百事 (PEP) 2003 Q4 法說會逐字稿

Welcome to PepsiCo's fourth 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 statement.

This conference call may include forward-looking statements based on our current expectations and projections about future events.

Our actual results could differ materially from those anticipated in any forward-looking statements.

But we undertake no obligation to update any such statements.

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 nonGAAP 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.

Thank you every for joining us this morning.

Our prepared remarks this morning will be made my Steve Reinemund, our Chairman and Chief Executive Officer and Indra Nooyi, our President and Chief Financial Officer.

In addition, joining Steve and Indra on the call today are Gary Rodkin, CEO of PepsiCo Beverages and Foods North America, from Frito-Lay North America, the CEO Al Bru is here, joined today by his Chief Financial Officer, Dave Raider, and Mike White, the CEO of PepsiCo International is here too.

All participants will be available to answer questions later in the call.

Before we begin, let me remind you that this call is being webcast and can be accessed at our website, PepsiCo com.

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

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

Thanks, Jack, and good morning everyone.

Thank you for joining us this morning and this morning I would like to start with a quick look at 2003 but I want to focus most of my comments on 2004.

That's because I want to share with you why I am so confident and optimistic that 2004 will be another great year for PepsiCo.

Last year all three of our operating businesses contributed to the strong top line performance, which accelerated during the fourth quarter to 10%.

And revenue for the whole year was 8% as you I'm sure saw this morning.

Those results demonstrate the strength of our current strategies and capabilities and the continuing benefits of the Quaker merger.

That strong top line performance drove solid bottom line results.

Our full year earnings per share of 201 is consistent with the guidance that we shared with you in December.

Looking at 2004, we're well-positioned for another outstanding year.

Our innovation pipeline is strong.

Our operating plans are solid and we're building new capabilities across North America and international and I would say we clearly have momentum.

We're well into the first quarter and I can tell you there that we're off to a very, very good start in all of our businesses.

To clearly explain the basis for our confidence, I want to discuss three common themes that run across our 2004 plans that drive the top line growth in our North American businesses first and that business is Frito-Lay and PepsiCo beverages and foods.

I would like to call these three themes the three Cs and they're core growth, new choices aligned with the right consumer trends and targeted customer strategies.

And I'll address each of those core, choice and customer by providing a few highlights of each one.

But keep in mind they're very much linked together into integrated growth plans within their respective operating businesses.

Let's start with core, which speaks to the confidence in the top line growth potential of our core businesses.

When you think about the core PepsiCo businesses, you might probably think of Lay's potato chips and trademark Pepsi products and in 2004 we have exciting plans for both of these.

Classic Lay's potato chips is our biggest global brand by far.

Over the last few years at Frito, we have leveraged the strength of the base brand to introduce Lay's kettle, products like Lay's stacks and numerous flavor varieties like Taste of America and ethnic initiatives like guacamole-flavored chips, much but we haven't done anything with the core classic line.

In fact, we have not advertised the base classic line or improved the base product in almost a decade.

Now, that's changed in 2004.

First, we made a clear improvement to product quality.

After extensive consumer testing, we now have a new crispier Lay's potato chip that's preferred when compared to the old formulation.

Second, we've changed the packaging to Lay's new global design that better communicates the product'ser irresistibility, it's freshness, and it's natural attributes.

And lastly, we're talking to consumers about the news with significant advertising investments like the high-profile spot that you saw on the Super Bowl.

Consumers have responded well.

In the first five weeks of the year, Lay's sales are already in the mid-teens and we're very optimistic about the full year.

Well, Lay's isn't the only core initiative at Frito.

There are other core initiatives that we have that will be rolling out during the course of the year like new flavors, packaging and advertising for products like Doritos, Tostitos and Cheetos.

That same focus applies to the core in our beverages.

And again, it starts with our biggest brand, trademark Pepsi.

Trademark Pepsi volume trends improved in the fourth quarter and contributed to the growth versus year ago.

That growth began to turn around in August with the launch of Pepsi Vanilla.

Vanilla has been a real success for us and heading into 2004 we look to this product to be an important part of trademark Pepsi's continued growth.

Pepsi will also benefit from increased advertising and from those of you who watched the Super Bowl, you saw some of our latest executions that continue to bring fun to the brand and leverage breakthrough promotions like the Pepsi I-Tunes.

And overall 2004 will be a year of stepped up support for Pepsi across the system.

We now have a third core CSD brand to add to Pepsi and Mountain Dew and that's Sierra Mist.

And in 2003, it was a terrific success.

Sierra Mist gained 1.7 share points of all CSDs in its first year and it's joined Pepsi and Mountain Dew as a powerful growth platform.

Sierra Mist will continue to provide growth for the company and will be supported throughout 2004, as you saw, I'm sure, during the Super Bowl.

Now let's turn to our leading core brands in noncarbs.

First Gatorade.

As you saw in our release, Gatorade closed out the year with blockbuster sales.

Importantly, you can continue to expect to see big things from that brand in the coming year.

In Gatorade, we've got terrific product, promotion and packaging news and we just launched a new sub-line called X-Factor that delivers an unexpected twist on the flavors that Gatorade consumers have come to know and love.

The sub-line will be supported with dedicated TV advertising that celebrates the memorable moments in sports.

Gatorade's history of successful sub-line additions like Frost and Fierce has us very optimistic about the X-Factor.

Now for Aquafina, we will continue to bring consumer value and greater instore visibility.

We fully expect to maintain our leading share in this category and we're committed to doing so in a profitable way.

Now Tropicana, we definitely saw an improvement in the core premium business in the fourth quarter and the business is well-positioned to reignite growth with innovation and increased advertising support in coming year.

While we're excited about the growth prospects across all of our core businesses, now I want to spend just a few minutes about why we're equally excited about the growth prospects from our innovation.

Our innovation across both snacks and beverages provides even greater choice to consumers.

And we're working hard to align these new choices with the most relevant consumer trends.

That's another reason why we're so bullish on our ability to deliver top line growth in 2004.

One of the biggest trends we continue to see is the interest in health and wellness.

The challenges is to target the key benefit that's really driving consumer choice.

And it could be reduced calorie or reduced fat products that are better for you.

It could be positive nutrition with foods or beverages that have proven good-for-you benefits.

It could be greater comfort from a natural or an organic product or consistent with the latest top trend in the market, it could be a focus on low carbs.

What's exciting being PepsiCo's portfolio is that it's big and it's broad enough to appeal to all consumer segments that are looking for a unique set of healthy benefits.

Lots of consumers continue to look for reduced calorie or reduced fat product options.

The continued growth in our diet CSDs and sensible snacks at Frito-Lay certainly attest to that.

In 2004, we've already introduced new snack choices, including products like Kid's Munchies, which is a product designed by kids and endorsed by Dr. Ken Cooper, a multipack that includes only sensible snacks, and later in the year we're introducing a reduced fat Cheetos that really tastes outstanding.

We're also going to continue to communicate that all Frito-Lay salty snack products are free of trans fats.

Now on beverages, we've just introduced a line of Tropicana non-carbonated beverages that will be distributed through the bottler system.

This is an entirely new line, including lemonade, lemonade light and fruit punch that promises to deliver significant incremental growth.

We believe this new line of Tropicana juice drink products will be a big hit for both us, as well as for our bottlers.

Now, another good for you product that has been a huge success and is growing in double digits is Propell Fitness Water.

Propell is a truly great part of the good-for-you portfolio and it's a clear leader in the enhanced water category with a 40 share.

In 2004, we look for that high growth to continue and it will be aided by some new line extensions, grape and tropical citrus, and a new package size alternative aligned to specific channels.

Another good-for-you beverage example is the new Tropicana Essentials line that includes a healthy heart product, with the necessary vitamins and mineraks to help consumers who are concerned about heart health as well as a light and healthy orange juice that contains one-third less sugar as well as less calories.

The line also includes a repositioned product which we brought out before immunity defense, as well as healthy kids and low acid varieties.

So all in all, this line of products and essentials will be an important part of Tropicana's growth this coming year.

In snacks, given the tremendous interest in soy, we're introducing Quaker Soy ichps, which will be merchandised in the natural food section of the grocery store.

We're also introducing new Rold Gold Heartzels, the first product endorsed by the American Heart Association.

In the bar category, we're introducing a healthy Quaker chewy fruit and crunch.

Now, if you're interested in natural and organic products, we expect to continue to grow here as well.

Last year, our introduction of Frito's natural organic line delivered on our expectations and more importantly, the sales trends continue to improve week-on-week.

Frito-Lay already has four of the top ten natural salty snack products and we generated over 90% of the category's growth in 2003.

And in 2004, we'll add natural Doritos, further strengthening the line and continuing that momentum.

Obviously, today, there's a lot of buzz about low carb diets in the marketplace and we see this as yet another opportunity to broaden our portfolio and we've taken steps with Doritos and Tostitos Edge, which contain 60% fewer carbs.

We're not expecting many heavy users of Doritos and Tostitos to switch to these products, but we do expect to attract medium and light users who are focused on low carbs and we'll pick up incremental business as a result.

Now on the beverage side, we continue to work on some lower carb alternatives but we already have many great products that contain little or no carbs and continue to deliver great growth.

Products like the entire CSD diet portfolio, Aquafina and Propell.

Also, we'll about continue to expand our portfolio of more indulgant, great-tasting convenient foods and beverage products.

In snacks in 2004, we'll be a full -- first full year of Lay's Stacks, which rolled out after Labor Day last year and Stacks is delivering on our expectations and the '04 marketing calendar includes advertising, instore support, and overlays with cross-brand promotions.

We now have approximately a 20 share in the stack chip business and we expect that position to improve over the year.

We're also introducing new -- a new product called Doritos Rollitos, which is a unique rolled shape that is less bulky and less likely to break and delivers as great burst of flavor.

The packaging is a flat-bottom bag.

It's an interesting alternative for us.

And very space efficient for both the customer as well as the consumer.

For breakfast, we're introducing Quaker Fruit and Oatmeal muffin bars that provide a great-tasting convenient option for consumers on the go.

With beverages, you can be assured that we will bring more choices to fun brands like Mountain Dew throughout the year.

So far this morning, I reviewed the first two Cs, core growth and more choice.

Now let me quickly turn to the third C, customers.

In 2004, we've targeted customer strategies as a way to take our power of one initiatives to an even higher level.

Now, we've talked to you for several years now about power of one and it's become an integral part of our business.

You probably saw efforts along that line these last few weeks with the Super Bowl that leveraged our terrific beverage and snack portfolio.

And as we've discussed with you previously, we're taking power of one to the next level in 2004 with the establishment of PepsiCo customer teams.

And these teams are completely committed to growing the business with our customers.

There are a number of very important benefits from this approach.

First, each team is organized around a PepsiCo senior leader, who's leading the total growth agenda for that customer with our products and we have now 14 teams in place and these teams also include representation from our bottlers and they serve over 30 customers, representing almost half of our North America revenues.

This scaled approach allows to invest in more capability for our customers on a very individual basis around things like customer insights, category management, customer marketing and financial analysis.

With this scale and capability, we'll develop targeted marketing programs that will tie PepsiCo with our customer strategies.

We're also working closely with our customers to develop new merchandising solutions that better cross merchandise things like snacks with CSDs and things like establishing new health and wellness sections.

So you can see that this new customer teams brings us exciting and added capability and I'm very optimistic about the potential upside that this significant step takes us with customer focus.

Well, those are the three Cs that will drive the top line growth across our North American businesses in 2004, core, choice and customers.

In summary, I'd like to say I'm very confident that we will deliver top line growth in 2004 across snack foods and beverages and our focus to grow the core business will be led by products like Lay's potato chips and Pepsi Cola.

It will be led by providing more choices in healthy and convenient great-tasting products with outstanding 2004 innovation and it will be lead by leveraging these existing brands in our targeted customer strategies by taking the power of one to the next level.

Overall, I expect North America to have another great year and as I mentioned earlier, we're off to a terrific start in the first five weeks.

Finally, let me briefly mention PepsiCo International.

Our international business had a spectacular year in 2003 and momentum has built throughout the year and it's continuing.

With volume growth pretty much across the board in all regions in snacks and beverages.

All in all, I'm very excited about the new integrated international organization that's now completely in place and totally responsible for the 2004 plan.

With this new approach in current momentum in the business that's continuing into the first quarter, the international businesses are very well positioned to deliver on our 2004 expectations.

And as I've shared with you before, I expect our international business on an ongoing basis, to beat their target, which is to grow the top line and the bottom line at twice the rate of the North American businesses.

In the Q&A session, you can ask Mike White to provide any specific questions that you have about the businesses or specific regions.

And with that, let me turn the rest of the meeting over to Indra, who will provide more detail on our 2003 financials and our 2004 financial guidance.

Indra?

Thank you, Steve.

Let me focus now on some of the items that affected the 2003 results below the division operating lines and provide guidance on these items for 2004.

As you saw, our 2003 EPS of $2.01, which is restated for option expense, was right in line with the guidance we provided at the end of the of this meeting in December.

These results include the impact of the charges we took to streamline the businesses, the favorable tax settlements and as I mentioned, the recognition of option expense.

The financials attached to the press release present the option expense and restructuring charges on separate lines in an attempt to make the impact of these items as clear as possible.

The tax settlement benefit is included in the tax provision line and amounts to approximately $110 million.

I hope the presentation is clear.

But please ask for further clarifications when we get to the Q&A or call Jack Callahan after this conference if you have any further questions.

Now let me turn to the corporate items in the P&L.

Corporate unallocated expense increased by $79 million in the fourth quarter.

This is driven by three items.

First, we made a contribution to the PepsiCo Foundation.

For the full year, the contributions equal to the 2002 amount, so the fourth quarter impact is completely timing-related.

Second, our deferred compensation expense is up, which is a function of the market's improved performance this year.

Much of this increase is offset by investment returns that I included in interest income.

And third, we are making an investment in the business process transformation initiatives we've discussed with you.

The investments we are making now will drive our future productivity.

For the full year 2003, the increase in corporate unallocated cost is largely driven by the business process transformation costs and deferred compensation.

For 2004, we expect our base departmental G&A to be flat to down slightly.

However, we will have continued investment in the BPT initiatives and as we mentioned in December, our pension expense is increasing in 2004 and most of the increase will be reflected in corporate unallocated cost.

In total, we expect corporate unallocated costs to increase by $70 to $90 million in 2004.

I will come back to both the pension plan and our BPT investments later.

Now let me turn to option expense.

We have reflected all option expense for both 2003 and 2002 as a separate line item in the release.

The fourth quarter expense is $140 million or 6 cents a share.

And the full year amount is $510 million or 20 cents a share, which is exactly what we shared with you in December.

Beginning in the first quarter of 2004, we will allocate stock compensation expense to the divisions.

We are going to provide the divisional cost allocations of the 2001 to 2003 amounts on our website within the next few weeks so that you can update your models.

As I mentioned earlier, we kept the entire amounts in one line today -- in today's release to make clearer the impact of adopting option expense.

The next item is interest.

Interest expense decreased $11 million in the fourth quarter, driven by the timing of maturing debt and retirement of high coupon debt.

Interest income increased by $8 million in the quarter and this was driven by the performance of the investments related to our deferred compensation balances that I mentioned earlier.

For 2004, at this point we anticipate our rate to be lower than in 2003 and our cash investment rate to be similar to 2003.

The absolute net interest number will obviously depend on where we settle up on our capital structure discussion.

But pending that, I don't anticipate the change in net interest to be a big financial driver in 2004.

Impairment and restructuring cost represent the charges we discussed in December related to our streamlining initiatives.

These came in at the low end of our guidance.

For 2004, as we mentioned to you in December, any remaining costs will be reflected in the division lines.

Margin-related costs for the quarter were $28 million, down from $90 million in Q4 of 2002.

This is the last quarter we will present merger costs as a separate line item as we don't expect any material costs related to the Quaker merger going forward.

Equity income.

Equity income benefitted from the strength of both PPG and PAS Q4 results and also lapping a Q4 2002 $35 million international impairment charge against a Latin American bottling investment.

Our tax provision for the quarter reflects the benefit from our tax settlement.

On a full year basis, our 2003 effective tax rate is 28.5%, which includes a two-point benefit from the Q4 settlement.

For 2004, we anticipate an effective tax rate of 29.5%.

Our operating cash flow, net -- less net capital spending was $3 billion for the full year, which is right on our guidance and includes $500 million of pension funding and net capital spending of $1.3 billion.

We made a tax payment of $250 million in Q4 in connection with the IRS settlement and there will be another payment in Q1, 2004 to close out the settlement.

The full year 2004, we expect operating cash less net capital spending to grow by 10% or more from the 2003 amount of $3 billion.

Capital spending should be in the range of 5 to 5.5% of sales.

During 2003, $3 billion was returned to shareholders as dividends of $1.1 billion and share repurchases of over $1.9 billion.

43 million shares of PepsiCo stock were repurchased in 2003.

We continued to actively repurchase shares in 2004.

Year-to-date, as of January 30th, we have repurchased close to 4.5 million shares for slightly over $200 million.

For the full year, we expect to use approximately $2 billion for share repurchase, contingent on the board of directors providing the necessary authorization.

Let me now get back to pension and the business process transformation initiative.

Just a comment on the financial health of our pension plans.

Overall, I'm very satisfied that the stepped up funded over the past two years has left the plans in a very healthy position, despite the continued record-low interest rates and the poor stock market performance from 2000 to 2002.

At the end of the 2003, our pension assets exceeded the liability for benefits earned to date for all of our qualified pension plans.

If you look at funding on a projected liability basis, a basis which includes future salary increases, liability from major qualified plans exceed assets by about $435 million, which is largely a function of the current interest rate environment.

We anticipate contributing $400 million to the qualified plans in 2004.

We also have about $535 million of liabilities from our nonqualified plans that we don't fund due to unfavorable tax treatment.

Please note that we target our pension contribution to achieve 100% funding of the liability for benefits earned to date for all of our qualified plans and we remain confident that our robust cash flow will give us the ability to continue to meet this objective and maintain the financial health of our pension plans.

Now let me provide an update on our business process transformation initiative.

We began this initiative early in 2003 and have now completed the initial scoping.

Our emphasis so far has been on North America.

We have not yet begun to look at our international businesses.

Based on our early analysis, we are very excited about the potential it presents to lower the cost of our operations, but even more importantly, the opportunity it gives to serve our customers better.

A key driver of these benefits is an enterprise-wide common IT system queueing off common business processes.

We are therefore in the process of evaluating ERP system alternatives for PepsiCo along with a timetable for implementation.

Much work remains to be done.

As most of you are well aware, these are multi-year initiatives and we intend to execute them in a way that ensures maximum success.

However, there are a couple of guiding principles we want to share with you.

First, North America will be our first and primary focus.

Pepsi beverages and food North America will be sequenced ahead of Frito-Lay North America as we use the common ERP system to integrate fully the legacy systems of Tropicana, Quaker and Pepsi Cola North America.

Second, we are planning to fund and implement the program in a measured and thoughtful way within the long-term EPS guidance we gave you.

That is, no double-digit EPS growth.

Consistent with that, in 2004 we will deliver on our EPS numbers.

But within that, you should expect to see a growth in investment in BPT.

Largely in the first half of the year, as a transformation teams that came together in the back half of 2003 continue their work.

Beyond 2004, we want to make this program as self-funded as possible, using the productivity savings from enterprise-wide initiatives to fund systems initiatives.

We feel confident about the full year 2004 EPS guidance of $2.24 to $2.28 that we shared with you in December, especially as we have started the year out on a very strong note, as Steve mentioned.

From time it time, we may provide some quarterly EPS guidance.

Given the transition to stock option expensing and the overlap of the gain on the sale of the Mission Pasta business in 2003, we believe providing EPS guidance for the first quarter of 2004 of 43 to 44 cents is appropriate.

Now it's my pleasure to turn this back to Steve.

Thanks, Indra.

Now you've heard our prepared remarks and I hope that you agree that we had a terrific year last year, and more importantly, we hope that you are as optimistic as we are about our ability to continue this level of performance across North America and International.

I'd like to thank our people and PepsiCo all around the world who work so hard to deliver what I think was an outstanding year last year and they're already hard at work to deliver against our plans for 2004.

Now let me make sure that I spend enough time answering your questions so I'll open the floor at this point.

Thank you.

At this time to ask a question, please press star, followed by a one on your touch-tone phone.

To withdraw your question, you may press star followed by two.

Once again, to ask a question, press star followed by a one.

Bill Pekerielo, you may ask your question and please state your company name.

Morgan Stanley.

Good morning, everybody.

Question on the Frito-Lay business.

If you could help us understand whether the low carb diets or are fad or not.

Did you see any impact at all on your snack portfolio in the latter part of Q4 or as you came through January or is it as you referred in your comments, that any impact on the light to medium users wasn't moving the needle versus the heavy users, and the second question is just growth by channel.

It seems like we saw convenience stores coming back, food stores looked a little weak from the data that Wall Street was monitoring, if you can comment where the growth was coming from.

Thank you, Bill.

Al, why don't you obtaining the first question and then I will come back.

I assume in the second question, Bill, you were talking about all of our business, just not just Frito-Lay, is that right?

And specifically Frito, because Frito was looking weaker in the measure channels.

Okay.

Al, why don't you take both of those questions.

Good morning, Bill.

Bill, as you know, over 50% of our sales are in unmeasured channels.

Let me first talk about the low carbs.

We did not see a significant impact on the Q4 results and as you know today, we have some products that are already in the market that address this opportunity that we have with low carbs.

One of our brands, which is pork rinds, is a low carb brand and that has done very well in Q4.

So we don't expect to see overall impact.

We see it as an opportunity, not as a loss of our core business.

Channels..

And the channel, we continue to see a strong performance in our measure channels.

C&G was very strong also in the fourth quarter, so again, the data that you see is only half of the picture and we continue to see improvement in C&G and improvement in the smaller channels such as dollar growth channels that for the most part you don't have measurable data on.

Bill, let me add a little color to this because I think, you know, we've had some challenges and I know you all have had challenges trying to sink up our actual sales with the data that that you get and I would say that the fourth quarter of last year was, particularly for Frito-Lay, was probably the most misleading quarter that I can remember, if you just looked at the IRI and Nielson-related information versus our actual results and it really -- I don't know if it will continue, but for the fourth quarter, the real reasons for that were that our sales in the emerging channels were extraordinarily strong, and it really skewed the sales and there was one piece of it that maybe made it worse in the fourth quarter and maybe it will change a little bit and that's that's the strike on the west coast because those stores were in the measured numbers.

But it really was as about as far off as I've seen it and it makes it very difficult to track.

And just one quick follow up, Steve, on Frito, would be you mentioned in the release you talk about the cost pressures that you've in the last couple of quarters and the conversion on the oil.

Do you see that abating as you move through '04 so that we can see more of the historical spread on the revenue versus profit there at Frito?

Let me ask Al to answer that specific question, but let me just repeat because I know some of you have questions about Frito's profitability.

I would repeat again what I've said, I believe in the second quarter call, maybe it was third quarter, that our expectations on an ongoing basis at Frito were certainly met at the top line and we believe that Frito going forward has the capability on an ongoing basis to perform an at, you know, the 7 to 8, closer to 8% number, although, you know, we may not do that because we want to make investments and we manage, you know, the total portfolio.

So the expectations of that business haven't changed although there may be pressures from time to time and you might want to talk about the specific costs.

Bill, for the first quarter we will still see some investments on the oil side that we will overlap, but after that the trend will be stabilized and we have locked into a majority of our cooking oil purchases for 2004.

Thank you very much.

Bonnie Herzog, you may ask your question.

Please state your company name.

Smith Barney.

Good morning, everyone.

I had just a couple of quick questions on Frito-Lay.

Just understanding the 3% volume growth in the quarter, I guess it was a little light but clearly very impressive top line growth of 6%.

So I just like to hear from you what your expectations are for sustainable Frito-Lay volume growth.

I mean, is 4% still realistic in the future?

And then I'd like to hear in terms of the promotional support, the increase in promotional support behind Frito-Lay, how are you going to be splitting that behind the better for you and good for you and the core salty?

Is there going to be a way to basis more support behind the better for you and good for you business?

Al, you want to --

Well, let me handle the last question.

We will continue to balance our investments as we have done in 2003 between the fun for you and the better for you products.

And we will increase the investments as we see our strong top line emerging.

Steve already let you know that we have gotten off to a very good start, so the investments will be in line with our top line growth.

The second question is as you saw last year, we were able to grow both volume and price mix realization.

We expect to be able to do that again in 2004 and you will see that data as the data is released in the next few weeks that the category is showing strength in taking the ability take price mix realization.

Okay.

So in terms of future volume growth expectations, 4% is a reasonable number?

Bonnie, we don't want to get into absolute specifics, but I would tell you that it's not unreasonable to expect that.

Okay.

And I would repeat that, you know, we're off to a very strong start this year and I also say just a little bit about the fourth quarter again.

The strike on the west coast plus, you know, some specific one-time events made the fourth quarter volume look a little different than our ongoing momentum, although it was very, very close.

So we're talking about tenths of a point here.

But we are very bullish about the future and I think what Frito has done and Al of his team have done a really good job and you can see it in the marketplace today on Lay's.

Right.

They're coalescing behind the big brands as it relates to the core and that is obviously a strategy which we haven't done recently and it's paying off dividends and at the same time, we're introducing, you know, specific niched products with a different kind of advertising marketing merchandising plan that really works for those types of products.

So I think that that effort will pay off big dividends in 2004.

Okay.

I appreciate it.

Thank you.

Jeff Kanter, you may ask your question.

Please state your company name.

Prudential Securities.

Good morning, everybody.

Indra, how much are you spending on information technology and BPT in 2004?

Maybe I missed that number.

I didn't give you the exact number for just BPT in 2004.

Jeff, we're working through the details.

In terms of total information technology, the numbers are in the divisional plans we hold very little in the corporate and unallocated line.

But in 2004, BPT investments are likely to be somewhere between, you know, the $55 to $70 million range.

Okay.

It seems though that, you know, there's a plenty -- listening to Al there's plenty of momentum in the business.

It seems like what you're doing when you take into consideration your guidance for the quarter, it seems like you're reinvesting some of that momentum, taking a majority of those costs in the first quarter, is that fair, is that the way you're thinking about it?

I wouldn't say a majority of the costs.

It's just that in the second -- I'm sorry the third and fourth quarters of 2003 is when the teams really started coming together and what happens at that -- you know, they ramp up and 2004 because they now fully staffed but the most important thing, Jeff, is that in Q1, we are lapping the sale of the Mission Pasta business, which really, you know, affects the growth rate by 2.5, 3 points because the first quarter is a small quarter and the gain on sale has a much bigger impact in the first quarter.

Okay.

Fair enough.

Okay.

And maybe Gary could hop in for -- very quickly.

I mean, there's -- we haven't heard boo about, you know, Quaker Foods North America in over a year.

It's never mentioned in presentations or conference calls.

The business was down, volumes were down 5%, you cut marketing, which operating income was up 10.

I mean, is it this -- are you -- are there plans to address it at Cagney, because this kind of radio silence about Quaker Foods continues to suggest to many that, you know, this will one day be sold.

Can you comment on that at all, Gary?

Yeah, Jeff, I would acknowledge that Q4 was relatively tough and I'd say we had some real private label challenges.

But we did have very good productivity.

It wasn't just the marking spend cut.

It was supply chain productivity as well that enabled us to get to the profit numbers but we're more optimistic about '04.

I would tell thaw we didn't have much of an innovation pipeline in '03 like we do in '04, and you'll start to see some of that impact.

We've got more productivity to come and maybe most importantly, we are going to as the year goes on, have stronger in-store execution, really including an eye towards more competing more closely with private label.

This business continues to be a great cash generator.

It's the base equity for the better-for-you snacks in the Frito-Lay line and I think you're going to see a better '04 than you saw in Q4 '03.

Okay.

Thank you.

Caroline Levy, you may ask your question.

Please state your company name.

UBS.

Good morning everybody.

Just want to touch base on International, which really is looking outstanding.

It's only 20% of your bottom line today and I'm just wondering how you view that and I have to go back, Indra, and ask you this question every quarter, I think, but what are you going to do with your cash?

You know, how much longer do we need to wait to, you know, hear about the capital structure decision?

And is an international expansion perhaps part of the plan?

I mean, would you like to see that 20% of the earnings be higher?

Let me ask Mike to comment on the International, but Caroline, we haven't changed our position.

I believe I've said publicly and I -- and specifically in answer to your question about in capital structure, we address this on an annual basis.

In December we told you that we were going to address it by May of this year as we take a scheduled plan of activities in front of our board and we plan to do exactly that.

There's no other message being sent, other than we're going to carefully look at our capital structure.

I would also say that as Indra made comment in her remarks, we think we've returned a lot of cash to our shareholders last year through a combination of dividends and share repurchase and I can't think of a better time to do share repurchase than today, given the current price of our stock.

So there's no message there and we will come back and it will be no later than May of this year.

As far as International, we couldn't be happier with the performance of International and we have aggressive, but realistic growth expectations for international and Mike, maybe you can share some of those thoughts.

Good morning, Caroline.

Hi, Mike.

I think if you go back and look probably for the last 10 or 12 years, PepsiCo has been investing heavily in international, both in people capital and I would say focus and as I chatted with our board of director last month, in fact, if I go back and look on beverages and food since 1990, we've tripled our sales in International and quintupled our profits, which is a pretty good performance but I think we're just scratching the surface.

As you said, we're only about 32, 33% of PepsiCo sales and a little better than 20% of the profits.

Some of that is driven by joint ventures but certainly as I benchmark us against other large multinationals and consumer products, the International business in my mind should certainly be north of 50%, but when and how we get there is a different question.

I think in the long run that's our vision and what we'd love to see.

Frankly in the -- you know, kind of three-year horizon, we've, I think consistently, said we want to grow at the twice the rate of North America.

We've been growing at the twice the rate of our other International peers and in fact, we're actually get getting to be a pretty scale business.

We're the 8th largest by my count and he expect this year we will move up to number six on the rate and I still think we've got a number of things going in our favor in International.

First and foremost, we've got very solid business in the UK and Mexico, which is the foundation for our portfolio, which gives me a lot of confidence that we can be consistent and in the balance of the portfolio, I think we've got significant growth opportunities in places like India and China, particularly China had a fabulous fourth quarter and we've also got significant margin expansion in the balance of the portfolio potential.

So I'm very bullish.

We're off to a terrific start this year.

You know, one period doesn't a year make or one month but we've already got double digit growth in cases and in volume on both the snack and the beverage side in January.

So we're off to a terrific start.

I expect we'll have a very, very strong year this in International.

Thank you so much.

Christine Farkas.

You may ask your question.

Merrill Lynch.

I have three questions related to the beverage segment.

Firstly, could you give us a little bit more color on the strength in Gatorade?

I believe you were lapping a strong quarter in 2002.

Can you comment on performance perhaps by channel and if you achieved price growth in the quarter?

Secondly, what's driving the beverage volume growth in Latin America?

Can you comment on trends in Mexico and Brazil?

Was this due to changes in package sizing?

And finally, really a company-wide question.

With your planned marketing and support behind existing and new brands in 2004, what kind of increase do you expect to see in your marketing expenses?

Thank you.

Gary, do you want to --

Yeah, Christine, this is Gary.

On Gatorade in Q4, it was absolutely an outstanding quarter and you're right, we were lapping a very big '02 Q4.

And we need to remember that Gatorade has a very significant presence in unmeasured channels and I think it's almost half of the business.

The very, very strong double digit growth in unmeasured channels like Wal-Mart and Club stores was a very key driver and what happened there was we put some more emphasis on off-season merchandising and distribution and it really worked.

And that was the key driver for our Gatorade performance.

Did you get price growth in the quarter?

We had a very good spread between our volume and our profit.

Great.

Thank you.

Andrew Conway, you may ask your question.

Please state your company name.

Hold on a second, Andrew before we go.

We didn't finish Christine's question on Latin America.

Sure.

In beverages.

I'm actually feeling very positive.

I was just down in Venezuela last week.

In the fourth quarter in particular, we saw significant strength in our beverage business in Venezuela.

Brazil this a terrific year last year.

We had really on product innovation, Christine, it was Pepsi Twist with real lemon juice in the product and we marketed it in a very innovative way and we actually got some significant increased pricing out of that as well, which was very positive for our business and in addition, Argentina had a good quarter.

So I would tell you in terms of South America, I think the macros are improving and I'm feeling relatively good about both our snack and beverage business outlook for South America this year.

In terms of Mexico in the fourth quarter, we continued to see some improvement but I'm seeing even more improvement in January where we were up mid single digits in case volume.

I think we've got more work to do in that market but I'm feeling good.

I think our strategies are working.

We tried to reestablish the right value equation after competitors changed the value equation from historical levels last year.

We feel good about where we are from a value standpoint.

We've got a great promotion going on right now around brand Pepsi in Mexico and we've got some big power of one ideas.

So I think we're off to a solid start in Mexico and, you know, I think the economy is going to be okay this year.

So I -- you know, I think we're in good shape.

Andrew.

Great, thanks.

Steve.

Two-part question on first -- first on Frito.

I was curious, Steve, if Al could give us his perspective on revenue per pound growth for '04, 2% plus last year on a flattish trend in '02.

Does he see, you know, maintaining that rate reasonable, is there opportunity on, you know, through mix or improved management of depth of promotional spending to provide further leverage on the portfolio?

And then a question for Gary, the fourth quarter was among the most spectacular leverage quarters in North America that I've ever seen and I'm kind of curious, Gary's feel on CSDs on whether he thinks a fall economy whether we're going to see a broader stabilization of consumer trends in channels which is kind of a macro question, but secondly, I'm curious, Gary, whether you think that the growth in diet CSDs is bringing in new users into the category or are you seeing more consumers switching from sugar to diets?

Al, you want to take the first one?

Andrew, on pricing, price mix realization, I think history is a good indicator of what we will be able to see in the future.

The one thing that I can share with you is we're getting better and better at price mix and volume balancing.

Learned a lot over the last couple of years and I expect those it continue to do well in that area.

And I would just add, you know, your question, Andrew, was I think had a bit of a negative tone at least I interpreted, because in the fourth quarter of last year, versus the fourth quarter of '02, we were not rolling over flattish revenue to volume and in fact, we had a very good fourth quarter against a good fourth quarter '02.

So this is -- you know, this is a sustainable effort by Frito-Lay and I think they did a terrific job all year but maybe even stronger in the fourth quarter.

No negative tone intended, Steve, purely intonation.

Andrew, this is Gary.

On CSDs, you know, we've got a huge base, you know, a huge category and we do expect to see, you know, small percentage growth but we do expect it to be positive.

We really believe that's a function of pretty significant packaging innovation going into the marketplace, things like 8 ounce cans, fridge mate, different sizes and of course an acceleration in diet trends.

Our diet portfolio is up double digits in Q4.

We do see switching from regular CSDs into diet but we see more consumption with diet users as well, if you think about a product being on trend, no carbs, no calories, no sugar and great taste with great brands, so we think there's some natural momentum there and we're going to accelerate that by using more resources in our portfolio because we've got a little wind at our back in this piece of the beverage business so we expect that's going go a big driver of CSD growth.

On the other hand, we will be as Steve mentioned, really focusing a lot on our core Pepsi business and we feel very good about the momentum we've been able to generate starting in Q4 and continuing here at the beginning of the year and that's really all about a system focus, just like on Lay's potato chips.

Our system is extremely energized about our biggest brand and we have a new advertising campaign to go along with the increased, say, space and merchandising from the system and the new campaign has gotten very good marks and it really marries our image with our functional benefit, which is really telling people that nothing goes better with food than Pepsi Cola.

Thank you, gentlemen.

Eric Katzman, you may ask your question.

Please state your company name.

It's Deutsche Bank.

Good morning.

I have two questions.

I guess the first one is I guess more from Steve's perspective.

In terms of the inflation, it seems like the only place in the world where inflation doesn't exist is at the Fed itself.

I just kind of wondering what's your feel whether it's basis risk on corn or transportation cost and how the company kind of manages through that in 2004 and then the second question, I guess with the -- you know, the SEC becoming more active today in terms of looking at either promotional payments or end of quarter loading, how do you think that just more broadly not necessarily PepsiCo, but more broadly how the industry kind of deals with what appears to be, you know, more legal action against kind of managing numbers and quarter loading?

Two good questions on inflation it's obviously something that impacted us to some degree, particularly at Frito-Lay last year in oil and fuel.

We -- right now looking forward, as best we can and with the number of our positions covered for the year, we feel that we're -- we've got it under control and that we're probably at least in the North American businesses, and this is specifically Frito focused and I will let Al and Dave talk more about it.

We look like we're probably flat on a procurement basis.

And that actually, you know, indicates a little bit of inflation because as you probably know, as you watched us over the years, we're able to pretty much manage a decrease in procurement costs, but next year we think it will be flat, but all in all, that's pretty controllable and we -- at this point we feel pretty comfortable with it, given a lot of our biggest positions are covered at least part of the year.

Let me ask Al or Dave to comment a little bit more on that.

And I will come back to your second question.

This is Dave Raider.

As Steve mentioned, we obviously have a world-class purchasing organization that's really focused on looking for opportunities to manage over the long-term our raw material costs as well as our energy costs and other input costs into our business and for this year, we have a -- the bulk of our costs for raw materials are already locked in and as Steve said, we're projecting that the total raw material cost will be about flat.

There will be some increases in oil costs and there will be decreases in other areas but we're comfortable that we have our year focused on what our inflation will be and we can manage it.

And to your second question on SEC investigations, there's no question that the focus on all consumer products companies, both manufacturers and retailers, has increased and we've obviously gone back and looked at our practices and feel very comfortable that we're operating both within the letter and the spirit of the law.

All that said, we are reinforcing the training with our people at every level in the organization.

And we feel that this extra scrutiny is probably a beneficial thing long-term as well as short-term and I think probably most other manufacturers probably look at it the same way.

Steve, do you think just as a follow up, do you think that this kind of leads to maybe a little bit more volatility in kind of quarter-to-quarter results versus, you know, the history where the industry clearly did, you know, trade load from time to time to make numbers and if we kind of are forced not to do that, does a traditional highly predictable industry just become a little less predictable?

I can't answer it for other companies.

I can answer it for ours.

I don't think it's going to make any difference in the practices and in the vulnerability or predictability of our business.

We're a DSD company.

We're in the stores, you know, in some cases every day and, you know, we manage our inventories accordingly as a DSD company.

So there -- you know, the decoupling of our inventory in the pipeline is very different for a DSD company than it is for a warehouse.

A majority of our business in North America is DSD and so for us, we really don't -- we don't see any difference.

Okay.

See you at Cagney.

Thank you.

John Faucher, you may ask your question.

Please state your company name.

Yes, J.P.

Morgan and I think as of this minute it's good afternoon, everyone.

Indra, can you talk about working capital?

As I look at it this year, probably wasn't as good as you -- a year for working capital as you've had in the past.

Can you maybe give us an idea, particularly on the receivables, what you see and also as you look at this deferred tax impact, given your tax settlement?

Thanks.

You want it take that?

John, this is Peter Bridgman.

Hi, Peter.

Hi.

Let me just take both of those areas.

On the accounts receivable, we actually continued to have very good performance I think in managing our collections.

What you saw in 2004, there's a 12% increase in the total receivables but remember, we had 10% revenue increase.

That accounts for most of it.

The other piece is that on our International businesses, our growth in Europe was strongest and there we tend to have slightly longer credit terms than elsewhere in the world.

So I think overall on receivables we continue to focus on that very closely.

And on the tax line, there were a number of changes between income taxes payable and deferred taxes and that was a result of the tax settlement that Indra talked about.

We settled some issue with the IRS.

We made a payment in the fourth quarter as part of that settlement and there's an another piece that we would make in the beginning of 2004.

Great.

So does that mean as you look at your Latin business, are you basically saying that terms are much shorter there --

That's right, I mean, it's -- it's a lot of the business in Latin America is cash basis, whereas if you look in Europe, we tend to be -- it could be 30 day terms to 45 day terms.

It's a receivable mix issue?

Right, rather than a quality of receivables issue.

Thank you.

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

Sanford Bernstein.

Good afternoon, everyone.

A question about Tropicana.

Things seemed to pick up a little bit in the fourth quarter.

Do you think you're turned a corner with this business at this point?

Yeah, I think that we have.

I'd say '03 was the beginning after turnaround where we got a lot of fundamentals right and it did start to really show up in Q4 where we had significant share gains in a category that's been somewhat challenged, particularly by the carb interest of consumers.

But I do believe that we've got a very strong base now.

We've got our pricing architecture in a better place.

We've got our instore execution in a better place and we've got some excellent innovation that's hitting the market now led by our essentials line with products like our light and healthy low carb, lower carb, lower calorie products.

So yes, I do think that we did see the beginnings of a pretty good turnaround toward the end of '03.

Great.

Thanks.

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

Mr. Spillane, your line is open.

Banc of America Securities.

Good morning.

And I'd like to ask about the cash contribution on pensions.

I understand that we've got a number for 2004 but could you give a little -- should we expect that contribution going forward, you know, '05 and in the out years and kind of what your view is over that over a longer time period.

Thanks.

As we mentioned to you in our script, basically our goal is to fund our qualified pension plans on an ABO basis.

That's really to keep those in 100% funded basis, our qualified plans.

Clearly the amount of pension funding we have to put in is a function of how our portfolio behaves and the interest rates.

So if interest rates go up, your discount rate goes up and therefore your liabilities go down and if the equity portion of your investments do well, then you've got a gain.

So right now what we have is a place holder for $400 million and that's what we put into the model year after year and then we true it up as the year goes on and we see what the interest rate assumptions are and the performance of our portfolio.

Does that conclude your question, sir?

Yes.

Thanks.

Marc Greenburgh, you may ask your question.

Please state your company name.

Deutsche Bank.

Good afternoon.

Indra, I was wondering if we could talk about the operating cash flow target that you laid out of greater than 10%.

It looks like a conservative number in light of EBIT coming in next year.

It looks at about that level and as I understand it, your cash contribution to pensions is actually declining $100 million year on year, so make you can talk about some puts and takes in that OCF number.

And as a corolary to that, assuming your cash flows come in higher, can we start thinking about higher levels of share repurchase in '04?

Mark, the most important thing is, you know, you have to be careful because we have tax payments that have to be made.

Our cash taxes, if you look at the evolution of cash taxes, they've been increasing year after year at a higher rate than our earnings.

So if you start factoring the increase in cash taxes, you will understand why the 10% plus growth in cash flow is a very reasonable number.

Now, let's turn to -- if we have increased operating income and therefore a higher cash flow, as we mentioned in this script over the last couple of years, we've been very good at returning pretty much all of the cash flow we've generated back to the shareholders through share repurchases and dividends.

Going forward, we're going to go to the board with recommendations on share repurchases, dividends and all the stuff related to capital structure.

And as we mentioned to you in our December call, we will be back to you once we have had that review with the board as to exactly what our program is going to be going forward.

Just to clarify the cash pension contribution did decline $100 million year on year?

Yes, that's the plan right now.

Thank you.

Neil Goldner, you may ask your question and please state your company name.

Actually, my question has been answered.

Thank you.

Bill Pekerielo, you may ask your question.

Please state your company name.

Morgan Stanley.

I had two follow-up questions just to clear up some of the things that were said earlier in the call.

The first one is there's some confusion out there on your Q1 guidance.

If you can talk about an apples to apples growth rate.

Because there's a consensus out there of 46 cents.

It's a hybrid that doesn't have all the options in and out and only a couple of analysts out there.

So if you can talk about an apples to apples growth rate in Q1 and the second part was more clarity on the $50 to $75 million BBT spending in '04.

Bill.

Can I take that, please?

Yeah.

First, let me talk about Q1, Bill.

You haven't yet received the restated quarterly numbers, restated for option expense by quarter.

Once the numbers are released, our current assessment is that Q1, 2003 base will be about 39.5 cents.

So if you factor in our guidance of 43 to 44 cents, it runs at a growth rate of about 10 to 12%.

Now, you've got to be very careful.

Q1 is a very small quarter and it has in it the Mission Pasta gain, which really dampens the growth rate by 2.5 points.

So if you add that back in, the Q1 growth rate is really 12.5 to 14.5%, which is a very, very strong quarter.

Now, let me talk a bit about the BPT expenses and the pension expenses because they both go to together in terms of what we refer to as the increase in the corporate unallocated line which I said was between $70 and $90 million in 2004.

If you go back to our December 2nd analyst meeting, we talked about a total pension increase at the corporate unallocated line of over $100 million.

And a significant amount of it, about $70 million plus hits the corporate unallocated line right in Q1, so the $70 to -- I'm sorry, $70 million hits the corporate unallocated line for the year.

So we've got a fairly major increase in pension.

On top of that, if you now factor in the BPT expenses, the increment in the BPT is between $10 and $20 million.

We spent about $45 to $50 million in 2003, so the net increment for the BPT is only $10 to $20 million.

And our goal, as we mentioned, is to cover both the pension costs increase and the increase in BPT cost within the overall EPS guidance we provided you for the year, which is growth in the low teens or guidance of $2.24 to $2.28.

Thanks for clearing that up, Indra.

Nick Booth, you may ask your question and please state your company name.

Wellington Management.

Actually, I have five questions but I'm only going to ask one.

And that is on Medicare legislation.

Any impact in 2004?

Medicare -- Peter.

This is Peter Bridgman.

We're running the numbers.

At this point, we feel it's going to give us an upside of about $5 to $10 million for 2004.

That's all.

Thank you.

Thank you.

This concludes today's call.

I'll turn the call back over to Steve Reinemund.

Thank you, sir.

Thank you and we appreciate the time that you've given us this morning.

I mow we ran a little bit over but we wanted to make sure we had time to answer all of your questions.

I hope coming out of this call you understand how confident we are about the year ahead and we're off to a terrific start coming out of what we think is probably one of the best years that we've had in a long time in 2003.

And that terrific year is really being driven by a balanced volume and revenue growth across all of our businesses in North America as well as International and we expect to see the performance very much in line with our long-term guidance and frankly, based on the early start, I'd be disappointed if it wasn't at the high end of that.

So thank you very much and we would welcome any individual questions you might have.

You can certainly funle them through Jack /KAL /HAPB.

Thank you and have a great day.

That concludes today's conference call.

Thank you for participating.