百事 (PEP) 2007 Q1 法說會逐字稿

Good morning, and welcome to PepsiCo's first quarter 2007 earnings conference call.

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

(OPERATOR INSTRUCTIONS) Today's call is being recorded and will be archived for 14 days.

It is now my pleasure to introduce Mr.

Jamie Caulfield, Vice President of Investor Relations.

Sir, you may begin.

Thank you, Operator, and good morning, everyone.

Thank you all 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 such forward-looking statements but we undertake no obligation to update such statements.

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

You should refer to the Investors section of PepsiCo's website under the heading PepsiCo Financial Press Releases to find disclosures and reconciliations 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 Indra Nooyi, PepsiCo's CEO and Chairman Elect; Mike White, PepsiCo's Vice Chairman and CEO of PepsiCo International; John Compton, CEO of PepsiCo North America; and Richard Goodman, PepsiCo's CFO.

Dawn Hudson, CEO of Pepsi-Cola North America, is also with us this morning for question and answer.

We have one housekeeping item this morning.

We put out a press release and 8-K earlier in the quarter reflecting two changes to PepsiCo International's reporting.

One, the reporting calendar for a number of the PI operating units was changed from four week periods to months.

This has no impact on the full year reported results but it does make the first quarter smaller as it goes from having 12 weeks to having just two months, January and February.

Each of the remaining quarters becomes a bit longer as a result of the reporting change.

With this change, almost of the reporting units within PI are now on a monthly calendar.

This simplifies our accounting close processes and aids in our compliance with statutory reporting requirements.

It's also helpful as we move PI operating units to the SAP platform.

The second change affecting PI is that income from our non-consolidated international bottling interests was reclassified from the bottler equity income line to the PI line of business.

This change was made to be consistent with PepsiCo's internal management accountability.

It appears virtually all the sell-side analysts updated their models and quarterly estimates over the past few weeks to reflect the changes but we're mentioning it again just to make sure there is no confusion.

And now it's my pleasure to introduce Indra Nooyi.

Thank you, Jamie, and good morning, everyone.

Thank you for joining us this morning.

I appreciate the opportunity to discuss PepsiCo's first quarter performance and our outlook for 2007.

As you saw in this morning's release, we are off to a very good start for 2007.

Worldwide snacks volume grew 7%.

Worldwide beverages grew 3.5%.

Net revenue is up 9%.

Division operating profit grew 9% and EPS grew 17%.

Before Mike and John talk in more detail about their businesses, let me share a few observations on the quarter's results and our outlook for the full year.

As I look at the performance across our operating divisions, there are a few key themes that emerge.

The first is the broad-based strength of our businesses.

All of our operating divisions had very good top line growth and within each division, the sources of growth were diverse, whether it was growth from the core and new platforms or it was broad-based geographic growth or growth across trademarks.

You also saw this quarter both the strength of our portfolio and the flexibility it gives us in meeting our financial goals.

As we experienced difficult overlaps of cost pressures in the particular business of our individual market, we were able to take advantage of the counterbalancing positives in other parts of our business to manage through these challenges and at the same time, generate strong, consistent, overall performance.

Point two is the breadth of our innovation.

We shared much of our innovation with many of you at our investor meeting in October and many of the products you saw and sampled there have now hit the market with good success.

For example, we have launched Flat Earth at Frito-Lay and Gatorade A.M.

and both are off to a very good start.

At the same time, our core businesses are doing extremely well.

Take Doritos, for example.

This is a big, established business that generates more than $1.5 billion in annual sales in North America and its volume grew 13% this quarter.

At Gamesa in Mexico, which is one of our big three international businesses, we had spectacular growth at Gamesa this quarter with volume up double digits.

The third point is how well the businesses are managing the pricing and productivity levers to offset input cost inflation.

In some cases, this involves some surgical pricing to offset more modest inflation or, as at Tropicana, managing through a major reset of category pricing in the face of significant inflation.

And finally, we are pleased with both the integration and business performance of our recent tuck-in acquisitions.

Stacy's, Izze, Naked Juice, Diverse, Sakata, Bluebird have been very good recent strategic tuck-in acquisitions and all of them are performing on or ahead of expectations.

As I look forward, I am truly excited about our business.

All of our businesses have positive momentum and our portfolio is working.

PepsiCo North America is performing very well in spite of difficult overlaps and significant cost inflation.

PepsiCo International continues to benefit from a stable global macro economic environment and excellent on-the-ground execution by our management teams.

We are announcing the scale benefits in many of our international businesses as they drive power for our advantages.

Next, as I am -- as pleased as I am at the performance of our recent tuck-in acquisitions, I'm equally exited about the prospects for future tuck-ins.

We have the richest acquisition pipeline I've seen with promising opportunities to fill white spaces, add scale, and obtain new capabilities.

Finally, we have a terrific management team leading our businesses.

Mike White, our Vice Chairman and CEO of International, and John Compton leading North America are both terrific executives doing a great job.

They're ably supported by extremely talented operating executives and the many function leaders and, most importantly, the team is really working well together.

This is what gives me tremendous confidence in our prospects.

So with that, let me turn the call over to John Compton to discuss the North American business in more detail.

John?

Well, thank you, Indra.

I'm pleased to share with you our North American results this morning.

For those of you who were at CAGNY, I want to remind you of the imperatives that we discussed for both our food and beverage businesses.

The imperatives are important as they contributed to our first quarter performance.

You may remember that across our Frito-Lay and Quaker food businesses we said that we would do three things -- one, that we would improve the core business; two, that we would drive premium health and wellness innovation; and three, that we would balance productivity and price.

And as you saw in our announcement this morning, both our food businesses performed well.

Let me talk about each, starting first with Frito-Lay.

Consistent with the fourth quarter results of 2006, Q1 2007 results for Frito-Lay were very good.

Volume was up 3.5%.

Revenues were up 7% and operating profit was just up over 7%, so a very healthy algorithm.

The performance was driven in part by improvements to the core business.

As Indra mentioned, Doritos capitalized on its tremendous momentum from the end of last year and registered another double-digit quarter with net sales growth of 14%.

Over the past year, the team at Frito-Lay has focused on every aspect of this business, flavor innovation, packaging innovation, marketing innovation, and in Q1 you saw the results of their efforts.

Likewise, Tostitos had another strong quarter with net sales growth of almost 10%.

The base business is growing, Tostitos Scoops continues to do very well and our new multi-grain product in Baked Scoops had a very good result.

Our dips business, which is highly incremental to our overall business, was an important contributor, growing over 10%.

The growth was fueled by new items like Tostitos brand new, all-natural picante sauce and new southwestern ranch and creamy spinach dips that are a perfect complement to our new flour Tostitos chip product.

Finally, we've completed the conversion to sunflower oil across all of our potato chip brands, eliminating almost 50% of the saturated fats.

Net, our core business at Frito-Lay performed well.

Our second imperative, to drive premium health and wellness innovation, is best exemplified by the strong growth in SunChips.

SunChips performed exceedingly well.

We added more manufacturing capacity for SunChips in February and we continue to run flat-out.

SunChips revenue was up more than 30% again this quarter.

Complementing SunChips is our newest brand at Frito-Lay, Flat Earth.

We launched Flat Earth midway through the quarter and we are pleased with both the retail trade and consumer acceptance.

The Quaker snacks platform at Frito-Lay continues to perform well with net sales up over 20%.

These products are very much on-trend with our health conscious consumers and we expanded the line with the new Granola Bites, Baked Muffin Bars, and Mini Delights in the first quarter and all are off to a very good start.

In total, our premium health and wellness innovation added to 17% growth in our Smart Spot eligible products.

And despite input cost inflation, the team did a nice job balancing productivity and price as margins at Frito-Lay improved 10 basis points and that included a 13% increase in A&M.

Overall, the Frito-Lay North American P&L was very well balanced.

We continue to invest in the long-term health of the business.

We're managing with a good mix of surgical pricing and ongoing productivity programs to achieve solid top line and bottom line growth.

Likewise, Quaker Foods North America had a very good quarter, particularly on the top line, with volume and revenue each up 5%.

Quaker had solid growth in its core portfolio with Quaker Oatmeal growing 8% behind new products like Crunchy Instant Quaker Oats and an extension of the Quaker Oats Weight Control line, and profits at QFNA grew 3%, despite higher supply chain costs.

Net, a very good start to the year at both Frito-Lay and Quaker Foods.

Now let me turn to PBNA.

You'll remember that our beverage imperatives are to reinvent CSDs for profitable growth, to accelerate our growth in the profitable hydration segments and to extend our lead in non-carbs.

And following these imperatives, PepsiCo Beverages North America had solid volume and revenue growth, and operating profit was about what we anticipated, given the difficult comparisons.

We felt good that we overcame significant inflation in the Tropicana business and the 1% overall PBNA profit decline was managed within the total PepsiCo portfolio.

Overall, bottler case sales volume was up 1% and that was against 5% growth in the first quarter of last year.

So on a two-year basis, we're up 6%, outgrowing the overall LRB category.

In the quarter, our CSD volume was down 3%, in line with the category and in line with our expectations.

As we look out to the balance of the year, we expect to see consumer momentum build from the choreography program we launched at the beginning of Q1.

Choreography is much more than a packaging update.

It's a 360-degree marketing campaign reflected on television, radio, print, outdoor, packaging and online.

Choreography is truly changing the way we interact with consumers.

Innovation will accelerate as we move into the year with the launch of Diet Pepsi Max this summer and Tava later this year.

Likewise, we're launching our new Diet Pepsi packaging in a new advertising campaign focused on our superior cola taste.

Now turning to our second imperative, we had very good growth across our broad hydration portfolio, with enhanced waters leading the growth, driven by Aquafina Alive and Propel.

Importantly, Gatorade had low single digit volume growth, lapping more than 20% growth from the previous year.

Both our shipments and the measured channel data reflect positive volume performance.

We launched Gatorade A.M.

in the quarter and it's performing right on our expectations.

We're very pleased with the end market execution and consumer response.

And as we've said in the past, we expect the normalized growth in this business to be in the high single digits to low double digits.

And if you look at the performance on a two-year basis, we're comfortably in that range.

The second quarter will be another tough overlap and then the comparisons ease a bit.

Overall, we remain very excited about the Gatorade business.

Finally, we're pleased with our efforts to extend our lead in other non-carbonated beverages.

In the quarter, we had 7% growth and this included the impact of the Tropicana Pure Premium decline.

Within non-carbs, Lipton continued to perform very well and grew over 40%.

We continue to benefit from our strong position in this very healthy category and our robust innovation which continues this year with the introduction of Lipton Pure Leaf, which is hitting the stores now.

Importantly, we're gaining traction on energy drinks, which were up more than 40% in the quarter, with new products launched under our core energy trademarks, Amp Cherry Overdrive and our all-natural SoBe Essentials.

And as Indra mentioned, we're happy with the progress on all of our recent acquisitions.

Our integration and business performance on both the Izze and Naked Juice acquisitions are ahead of our expectations.

On the operations front, we're encouraged with the progress on the expansion of Gatorade's manufacturing capacity.

We brought four new Gatorade manufacturing lines on during the first quarter.

We didn't get the full productivity benefit of the new lines in Q1, because they were only up and running in the latter half of the quarter, but we'll start to see the full impact of these lines in the balance of the year.

Keep in mind, we'll continue to have some level of investment as the year progresses as we build out the new plant in Pryor, Oklahoma.

Net, our new capacity adds efficiency to our network and we're continuing to invest in the Gatorade supply chain.

And on that front, I'm pleased to report that our new plant in Wytheville, Virginia received the leadership in energy and environmental design gold certification from the U.S.

Green Building Council.

With this recognition, Wytheville becomes the largest lead gold certified food or beverage facility in the world.

This recognition is based on the efficient use of resources like water and energy so it's good for the environment and it's good for our bottom line.

Finally, we're pleased with the performance on Tropicana.

It is completely against our DNA to have a business and volume decline, but Tropicana Pure Premium is a special case because of the significant increase in the cost of oranges.

We've executed a series of price increases and although volumes are down, our revenues are up, the price increases are sticking, and the P&L on this business is much healthier.

So to summarize our North American businesses, we're off to a strong start and have very good momentum.

Each of our divisions is executing well against our strategic imperatives with good results, all of which make me feel good about our prospects for the balance of the year.

Let me now turn the call over to Mike for our international business.

Thanks, John.

Similarly, I'm very pleased with International's first quarter performance.

We had very strong top line growth in both snacks and beverages, as well as very good flow-through to the bottom line.

As you saw in the announcement, operating profit was up 29%, which drove a 130 basis point increase in our operating margins.

Now, our profit growth did benefit from ForEx and some amortization fall-off, but even allowing for these items, profit growth was still very, very strong and our operating margins did expand.

I would keep in mind and remind you, as Jamie said, it was a short quarter, January, February only for PI.

and therefore a relatively small part of our full year.

Having said that, growth in the quarter, as Indra pointed out, was very well balanced across all of our businesses.

Both snacks and beverages, developed as well as emerging markets, and in every one of our regions.

In particular, our snacks volume was very strong, as you saw, up 13% with each of our regions posting double-digit gains.

This growth is being driven by the combination of both innovation and strong execution at the front line.

Our innovation was evident I would say in three broad areas.

First, as I have said before, we continue to innovate to make our products very locally relevant.

I think snacks is unique in that regard that with flavorings and seasonings we're able to do some very unique things with our business locally.

Among the many examples this quarter, one of my favorites is White Mushroom Lay's in Russia and, one of Indra's favorites, Bell Peppers and Cream in India, and we also have Spicy Seafood in Thailand.

Second, we're also in International accelerating our health and wellness agenda.

This means continuing our roll-out of healthy oils into new markets, introducing reduced salt products and expanding our products with oats and grains as well.

Finally in innovation, we're sharing successful new products across all of our markets.

We've been doing that for a number of years.

So for instance, in the U.K., we took the North American Baked Lay's platform to Walker's and it's performing very well.

And by the same token, John's team at Frito-Lay North America has introduced our Australian rice snack products, Sakata, into some natural food channels in the United States.

As Indra pointed out, particularly notable in our quarter snack performance was Gamesa in Mexico, the leading cookie business in that country.

We had excellent growth at Gamesa for both the premium and value ends of our cookie and cracker business there.

I would say our team down there really has that business firing on all cylinders, from great innovation to terrific advertising to world class retail execution.

Our beverage volume grew 7%, which by the way lapped a 16% growth, our toughest growth rate to lap in the first quarter of last year, 2006.

Carbonated soft drinks grew across each of our major trademarks.

Trademark Pepsi growth is being supported by the global choreography program John described earlier and the roll-out of Pepsi Max, both in developed low sugar markets as well as in emerging and developing markets, especially in Latin America.

And our 7-UP business is off to a fantastic start behind the roll-out of 7-UP H20.

Our non-carb business also had a strong quarter, growing double digits, with strength across the portfolio, particularly in Gatorade, Tropicana and Lipton, and across geographies as well.

We continue to focus on Gatorade in our key markets in Latin America and Italy where we experienced double-digit growth, but we're also moving Gatorade with success into promising expansion markets like China, India and Russia.

Tropicana had very strong performance in our core markets, both the U.K.

and France, and we're making good progress in new developing markets like Russia.

Finally in non-carbs, Lipton tea had a fantastic broad based double-digit growth in the quarter and was particularly strong in Turkey, Poland and Russia and frankly, I think we're just scratching the surface on the global growth potential of the Lipton ready to drink tea brand.

Now on the cost side, I'm really pleased and proud of the work our teams have done managing some real commodity cost increases in the quarter.

We stepped up our procurement efforts, working with the global procurement team to help mitigate inflationary pressures and we're offsetting the impact with productivity initiatives and some judicious pricing in our field businesses.

The net result of these efforts is evident in our operating margin expansion in the quarter.

Now, I should point out inflationary pressures on commodities will increase in its impact on our business in the balance of the year so we'll need to continue to manage this issue carefully.

Finally, I'm very pleased with the performance of our recent tuck-in acquisitions, whether it's the nut business, Duyvis in Europe, the Sakata rice snacks business in Australia, or the Bluebird salty snack business we just acquired in New Zealand, the leading snack company in New Zealand.

They're all tracking well.

And in the case of Duyvis nuts and Sakata rice snacks, we've also gained new growth platforms that we think we can leverage in many new markets globally around the world.

So net, I would say our international business is off to a very good start, most especially our snacks business.

The strong performance is broad-based across all of our geographies and businesses.

We're seeing great success with our innovation in the marketplace and our businesses continue to execute extremely well thanks to the terrific talent I'm fortunate to have in the field around the world.

And yes, we're also benefiting from continued solid macros in developing markets.

Taken together, these factors give me confidence in PI's ability to continue to contribute in a meaningful way to PepsiCo's overall growth.

So with that, let me turn it over to my friend and our CFO, Richard Goodman.

Thanks very much, Mike and good morning, everyone.

I'll cover off on our below the line items for the quarter and our outlook for the balance of the year.

As you saw in the release this morning, corporate costs decreased by $35 million in the quarter.

Within corporate costs, departmental G&A was essentially flat.

So the biggest single driver of the decrease was the year-on-year impact of certain hedge positions for which we do not get hedge accounting treatment and which we therefore mark to market each quarter.

In Q1, the overlaps produced a larger delta than normal.

We had a loss last year of $10 million and a gain this year of $17 million.

Keep in mind that over the duration of the contract, the mark-to-market impact in corporate cost is zero, with the net gain or loss on the hedge ultimately being reflected in division operating profit.

Bottler equity income was essentially flat, reflecting the profit pick-up on our non-consolidated anchor bottling interests, principally PBG and PAF.

I want to remind you that as a result of the reclassification that Jamie mentioned at the beginning of the call, our international bottling interests are now reflected in PepsiCo International's line of business.

Also within the bottling equity income line is the gain on our sale of PBG shares.

For the quarter, the gain was roughly equal to the gain we recorded in the first quarter of 2006 so there was no incremental benefit from the share sales year-over-year.

Our tax rate for the quarter was 25.6%, which was down 240 basis points versus last year.

It was also significantly below our full year guidance of 27.7%.

The decline was largely driven by the timing of some specific tax planning items and an audit settlement.

The difference between this quarter's 25.6% and the 27.7% we're assuming for the full year added about 3 percentage points to our first quarter EPS growth.

As we mentioned on our last call, the adoption of FIN 48 means that the quarterly tax rate will be much more variable than in the past.

Our weighted average diluted share count declined by 1.3 percentage points, which reflected the impact of our share repurchase program.

Moving on to cash flow, cash provided by operating activities was $626 million in the quarter, which compares to $173 million cash flow in the first quarter of 2006.

The 2006 performance was impacted by a $420 million tax payment related to our international cash repatriation.

Beyond that, the elements of cash flow performance are fairly straightforward.

We had a net use of working capital which was driven by seasonality and the growth in our business.

Capital spending was $267 million, which is consistent with our full year CapEx forecast, and we returned $1.4 billion to shareholders, $498 million in dividends and $884 million in share repurchases.

Let me turn now to our balance of year outlook.

Both Mike and John commented on our operating divisions' effective management of input costs.

Costs overall have been consistent with our expectations and our outlook for the full year is essentially in line with what we shared on our last conference call.

Foreign currency provided a modest benefit to the P&L overall with strength in the pound and euro more than offsetting weakness in the Mexican peso and Canadian dollar.

We expect to see continued modest ForEx upsides for the balance of the year.

For the full year, we expect earnings per share of at least $3.30 and, given the strength of our first quarter, we're feeling much more confident in that outlook.

As you model out the year, I'd like to remind you that the second quarter is our toughest comparison for the remainder of the year.

Finally, both our cash flow and CapEx targets are consistent with our previous guidance.

We expect $7 billion in cash from operating activities and $2.6 billion in capital spending.

Let me now turn it back to Indra.

Thanks, Richard, and let me just sum it up and say that we are pleased with the results for the first quarter.

The strength of the top line and bottom line indicates we've got the right strategies in place and our teams are executing them effectively.

The businesses all have good momentum and, as Richard just mentioned, that gives us increased confidence in our outlook for the full year.

Before we open it up to questions, I'd like to share some news about my favorite Investor Relations person, Jamie Caulfield.

Jamie will be moving on from his current role as head of PepsiCo's Investor Relations to work with Wahid Hamid, our Head of Corporate Strategy, supporting our international acquisition book.

I mentioned to you in the earlier part of my comments that our acquisition pipeline is very full, so we are happy now to have a person of Jamie's caliber focused on this critical area.

Now, Jamie would like me to stop here and say some good things about him, but Jamie, you don't have to remind me because a lot of people want to say great things about you.

But I'd like to just summarize it by saying he did a stellar job articulating the PepsiCo growth story and he took a very strong IR function and further strengthened it and many of you have reached out to me to tell me just that.

And Jamie was rated the best in the industry by the Institutional Investor magazine.

But most importantly, Jamie does his job with a smile and a great attitude and his trademark sense of humor.

And Jamie, I know I speak for Mike, John, Richard and Steve Reinemund in saying that you did a great job for us.

I'm glad you are just around the corner working on M&A and taking that to a new level, but we will miss you in Investor Relations.

I'm also very pleased to announce that Jamie will be succeeded by Jane [Neilson.] Jane is rejoining PepsiCo from the Pepsi Bottling Group where she is the Vice President of Finance for North America.

She is no stranger to PepsiCo.

She spent five years with PCNA before joining PBG in 2002.

And before her time in PCNA, she worked in the corporate strategy and development group when I was running it many years ago.

I've worked with Jane in the past and she's an outstanding executive and I'm really excited to be working with her again.

Both Jamie and Jane are committed to making the transition absolutely seamless and will be working together over the next several months to make sure that's the case.

Operator, we'll now be glad to open the line for questions.

Thank you.

(OPERATOR INSTRUCTIONS) Judy Hong of Goldman Sachs.

On M&A, Indra, I'm wondering if you could just give us a little bit more form to your comment about the robust pipeline of tuck-in acquisition, specifically some of the sizes of the deals that you're looking at, and then just balancing this comment with a view that the asset prices seem generally high, if you look at the broader marketplace and if you could just comment on that.

Judy, in the past years, we've always talked about a rich acquisition pipeline and I think several calls we've talked about a pipeline that, you know, runs anywhere from 10 to 20 deals, but then we end up doing maybe one because we apply fairly strict financial and strategic criteria and we are very careful not to overpay for acquisitions.

What we're seeing now is a pipeline where the hit rate is likely to be much higher.

These are properties that are uniquely suited to PepsiCo's strengths because they're an extension of our businesses and so we can afford to pay a fair value for these businesses and realize the synergies and they range in size from businesses that are $5 million, $10 million, we're looking at some very, very small deals, to businesses if they pan out could run a couple of billion dollars.

So you're looking at the whole range.

Again, the hit rate looks like it's going to be better this year than it's ever been and all of the acquisitions we're looking at are either filling out white spaces, getting us into geographies we've not been in but are very complementary to our portfolio, or adding new capabilities that we desperately wanted.

So we're feeling good about this portfolio, this acquisition pipeline.

Great.

And if I can just follow-up with a question on Frito-Lay, just looking at the 13% A&M spending increase in the quarter, maybe if you could give us a little bit more color in terms of where the spending is going to and how we should think about the increase for the balance of the year and the payoff that you're seeing from a volume perspective on some of these spending increases?

John?

Okay.

Good morning, Jane.

The increase was largely on the incremental effect of rolling Flat Earth into the marketplace.

We didn't want to take A&M away from Lay's or Doritos or Tostitos to make that launch, so the full year increase that we had at Frito-Lay is largely going to launching Flat Earth to help us build up that new platform.

Okay.

Thank you.

Lauren Torres of HSBC.

Good morning.

I was hoping you could provide us with an update on your cost environment, maybe particularly corn and sweetener and orange costs.

And also talk about your confidence for the remainder of the year as far as managing this cost inflation.

Richard?

Lauren, as we talked about on the last call, we have really a very diversified basket of input and we're really tracking exactly where we thought we would be.

In any kind of situation like this, you have some puts and takes, some of the costs are a little bit higher than you expected on corn, some of the costs on energy are a little bit lower, but as we look out both what we experienced in the first quarter and what we anticipate for the balance of the year, we are going to be very, very close to the numbers that we had thought we would be at.

And I guess also too thinking about what you're doing for the rest of the year, be it through productivity, mix and pricing, is there one area in that respect that you're going to be a little bit more reliant on than you originally thought?

Well, I think as Mike talked about, I think that we're always -- that we're going to continue to step up the productivity initiatives because we're just in an environment in which commodity costs and other costs are going to be very volatile and we need to make sure that we're balancing off our ability to provide value to the consumers while still absorbing those costs.

So we're a huge emphasis on productivity.

And as we said earlier, we're taking surgical pricing and being very disciplined in how we take it and monitoring how that impacts our volume as well, and that's true both internationally as well as domestically.

Okay.

Thank you.

Bill Pecoriello of Morgan Stanley.

Good morning, everyone.

A question on international, a couple of things, Mike.

One is with this strong emerging market macro back drop that we're seeing along with the strong execution described, it seems like you're really well positioned, even though Q1 is a small quarter, to certainly sustain profit growth above that mid-teen, long-term growth you had given.

If you could talk about how much this emerging market macro back drop that we're seeing in a lot of categories is contributing?

And then in terms of the tuck-in pipeline on international, if you could talk about some priorities on filling in some of that space, whether it be certain geographies or non-carbonated beverages in markets like China, local snacks, et cetera?

Mike?

Sure.

Good morning, Bill.

Clearly emerging market macros have been solid, but I don't know that I would say that the first quarter macros were any -- all that dramatically different than they were in the fourth quarter or the third quarter last year.

They continue to be very solid.

I think the strength in our emerging markets has really been a combination of I think innovation and execution in the way we're building out our business.

So in terms of the full year, I'm real pleased with the first quarter but I just would remind you, it's two months out of the year.

It's a short quarter and it's a small quarter from a seasonality basis.

So again, I think we -- I'm sticking to kind of the direction that I gave last October, frankly, overall, but I'm pleased with the performance.

The other thing I think that is underneath the numbers, we had very, very strong performance in some of our large developed businesses like Mesa that helped the quarter.

We also had some things that kind of broke our way that we didn't quite expect or plan for in the quarter.

And the other thing that was interesting was that a lot of the smaller portfolio, what I call kind of my G30, if you will, of smaller emerging markets from Venezuela to Vietnam to markets like that, Egypt and South Africa had very, very strong performance in the quarter, so it was very diversified in terms of the markets overall.

So I'm pretty happy with the performance overall for the quarter, obviously, and we're going to try and take advantage of that to drive continued strength the balance of the year.

But as I said, it's a short quarter.

We've got some commodity costs challenges balance of the year.

So for the moment I'd stick with the full year guidance that we've given.

In terms of acquisitions, as Indra said, we're very active on that.

We obviously don't talk about specific acquisitions nor do I want to tell my competitor where I'm targeting.

But clearly I think we've said before that in terms of snacks, we continue to look to strengthen our portfolio in white spaces.

There's still opportunities in geographies, virtually everywhere, I would say, for the snacks business, with a particular focus on emerging markets but not exclusively so, frankly.

We're seeing some opportunities come up in a couple of developed markets in Europe as well.

So I'm -- but it's never over until it's over and so like I think we've got good opportunities there.

And of course we continue to look for ways to strengthen our portfolio on the beverage side with a focus on emerging markets and broadening our beverage portfolio.

Thank you.

Christine Farkas of Merrill Lynch.

Thank you very much.

Good morning.

I'm hoping we can dive a little bit more into Gatorade.

Volumes were up low single digits in the quarter against a very tough comp.

We see a similar comp in the second quarter.

Can you discuss trends perhaps as the quarter progressed, getting into the second quarter?

With Powerade potentially not taking pricing, how are you seeing the dynamics, both in the food stores and in C&G as well.

John?

Yes, Christine, I think Gatorade performed right where we thought that it was going to perform coming out of the fourth quarter.

We said that in the first quarter of this year and to some degree in the second quarter that the volume growth, given the lapse, that we'd like to look at this business on a two-year basis and we're continuing to see double-digit growth in that business on a two-year basis and we had low single digit growth in the quarter.

It did improve as the quarter went along, particularly as A.M.

got into the marketplace and got seeded and Propel's new advertising campaign that has launched has also done very well and that has helped both on the Propel business.

So we're optimistic about Gatorade.

I feel good about where we stand right now.

I think the pricing actions that our competitor has or hasn't taken is somewhat irrelevant to us because Gatorade has a good share position.

We don't really look at their price points necessarily.

We stay committed to the business for the long-term.

We're happy with the pricing that we have today and the pricing that we've taken going forward.

Okay.

Great.

And just as a housekeeping, John, with orange juice prices coming off or moderating here, how is the overall hedging position?

Can you take advantage if there's a serious move in that commodity?

I'll let Richard pick it up, but I'll tell you this.

Having watched the FC OJ futures for the last year and-a-half, I've learned not to look at any one given day or week because they fluctuate all over the board.

At least they have recently and I'll let Richard pick it up from here.

Yes, I mean I think clearly they've come down and we're -- and that would be nice if it sustains that, because then it means in part as well that there's more oranges available and that the overall pricing and productivity environment will be different.

So -- but from an ability to hedge it, obviously we're looking -- we always look at the -- at our ability to do that and we're taking advantage of it as we can.

Okay.

Great.

And final question on CSDs internationally, certainly strong overall beverage growth, 7% volume growth.

But perhaps, Mike, you could talk about the carbonated market in Mexico and the U.K., some big mature markets which might be seeing some challenges?

Sure, Christine.

Overall in beverages, I think we had a solid quarter.

You have to keep in mind, we were lapping some very, very strong numbers, particularly in Asia from last year.

So our overlaps were quite tough in Asia and I think that probably impacted the number that you're looking at in terms of our Asia performance.

Just to comment on Mexico, Mexico first, I guess, certainly I was disappointed in our CSD performance in the quarter in Mexico.

We have kind of done a field strip of the business.

The weather was not great but I nevertheless was still not happy with our performance but I think that the teams collectively have relooked at our strategies, both in the marketplace and in terms of execution and in terms of the pricing and marketing calendar, and I feel pretty good about the balance of the year.

But Mexico is a focus and I would say we've got more work to do there.

The U.K.

business performed very well for us in the quarter.

Pepsi Max continues to be very strong in the U.K.

and we had very solid growth in the U.K.

We had excellent support from our retailers there, Tesco in particular, and so I was really pleased with the strength, particularly of Pepsi Max and our retail execution programs in the U.K.

So net, net, I would say I feel pretty good about our overall beverage performance.

As I said, we had a bit of an overlap issue in India and China which kind of softened those numbers just a tad.

Okay, great, and a quick congratulations to Jamie.

It sounds like you're going to be very busy.

Thank you.

That's our goal.

(OPERATOR INSTRUCTIONS) Marc Greenburg of Deutsche Bank.

Thanks and good morning.

Indra, in light of what's a strong cash flow and earnings performance, I'm surprised you continue to endorse the same guidance for earnings and share repurchase.

I'd like to dig into the acquisition pipeline a bit and hopefully get some sense from you as to how that plays into the Board's current thinking with regards to dividend and share repurchase.

Your balance sheet continues to be very unleveraged.

Even if you guys are able to pull off three or four of the deals with the magnitude you're alluding to, you've still got an awful lot of balance sheet flexibility.

So can you help me square that with current thinking on dividend and share repurchase?

Thanks.

Good morning, Marc.

Good to hear from you.

Let me toss this over to Richard Goodman, our CFO, who will answer these questions for you.

I mean as you know, Marc, on dividends, the dividends are reset at the Board meeting in conjunction with our annual meeting, which is just in a couple of weeks.

And so that -- any change in dividend policy is announced then.

As far as the -- any other changes in leverage, we really have nothing to report at this point.

At the same time, as Indra pointed out, there is a huge pipeline on the acquisition front and that's one of the reasons that we have a strong balance sheet and to be able to take advantage of multiple opportunities that are happening across the globe.

And we're in a very good position to be able to do that right now.

Just on the huge work, because I think that's -- everything's relative there, Indra, you talked about business opportunities of $1 billion to $2 billion.

Are you talking about those are enterprises that generate $1 billion to $2 billion in sales or are those the size of the enterprise value?

I'm talking about the enterprise value.

Okay.

So again, if you guys did three or four of those, you're coming pretty close to funding that from cash.

Your balance sheet is still pretty unlevered.

Richard?

I don't think that -- our balance -- remember, our balance sheet also includes the debt that we have from our bottlers as well from a rating agency standpoint and so it's not quite as pristine as it looks.

And we are -- remember returning, at the current time, we're returning all of the cash flow that we have to shareholders.

So if we did a significant amount of acquisitions, that would -- then we would wind up potentially taking on additional debt for that.

Thank you.

Thanks, Marc.

Matthew Riley of Morningstar.

Good morning and congratulations, Jamie.

Thank you.

Thank you, Matthew.

I was wondering, when you talk about returning to profitable growth in the North American CSD market, is that dependent on taking a large share, a large volume to value shift in the industry or are you anticipating a large secular recovery in the overall market?

I'll toss it over to Dawn Hudson, Head of PepsiCola North America, who is here.

Dawn?

First of all, the CSD market, I think we continue to see the consumer shift from carbonated soft drinks to non-carbonated.

This is how people have been drinking for a long time in their homes and when they go out and live life on the go and want a ready-to-drink beverage, they are continuing to take more of the non-carb area so we don't see a fundamental change to that.

But I think it would be a mistake to say the category is tanking.

Consumers still continue to really like carbonated soft drinks and there are some real opportunities to position new brands against new unmet needs and to continue to ride brands frankly like Mountain Dew or Sierra Mist that are still in the areas of the market that are growing.

So we continue to see growth opportunity.

On the volume side, we want to make sure that that is captured as well in a profitable way for both ourselves and for the system.

So I guess in closure, I would say innovation has opportunities.

Segments that are growing within the market have opportunities and we'll attack those in a balanced way between volume and profit.

And Dawn, I think it would be fair to add that our promotional activity has also not been targeted in the past.

Some of it has been wasteful.

So I think we're cleaning that up and getting more targeted in our promotional activity.

Yes, as Indra commented, we continue to invest in the market but we're careful to do it in ways that we think provide long-term value.

Okay.

Thank you.

Bryan Spillane of Banc of America Securities.

Hi.

Good morning.

Good morning, Bryan.

Question for Mike White.

If you look at your business now, how much benefit are you getting from just taking real local price increases?

And I guess my impression in past years is that that hasn't really been a lever you pulled.

So given how strong a macro back drop is, is that something you're benefiting from at all now and what's the opportunity in the future?

Good morning, Bryan.

It's awfully hard to talk about PI as a whole on a question like that because pricing and costs are so locally.

But I'll try and give you at least a little bit of local color for what is kind of running through the P&L because it does range.

In some of our businesses, it's minimal in terms of pricing, say 1% to 2%.

There are a couple of significant challenges and I would say it's primarily Mexico where we are facing significant commodity cost challenges for the year.

Hence, we had to take some significant pricing and I think I may have mentioned on the last call if I take Sabritas as an example, I was very pleased with Sabritas' performance in the first quarter, it's our largest salty snack business.

But our volume for the quarter was up modestly.

It did benefit a little bit from those extra trading days, but even ex that, the volume was flattish, and we had to take about a 6% price increase.

So if you look at any elasticity model, I was quite pleased with the performance of Sabritas on that.

So Gamesa and Sabritas are both looking at some meaningful pricing on the order of 5% or 6% to deal with extraordinarily high commodity costs.

But I wouldn't say that's necessarily giving us a windfall in terms of gross margin flow-through.

It's really just trying to offset the extraordinarily challenging commodity costs that we're facing.

On the other hand, in a lot of other emerging markets, Russia, India, China, I would say it's modest, if any, pricing.

In Europe snacks, we're getting probably a couple percent of pricing.

So I would say it's not extraordinary other than the Mexico part of the story.

But I'm quite pleased that we've been able to make the pricing stick.

And also, that we've been able to hold the consumer in Sabritas, in particular.

I would say I was real pleased with the progress the team made there in the quarter.

So is there an opportunity going forward?

I guess you think of -- I guess I think of these developing countries like a Russia, for instance, where purchasing power is rising.

Is there an opportunity to start raising prices or offer more value added products maybe?

Yes, I think it's more the latter, Bryan, I was about to say.

These countries are still very price sensitive.

You have a huge swath of the population that doesn't have huge amounts of money.

And so small price increases can make a huge difference on the core product and there is still so much growth opportunity because the per capita consumption is still just a fraction of what it is even in other emerging markets, much less in developed markets like the United States.

But where I do see -- what I do see happening is the rise of the middle class in markets like India, China and Russia is absolutely opening up opportunities for us to find ways to sell more of our value-added products that I frankly wouldn't have dreamed of being able to sell in those markets five, six, seven years ago and we're seeing good take on those products.

We just launched, for instance, in China, a soy drink that is a premium quality product and it's off to a very good start in the markets that we've got it going.

Great.

Thanks.

And just Jamie, thanks again for all your help over the years.

Thanks, Bryan.

Mark Swartzberg of Stifel Nicolaus.

Thanks, Operator.

Good morning, everyone.

John, on Gatorade, it's encouraging to hear your comments on how things are laying out there.

I was hoping we could peel the onion a little bit more here.

As it relates to the price increase, can you give us a sense of how when you net all these things out relative to the incremental costs from [McLain] and others, how did things shake out in terms of how that affected your margin structure for Gatorade?

And then secondly, I think it was implemented about March 19th, can you -- you talked in some direction about how things are going, but can you give us a little bit of a sense of how it's -- what kind of reception you're getting at retail since that price increase?

Yes, I'd be happy, again, Mark, to say that the full year Gatorade plan is pretty much happening exactly as we originally laid out.

Pricing was a part of the algorithm as we started the year.

In the warehouse business when you announce a price increase, you typically spin that back with customers for the first 60 days of that increase and we're in the midst of that right now.

In the back half of the year, the net effect of the pricing will be much less than the list price increase that we took because we still want to be relevant with our promotional pricing that we have in the marketplace.

And I just remind you, it's the first price increase we've had on Gatorade in the last five, six, seven years.

It's a relatively modest price increase in the scheme of things.

And we're not looking to expand our margins through pricing and things like that.

This is a business that has a real base business growth still ahead of it and that's the actions that we took.

And reception at retail?

Has been fine.

I mean, we're -- like I said, we're four weeks into it, a little over four weeks into it and so far, so good.

Great.

Thank you.

And again, thank you, Jamie.

Thanks, Mark.

Kaumil Gajrawala of UBS.

Thanks.

Good afternoon, everybody.

Good afternoon, Kaumil.

Richard, could you update us on the SAP roll-out and what levels of cost savings you've identified so far and if there's things surfacing that maybe you hadn't initially saw?

I think the SAP roll-out is going extremely well.

We had a couple of modules implemented at the end of last year and those went well.

The next set of implementations is scheduled at the beginning of 2008.

And what we're seeing, I mean what we're seeing is a continuation of the cost pretty much this year and last year is pretty similar from an overall cost standpoint for it and we'll probably begin to see really substantive cost savings on a go-forward basis, starting in later of 2008 after we have the next set of implementations.

We've gotten some stuff on the supply chain side so far that we've implemented, primarily in procurement, but most of the rest of the stuff will be after we have the next set of implementations and then obviously when we get onto Frito-Lay as well.

Got it.

Thank you.

And then Mike, if you could give us a little bit of help on what profit growth overall you're looking for for international, because you've done over 20 for some time now and maybe what you're targeting for the next few years?

Well, Kaumil, if I gave you the answer to that question, I'd have Indra writing it down.

I don't know.

No, I -- yes.

Sorry.

I was just being facetious, but we had a very short quarter.

I was real pleased with the results.

We had a number of one-off items that broke our way.

I still believe that we're in the mid to high teens on kind of a flight path and this quarter we did better than that.

And if we really get conviction that we can kind of blow past 20 on a consistent basis, I'll let you know.

But I've still got several very large businesses, as I've said before, Gamesa, Sabritas and Walkers, which have margins in excess of 20%, which have shares in excess of 60% and which have high per capita consumption, and a little bit of a drag on the Mexican peso.

And so the net of those businesses, which are still 40% of my profit base, they're going to grow similar to North American growth rates or maybe a point better, but in that ballpark.

And so, it really is driven by how strong we can drive the growth in the balance of the portfolio.

What I can tell you is that the good thing about it is that it is very broad-based, probably far more broad-based geographically than I think is widely understood.

It is not just Russia, India and China.

In fact, they're doing fine, but it is countries like Turkey, Vietnam, South Africa, Argentina.

I mean, we've had good performance across a number of -- Venezuela -- across a number of markets and I think it's the diversity of that emerging market portfolio which gives me great confidence from a risk standpoint that we can continue to manage it successfully.

But I'm delighted with the progress.

It's just it's awfully early in the year after our shortest quarter and our smallest from a seasonality standpoint to go beyond that at this point so --

Got it.

Thanks.

Thanks everyone.

And Jamie, congratulations.

It's been a pleasure.

Thanks, Kaumil.

Thank you.

I would like to hand the floor over to Indra Nooyi for closing remarks.

Thank you for all your questions and, on behalf of Mike, John, Richard and Jamie, let me just say thank you to all of you for your time and attention today.

We appreciate your interest in PepsiCo and look forward to speaking with you soon.

Thank you.

Thank you.

This concludes PepsiCo's conference call.

You may now disconnect.