百事 (PEP) 2005 Q4 法說會逐字稿

Good morning and welcome to PepsiCo's Fourth Quarter 2005 Earnings Conference Call. [OPERATOR INSTRUCTIONS]

Today's call is also being recorded.

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

Sir, you may begin.

Thank you, operator and good morning, everyone.

Thanks to all of you for joining us this morning.

Today's webcast includes a slide presentation that can be accessed at our PepsiCo.com website.

Before we begin, please take note of our cautionary statement.

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

Our actual results could differ materially from those anticipated in these forward-looking statements but we undertake no obligation to update any such statements.

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

You should refer to the investor section of PepsiCo's website at PepsiCo.com under the heading Pepsico Financial Press Releases, defined disclosure and a reconciliation of non-GAAP measures that may be used by management when discussing PepsiCo's financial results with investors and analysts.

This morning's prepared remarks will be made by Steve Reinemund, PepsiCo's Chairman and CEO and Indra Nooyi, PepsiCo's President and CFO.

Steve and Indra are joined by Mike White, Chairman and CEO of Pepsico International and by Dawn Hudson, President and CEO of PepsiCo North America.

Following the prepared remarks, Steve, Indra, Dawn and Mike will be glad to take your questions.

I'd like to call your attention to a few items that effect the comparability of the numbers we'll be discussing this morning.

The fourth quarter of 2005 included an extra reporting week.

As we announced in the fall, the extra week's profits were used to fund restructuring charges also taken in the fourth quarter.

Both the restructuring and the extra week were approximately $0.03 per share.

In the third quarter, we recorded a $0.27 per share tax charge related to the repatriation of 7.5 billion of international cash.

And in the prior year, we recognized a tax credit of $0.18 per share related to the resolution of tax contingencies and incurred a $0.06 charge related to our manufacturing network consolidation.

The tables in the release and attached financial schedules include both the GAAP reported numbers and the numbers adjusted for the items I just mentioned, which we believe are more indicative of our ongoing performance.

On today's call, we'll refer to the results excluding the items I just mentioned as core results.

Finally, in the fourth quarter of 2005, we reclassified certain costs from cost of sales to selling, general and administrative costs.

These were principally warehousing and freight costs that were treated as cost of sales in some divisions and distribution costs by other divisions.

These reclassifications were made by part of our BPT initiative to align our accounting policies across our divisions to facilitate our move to a common IT platform across our divisions.

We've posted a schedule on our website with the quarterly restated numbers for 2005 and 2004 and for the full year 2003 so you can update your historical models to reflect the reclassified numbers.

It's now my pleasure to introduce Steven Reinemund.

Thank you, Jamie and good morning.

I'm very pleased with the performance of our Company this past year and I believe we're well-positioned for another strong year in 2006.

Just to summarize the performance that you saw in it the relation this morning, worldwide snacks grew 6%, worldwide beverages grew 7%, net revenue was up 11% and division operating profit grew 10%.

We're pleased with these results, although we do realize the operating profit was lower than revenue growth in the fourth quarter.

However, if -- if you remember our Q3 year-to-date results, we had a more typical, positive spread between revenue and division operating profit.

In the fourth quarter, we took deliberate actions to invest in the business and that's a primary driver of the change.

And Indra will cover this in more detail later in the call.

I thought this morning I would spend just a few minutes telling you why I believe 2005 was a strong year and why I am optimistic about 2006.

I've summarized it into the 10 reasons on why I believe in both a strong 2005 performance and in 2006.

First, sales and revenue were healthy all year across all businesses and all geographies and we ended the year with accelerating momentum.

Second, the innovation pipeline was successful across all businesses and geographies and we had a very good pipeline for 2006.

As part of that innovation, we have advanced the health and wellness agenda and product portfolio around the globe.

For instance, in the U.S., Smart Spot Products are growing more than twice as fast as the remainder of the portfolio.

And in 2005, we became the first major food company to promote healthier lifestyles beyond products to consumers through major advertising campaign using Smart Spot logo to encourage healthier eating and exercise habits.

And in 2006, Frito-Lay North America is committing 50% of their total media to healthier products, up from 20% in 2005.

And in 2005, we exceeded our U.S. goal of 50% of our innovation focused on health and wellness products and will do the same in 2006.

And 70% of our North American beverage portfolio is Smart Spot eligible.

And in 2005, those products grew 15% for the year.

Moving to number three, the controls in all of our businesses across the world were strong and our processes are sound.

The SAP implementation in the U.S. is on schedule and on budget and we celebrated our first release milestone on January 16th of this year.

Fourth, we made real progress in addressing a few of our soft spots.

For instance, Walkers in the U.K. and Tropicana in the U.S.

Fifth, Frito-Lay North America had a solid year and at the same time, they made strategic investments in the future.

I feel very optimistic about Frito-Lay's future.

Sixth, we made a number of strategic tuck-in acquisitions around the globe that will be platforms for future growth, like Sakata Rice Snacks in Australia, Stacy's in the U.S., and our nut business acquisition in Europe.

Seventh, diversity is a major strategic initiative at PepsiCo and we continue to make progress towards achieving our goal of becoming a truly diverse and inclusive company.

For instance, in the U.S., our representation of people of color in management grew two full points in 2005 and for the fifth year in a row, it exceeded one point of growth and we now are about 20% representation in that group.

And our female representation also grew to over 30%.

Number eight, the Power of One concept is gaining momentum around the globe.

From great consumer ideas to more effective ways to meet customer needs to consolidating back room operations and systems in countries like Mexico, the U.S. and Canada, and to finding more effective collective go-to-market systems in the U.S. and around the globe.

Ninth, we have advanced our understanding of our PepsiCo core values around the world through hundreds of meetings small and large, focused around our commitment to deliver sustained growth through empowered people, acting with responsibility and building trust.

And finally, number 10, our team from the front line to the board room is stronger than ever and I could not be more pleased with the leadership of our businesses.

So that's my view of the state of our business and future, so, now let me ask Indra to pick it up from here.

Thanks, Steve.

Let me just spend a moment to recap the fourth quarter.

We had very strong top line growth across the divisions with Q4 volume growth rates equal to or greater than our full year growth.

Excluding the extra week and the impact of the restructuring charge, what we refer to as our core performance.

Snacks volume was up 7%, well ahead of the full-year rate.

Beverage volume was up 8%.

Net revenue grew double digits and division operating profit was up mid-single digits.

The division operating profit flow through in the quarter was impacted by the investment spending Steve mentioned earlier.

Let me spend just a minute reviewing this.

Through the first three quarters of 2005, net revenue was up 9.8% and division operating profit was up 11.7%.

Cost of sales and S&D combined grew ahead of net revenue, reflecting the impact of input cost inflation.

A&M was right in line with sales at 9.8%.

And G&A and other costs are flat, providing the operating profit leverage.

In Q4, excluding the impact of the extra week and the restructuring actions, net revenue grew 9.9% and division operating profit grew 4.3%.

Cost of sales and S&D, primarily due to commodity and inflation combined, again, grew about 1.5 points faster than net sales.

But A&M grew 17% and G&A and other costs grew 10%, resulting in the 4.3% division operating profit growth.

The A&M and G&A increases in the fourth quarter fruitfully represent discreet investments we made.

And in the case of A&M, it also reflects some timing impacts of the A&M curve in both 2005 and 2004.

For the full year, net revenue was up 9.9%.

Cost of sales grew ahead of net sales, again, reflecting input cost inflation and in line with both the Q3 year-to-date and Q4 trends.

A&M was up 12%, so, for the full year, we did invest in A&M ahead of sales growth and this reflects deliberate investments enabled by our strong top line growth.

And G&A and other costs grew 4% for the year, providing enough leverage to offset the inflation and the A&M investment to deliver division operating profit growth in line with revenue growth.

EPS was up 11% excluding items, ahead of the division operating profit as we got leverage in every area below the division operating profit line.

So, let me briefly review what we refer to as below the line items and why we got the leverage.

For the quarter, corporate unallocated costs was essentially flat, which reflects ongoing investments in our business process transformation initiative, which was offset by the benefit of lapping a contract dispute settlement in Q4 of last year.

For the full year, however, corporate unallocated costs increased by $99 million, which is principally driven by increased investment in business profits transformation and in our health and wellness initiatives.

On a full year basis, the contract settlement charge from Q4 of 2004 was essentially offset by the $45 million accounting alignment charge we took in the third quarter of this year.

EIBI includes a pretax gain of $21 million for the quarter and $126 million for the full year, related to the sale of the PBG shares.

You may recall that this year we initiated a multi-year program to return our ownership in PBG to approximately the level at the time of PBG's IPO, about 40% on an economic basis.

For the full year, we sold 7.5 million shares, right on the number we set out at the beginning of 2005.

Our [proportion] ownership at the beginning of 2005 was 42.5% and at the end of 2005 was 41.2%.

Net interest expense increased by $7 million in the quarter and about $4 million for the year, principally driven by unfavorable comparisons to prior year market gains and investments used to economically hedge a portion of the Company's deferred compensation liability.

Diluted shares declined by 1% for the quarter and the year and that's driven by the impact of share repurchases for the year.

We repurchased approximately 54 million shares in 2005 at an average share price of $55.39.

Our reported tax rate was 28.1% for the quarter and 36.1% for the full year.

Our core effective rate was 28.8% for the quarter and 28.9% for the full year.

Again, very much in line with the expectation we laid out at the beginning of 2005.

We are also very pleased with our cash flow performance for 2005.

We delivered cash from operating activities of just under $5.9 billion ahead of our expectations.

This included pension contributions of $803 million for the year, which represents an increase of $345 million compared to 2004.

As of our pension measurement date, which is September 30, our funding exceeds our ABO by approximately $350 million.

And net capital spending came in at just over $1.6 billion, essentially on our full-year target.

Through combined share repurchases and dividends, we returned almost $4.7 billion to shareholders in 2005.

Finally, we completed the repatriation of $7.5 billion of international cash in the fourth quarter.

As we explained on last quarter's call, the impact of the transaction on the balance sheet was to increase gross debt by approximately $1 billion and gross cash and short-term investments by approximately a billion.

And this is what's driving the increases you see in the balance sheet between 2005 and 2004.

Let me wrap up 2005.

Strong broad-based top line growth, yes, we had some cost challenges but we overcame them and delivered very strong bottom line growth.

Our cash flow growth was impressive.

We continued to invest in the long-term health of the business and, as Steve mentioned, we have great momentum as we enter into 2006.

Let me now turn to our 2006 guidance.

For the year, consistent with our long-term guidance, we anticipate mid single digit volume and revenue growth with a positive spread between volume and revenue.

And, a low double-digit EPS growth, or to be more specific, EPS of at least $2.93.

The EPS target of $2.93 represents a 22% increase on a reported basis and low double-digit growth of the core $2.66 for 2005.

So, we anticipate two points or more of leverage from below the division operating line.

Let me walk you through the key underlying assumptions.

Our line of business growth assumes that the North American profit growth will be driven by continued top line growth but will have some pressure from energy and other commodity costs and a substantial increase in orange costs, in particular.

International operating profit will be driven by strong top line growth, a slight benefit from acquisitions and energy-related input cost pressures.

We expect 4X to have a negative impact on our international performance, also.

Below the division operating profit line.

And we expect to generate corporate leverage from a combination of shorter activity and base departmental expenses, gains from the sale of shares in PBG, as we continue the multi-year program to return our proportion ownership to the level of PBG's IPO.

Financial leverage in interest and shares, driven principally by intention, subject to board approval to repurchase approximately $3 billion of our common stock and an expected tax rate of 28%.

These sources of corporate leverage will be offset somewhat by increased pension costs, in part driven by 40 basis point reduction in our pension discount rate, deleveraged on the bottling equity income line as some of our bottlers are adopting FAS 123R in 2006 and planned increase in investments in our business process transformation initiatives.

As Steve mentioned, this initiative is making steady progress and we are very excited about its potential.

I'm also pleased to report that our go live with the first release on January 16, went flawlessly and early indications are that we are well on track to have a flawless release on [PD11] of this year with our major financials release in Quaker Tropicana Gatorade.

Let me now turn to cash flow.

As you saw in the release, we anticipate cash from operating activities of $6.2 billion for 2006.

Cash flow's benefit from growth of the business, as well as an anticipated reduction in our pension funding to approximately $250 million.

This will be somewhat offset by the incremental cash taxes we will pay in the first quarter related to our cash repatriation .

We expect net CapEx expending to increase to $2.2 billion in 2006.

This spending is ahead of what we've targeted as our long-term rate.

And it's really driven by capacity needs for China's snack and beverage operations and for North American Gatorade.

Both of which have had phenomenal growth recently.

And we're also investing in several snack lines globally.

It also includes some CapEx investments behind our business process transformation initiative.

Before I sum up and open it up to questions, I'd also like to offer some pointers to you as you consider modeling out our quarterly growth rates for the year.

First, Frito-Lay North America.

The first quarter will be impacted by holiday timing for both the new year and Easter, with a key sell-in reached for both holidays, falling within Q1 for 2005 and outside Q1 for 2006.

And this is going to create a negative comparison from a timing perspective.

Second, on the Gatorade business, as we excelerate the [prebuild] for the key summer selling season into the first quarter, we expect to incur more [inaudible] costs in the first quarter.

Again, this is just a timing issue.

We anticipate the year-on-year input cost inflation to be greater in the first half of 2006 than the second half as the cost comparisons are more difficult in the first half.

And finally, our Q4 2006 profit performance should benefit from cycling the higher A&M investment in the fourth quarter of 2005.

Overall, we feel good about the momentum of our businesses and believe we have a good balanced plan to continue to deliver results in line with the long-term target we've established.

Let me pass it back to Steve.

At this time, we're prepared to take any questions.

[ OPERATOR INSTRUCTIONS ] Bonnie Herzog, Citigroup.

Hi, everyone.

Actually I was hoping to get an update on some of the pricing trends that you see for Frito-Lay.

I'm curious what the current environment looks like in 2006, how are pricing and volume trends in the non measured channels, I guess, versus the measured channels for Frito-Lay products?

Also, I guess, at the Cagney Conference last year, Irene Rosenfeld did discuss Frito's macro snack strategy.

Therefore I was hoping to hear more details on how you've been progressing on your quest to gain increased relevance in the greater macro snack segments.

Bonnie, let me ask Indra to talk about the pricing trends and I will come back and talk about the -- the macro snack positioning.

Bonnie, it's very hard to talk about the outlook for pricing.

All we can talk about are the actions that we've taken and what we expect.

In Q4, let me just go back to 2005, Frito had a strong quarter in terms of pricing trends and total pricing for the quarter was about four points and was driven by pricing actions on single-serve sizes, multi-pack, Lays, Tostitos, Doritos, it was overall a good quarter.

To break it out by channel and give you what was non measured and measured channels, you can drive the numbers based on the IRI numbers you've seen for the measured channels.

I'd say overall Frito had good visible pricing and mix related pricing that resulted in that spread between volume and revenue that you saw in our earnings release today.

Do you want to comment, Indra, a little bit on the environment ?

For pricing ?

For pri -- for costs.

In Frito-Lay?

That would be great.

Yes, let me -- the biggest impact for Frito-Lay, in terms of costs going into 2006, is clearly the energy costs.

Fuel costs are up and nobody's immune from it, Bonnie.

We expect that Frito is also going to be impacted by those cost increases.

When we talked earlier this year, we talked about the impact on Frito-Lay being almost two points from commodity inflation.

And going into 2006, again, the first half of the year, we see a disproportionate hit on costs and we expect that as we progress through the year, the cost mitigates somewhat.

Again, the impact is fueled because crude oil prices are still in the high 60s and even though we've hedged some of the purchases, there is a net increase in the cost situation.

And then there's a secondary impact because suppliers experienced the impact of higher fuel costs, some of that gets -- gets passed on to us.

So, Frito-Lay is going to see some of the impact.

But overall for PepsiCo, I would say that you're going to see a net increase in our cost base coming out of increases in orange costs, [pc] resin costs and basically fuel costs.

And the impact is going to be more pronounced in Q1, starts coming down a bit in Q2, Q3 and then Q4.

You see the smallest impact because in Q4 of 2005, we saw the biggest impact.

So that's how the quarters are shaping up at this point.

Okay.

And just briefly on the macro snack comments, last year was a very strong year for our convenience food business at Frito-Lay, which is where most of these, outside the core salty products, are -- are being produced and sold.

Specifically, I just comment two in the bars area.

It was really a repositioning year for the bars during last year and we had strong growth.

We finished with excellent momentum and we're off the -- out of the gate this year, continuing strong growth in the bar category.

And the other major initiative there is [Inga Mesa] bringing the Inga Mesa products in from Mexico into the is Hispanic markets.

That -- that effort is -- is moving very well and the volumes are in the teens, to very high teens, to low 20s in terms of increases year-over-into in that part of the business.

It's -- we're going slowly in bringing that business into the appropriate distribution methods that will work long-term and we expect that by the end of this year, we should be in full distribution with Inga Mesa.

So, those will be the two primary ones.

We still have our primary focus, as you would expect and I think imagine, in the salty area, where the innovation is -- is clearly on target.

But we also have a lot of promise and confidence in -- in moving outside the core with our convenience foods.

So, maybe just a quick follow-up because I mean, honestly, I don't think we've really had an opportunity to hear from her since last year, the things seems to be more on track, if I'm hearing you correctly.

Or would you characterize things as progressing better than expected?

Just more on track?

I want to first say, I think last year was a very good year for Frito-Lay.

Okay.

And as I said in my comments, they had a strong volume and revenue year.

But what I'm really pleased about is that they made a lot of investments for the future.

And those investments were across the board from innovation, to marketing and advertising, to go to market systems, to improving the route structure with better productivity like new hand-helds.

So, it was really all across the board.

And that's what makes me feel very confident about the future.

And then Steve, we'll start to see the benefits as early as this year?

In '06?

Is that fair?

Well, you know, I -- I -- I want to answer that carefully because I -- I think that the volume that they've had and the revenue they've had has been very strong.

I think the opportunity for that to -- to -- to get stronger is certainly there, but they're well within their guidance today.

And my only point in making the comment is that I feel that we're making the right investment to continue the kind of growth at Frito.

Now, the bottom line performance of Frito is not at our long-term guidance.

It wasn't last year.

But I do have confidence that that's where we're going to be heading.

But I don't anticipate that the long-term guidance will -- will go up.

All right.

Thank you.

Judy Hong, Goldman Sachs.

Good morning, everyone.

Indra, I'm wondering if you can talk a little bit more about the A&M spending increase in the fourth quarter?

First of all, if you could just clarify that this is the spending that you didn't plan really in the beginning of the year and you saw the upside in the top line and you decided to spend back into the marketplace.

And secondly, if you could just talk a little bit about the allocation of the spending by division, that would be very helpful.

Sure.

As I said in my script, Judy, Q3 to date, A&M was up 10%.

And Q4, it was up 17%.

As Steve and I both mentioned, they were planned investments.

We increased A&M on a discretionary basis, but planned basis in Q4.

In Frito-Lay, we had additional Gatorade media.

We increased Quaker Foods media and then we also authorized additional spending in Pepsi Cola against carbonated soft drinks.

In addition both our China business and Middle Eastern business stepped up the A&M spending.

So, across every one of our businesses, we stepped up our A&M spending and these were decisions we made going into Q4 because we saw opportunities to sustain the top line growth by investing more dollars in Q4.

And then just a question for either Steve or Dawn.

The Coke system is -- is testing the warehouse delivery system for POWERade.

To the extent that the test is successful and they roll this out fully, I'm just wondering what you think the impact of Gatorade is going to be in the future?

Well let me answer that question.

We obviously will watch any changes in the marketplace.

But I would say that last year's performance against Gatorade, particularly in the share area, was very encouraging.

We had had some slight losses in share, particularly in the convenience section -- convenience sector.

And we -- we gained share in the supermarket sector.

And we ended the year on a very positive momentum in share in the convenience arena.

So, we -- we're very comfortable with where we are in Gatorade, but we are constantly looking for ways to be more efficient with our customers and to continue the growth at Gatorade.

But we -- we couldn't be more pleased with -- with Gatorade's performance.

The only issue we had last year in Gatorade was a capacity issue in the summertime which we are working to correct.

But we think we have a very efficient system that's highly competitive and we'll certainly be -- be watchful of what goes on in the marketplace, but don't anticipate major changes to that.

Great.

Thank you.

Caroline Levy, UBS.

Good morning, everyone.

Congratulations on a good quarter.

I had a question, number one, is the CapEx base of 2.2 the new -- is that the new base we should use going forward?

Or is this an unusual year?

And more importantly, could you talk a little bit about what savings you anticipate out of SAP?

Because some of the large consumer products companies you've rolled it out of had absolutely enormous savings, well over a billion.

And I'm just wondering at what point you can give us some guidelines on what to expect in the timing on that?

And to that point, well, actually a little -- slightly separate -- the last thing -- would just be you've had some layoffs at Pepsi.

You've had them in Dallas.

Is -- do you see more coming as a result of SAP?

Or do you see more coming just because that's the way business is evolving as you examine your relationship with your customers?

Let me ask Indra to talk about the CapEx and SAP piece.

I will come back and talk to you -- the layoffs.

Let me start with CapEx, Caroline.

As we mentioned in the earnings release, I think I mentioned in the script, also.

At this point, our expectation is that the 2006 number is a one-time step up.

And again, the thing to be careful about is while we talk about a long-term guidance being around 5%, 5.5%, we don't manage it to that number every year.

We put the capital in when the business needs it.

And in 2006, because of the explosive growth of Gatorade, our China business, our snacks business, our European juice business, we've had to put in some capacity investments.

That's why you're seeing the step up in 2006.

And the plan is that over the next few years, prior 2006, you see a return back to the five -- around 5% of revenue, which is really what our expectation is for long-term CapEx spending.

That's the first question.

The SAP project, the savings out of it, as I've mentioned before, yes, we do expect savings out of the SAP project.

There is no question about it, but we are funding the SAP project out of our current algorithm and our expectation is that as our existing productivity programs, that we have in place, start sunsetting, the SAP productivity will start kicking in.

And it's this sunsetting and this thing coming up that's going to allow us to keep our long-term algorithm sustained over the next few years.

So, our plan right now is not to take the algorithm up, stay with the low double-digit EPS growth and basically the existing productivity programs we have will get replaced by savings with SAP.

That's how we planned it.

To the extent we get benefits above that, we will come back and talk to you about it.

But you asked when are we going to come and talk to you more about SAP.

Our first release was on January 16, that was indirect procurement, and a big release goes into effect towards the end of this year.

I think we'd rather wait to see how that big release goes in and come and talk to you with the success of that release behind us, rather than say, hey, there's a big release coming PD11, let's wait and see.

So, maybe in 2007, Carol -- Caroline, early part of 2007, we can come and talk to you with, all of these successes behind us.

I would just add one thing, Indra, I think you would -- might want to comment on this.

The SAP investments that we're making, 2006 will be the biggest year we're going to be rolling over and after that our investments, both in the P&L and the CapEx --

2007 is the big year because there are two releases in 2007 and after that we start rolling over the investments.

As far as layoffs are concerned.

We take those very seriously, as you can imagine and and we -- we look at each business each year as we try to make sure that they're more efficient.

And having the right staffing level is important, primarily for the effectiveness of the organization.

And as we looked at both Frito and Pepsi North America, and to some degree at corporate, we saw some opportunities to become more efficient.

And we took those steps.

We don't have any plans in place for further reductions at this point.

And as Indra said, it's too early to project what the SAP impact on the employment base might be.

I think probably a couple years too early to be talking about that at this point.

Thank you very much.

Bill Pecoriello, Morgan Stanley.

Good morning, everybody.

First question was on Frito-Lay North America.

If you could comment on the push and pull levers, and are you happy with the balance there?

Are you rethinking anything after you examine the effectiveness of the '05 pull investment?

Looking out on the innovation pipeline, if you can also comment on what you see as the key drivers?

It seems like Sensations, the Doritos relaunch, seem like big ideas for '06.

If Mike can update us on Walkers and the actions being taken there to improve performance?

Thanks.

Sure.

You're right, Bill, in talking about the -- this balance between push and pull as being something that we -- we constantly watch.

I think last year the management team there believed that it was appropriate, and we talked about this on several calls before, that we needed to reinvest a little bit more in the pull side of the business, which was manifest itself in increased advertising expenses.

That's a difficult investment to measure on a short-term basis, as I think you can imagine.

But we think it's the right thing for the long-term health of the business, and particularly as we move into the health and wellness arena, where we need to communicate the messages very clearly to the targeted audiences.

So we -- we feel good about those investments and, as I said, we're stepping up the health and wellness portion of those.

And we want to also, at the same time make sure that we're continuing to invest in the -- in the indulgence side of our business, in an innovation and marketing perspective.

And the pipeline for next year is really a good balance between the two.

We -- we have a lot of confidence in the investments in Sun Chips.

It's a product that we haven't advertised since the early '90s.

It's selling very, very well.

We see it as a -- a good opportunity to bridge consumers into healthier salty snacks.

We'll be coming out with some line extensions, some close in-line extensions and frankly some not so close in-line extensions that we're not prepared to talk about today.

As well as lines of dips to go along with it.

And other examples of health and wellness innovation would be baked Tostitos Scoops, which, as you know, the Scoops and regular Tostitos line has been very popular and we think the baked will -- will also -- there's more room for growth there.

And then the portion control.

We'll be coming out with portion controls and multi-packs, which we think is another opportunity in health and wellness arena.

And as you stated, Bill, we think that there's a lot of opportunity in the Sensations and the Doritos arena.

We've been making investments in Doritos and we will continue to do that.

So, it really is a balance of investment across the portfolio, both in health and wellness products as well as the more indulgent products.

And Mike, do you want to talk about Walkers?

Sure, Steve.

Good morning, Bill.

Hi, Mike.

As -- as I'm sure you know, 2005 was a challenging year for our U.K. team.

But I'm delighted to tell you that 2006 is off to a very, very strong start with -- through five weeks, double-digit volume growth.

So, I think the strategies that we put in place in the fourth quarter last year are kicking in and I've got a lot of confidence in them.

Specifically, there are three or four things that we're doing there.

First, I think last year, earlier than ever, we were able to negotiate all of our trade activity with our retail partners and all of that resulted in substantial increases in end aisle displays and activity that we've got slotted throughout 2006.

So, I do expect our execution on the marketplace and particularly our on-display promotion activity will be substantially stronger than last year.

And that that will contribute significantly to our growth.

Second, the big news, which we've been talking about just this week, is the major relaunch of our -- of our core Walkers product.

We have reformulated the product.

It was a fair amount of effort from our research and development team.

We're changing the frying oil to a much lower saturated fat oil.

We're calling it Sun Seed.

It's 70% less saturated fat in the product, with the same great taste of a Walkers Crisp that consumers would expect.

In addition to that, we've done a fair amount of work fine-tuning sodium levels and on most of our products, sodium will be reduced by 20 to 25%, as well.

We believe this is what consumers in the U.K. want.

We think it has, still, the same great tastes and a better for you profile.

We have a major ad campaign that we will be going on air with in March.

So, it's even -- even a little bit early, although we've been out in the media talking about our relaunch.

So, I have just tremendous confidence and optimism in the relaunch of the Walkers brand that it's going to be right on the -- the consumer trends toward health and wellness in the U.K.

In addition to that, we have a number of other new product initiatives.

We have a launch of a product called Walkers Cheese Heads, which is a baked, lower-fat cheese product, a snack product, that we're quite excited about.

And to be perfectly honest with you, we've just scratched the surface, we have some plans that I'm not prepared to talk about today.

Looking at some of the Smart Spot snack products in the United States that we've been testing in the U.K. and have plans in the second half of this year for some of them to be launched, but we will talk about that on another occasion.

And lastly, I'd just point out that our total U.K. business, Tropicana and Quaker and Pepsi Max had the best years we've ever had last year in the U.K.

Those three businesses were absolutely flying and I expect we'll see continued momentum from them in 2006.

Thank you.

Marc Greenberg, Deutsche Bank.

Good morning.

My question relates to Pepsico's route to market systems and it's in two parts.

First, as your retail partners look for alternatives to traditional DSD for both snacks and soft drink, what kind of considerations do you make beyond product turns and density to make it make sense for you to consider warehouse distribution?

And as a part of that, how important are the legacy distribution systems that you have in place now?

The second part is more long-term.

If you think about three to five years from now, is it possible that your businesses will be less capital-intensive as a result of some of the changes we're hearing about?

And if so, how might that benefit the capital investment trends that you were talking about earlier?

Marc, your question on route to market is a complex one.

It's not one that's easily answered in a session like this.

It is one that we would like to be able to address in a -- in a different form.

But just let me summarize by saying we are listening to our customers.

We are looking at our systems constantly to be sure that we are efficiently structured in the marketplace.

And I -- I like to think about it in terms of an enterprise.

Being the customer and our system combined, how do we make sure we have the best enterprise solution going to market?

And those are changes which sometimes you can make short-term alterations to them to meet a specific need.

But oftentimes these are long-term types of investments.

And the go to market systems, by -- by business, are obviously different and we have partners in our bottling operation that have -- have a say in this, as well.

So, it's a complex question, it's clearly one of the major strategic issues that we're looking at in all of our businesses.

And we have, frankly, for a long time.

It's -- it's frankly what we think is one of our core competitive advantages and it's one that we think we know something about and we don't believe that it can be static.

It has to be dynamic and we're constantly looking at it.

And I'd be happy to -- to spend some more time and more depth with some of our experts in another format to be able to get more deeply into this question.

And as far as the capital intensity, three to five years out, I don't know, Indra if you'd like to --

Hello Marc.

Let's talk about go-to-market, capital intensity.

Because you know, our DSD system does require capital, whether we do hand-helds or trucks or whatever.

Again, depending on how we see this whole go to market system shake out, that might be -- that might have consequences for caps intensity.

But in terms of our core businesses, as long as we are in the snacking business and the beverage business, it is going to take capital in the range of 5%, 5.5% of sales to keep growing.

And if the business changes or there's a different way to deliver those products, we'll come back and talk to you then.

But at this point, the number that we have out there seems to be the right number to sustain our algorithm as we've laid it out now.

Thanks, both.

And just as a follow up to that, and you think -- when you think longer term about structurally higher fuel costs, you know, $70 a barrel of oil is a fact of life.

How does that affect the calculus around DSD versus warehouse distribution?

Well I think it's one of many factors, but, there's no -- there's no fuel-free way to go to market.

And so whether it's our fuel or the customer's fuel, it still has to go to market.

So, at the end of the day, it clearly has -- is a factor, but it isn't maybe as clearly on one side of the ledger versus the other side of the ledger as some people might think.

Thank you.

Lauren Torres, HSBC.

Good morning.

I was hoping you could talk a little bit more about your thoughts regarding acquisitions, both domestically and internationally?

Now, seeing such good top line growth across all of your divisions, in order to keep sustainable growth rates or to grow these rates over time, do you need to look outside your current businesses or do you feel there's a lot of upside with your existing businesses?

Lauren, I -- that's a great question.

And one of the things that I said I feel good about in -- in last year's performance is that we made a number of nice-size tuck-in acquisitions that could serve as growth platforms for future -- for the future of the business.

And these are -- are, in many cases, helping us get into health and wellness-oriented products and that is really a huge upside opportunity for our growth going forward.

And so we think that there are probably others like that all over the world and that's really what our primary target, as it relates to acquisitions, are concerned.

It doesn't mean we can't get into health and wellness products on our existing platforms, but it gives us yet another way to develop products for the consumer when we get a base like Sakata in Australia.

I might ask Mike just to talk a little bit about what that kind of acquisition does, beyond -- way beyond what it -- just buying the portfolio for the country that it's in.

I think it's really been exciting to see how this is -- is traveling beyond Australia.

Thanks, Steve.

Yes, we -- we are very excited about Sakata .

For those of you -- it's a low-fat rice-based snack and when we looked at it, there were a number of things that -- that we evaluated.

Today, it's primarily in Australia.

A little bit sold in the U.K., South Africa, a few other markets, but as we looked at the product itself, first of all, it's a terrific tasting product, which all snack products need to be.

Second, it happens to be low-fat and therefore is right in line with looking at health and wellness trends on a global basis.

Third, it's a rice-based snack, which we are probably weaker in, in Asia, for example, and we felt it was a uniquely advantaged rice-based snack that would be a big opportunity for us to leverage, particularly in Asia, where there is a real affinity for rice.

And lastly, it has a -- we think an advantaged technical platform.

So, we've -- we took over the business I think in -- in September.

We've totally integrated it into our Australia business, so, from a back office and those kinds of things it was an easy integration.

And we're really in the process now of developing a pretty explosive growth strategy for it on a global basis, including the United States.

So, I think it's a terrific idea and it's very leverageable.

And, Lauren, just one example of what I'm trying to explain in terms of the tuck-in acquisitions.

This is really, we think, a great way to put small teams around the world with opportunities to add to our portfolio.

Thanks.

John Faucher, J.P.

Morgan

Yes, good morning,everyone.

Two questions, first, Indra, if you could, just a clarification here, when you spoke about the fourth quarter in terms of the A&M spending year-over-year, I'm assuming what you're saying is just that the sales curve is going to be less lumpy and less back half weighted and so A&M will still be up, but it's just going to be a question of accounting -- is it going to balance through the year?

Is that correct?

Peter, Hi, John, Peter Bridgman.

In 2005, you mean?

No, 2006.

Indra mentioned that in fourth quarter, in particular, the A -- the A&M comp will be easier -- [inaudible]

That's correct, John.

Okay.

Thanks.

And then for Mike, a follow-up question on -- on the Walkers piece, which is, if we look at the U.S., aside from the trans fat issue, we've generally seen the health and wellness products be different lines, different extensions and I'm wondering what the risk is, as the business seems to be stabilizing to going out and changing the base product, the core Walkers franchise, with this re-launch as opposed to coming out with a healthier line..

Can you walk me through the logic in that?

Sure, John.

Obviously that question is one that both Steve and I were looked at very, very carefully before we -- we made the decision.

We did extensive consumer research in the U.K. both on the new product formulation and the taste of the new product formulation, blind and identified, as well as on attitudes in the U.K.

And first of all, we found blind taste tests that the -- that the reformulated product, different from other perhaps light products that sometimes don't taste as good as the real thing, that, in fact, we had preference.

We had significant wins for our product formulation on a blind basis.

And second, when -- when we kind of gave consumers, including heavy users, who tested carefully the whole story, heavy users in particular, we looked at and were very positive about the reformulation.

So, all of the work that we did and we were quite, quite careful and very -- looking very rigorously at heavy users in particular, looking at the product itself and the attitudes, and we just found that there was just such an overwhelmingly positive view and that the taste of the product was -- was terrific, that -- that we felt the right thing was to -- to go across the core line.

And let me add to that, and I agree 100%, because we -- it's is obviously a topic of much debate.

That was very similar to what we did in the United States by taking trans fats out.

And we really have three strategies on this whole health and wellness arena.

One is we want to make the whole -- all of our products, over time, healthier without changing the taste.

Which is exactly what we did with trans fats.

Absolutely no perceived difference on trans fats in the United States and Mike talked about the Walkers piece.

Second is to develop health and wellness products, but at the same time, be very clear and make good investments in what we call the indulgence products.

So, we really have a full portfolio.

Sensations is a great example of that.

We have many of them around the world.

And the third is to make acquisitions of platforms that will allow us to develop more products like the Stacy's acquisition in -- in the U.S. this year.

So, we really think about our portfolio and health and wellness in that arena.

But over time, we think that moving the products in that direction is a good thing.

But we want to be very clear that there are multiple consumers, multiple needs and frankly the same consumer with multiple needs, based on the time of the day and so forth.

So, we're very careful, John, to make sure that we -- we know that when we're making our base product healthier, we're not doing it in any way sacrificing the taste that they've known to like over the years.

Okay, cool.

Thanks.

Operator, I think we have time for one more call.

We're a bit oversubscribed on the questioners today, so I'll make sure that we circle back with those of you that we haven't gotten to this afternoon.

So this will be our last call.

Kristine Farkas, Merrill Lynch.

Thank you very much, thanks for taking the call.

Quick question on -- on your tax rate, Indra.

Just to clarify, why the lower tax rate in 2006?

My sec -- my second question has to do with your non measured channels, can you talk a little bit about -- about the strength there?

Certainly Frito-Lay looks -- looks strong.

And finally, on -- on A&M spending, delving deeper into PB&A, you talked about Gatorade media increases.

Can you -- can you clarify what the spending was, [against], CSDs, was that promotional [programs]?

And are you absorbing any increase in or -- orange prices?

Because we're not seeing Tropicana prices move up that much in scanned -- in scanned data.

The tax rate -- Matt, you want to address the tax rate issue?

Matt McKenna, head of taxes is right here so --

Thank you.

Yes.

It would be -- tax rate in 2006 will come down just a little bit because of planned changes to our concentrate manufacturing sources around the world.

Let me get to the A&M issue next.

It's not promotional spending, because promotional spending goes against the revenue number.

This is real A&M spending that we put behind Gatorade as we did Quaker Foods and certainly not worth going into the details behind the dollar numbers Kristine, but say that we increased A&M behind Frito-Lay, Gatorade, Quaker Foods, PC&A, China and the Middle East.

And in terms of unmeasured channels -- can you just repeat that question again?

Just -- just were there any changes when you compare the unmeasured channels to your overall volume growth?

Or excelerated or decelerated growth there?

Frito-Lay was very strong and I was just curious which channels that came from.

Dawn, do you want to -- ?

From a PC&A standpoint, we had great success in 2005 in unmeasured channels and see that as a continued opportunity for 2006 as consumers continue to change their shopping behavior and look to a broader set of retailers to buy their ready-to-drink beverages.

And I think as it relates to Frito, it's -- it's obvious when you look at the reported IRI and Nielsen data versus our -- the total for Frito, the big delta, and it's getting bigger all the time, is the unmeasured channel, where, Frito had very, very strong growth.

And you're not seeing any changes in those trends?

No.

Terrific.

Thank you.

Well, thank you -- thank you all.

I apologize for -- for having to cut the questions off at this point.

We always make difficult choice as to whether to keep on going or not, but we don't mean that we don't want to answer those questions, we just would be happy to do them individually and we will be available today and -- in the coming days to -- to answer any questions you might have.

Thank you very much for joining us today.

And we look forward to speaking with you again next quarter.

Thank you.

This does conclude today's teleconference.

You may now disconnect your lines and have a wonderful day.