saying that we're pleased, very pleased with our first quarter results, particularly given the very difficult operating environment we're all facing.

I'm proud of the way that our people are responding to the challenges that we find in the marketplace.

We're making good short-term and long-term progress against our strategic objectives while we meet our financial goals.

Now let me put the first quarter into perspective.

Earnings per share was 45 cents, as you know, and that's up 17%.

The reduction in merger-related costs contributed 4 percentage points of growth to EPS.

And the gain from the sale of Quaker's Mission Pasta business contributed another 2 points to the growth.

So the way I look at it, we had an 11% EPS quarter and that's consistent with our long-term guidance and it's in the middle of the range of our outlook for the year.

Topline growth was solid.

Servings of snacks and beverages worldwide each grew 3%, driving total worldwide servings up 3%, as well.

And due principally to mix-related pricing, total division revenue grew faster than volume at 5%.

So macro conditions notwithstanding were off to a good start.

Our long-term outlook calls for volume and revenue to grow in mid-single-digit range and we see nothing that would cause us to change that outlook.

This morning, I'm not going to review the details of our earnings release with you because I'm sure you have all carefully read that.

Instead, I'm going to focus on two issues that I anticipate are foremost in your mind.

First, the competitive position of our North American beverage business and, second, Frito-Lay's bottom line and specifically, the profit flow-through.

To make sure we provide you with the maximum insights, as Kathleen said, we have several of our operating people here today, specifically Frito's Al Bru and his CFO Dave Rader, and our North American Beverage and Food leader, Gary Rodkin.

Indra will join me as she normally does with opening remarks and we'll try to keep them brief and we'll open up the remaining time to answer your questions.

Let's start with beverages.

There's no question the first quarter was a challenge for the category.

We knew going into the quarter that our products overlapped, particularly in CSDs, would present a difficult competitive environment.

Let's talk about how we did and where we're headed.

Our volume was up about a half percent, sales rose 4% and profits were up 5%.

Although we're not satisfied with our volume growth, it's worth noting it was all generated without acquisitions.

We do have some real bright spots in our portfolio, but we also have challenges and we're addressing those challenges.

As we said previously, we expect the CSD category to grow slightly less than 1% a year, and we're committed to outgrowing the category.

I might add, although, we did not realize that in the first quarter.

While the Pepsi and Mountain Dew trademarks were soft in Q1, we have terrific product, packaging, promotional news, that will drive these businesses for the balance of the year, and this will complement the outstanding momentum on Sierra Mist and help revitalize our CSD growth.

And our industry-leading, noncarb portfolio has much to build on as we look ahead in 2003.

I would like to spend a few minutes on some of the core beverage elements and brands starting with CSDs.

While we clearly had a tough Q1 in CSDs, by all accounts, I would have to say the national launch of Sierra Mist has been a huge success.

We have expanded our distribution from 60% to over 90% of the country and we have already reached a two-share.

Trial rates are slightly higher than Vanilla Coke's, while repeat rates are significantly higher.

Mist is already larger than 7-Up in our new markets, and nationally it's fast becoming the number two lemon-lime.

Mist is extremely important.

It's not just another new product, it's a platform and provides us now with three major brand platforms: Pepsi, Mountain Dew, and now Sierra Mist.

And we outpaced the category in Diet CSDs as well.

Our three power CSD trademarks, Diet Pepsi, Diet Mountain Dew, and Diet Sierra Mist, grew at a combined rate of 6% for the quarter.

Of course it's imperative we turn around our two biggest trademarks.

We understand that very, very clearly, and that's Pepsi and Mountain Dew.

Our game plan to is to bring news to the market that will build growth that sticks incrementally.

As you've read about, starting in early May and going straight through the summer, we've got a very aggressive and innovative program.

Now let me just top-line just a few of the things that we're doing, starting with two great new products.

Mountain Dew LiveWire will not only add incremental volume, it will accelerate the volume growth for the entire Dew franchise, which is exactly what the objective is.

And Pepsi Vanilla, in regular and diet, which will be bundled with Pepsi Twist with the objective of igniting trial and volume for our newly-formulated Twist with real lemon juice, as well as for Pepsi Vanilla.

We're also bringing some great promotions, including the "Pepsi Play for a Billion" contest, which is generating strong customer excitement as we sell it into our trade, and Mountain Dew has a great tie-in with the movie called "The Hulk," which we believe will provide some opportunities for terrific in-store theater.

And on the packaging front, we have a plan for competitive new packaging innovation for the second half of the year.

I recently attended PepsiCo of North America's bottler meeting where these plans were laid out and explained to the bottlers.

I can tell you they're very excited and they're ready to execute.

In summary, we're very confident about Q2 and for the back end of the year for two primary reasons: First, the exciting product news and the supporting marketing programs.

And second, we have a much easier overlap for the balance of the year.

Now, let's turn to noncarbs.

As we have said before, we have an outstanding lineup of brands across our segments that are performing quite well.

Gatorade delivered another strong quarter.

Trademark Gatorade was up 12% versus last year, against a tough cop with 16% volume growth in the first quarter of last year.

Brand Gatorade grew 8%, driven by new packages and flavors and Propel Fitness Water from Gatorade is doing extremely well.

Propel has established itself as the clear and dominate leader of the enhanced water category with over 40 shares.

In addition, we're gaining distribution and space, and we just launched two additional flavors to round out the Propel line.

As you know, we began transitioning some Gatorade vending to our bottlers this year, and this will enable us to have Gatorade and both Pepsi and Gatorade-specific vending machines, and opens up countless new points of sweat for Gatorade.

We're not satisfied with Gatorade's preseason share performance in grocery and C-stores, however, the first quarter is a low-index quarter for isotonics and the real growth season is just ahead.

And as we move into the heart of our season, we expect to bring more users into the trademark with a strong arsenal of product and packaging news, in-store initiatives, as well as advertising.

Meanwhile, Aquafina remains the number one PET water, growing in double-digits and maintaining its rational pricing architecture in face of very aggressive pricing action by competitors.

And in partnership with our bottlers, we expect that performance to continue.

Now, moving to Tropicana.

Last quarter we promised we would start to see a real improvement in performance, and I'm pleased to report that Trop had a very solid first quarter.

Despite the shift of Easter into the second quarter, the chill juice volumes led by Pure Premium grew for the third consecutive quarter and they were up by 4%.

And more importantly, this volume growth was profitable.

The recovery plan that we set in motion in the second half of last year is well underway and on target.

We're focused on rationalizing our pricing and our promotional strategy, and as a result, Tropicana's first quarter volume, sales, and profits were in line with our expectations, and I believe the outlook for the balance of the year is very strong.

The result of this activity is a dramatic improvement in share.

Tropicana's grocery, gallon share of the chilled juices and juice drinks is 28.5%, and that's up almost 2 percentage points versus the first quarter of last year.

Now, I would say this performance was most encouraging in the Northeast where Simply Orange has been in the market for over a year.

During that time, Pure Premium has gained more than 2 points, to over 51 share, and Simply Orange has remained flat at 4, while Coke's combined share of chilled orange juice in the region has actually declined almost a full point.

We've got a great brand in Tropicana that stands for the closest product there is to fresh-squeezed orange juice.

We know we have a better product with a taste that the consumers prefer.

And for those who want a clear package, we'll be introducing a plastic carafe of Pure Premium at the end of this month in the Northeast with a national rollout scheduled by year-end.

To sum it all up, we fully expect our noncarbs to continue their strong growth performance.

Now, let's turn to Frito-Lay.

On balance, Frito had a good quarter.

Driven largely by news, total volume increased over 4% on top of a 6% volume in the first quarter of last year.

In fact, I would have to say that 4% is at the high-end of what we have historically delivered, as you well know.

Core salty had strong growth that cut across virtually the entire line of potato and corn and dip products.

I won't take the time to recite all the new offerings that we talked about in our release, but I would want to talk a little bit about the natural and organic line of Ruffles, Tostitos, Cheetos and Lays, and they were introduced late in the quarter, and I would tell you the response to these products has been terrific, and we remain more optimistic about their prospects going forward.

Now, in convenience food, there has been excellent double-digit growth and it came from the highly-successful introduction of Fruit & Oatmeal Toastables and from a strong result in bars and meat snacks, as well as nuts.

Across salty and convenience, Frito's 'Better for You' products grew more than 25%, so we're clearly on track with the consumer's tastes and their changing interests.

With net revenues growing over 5%, we had a positive spread of revenue to volume.

Now, let me put this into context because this strong performance is important for a number of reasons.

First, the positive spread demonstrates the trade-spending discipline is firmly in place and it's working well.

And we achieved this result in spite of a difficult environment where C-store traffic was down as a result of the weather.

So the positive spread came even as a channel mix skewed to the more promotion-dependent large format.

Third, we grew the positive spread despite investments made to launch the convenience news through the warehouse distribution system.

And finally, the spread is a testament to our pipeline planning.

It shows that our innovation is sticking and that we're able to successfully introduce new products with higher net revenue per pound.

Fritos 6% profit growth followed the 12% of a year ago, which I might add was among the highest that we have had at Fritos, in fact, as far back as I can remember, that's the highest we have had.

Let me add the 12% growth last year and our growth this year did not come from synergies.

Now, I'm going to spend just a little time talking about Frito-Lay's profitability flow-through.

Let me just back up a little bit and repeat what we've said to you before.

That is, historically, Frito has grown its bottom line by getting 3 to 4 points of contribution from volume growth, a few more points from price realization and scale, and then a couple of points from productivity.

Now, many of you have written for some time about Frito-Lay as an 8% operating profit growth company.

Let me just use that as a hypothetical model to build a bridge between our 6% for the first quarter and that 8% expectations that you have written about.

First, as I walk through this little discussion, I might add that we got the volume growth, which is clearly the most important starting point.

Next, we did get some price realization.

We didn't get as much as you might expect, and that was principally due to the weak performance of our higher-margin, single-serve business, which was impacted by two things: First, lower traffic in the C-stores, which I just mentioned, and the business and school closings, all of which were driven by the unseasonably cold and snowy first quarter.

And finally, while Frito had excellent productivity and our overall productivity program is very well on track, we chose to make some investments in the quarter and we covered some increment energy costs beyond what we had hedged.

So, looking ahead, we expect Frito profit flow-through to improve over the balance of the year for several reasons: First, we're lapping a much easier profit comparison for the balance of the year.

Next, we expect price realization to improve because we'll start to lap the higher levels of trade spending that we saw in the second and third quarters of last year.

And because we expect our single-serve business to continue to improve.

In fact, we have been seeing that uptick in the last four weeks as the weather has, improved over the first quarter.

And finally, on the cost side, we expect productivity to ramp up as the programs that we have initiated come on line, and we expect the energy costs to mitigate over the balance of the year.

So putting it together, we're very pleased with Frito's first quarter performance and the flow-through should improve in Q2 and the balance of the year.

Now, let me address one new product in particular, and that's Lay's Stax.

As you know from the release, the introduction will be delayed.

We're working out the exact time but we anticipate sometime after Labor Day of this year.

We're a little late getting the equipment installed due to some dock strikes we had on the West coast, and we encountered some unexpected start-up challenges which drove our timing issues.

But the lines are up and they're running.

However, the through-put of those lines is not what we want.

And I can tell you after almost 10 years of going through Frito-Lay commissioning, I have had my fair share of challenges in this arena, and this kind of start-up problem is not unusual.

It just happens that this product is a little more visible than some of the other issues that we've dealt with.

I will tell you we remain very excited about Stax, and we don't intend to jeopardize a very successful launch by having limited quantities of product available, so we're going to take our time and get it right.

Now, for those of you who followed Frito-Lay closely over the years, you know how flexible Frito can be and how we can respond effectively to the developments like the one I just described.

And we expect Frito's powerful lineup of innovation will more than offset any impact that Stax timing might provide.

So right now, we don't expect this change to materially impact Fritos growth.

So to sum this all up, we think Frito is off to a very sound start.

Now, let me turn the call over to Indra, who will role over some of the numbers issues and then we'll turn it over to questions.

Indra.

Thank you, Steve.

I'm very pleased with the division-operating results and with the corporate and financial levels we delivered.

Our finance team does a terrific job managing the corporate costs, overall capital spending, capital structure and tax planning to maximize our cash flow, return on invested capital, and earnings.

Ongoing division operating profits margins increased to 21.7% for the quarter with every division showing margin improvement.

Below the division-operating line, corporate costs declined by 8 million in the quarter, principally from timing of expenses and favorable for its performance versus last year.

Our core department expenses are roughly flat, and we have begun to invest in the business process transformation initiative we shared with many of you at our conference in February.

We expect our investment spending to ramp-up as the year progresses, but as we mentioned at the conference, we intend to fund this on a pay-as-you-go basis.

We recognized a $25 million gain on the sale of our Mission Pasta business in the quarter, which contributed about 2 points earnings growth.

Our intention is to use those gains to fund some of the business process optimization spending later on in the year.

We remain ahead of plan on our Quaker merger synergy and now expect to reach the $400 million goal by the end of 2004.

We expect to capture 1/3 of the remaining $150 million this year and the balance in 2004 as the operation lines of rationalization of our hot sales supply chain.

Merger expenses are also on track.

We incurred approximately $11 million of restructuring costs in the quarter, most of that was severance related.

We project total costs to be around $50 million for 2003, and we will no longer report these costs separately after this year.

Bottler equity income was down 12 million in the quarter reflecting the soft performance of our anchor bottlers and essentially offsetting the favorable corporate cost performance.

Before I turn to cash flow and financial leverage, let me address a couple of customer-related topics, Fleming and U.S.

Food Service.

Fleming is a customer of our warehouse distribution businesses, Quaker, Tropicana and Gatorade, and through their ownership of grocery chains, also a customer of Frito-Lay North America.

We expect to continue to sell to Fleming under very tight financial controls as they operate under bankruptcy.

U.S.

Food Service is a customer of our food service vend units in Dallas and PepsiCo in North America delivers product to a national [INDISCERNIBLE] account through U.S.

Food Service.

We also expect to continue to sell to U.S.

Food Service barring any significant change in their operation.

We have not received any SEC inquiries regarding our sales to U.S.

Food Service.

Our receivables exposure to these two accounts is well within historical levels, and we do not expect either Fleming or U.S.

Food Service to have a material impact on our business.

Now, let me turn to our cash flow, where I know several of you have been asking questions.

In the quarter, our cash flow from operating activities fell from $692 million in Q1, 2002, to $422 million in Q1, 2003.

This is entirely due to the change in operating working capital, which went from a cash-use of 243 million to a use of 528 million.

Let me explain what is happening.

First, and most of you know, our working capital always increases and as the use of cash in Q1 as we build ahead of the peak season.

Second, we have placed tremendous emphasis on efficient working capital the last few years and we have delivered real improvements.

Our division's key working capital measures, days' sales, days' inventory, and days' payable in 2003 have maintained the same high level of efficiency.

The change in working capital is really due to two things: One, the change in operating working capital was abnormally low in 2002 due to the timing of supplier payments in 2002.

The comparable 2001 amounts for your information was a $658 million use.

Second, the change in the Quaker reporting period from months to period means there is an extra three weeks of inventory built for Gatorade in the 2003 results as we did not restate the 2002 balance sheet.

Both these reasons are temporary and will not effect our full-year cash flow.

Moving down the cash-flow statements, capital spending went from 187 million to 305 million in the first quarter.

This is due to planned spending behind our new Ireland concentrate plants and our Stax lines.

And under cash flow's financing activities, you can see we used our cash to pay down $350 million of long-term debt, and to repurchase approximately 7.4 million shares.

The impact of our cash flow and financing activities was to increase net interest expense by about 11 million and reduce our outstanding shares by about half a percent in the quarter.

Through April 15 of this year, we've purchased 8.6 million shares for a total purchase price of about $350 million at a weighted price of $40.86.

Our average shares for the quarter were down 3% versus the first quarter of 2002, as a result of the $2.2 billion of share repurchases we made in 2002.

We now have 2.4 billion remaining under our $5 billion share repurchase authorization and expect to buy back between a billion and 2 billion during 2003.

On a full-year basis, we still expect our full-year cash from operating activities, before capital spending, to exceed 4.5 billion with capital spending to be around $1.5 billion, or approximately 5.5 to 6% of sales, which is exactly what we originally planned.

Our tax rate in the quarter was 30.7 on a reported basis, down 100 basis points from Q1, 2002.

About 70 basis points is from a reduction in our ongoing effective tax rate, and 30 basis points is from the tax impact of merger costs.

The reduction in the ongoing rate is largely driven by the impact of the concentrate line we've built in Ireland.

The combination of our strong cash flow, capital spending controls, and our share repurchase program have been the key drivers in our return on capital performance, and we expect them to contribute to a 50 to 100 basis points annual ROIC improvement this year.

Net-net, I think our P&L and balance sheet are in great shape.

We have the top-line going, we're delivering the bottom-line in cash flow performance, and we're reinvesting in our businesses to position ourselves for continued growth.

Let me close by giving you some clarity on EPS guidance.

With the new SEC rules, we will now be discussing our financial performance on a reported basis, which includes merger expenses.

Our previous EPS guidance of $2.19-$2.22 was over the 2002 EPS of $1.96 and reflected 11 to 13% growth rate.

All of these numbers excluded the impact of merger costs.

On a reported basis, our 2002 EPS base is $1.85 and it includes an 11 cent impact of merger costs.

In 2003, we expect merger costs to be about 3 cents, versus 11 cents in 2002.

Therefore, on a reported basis, 2002 EPS is $1.85 and the 2003 guidance is $2.16 to $2.19, which is a 16 to 18% reported EPS growth.

Now, my pleasure to turn the call back to Steven Reinemund.

Thanks, Indra.

Before I open call to questions, let me just make one final comment about the quarter.

The external issues that have affected every company certainly have affected us as well, and it's been a convergence of some very extraordinary issues happening in one quarter.

The unseasonably cold and snowy winter that slowed retail traffic, particularly in C-stores and closed schools and shut down businesses, we have an economy where consumer confidence has been driven down while energy costs are continuing to rise, a war that has changed lifestyles and behavior patterns, and an international situation that virtually has stopped commerce in Venezuela, slowed the economy in Mexico and Latin America, and has discouraged European and Middle Eastern consumers from buying U.S. products.

Now, I mentioned this not as a way to make excuses but as a credit to our people everywhere around the world who, despite this very tough environment, made sure that PepsiCo delivered another solid quarter.

I remain comfortable that we'll be able to grow our volume and revenue in the mid- single digits, and our EPS will grow in the low double-digits on a full year basis, with an additional 4 to 5 points of growth added to the 2003 due to the reduction in the merger-related costs that Indra just talked about.

We believe our businesses are on very sound footing with great plans for the future, and more importantly, great people who are excited about implementing those plans.

Hopefully we've anticipated some of your most pressing issues in our prepared remarks.

Now we didn't address our international or our food businesses because we didn't feel it was necessary to do that, but we certainly don't want to limit the questions that you might have to any areas of our business.

So, with this in mind, let me open the floor up to questions from you.

Thank you.

If anybody would like to ask a question, please press star 1 on your touch-tone phone and I'll 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, everyone.

I had a question within the U.S. beverages on the water segment and you referred to it in your prepared comments, in terms of the low-end prices with Coke's Dannon prices down over 20%, private label prices down, Nestle prices down, how much does this concern you regarding Aquafina's slower share gains and would you consider a low-end warehouse delivered water?

Does it make sense to offer multiple tiers to the retailers or a [INDISCERNIBLE] brand at the low-end considering what is happening in the market right now?

Bill, let me ask Gary to field that question.

Morning, Bill.

Hi, Gary.

We have a plan on Aquafina with our system and we have stuck with it and still been able to deliver double-digits.

Our pricing architecture has been pretty much what the system has planned.

So if you take a look at our pricing versus a years ago, it's down very nominally but it's really only down because of the acceleration of our big multipacks.

If you look package-by-package size, there really actually has been a little bit of price realization.

Nevertheless, there is a lot of competition, no question about it, and we're constantly looking at how we ought to attack that market, but we're committed to maintaining our share.

We're not looking to get volume at any cost.

That is not a smart thing to do, but we're looking holistically, as always, across all our channels and remembering that there is still a significant amount of cold channel development to be had.

Okay, if I can also ask you if your fountain-channel volume in the quarter, in the North America beverage business, given the weakness we have seen in that channel?

Our fountain business was actually pretty good.

I would tell you that the, if you want to take a look at the same-store sales, there is some issue there from a macro basis, there is no question.

But we have been very successful in increasing our distribution and winning the accounts and growing business that way.

So the net of it all is a plus for us.

Specifically, you know, the conversion in the first quarter of the Applebee's business was a huge upside for us, which will be that way for the whole year.

Thank you.

You're welcome.

Our next question comes from Jeff Kanter of Prudential Securities, Inc..

Good morning, everybody.

Steve, did you -- or, Al, did you reinvest more than planned at FLNA, seeing strengthened in the international business and else where and was this investment in the quarter, did, this investment more than offset the mix shift?

Jeff, we didn't invest more than we planned, other than we had some unexpected energy costs that we absorbed in the quarter, but in terms of discretionary investment, we pretty much were on our targets.

I don't know, Al, if you want to add anything to that.

I think the answer is we were, the investments that we made were planned investments.

Okay, again, I'm looking at a 5% revenue growth and a 6% operating income growth, and, you know, I guess the slow down in the single-serve would have hurt you a little bit.

I know that some people were expecting more.

Well, that's, you know, Jeff, why I spent the time to go through the discussion because I knew that that would be an issue, and we had planned the first-quarter profit.

As we looked at the whole year, we expected the first quarter profit to be lower than the remaining part of the year, and it was due to the fact that we had a very strong growth last year, as I talked about, and because we wanted to make investments that were right for the business, and we didn't want to hold them off, but to time the investments just to balance the earnings.

We didn't think that was the right thing to do for the business.

We felt very comfortable with the overall profitability of PepsiCo.

As we said before, we're going to manage the business on a portfolio basis.

And I think the volume that we saw in Frito was a testament to the fact that there is a lot of growth opportunity in the Frito business, both in the salty side as well as in the convenience food side.

And frankly, we're very pleased with how the volume came out in the first quarter and feel very good about the volume prospects for the remainder of the year, as well as the profit piece.

We understand, I mean if anybody understands the balance, Frito does.

I mean they have been doing this for a lot of years and they've managed this balance very, very well.

So again, the reason I went through it, and I would be happy to go through it again, if anybody wants to have a better feeling for why we feel comfortable with the profitability.

Okay, wonderful.

Thank you very much.

Our next question comes from Marc Greenberg of Deustche Banc.

Good morning, Steve, Indra.

I was hopeful that you could provide some overview comments on the retail price environment, specifically, maybe some of the differences that you see within the take-home and convenience gas channel.

Steve, you talked a little bit about the environmental factors that are different in each, and sort of the slow foot traffic, but some of the anecdotals that I guess are a concern here in terms of margins overall was the rapid growth in private label share and take home for CSDs, for example, I'm wondering about how we should think about pricing and specifically within C-stores, what are the things in that environmental overlay that you gave at the beginning that you think are likely to improve?

I know you talked about war, consumer confidence, cocooning effect, and within your numbers, how is that likely to change?

What have you thought about in your guidance for the rest of the year?

Well, let me just say that in the comments I was talking about in the first quarter, most of those were relatively short-term and nonrepeatable.

I mean the weather was, and I'm sure you heard this from every company that has given calls so far.

It's been unprecedented, particularly in the Northeast, and, you know, if you think about it, people are flat out not going to go out unless they have to in the kind of environment that we had in the first quarter, and certainly not into C-stores.

So we think that is, you know, is really sort of behind us.

The war and the impact, the changing habits of that, you know, we think a large part of that is probably behind us or soon will be behind us.

The economy is probably not going to rapidly change.

And I said in an earlier call that I thought the pricing environment in the United States, and frankly, in other countries, is going to be difficult to take pricing in this environment, and we certainly understand that and we're very prudent in the kind of pricing that we take.

Same time, there have been cost increases, some of them energy-related, which we think will subside, that, you know, they're putting some pressure out there.

So I imagine over time most companies will try to get a little bit of pricing in order to make up for the cost pressures that are out there, but it's going to be a tough, science, tough art to do.

It's not an exact science, and I think everybody's sort of feeling their way through it.

Let me ask Gary and Al if they want to make a comment about what they're seeing in the marketplaces as it relates to the ability to take pricing.

Yeah, Mark, this is Gary.

On the take-home side, obviously on all sides, these are questions for our bottling partners.

But we certainly are committed with them that price realization is important for the long-term health of the business, so you know, we're looking for that to, you know, hopefully stick as the year goes on.

But it's important for us to be able to provide the kind of news and innovation, the marketing, that will help them to get that, and we think a lot of the things that Steve talked about, the new products, the innovations, the new packaging and marketing, is going to provide us with that kind of ammunition.

As you take a look on the cold-channel side, C-store in particular, yeah, there are certainly some macro issues but, again, we believe that innovation is a very important way to drive more business back there, and we think the way we're going to introduce LiveWire in May, and bundle it with our regular Mountain Dew and Code Red, will help to drive some more people back into that channel and help the mix.

Al?

Mark, our pricing, as we disclosed at the analyst's conference back in February, is coming from the innovation.

Our news is giving those good pricing realization, and, especially our 'Better for You' portfolio is showing very strong growth rates.

So we're, although we have a portfolio that has different pricing, pricing toward all segments, our consumer segments, what our innovation is going to deliver is good pricing in the balance of the year.

Thanks, Al, just one follow up, I know at the meeting in February we talked about, at least there is a concern out there about competitive response to new initiatives outside core salty, and you've had a couple more months now, what observations can give us about other food companies defending share and sort of discounting aggressive practices in new categories?

Mark, so far our performance in convenience foods has been very strong, stronger than last year.

The portfolio products that we're taking to the market have been very well accepted by consumers, so we're very bullish about the balance of the year, and we're bringing more innovation on the convenience foods portfolio.

Thank you.

Our next question comes from Caroline Levy from UBS Warburg.

Good morning, everybody.

Questions on the beverage side.

Can you just comment on your marketing support per case to the bottlers?

Just wondering if you're willing to take that up a little bit as their volume softened here, or have softened, in order to help them with their earnings, which are obviously under much more pressure than yours?

And also wondering if you can break out how much Sierra Mist contributed to CSD volume growth?

And finally, if you can help us with how pricing would have looked in the beverage side, maybe by separating out the noncarb from the CSD.

I think your concentrate pricing was up 2 to 3%, something like that.

Yeah, Caroline, our concentrate price was up almost 2%, and if you're talking about the spread between our volume on the beverage side and our revenue, that's a piece of it, but another bigger piece of it is mix, as we sell more full-priced goods, products like Tropicana and Gatorade, which obviously carry a higher absolute price for us because we're selling them whole rather than as a concentrate.

On the volume support, we have plans that we work with our bottling partners in the beginning of the year, and we basically stick with those plans and we also look to, you know, supplement across the year, with things in the marketplace, which we are doing, and you have heard about a lot of that.

And we believe that is the best way for our system to work.

So, they have their part to do, we have our part to do, and it's truly a partnership.

As it pertains to Sierra Mist, we're thrilled with the growth there.

As Steve said, it's extremely important because it's our third brand platform, and if you take a look at this as a two-share and growing, the last time a two-plus share was introduced and sustained in the marketplace was 40 years ago when Mountain Dew and Sprite were introduced in the early 60s, and it took them 10 years to get to a two-share.

So we're very pleased Sierra Mist.

That certainly led our CSD growth.

We're not pleased with what we saw from our Pepsi and Mountain Dew trademarks in the first quarter.

A lot of that had to do with the overlaps of Code Red and Twist.

We put an awful lot in place in new products, promotion, and packaging across the summer that we think will not only drive those initiatives but pull the whole trademark along with them.

So --

Gary, can I just clarify?

Would that mean that Sierra Mist was 5 points of growth, something like that, from CSD?

Uh....

If it's got a two-share, you have a 35 or so share?

Well, but Sierra Mist wasn't a 100% incremental because we already had it in the marketplace.

It wasn't totally incremental for us.

It was incremental in 30% of the markets.

In only 30%?

Yeah, I mean that's the new market, 30%, but it had already been in 60% of the market.

And I also just want to clarify your answer on the marketing support was that you would limit your change to a change on the innovation side rather than anything financial?

Well, not just on the innovation side, but overall, when we put initiatives out into the marketplace, say, for instance, at a particular customer, a particular market, those are joint initiatives between ourselves and the bottlers.

Thank you.

Okay, great.

You're welcome.

Our next question comes from Christine Fargas# of Merrill Lynch.

Christine Fargas#: Thank you very much.

A quick three-part question on Frito-Lay.

Just to understand, again, the reinvestment in incremental spending.

How much of that is tied to your innovation schedule or calendar, and if so, given how aggressive your calendar is, can we assume similar levels in the remainder of the year?

Secondly, the startup challenges from Stax, did that impact the profit, or the reported profit, from Frito-Lay North America?

And lastly, Steve, you indicated the 6% profit growth in the first quarter was not driven by synergies.

I want to confirm that in fact there were some synergy savings present in the quarter.

Thank you.

Let me start Christine, by saying, again, we went through the breakdown against this hypothetical 8%, which you all, many of you, work against.

And I would just say that we understand clearly that we have a target.

I'm not going to tell you that the target's 8%, but many of you think it's 8%, so we'll leave it at 8%.

It's certainly an interesting number to use as a reference point.

So to tell you that we went through that explanation with the idea of not hitting it, you know, that's not the case.

So we did make investments, we will make investments, and we're not going to break down the specific pieces of those investments.

You know, the difference between the number reported and 8% for the first quarter is $12 million, and that was made up by a lot of different things, but we clearly understand where they went.

Was Stax investment included?

Yes, Stax was part of the investment for this year, and it has always been.

And we do plan to invest in Stax.

And the reason we talked about synergies is the synergies, if you go back to several conversations we have had with you, the synergies are primarily in the businesses between -- in the beverage and food business, and very little of the synergies has ever been planned in the Frito piece, and the reason I made that comment was to make sure we had comparable comparisons between businesses and there was not any confusion there.

So, there is some synergies but a very, very small, and they never have been planned there and they weren't in either of the quarters.

Christine Fargas#: Okay, terrific.

In terms of the first point, forgetting about 8%, because my question actually had nothing to do with 8%.

In terms of how much you invested in the first quarter, I guess I'm curious if that's the same kind of investment you're looking for in other quarters based on your innovation calendar, or development plan?

We're going to continue as we always have to invest in the future at Frito

Christine Fargas#: Thank you.

Our next question comes from Eric Kaplan of Deutsche Bank.

Hi, good morning.

This is more a question I guess for Indra.

I'm kind of wondering if you have, if I take your numbers of 4.5 billion of free cash flow and then you take Cap Ex down a billion and a half, that's a 3 billion number, roughly, how much is that up versus 2002?

In 2002, Eric, we had a tax refund that helped our cash flow and so I would say end-of-the-year we would be roughly flat with 2002.

2002.

Okay, so -- and then because -- I guess the basis for the question is if I look at your cash-flow statement and I look at the merger costs, it seems like the swing in cash-out was roughly 50 million in the quarter.

Will cash outflow as a result of merger-related cost, seeing that now we're accounting for them in the income statement more than we used to, you know, what is the cash-merger cost over the year, and is that material?

It's not going to be material this year.

As we said earlier, the merger restructuring cost, we have given you a range of about 450 to 550 million, and we're going to come in around the 515 range, and we're going to shut down the restructuring cost [INDISCERNIBLE] this year.

So incrementally, the restructuring costs this year to be about $50 million.

So it's not a big swing to the cash flow at all.

Okay.

And then just as a follow up, I guess, you know, how are you, I guess, deciding, at this point, more on the Frito-Lay North American business, how are you deciding, you know, which products and at what scale is it worthwhile to put them through the warehouse or put them on the DSD trucks?

Al.

What we do, Eric, is that we look at products that have high velocity, go through the DSD system, products that are, do good with merchandising lift and have high velocity will stay DSD.

And products that have lower velocity will go to the warehouse for the convenience food side of the business.

So every time we create a new product, we looked at the velocity that the products have and make the assessment of which is a better way for the products to go.

Now, I can tell you that some of the products meet both criteria and can go in both DSD and warehouse.

So we have a full array of distribution systems that we use, including vending and full-service, to take products, not only through DSD and warehouse, but also through vending and food service channels.

So it's not a function of scale of the business, it's a function of the velocity of the business even as it gets bigger?

That's correct.

Okay.

Thank you.

Our next question comes from Bonnie Hertz of Smith Barney.

Good morning, everyone.

I just wanted to ask a couple of questions.

My first question is related to Frito-Lay and the 4% in volume growth.

You mentioned in your comments that core salty growth was strong.

Can you, you know, clarify that a little further and give me an idea what have you view as strong growth again for the core salty business?

And then secondly, Pepsi Vanilla.

Give us an idea of the blend of the formula, you know, and then also where you're hoping to take share with Pepsi Vanilla.

And then I would love to hear, if you can share it with us, the spending cost, either R&D, advertising, promotional costs, and maybe just looking at it relative to the Code Red launch awhile back.

Just relative to that product launch.

Bonnie, related to your first question on growth, the core salty business was very strong in the first quarter, we're very pleased with it.

We're not going to break out specifically, you know, the salty from the rest, but I would tell that you we understand the importance of keeping that balance and the core salty growth in the first quarter was an overwhelming majority of the total.

Okay.

And as far as the formula for Vanilla.

Right.

I think if we shared that, we would have to shoot each other. [ Laughter ] Because that's proprietary.

But with that caveat, let me ask Gary to answer this.

Why I will tell you, he's right.

You'd have to be locked away in a safe in Siberia.

It's our own take on vanilla.

It's our own blend.

Okay.

Of vanilla and cola and, you know, I would tell you it's not an exact replica of what is in the marketplace today, and we have worked very, very hard on those formulations.

We're very pleased with the formulation, with the packaging, and with the positioning that we'll be coming out with, but I can't really talk too much more about that for competitive reasons.

In terms of the support, we have it built into our plan, so it's not incremental costs for us, and it will be a Pepsi-like introduction.

Do you feel comfortable giving me an idea of, you know, all the costs associated with launching a product as significant as Vanilla Pepsi, you know, just relative to your big product launch with Code Red.

Is it more?

Is it about the same, is it less?

No, I really can't talk about that.

This is a very competitive marketplace.

Sorry.

Okay.

Thanks for your time.

You bet.

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

Steve and Gary, I just had a brief question.

Steve, if you could share with us your thoughts coming back from the Pepsi bottling meetings in Las Vegas?

Just some of the lessons learned and some of the thoughts strategically in your discussions with the bottlers.

And, Gary, I value your insight as well, in terms of your volume outlook for PB&A for full-year this year, anything change from where we were in the middle of February?

And as you look at strengthening the trademark Pepsi and Mountain Dew from your operating planning process last fall, any need to step up investment or perhaps, reallocate your marketing mix in what has turned out to be some changing consumer patterns in the marketplace?

How should we analytically think about your thought process?

I'd value that.

Well, Andrew, let me take a shot at the first part.

I was very, very encouraged coming back from the bottler meeting.

It's been a challenging first quarter in volume and, as a result, you know, I think we have got both the PepsiCo in North America, as well as our bottlers, extraordinary focused on building volume in the marketplace, and the reaction to the marketing programs was the strongest that I have seen, and I was very pleased with that.

I share their enthusiasm.

Because I think it really is a good marketing plan.

But the real proof it is when you show it to the bottlers because they have seen a lot of marketing, they have seen a lot of products, they've been to a lot of meetings, and you can tell right away whether they're happy with what they see and whether they're not.

And particularly in a challenging time it's even more important to have that positive reaction, and I came back very, very encouraged that we have got some very aggressive bottlers that are very committed to executing in the marketplace.

So, it was an excellent meeting and I think you will see that in the balance of the year.

Gary.

Andrew, I would echo Steve's comments and tell you that we are very, very pleased with the reactions and with the, you know, with the relationship and partnership.

That is just extremely positive and it's going to work very well for us as we look ahead.

As pertains to the mixing or matching of our resources, we're always pretty fluid in that regard, and we move our resources around between the portfolio as the marketplace dictates, and we're obviously doing that.

But I would tell that you we're very comfortable that we can maintain our focus on the core businesses and keep the momentum growing there on places like Sierra Mist, but at the same time, make sure that we can support these new initiatives in a way that will have impact materially on the marketplace.

From a volume standpoint, you know, Q1's behind us.

We're looking forward to the rest of the year and feeling very bullish on it, across the entire portfolio, the carbs, the noncarbs, Gatorade, Tropicana included.

Thank you.

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

Good morning, two questions.

One, for Indra and Steve on dividends.

Given the substantial free cash flow, any thought on increasing or rethinking the amount of dividend increase you pay each year?

And then the second is just on Frito-Lay International, or on PepsiCo International, where the profits were up strongly.

Can you give more color in terms what have the drivers there were in the quarter, and, I'm trying to figure out what is sustainable over the balance of the year?

You want to take care of dividends?

Sure.

At this point, we have no plans to increase our dividend payout.

Right now, we pay out roughly 1/3 of prior year's earnings and they grow with earnings growth.

And to be honest, I think we want to keep our powder dry because we think that, internationally as we fill out some of the wide markets in our salty snacks business, we want to make sure we have the financial flexibility to make acquisition.

Secondly we believe repurchasing our shares is a great way to return cash to our shareholders.

At this point, we're going to keep with our strategy of paying our dividends equal to one-third of the prior-year's earnings.

As far as the beverage, the issues were, or the performance, really, was soft in Latin America, as I'm sure you know.

And we think that will probably subside somewhat during the balance of the year, particularly with Venezuela rebounding.

Asia was strong.

Europe was mixed, and the Middle East was okay.

And I think, you know, the question going forward for the balance of the year is what is going to happen in terms of the consumer there.

In keeping on that, on Pepsi International,[INDISCERNIBLE], the first quarter is such a small quarter that the, you know, any small swing in numbers causes a huge shift in profit growth rate, Bryan, so I wouldn't read too much of a trend into the first-quarter numbers.

Just if I could follow up on Frito International, I guess the profit growth was pretty strong there in the quarter?

And was there was anything unusual here in the quarter, or is this, you know, I'm trying to get at this 12% operating profit growth rate in the quarter and how sustainable is that over the balance of the year?

Well, I think it has some of the same issues that Indra just talked about.

It's a smaller index quarter; however, it's not out of line with what we expect out of that business.

Okay, thanks.

Our next question comes from Alec Patterson of Dresdner RCM.

Good morning, I wanted to focus on the bottled water pricing, vis a vis, what you guys talked about at your meeting back in February, and how your product positioning, you know, more convenience focus packaging should not extrapolate trends in Europe to trends in the U.S.

And just wondering, as you started to hint at, I think Gary you were talking about how you're getting, actually, neutral or net-pricing realizations per package, is that what is happening in the category as a whole in convenience side of it, and thus, would you tend to continue to focus on the notion that it's an impulse purchase almost, and you want to maintain pricing at a more neutral pace?

What is the point at which you feel like you have to break and take pricing down?

This is, obviously, a pretty complicated question.

We're trying to strike that right balance.

I would tell you within our system we're trying to maintain that rationality.

There is some competition that has taken the pricing down pretty significantly and obviously as a system, we're hoping for a little more rationality there.

On the convenience side, you know, that -- on the single-serve side, particularly when we get into channels like vending, there's certainly not nearly as much sensitivity to the pricing on the convenience side of the business, obviously.

On the take-home front, that is a real competitive marketplace, and we believe that one of the core strengths that we have, and will continue to use, is the DSD system with our bottlers, and our ability to drive category management and merchandising excellence.

Okay.

And if I could flip it over to Steve quickly, the discussion on the profitability leverage in Frito-Lay North America.

If I understand right, if I could encapsulate what you said, there has been some sort of up-front investing going on in the business here this year, sort of a first half lay in of that new product lines, the line manufacturing, et cetera.

Productivity benefits you talked about coming over the next three years, which I believe was around $800 million.

Is that something we should see as a benefit of some of this investment or is running in tandem?

Is there a sort of, the investments come first, the productivity comes second nature to this?

Well, let me reiterate again.

The first quarter, again, we were overlapping the strongest quarter from last year.

Secondly, we did make investments.

Our investments were, again, let me put it in context.

The difference between 6 and 8 is $12 million.

We didn't have any huge investments.

We had a lot of small investments and those investments are broken down to top-line, as well as productivity investments that we make into the business.

So the productivity is really not a -- it's a continuous investment into the business, which we have been doing for a long time, most of which we talked about at the meeting here in New York, earlier this year.

So, you know, it really isn't dramatic differences we're going to see.

The only, maybe step function, and maybe that's even too strong a word, difference is the trade spending overlap difference that we're going to see in the second quarter, and particularly in the third quarter.

So you really have, you know, sort of, two lapping kinds of issues.

One is the strong first quarter last year, and the second is the strong spending in the second, and particularly, third quarters last year.

So that's why, when you just look at those two issues alone, just the lapping piece, you have to step back and be more comfortable, all other things being equal, that the numbers would change.

I understand that.

Your expectations for improved profitability growth trends are more a function of what is happening at the top-line, as opposed to specific initiatives, or productivity initiatives, going in on the operating expense line on Frito-Lay North America?

No, no.

Let me try again.

There are really three things.

Let me try it this way: One is overlap.

Right.

Two is volume-driven, but the volume was strong in the first quarter, so that's, you know, that's not it, and the third is productivity, which is an ongoing piece.

It doesn't necessarily come even in every quarter, but it's ongoing.

Okay.

All right.

Thanks.

And I think that, you know, the final thing, I don't want to keep piling it on here, but the final thing is, Frito is a complete operating company and it's, you know, sort of a well-oiled machine that you have to feed each portion of it on an ongoing basis for it to perform.

So, it's -- if our performance is not, you know, we're not going to turn on a dime from getting it from the top-line to the bottom-line by changing some program on a short-term basis.

It just doesn't work that way.

Thank you.

Our next question comes from BillBooth of Wellington Management Company.

Yeah, Steve, great quarter.

I had two questions.

The Ireland concentrate plant.

Is that going to have any impact on the tax rate in 2004?

That will be number one.

Number two, can we get a little more commentary on Sabritas and some of the issues that you're facing in the Mexican market and how that will play out the rest of this year?

Nick, let me ask Indra to do the first part and then I'll come back.

Nick, why don't you wait until about the third quarter when we give you guidance on 2004 tax rate?

At this point, 30.5 is a good tax rate to use.

And that does include the Irish concentrate plant?

We've already factored in the impact of the Irish concentrate plant coming onstream this year.

Some of that impact is already there.

Okay, thank you.

As far as Sabritas is concerned, the Mexican economy, which I might ask Indra to give some editorial thoughts on the Mexican economy, but it's no secret that that is a challenging environment right now.

And it's, in large part, dependent on what happens with the U.S. economy.

But putting that aside for a bit, understanding that it's a challenging environment and that the consumer, the Mexican consumer, is more value-conscious now than ever.

And you know, we do have a peso-to-dollar issue we have to deal with.

All of those things together, we have a very extraordinarily talented team in Mexico that has seen these trends before, managed through them before, and are managing quite well for maintaining volume and growing profits in a reasonable way.

We have a strong franchise there and so, you know, we're really taking the right steps to, maintain our profitability, to watch the situation, to be able to capitalize on the environment when it starts to become more favorable.

So, with that in mind, the volume coming out of Sabritas in the first quarter was, you know, was soft.

The profit on a local-currency basis was quite strong, and we're pleased with that.

We're going to watch it very closely and, you know, we're going to be careful that we understand how to keep that machine at Sabritas going very well.

Now, I would say, as happens in many countries in situations like this, the kinds of businesses that we're in with Gamesa benefit from the economy, and people start switching over from snacks to more food-like products that provide more value for them, and we have seen Gamesa add a very strong first quarter.

And again, we have seen this trend several times before in Mexico and other countries, and we're going to balance this going forward.

But you know, clearly we have a huge business in Mexico, and it's an important part of our portfolio, and we watch it very closely, but I would say right now, I feel comfortable with where we are.

I'm cautiously optimistic that, you know, the environment will slowly improve, the macro environment will slowly improve, and we'll take advantage of that.

But, Indra, you want to add anything?

No, Nick, I hate to talk about macro economics, but clearly how the economy performs has a great bearing on our business, especially the shift between Sabritas and Gamesa.

If you recall, in 2002 the Mexican GDP only grew 1%.

We're not seeing a major improvement in the GDP growth, even though the estimate's on the 2-2 1/2% range.

So the economy is so tight in the U.S., you can watch the U.S. economy to see how Mexico's going to behave, and it's still unclear whether the president's talks of structural reform are taking hold.

We're all watching and waiting to see how Mexico's going to evolve.

Unless the U.S. recovers, we don't see a major improvement in the Mexican economy at this point.

So volumes were down single-digit in the quarter, and operating profit would have been up, you're saying?

The volumes were close to flat.

Flat.

Okay.

And operating profit was up nicely?

Yes.

Good.

Thank you.

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

Good afternoon, everyone.

Just a quick point of clarification and then a question.

In looking at your guidance, although I know you guys don't actually give guidance, if we're using $1.96 estimate for actual for last year, and basically what you're saying is that's still $2.19 to $2.22, it's only if we include the merger costs that you go down to $2.16 to $2.19, because I've gotten some e-mails about that.

Is that the right way to look at it?

John, since we don't give guidance, I'll let Indra give you the guidance on the nonguidance.

John, you're absolutely right.

Okay.

Absolutely nothing has changed with our $2.19-$2.22 comparable number.

Nothing has changed.

Okay.

Great.

And then the question I have is, the price mix generally on a corporate basis came in better than I expected in the quarter, and we have yet to hit last year's, what you guys would admit was wildly inefficient trade spending.

How should we look at price mix over the next couple of quarters.

You know you've got a much easier top-line comparison in the second quarter and I'm just trying to get some thoughts from you on that.

I don't know.

I think really, the issue you're talking about is Frito-Lay, John?

Uh-huh.

Steve mentioned in his opening remarks on Frito-Lay, as we go into Q2 and beyond, you see that as we're lapping, the trade-spending issues we had in Q2 of last year that are price realization will, in fact, improve in Q2 of Frito-Lay.

Mostly Q3.

Q2 and Q3.

Okay, great.

Thanks.

Our next question comes from Cecil Godwin of Highland Capital Management.

Yes, good morning, thank you, and great quarter.

I want to ask a couple of questions, if I could, one off the cash-flow statement, one off the balance sheet.

From a cash-flow standpoint, Indra would you share with us the balance of debt that you have viewed for the company for this year?

And then also, if you could, on the balance sheet under the other current assets, would you break out and tell us what the inventory lines were for each of those periods?

Cecil, you're going to get the Q in a couple of weeks, in a week, and all the details are in the Q. So if you can just hold it to that a week from today, you will have all the details you want in the Q.

Okay.

All right.

Thank you.

Our next question comes from Jim Baker of Newberg Berman.

Yes, good morning.

Indra, I just wanted to ask you in the income statement, where did you book the gain on sale from the Mission Pasta, which I gather is 26 pretax from the--

It's in the selling, general administrative expenses.

Okay.

So it's a reduction of SG&A?

That's right.

Okay, and also, you mentioned that the tax rate would have improved 70 basis points excluding the merger-related costs impact.

Can you just give us what the rates would have been on that adjusted basis in both the first quarter '02 and the first quarter '03, tax rate?

The full-year tax rate that we have given you guidance on is 30.5%.

Yes.

And we were 31.2 in '02, and all that we said was, in Q1 the tax rate was 30.7, but it was 30.5 for year.

Okay.

But what I'm trying to understand is the 30 points.

Was that affected much by the merger-related cost or not?

Oh, absolutely.

Absolutely.

As, let me, in fact, go back to the exact comments that I made on the tax rates for just a moment and, the tax rate was 30.7, down 100 basis points. 70 basis points is a reduction from the ongoing tax rate, and the tax impacted the merger costs, only caused a 30 basis for reduction.

And if you recall, the merger cost in Q1 was about $20 million.

Yes.

I'm sorry. $11 million.

Right.

In general, I gather these merger-related costs are, they give you less of a tax benefit than a normal.

That's exactly right.

Okay.

Then the only other can question I had is, what in your cash-flow projection are you assuming for the 2003 pension contribution?

We drew up in September 2003, the time that we actually go through the analysis, but hypothetically, let's just assume that the return on our assets is flat.

Okay, just for the moment.

Let's just use that as an example.

Okay.

If we did that, and we want to remain fully funded, it would be about a $300 million contribution we would make this year.

But, you know, let's see how the year evolves and what our actual return on assets end up being.

Thank you very much.

That's all my questions.

Our next question comes from Mark Swartzberg of Legg Mason.

Mark Swartzberg#: Hey, good afternoon, everyone.

Two items.

One really a plea to you, Steve, and the other one, perhaps for you, Al.

In terms of breaking out EBIT or EBIT growth or operating income for PC&A in Gatorade/Trop North America, that seems like that's a thing of history.

Is there any hope we're going to get some consistent color there?

The urgency with which I ask that is simply that PC&A is clearly your high ROA business, return on assets business.

That ROA appears to be going down.

Gatorade/Trop is one of your lowest ROA business.

I know this is not a new issue for you, and you've looked at it.

Can you give us incremental color there?

And then really, Al, or perhaps for you, Steve, on Frito-Lay North America, and I may have missed this from your prepared remarks, but can you give us a sense of what have you're seeing, and maybe it's too early, but what are you seeing in terms of repeat for this whole raft of new products, and how much you compare it to what you saw in the way of repeat for the new products at FLNA last year.

I think it's fair to say that last year's raft was a bit disappointing, ultimately, and it seems encouraging what you're seeing.

If you could give us added color there, that would be helpful.

From the PC&A, I understand your question.

I would ask Indra and Gary both to comment on this.

I think it's a very good question.

From a competitive perspective, you know, until we got lined up the way we are now, we really didn't have a way to very clearly set ourselves up versus our competitor, and now we have that and they too have the same issues that you raise.

And I am sympathetic to your needs, but I also would say that, you know, we do need to manage this thing as a portfolio, and, you know, I really feel that given the current circumstances, that we're doing the best we can, and I believe we're doing the right thing for our shareholders, to divulge the information the way we do.

Because, you know, last year we clearly, in my opinion, didn't get credit for the way we were managing the business because, frankly, it's our fault.

We didn't present it the right way.

We were presenting it one way, and rightfully so, our competitor was presenting it the way they'd always presented it.

We had a different portfolio because of the mergers.

I, again, Mark, I'm sympathetic but I'm not inclined to change that.

Now, if Gary and Indra, you know, feel differently, we'll obviously continue to talk about it.

There's no way we will feel differently, Steve.

We completely agree with your point of view.

Well, that's the first question.

In Frito-Lay North America, let me just -- I want Al to comment on this.

Let me tell you first that one of the -- there is some big differences in the products we're introducing now than last year.

Last year, the first quarter, the big issue we had was the miscalculation we had on Doritos, the Doritos product.

And frankly, what happened is, we introduced a product which we thought would be like many other products we put out in Doritos, because we have been doing product-line extensions for a long time, in Doritos and in Frito.

But, it slowed deterrence on the most important product in our portfolio, and that was clearly a problem.

Now, this year the introductions of the products are very different in nature.

And you take the product line like the natural and organic line, completely different line in a different section of the store, for the most part, we happen to be very pleased with the performance, but even if we weren't, it would have far different kinds of impact on the business.

But I would say that, you know, we are -- that's probably one of the most encouraging products that we have because it does fit into a new part of the store, a new consumer, a changing consumer, and an on-trend product in this whole health and wellness sort of arena.

So we're looking at our portfolio differently, and I would say that it's a bit of apples and oranges comparison, if you let me take that point of view.

But Al, I don't know if you would like to add something to that.

Mark, I may add that we learned a lot last year about managing space for new product launches, and as you can see by the performance, our baked in promotions this year, almost 40% of the new products in the baked line that we have put on, our March portfolio has gained 2X share versus some of the stuff that we did last year, and even if you look at our Go Snacks, we're getting good repeat volume on Go Snacks year over year.

So we're very pleased with the fact that we have done a tremendous job of analyzing how we put products into new space, how we manage velocities and how we make sure the innovation is more incremental.

Very satisfied with what we're seeing and expect a lot of things to come, as about 30% of the news is still to be launched in the balance of the year.

Mark Swartzberg#: Anything specifically on repeat, Steve or Al?

I think it's too early.

It's too early to give you a date of repeat.

Again, the trends are very solid in what we're seeing happening in the marketplace.

Mark Swartzberg#: Thank you.

Miss Luke, I will turn the meeting back over to you.

Thank you.

Well, I apologize for running over today, I wanted to make sure we had -- we gave everybody a chance to ask a question, and I think we have honored that, as far as I know.

Let me close by emphasizing again that we believe our businesses are on very strong footing with great plans for the future and solid growth prospects.

Yes, there is no doubt there are challenges out there, both domestically and globally, but we believe we understand these issues on a top-and-bottom line challenges, and we know what we have to do.

We have smart and experienced associates all over the world that are committed to continuing to grow our business as they have so adequately done in the first quarter, and I have great confidence that our people will keep on doing a terrific job executing our plans and achieving that growth.

Thank you for your time today and if there are further questions you have, I know Kathleen would be happy to talk to you.

Thank you.

Thank you.

This concludes today's conference call.

You may disconnect at this time.