百事 (PEP) 2003 Q3 法說會逐字稿

Good morning and welcome to PepsiCo's third quarter earnings conference call.

Your lines have been placed on listen only until the question-and-answer session.

Today's call is also being recorded.

Please note the company's cautionary statements.

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.

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.

You should refer to the investor section of PepsiCo's website at www.PepsiCo.com to find disclosure and a reconciliation of non-GAAP financial measures used by management when discussing PepsiCo's financial results with investors and analysts under the heading press releases.

I would now like to turn the call over to Mr. Jack Callahan, Senior Vice President of Investor Relations.

Sir, you may begin.

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

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

In addition, joining us today on the call are the CEO's of our three operating divisions;

Gary Rodkin of PepsiCo Beverages and Foods, Mike White of PepsiCo International and Al Bru of Frito-Lay North America, who is joined by his CFO, Dave Rader.

All will be available to answer questions after the prepared remarks by Steve and Indra.

Let me remind you that this call is being webcast and can be accessed at our website, www.PepsiCo.com.

It is also being recorded and will be archived at our website for 90 days.

I would also ask you to take note of our cautionary statements.

And now, it is my pleasure to introduce Steve Reinemund.

Thanks, Jack and good morning and thank all of you for joining us this morning.

This morning I'd like to spend a few minutes talking about the headlines of the quarter and then share with you some of my thoughts.

Then I'll have Indra discuss a few corporate items, provide some greater detail on the financials, then we obviously want to leave plenty of time for your questions.

I want to be careful not to appear overly aggressive in talking about this past quarter but I would say I think it's probably one of the best performances we've had in quite some time.

Our three largest operating divisions contributed to the strong top line performance driving worldwide servings of our products up 5%.

I'm especially proud of the 9% division net revenue growth.

We're not going to be able to deliver that high single-digit revenue growth every quarter but I would say it's exciting to think about.

This strong top-line performance drove solid bottom-line results.

Our earnings per share of 62 cents, in line with consensus, was over 15% high are than our third quarter last year and it included lower merger expenses which added about 3 points to EPS growth.

I'd like to discuss these strong results by first reviewing the North American businesses.

Their strong third quarter results were the combination of solid incremental innovation and excellent execution in the base business.

Then I'll provide an update on our international organization which had a spectacular quarter.

First, Frito-Lay North America.

In our last conference call after the second quarter, I stated that I'd expect Frito-Lay to deliver around 8% profit growth over the long term.

As I said then, of course there will be challenging quarters and there will be windfall quarters but 8% is my ongoing average expectation and as you saw in today's release, Frito-Lay delivered on that 8% profit growth target.

It started with top line growth of 4% for volume, 7% for revenue which was an improved spread between revenue and pound growth versus the third quarter of a year ago.

The strong performance was driven by both Frito's core salty business as well as its add more macro snack business.

In the salty businesses, all of our key drivers that we discussed last quarter continued into this quarter led by outstanding performances in Cheetos, Doritos, and Munchies, and I might add that Munchies is our new entry into the snack mix category and it already holds a 27% share.

In the third quarter, I'd also point to three other drivers of performance.

First, our immediate consumption or single serve business sold by our direct store delivery system was the single biggest driver of volume growth.

It was up in the high single digits.

Second, the expansion of ethnic regional varieties on popular brands is working.

Lay's and Doritos Guacamole are leading examples of these successful efforts.

Third, Classic Lay's, a heavily promoted brand, also had solid volume growth despite a very tough overlap of a year ago.

As we came into 2003, there were many questions over whether Frito-Lay could improve price realization at the same time deliver expected volume growth.

Well, I think the results of the last quarter shows that Frito-Lay has delivered.

Furthermore, when I look at these results, I'm confident that we're seeing the benefits from our move that we made this past year to remove trans-fats from our salty snack products.

We wanted to lead the industry but over the near term we realized that it would be costly for our P&L.

I'm proud that we made the right choice and you will be hearing more from us in the future about how we intend to continue to improve the nutritional choices that we make available to the consumer.

We want balanced growth across our portfolio in Better-For-You products as well as in our Fun-For-You and indulgent products.

In the third quarter the volume of our Better-For-You products grew in the high teens and the volume for the Fun-For-You grew in the low single digits.

Our most exciting new entry into the Better-For-You product line was the new bar platform called Quaker Fruit & Oatmeal, or Oatmeal On The Go.

I know many of you have tried the product and we believe it's a great addition to our bar portfolio.

During the third quarter, Frito-Lay grew profits faster than sales and this was despite having some higher than anticipated costs, some of which we discussed previously in our call last quarter.

For instance, the investment to move to corn oil was one of those costs and they remain high as other manufacturers look to reduce their dependence on less healthy oils.

The impact of this investment will continue into 2004 and it would probably be safe to assume in the first half it will be higher than in the second half.

Energy costs, especially fuel and natural gas increased well beyond expectations.

We have hedged our natural gas positions through the winter but fuel costs that we had hoped would moderate in the back half of 2003 still remain a challenge to us.

Despite these cost challenges, Frito-Lay was able to expand margins versus the first half as a result of productivity programs, volume leverage as well as positive price realization.

So to sum it up, Frito-Lay is having a good year delivering its share of growth and making investments for the future growth in the salty business.

They're making those investments in Better-For-You, Ethnic, and now Lay's Stax.

A quick note on Stax.

By all accounts, it's off to a very good start and we're selling all that we can make.

The DSD system of Frito-Lay achieved over 90% distribution in large format in just two weeks and we're all very excited about this product and once we have more in-market experience we will be able to provide you with more details.

Now, let me turn to PepsiCo Beverages North America.

We're very pleased with our third quarter performance across our beverage portfolio.

Our servings were up 3%, revenues up 6% and profits up a strong 12%.

Importantly, we gained momentum in our carbonated soft drink business gaining close to 1 share point in the U.S. measured channels.

We continued to drive growth in our non-carb business as well.

First I'd like to talk about the CSD business.

As we indicated previously, we expect the CSD category to grow a half of a point to a point per year, and we're committed to outgrowing that category.

When the third quarter, we did just that, with CSD growth at 2% despite the continued softness in Brand Pepsi.

Brand Pepsi is a major focus area for us and we're developing plans to reinvigorate that flagship brand.

I can't be specific today for competitive reasons, but we are looking at this challenge from every viewpoint, including marketing investment, packaging, merchandising, advertising and I assure you, you will hear more about that in the coming months.

Our Trademark Pepsi volume trends did improve in the quarter compared to the first half of the year and that was obviously driven by the launch of Pepsi Vanilla in August.

So far, customers and consumers are really embracing this product.

We achieved over 90% distribution in just two weeks and we exceeded our competitors' share over the last four-week period.

Again, Diet Pepsi had a very strong quarter this past quarter and we gained share in the diet cola segment as well.

We continue to be very excited about flavored CSD's, the national launch of Sierra Mist has been a huge success and we're holding a steady 1.7 share.

We're already larger than Seven-Up in new Sierra Mist markets and quickly becoming the new number two lemon lime nationally.

This is extremely important.

Sierra Mist is not just another new product, it's a brand platform which gives us now three major platforms;

Pepsi, Mountain Dew, and now Sierra Mist.

Now, Trademark Mountain Dew.

We had growth trends which improved significantly in the quarter, thanks mostly to our terrific summer only Live Wire product.

This orange ignited Mountain Dew was available from Memorial Day until Labor Day and we worked very closely with our bottlers to bundle merchandising activity across the entire Dew trademark throughout the summer and as a result the Dew line was reenergized and especially Diet Mountain Dew.

Now, I will shift gears and talk about our leading non-carb portfolio.

As you know, we have great brands in each of the categories that we compete in and we're committed to outgrowing our competition.

Aquafina remains the number one P.E.T. water brand in the U.S. measured channels growing in double digits and maintaining its rational pricing architecture in the face of very aggressive pricing actions by our competitors.

We recently completed the first ever national promotion for Aquafina with our "Get Spotted and Win" program.

This was an example of brand building that you will see more of in the future.

We fully intend to remain competitive and to build the Aquafina brand maintaining a sustainable and profitable position for the future.

Now for Propel.

Propel Fitness Water is a great example of how to clearly differentiate a product in the water business and the brand continues to grow at a feverish pace.

Propel has itself become the clear leader of the enhanced water category with over 40 share.

Importantly ,we're gaining distribution and space at retail and we've launched two new additional flavors this year to round out the Propel line, those are peach and kiwi-strawberry.

Now Gatorade.

Gatorade had a strong quarter and it was lapping a double-digit quarter from a year ago.

Volumes were up in the mid-single digits despite cooler and wetter than normal weather in most of the country and a very difficult overlap versus the quarter three of 2002.

Expanded distribution has been a key to Gatorade's growth, with excellent growth in mass, club stores, drugstores and in the emerging on-premise points of distribution.

Year to date, brand Gatorade volumes are up double digits.

As you know we've also transitioned some of Gatorade's vending business to our bottlers and this transition has gone very well.

This will enable us to put Gatorade in both Pepsi and Gatorade specific vending machines.

Finally, the Tropicana business which continues to have mixed results.

Tropicana Chilled Juice was relatively flat in the quarter due to continued softness in the chilled juice category but on a positive note, we've gained nearly 1 full share point year to date and we're doing so profitably.

The recovery plan that we set in motion in the second half are last year focused on rationalizing our pricing as well as changing our promotion strategy and it's heading in the right direction.

In summary, PepsiCo's beverages North America had a terrific third quarter.

When you add it all up, PepsiCo is the market leader in the liquid refreshment beverage category in the U.S. measured channels, approaching a 27 share.

For the balance of the year, we have programs in place to ensure all of our brands across varied categories remain in their leading positions.

Finally, let me discuss PepsiCo International.

PepsiCo International had a spectacular quarter.

Overall snack volume grew double digits, 10%, and beverages volume growth was also a very strong at 8%.

The volume growth was pretty much across the board in snacks every region grew with very strong performance in Asia Pacific and in the Europe regions and mid single digit growth across Latin America, including Sabritas and Gamesa.

The one significant acquisition that we made in snacks over the last year, the Wotsits brands in the U.K., is very much on track and it contributed to the double-digit volume growth that we had at Walkers.

In beverages, growth was again strong across all regions led by China, the Middle East, the U.K., Spain and India.

We do have a couple of challenges in a number of markets and I'd like to point those out.

As you know from PBG our CSD business in Mexico is not where we'd like it to be given the state of the economy and the current competitive environment.

We're working closely with PBG and given PepsiCo's premier position in Mexico, I'm confident that the situation will improve as we develop the right pricing and packaging structure and we leverage PBG's improved execution at point of sale.

Both our snacks and beverages business in Venezuela continue to suffer due to the macroeconomic and political environment there but I expect this situation will probably continue indefinitely.

Profits international were reduced due to certain one-time reserve actions taken on potentially unrecoverable beverage assets.

While we're continuing to aggressively pursue recovery of these assets, these actions are prudent at this time.

The impact of these reserve actions reduced our international results by about 10 points.

All in all, I'm really excited about the newly integrated international organization that we're building and with this new approach and the current momentum in the business I believe the international businesses are well positioned to continue this accelerated rate of growth into the future.

And with that, let me turn the program over to Indra who will provide more details on the financials as well as a couple of corporate items.

Thanks, Steve.

Below the division operating profits numbers our finance team has done a terrific job keeping corporate costs lower than the prior year.

Starting with corporate unallocated costs, as we noted in the release, corporate unallocated costs declined 10%, while making focused investments in the North American business process transformation initiatives.

These are the initiatives we shared with you at our analyst conference in February and the Prudential Back to School Conference in September.

With regard to these initiatives, we are very pleased with our progress to date and will get back to you in the first half of 2004 with more details.

Turning to interest expense, as we noted in the release, interest expense in Q3 declined by 3.4 million, or 8 percent as we paid down maturing debt that we have chosen not to refinance at this time.

Interest income increased in Q3 by approximately 3 million, driven by gains in investment funds that largely offset deferred compensation costs that are reported in the corporate unallocated expenses.

The gains are partially offset by the effect of lower interest rates on the balance of our investment portfolio.

Let me now turn to cash flow.

Cash flow from operations, net of capital spending, was $2.7 billion year to date which is an increase of $72 million compared to the same period last year.

These results reflect strong cash flow generation in the third quarter alone of about $1.6 billion driven by the underlying strength of our businesses and a reduction of working capital levels as the peak summer buildup started to reverse.

All our divisions carefully monitored their key working capital metrics and performance is well within our targets.

For the full year, we are on track to achieve $3 billion of cash from operations net of capital spending.

This amount assumes capital spending for the full year of approximately $1.5 billion and $500 million in discretionary contributions to our pension fund.

Our share repurchases during Q3 were just under $600 million, close to 13 million shares.

However, when compared to the second quarter, the impact of our share repurchase in the third quarter was more than offset by option exercises and because more options are in the money.

We are continuing to actively purchase shares.

Through October 3rd of this year, we have purchased 25.7 million shares for a total expenditure of over $1.1 billion.

As you can see, we are well on track to meet our $1.5 to $2 billion goal by year end.

Some of you have asked why our average shares for Q3 are higher than Q2.

Let me walk you through the numbers: First, our ending basic shares outstanding at the end of Q3 are lower than at the end of Q2 by about 5 million shares.

The average basic shares Q3 versus Q2, which is what the disclosed numbers are based on, are about even and that's driven by the timing of option exercises and share repurchases in both Q2 and Q3.

The impact of option dilution, which gets subtracted from the average basic shares, is about 4 million shares greater in Q3 than it was in Q2 driven by the higher average stock price in the third quarter.

All of this will be detailed in the 10-Q filing which will appear sometime next week.

Turning now to ROIC.

ROIC improved approximately 200 basis points to 28.4% on a reported basis.

As you can imagine, we continue to be very pleased with the steady improvement in this important metric.

As we noted in the release, our tax rate was lower than the prior year due to the impact of our new concentrate plan as well as a reduction of merger costs partially offset by the impact of the international beverage business reserve action which, I should reiterate, was a one-time action.

Next, I would like to remind you about our earlier comments on our management compensation programs, option expensing, and differentiated strategy.

As I noted in the recent Prudential Conference in September we updated the design of our management compensation program every three years.

We are in the process of updating the design for 2004 and beyond.

Once that design is finalized, we will update you on any key changes in the plan's features.

Similarly, we are continuing to evaluate whether or not to begin expensing options.

We expect to have more to say on this issue in the near future.

We've also received many questions from investors on our current dividend strategy which is to pay out one-third of previous year's net income.

We are currently reviewing the strategy and expect to discuss this topic with our Board of Directors before the end of this year.

If the Board determines that a change in strategy is appropriate we will communicate this decision to you on a timely basis.

In closing, we should deliver on the higher end of our current guidance which is reported EPS of $2.19 and our current estimate for merger costs is about 2 cents per share.

Therefore, excluding the impact of merger costs, we expect that full year 2003 EPS will be consistent with the current consensus which, as I read through your reports, looks to be about $2.21 for the year excluding merger costs.

I know that many of you have asked about guidance for 2004.

For now, I will refer you back to our long-term guidance of mid single-digit top line growth and low double-digit EPS growth.

You will hear more from us on this subject in the coming months.

Now, it's my pleasure to turn the call back to Steve.

Thanks, Indra.

Well, now you've heard our prepared remarks and I hope you'll agree that we did have a terrific quarter.

I'd like to thank our people all around the world for the hard work that they do day in and day out to deliver that kind of great performance.

PepsiCo is clearly on track to have a strong 2003 and we're well positioned on our work to finalize our plans for 2004.

Hopefully we've addressed the key issues that you had on your mind but we want to be sure that we address all your issues, so now I'd like to open up the floor to your questions.

Thank you.

At this time, if you would like to ask a question, please press star 1 on your touch-tone phone.

Again, that's star 1 to ask a question.

Your first question is coming from Bill Pecoriello.

Please state your company name.

Morgan Stanley.

I was wondering if Mike could give us more color on what he sees on the international landscape in discussing his priorities for the international snack and beverage business as you've challenged the businesses for accelerated growth and what opportunities he sees for top and bottom line synergies from the newly combined business units.

Mike?

Sure.

Good morning, Bill.

Hi, Mike.

Clearly, I'm delighted with the tremendous efforts of our field folks in the last quarter.

I think while we've been in the midst of making some organizational changes, the two things that really made a difference in the quarter, we had a full calendar of innovation, both beverages and snacks and second, we had tremendous focus on execution, I think, across the board.

I'd love to say I could see those kinds of numbers every quarter.

I know Steve is looking for that but I would say clearly we had just an extraordinary quarter.

Nevertheless, I continue to be very optimistic about our future in international.

Clearly, we will continue to see some pressure on our numbers from the Mexican peso, given the size of Mexico to our total business from a dollar standpoint but I hope you notice we've gotten back on track with Sabritas with solid mid single digit kilo growth, which we talked about on our last call, some of our value initiatives played out there.

Clearly as I look going forward, priorities we've got to continue to have; solid growth in our large businesses in Mexico and the U.K. because they are such a big piece of our business as a whole, particularly on the snack side.

We've got to continue to have good innovation.

Walkers had a fabulous quarter with some new innovation on Walker Sensations, which is a kind of a premium potato chip as well as an Indonesian cracker product which is beginning to move us towards the cracker aisle.

Walkers guys, that plus Wotsits, did a terrific job in the quarter and, in the longer terms for beverages and for foods, I think we've got to look to Asia as a huge growth opportunity for us.

I think we're a fraction of what our potential could be in Asia and I look for us to continue to jump-shift our growth there as we look at priorities for next year.

Thank you.

Thank you.

Marc Greenburg, you may ask your question.

Please state your company name.

Hi.

Deutsche Bank.

Let me start by commending you on an exceptional result.

The evidence of your ability to capture better growth in the snack business is compelling but it also highlights some real challenges at Pepsi North America.

Could you discuss some of the initiatives in single serve, which was up at Frito but PBG said was down?

Also, what confidence you have that innovation can enable pricing for juice at Tropicana and what we can expect at Pepsi North America next year after lapping Sierra Mist?

Thank you.

Wow.

Gary, you want to --.

I'll try.

Good morning, Mark.

Good morning.

First of all, on the single serve, it clearly has been an issue for us for the industry this year, a macro issue but we are definitely focusing on it from a merchandising standpoint, as we program our initiatives for next year and we have some exciting merchandising as well as some packaging initiatives that we're looking at.

But we are going against a macro trend here but we clearly have it in our sights and we also look to, you know, the power of one to enable us to gain a little bit of leverage there across our total portfolio.

On the margin front, from a juice perspective, we are actually making good, good progress this quarter, in particular if you took a look at Tropicana we've got a good spread between our volume and our revenue ending up in a pretty significant gain on the profit side as we manage our pricing architecture as we said we would and that certainly includes our trade spend.

So we're making very good progress there which leads to better margins in that business.

And you had one more piece to that, Mark?

The Sierra Mist lap and how we should think about the impact on PB&A margins next year?

Sierra Mist, as Steve mentioned, is clearly something that is not a one-time event for us.

This is our third brand platform and we are going to treat it as such, so we've got significant resources, more programming, significant spending against it, again, next year.

This is a core product with one of the best, if not the best, repeat rates that we've seen in the industry.

So, this is a core business that we're going to continue to expect growth from, you know, we also have some other innovation on the way under a couple of different brands that we can't talk too much about right now.

But we will look to Sierra Mist to continue to drive growth as well as our very strong diet portfolio and some things we've got on the innovation front on the non-carb side.

Thank you.

Mark, I might just jump in and add to a few things that Gary said.

One, on Sierra Mist, we talked about this before, I just can't reiterate how important Sierra Mist is to our total portfolio, it is not a new product.

I'd be very disappointed if in 2004, on a full-year basis, Sierra Mist wasn't a growth contributor to our business.

The first quarter obviously will be somewhat challenging since we had a major introduction in the first quarter but on a year to year basis, Sierra Mist is a long-term growth vehicle for the company.

Furthermore, on Tropicana, I think righting the ship on Tropicana has taken a little bit more time than probably all of us would have liked to have seen but we are in the right direction and I think you will see some nice growth out of Tropicana next year.

So, I do think the beverage portfolio driven by innovation and sound marketing will have, you know, a strong year next year.

And I'd also like to take this opportunity to jump back into a question, Bill, that you asked, Bill Pecoriello, that you asked to Mike.

I just feel like, after a quarter like this international, we probably should spend as much time as we can making sure we're clear about where we're going with international because it clearly is an important part of our business.

I'd just make three comments about it.

First, the growth that we're looking at in international is going to come in the salty snack side as we've said many times before, through organic growth, through tuck-ins and at the appropriate time, when it's appropriate and when it's available, some larger acquisitions.

But what we are also seeing now and we've talked about this before, too, is that the scale is starting to work in our favor as we start to reach scale in markets it really has a dramatic impact on our ability to fuel the growth at the top and bottom line.

So the snack business, as we've talked many times, we think has lots of opportunity for growth and carefully, we're going to build into beverage side.

We clearly understand the competitive challenge and the situation that we face around the world but we think continued prudent focus will give us an opportunity to build the portfolio in a very organized and planful way.

And then on top of all that and the reason that we have the organization that we now have is that we really do believe that this power of one selectively applied and, frankly, differently applied by region is going to help all of our businesses.

And the way we apply it in one country or one region may be very different than the way we apply it in another way but collectively, using the scale of PepsiCo, clearly will help both of our businesses.

So in summary, I would echo everything that Mike said about the performance of the international business.

I think we should be optimistic.

I don't think we should be unrealistic and think that we we did in this past quarter we can do every single quarter, although we would like to but it is a very strong, sound business.

Thank you.

Mike Branca, you may ask your question, please state your company name.

Lehman Brothers.

Good morning everyone and well done in the quarter.

Steve, you mentioned productivity in your prepared remarks about Frito-Lay North America and I was hoping you could elaborate on the max at productivity initiatives and specifically help us understand which of those programs, whether it's the 168-hour manufacturing process, supply chain or selling system, is furthest along and contributing here in the third quarter and more importantly, you know, where the more significant productivity savings going to flow through and which of those is leading that?

Mike, I'd be happy to answer that because we've got the experts here to do it, so I'll just turn it over to Al.

Hi, Mike.

Good morning.

We have had a terrific run at our supply chain efforts and so what you're seeing right now is a big payback on the things we have done on the manufacturing side and on the logistics side which has given us tremendous position on how to forecast volume and how to get maximum run time out of our programs.

So, this idea of 168 hours is coming to life in Frito-Lay and on logistics network and our capacity to forecast what the volume is going to be is getting terrific leverage in our P&L.

And Al, as a follow-up, in terms of some of the cost hurdles that you are faced with at Frito-Lay, how much is that obscuring the productivity initiatives and the supply chain optimization?

Our productivity initiatives have allowed us to overcome inflationary pressures on fuel oil and the investment that we have made in corn oil.

So, that is what is allowing us to deliver strong bottom line in spite of having inflation in fuel and the investments that we made in the corn oil change.

So, we're very excited about that and at Frito, we believe that productivity is infinite.

That's a big number.

Thanks.

He's going to talk to us next time about how he's going to get 186 hours into a week.

Thank you.

Jeff Kanter, you may ask your question, please state your company name.

Prudential Securities, good morning everybody and thanks for the two plugs.

Indra, I just want to make sure that I have my numbers right when we think about next year.

There's a lot of numbers right now.

There's the 219 that you keep on quoting, there's the 221 that we're talking about which you make the argument is 222 because of the write-off that is buried.

What earnings basis should we be using for next year?

On a reported basis, Jeff, you should be looking at 219 and that's the number you should base all your numbers off of because going forward, since everything is going to be reported, 219 is the base on which everything will be calculated.

Okay and the second question for Al, you know, you've put out a host of new products this year at Frito-Lay North America and you've had, you know, some pretty solid top line trends here of about 4%.

Do you feel you need the same level of activity in 2004 to keep this run rate?

Jeff, we have looked at that question very closely and we feel that we have a balanced portfolio between execution capabilities and new products that are going to the market.

And so the key to this is to make sure that the news that we have, A., are consumer relevant and that we have the proper spacing and merchandising capabilities to put those news across all the channels.

So that question is, we may not need the amount of innovation that we put forward last year because we have some of the news that we're rolling right now will be in the marketplace next year.

Okay.

So you have carry-through.

We have carry-over.

So, Indra, it's low double digits off of 219.

I'm just kind of trying to figure this all out, because everyone is using a 221 number?

Jeff, as you know, the accounting rules say that we have to talk to reported earnings.

So the reported earnings is 219.

Whenever you have a merger or when you have one-time costs like we had over the last couple of years with the merger integration, we have to talk to comparables, so you can have some sort of idea of what our merger integration costs were but we've now reached the end of our merger integration.

As of this year we will stop talking about merger integration costs, and since we have to talk just to reported numbers, 219 reported is the right base from which to build your models.

Fair enough.

Okay.

Thank you very much.

Thank you.

Bonnie Herzog, you may ask your question, please state your company name.

Smith Barney.

Good morning everyone.

Good morning, Bonnie.

My question is related to the strong spread you reported during the quarter between volume and revenue growth at Frito-Lay North America which I guess indicates the favorable mix in pricing.

So first, can you give us an idea of how much of this spread is attributable to pricing versus mix and then could you break down your pricing strategy further in terms of actual price increases on certain packages versus actual weight-outs?

I believe you took out a half an ounce in your Doritos bag in the supermarket channel maybe in the last four to six weeks, so basically I'm just curious about your weight-out strategy and what balance you hope to achieve between weight-outs and actually price increases going forward?

If you could discuss that, I would appreciate it.

Bonnie, let me just say that we would prefer not to get into the details of that mix other than to say directionally we would like to see our pricing come from mix as most, as best we can.

Okay.

And we will selectively, very selectively, take pricing when necessary but the consumers pick up pricing in any form very quickly and we want to do it very, very prudently and we really believe that innovation, the proper innovation, like Al talked about, you know, innovation that really has incremental characteristics because it meets a specific consumer need that's not now met, is the best way we know to get pricing.

And if you think about the products that we've introduced this year, that's probably the most optimistic thing we've seen.

You look at the natural line, that was a great introduction.

The numbers, you know, wouldn't tell you that it's the best introduction in the last ten years on the surface but when you realize we've got incremental space, we've got better margins and it is almost entirely incremental, that will be a role model for future innovation and that's the kind of thing that we're trying to do as we grow share.

And then you take other areas like, you know, new products that we're bringing in, in the area of snack mix where we have some opportunities to do the same in a little different fashion, that's the sort of fine-tuning way that we expect to get pricing in the future.

But if we are expecting to get visual pricing or weight-out pricing as a way to make up for a lack of productivity or inflation in the marketplace, we're going to have a rough go at it because that's not going to work.

Right.

So it's obviously, you know, the majority, you know, of the spread in your mind is coming from mix versus the actual pricing, whether that's weight-outs or price increases, correct?

That's correct.

Okay.

Thank you so much.

Thank you.

Mark Swartzberg, you may ask your question.

Please state your company name.

Good morning.

Legg Mason.

Thank you, operator.

Good morning, everyone.

Two questions probably for you, Indra.

First on the synergies relating to Quaker, can you give us any incremental update?

My understanding is that you still think that the cumulative annual number is 400 million by the end of '04 but at the end of '02 you were at 250 so I am trying to get some clarity on where you are in '03.

And then unrelatedly, on pension funding with the 500 million you've talked about before in '03, how does that compare to what you think is, or at least can best comment, sort of a run rate might be in future years?

Obviously there's a lot of assumptions that goes into responding to a question like that but 500, you know, if you could give us some sense of how that might compare looking beyond '03, that would be helpful.

Mark, if you go back to our analyst meeting and the Prudential Conference, we talked about the 150 million which will come in on the Quaker synergies in '03 and '04, to be spread about evenly between '03 and '04.

I'd say we are very much on track to get to those numbers and by the end of '04, we will most certainly meet that 400 million target without a doubt.

That's the first thing on the Quaker synergies.

Turning to the pension contribution, this year we're making a $500 million contribution and our goal is to be fully funded on our U.S. pension plans.

Going forward, one cannot speculate as to how the stock market is going to perform and how the bond market is going to perform, I wish I had a crystal ball on that one.

But as we run our models what, we assume is that we want to stay fully funded on the pension, especially our U.S. pension plans, and so, you know, putting in some sort of a contribution into the pension plan is part of our cash flow calculation.

I'd say two to three hundred million dollar pension contribution program is kind of what we rolled into our models.

I hope that doesn't happen but that's what we assume in our models.

That's great.

That's helpful.

Thank you.

Martin Feldman, you may ask your question and please state your company name.

Actually, it's Christine Farcus, Merrill Lynch.

First thing, on the international business I'm wondering if you can provide some more detail about the unrecoverable assets, specifically what are they and where are they?

And secondly, in the press release it was stated that currencies added 2% to Pepsi International's revenues.

Can you comment what the impact of currencies were on your profit growth in the international business and secondly, on Frito-Lay North America, in the second quarter, you provided a breakdown showing that there was an additional 10 million in costs that hurt profit growth.

Can you comment on how those costs came in in the third quarter relative to a year ago?

Thank you.

Mike, you want to take the first two?

Sure, I'll take the first two.

Christine, in terms of the reserve action, as Indra said this is a one-time-only event.

We've taken a very disciplined approach to looking at our balance sheet on a regular basis.

We that had review and made a determination that we would do that, I would say, it was connected with emerging market but not Mexico to be explicit, in that regard.

I guess a question has come up in that regard.

I don't anticipate any further actions in that regard in terms of asset recovery and that is really all we are going to disclose on that at this point.

To your second question about foreign exchange, it is always a bit complex with the international division because revenues and profits can sometime move differently depending on how big the countries are in the portfolio.

Suffice it to say in terms of the profit, we actually had negative hit from four ex from a profit standpoint of around 4 points.

It was positive from a revenue standpoint and that's primarily the size of Mexico and its profitability in our total portfolio.

Mike, if I can just add on the reserve, if you go back to what Steve said in his opening comments, we called it a reserve action against potentially unrecoverable assets but from PepsiCo's perspective, we are continuing to aggressively pursue recovery of those assets.

So, while it's prudent accounting policies to reserve against, what we think are potentially unrecoverables, it's not that we're giving up hope, we're going to go after this as much as we can to try to recover almost all of it, if we can.

So, please take our reserves in that spirit.

Christine, this is Al, the impact that we had due to the investments that we made in corn oil and the fuel charge was about the same as we had in the second quarter.

Should we then imply that some of the productivity enhancements would have worked through in the third quarter to show better profit growth?

No, we had to, we had other investments that we made, therefore, not all of it went into productivity, not all went to the bottom line.

Terrific.

Just to back up on the international, the reserve, the press release suggested 10 points of lost profit growth.

Would we imply, then, all else being equal in terms of volume growth and pricing growth and international markets, that an additional 10% in profit growth could occur in the fourth quarter or next year?

Let me just jump in here a second.

International, the algorithm on international is very tricky and I would caution you not to try to project top to bottom line as a trend because it doesn't, as you've seen in the past, it doesn't necessarily work that closely, and Mike?

Yeah, and the only thing way add is we did have excellent SG&A productivity in the quarter and I certainly expect us to continue to drive the productivity agenda hard because I think Steve's comment earlier, we've still got significant scale leverage opportunities that we are going after as we now look at food and beverages together but, that's it.

Thank you.

Thank you, Caroline Levy, you may ask your question, please state your company name.

Good morning and my congratulations on a great quarter.

I think I asked this of you, Indra, in the second quarter conference call and I would like to just refine it a little further and it's regarding your acquisition strategy.

It's very clear that you'd love to get leading positions in certain key snack marks in Europe and Asia.

What I'm wondering about is your appetite in terms of scale of deal.

I think the largest deal you've done was the Quaker Oats transaction at about 14 billion but I'm just looking as your balance sheet which is pristine and your huge cash flows and I'm looking at comparable companies, like an an Anheuser Busch with a 70% debt-to-cap ratio and wondering what your thinking is about leverage, accelerated share repurchase and how big an acquisition you would have an appetite for, if it was strategic?

I mean, the key thing is what you said at the end, Caroline.

Any acquisition we make has to be financially compelling and strategically very, very sound.

We haven't found one of those companies around as yet.

If we find one of those around, like we did Quaker Oats, we'll come back and talk to you about it, because it makes a lot of financial sense and it's strategically compelling in terms of driving our top line growth and resulting in productivity savings

I agree with you that our balance sheet is pristine and we are generating a lot of cash, I consider that a huge positive but I don't think we're going to make acquisitions for the sake of just using our debt capacity or because we have a lot of cash.

We have been buying shares back because we think we're still under valued and we think that's a prudent thing to do.

As I said to you earlier, we are relooking at our dividend policy and if our Board suggests that we should change our dividend policy, we will come back to you but otherwise, we will continue to do what we've been doing so far, make a whole bunch of tuck-ins, we've done $10 million acquisitions, we've done the Wotsits acquisition, which was a couple hundred million dollars, so we'll continue to make those as they become available, and, as Steve said when he talked about international in response to a question from Bill Pecoriello,if we believe we need to build scale in a particular product line, geography or on a global basis and that acquisition makes compelling strategic and financial sense, we will be back to you.

Just take you a little further in water, do you feel you are where you need to be in water either in U.S. or internationally?

Mike, you want to talk about international?

Internationally, Caroline, as you know, the water business is quite a different strategic question, even regionally, much less to talk about international.

Europe is different than Asia, is different than Latin America, is different than Mexico, even.

So it's difficult to talk about it on a total basis.

I certainly see selective opportunities for water and we continue to look at it but it will be on a selective basis internationally.

Caroline, this is Gary.

We are very pleased with the performance we've had on water, continue to be very pleased with the performance on water.

Aquafina as well as Propel and we are committed to continuing to have, you know, a leading position and driving our top-line growth, top line and bottom line with water.

It's very much a very high priority for us and we're looking at all alternatives.

Thank you so much.

In the water business we want to be in the distinctive branded profitable part of the business and we believe that provides a lot of growth.

If, for some reason, we felt it was necessary to be in more expanded way, I think we would have a hard time convincing ourselves that that's a good idea to do.

I think we are in the business of building brands and that's where we want to be.

We're not going to be in it just for volume.

Thank you very much.

That's helpful Thank you.

Andrew Conway, you may ask your question.

Please state your company name.

Credit Suisse First Boston.

Good morning, Steve.

In looking at the two-part question for Frito, Al and David, as you look to 2004, should we anticipate a similar contribution to revenue in terms of promotional efficiency, which has been spectacular this year, mix and tactical pricing moves and do you anticipate your revenue per pound to exceed your cost per pound in a year where corn oil may still play a role first quarterish into early second quarter?

And then second question, please, to Gary, as you look to your '04 plans in light of lapping very successful launch in Sierra Mist, broadening that portfolio, some of the other summertime success with Live Wire and now Pepsi Vanilla, together with the Quaker and Trop organization, is there any reason to think, Gary, that you've got the cost leverage so you will be able to continue to grow your profits at a similar long-term rate as we look at '04?

Andrew, we expect to continue to see our revenue per pound rise above cost per pound and, as far as the efficiency that you have seen in trade, we are doing a good job of managing that and I think we have rates on our product portfolio, we could continue to move that going forward.

Great.

Andrew, it's Gary.

Hi, Gary.

We have major, major productivity initiatives in place as we look forward and there's no question that we need to find more and more ways and we are uncovering them every day to leverage our total beverage portfolio.

Do those, Gary, include both how you deal and interface with your customer on terms of a trace spending as well as internal go to market management?

I would say, all of the above.

Thank you very much.

Thank you, John Faucher you may ask your question and please state your company name.

Yeah, thanks, J.P. Morgan.

A question from Mike.

Mike, you've gotten a lot of questions about acquisitions in terms of tuck-ins on the snack side.

Can you maybe give us an idea of where you think your biggest green field opportunities are in snacks?

Is that something we should look at for mostly as emerging markets in something like, let's say, an Asian-based phenomenon?

From the green field standpoint, John, we look at every market, you know, through a screen.

I'm looking for scale and size a potential to make a real difference in our portfolio, so I tend to like us to see making big bets in big countries where there's a big population base to go after.

Subject to kind of political and macro things being in a stable place.

To be honest with you, I still feel we have got tremendous growth potential both from out of our existing business as well as leveraging power of one ideas in places like the Middle East where Pepsi is very very strong, as you know and has had a terrific year this year and we're really having a great year in snacks in the Middle East but we're only in Saudi Arabia and Egypt and I think there's a lot of potential for us leverage each other in that part of the world where we're building on strength.

Clearly, I think we've just scratched the surface in our potential, from a snack standpoint, in India and China and I think that's got to be a big priority for us going forward.

Frankly I also think we've got to do a much better job in Brazil.

It's a big growth opportunity for us and I suppose, as the macro's stabilize, Indonesia would be something we'd take another look at.

We are in Indonesia but in a very small way but eventually as the macro's settle down that's an opportunity as well.

Those are a few but clearly I think it will be a focused, selective approach that we'd want to take to make sure that we can manage because as you know, with each snack business, you have to build up the agriculture and so on and so forth.

We've still hardly scratched the surface in Russia, for that matter, on snacks there is a lot of potential to go there.

Great and if you can just give me a quick follow-up in terms of India, what type of impact you've seen on your business from all the pesticide allegations and sort of where you stand there?

Sure.

Okay.

From a standpoint issue, recall we had a very difficult August.

The Health Minister has come out and reassured the public that both ours and our competitors' product are safe and well within appropriate standards in India.

In fact, frankly we apply the same standards for the way we make our product there as we do in other parts of the world.

We continue to be working now closely with the Joint Parliamentary Committee on refining those standards and we will do whatever is appropriate and necessary as we go forward.

In terms of the business, we've seen an improvement in our September trends.

We're not yet where we would like to be but with the holidays coming up, we've got a very full calendar and I'm still very optimistic about our future in India.

We still were above year ago for the quarter given the strength that we had in the early part of the quarter.

Indra, anything you would add to that?

Great.

Thanks and Indra, thanks for clarifying on Jeff's questions since you guys don't give earnings guidance anymore.

Thank you, John, our pleasure.

Thank you, Robert VanBrugy you may ask your question and please state your company name.

Sanford Bernstein, good morning.

I have got a question for Gary.

Gatorade volume trends seem to be a little bit weaker this quarter.

To what extent do you think this is driven by higher pricing and, if it is higher pricing, are you driving this or are the retailers starting to take some margin on Gatorade?

The performance on Gatorade this quarter is very, very strong.

We're up against a big, you know, mid-teens gain a year ago in the quarter and the momentum on the brand is very strong, particularly as you look across the quarter at built.

So we're feeling very good about Gatorade.

From a pricing standpoint, that, yeah, there always is a a little bit of margining up, we think we're managing it well, it's also a question of mix but we don't see that as a significant issue here.

You know, we expect to continue to see very strong momentum on base Gatorade.

Okay, thanks.

Thank you.

Marc Cohen, you may ask your question.

Please state your company name.

Goldman Sachs, good morning.

You got at this already with some of the questions that John was asking, John Faucher was asking.

Mike White, I wonder if you talk a little bit more and amplify on the markets specifically where you see the swing in the business to scale.

I mean, some of these markets are getting to a size where you could really begin to bring the margins up quite a bit.

I'm wondering if you could kind of bring our attention to the ones where you see that happening, you know, within kind of the next 12 to 24-month time frame and just exactly what's happening to drive that and I wonder if you would also talk a little bit about costs as you bring these two businesses together, at least you know, the non production and marketing parts of the businesses together.

Would do you see in terms of being able to bring the cost structure down?

Sure, Mark.

First in terms of scale opportunities, I've always thought that in snack businesses when you cross the hundred million dollars in revenue market in a country, Mark, in a country, you really get to that kind of scale where you can start to really do things.

That has been a challenge for us in a number of our emerging markets with the incredibly difficult macros over the last couple of years because if you had looked at where the trajectory we were on several years ago, we'd had a whole bunch of markets that would be there already.

But in spite of those macros, I'm really excited.

We're making huge progress in India.

Our business is up well over 50% this year.

China we're making huge progress in from a snack standpoint as well as a beverage standpoint.

We had a terrific quarter on both sides in the quarter.

Russia is having a terrific year on both beverages and snacks and I think particularly on the snack side.

Now that we have local manufacturing there, we're getting to scale there as well.

But, you know, we've got a number of those opportunities.

The other thing which really kind of plays into that and it also plays into the question on productivity, we really are just starting to look at a different approach to clustering our regions and also to looking at our cost structure and, you know, what I like to say is we want to capture the power of one but avoid the pit falls of one.

What that means is I think we'll continue to separately focus strategically on beverages versus snacks as it relates to marketing for sure and probably in some cases on sales and certainly on supply chain where the manufacturing is different.

But in every other area of the supply chain and the P&L, we're going after opportunities to create synergies whether it be in purchasing, IT, finance, human resources,but equally important by having one individual over each of the regions who can now look for opportunities to leverage each other.

A good example, I was in the Middle East two weeks ago.

We've got great properties out there and a great competitive position with Pepsi.

We now have one individual over the Middle East and Africa who sees enormous opportunities for us to leverage each other on a top line growth standpoint.

So, I certainly expect us to see significant savings in both the short term and over the medium and longer term from the way we are reorganizing the international business.

Yeah, Mike, just to follow up on that $100 million mark in the India, China route, I mean, what is it about those businesses at this point that you have to kind of break through, is it distribution thing, is it consumer acceptance of salted snacks, what is it that you are trying to really tackle there from a strategic standpoint as you try to get to that kind of scale level?

Well, unfortunately each market is different.

In the case of India, we've got a great consumer who really already has a snacking habit and it's been actually kind of, grabbing this consumer has been the easy thing.

We added 400 routes in the quarter and that's been a big part in addition to some strong marketing.

Clearly in Asia, I think we have to be more local in our thinking.

For example, we had a fabulous quarter in Thailand on the strength of one new product which we launched, Lay's with Seaweed.

Now, I have to tell you it's not my favorite flavor having tasted it but as we have looked more and more at how to take the best of our global snack ideas but then really tailor them locally and I think that's a lot of what has been successful for us in Europe over the last couple of years and now we're seeing it in other parts of the world as well.

We've done it in India, so it's kind of a combination of leveraging global technology and branding like Lay's but then marrying together with locally relevant innovation.

That was also a key part of our success in Turkey, I didn't mention Turkey.

Turkey is having a fabulous year this year and there we relaunched Lay's and added a new Doritos product that I'm very excited about having leverage in other parts of the world.

Two points maybe I'd add to Mike's points.

One of the opportunities that we're capitalizing on right now that we've invested on for many, many years is people.

And as Mike talked about putting his businesses together and as I was just reflecting on his market tour recently in the Middle East, we have a leader there that has had experience in both snacks and beverages.

So, it's not like we're, you know, we don't have tremendous depth of people out there that make this happen because in the end, that's what it takes in these new countries to develop the businesses.

The last thing I'd say is that the profitability picture is really about getting the right balance between depth and width in the business and we know that when you get deep you start making money and that's what we've been really working on in the last few years,

As you go into a place like India and I remember when we started that business and we started on a pay as you go basis and we said, you know, you can grow this business as you build it and it has been a great heritage and that team is really strong as a result of it.

But the deeper we get, the more profitable we get and the stronger we get as a business and that's really the key to building these businesses because, again, as Mike said, in the salty side we really have to start from truly start from scratch.

We start from the fields and so the depth is really important and so we have a number of these very large countries that will give us growth for many years and as we look at places like India, China and Russia, we're very happy with the results, we're happy to be profitable in those areas but the upside opportunity is huge.

Can you just clarify what you mean by distinguishing depth from width?

We don't want to be in every country in the world, necessarily, or at least not next year.

What we want to do is make sure we selectively pick those places to plant the seed and then nurture it and get it to grow and the good news is you look across the portfolio and we don't have the time or probably the proper capabilities on a conference call to go through it, if you look through the development of our portfolio you will see countries where we have very mature, longstanding businesses where we're moving into new kinds of categories, like we are in the U.S., and then we have other businesses like India and China and Russia where we have scale businesses, we're making money but we have huge growth, then we have other places where we're still, you know, fairly early on in planting the seeds, in Eastern Europe and other places, where we just balance that portfolio and it works for the profits and it works for the growth of the people and the long-term health of the business.

Mark, if I can just add to what Mike White said and Steve said, the depth and breadth, particularly important because if you take a country like China which is so big, the biggest danger is trying to serve all of China with a very narrow product line and not really build a snacking habit but get growth through distribution.

What we're trying to do is say, look, if we went into Shanghai or Beijing as a market, let's make sure in that market we've built the snacking habit and people are actually coming back to buy the products.

So, we really have to understand whether the product we're selling is taking roots with the consumer and building the habits and brand preference.

The depth is critically important before we try blanket the whole country with our products and try to bring a lot of innovation, similarly in India.

Rather than serve the whole country, we started with the north, we started by rolling out the products from New Delhi, serviced by the plants right here in New Delhi, slowly we started rolling the product and now we're in national distribution.

It was critically important for to us solidify the business model and build the habit in certain regional geographies so we could then apply that same, you know, adoption model, if you want to call it that, to the rest of the country.

Thanks.

Bryan Spillane, you may ask your question and please state your company name.

Thanks, good morning, it's Banc of America.

Just one real quick question, Steve.

You made a comment about your single serve business at Frito-Lay improving here in the quarter, and I was just curious if you could comment on, one, have you seen just an improvement over all in single serve channels and talk a little bit about the differences between convenience and gas and vending maybe and also have you seen any carry-on or follow-through in single serve on beverages as well?

I will let Al and Gary weigh in, in a second, but I'd just say in general this has been a challenging year for the convenience chain channel, so the impulse channel, for a couple of reasons.

One, we've had some unusual weather, not so much now but earlier in the year, we've had extraordinarily challenging gas prices that certainly hurt us as well and so those are some of the macro pieces that I know you hear from us and you hear from other manufacturers as well.

But despite that, you know, I think we have reasons to be optimistic and, you know, I think Frito has done a very good job of adapting to the marketplace and maybe I'll ask Al to talk about that, then, Gary, you can come back in and talk about the beverage piece.

Frankly, we're seeing an overall growth in this trend for people to go into different outlets, like conveniences like C&G and drug and dollar channels and pick up single serve.

So that's what's leading a lot to the growth in single serve.

Having said that, we have seen in Frito improvement in the C&G channel in particular over the last few months.

So we're beginning to see better performance out of the C&G channel.

But drug and dollars outlets are becoming also part of people walking to the stores and using them to a certain degree as they would use a traditional mom and pop store.

Okay.

And segueing from Al's comments, we on the beverage side have seen some improvement across the summer driven by innovation, certainly Live Wire and then Vanilla on the PC&A side.

We continue to have outstanding execution across the board, particularly from our bottling system but all across the board, the execution has been great.

What we really need is product and package innovation in this channel.

Again, tough macro's, as we talked about but we're working very hard on the innovation front, product package as well as merchandising.

Okay, thank you.

Art Cecil you may ask your question.

Please state your company name.

Hi.

Tevo Price.

Indra?

Yes, Art.

I think that at the conclusion of your remarks you reminded us that the company's long-term goals are mid to single digit revenue growth and low double digit earnings per share growth.

Then you went on to say, I believe, we'll have more to say about this later on.

My question is, what more is there to say later on about these two points?

Art, very well put.

Just that when we close out --.

Pardon me?

I'm sorry, I didn't hear what you started to say.

I said, that's a great question.

Realistically there's not much more to say but I went back to Jeff Kanter's question.

As we close out Q4 and talk about 2004 we'd just like to reset the base so all of you understand what base you have to model your numbers off of.

Right now, we are saying it's 219 on a reported basis but we need to have the year closed out before we can tell you exactly what base to model off of.

But as far as the long-term goals of mid single and low double digit, there isn't any more to say on those two points.

That's exactly right, Art.

All right.

Secondly, I guess earlier in the year you made a lot about we're not going to make any more short-term guidance and I just am wondering has that policy changed because ever since then you've been giving us short-term guidance.

That's a very good point, and, John, sort of made that point a few minutes ago.

We found ourselves in a bit of a dilemma this quarter, given our performance this quarter and the fact that we had given a range on yearly guidance earlier and we felt that we needed to clarify the fact that we had one quarter left and if you took the low end of our previous annual guidance, you would come out with a number that clearly wouldn't be in your expectations, our expectations or our current performance.

So, it is our hope that we can wean ourselves out of this forecast predictions in the future.

We're working hard at it.

I think we've made some strides at it, although we may have regressed a bit this quarter but that is our intention.

Might there be more to say about that later on?

Art, you have a way with words.

Finally and it really was a great quarter, I think, on the SG&A ratio which is where you got the improvement, in other words, gross margins were flat, it looked like and the improvement in the EBIT margins came from SG&A.

Was that largely from the Quaker savings that Indra talked about earlier?

I think it was from prudent management across the whole business in that arena.

In today's world, we talked about it in response to an earlier question about pricing, I think everybody's very cognizant about the fact with escalating people costs and with really no room for pricing other than through innovation, it is clearly a mandate to find productivity and to be prudent with our G&A spending and that's exactly what we're working on.

So, I would commend all of our businesses for their progress, continued progress in controlling costs and I think this is just the way of the future and that's pretty much our operating principles going forward.

Great.

The share repurchase pace is significantly faster in the third quarter and likely in the fourth quarter than either in the first or second quarter.

Is there anything to make of that, you know, that dichotomy, given that the stock is at kind of a 12-month high now and you've accelerated your program versus this spring and summer when the stock was lower?

No, Art.

When we had our second quarter earnings call, we talked about why our Q2 share repurchases were not at the accelerated pace that we would like them to have been.

Q3, we just picked up the pace because that's the plan.

We had the cash and we picked up the pace and by end of this year we would be on track to complete the billion and a half to $2 billion of share repurchases that we talked about.

Now, in terms of our stock price itself, as I said to you earlier, we constantly look and see what the stock prices, you know, when we're repurchasing the shares versus what we think the shares are worth and make sure that's spread is at least a return on equity type of a return and at this point, we feel quite comfortable that we are there.

So we're going to keep repurchasing until we believe that spread has become too narrow.

Okay, thank you all very much.

Thank you.

Your final question comes from Ann Gurkin.

Your line is open and please state your company name.

Davenport, good morning, or good afternoon now, I guess.

Just a couple of things, can you comment on the price gap for Frito-Lay between Frito-Lay pricing and private label, then can you give us any more color in terms of your budgeting for commodity costs as we look out to 2004?

We've talked a little about corn oil and energy but any other comments?

Ann, let me ask Al and Dave to jump in on that.

Our price gap between us and private label, if you look at throughout this year has been relatively constant and we don't, you know, we are a branded company, we always continue to look at that difference but how we are very effective at that is through bring in innovation in our branding and then news we bring through our brands.

But as you can see by the share report, we gained share against private label, so I think we're doing a pretty good job of managing the price gap.

I think we have one more question.

Okay.

Thank you.

Carlos Laboy, you may ask your question, please state your company name.

Good afternoon, Bear Stearns.

Mike, I was hoping you could be more specific on issues that are getting you this pretty good growth you're getting out of Sabritas/Gamesa in a tough environment and how do you feel about this improvement going forward?

On a related basis, as you bring a fresh pair of eyes to Mexico, are there any critical lessons in package price or any other areas for Sabritas/Gamesa that you can use for your soft drink business?

Good morning, Carlos.

Suffice it to say, we're spending a lot of time looking at our overall business in Mexico.

In terms of Sabritas and Gamesa, really, I think we felt we needed to improve our value proposition coupled with some innovation along the lines of what I talked about earlier, kind of local spend to global ideas.

In the quarter for example, for Sabritas we had Sabritas Mexicanas which is a local flavor approach to our potato chip business down there, similar to what we did in Europe that was very successful, we improved our value on single-serve Doritos.

I think, to your point, in a recessionary economy you've got to have the right price points, particularly for the kids coming into the store and we've also taken a page out of the Frito-Lay North America strategy on convenience foods.

We launched a product called Toasty Lunch, which is a tortilla soup that you can kind of mix up and make.

So suffice it to say, Sabritas had solid mid single digit growth in the quarter, Gamesa also had a terrific quarter with high single digit volume growth and in both cases, we continue to have good and bad promotions that have been effective for us.

Certainly as I look at the beverage business down there the value equation I think is priority number one.

I think we are working quite closely with PBG on ways to do power of one promotional ideas.

In fact, we've got going in the fourth quarter a power of one promotion between Pepsi and Sabritas that I'm quite positive about.

And, you know, while I think there were some lessons on price elasticities, beverages tends to be a little different than snacks but both are, you know, you've got to have the right price point for the consumer, particularly on single serve, I would say.

Lastly, we're working very closely with PBG on the whole question of capability building with Mexican Spanish-speaking talent and how we can help strengthen the organization down there as well.

Thank you.

Let me just close by emphasizing that PepsiCo is very much on track.

Our strategies are delivering in the marketplace, I think, as you've seen.

Our consistent financial performance is very much in line with our expectations and we're developing the right plans to continue this momentum into 2004.

We do obviously have our challenges, both economic and competitive but the strength and balance of PepsiCo portfolio I think is remarkable and again, I'd like to thank our associates all around the world for a great quarter.

I have confidence, great confidence, that they will continue to work together to deliver on our fourth quarter expectations and we'll set a fast pace for entering into 2004.

And I appreciate the strong interest today on this call and we did run over by about 20 minutes but I appreciate your patience and thank you for participating today.

Thank you.

That concludes today's conference call.

You may disconnect at this time.