百事 (PEP) 2006 Q1 法說會逐字稿

Good morning and welcome to PepsiCo's first-quarter 2006 earnings conference call. (OPERATOR INSTRUCTIONS).

Today's call is being recorded and will be archived for 14 days.

It is now my pleasure to introduce 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 will include the 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 these anticipated statements, but we take no obligation to update any such statements.

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

You should refer to the Investor section of PepsiCo's website at PepsiCo.com under the heading, PepsiCo Financial Releases, to find disclosure and a reconciliation of non-GAAP financial 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, our Chairman and CEO, and Indra Nooyi, our President and CFO.

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

It is now my pleasure to introduce Steve Reinemund.

Thank you, Jamie, and good morning, everyone.

Thanks for joining us for this morning's call.

To recap our topline, it was very healthy this quarter with worldwide snack volume up 4%, worldwide beverage volume up 9% and net revenues increased 9%.

Almost all of our growth was organic, and division operating profit was up 8%.

As we mentioned in the release, we are especially pleased with the strength of the division operating profit in light of the input cost challenges that we faced in the previous quarter.

Let me spend just a minute to focus on a few themes that I think characterize the first-quarter's performance before handing the call over to Indra for a more detailed review and to cover some of the corporate items.

The first theme is the balanced performance across our portfolio.

We had growth across every operating division, across each of our categories and across almost every one of the markets that we operate in.

Although we did have a couple of soft spots in the quarter, the broad-based strength of our businesses more than compensated for them.

The soft spots in the quarter were trademarked Pepsi performance in North America and a volume decline at Gamesa in Mexico.

We will talk about both of these in more detail in just a minute.

But despite these two areas, global carbonated soft drinks grew 5% and global noncarbonated beverages grew 21%, and as I mentioned, our global snack volume grew 4%.

We had growth in both snacks and beverages in each of our major regions.

The second theme is choice.

We have a portfolio of products that taste great and appeal to a wide spectrum of consumers, occasions and need states.

I think the success of our Smart Spot program demonstrates this point.

In North America our total revenues grew 8% with revenues of Smart Spot eligible products growing 14%.

Smart Spot growth was led by Frito-Lay North America where Smart Spot eligible products grew 20%, and at our beverage business, Smart Spot eligible products grew 14%.

With the strong growth we're experiencing in our Smart Spot eligible products, we continue to make progress against our objective of having Smart Spot comprise a larger piece of our overall product mix over time.

Although Smart Spot is a North American initiative, we're benefiting from a number of similar initiatives around the world.

These initiatives are to introduce new products that are healthier, as well as to make our existing products more healthy.

Now the third theme is the continued strength of our international operations in general and the emerging markets in particular.

Now international posted 7% snack growth and double-digit growth in beverages.

Emerging markets continue to perform very well.

China beverages grew over 40% in the quarter.

India had double-digit growth in both snacks and beverages, and Russia snack volume was up over 40%.

In part because of the strong topline growth, we continue to see healthy margin expansion in our international operations.

In the last quarter, operating margins were up a full point to 15.6%.

The fourth theme is productivity and financial discipline.

As we anticipated, the first quarter was a challenging quarter from a cost standpoint.

As we manage through this environment, we are being very careful not to overreact to cost increases and take short-term actions that jeopardize our market positions or the long-term health of our business.

So although input cost inflation led to some margin contraction in the first quarter, I think the operating units did a remarkably balanced job of managing their business levers to address this inflation, principally through productivity and disciplined pricing to deliver solid topline as well as bottom-line results.

The final theme, which is a little tougher to discern from just looking at the numbers, is the strength of the people we have operating our businesses.

This is fresh in my mind as I have just completed reviews of each of our major business units from around the globe, and I always come away from these meetings very impressed with not only the depth of talent but also with the passion of our people for the businesses that they lead.

Now let me turn the rest of the script over to Indra for a more detailed review and to cover some of the corporate items.

Indra?

Thank you, Steve.

Let me begin with some more details on the division's first-quarter performance and some of the news we have for the second quarter.

We feel very good about Frito-Lay North America's performance this quarter.

Despite the holiday shift and some input cost pressures, Frito-Lay North America volume was up 2% with healthy price mix to generate revenue growth of 6%, and profits were also up 6%.

In the quarter we were especially pleased with the growth we experienced in a number of Smart Spot eligible products.

Smart Spot volume in total grew in the midteens.

Sun Chips, which is a key growth priority for 2006, had volume growth of 20%.

Baked Lay's was up over [30%], and Baked Crunchy Cheetos grew over [70%].

We had great success with our other macro snacks.

For example, our line of Quaker Rice Snacks was up over 80%, and our low-fat Quaker Chewy Granola Bars grew more than 30%.

The holiday shift affected our DSD salty volumes primarily and Lay's and Doritos in particular, as these brands are typically featured on promotion for the new year '07.

Adjusting for the holiday shift, the growth rate in our salty snack volume was in line with our expectation for that business.

During the quarter, we completed our acquisition of Stacy's Pita Chips, and the transition and integration are right on track.

So on balance we feel very good about Fritos' first quarter, and looking ahead we have got a solid lineup of new products as we head into the summer.

We are launching multigrain Tostitios.

We are introducing our new Lay's Sensations and Tostitos Sensations line that will marry new gourmet seasoning combinations with our most popular snacks.

We are expanding our offering to the 100 Calorie Pack Mini Bites, and our new Doritos campaign, Snack Strong, kicks off in June.

We are expanding our Doritos Habanero flavor nationally, and in the fall Doritos will be the featured brand for our NFL tie-in.

Later this year we launched Baked Tostitos Scoops!, a new baked form of our widely popular Tostitos Scoops! product.

So net net we feel pretty good about what we have in store for Frito-Lay.

Let me now turn to PepsiCo beverages North America.

The business had a very strong quarter with total volume growth of 5% and very strong growth across our noncarbonated portfolio which was up 18%.

Within CSD, both trademark Mountain Dew and Sierra Mist posted positive growth for the quarter, although we did experience a low single digit decline in trademark Pepsi.

Net revenue was up 12%, which reflected the positive mix benefit of the noncarbonated beverage growth, timing of concentrate shipments and some pricing.

Pepsi beverage North America's profit performance reflected increased costs in oranges at Tropicana and energy, which had its largest impact on our Tropicana and Gatorade businesses.

The profit performance also reflects lapping of marketing accrual credits from the first quarter of 2005.

Turning to Gatorade, Gatorade was up over 20%.

We are very encouraged by the successful launch of the new Rain subline, which is available now in three flavors.

We have had outstanding end market execution of the launch, and I hope you have all seen the distinctive advertising supporting the new line.

It features athletes emerging from balls.

In one commercial, it is a basketball and the other it is a volleyball into a summer rain with the tagline, come up, "Starts crisp, finishes clean; it is the rebirth of cool."

Our water trademarks had very strong growth in the quarter.

Both trademark Aquafina and Propel Fitness Water were up over 30%.

Aquafina continues to benefit from the Flavors [Flash] line, including the new grape flavor introduced in February.

Propel is benefiting from the introduction of our new Propel line with calcium, which was introduced in January and is off to a very strong start.

Our Lipton Ready-to-Drink Tea business grew 30% in the quarter, and the outlook is very positive as we extend the Lipton iced tea line with new peach, dried peach and dried green tea with mixed berry flavors.

The Lipton Original Iced Tea line in the 16 ounce glass bottles will benefit from the upcoming introduction of white tea with tangerine and green tea with orange and passion fruit.

Next month the Pepsi/Starbucks partnership will launch a new ice coffee line, Starbucks Italian Roast with just a hint of milk and sugar in a slim 11.5 ounce can, and we have extended the bottled Starbucks Frappuccino and Starbucks DoubleShot brands.

Strawberries and Creme Frappuccino, a blend of real strawberries and low-fat milk, is the first coffee free bottled frappuccino creme drink.

We launched Starbucks DoubleShot Light, which has the same great tasting Starbucks espresso, from the original Starbucks DoubleShot with lower fat, calories and sugar.

In July we are launching Pepsi Jazz, which is positioned to appeal to more C-store locations but with zero calories.

The initial launch will include Black Cherry French Vanilla and Strawberries & Cream.

It will be available in 20 ounce and 2 liter singles and in 12 ounce 12 pack cans.

From May through August, Pepsi will run the Pepsi Cool Tones & Motorola Phones promotion, giving music fans the opportunity to download more than 100 original ringtones created specifically for the program by some of the summer's hottest artists including Mariah Carey, who will also be featured in the promotion's TV spots.

Consumers who participate in the promotion will also have the opportunity to win their choice of Motorola phones, including the RAZR and the SLVR.

Turning now to Power of One.

Our Power of One initiatives continue to have strong momentum, and from May through July to summer, Pepsi, Frito-Lay and Quaker are the exclusive sponsors of the most anticipated movie of the summer, Superman Returns.

Pepsi will be running a sweepstakes featured on 1 billion packages, guaranteeing that one person will win $1 million.

Frito and Quaker will also run Superman themed promotions and packaging, and of course, we will be working with our retail partners to make our Superman Returns tie-in as big as possible through Power of One programming.

Turning now to PepsiCo International.

PI had another terrific quarter with snacks volume up 7% and beverage volume up 16%.

Growth was very broad-based.

For example, in beverages, CSD grew 14% with each of our four major trademarks growing double-digits.

Noncarbonated beverages were up over 30% with Gatorade, juices, water and Lipton Ready-to-Drink Tea each growing double-digit.

As you saw in the press release this morning, each of the three international regions had double-digit beverage volume growth.

In international snacks we had double-digit growth in both the Asia-Pacific region, which was up 18%, and in the Europe, Middle East Africa region, which was up 15%.

Importantly, growth in these regions reflect the return to growth of our snacks business in the United Kingdom, which was an area of some focus last year.

As Steve mentioned in his opening comments, Gamesa, our biscuits business in Mexico, was one of our soft spots in the first quarter.

We had a significant shift in product mix at Gamesa from lower value products to higher value products.

So while kilos were down about 2% at Gamesa, revenue grew 7% in local currency.

We do not view the first-quarter volume performance at Gamesa as indicative of any kind of a secular slowdown in the category.

But the Gamesa team is refocusing attention on achieving more balanced growth across both segments, and at this point we do anticipate a return to volume growth of Gamesa this year.

Finally, our Quaker Foods North America business had a solid quarter with broad-based growth across its product line.

Profit performance includes the impact of higher input costs and a difficult comparison as they lapped 18% profit growth in the first quarter of 2005.

[Forex] had a neutral impact on total PepsiCo revenues in the quarter and added just over .5 point to division operating profit growth.

Year-over-year strength in the Mexican peso and the Canadian dollar were offset by the Euro and the Pound weakening.

For the full year, we expect Forex to be a slight negative to both revenue and operating profit.

As we anticipated, input costs and commodities were a headwind in the first quarter across the divisions, and we will continue to pressure the P&L for the remainder of the year.

Although we do expect the pressure to be a bit less in the second half as the year-over-year comparisons ease.

In the first quarter, we felt the largest impact from energy, which impacted all of our divisions and from the hurricane-related increase in orange cost, which is a Tropicana-specific issue.

The balance of our key inputs had a fairly benign net impact across the businesses, although cooking oil was up at Frito-Lay.

Within energy, natural gas was better than expected because of the relatively mild winter, and spot prices on fuel were higher than we had anticipated.

Because we are pretty well covered on both fuel and natural gas, we did not experience much volatility versus our expectations.

As we have mentioned, the bulk of our energy is covered through the end of this year.

Orange costs were a bit worse than expected in the first quarter, and we baked just a bit more pessimism into our balance of year forecast and guidance.

Net net gross profit margin for the quarter was down approximately 50 basis points from the first quarter of 2005, driven primarily by gross profit margin declines at Pepsi Beverages North America and Quaker Foods North America.

Total costs are pretty much in line with what we had anticipated, and I think our divisions supported by the Global Procurement Group are doing a very good job offsetting the inflation for productivity, strategic purchasing, mix management and selective pricing.

Let me now turn to the P&L below the division line.

Corporate unallocated costs increased by $12 million in the quarter.

Corporate departmental costs were essentially flat.

Employee-related costs increased by $15 million.

These are principally pension costs and the mark-to-market of the deferred compensation liabilities.

The mark-to-market of derivatives contracts accounted for a $10 million increase, and costs associated with our business process transformation initiative increased by approximately $6 million.

These cost increases were somewhat offset by lapping a $10 million contribution for the PepsiCo foundation from the first quarter of 2005 and $11 million related to the re-evaluation of an office building held for sale.

Bottle equity income increased by $19 million.

The increase reflects a year-on-year increase of $22 million in the gain on the sale of shares in the Pepsi bottling group.

The gain in the first quarter of 2006 was 50 million as compared to 28 million in the first quarter of 2005.

You may recall in the first quarter of 2005 we initiated a multi-year program to return our ownership in PBG to approximately the level of the time of the IPO, which is about 40% on an economic basis.

Our proportional ownership at the beginning of the first quarter was 45.2% and at the end of the quarter was 44.5%.

For the quarter, we sold approximately 3 million shares, and we anticipate selling a total of approximately 10 million shares this year.

Net interest expense decreased by $10 million, which reflects the impact of higher rates and investments in gains in the market value of investments used to economically hedge a portion of our deferred compensation liability.

This decrease was offset somewhat by the impact of higher rates on debt.

The tax rate for the quarter was 28%, a reduction of 100 basis points from the first quarter of 2005 and consistent with the full-year expectation we laid out in February.

Averaged diluted shares declined by approximately 1% or 18 million shares as compared to the first quarter of last year.

Turning to cash flow for the quarter, we generated $246 million in cash from operations.

The cash flow number was impacted by a $420 million tax payment related to last year's cash repatriation.

Capital spending was $289 million in the quarter, an increase from last year but completely in line with our projected full-year increase in capital spending.

Option proceeds were $436 million on exercises of 12 million options.

We returned approximately $1.1 billion to shareholders through dividends and share repurchases.

Finally, let me turn to guidance.

As you saw in the release, we are maintaining our earnings guidance of at least 293 per share for 2006.

The strength of the first-quarter results gives us added confidence in our ability to achieve that number.

Our cash flow outlook remains unchanged from what we shared with you in February.

We expect cash from operating activities to exceed $6.2 billion, and this assumes a pension contribution in 2006 of about $250 million and also includes the tax payments related to the international cash repatriation.

We also anticipate net capital spending of approximately $2.2 billion and share repurchases of $3 billion subject to board approval, again consistent with what we told you in February.

To sum up, we had a strong quarter across our businesses both in the top line and bottom line.

We have got good momentum and a solid marketing calendar as we head into the summer, and we feel confident about delivering on our 2006 financial goals.

Let me now turn it back to Steve.

Thanks.

Operator, at this point, we're prepared to take questions.

(OPERATOR INSTRUCTIONS).

Bill Pecoriello, Morgan Stanley.

A question on Frito-Lay North America.

If you could talk about the weakness we have been seeing in Doritos and the drivers behind that?

You had the new packaging that rolled out in January, some new flavors.

Is this more what is going on in the teen segment and what they are snacking on versus Doritos?

Also, if you can give us some early indications on your expectation for the Sensations and the portion control products that are being rolled out?

Well, thank you, Bill, and good morning.

I think there's a couple of questions there.

Let me start with Doritos.

We are not pleased with the Doritos performance to date.

But we do have a plan in place to reverse that with a number of aspects to it.

One is several new products that we will be introducing for the balance of the year.

One is coming out basically as we speak.

It should be in full distribution in early May.

It is Habanero product, which we have had in limited tests and has done pretty well.

We will have another new product in period five, which is the reintroduction of salsa.

We have new merchandising programs which will go in many stores between now and the balance of the year.

We have a new advertising campaign which Indra alluded to in her comments, which will be coming out in the second half.

By the way, in the first quarter, we were -- because we did not have the advertising plan ready to go, we were below a year ago in media against Doritos.

That will change for the balance of the year.

So I think all-in-all the support behind Doritos for the balance of the year should be enough to move this brand back into a strong performance.

You made mention of the teen issue, and Doritos clearly has been and will remain focused at the young adult -- the teen and young adult market.

We are very optimistic that we will get Doritos back on track.

As far as the portion control product, in many categories including the ones we play in, portion control has been an important product.

We're very pleased with the early rollout of our portion control products.

Frankly, we're at a bit of a capacity challenge at this point, so we have not pushed it as much as we plan to once we get all of the production capabilities in full swing.

But we feel that that is a very important product going forward.

In Sensations, it has been rolled out into the market.

It is getting incremental displays in most of the chains.

I would say it is too early to have a full read on it, but we still believe that it's a good incremental product for the category.

Steve, is there anything on the channel contribution for Frito in the [coin] terms of convenience stores, mass club, foodservice vending, any changes in the trends that you have been seen throughout '05 by channel?

No, except that maybe the unmeasurable channels have been slightly stronger vis-a-vis the other channels.

As I think you can see that from just your own numbers and the numbers we just reported today, that unmeasured channels still drive our growth more so than any other channel.

Bonnie Herzog, Citigroup.

I actually just had a question on what I would note marketplace, which is that I have seen you have changed I think on your base product that you are now manufacturing that with flower oil and at least I have noticed on Lay's and maybe you could address that?

Certainly, I am aware of what you have done in the UK and the transition there.

How much do you expect to roll that out in the U.S., and when will you advertise that?

And then if you could talk about your potential competitive advantage regarding this because it is maybe my understanding that in terms of where sunflowers are grown within the states, you might have that market tied up?

Well, I'm impressed that you noticed.

We have it in limited tests, primarily in the Northeast.

We are still reading it.

We feel good about it, primarily based on our results in the UK.

But it would be too early to make a call beyond the fact that it is in limited tests.

That is all you want to say?

That is all I want to say at this point.

Steve, okay.

So in terms -- okay, in terms of the taste, now I tried it.

To me it tastes similar, but certainly there are great attributes, and if it is successful, can I push a little bit and assume that if it works, you would certainly launch this across your full portfolio?

We take all consumer insights into play, but we take yours even more.

So we will note your comments, and I will certainly pass them back to Irene at Frito.

But in all seriousness, we are optimistic about it and again primarily based on the results in the UK.

The perception of sunflower oil is quite positive in the UK, and we will know a little bit more after we have some more test data in the U.S.

Last question.

At some point, you will be communicating that to the consumer?

Well, we are communicating it, maybe not as overtly in the Northeast tests as we are in the UK because I don't know if you have seen some of the commercials in the UK (multiple speakers)

I have.

They are pretty in-your-face, and the results have been so far pretty well received.

So my guess is, we will learn a lot from the tests and from what we learn from Walkers, and we will formulate a response, and we will certainly take your positive feedback into consideration.

I'm just highlighting a potential opportunity.

Okay.

Thank you.

Caroline Levy, UBS.

Congratulations on unbelievable strength in your volume and your portfolio.

A couple of questions.

One, did Easter shift hurt you at all?

Two, how are you thinking about lapping Quaker's performance in the third quarter of last year because it was so spectacular and I know you have a lot of momentum right now?

Do you feel confident that -- maybe you don't keep up 20% volume growth -- but what you have for Quaker -- I mean for Gatorade is enough to help you lap the third quarter.

I also understand there's a shortage of PET.

So I just wanted to -- I mean capacity -- I might be wrong on that, but I thought that there was some issue there.

And then finally, the third question just if you could let us know how April has looked across the businesses relative to the first-quarter trend?

Well, the Easter shift did hurt our business primarily at Frito.

We think it will balance out for the balance of the year.

But the holiday shift, not only Easter but the New Year's holiday shift, we had sort of a double whammy at Frito.

Just so I understand -- I'm sorry, does that mean it would have hurt profitability as well as volume or just volume?

Well, volume affects profitability, but it was primarily a volume issue.

Okay.

As far as lapping Gatorade in the third quarter, we have known all along that we had a fabulous quarter at Frito last year.

The hot weather was a driving factor, but I would remind you we had a shortage last year.

We were capacity constrained for most of the quarter, and as a result, we lost some potential, and we had some share issues as a result of that last year in the third quarter.

So we are conscious of the strong numbers in the third quarter.

We have started the buildup of the inventory for Gatorade earlier this year to make up for that.

That partly is why the profit piece was hampered a bit because of the inventory buildup.

But we are preparing for a strong summer with Gatorade.

And as far as April performance, I would say we're pleased, but it is too early to be talking about the performance numbers at this point.

Judy Hong, Goldman Sachs.

There is a lot of chatter about whether it makes sense in this environment for a concentrate company to own a bottling operation and a distribution system.

I was wondering if you can just comment on where you stand on that issue, and maybe just talk about the pros and cons in this environment in terms of having a separate bottling company?

Well, Judy, nothing has really changed in our view of this particular aspect.

I know this week with Cadbury making their purchase, it probably raised people's questions, but their issues are very different than ours.

Our bottlers are operating bottlers and in Cadbury's case they were financial investors, and it is a very different situation.

We are very pleased with the strength of our bottlers, and I have commented several times over the past few years about why I believe the bottling system is so advantaged as an independent company.

I think they are operating far better than they were when we owned it, and their execution and their focus in their marketplace, the skills of their people, their training, it is far superior to what we had when we owned those businesses, and I see no reason for us to be thinking about the ownership differently.

But I would say that go-to-market systems have to change as the customers' needs change and product lines change, and that we are doing as a system.

So as an enterprise, as a PepsiCo enterprise, we are constantly looking at ways that we can improve the way our system goes to market, and we will continue to do that and adapt accordingly.

Lauren Torres, HSBC.

I was hoping you could talk a little bit more about the sustainability of growth rates at Pepsi International?

Just thinking about it as far as what you're doing with regard to infrastructure buildout and new products, how much of this growth is organic growth, or is it just really incremental growth at this time?

I'm not sure -- I think I understood most of what you said except the end piece, could you repeat --

I was just wondering as far as -- I know you're investing in a lot of these countries and as far as what you're doing to expand the business or we are just seeing your existing business that was maybe there a year or two ago just growing at a very strong rate?

Well, I think what we tried to point out in the script, and we will go over it again because I think it is an important point to make, is that we are very pleased with our base developed markets.

But the real encouragement in the first quarter, and which is a continuation of what we have seen over the recent quarters, is the growth in our developing markets.

When you get the combination of the two, it really makes for a very strong performance.

So it is organic growth in the sense that these are businesses that we are growing and businesses we know how to do, and we are expanding the penetration, the per capita consumption and our own internal capabilities.

We are also looking at opportunities on a selected basis to acquire other businesses as we did last year.

We acquired a snack business in Australia and a nut business in Europe, and we bought some juice businesses around the world, smaller businesses to add to the portfolio.

So, in that sense, it is in businesses we know.

It is in categories we are in, and most of it is what I would call organic, although we are supplementing it with some tack-on acquisitions, smaller acquisitions, and I think we will continue to do that.

The sustainability of it I would say we feel very strong about.

As good as the business has been, there are many countries, particularly the developing countries, where the per capita consumption is still very low.

As we continue to develop and the economies strengthen, those per capita consumption numbers go up, and the categories we play in will benefit from that.

So we feel very good about the balance we have in both the developing and developed markets.

I don't know, Indra, if you would like to add anything?

Well, I just say, as we said before, the entire world is going through macroeconomic stability at this point, and clearly our International businesses are benefiting from that.

So you have got the tailwinds from the macroeconomic growth happening around the world that is helping us.

On top of that, as Steve mentioned, over the past three to five years, we've done a very good job building out our business infrastructure both for beverages and snacks.

There is the agriculture program for potatoes, having the right partners and beverages or building the noncarb businesses in selected markets.

We have put the platforms in place upon which we can sustain growth rates for some years into the future.

So I think our teams are in place, our execution capabilities have improved, and then the tailwinds of the macros have actually given us some added umphf, if you want to call it that, to sustain this performance.

So barring any major macroeconomic slowdown, we feel good about, as we have said always, the midteens are better operating profit growth for our International business.

Let me just add to this something I have said several times in previous calls, but the backbone of our ability to grow internationally has been the leadership teams that we have around the world.

I think Mike and his senior leadership team have really done a terrific job of building up our capabilities around the world.

This is something PepsiCo has been investing in for many years.

I think I used this analogy in a previous call, but I can recall back in the mid-90s going to a senior management meeting when International represented 10% of our revenues, and we had 50% of our senior management that was focused against the International business.

That was an investment ahead of our time to build up the capabilities that we are now reaping the benefits of that with strong teams around the world.

In many cases with the consolidation of our businesses, we have really strong senior experience teams around the world building these businesses, and that makes all the difference in the world.

Because clearly you can have great products, but without the experienced leadership, it is very difficult to develop in the international markets, particularly in the developing markets, which is they are much more complicated than the size of the business would lead you to believe.

Christine Farkas, Merrill Lynch.

A question on your carbonated soft drink business, which you indicated was down 1% in the quarter.

Can you give us a little bit of color between regular and diet, and are you seeing any measurable shift or cannibalization perhaps from one of your other lines which is energy or coffee?

Well, let me start with the second part of your question, and then I will ask Indra to elaborate a little bit on the specific numbers of the difference between the diet and regular.

You know, the real question about liquid refreshment beverages, really you have to look at the categories of the portfolio.

As the consumers are getting more choices, then that is certainly affecting the overall carbonated soft drink alternatives.

That is a large part of what we're seeing in the U.S. and in other developed countries.

Clearly it is somewhat difficult to research, but clearly there is trade-off being made with -- from carbonated soft drinks to other alternatives as those alternatives are more available.

The primary ones are clearly water and isotonics in the U.S., and clearly the growth rates that we're seeing in both of those categories are having an impact on CSD.

So yes, there are trade-offs, and yes, in some sense, there is cannibalization as a result of that.

Steve, just if I can add on to what you said about noncarbonated, as we look at the first quarter again, data is hard to come by.

But based on the data we have, the overall liquid refreshment beverage category still grew over 2% in the first quarter.

Because we went ahead and built the noncarb portfolio well before it's time I would say, we had extraordinary growth in our noncarb business that grew over 18%.

So we feel very good about the non-carb growth.

At this point I would say it is almost indifferent whether we grow CSD or non-carbs because it helps the overall business.

So the non-carb growth really carried the quarter.

Again, coming to CSDs to your question, as I mentioned in my prepared remarks, trademark View and trademark Mist grew.

Trademark Pepsi was an issue.

You asked a question between regular and diet?

I would say regular was down more than diets were, and diets were down marginally.

We did not see positive growth in Diet Pepsi I think, one, because we had extraordinary lap in first quarter of 2005 on the diet.

And second is, we had the negative Q1 Easter overlap.

So it is a combination of things that caused diet CSDs to also be slightly in the negative territory.

Okay.

That makes sense.

As a follow-up to (indiscernible), could you remind us if you have in the past what the size of that favorable marketing expense accrual was a year ago?

The marketing accrual?

The overlap is about 15.

$15 million overlap.

About 15 million.

15.

15.

Right. 15.

Got it.

Walkers improvements, just some clarification there in tons of underlying trends.

Is it the healthier profile of the product?

Is there additional promotion?

Just a bit more clarification on the turn?

Let me repeat what we have talked about in terms of Walkers in previous calls because I think it is helpful to put it in complete context.

Last year was a difficult year for Walkers, and there were several aspects.

One, the trade in the UK and many companies I'm sure you have heard the same story from many other companies -- there was a consolidation in the trade and some shifting around in the trade based on relative strength of different partners in that business.

That had an impact on all of us that do business in the UK.

So that was one factor.

Secondly, our innovation pipeline was not as strong as it has historically been.

And third, the focus in the UK press on health and wellness certainly had an impact.

So it is really three items.

Coming into this year at the beginning of the year, we had a very strong new product innovation that was heavily focused against health and wellness program.

As we talked about earlier with Bonnie's question, we've introduced several new products that had healthful orientations to them, and that has certainly been popular in the marketplace.

We have sorted out some of the retail customer issues that we struggled with last year.

So all-in-all we're pleased with the early results this year coming out of Walkers, and we have expectations of positive year-over-year volume for Walkers this year.

Matthew Reilly, Morningstar.

I just wanted to follow up a bit on the diet CSD category.

I was wondering if you think that long-term the non-carbs are going to continue to cannibalize some of the growth in that category?

I have been surprised by kind of the weak trends lately.

It has not been just a Pepsi-specific problem.

It has really been seen in a number of -- across companies.

I was wondering what you think kind of the long-term outlook is for the diet CSD category in America?

Well, I think the diet CSD category is going to strengthen over time.

We've focused on sometimes one issue that maybe the most prominent at the time.

But, as in many cases, there are several issues that are playing here.

There is a pricing issue.

There are certainly alternative beverages that cannibalize diet.

There is an innovation pipeline year-over-year issue, and all these things come into play.

But long-term it is hard to imagine that diet CSDs will not become again a growth area for liquid refreshment beverages.

That is my point of view, and I know there are plenty of other points of view out there and --

If I can just add to what Steve said, Matthew, I think as the years go by, the lines between CSDs and non-carbs are also beginning to blur because you're now beginning to see sparkling juices.

You are beginning to see all kinds of blended drinks coming in.

So over time the historical view of the beverage market of looking at CSDs has just been two or three brands that we all know versus non-carbs may have to change, and we may have to focused more on liquid refreshment beverage and maybe come up with a brand-new segmentation of the category.

But overall I would say that the growth in the traditional CSD is also going to be a function of how we reconceptualize that category and all of us have to look at that, so stay tuned.

Cheryl Gedvila, Prudential.

Looking at one of your areas where costs have been a little more onerous, in the Tropicana division could you just detail how volumes and pricing looked and how much of the cost inflation have you been able to or have you tried to pass on at this point?

Orange cost increase in the first quarter was coming out of the hurricane, Hurricane Wilma of last year, was almost punitive on the business because it's not just a question of the cost going up, it was also a question of availability.

As I said in my prepared remarks, we did not have a price increase in Tropicana, but it was not -- it did not cover all of the cost increases.

The reason we did not cover all the cost increases is we wanted in be careful about taking up the pricing too much in a category which is not growing significantly.

So we had to judiciously manage the cost price relationship and make sure that we get the consumer used to the increased prices for a great tasting orange juice.

So I think as the year goes on, with innovation we can start working the pricing angle, but we did not cover the costs completely when we made our price increases.

Okay.

How have volumes reacted for that particular product?

Volumes are in the positive territory.

The business has recovered nicely, and at this point the volumes are in the positive territory.

Okay.

Just one more question.

When you look at Frito-Lay and introducing more portion control items, on the beverage side you have been very successful at introducing packagings and enriching your mix in terms of margin.

What do you think the opportunity might be for portion control down the line?

I realize it is only a small entrance right now.

The 100 Calorie Package is a great first example of what is happening in Frito.

As Steve mentioned, the business is off to a very good start at Frito-Lay, and hopefully this will be the beginning of other forays into the whole area of portion control.

I think it is a good question.

I think it is being played out as we speak.

It has obviously been more aggressively pursued in the food side, not just by us but by other companies in the food business than it has been in the beverage side.

It is a good question, and I think over time we will probably see more of that activity as well.

Robert van Brugge, Sanford Bernstein.

All my questions have been answered at this point.

Thanks.

John Faucher, JPMorgan.

I will try to make this quick.

As you look at your single-serve trends, there has been a lot of concern given gas prices, etc. rising up.

Historically you guys seem to have been able to weather that, particularly in your single-serve volume.

However, there were some comments last week from another food company that maybe highlighted a cautious tone for C&G.

So could you give us some ideas in terms of what is going on in there?

What are you seeing in terms of your ability to maybe push through pricing and how volumes are holding up given gas prices?

Well, John, I think we have been pleasantly pleased to see our C-store volumes and all of our business has held up.

In fact, they are fairly strong.

But I have heard some of the same things that you have heard over the last few weeks.

We have not seen that to this point.

I think the jury is still out as how far can a consumer be pushed before it impacts their ability to spend incrementally in the C-store store when they are getting gas at the prices we are now seeing.

But, at this point, we have not indications happening.

Bryan Spillane, Banc of America Securities.

I just wanted to follow-up on Sheryl's question earlier.

You mentioned Tropicana.

Your pricing did not quite cover the cost increases.

I'm curious, how many other businesses are experiencing that, and is that what is hanging on gross margins here?

I guess at what point do you expect to see gross margins start to improve a little bit?

Let me make a general comment, then I will let Indra clarify it a little bit.

I don't want the comment on Tropicana to be taken out of context.

Tropicana is the most seasonally impacted beverage business that we have from a cost perspective.

If we immediately adjust prices based on our input, we are going to scare the consumer off and damage our brand, and we don't want to do that and we don't intend to do that.

Last year was very unusual.

We got hit by several different things beyond our control, and we chose, as Indra said, not to take it to the consumer.

The same would be true if we had huge upsides in supply in Orange, although usually in that case, the competition forces the prices on that part.

But Tropicana is different.

But as it relates to the total U.S. beverage of margin squeeze, which is the primary place where we saw the margin squeeze, it had three issues.

At Tropicana we talked about.

At Gatorade it was really around PET and investment for future inventory by adding -- we are adding a lot of capacity, and that is taking cost as well as the inventory buildup.

As it relates to PepsiCo North America, we talked about the $15 million overlap year-over-year.

So it is the combination of those three things that had the margin squeeze, and they are very different.

All three of those have very different reasons for having happened, but they did all happen in the beverage business.

So it is all PBNA in terms of the impact on corporate gross margins, did I understand that right?

Absolutely.

I would say 95% of the gross margin decline is attributable to Pepsi Beverages North America.

Actually it is over 100%.

Okay.

Was that the case in the fourth quarter as well?

I'm just -- because the gross margin trends have not been good recently beyond just the first quarter, and I'm just curious is that the same, or is it something else that impacted it earlier?

The cost increases really started in the fourth quarter because if you really look at what happened in Q4, we saw the first big shock from Hurricane Wilma, and we saw the energy price escalation and the PET squeeze happen in the fourth quarter of last year.

Also, last year we reinvested some in Q4 in the business as we talked about in our Q4 call.

But volume compression was really those inflationary pressures that started hitting us in Q4.

So in terms of expecting gross margins to improve from here, it is really going to be depended upon PBNA.

Is that right?

PBM starts recovering as the year goes on, and at this point, as I look through the rest of the year, focusing on gross margin is important of course, but you've got to look at the total cost structure, and I think in terms of the total cost structure, we still look good for the year.

Eric Katzman, Deutsche Bank.

I guess first question kind of more specific, I know most of your business goes DSD.

But in the portion that goes warehouse, did you see any trade deloading impact from Wal-Mart's efforts?

Very little.

Very little.

Okay.

I guess the second question, maybe a little bit broader, Steve, I know you bought the pita business, but do you think that the market is maybe somewhat ahead of you or maybe fragmenting faster than you thought in snacks to the extent?

Like when we go into a Whole Foods or some of these other kind of more health oriented outlets, you see like Lundberg has numerous products out there in the rice category, and all just kinds of expansion using whether it is flax seed or rice or just different ingredients than what you have historically used.

Kind of do you think you're doing well enough given how fast that segment is growing?

Can your brands extend into that without acquisition?

Well, certainly the healthy area, which is what you're talking about with Whole Foods, we think is a tremendous growth opportunity, and we are focused on developing all kinds of alternatives to get into the healthier products.

I would remind you, however, it is still a relatively small category, but we think it is the future, and we are all over it both with acquisitions, small acquisitions like we did with Stacy's, as well as internal focus.

But I can assure you that Frito, as well as all of our businesses, are taking very seriously our challenge to have 50% of our new product introductions in the health and wellness focused area.

Now this part of your question that relates to the brands, I think you're right in saying that some of our brands may not extend as easily as others into the area of more healthy focused products.

We are looking at ways to get in there with other brands or with brands we create.

But I would remind you that probably the fastest-growing piece of Frito right now -- there's many positive growth pieces of Frito -- but Sun Chips, which has been around since the early '90s, is growing dramatically.

It is right in the sweet spot of where the mainstream health oriented focused consumer is going.

So we think we have a good portfolio, but we are not resting on our laurels in terms of what the future might be.

Okay.

Then just a last follow-up is you touched the consumer through so many channels and across a number of different categories.

Can you step back and just kind of say based on like looking at, let's say, the last 10 years or so given the input cost pressures that everybody is seeing, whether it is energy-related or benefits or just raw materials, how the retailers versus the manufacturers are kind of dealing with it?

You know, we kind of went through a period of deflation, and now we're going through a period of inflation.

Do you think like generally the retailers and the manufacturers are on the same page in terms of passing costs on, or is it still fairly contentious?

That is a broad -- that is a really broad question, Eric.

But each of our retailers has strategies that it is our objective to understand their strategies and to try to come up with product lines and programs that meet their specific needs.

As we get more and more customer focused, which is what our customer teams are designed to do, then we can find more customized ways to meet their individual needs.

Solving their strategies is what gets the most results in terms of programs in the stores.

But clearly everybody recognizes that.

And I say everybody -- retailers as well as manufacturers recognize that consumer spending is going to be balanced by many factors.

For us we want to make sure we have vibrant brands, great innovation and competitive prices and do that in a balanced way.

I think so far we have done pretty well at that.

Going forward strong brands are going to succeed and the weaker brands in a market with all the pressures that are out there are going to struggle.

We want to be among the stronger brands.

Mark Swartzberg, Stifel Nicolaus.

Steve, I guess in a phrase what keeps you up at night?

I mean you guys make healthy consistent profit growth almost look easy, and of course, it is not.

So, as you think about maintaining momentum beyond '06, what is most on your mind?

Is it a particular business?

Is it North America broadly?

Is it the cultural issue of maintaining drive?

Is it planning?

Maintaining that long-term view and investing now accordingly?

What is top of mind for you?

Well, to me I think this is the most exciting time that we've ever had to be in the business because there is so many factors impacting the markets around the world.

But clearly I would say I don't have a whole lot of trouble sleeping at night.

Indra and I talk about that often, and neither one of us probably sleep a whole lot at night just to start with.

But I would not say that has changed much over time.

But I would say that the single biggest factor, and I have talked about it in my opening, is that attracting, developing and retaining world-class talent is what makes this business work.

It is the beginning and the end of what makes this Company successful.

As long as we can continue to do that, then I think we will continue to have the results that we have had in the past.

It sounds like connecting a lot of dots not only over today but over the last few years.

Internationally your biggest constraint -- opportunity is not the constraint.

It is really the pace and planning that you put into the investments to go after those opportunities.

I think that is very well said, and the opportunities, particularly in the developing markets, are really around pacing all of the people aspects, the capital, as well as the market and the capability of the consumers to take our product.

So really it is a matter of planning, and I think you said it well.

Thank you.

I would like to turn the floor -- (multiple speakers).

Please go ahead.

Thank you very much, and we appreciate all the interest in today's news.

Thank you for joining us.

Thank you.

This does conclude today's teleconference.

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