百事 (PEP) 2004 Q4 法說會逐字稿

Good morning and welcome to PepsiCo's 2004 year end earnings conference call.

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to find disclosure of reconciliation of the non-GAAP financial measures that may be used by management while discussing PepsiCo's financial results with investors and analysts.

I would now like to turn the call over to Mr. Jamie Caulfield, Vice President of Investor Relations.

Sir, you may begin,

Thank you, operator.

Thanks to all of you for joining us this morning.

Welcome to PepsiCo's 2004 year end conference call.

Today's webcast includes a slide presentation and can be accessed at our Pepsico.com site.

It's also being recorded and will be archived for 90 days.

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

Following the prepared remarks we'll open it up for questions.

Now I'll turn it over to Steve.

Thanks, Jamie, and good morning to all of you.

Thank you for joining us this morning.

I appreciate the opportunity to discuss PepsiCo's 2004 performance and offer some of my thoughts on 2005.

As I'm sure you saw in this morning's press release we had a very strong Q4 to finish out what has been a great year for PepsiCo.

Our businesses combined to turn in truly outstanding performance for the full year.

We had very strong results both on the top and bottom line.

Our worldwide snacks volume was up 5%, worldwide beverages grew 7% and revenue was up 8%, while division operating profit was up 12%.

Our core earnings per share grew 13% so we were able to generate as you can figure a point of financial leverage below the division operating profit line.

And at the same time we were able to absorb a sizeable pension expense increase and make some very important investments for the long-term health of the business.

For instance, our investment in business process transformation.

And the launch of the Smart Spot program, both of which were funded at the corporate level.

What's notable about our financial performance this year is the strength across our entire business.

Frito Lay North America had three-points of volume growth, two-points of positive price mix and a 7% operating profit growth.

PepsiCo Beverages North America had volume growth of three-points, four-points of positive price mix and very strong 13% operating profit growth.

Quaker Foods North America had 3% volume growth, one point of positive pricing and positive profit performance despite raw material inflation pressures and stepping up of our A & M investment.

And our international business had a truly outstanding year with 8% snacks growth and double-digit beverage growth, 14% net revenue and profits increasing 25%.

And they contributed over 40% to our total division profit growth last year.

Let me highlight some of the achievements of each of our divisions.

I'll start with Frito Lay North America's top line growth.

The division posted 3% volume growth as I said before.

And this is right in line with the historical trend for this business and puts Frito at the top of the industry performance in North America.

The volume performance was a result of bringing innovation in the marketplace, by being responsive to shifting consumer tastes, by effective advertising and continuing to demonstrate the exceptional power of our direct store door delivery system.

Frito completed its manufacturing network consolidation.

And you may recall we undertook the first phase of this at the end of 2003 and we completed the consolidation in the fourth quarter of 2004.

We now have an optimized network cross North America which will provide P & L benefits going forward that we'll use to reinvest in the long-term health of that business.

Frito delivered solid bottom line results despite facing the toughest input cost pressures the division has seen in my memory, and that goes back a ways as most of you know.

The business absorbed over $50 million of input costs, inflation this past year, principally in cooking oils and energy and they still improved margins by 30 basis points.

And finally the team overcame a challenging year in Quaker snacks.

And most of these issues are behind us now and we have seen a sequential improvement in the business as 2004 has progressed.

And you should expect to see steady improvement in this portion of the business as we move forward.

And now the North American beverage business.

We're very pleased with the strong performance in an always competitive environment.

Clearly having our product portfolio more heavily weighted towards faster growing non-carbonated beverages has been an advantage.

But we leveraged that advantage with product innovation, great marketing and terrific execution by our bottling partners and we turned in industry leading profit growth while maintaining our A & M investment levels.

We posted positive growth in carbonated soft drinks behind our diet portfolio and had strong volume gains in both trademark Mountain Dew as well as Sierra Mist.

The relaunch of the Diet Sierra Mist as well as a repositioning as Sierra Mist Free in the quarter accelerated our growth in this brand.

And has continued to gain share against the branded competition.

And we had very good success with our two limited time only products in the quarter.

Mountain Dew Pitch Black and Pepsi Holiday Spice.

On the non-carbonated side we had double-digit growth in Gatorade, Aquafina, Propel Fitness water and our AMP and Adrenaline Rush energy drinks, and we got a significant boost from the launch of our Tropicana juice drinks.

Gatorade continued its track record of strong innovation with launch of the X Factor early in 2004.

And this line was a resounding success surpassing our plans both in terms of sales and it's incrementality to the overall Gatorade franchise.

Now the Tropicana drink launched last year was also a big success, driving a 12-point share gain in this category and it continues to post solid growth.

And while the chilled juice category was soft in '04 our chilled Tropicana product posted positive growth and gained share in the category last year.

Now turning to international.

As you saw in this morning's release this division capped off an outstanding year with another great quarter.

It's difficult to highlight any one aspects of the business driving this performance because we're seeing remarkable growth across both beverages and snacks and in -- and in just about every geography around the world.

We've talked to you in the past about the role of international being PepsiCo's growth engine and I think they've certainly played that role very effectively this past year.

They achieved a very significant milestone in 2004 as they became PepsiCo's largest division on a revenue basis.

As each of our international markets reaches scale and gains larger scale we're seeing very healthy improvements in margins and profitability.

Now let me spend a few minutes talking or a few comments on the operating performance in the quarter.

And as you can see our performance in the quarter was right in line with our full year results.

Division operating profits were up 10% in the quarter and that's lapping 15% growth in the fourth quarter of 2003.

And as with the full year results the performance in Q4 was very balanced cross each of the divisions both in terms of volume as well as revenue growth.

Now let me turn to Indra to review the cash flow performance, some of the corporate items, as well as a brief look at 2005.

Indra?

Thank you, Steve.

I'm very pleased with our cash flow performance for the year.

We grew cash from operating activities by 17% to over $5 billion and after net capital spending cash flow was up 22%.

The growth was driven by the very strong division operating performance, minimal incremental investment in operating working capital and good capital spending efficiency and discipline.

Finally we absorbed as a 20% increase in cash taxes and contributed almost $460 million to our pension plans in 2004.

Our qualified pension plans in the United States remain fully funded on an accumulated benefit obligation basis.

Let me now just take a minute on earnings per share and walk you through the numbers in order to clarify what core ongoing EPS and how you relate it to reported EPS.

For the full year we're reflecting non-recurring tax benefits of $304 million or $0.18 a share.

Of this amount $38 million is presented as a tax benefit from discontinued operations and relates to settlement of a tax issue resulting from the restaurant spin-off.

Offsetting the tax credits is a charge related to the Frito Lay North America plant consolidation, which amounts to $150 million or $0.06 a share.

We went through this in some detail on the Q3 call.

At that time we estimated the charge would be 160 million so the actual amount came in $10 million lower than the original estimate.

And we're happy to report that the consolidation is right on plan with the plan completed and no disruption to our business.

Importantly, we have also had good success in assisting those employees impacted by planned closures in identifying and securing new employment opportunities.

We had similar tax items and charges including if the first phase of the Frito Lay North America plant consolidation last year.

Each amounting to $0.06 a share.

So if you exclude these items from the reported EPS in each year you arrive at a core EPS growth rate of 13%, versus the reported EPS growth of 19%.

Turning now to the quarterly EPS and using the same format, you can see the reconciliation from reported EPS in the quarter of 10% to core EPS growth of 12%.

It gets a bit complicated as the earnings per share amounts are equal on a reported and core basis in both years.

But the growth rates defer and this is because the growth rates are based on unrounded numbers.

So that wraps up the review of 2004.

In summary, Q4 was a great fourth quarter; capping off a terrific full year.

We had balanced growth across all our businesses driven by powerful product portfolio, superb innovation and great execution.

Our cash flow performance was terrific and we made major investments for our long-term success.

All in all, we feel very good about 2004.

Let me now turn to our 2005 guidance.

As we mentioned in the release, 2005 will have a 53 week.

As we take you through our guidance we will generally be talking in terms that exclude the impact of the extra week so that you have a good comparison.

We've also provided reconciliations in the slides and on our website to the 53 week numbers.

So for 2005 you should expect to see mid single-digit top line growth, both in volume and revenue, approximately 8% division operating profit growth, low double-digit EPS growth, and operating cash flow net of capital spending of over $4.1 billion.

I recognize that providing division profit guidance is a departure from our practice over the past couple of years.

But I think it will avoid confusion and provide little better insight into what we expect to drive our EPS growth in 2005.

So let me start with what's underlying our 8% operating profit growth assumption.

As we look at 2005 each of the divisions has its share of tail winds and head winds.

At Frito Lay North America, the tail winds for 2005 are the P & L benefits of the plants consolidation, benefits from increased A & M as we balance our push and pull marketing model and a strong innovation pipeline.

The head wind is the P & L impact of the increased A & M spending.

Essentially the way to look at this is that we are taking the plant consolidation benefits and investing them in stepped up A & M as we've discussed before.

I would characterize Frito's raw materials cost outlook as neutral for 2005 as we're expecting a flat profile on our top input costs.

At Pepsi Beverages North America tail winds include our advantaged portfolio and strong innovation pipeline.

The head winds are an expectation that we may need to invest to maintain our liquid refreshment beverage share leadership in the face of stepped up spending by the competition, and input cost pressures principally in the area of PET resin and oranges.

In times of share performance we expect P B & A to hold or gain LRB share in 2005.

Our share performance will not be as strong in P1 based on timing of promotions in some channels and the timing of our new product introductions.

And you should also expect to see our chilled juice performance soft in the first period as our pricing is hitting the market ahead of the competition.

But again you will see the share numbers improve as the year progresses.

At Pepsi International, while we have strong momentum as we head into 2005 and we expect PI to be a net positive for the year, we must be mindful that we have some very big numbers to lap based on the strength of PI's 2004 performance.

We also expect to invest in some competitive spending on the beverage side of the business.

Finally at Quaker Foods North America, we have a solid innovation pipeline and should see a modest benefit in the raw materials front.

But we plan to selectively step up our A & M investments.

Net/net , I believe we have balanced plans for the year that, taken together, demonstrate the power and flexibility of our portfolio of businesses.

I believe the divisions should grow profits in the neighborhood of 8%, while making the necessary competitive and marketplace investments to insure the long-term health of the businesses.

We've been pleased with our recent innovation results and as you saw in the preceding slide we view innovation as a tail wind for each innovation in 2005.

Time does not permit an exhaustive review of our 2005 innovation on this call.

But let me hit the highlights behind three big themes you'll see.

The first is continued innovation behind our big brands.

At Pepsi Beverages North America our focus within CSDs is on three power trademarks where we have news behind Wild Cherry Pepsi, a relaunch of Pepsi one with Sucraluce, and we'll continue to benefit from the Sierra Mist Free relaunch.

Non-carb innovation includes a new lemonade sub-line of Gatorade, new a melon flavored Propel and the Aquafina Splash and Aquafina Sparkling introductions.

At Frito Lay, we introduced Baked Crunchy Cheetos, Doritos Black Pepper Jack and Lay's Cheddar and Sour Cream in Q4 and we will be expanding the Lays Staxx product line with new Pizza and Hidden Valley Ranch flavors in the first quarter.

In the first half we'll also re-launched two of our core brands, bringing out Nacho Cheesier Doritos and Tostitos with a new preferred taste.

And at Quaker you'll see product innovation across hot cereal, Breakfast Crave, Cap'n Crunch and the Roni line.

The second innovation team is our focus on health and wellness.

For example, our beverage innovation is focused on health and wellness such as the reformulation of diet CSDs, expansion of the Aquafina product line and the Gatorade line extensions.

At Frito Lay North America we will be launching a 30 count Smart Sport variety pack as well as new trail mix and low sugar granola bars in early 2005.

We''' also will further expand our naturals line of salty snacks.

And at Quaker much of the news is focused on reduced calorie and heart healthy products.

And the third theme is continued great marketing and promotions that highlight the innovations and leverage the Power of One concept.

The 2005 promotions begin with our Power of One Superbowl event in stores this week, followed by a 19 consecutive year of great advertising during the Superbowl game this Sunday.

Four new commercials from Pepsi Cola North America will debut during the game, two for Diet Pepsi, featuring Puff Diddy and Cindy Crawford and two for the Pepsi ITunes promotion.

Frito Lay will air a new Lay's spot directed by Spike Lee.

During February we launch our first ever PepsiCo national Smart Spot promotion.

This promotion will be featured at our largest U.S. retailers with significant point of purchase displays of many of our over 100 Smart Spot products from across all of our product categories from breakfast products to snacks to sports drinks and other beverages.

The promotional also features a national sweepstakes and product rebate and will be supported by a national trend campaign.

This promotion is in addition to the media partnership announced in December with Discovery Communications to promotion our Smart Spot program on Discovery's U.S. network for 2005.

Also this month we have two music promotions for teens and young adults.

First, the return of our very successful Pepsi ITunes promotion, only bigger and better.

This year we're offering 200 million free songs from the Apple ITunes music store.

Twice as many as last year.

Winning codes appear under caps of single serve sizes of various Pepsi Cola, Mountain Dew, and Sierra Mist products.

And Frito Lay is launching the Doritos INNW, that is, "if not now, when?" campaign, featuring interactive website, www.innw.com where teens can win unique prices, get free down loads and a lot more.

This promotion supported by television, radio and print media.

More details on this campaign to come later this month.

That's all for the divisions.

Below the division operating profit line we have a balanced investment profile on the corporate items.

For 2005 you should expect to see leverage below the line from corporate G & A productivity, shared buy back, which we expect to be in the range of two and a half to three billion, an effective tack rate of 29.4% and guidance resulting from trimming our ownership of Pepsi Bottling Group by up to seven and a half million shares this year.

As with mentioned in the release.

As a result of buy PBG's buy back program our proportional ownership has been climbing, so we're going to start selling down our position, over several years, with the intention of ultimately returning to the strategic levels set at the time of PBG's IPO.

Offsetting this leverage will be increased investment in our business process transformation and other long-term growth initiatives, an increase in unallocated pension cost and reduced bottle equity income consistent with PBG's

2005 earnings outlook and the potential impact from our equity bottler's adoption of stock option expensing in 2005.

Let me spend just a minute on our business process transformation efforts.

Basically, we are moving to common, integrative systems based on common processes using SAP as our primary ERP software vendor.

The focus is on threading together the North American businesses with a parallel effort in international markets.

This is a multi-year undertaking that requires careful management.

And as we've said before we have dedicated some of our top executives and managers from around the company 100% to this project to insure its success.

We are pacing the project to insure that it can be managed successfully and as you can see we are funding this project within the P & L so you should not expect to see us take a one time charge or ask for a free pass to fund this initiative.

The project is progressing on plan and we will keep you informed about its progress throughout the year.

Net/net.

Corporate items should generate two points or more of EPS leverage while at the same time providing the funding for business process transformation and other initiatives that insure the long-term health of the business.

One additional comment.

I'm sure you have all seen the recent state of announcements regarding cash repatriation.

We are in the process of evaluating the cash repatriation opportunity presented by the American Jobs Creation Act.

But pending clarification of a few technical areas in the bill we are not in a position to finalize our plans.

What I can tell you is that the maximum amount we will be permitted to repatriate is $7.5 billion.

And the cash must be repatriated in 2005.

We estimate the rate of tax on any cash we repatriate to be approximately 6%.

But this is one of the areas where some clarification is still needed.

And we expect that we will be able to finalize and announce our plans some time in Q1 or early Q2.

So approximately 8% division operating profit growth, two points or more of corporate leverage, that yields a targeted core EPS growth of lower double digits.

Using our 2004 core EPS of 2.32 as a base our 2005 guidance is of core EPS of at least $2.55, which is a growth rate of 10% plus.

We are comfortable with the current first call consensus but would not encourage you to take your estimate any higher at this point in the year.

On a reported basis our 2004 base is 244.

The reported results in 2005 will be affected by the impact of a 53 week.

We are estimating the impact of the 53 week to be $0.04 to $0.04 per share.

Our guidance of at least 255 is based on the 52-week and we ask that estimates post-to do first call also be on a 52-week basis to avoid any confusion.

I believe all your current estimates are on this basis.

Adding the impact of the 53 week to 2005, we expect our reported EPS to be at at least 259.

Keep in minds that this guidance does not reflect any tax impact that the repatriation of cash might have on our 2005 reported EPS.

With that let me turn it back to Steve.

Thanks, Indra.

And, in summary 2004 was we believe, a terrific year, that our associates around the world should be proud of.

And as we look at 2005, while there are clearly challenges on a number of fronts, I believe that our plans have a balanced risk profile and I feel comfortable in our ability to deliver on the targets that we've shared with you today.

And I'm equally as confident that at the same time we're delivering on this year's commitments we'll continue to invest behind our brands and our capabilities to insure long-term health of our business.

So with that let me open the floor to questions.

[Caller Instructions].

Our first question is coming from Bill Pecoriello with Morgan Stanley.

Please go ahead.

Good morning.

My first question was just on the Frito Lay North America revenue of a pound up 3%.

And we've been seeing in the scanner data the price down.

Has there been any change in behavior at retailers in terms of stepping up investment in the category that's driving that?

Good morning, Bill.

Not that I'm aware of.

No, I think fourth quarter was -- was pretty consistent with what we saw during the course of the year.

Okay.

And then the second question is on the PBG gain that you referred to when you talked about reinvesting back in the business.

Are you going to be reinvesting that gain back into the North America beverage business?

And along those lines, are you building in offensive spend in anticipation of the Coke stepped up spending or is this a pool of funds available in case that spend turns out to be more promotional than media basis?

Bill, this is Indra Nooyi.

We're not giving you guidance on exactly what we are going to be spending by line of business.

But I will tell you that in our North American beverage business we intend to be fully competitive.

And our 8% division operating profit growth guidance assumes that we will remain fully competitive with any marketplace spending by our principal competitor.

And the PBG gains as I said in my remarks is going to be used to fund business process transformation initiatives and other corporate initiatives we're going to undertake to insure the long-term health of our business.

And I might just add, that slide that came up during Indra's comments on the investments and sources might be helpful 'cause that's really what we are saying.

We are talking about the below the line expenses in investments.

Okay.

Thank you.

Thank you.

Our next question is coming from Caroline Levy from UBS.

Please go ahead.

Good morning, everybody.

I was wondering if you could comment, in the context of the P & G acquisition of Gillette and in the context of what you've been saying for a long time about the Power of One and your -- you know, your importance to the retailer,

whether this makes you feel any more desire to get bigger in the U.S., obviously within health and wellness and high growth areas, if you could just comment on what the retail environment feels like and what you think your competitive advantage is or needs to be?

And if I might, on a separate note, if you could walk us why fourth quarter margins were so strong in the U.S. beverage, a bit of a surprise and is that sustainable that margins can go up despite some raw material cost pressure, particularly PET.

Carolyn, let me take the first one, and I'll ask Indra to take the second one.

Really the merger talks between P & G and Gillette really haven't changed our opinion of what's going on in the relationship with our customers.

But as we've talked about it several times on these calls, increasingly being able to go to our customers of all different sizes with one voice to talk about all aspects of their business from driving the top line, to bill paying and to logistics and supply chain, is a huge advantage.

And obviously the scale, bringing scale to these discussions is very helpful.

There's an awful lot going on in the retail trade to become more efficient and the retailers are making investments and they're expecting their partners to make investments as well.

So we do think that this whole idea of working together Power of One has been helpful to us.

We think we've made great progress there but we still think that within the portfolio that exists today in PepsiCo, we have a lot of opportunity to continue to get even better.

And why don't you take the second one?

Yeah, Caroline.

Let me talk about the other question you asked about Pepsi Beverages North America strong operating performance in Q4.

There're real two factors.

The first is that if you look at the mix of products that P B & A sold in Q4 it was a favorable mix towards higher margin products, packages and channels.

For example, our Gatorade sports drink, a higher margin and so -- and a full revenue so that helped us.

Tropicana juice drinks also helped us and diet soft drinks grew strongly which also helps us in our margin and our revenue.

The second is the A & M spending.

On a similar basis, as I mentioned in the script and Steve mentioned it, our A & M expenses were up, but year over year as you look at the lab versus Q4 of 2003 for P B & A the A & M expenses because they curve during the year, and the way we manage the curving, the way the accounting is done on the curving, the Q4 expenses were lower than Q4 of 2003.

And that's why you have the double benefit from the product mix and the A & M, lower A & M expenses in Q4.

And so that sort of margin expansion's unlikely to recur in the first quarter?

I'd focus on the full year margin, Caroline, as opposed to Q4 number.

Thanks so much.

Pleasure.

Thank you.

Our next question is coming from Eric Katzman with Deutsche Bank.

Good morning, everybody.

Good morning.

I guess the first question I would have is in the -- the press release you didn't really mention any kind of rebound in Rold Gold which I would have thought occurred given the , I guess the fact that the low carb diet trends seem to be kind of behind us.

I was wondering if you can comment on that and I will follow up with another question?

Well, Eric, actually Rold Gold is not performing up to our expectations yet and even at the end of the year it was below a year ago.

It did pick up somewhat during the course of the year.

And we think there's a lot of opportunity to grow this category as people get a better balanced focus against health and wellness.

Cause clearly although pretzels have high carb levels they have lower fat levels and I think as -- as people start looking at their diets in a more balanced weigh this category will come back.

But we didn't focus on it in the second half of the year and I do think that there's opportunity and frankly you asked a great question because it's my favorite product in the portfolio, so I'll use your question as a way to go back to Frito and give them a little more encouragement.

And then I guess Indra, looking at last year's annual, it looks like on the pension that your ROA and discount assumptions are very conservative, at least compared to the food company's I follow.

And yet you're saying with a fully funded pension that pension benefits should still cost you year over year.

I'm wondering, one, why is that?

And, two, is the cash cost, I assume that's going to be less year over year?

The most important thing is that we upgraded our mortality tables and we implemented all of them, are implementing them in 2005.

And the impact of all of our revision and the assumptions result in a higher pension expense.

The second is that and as you know with pension accounting any losses, historical losses are feathered in.

And so, you know, those sort of hit the P & L as you go along.

Okay.

But you, like as you mentioned, I mean you guys did a great job in terms of cash flow, even with the 458 million, is that going to be less, you expect, in 2005?

Well, it's actually a function of actual asset returns and changes in interest rates.

But at this point what we are planning is to keep funding this plan around $450 million in 2005.

That's the placeholder we have right now.

Okay.

Thank you.

Thank you.

Our next question is coming from Jeff Kanter from Prudential.

Please go ahead.

Good morning, everybody.

Steve or Indra, does -- do the share repurchase activities of PBG and PAS influence your share repurchase?

And secondly as their biggest shareholder would -- you wouldn't you want them to just pay out dividends rather than share repurchase where you don't have to keep on selling stock every once and again like you are doing now, so I would be curious on your thoughts there?

And then kind of going forward does the consolidation of snack ventures Europe make you, give you a little bit more flexibility to perhaps leverage up your balance sheet a little bit and make some acquisitions in Europe that maybe you were constrained to do before?

Thank you.

Good morning, Jeff.

As Indra said in her comments, the share repurchase by PBG is in fact the precipitating factor causing us to sell off our position.

And they are a public company.

They have -- they're independent and they make those decisions.

So, you know, our desire in that regard really is not the precipitating factor.

So, you know, if you make that assumption that they're conduct connected that's exactly the assumption we wanted to make sure you understood, that that is the reason for doing it.

Secondly, on the SVE consolidation, clearly we had a successful business before.

It really doesn't change the way we operate the business.

It does, however, probably make it a little bit easier to make further acquisitions, although we really weren't hampered before so there's not a huge difference in our flexibility.

Okay.

Thank you.

Our next question is coming from Mark Greenberg from Deutsche.

Please go ahead.

Good morning.

Thanks for taking the call.

First I'd like to talk about market share opportunity in soft drinks in a little more detail.

Would you talk about the Superbowl's importance to the first quarter for P B & A and what kind of leverage you're getting from joint promotions with Frito?

Well, market share is always important, Mark.

The biggest event in the first quarter in terms of consumption, and quite frankly excitement, is the Superbowl.

And we've, you know, we've effectively used it most every quarter for quite sometime; as Indra made reference in her comments.

And we feel pretty good about our presence this weekends.

You can tells on Monday whether you agree, but we think that the messages we have are good once and it's a high consumption weekends and we're very optimistic about it.

One of the things a big event like this always does is, when it moves around it sort of makes it more difficult to get a read on, on your year over year performance until after the fact.

And this year as all of you know it's moved and so it's moved from one period, one accounting period to another.

And it so it makes it a little more difficult to read share numbers and everything else.

But we feel good about where we are positioned in the Superbowl and we'll, we'll have to see, you know, in a couple of weeks, how it all shakes out.

As far as joint promotions with Frito, we've been doing that for quite sometime now and we believe that particularly on an event like the Superbowl where the consumption of these two categories is so intertwined being able to bring to the consumer and to the retail partner, activities and excitement that are right on target make a whole lot of sense.

So we've been enthusiastically supportive of this and we continue to be, you know, major supporters both, on both sides of the business.

Thanks, Steve.

My follow up relates a little bit more to the market share gains, how you hold on to them versus private label after you have a big weekend impact like this.

And I thought maybe as an adjoin to that, you could talk about the development of your warehouse capabilities and what kind of a dialogue you're having with large format retailers, how important that is to have different routes to market in terms of offering, you know, the people in that chain?

Well, Mark, there are two somewhat different questions.

The second one we could go on a for a long time about and I'd be happy to have a conversation with you about it at some point.

But, you know, the first one, the Superbowl for us has always been a time for us to get excitement with the consumer.

And, you know, brands are all about creating excitement and creating a reputation with the consumer and to be relevant to the consumer.

So, you know, being able to to have all the activities associated with the Superbowl from point-of-sale to, you know, special features to advertising is all part of the whole, you know, sort of gestalt of creating a brand and we do think it has capability to sustain beyond just that weekend.

Frankly if all we were doing was spending money for that weekends for the sale of that weekends we clearly would spend less than we spend around this whole event.

It is really all about putting Pepsi, Frito products in a -- in a venue that creates a positive impression for the consumers, and the target audiences, the age of our target audiences is right dead center.

From a market share perspective that's what brands do and we think this is a good way for us to use it and we've done it pretty well in the past.

The second part of your question I'll just make, briefly make a comment and then I'd be happy to talk with you off-line in more detail about it.

But we think that the power of our go to market system is that we have multiple ways to go to market.

And we think over time the ability to move cross supply chains by channel and by customer across different ways to market is going to be a powerful competitive advantage.

You don't change on a dime, you know, across products but being able able to have that capability is important and, you know, we think over time that this will pay off dividends for, for us.

But again, I'd be happy, Mark, to chat with you more about it.

Great.

Thanks, Steve.

My friends in Germany will love that you used the word gestalt.

Thank you.

Our next question is coming from Christine Farkas from Merrill Lynch.

Please go ahead.

Thank you very much.

I'm wondering if perhaps you can comment specifically on Frito Lay, the product trends within the salty and macro snack performance during the quarter?

And given your divisional operating profit target of about 8% where Pepsi International is above average and PB & A may be below average, is the 7-8% profit growth range still reasonable for Frito Lay North America?

Christine, first the trends were pretty consistent for salty snacks throughout the year.

And we feel pretty good about the basic volume trends and it was good year for salty snacks.

At the top line and quite frankly, at the bottom line.

The issue we had from a profit perspective last year was impacted by two primary things, one was our convenient food and the challenges we've had there which, as I said are improving and will continue to improve.

And the second was input costs.

And if you, you know, sort of look at those two issues on a year -- yearly basis and you factor those back into the existing profit as reported, I think it's pretty easy to get comfortable that our long-range target for Frito Lay is a reasonable one which we expect to achieve over consistent timeframe in the future.

That's great.

And if I could follow up again on snacks in your international market, specifically in Europe, Middle East and Africa of the snack volume growth of 8% was strong, can you comment on how Walkers brands did in the U.K. and if trends have changed there since the third quarter?

Thank you.

One good thing about last year and I mentioned it briefly in my comments is that it was probably the most balanced year, it was the most most balanced year that I can remember across all of our businesses across all of our geographies and that's encouraging.

Now clearly from time to time we're going to have challenges but it's certainly nice to have a year like last year where we had steady performance.

And Walkers is a big and important business.

We have confidence that it will continue to be a strong contributors to the future.

And, you know, it was a little lower last year than it has been but, but -- but I believe that the management team there understands the issues and will get that business back to the levels that we've become accustomed to.

Thanks a lot.

Our next question is coming from Mark Swartzberg from Legg Mason.

Please go ahead.

Thanks, operator.

Good afternoon, everyone.

Steve, on Frito Lay North America, I'm hoping we can perhaps explore Christine's question a little bit more and what I mean by that is, I guess, do you believe the business is nearing a positive influxion in terms of profit growth?

And if so can you elaborate on why?

And one of the reasons I ask that is I absolutely hear you on the commodity cost situation not getting worse but it looks like the category got a lot more promotional in December and that's all channel data I'm looking at.

So it look like volumes, you know, were clearly lackluster at the beginning of the quarter.

Can you give us a sense, again, you know, not trying to get bogged down in a quarter, how do you feel about the profit growth of the business in '05 and '06?

Mark, I don't want to be hard headed about it but I think I would come back at it pretty much the same way I answered it.

First of all, we haven't seen the kind of increase in promotional activity across the entire business that you're talking about.

It certainly didn't ring true with the way we looked at our business.

The issue for -- for Frito last year was primarily in two areas from a profit perspective.

One was the convenient food issue and the second was input costs.

And again if you add those back, and I'm not asking you to do that, I'm just saying as I think about the business long-term, when we have the kind of volume we had last year with probably a little stronger price realization than we have historically gotten, or always get, it's pretty easy to get to the kind of expectations that we have for Frito Lay long-term.

However, the good news is we have a portfolio and we can -- we can manage our businesses, make the investments, deal with the challenges of input costs and still come out on our portfolio targets on an ongoing basis.

So I feel very comfortable that the profit flow through for Frito Lay North America can continue against our expectations going forward.

Now the first quarter might be a little bit more challenging than the rest of the year but even in the first quarter I feel optimistic that we're going to make progress to the bottom line.

And can you give us any directional sense, Steve, about level of profit growth you expect for the business in '05?

I think we've given it to you, you know, in the past, Mark.

If I felt that there was a change in the ongoing business, then we would talk about it because clearly I understand the importance of Frito Lay.

You understand the importance of Frito Lay to the total valuation of our company.

And frankly, you know, the disappointing thing about last year was that the performance of convenience foods, you know, really clouded what would have been otherwise a very, very impressive year and, you know, the reality is that's what happened.

But it certainly doesn't reflect, in my opinion, on the health of the salty snack portion of Frito Lay.

And on top of that, we are still committed to growing outside the core because we think that's a good opportunity to leverage our capabilities going forward and we're going to continue to do it even though we missed a beat last year on the, that effort.

Very helpful.

Thanks, Steve.

Thank you .

Our next question is coming from Phillipe Gusains (sp) from CSFB.

Please go ahead.

Good morning, [inaudible] from fixed income research , here.

Indra when you indicated you might repatriate as much as $7.5 billion this year, based on your current cash balances and your cash flow am I right to assume that you might have to issue some debt overseas in order to facilitate debt repatriation?

That's correct.

Wonderful.

Thank you very much.

Our next question is coming from Robert van Brugge from Sanford Burnstein.

Please go ahead.

Good morning, a question about A & M spending.

It looks like you're planning on stepping it up across pretty much all of the division.

Do you anticipate this is going to grow a lot faster than your top line this year and if so is that going to be the going forward algorithm or do you expect it to step back down in 2006 and beyond?

Well, Robert, I'm probably not going to answer this question as well as you'd like me to answer, it for competitive reasons, but we have stated that we are going to increase our A & M spending this year and it's completely within the financial numbers that Indra's outlined to you.

And we think it's justified and we think it's a good investment.

And I think going beyond that would probably make our operating guys feel a little less comfortable than I'd like to leave them with.

Okay, fair enough.

Then, if I may one more question on Tropicana, I mean this is a business that has had a number of challenging years.

With the commodities cost pressures next year, do you feel that you can pass on most of that through higher price increases and if so do you think that's going to hurt the volume growth?

Well, Robert, we took the price increase, you know, at the end of last year and we -- we don't have plans to increase prices in Tropicana again.

And we're hopeful that with advertising and innovation that we can get this business back where we want it to be.

But frankly, it's not performing right at this moment at the level that we would like and I would say that's something that we are actively focused on and intend to fix.

Great.

Thanks.

Thank you.

Our next question is coming from John Faucher from JP Morgan.

Please go ahead.

Good morning, everyone.

Quick question, Mike White has given a currency neutral operating market target, if I remember correctly, of 15% for PepsiCo International.

It appears in this quarter for the first time with the stabilization of the Mexican Peso that you guys are getting a currency benefit on international in the bottom line when it's been negative over the past couple of quarters even with the top line benefit.

Can you talk about how we should look at, if the Peso stays relatively stable, how we should view currency impact and if that can ends up being a positive over the next couple of quarters or the next couple of years?

Thanks.

Indra, do you want to --

John, let me just -- let me just give you sort of a sneak look at what our currency expectations are as we did our planning for next year and how we should [inaudible].

And I'm just going to give you sort of rough average rates for the year.

Basically what we assume is that the U.S. dollar to the Euro will be in the dollar 30 to $1.35 range.

The patience so will weaken to 1130 to 1160 and the U.S. pound will be at $1.85 to $1.90 range.

So, that's the rough ranges.

Basically what we are saying is the Euro and the pounds strengthen slightly.

The Peso weakens slightly.

So on balance we expect a bit of a tail ends on the four X but not as much as we got in 2004.

Okay.

Let's take it a year at a time, John, because we can't even forecast a year on currency leave alone 2006 at this point.

I don't think you're the only one that can't, so, forecast currency, so.

Thank God. [laughter] See you.

Thanks.

Our next question is coming from Carlos Laboy from Bear Stearns.

Please go ahead.

Good morning.

I was hoping you could expands on the comment you made on Walkers, what type of changes are like to the accelerate growth in '05?

And on two other international markets, could you speak to the sustainability of the growth rates that you've been having in Mexico in, in Sabritas and on the India side, the India business looks impressive.

How much of the growth over the next two to three years is going to come from increased distribution reach versus maybe adding another brand platform to Cheetos and that Ruffles.

Carlos, you've got several questions there. and we'll do our best.

I Walker's - the formula for Walkers and frankly, for most of our salty business, is innovation and marketing.

And we have a --a very good product portfolio that's going to be rolling out in Walker's starting in the middle of the first quarter for new products this coming year.

And Walker's has historically been among our best advertisers in the salty snack portfolio.

They really do a great job of innovating in the advertising and marketing side and I expect that will continue to help drive their business.

And lastly introducing health and wellness related products in that market is going to be an important part of the future, in my opinion, because that, that community in the U.K. is focusing more and more, as many communities are around the world, on the whole health and wellness arena and we think that products in that portfolio will work as they have in the United States.

As far as Mexico is concerned, I don't know, Indra, if you want to comment on Mexico, or --

Well, specifically the Sabrita's performance?

I'm sorry, Carlos, was it Sabrita's you were asking about?

It's Sabrita's performance.

Yeah, well, let me answer that, then.

Sabrita's last year had a very good year and I'd say one of their stronger years.

They took a balanced approach to meeting the consumers needs by taking prices.

They did a wait out.

They continued to grow volume.

They had some very effective marketing and some good promotions and new products.

I'd say their portfolio of marketing innovation was -- was very strong and we felt good about their growth in a tough market conditions.

But they're used to performing in tough market conditions.

So Sabritas had a had a very -- a very good year.

As far as India is concerned, the India snack business is one of the most exciting businesses we have in the world.

I was over there at the end of last year and the management team is really focused on the consumer.

They're doing a great job of balancing global brands and global ideas with local brands and local tastes.

And frankly, I think our future there will be a combination of distribution, because there's still a lot of distribution opportunity, as well as new product innovations and introductions to raise per capita rates in existing markets.

So, l couldn't be more optimistic about the India business and their prospects.

In fact the India management team has -- has historically, over the past few years has won our Kendall Awards, they're one of our Kendall award winners for the best performing salty snack business in the world.

Do you see potential for corn based product in India any time soon?

Carlos, the local snacks India, the Nan Keens that we sell in India, which is a version of Cheetos with Indian spices and then a whole range of lentil based snacks we sell, in India, are also doing exceedingly well.

At this time there aren't plans to launch a corn based snack because existing products have huge potential still, that are still untapped.

And I think it is going to have a repeat performance in terms of it's volume rate.

And the only other thing I wanted to add Steve, is that you're just surrounded by great Indians. [laughter]

That's obviously while we are doing well.

Thank you.

Thank you.

Our next question is coming from Bryan Spillane from Banc of America.

Please go ahead.

Good morning.

Steve, could you, you guys talked a little bit about tail winds and head winds and going into 2005.

And I'm curious if you could talk a little bit about what kind of pressure on the low end consumer, what impact that had on your snack and beverage business in 2004 and whether you see that as a head wind going into 2005?

Well, an Indra was the author of tail winds and head winds so maybe I'll ask her to comment on it.

Okay.

You know, there is no question that there is a value consumer and that sort of resulted in the growth of private label in some categories.

But I think the power of our brands and our distribution system has stood us in good stead in the sense that we've had enormous brand loyalty and the fact that our availability is so high has insured that in our categories the branded products have done exceedingly well and although we have seen some private label penetration it hasn't been significant.

In fact, it's lower than it was in the 1994 time frame when private label penetration was, you know, reaching fairly high levels especially in the beverage category.

So I think our pricing is still within, you know, reasonable gap within private label and because of input costs going up private label prices have had to go up.

So overall our scale, our distribution and our brands and our innovation have sort of kept us in the ballpark in terms of private label.

I would not say it's not a head wind but I wouldn't say it's a strong head wind.

Do you have a chance to see rate increases?

Will it be difficult to see rate increases on snacks and beverages this year?

We don't have a plan for rate increases but, you know, Brian, the -- this whole value equation is something that we learned many years ago and we don't always get it right but the balance of making sure that we understand the consumer's buying sensitivity to pricing changes is something that frankly

our management team in Mexico probably broke through an understanding of this better than -- better than we had before in the 90s when they were going through the Peso crisis and we've taken that formula in looking at the consumers resistance to pricing and we've taken it all over the world and it's something we constantly focus on.

So as, you know, inflation hits in different places around the world it's critical for us to understand that balance.

And again, we don't always get it right but, but -- but our categories are very sensitive to pricing and we constantly want to keep getting our efficiencies in productivity so we don't have to take pricing.

Okay, great.

Thank you.

Our next question is coming from Alex Paterson from RCO Please go ahead.

Yes, good morning.

Indra, I think this is probably up your alley, the PBG sales, seven and a half million in this year, off the ideal price is a base roughly, is that correct?

Repeat the question again?

I didn't hear the second part.

I'm just, in terms of looking at what the benefit of the gain will be, you're using the IPO as the cost price, cost basis?

Yes, we are using the IPO as the cost basis, yes.

So approximately $100 million?

You know what, we're not disclosing that at this point.

So, let's just say that if we conclude the seven and a half million share sales this year, the after tax benefit is south of $100 million and let's just leave it there.

Okay.

Can I ask you, do you use a capital gains -- long-term capital gains tax rate on that?

No.

Okay.

It's a corporate tax rate?

Slightly higher than the corporate tax rate.

Okay, so it's not a benefit there.

And then just, the input costs that you highlighted not necessarily a benefit for the full year in '05 and I think you were speaking of Frito Lay, could you sort of break that down between first half, second half thought process?

Well, it's going to have a benefit in the second half versus the first half and specifically the last three quarters over the first quarter.

Okay.

It's just a happening issue.

So we are really just absorbing the most pain right now.

That's right.

That's right.

Q1 is the most pain.

Alex I just to go back to the PBG share sales question.

Clearly all these numbers I gave you are a function of what the share price is going to be.

And so, you know, we just make some assumptions based on today's market as the year evolves , because we've got a 75 trading grid in place and it's a arm's length transaction on the share sales, you know, whatever shakes out in terms of the market price is the gain we report.

Understood.

I was using current stock price.

And then lastly just, you guys always talked about share repurchase in the close to $3 billion range.

But you guys generate nearly $1 billion of proceeds from options.

One, do you see the options proceeds starting to tail off a little bit as the options program, you know, sort of fading a little?

And, secondly, do you consider that $3 billion growth or net of options?

$3 billion is the gross, is the gross number.

And basically we said about 425 -- I mean $425 million of share repurchases were required to offset the dilutive impact of stock option exercises.

Okay.

And so the options program winding down a little bit, is that going to have an impact on proceeds going forward?

No, not next year.

Okay.

Great.

Thanks, Indra.

Thank you.

Our final question is coming from Mark Cohen from Goldman Sachs.

Please go ahead.

Please go ahead.

Hi, I guess I have two questions.

First of all, Steve, I wonder if you could talk more about the mandate that Irene Rosenfeld has with respect to the convenience food business.

Before you bought Quaker you had worked a lot on the bar business and found it frustrating to internally develop products.

And I'm wondering how your thinking's evolved on the capabilities to internally develop them now, whether there is a need here for you to really do something of a much bigger nature externally, to rounds the business out to really where you want it to be?

And talk about how you see that whole development effort now.

Well, Mark, I think it will be a combination of internal and possibly some external but the real opportunity that management has at Frito is to bring the marketing, the full marketing mix to this opportunity.

And I think that's really frankly, where we've missed the mark up to this point in terms of product formulation to consumers needs, positioning those products, advertising against them properly, packaging, pricing.

I mean, all aspects of the basic marketing mix.

And frankly we are starting to see some very positive signs by applying these, you know, these basic principals.

For the short term we think we have plenty of opportunity to take the assets that we have and the capabilities that we have to get that business going.

And then longer term, who knows.

But we do think that there's opportunities there for us to turn that around.

And I think, you know, by this time next year you should see that.

Is it something that, Steve,you think, I guess I get the sense that this is the case, but is it something that you think is built incrementally in small lumps or is it something transformational need to be done here?

Well, first of all, let's -- let's keep in mind that we have a very, very healthy salty snack business that last year, despite the problems we had, was able to overcome most of them and have I think a terrific year.

So we don't have a , you know, burning platform.

Now, there's good news and bad news to that.

I mean, the fact is we don't have to do something dramatic.

Sometimes having to do something dramatic allows you to get there faster but we'd like to do this in an orderly way, build a foundation with the capabilities and the people to get there.

And, you know, prove that we can do it and if there are other opportunities that come along our way we'll -- we'll add to it.

But, I'm confident we are on the right track.

I think the opportunities with the products that we have, you know, just simply think of rice cakes and that whole platform and the opportunity of repositioning that, you know, that's a -- that's a fairly sizeable business that we can grow and we already know how to do that.

The bar business, although it's highly competitive, very strong competitors in there, there's no reason for us not to be able to compete with the equities that we have in that business today.

Great.

Indra, can I just come back to Alex question on the PBG book value?

I mean, it look like this could be four or $0.05 gain, and I'm wondering, I didn't have the opportunity to look at the slides, I couldn't get on, but -- but I'm wondering how we should think about how that four to $0.05 as we look out a year?

I mean, are you presenting this as something that funds spending this year but that the idea is that the things that it's funding like BPT and things below the line are going to go down next year so that it's not something we have a troub -- we have trouble happening in the following year?

2006, Mark, let's talk a little bit about this year.

As I mentioned the head winds and tail winds, the PBG gain is going to be used to funds incremental BPT spending and additional initiatives we're going to take on at corporate to insure the long- time health of the business.

Now as far as 2006 is concerned, we haven't begun to talk about what spending levels we are going to have in 2006.

All that we have said is we are going to take down the PBG shares down to levels over several years.

So we have to decide in 2006 how many shares we're going to sell, again, I don't want, I don't know what the gain is going to be, and we have to look at the competitive environment there to decide whether we need to spend more against, you know, defending our brands and growing our leadership position.

And until the BPT, 2005 we expect to have the influxion point and 2006 might be the same level as 2005.

So we don't expect a major step up in PBG in 2006.

Okay.

Thanks.

Thank you, at this time I would like to turn the floor back over to Mr. Reinemund for closing comments.

Well, thank you.

I know we ran over a little bit today and I apologize but I wanted to make sure that we took all the questions that you had about 2004 and our prospects for 2005.

We feel very good about last year but we're already moved on to our plans and our programs for 2005.

And we feel equally as confident about our future as we have about our past and we thank you for your continued interest and support of our business.

And thank you for joining us today.

This does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful day.