百事 (PEP) 2007 Q4 法說會逐字稿

Good morning and welcome to PepsiCo's fourth 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 had will be archived for 14 days.

It is now my pleasure to introduce Ms.

Jane Nielsen, Vice President of Investor Relations.

Ms.

Nielsen, you may begin.

Thank you, operator, and good morning, everyone.

Thanks to all of you for joining us.

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 any such statements.

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

You should refer to the investor section of PepsiCo's website 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 Chairman and CEO; Mike White, PepsiCo's Vice Chairman and CEO of PepsiCo International; John Compton, CEO of PepsiCo America's Foods; Massimo d'Amore, CEO of PepsiCo America's Beverages; and Richard Goodman, PepsiCo's CFO.

Today we will review our 2007 results in the context of our old structure, and 2008 outlook in the context of our new structure.

After our prepared remarks we will leave 30 minutes for questions and answers.

I would like to call your attention to two items that affect the comparability of the numbers we reported this morning.

We had restructuring charges in the quarter totaling $0.04 per share or $102 million pre-tax related to previously announced restructuring actions and division reorganization expenses.

Our reported full year 2007 results also include the benefit of $129 million or $0.08 per share related to the settlement of certain foreign tax matters, $115 million in Q3, and the remainder in Q4.

Reported results for 2006 included a $0.34 per share net benefit of a tax settlement and restructuring charges.

Excluding these items, earnings per share in 2006 and 2007 were $3.00 and $3.38 respectively.

On today's call we'll refer to results excluding the items I just mentioned as core results which we believe are more indicative of our ongoing performance.

The net is that our core EPS grew 8% for Q4 and 13% for full year 2007.

With that I will turn the call over to Indra.

Thanks, Jane, and good morning, everyone.

We truly appreciate the opportunity to discuss PepsiCo's fourth quarter and full-year results and our outlook for 2008.

As you read in our press release this morning, PepsiCo had a strong finish to a very strong year.

I am proud of the outstanding work our associates around the world have done to advance our performance of purpose journey in all its dimensions whether it be delivering outstanding business performance, building platforms for growth through innovation, acquisitions, and joint ventures, and advancing our sustainability agenda for our products, our environment, and our people.

I will share my thoughts on our performance in 2007 and our outlook for 2008.

Mike, John, Massimo, and Richard will then take you through the division and corporate performance in our 2008 guidance in more detail.

In 2007 our categories continued to demonstrate vibrancy and resiliency around the globe.

Internationally our markets are growing and are particularly strong in developing emerging markets where we gained share.

In the U.S.

both savory snacks and liquid refreshment beverages posted category growth with relatively stable trends throughout the year.

We gained savory snacks share for the quarter and the year and CSDs we gained share in the fourth quarter and had a positive share swing to our principle competitor for the year.

That market strength shows in our full-year results.

Our teams delivered excellent top and bottom line performance with 12% net revenue, 10% core division operating profit growth, and 13% core EPS growth.

In total we offset inflation with pricing and productivity while maintaining volume momentum.

Our teams leveraged strong developing market macroeconomics.

We reinvested 4X upside to drive growth in our operating divisions and to support IT transformation and Corporate R&D initiatives.

The benefit of both the geographic and product diversity in our portfolio is evident in the consistency of our overall algorithm this past year.

For the fourth quarter strong volume growth, net pricing, and effective cost management across the entire value chain drove 11% core division operating profit growth.

We also successfully executed our tuck-in acquisition strategy to complement our organic growth.

These acquisitions helped to scale our portfolio, expand our global footprint, and extend our business into adjacent categories.

In Q4 we closed on the acquisition of Lucky Snacks in Brazil.

We also advanced our penetration in adjacent categories with our announced acquisition of Penelopa, Bulgaria's leading nuts and seeds business and Frito-Lay's joint venture with Sabra in fresh dips and spreads.

In 2007 we spent a total of $1.3 billion in M&A transactions and every transaction will enhance our future growth and create value for our shareholders.

Now more than ever we have the right organization with the talented management team to take PepsiCo into the future.

Our three divisions, PepsiCo International, PepsiCo Americas Foods, and PepsiCo America's Beverages build a more global perspective, allowing for improved best practice sharing and provide greater developmental opportunities for our management talent.

You will hear about some of these benefits as Mike, John, and Massimo discuss our division outlook.

We've also added capability in the critical area of nutrition and R&D.

Dr.

Mehmood Kahn has recently joined PepsiCo as our Chief Scientific Officer.

Dr.

Kahn comes to us from Takeda Pharmaceuticals where he headed up global R&D, and R&D with specialties in internal medicine and endocrinology, he served at the Mayo Clinic as the Director of Diabetes, Endocrinology, and the Nutrition Clinical Trial unit.

Dr.

Kahn will guide PepsiCo's long-term research strategy, provide leadership for next generation technologies, food safety, nutritional standards, and quality assurance.

Turning now to 2008, I am confident in our ability to continue our progress on our performance of purpose journey delivering both our sustainability goals and financial goals.

Next year or I should say this year, 2008, we expect to deliver performance consistent with our long-term target.

We expect volume growth of 3 to 5%, mid to high single-digit revenue growth and at least 10% core EPS growth.

I am confident but recognize the challenges ahead.

In our Q3 call I spoke to you about inflation and economic uncertainty and both are upon us now.

The world economies outside the emerging countries are expected to slow in 2008.

However, as I have indicated, our categories of comfort food and refreshing beverages have generally proved pretty resilient in past economic downturns, and I am encouraged by our continued strength in share gains in our important and emerging developing markets.

It is clear that inflation and commodity costs has accelerated, particularly as it relates to grains and energy.

We are estimating that in 2008 the commodity cost inflation across PepsiCo will average about 6 percentage points.

To address this issue, we are utilizing all of the multiple tools at our disposal.

From a productivity standpoint we're accelerating efforts across the entire business system.

Product formulations, ingredient sourcing, trade efficiencies, manufacturing, go to market, and G&A.

In addition, we will be looking to effective pricing both through innovative new products as well as through judicious combination of mixed management, product maintenance, and absolute pricing.

That said, we do not expect our brand's relative value proposition to change.

Inflation is a reality for all our competitors and for private label as well.

We're seeing them raise prices across all our categories.

As always, our decisions have guided the consumer, customer, and competitor environments in each market.

Underlying these efforts are the important structural advantages that we have across the world.

Our brands have highly loyal and engaged consumers, our brands are affordable treats and healthy eats, our innovation pipeline is robust, we have ubiquitous availability through our powerful go to market systems, and our global footprint is wider and stronger than ever before.

Our key strategies which partially leverage advantages and give us flexibility and resiliency remain unchanged.

We will continue to execute our tuck-in strategy, acquisition strategy, invest in new platforms for growth, transform our IT capabilities, and build and retain our talent.

As a team we remain committed to managing for the long-term, executing with excellence, and consistently delivering our annual targets.

In total, then, I want to reiterate how pleased I am with our performance this year and the confidence I have in my leadership team and all our associates around the world.

Now let me turn the call over to Mike White who will talk about PepsiCo International.

Mike.

Thanks, Indra, and good morning, everyone.

Today I will first focus on our overall PI results for the full year 2007, cover a few details on our fourth quarter results, and then I will provide a 2008 outlook for the new PI which is comprised as you know of the United Kingdom, Europe, Asia, the Middle East and Africa.

The PepsiCo International team had another very strong year, and I am real proud of the way they performed in 2007 on both the top line and our bottom line.

For 2007 in total our snacks volumes were very strong, up 9% for the full year and we gained 1 full share point of market share in our top 27 markets.

Our beverage volume was also strong, up 8%, and importantly emerging and developing markets had robust double-digit growth, and we gained share there in both the our snacks -- both our snacks and beverages businesses.

Innovation continued to be a key driver of growth behind new snack forms and flavors, expansion of Pepsi Max and 7-Up H2O into new geographies as well as strong growth from Lipton and Tropicana in particular.

In each of our markets we continually work to maintain a local cost structure with targeted initiatives to drive productivity across the entire supply chain.

To build out our infrastructure, we need to sustain our growth, and we continued our IT transformation journey with successful and self-funded SAP go-lives in Mexico, in China, and Holland.

We're enhancing the global communications backbone for PI as well.

As Indra pointed out we were successful on the M&A front as well.

We acquired the leading salty snacks Company in New Zealand, Bluebird, we acquired a terrific snacks business called Lucky Snacks in Brazil and in partnership with Pepsi America as our anchor bottler we acquired the Sandora juice business in the Ukraine, the leading juice business in that country.

We also expanded our partnerships with Unilever and Starbucks and we increased our equity positions in both our Northern Latin America snacks business as well as several of our beverage operations in China.

As you saw in the press release our core operating profits grew 18% for the full year.

Core operating margins were down about 50 basis points.

Let me point out that drop relates entirely to the impact of consolidations of already existing joint ventures.

When we changed our equity interest, we added significant amounts of revenues, virtually 100% of the revenues of those businesses, but only our proportionate share of the profits, in some cases 50% or less.

These consolidations reduced our margins by 60 basis points.

The impact of all of the other acquisitions and divestitures compressed margins by an additional 20 basis points.

If you take all these factors together, PI would be just about right on consistent with the margin targets that I have discussed with you in the past.

Focusing now on our fourth quarter results, core operating profits in the quarter as you saw in the release were up 12% in spite of significant benefits we saw from foreign exchange in the quarter.

Let me point out two primary factors at play.

First, keep in mind we were lapping gains on the sale of a business in the United Kingdom last year which contributed about 4 points of profit growth in 2006.

The second factor is that we, as we pointed out in the release took advantage of our 4x upsides and PepsiCo's strong overall performance to consciously invest back in our businesses, both to enhance our competitive position as well as to set us up for good growth in 2008.

The majority of those investments were targeted to emerging markets as well as to implement our SAP platform internationally.

Combined, they lowered our operating profit by about 10 percentage points.

Let me dig a little deeper into the drivers of our fourth quarter growth.

Our volume trends remain very solid with snacks volume up 8% and beverage volume up 9%.

Consistent with the strong growth we saw throughout the year, our emerging and developing markets again posted double-digit growth in both snacks and beverages and we gained share in those markets in the quarter.

Our core brands like Lay's and Doritos continued their strong growth, and we saw the continued strength of our innovation as we closed the year.

Additionally, we were encouraged by the improved top and bottom line trends at Walker's whereas Sabrina's performance was very solid and consistent with our prior quarters.

We've managed significant commodity cost headwinds all year, and the fourth quarter was no exception.

To address this we executed just under 4 points of net effective pricing, and with similar increases being executed in the categories we compete in, the relative value of our brands is unchanged or in some cases improved.

Our teams remain alert to the affordability trade-offs consumers may begin to make given the euros.

pounds.

or rubles they have got in their pockets.

With adjust product weight outs, mix, and price pack management strategy to say provide value and affordability for consumers around the world.

Net-net we continued to deliver underlying top and bottom line results in line with our long-term algorithm while investing for the future.

As I look ahead, there are tremendous opportunities for growth for the new PI, that is the U.K., Europe, Asia, Middle East, Africa, and we're well positioned to capture those opportunities in some of the fastest-growing economies of the world.

We have 86% of the world's population, and yet we capture only $2 in revenue per capita in those markets.

Clearly we still have tremendous room to grow.

Now as you would expect from PepsiCo, we have in place the right teams, the right strategies, and the right measures to navigate through the input cost headwinds we expect, and we will deliver for PepsiCo in 2008.

In our beverage business we're executing price pack management to offer entry point packages, promotional value, and channel specific offerings, and in snacks we're managing our wait out strategy and in some cases list pricing increases and trade productive to offset inflation, and of course we're driving hard against productivity in all of our businesses.

I feel great about our innovation pipeline for 2008.

It is rich and it is targeted at our critical integration platforms for growth.

In snacks we focused on three fronts.

First, we'll continue to have more flavor extensions building local relevance and adding food authenticity.

For instance, Lay's [Shahslik] in Russia, our new sausage flavor or Kurkure Extreme in India offering intense flavors for teens.

Second, we'll continue to advance our better for you platforms through continued support of the successful baked launches that we had in both the U.K.

and Benelux last year and extend that platform with baked bread snacks.

These bread snacks offer the health and wellness appeal of baked in combination with great snacks like flavorings.

In Turkey we're launching a product called A La Turca Office 3 to 5 to be used in the office in the afternoon, a crusty baguette bread slice with local flavors like yogurt and garlic.

And across Europe a similar type product named Sun Bites will be our snackable bread offering also with flavors tailored to local tastes.

In addition, in our better for you arena we're going to be strengthening our multi-grain offering with our Sun Bites product in the U.K.

which has a third of the daily amount of fiber that you need, and Grain Waves in Australia.

Finally, premium innovation in potato chips offers flavor, indulgence and intensity with terrific products like and Red Rock Deli potato chips in Australia.

And our premium diets flavors Smoky Cheese in Taiwan offers a flavor combination resulting from both marinating and seasoning the chip with a rich smoked cheese flavor.

Beyond our core adjacent categories with extensions like [Divus], pure and natural nuts will enhance our premium line in the Netherlands, and all of these products are at a premium price.

In beverages we'll continue our regional expansion of both Diet Pepsi, Pepsi Max, and 7-Up H2O in a number of countries.

In the U.K.

we're launching Pepsi Raw a premium carbonated soft drink with natural flavorings and colorings sweetened with real cane sugar.

Pepsi Raw will be packaged in glass bottles and initially targeted in the on-premise channel.

On noncarbonated beverages we continue to drive against our new Tropicana juice drink platform which we recently launched in both China and India.

In the United Kingdom we're extending our successful Tropicana brand with a terrific Tropicana Smoothies NFC product, a premium better for you fruit smoothy.

Finally on noncarbonated beverages we'll be significantly expanding our ready-to-drink tea business through the integration of the Lipton markets that we recently added as we expanded our joint venture, primarily in Western Europe.

Overall a strong innovation pipeline that drives relevance, expands our better for you and good for you offerings, and extends into premium core and adjacent categories.

We'll also continue to build out our infrastructure to gain both manufacturing and sourcing efficiencies.

So taken in total we expect to be a strong driver of growth and profit for PepsiCo in 2008.

Let me now turn the call over to John Compton.

John.

Thank you, Mike, and good morning, everyone.

This morning I would like to review the Frito-Lay North America and Quaker Foods North America businesses for 2007 and then give you a brief outlook on the new PepsiCo Americas Foods.

First, let me share my thoughts on a few highlights for what I think was a terrific year for Frito-Lay North America.

The full year Frito-Lay North America growth algorithm was very consistent with our expectations.

3% volume growth, 7% revenue growth, and 7% core operating profit growth with some margin improvement.

Importantly, we invested in double-digit A&M growth over the course of the year to support both our core brands as well as our emerging health and wellness platforms.

Our volume growth was built on strong growth in our core salty snack business with Doritos, dips and multi-packs as key drivers and growth in our emerging health and wellness brands like Sun Chips, Quaker Snacks and Stacy's.

Importantly in measured channels we grew market share both in volume and value in the growing savory snack category and private label remained below a 12% volume share.

I would also like to highlight that measured channels represent less than half of category volume and that the growth is much faster in the unmeasured channels where Frito-Lay also gained share.

Net-net 2007 was a very strong year for Frito-Lay.

Our marketing teams connected with our consumers in meaningful ways and led the industry with award-winning advertising and consumer engagement programs.

Our sales organization delivered service and execution excellence while our supply chain teams achieved 1 full point of manufacturing productivity.

In short, a very strong balanced year for Frito-Lay North America and I could not be more pleased.

Now, specifically in the fourth quarter, Frito-Lay again delivered strong, balanced, top and bottom line performance.

The volume growth was broad-based across our portfolio, returning to 3% growth in Q4 and revenues grew a strong 8%.

That top line momentum combined with manufacturing productivity allowed Frito-Lay to again invest in A&M and handle input cost increases all while driving a healthy 7% core operating profit growth.

Once again Frito's position in the marketplace continued to strengthen in the quarter gaining 0.5 a point of volume share and 0.4 of a point of dollar share in the savory snacks category.

Growth in core Salty's brands and Quaker Snacks was balanced across the portfolio.

Doritos volume continued to grow even as we began to lap last year's crash the Super Bowl excitement and the successful Blazin' Buffalo Ranch introduction.

In this year crash the Super Bowl 2, 300,000 Dorito fans voted online for the original music video that inspired enough of them to be featured on a 60-second Super Bowl spot.

We're confident that this kind of engagement drives growth and loyalty to the Doritos brand.

Importantly, we also aired another consumer-generated 30-second add called Mouse Trap.

Mouse Trap finished number 4 in the USA Today ad meter, and like last year's top-performing ad, the production cost was zero.

All of this reflects our staying connected to the Doritos consumer.

We are also pleased with the sequential improvement in Lay's, volume was down about 1% in the quarter, but our kettle capacity was coming online and began to have a positive impact.

Cheetos grew with the launch of two intense flavors, Chile Limon and Extra, Extra Flaming Hot Cheddar Jalapeno.

In the Quaker Snack line growth was led by innovative products such as Granola Bites and Sweet and Salty Crunch Granola Bars and our Quaker rice snacks business grew double-digits.

To cover accelerated commodity costs, especially in grains, cooking oil, and fuel, we realized about 4 points of rate increases.

We did this using a combination of weight outs and everyday price increases.

Overall then excellent results for Frito-Lay both for the year and for the quarter.

Turning now to our Quaker Foods business, we finished the queer with solid top line momentum in the fourth quarter as oatmeal and ready to eat cereals helped drive a 3% total volume growth for Quaker Foods.

This coupled with effective net pricing led to 8% revenue growth.

NOW, higher input costs, SAP investments, and marketing investments resulted in operating profit growth of 3%.

As I look forward to 2008, we will leverage a combination of innovation such as our new Simple Harvest Heart cereals and Simple Harvest bars and productivity to drive balanced growth in the business.

Now shifting focus to the future and to the new PepsiCo Americas Foods, we're very excited by the synergies and by the opportunities for best practice sharing.

One such example is a truck loading system that Sabritas developed and rolled out across Mexico, and we're already testing that now and in New York, and the results are very encouraging.

Additionally by more fully leveraging power of one across Sabritas, Gamesa, and Frito-Lay North America we'll extend our leadership with the fast-growing Hispanic market, and as Mike outlined, we have made key strategic acquisitions in key South American markets which have strengthened our position in the marketplace.

Let me take you through a few of the highlights for 2008.

At Frito-Lay the innovation will again expand better for you choices.

The coming months we'll see the launch of Lay's Oven Crisp, Cheetos Tracks, and a lower sodium version of Frito-Lay's Ruffles and Tostitos, a line that we call Pinch of Salt.

We will also continue our expansion into adjacent categories with the launch of our True North nut platform.

True North puts a unique twist on nut offerings by offering nut clusters, nut chips, and exciting flavors to nuts.

We will add more flavors to Doritos like Spicy Sweet Chile which promises to build on the success of last year's Doritos line extensions.

II am confident that these new campaigns and offerings will continue to drive consistent growth at Frito-Lay.

Turning to our Latin American snack business which encompasses Sabritas, Gamesa, and our South American food businesses, the innovation focus is also better for you.

Our upcoming initiatives will expand our baked platform with the baked Cheetos introduction in several markets, baked Twistos bread snacks in Mexico, and baked Ruffles in Brazil.

In Gamesa we're excited about the innovation in our Quaker portfolio.

In Q1 we're launching two Better For You Quaker products, Quaker Granola Pops and Quaker Still Bars.

We will also be running our first ever Quaker promotion in Mexico this quarter which should accelerate our launches in the brand overall.

In South America we're extending Doritos beyond corn using locally relevant foods as the base.

Brazil is a great example where one of our upcoming line extensions is a black bean based Doritos.

Now, I don't want to ignore the obvious head wind that our food businesses face in 2008, namely the ongoing increases in key commodity costs.

To offset these increases, we will use all the tools that we have at our disposal.

Those include mixed management, visual pricing, weight outs, and increased productivity.

The combination of weight outs and the modest visual pricing will likely moderate volume growth by about a point although our unit growth will continue to be strong.

At the same time I want to assure you that we're committed to maintaining a strong relative value position within the categories and to continuing to gain market share.

As in the past, all of our snack and food business in the Americas will continue their relentless pursuit of productivity in manufacturing, selling, delivering, and product sourcing.

So in summary, I am proud of the 2007 results, confident that we have the tools and the people in place to continue to deliver excellent operating results and I am proud to lead the new PAS.

Let me now turn the call over to Massimo who will cover our beverage business in the Americas.

Massimo.

Thank you, John.

I'll first comment the results of our North American beverage business for 2007 and then turn to the 2008 outlook for our new PepsiCo Americas beverage division including Mexico and Latin America.

For 2007 PB&A delivered solid 7% revenue and core operating profit growth and at the same time reloaded the innovation pipeline going into 2008.

Across measured and a measured channels, our estimates show LLB category growth of about 1 point for 2007.

Nonmeasured channels drove the majority of the category growth, and we continued to gain share in these important channels.

We did this in the context of enhancing margins of Tropicana despite the dramatic orange inflation and dealing with serious depricing above historical levels as a result of commodity pressures.

We gained volume share versus our principle competitor and private label continued to lose ground.

Our ready-to-drink tea business grew 25% for the year and gained substantial market share.

In Gatorade improved in the fourth quarter which I will cover a bit later.

Let me turn to our quarter four results.

As you saw, we posted a strong finish to the year, particularly in terms of revenue and profits.

PepsiCo beverage North America volume for the quarter grew 1%, and within that CSDs declined 3%, but we gained CSD share and so growth for trademark Dew and our successful new Diet Pepsi Max.

Our non-carbs portfolio grew high single digits, and I am pleased to report that the positive Gatorade volume growth momentum we began to see in August of last year continued through Q4 resulting in about 18% shipment growth for the trademark and high single-digit growth excluding the impact of the G2 launch in November.

Trade and bottle enthusiasm for the G2 launch resulted in strong initial orders.

In looking at Gatorade update we saw all channel scans for the quarter at about 5% lapping 5% last year, and that includes very little from G2.

Our enhanced water brands grew about 30% in total our hydration portfolio delivered double-digit growth for the quarter.

Rounding out our non-carbs, our Lipton ready-to-drink tea and our energy drinks brands also grew double-digits.

Lipton teas white tea innovation coupled with the distribution gains helped fuel the growth behind Lipton's iced tea, and the AMP brand drove energy growth in the quarter.

The growth in finished good long carbs and the relatively soft overlaps from prior year resulted in 15% revenue growth and 19% core profit growth for the quarter.

Now, looking ahead we are very excited about our break through marketing, our robust innovation pipeline and sponsorship events that together will bring new store leverage portfolios throughout the year.

For the new PAB I will share my thoughts on the U.S.

and then turn to the Latin American outlook.

As you saw last weekend on the Super Bowl, we set out to put our brands where they belong, at the core of popular culture.

We leveraged the most interactive and wired communication to do it.

Our pregame efforts generated outstanding awareness in top value, and our associated PR has generated $6 million in comparable print and add value already.

Pepsi Stuff will be our biggest promotion ever, and it is targeted to drive frequency loyalty with our core consumers.

The more Pepsi products you buy, the more stuff you can collect.

Justin Timberlake's spot on the Super Bowl launched our promotion which resulted in over 1.3 million online video views and over 1 million Pepsi calls already entered online.

Also on the Pepsi trademark our Nod spot communicated invigorating benefits of diet Pepsi Max while putting a smile on consumer faces.

We have a strong multi-brand strategy in hydration, meeting key consumer need states with a portfolio of targeted offerings across our brands.

Gatorade, G2, Propel, Sobe Life Water and Aquafina and its extensions.

Our hydration portfolio had some great exposure at the Super Bowl, and our visibility will continue throughout the year.

Moving to specifics, I will first address Life Water and then Gatorade and G2.

Earlier in the year we reformulated Sobe Life Water by reducing calories by 20% while replacing fructose with natural sucrose.

Adding specific infusion of antioxidant vitamin and healthy other ingredients and offering five new well-liked flavors.

Clearly Sobe Life Water is a brand ready to be put on the map.

We did it by adding Lee the Lizard, Naomi Campbell and the world's most popular song and then ad meter's top ranking for a new launched brand.

Importantly, the Monday following the Super Bowl the Life Water commercial was the most watched video on YouTube with over 400,000 hits driving very strong brand awareness that in turn will accelerate our stake at point-of-sale where our bottlers have achieved unprecedented levels of displays.

The Gatorade trademark will continue to benefit from exciting news.

Fueling the G2 rollout was a media campaign that kicked off with the eye-catching teasers prior to Super Bowl and then broke fully on the Super Bowl with the ad featuring Derek Jeter that provided a clear message on off the field hydration.

You will see Jeter in Gatorade excitement in the store as we leverage and commend our replacements and point-of-sale materials that will drive awareness in time.

We're also looking forward to the launch of Tiger in March, a new Gatorade formulation with three flavors that the Gatorade Sports Science Institute developed in conjunction with our specific hydration work with Tiger Woods.

The packaging will also be new and distinctive with an improved grape for better portability.

The energy category is dynamic and growing, and we're making AMP our lead brand.

Our new AMP line extensions elevate traction and relaunch, a leading energy innovation with unique formulations that add functional benefits to energy drinks.

For example, AMP Elevate adds antioxidants and LTN for mental focus and clarity, all with a new mix better flavor.

These brands better target specific energy needs across a broader consumer base.

AMP has teamed up with NASCAR legend Dale Earnhardt Jr.

who will drive the number 88 AMP Energy National Chevrolet at the Daytona 500 season opening in Florida.

Along with great visibility and presence across the AMP brand, the sponsorship offers a tremendous opportunity to bring excitement into the store.

From local race oriented promotion to in-store displays centered on Dale and the number 8 AMP energy car.

Finally, next week we are starting shipments of Tropicana Pure Valencia, the most premium juice Tropicana has ever offered, crafted from the top 3% of our harvest, the selected Valencia oranges.

This premium product answers consumers growing demands and sets a new standard for premium juice.

Pure Valencia is complemented by a line of four other premium 100% pure juice flavors made from consumer preferred fruits.

With four great flavors, the lineup would include both multi-serve and single serve packages.

In total, we have a great lineup of news for our U.S.

market.

Turning now to Latin America, one of the our main crafts on the beverage side is the expansion of our very successful H2O brand, beyond Mexico, Brazil and Argentina to the rest of the region.

In our larger markets we have H2O citrus flavor line extensions featuring natural citrus ingredients.

Natural ingredients will also play in innovation like Pepsi 3 seemed to seal which incorporates all the natural calories from Lemon juice.

Another key focus is to continue to build our Gatorade brand in Latin America which is the largest Gatorade market outside the U.S.

and an important platform and scale driver for non-carbs in the region.

We will strengthen Gatorade across the region with countless specific introductions of packaging innovation and even more new flavors.

In addition, in our Lipton ready-to-drink tea business we have started to transfer the best practices from the U.S.

to Latin America, and in 2008 we will be selling the brand in over 10 countries with high double-digit growth volume expectations.

Importantly what we have shown you in this call is just the beginning.

Across PepsiCo America's beverages, we will continue to strengthen our core, nurture our new launches and develop game-changing innovation, and I am confident PAB will be energized growth in 2008.

With that I will turn the ball back to Mike.

Thanks, Massimo.

One dimension I would just like to briefly comment on is how John's, Massimo's, and my teams are working together with our new sector structure to increase our scale leverage across all of our international businesses.

To accomplish this we're going to continue to leverage our international, commercial, and operating support center to provide outstanding service and ensure that we effectively share best practices across all of the three sectors.

I fully expected this ongoing structure is going to facilitate further joint new product development as well as packaging initiatives as we look to the future.

In addition with my new responsibilities in procurement and IT, I am already finding opportunities to better leverage our global scale in those important areas as well.

I look forward to sharing a few more thoughts on that when we get together at CAGNY.

With that let me turn it back to Richard Goodman.

Thanks, Mike, and good morning, everyone.

As we had indicated we ended the year with strong top line momentum, revenue was up 17%, and core division operating profit was up 11% in the fourth quarter.

We addressed rising commodity costs and made important investments in our operating division.

As you saw from our release, the overall division operating profit margin was down in the quarter but almost all of that decline reflected the items at PI that Mike White talked about, namely the impact of consolidations, M&A and divestitures and marketplace investments.

In the interest of time I won't repeat what we said in our press release this morning regarding drivers of below the line items.

However, I would like to point out that a 220 basis points higher comparable tax rate in the quarter was the primary driver of EPS growing slower than operating profit.

For the full year the comparable tax rate was 27.6% in line with the comments I made during our third quarter call and about 40 basis points lower than prior year.

Moving on to cash flow for the year, cash provided by operating activities grew 14% to $6.9 billion capital spending was $2.4 billion with the net of almost $4.6 billion slightly better than our guidance.

We returned $6.5 billion to shareholders, up 34% from 2006, $2.2 billion in the form of dividends and $4.3 billion in share repurchases.

Acquisition spending totaled $1.3 billion reflecting the strong deal pipeline we discussed at the start of the year.

Now let me turn to our 2008 outlook.

For the year and consistent with our long-term guidance we anticipate volume growth of 3 to 5%, mid-to high single-digit revenue growth and EPS growth of at least $3.72 which represents 10% growth off of our 2007 core EPS of $3.38.

Globally we expect overall direct material inflation of about 6%.

The big driver of cost increases versus the past couple of years is the grain complex, cooking oils, corn, oats, and wheat.

As my colleague's already indicated, we have a considerable number of tools to offset the impact of these cost increases while still maintaining momentum with our consumers.

Taken as a whole, we remain confident that a combination of innovation, selective price increases and productivity will enable us to deliver solid division operating profit growth and EPS growth that's in line with our long-term guidance of at least 10% growth.

I do want to point out that we expect our EPS growth in the first half of the year to be lower than in the second half.

As you'll recall from last year's presentation we benefited early in 2007 from gains on mark-to-market commodity hedges and from relatively low quarterly tax rates as a result of the new FIN 48 tax accounting standard.

These overlaps will particularly impact us in the first quarter of 2008.

In addition, early in the year we will have somewhat higher year-over-year commodity increases than we will for the year as a whole.

Not all of the offsetting pricing and productivity initiatives will have fully kicked in.

As you saw in our press release and in line with our trading plan, we have started to sell Pepsi America's shares.

Our goal over the next few years is to bring down our ownership level to approximately 37%, in line with the level at the time of the Whitman merger.

We also expect to continue to sell shares over the coming years in PBG to a target ownership level of about 35%.

Finally, our EPS guidance assumes a full year tax rate of about 27.5% which is slightly below the comparable 2007 rate.

Moving onto cash flow, we expect management operating cash flow after capital expenditures to be in line with earnings growth.

Our capital investments remain focused on key growth opportunities as we continue to add capacity to meet demands, particularly in our international markets.

Finally, we expect share buybacks to total approximately $4.3 billion.

I would like to remind that you beginning Q1 2008 we will start to report six segments versus the four we had in 2007.

In mid-March we will provide segment results for full year 2005 and 2006 and quarterly segment results for 2007.

I am sure all of you will appreciate the incremental disclosure, our goal remains the same, manage the business as a portfolio on a full-year basis.

Now I will hand it back to Indra.

Thank you, Richard.

I know we have gone a bit longer on the script and will allow a full half-hour for questions and answers.

Let me just sum up by saying I am very pleased with our performance this year.

As I look at our portfolio of leading brands, path of go to market systems, global footprint, and most importantly the passion of our leaders and associates I'm confident in our ability to manage this business for the long term and continue to execute with excellence and deliver our annual targets.

With that we would now be glad to take your questions,

(OPERATOR INSTRUCTIONS) Your first question is from John Faucher with JPMorgan.

This is actually [Joe Herrick] with [Gutterman Research].

A couple of things, Indra.

Congratulations on solid results again.

Regarding (inaudible) can you talk about, maybe provide some color as what you guys are doing with lean manufacturing to keep you in the Six Sigma--?

Joe, you're breaking up in asking the question.

Can you slow down and ask it?

Yes.

No problem.

Regarding your interior divisions, can you provide color as to how you're improving on lean manufacturing, TPN and Six Sigma and the throughput benefit you expect to see through your bottom line within each division.

This is a level of detail we typically don't provide in this call.

All that I'll tell you is if you look back historically, PepsiCo in all of our operating businesses has been a productivity machine.

We talk once every three or four years on the big productivity programs we're engaging on, especially in a large operating division like Frito-Lay.

A couple of years ago when we were at our investor meeting in October of 2006, we talked again about the major productivity programs that we were undertaking.

We are executing along those lines, and that's as much detail as we're willing to provide.

Mike, do you want to add something?

I just, Joe, would add, look, our businesses are as close to a lean manufacturing business as you will ever find.

If you go into a Frito-Lay plant and compare it to a Toyota plant with their approach to lean manufacturing, I think you would find that our velocities, we virtually have almost negative working in capital in the Frito-Lay business in the U.S.

So a lot of those tools really kind of we put in place a number of years ago because it is kind of the nature of our flow business, and we played around with Six Sigma in India and a couple of other markets, but to be honest with you, I would say we continue to think that the best approach for us on productivity is leveraging the front line ideas through our global star world program which we do across both businesses, the U.S., and international, and then continuing to look for opportunities to reengineer our distribution go to market systems and I think we feel very good about you're productivity initiatives for 2008.

What metrics are you using to measure yourself, are you looking at RONA, OE, how are you guys figuring out how are we staying competitive within the marketplace?

We look at return on invested capital.

We have several productivity measures that we look at internal to the Company, and we track every one of them maniacally for every one of our operating businesses, and as Mike said, it is not just in manufacturing.

We do it across our distribution system all the way to our front line.

Are there certain divisions within Pepsi that you have a concern regarding throughput that--?

No, not really.

Not meeting your demand or capacity?

No.

We are sized exactly right, and we handle our capacity expansion very, very carefully.

We're not concerned about this issue at all.

Final question.

Going forward for 2008, going to be very challenging for all companies out there heavily involved in manufacturing.

What's going to be your top three initiatives that you want to put in place to accelerate your continuous improvement processes to show the shareholders whether I am the right person for the job, we're doing well within all of our divisions, and we're moving forward positively?

Look, we've been pretty clear.

Let me be clear.

The three top initiatives, one, dive international growth, and we're doing a very, very good job of driving international growth because most of the fast-growing economies are East of the Middle East, and we're driving growth in all of those areas and in Latin America priority one.

Priority two, make sure that our innovation pump is well primed, and we have a great mix of innovation between premium innovation and innovation in all of our core lines, and we have spent a considerable amount of time on this call talking about the quality of our innovation.

Third, we've often talked about making every $0.01 a prisoner in PepsiCo.

That's what's PepsiCo is known for.

We have productivity programs across the Company which focus on productivity.

Those are the three priorities for the Company, and we're very comfortable, that's what the entire Company is focused on, and we're proud of our record in that.

Joe, thank you so much.

We'll need to move on to the next question.

Thank you.

Your next question is from Christine Farkas with Merrill Lynch.

Thank you very much.

Good morning.

I am looking at your Frito-Lay track record.

The last couple of years you have managed to put up 3% volume growth and 3 to 4% in price mix.

If I heard your comments correctly, you anticipate a potential slowdown in volumes in '08 on the back of stronger rate.

What's different this year?

Are we hitting a new point in terms of affordability or absolute pricing?

John?

Christine, thank you for the question.

Clearly as Richard said the overall commodity market is increasing, and Frito-Lay historically has taken somewhere in the 3 to 4% range in rate and mix increases.

As we go into 2008, as the commodity prices are going up, we will take higher than the historical average in rate and mix increases, most of which, a large majority are through the combination of weight outs, and weight outs as you know don't impact unit volume so you will probably see our volume growth moderate a little bit from our historical averages, but our unit growth will remain strong and our net revenue should remain strong.

On the back of that are you seeing any changes in overall channel mix?

We've heard slow down in beverages in C stores.

Are you seeing that in snacks?

At Frito-Lay we really haven't seen that yet.

Our channel mixes remained pretty consistent.

Our C store business exited the fourth quarter with good strength, so so far we've not seen that yet.

Thanks a lot.

Thank you.

Your next question is from Carlos Laboy with Credit Suisse.

Good morning.

Thank you.

Hi, Carlos.

Hi.

Mike, can you speak to what some of the biggest benefits might be from our SAP investments, you mentioned China, Holland, Mexico, and how do these investments change the way you do business or the way you can do business going forward?

Sure, Carlos.

First of all, this is a long-term transformation initiative to even in China it is probably a several-year initiative, so let me be clear on that.

Our biggest implementation so far by the way has been at Sabritas and Gamesa, so you have to think of it as a five-year transformation initiative.

Obviously we follow our CapEx process where we have a return on investment projected including savings, and we're targeting right in line with that.

I would say there are a number of opportunities that we think overall in our IT agenda through the SAP initiative first and foremost it's going to help us be more effective in providing information on our business.

Let's keep in mind, Carlos, that in international in particular many of our businesses have exploded over the last four years, and our IT infrastructure has not kept pace in providing the information that's needed for us to make the right trade off calls in the marketplace, and I think it will help us there.

Second, it is also very clear that we have a huge legacy across all of PepsiCo of multiple platforms, way more varieties than you would ideally want if you were starting with a clean sheet of paper.

There is substantial IT productivity as we start to shut down old systems and simplify and streamline under the SAP platform that is also going to generate significant savings for us as well.

So those would probably be two of the top ones, and that I would highlight.

Certainly it would also provide us better productivity on our purchasing area, particularly areas like other goods and services that sometimes doesn't get the same focus that the core commodity purchases get.

Carlos, if I may just add to what Mike said, the two big benefits of SAP, whether they be international or North America, is you get one version of all the facts that allows to you look at the data in a more granular way in one place and increased transparency.

You get realtime data, and enough granularity that you can make faster decisions at a point when working the right of the decimal point is as important as working the left side of the decimal point.

Thank you.

Thank you.

Your next question is from Marc Greenberg with Deutsche Bank.

Good morning.

Good morning, Mark.

I just wanted to talk a little more about your domestic snack and beverage businesses, and I am curious about consumer response to pricing in 2007, how that's informed your decisions this year, and whether or not your models for price elasticity tell you anything about what happens in periods of greater economic weakness, and if we start to see consumer really bear down, what kind of adjustments you can make to reflect that growing consumer weakness.

Thanks.

John, do you want to talk about--?

Yes, Mark, this is John.

Again in the fourth quarter you started to see some of the pricing flowing through into the P&L, and we still delivered right at 3% volume growth in the quarter.

It was broad based.

It was across our core salty snack business as well as the higher price per pound health and wellness brands, so to date anyway we haven't seen a slowdown in our volume growth.

Now, as I said to Christine's question, we are going to take a little more pricing in 2008 than we took in 2007, and so one would expect based on the normal elasticity models that the volume growth would probably mitigate, slow down just a little bit.

All of our competitors are also in the same boat that we're in as well as all the broader savory macro snack categories that we compete against.

Some of which are not obvious, confectionaries and businesses like that where the rate increases that some people have announced are higher than what we will probably intend to take.

I think Marc as we get into the course of the year we'll know more obviously, we'll see some channel shipping potentially.

We'll probably see some mix shifting within our own business, but I think we're on balance we have got it fairly well planned out right now.

Marc, if we could just step back from this question instead of getting specifically into snacks and beverages, this level of price increase especially that began last year is new uncharted territory because for many, many years both snacks and beverages were a deflationary environment.

We have to navigate through this thing carefully.

The only thing I will tell you is we have looked at every lever we can deploy to handle revenue growth, volume growth and to get more productivity out of the system.

Because by and large we have DSD systems we can actually implement changes quite rapidly whether it be snacking or beverages, and because we have a great relationship with our bottlers, we can actually work with the bottlers to implement the changes rapidly.

As John said, we are in uncharted territory.

We have to wait and see how traffic patterns evolve in the retail channels, but at this point we're not worried.

Thanks, Indra.

Just as a quick follow-up to that, to the core commodity pressures that you indicated are driving inflation higher, are you seeing any significant difference in the level of those commodity increases domestically versus abroad?

Many of these are global markets, Marc, but Richard, do you want to talk?

They really are global markets, and we're seeing it in primarily in vegetable oils and sort of the grain complex, and those really are being affected by all of the global macroeconomic trends, right, and you've seen that from other food companies as well.

So the India and China's consumption is affecting the global markets, the biofuels, which is happening both in the United States and other countries is affecting that.

The weather in Australia throughout Australia affects global prices as well, so it is across all of our businesses, and both the commodity pressures and the pricing and the weight outs that we're going to see are going to take place both domestically and internationally.

Thank you.

Thank you.

Your next question is from Judy Hong with Goldman Sachs.

Hi, everyone.

Hi, Judy.

Massimo, I was wondering if you can just speak to the disconnect we've seen in terms of your very strong shipment growth in Gatorade versus sort of weaker scanner data on that product so that some of that is G2 impact?

Obviously the scanner data is limited from a channel perspective.

I'm just wondering if you can talk a little bit more about sort of the disconnect there and then maybe even more broadly speaking in terms of the health of the Gatorade product itself with the G2 launch, if you think that this is a product that still has legs to grow in a high single-digit right?

Massimo.

Yes.

Hi, Judy, so first of all let me really start by saying that we feel that the Gatorade franchise is very strong, and if you think about it, we really are selling the best range of sport drinks across the category.

Now, on specifically your question, first of all the shipment as we said, the 18%, includes about half, was G2 shipments.

While on the scan number we quoted this was -- G2 was ast the present was all core Gatorade, and as you say, it is important to remember that our measured channel is only half of the story, and naturally we're very pleased with what we've seen in the non measured channel performance.

Now, specifically on G2, remember that G2 is the biggest innovation we have done in Gatorade since the launch of the brand.

It is having a very, very strong start at the moment across all the channels, and because it is really meeting an existing consumer need of providing hydration functionality at the lower calorie level, so we feel very positive about it, and the early signs confirm our expectations.

Now, don't forget that as of next month we also start shipping Tiger which is going to be another very strong innovation and right at the core of the Gatorade functionality promise, so all in all we feel confident with our guidance of high single digits.

Judy, let me just add one other thing.

We went through December shipping G2 so that we have distribution when the advertising breaks.

It is only with Super Bowl that the advertising for G2 has broken which means consumer awareness through mass media is just breaking, so we have to wait a couple of periods to see how Gatorade and G2 perform in terms of the overall franchise, but the early reads that we have look positive.

Let's come back and talk sometime when we have our Q1 earnings call as to how we did on Gatorade and G2.

That's helpful.

Then just a clarification, Richard, on the commodity costs inflation much 6% in '08.

That includes the orange prices decline year-over-year?

Yes.

That includes some benefit.

It is about a 0.5 percentage point benefit from the benefit on oranges, but note that the answer I am giving you is a global answer as well.

Thank you.

Thank you.

Your next question is from Bill Pecoriello with Morgan Stanley.

Good morning.

Hi, Bill.

Question on the productivity initiatives for '08 you said you're looking at everything up and down the value chain, and you took some restructuring charges also here in the fourth quarter, so what kind of magnitude of productivity savings do you expect in '08 or can you talk about in terms of the higher commodities that you're facing versus what you expected, how much is offsetting on the rate side versus the productivity side?

Bill, we're not providing that level of granular detail, but just be assured that to offset the 6% inflation impact we are balancing that inflation with pricing, productivity, and mix management to deliver on our algorithms, so we're not providing you individual detail in each of these buckets, but rest assured that productivity is a major contributor to that formula.

I had a question for Mike on the international reinvestment in the emerging markets in the quarter, if you can give any more color on the nature of those investments or where they were concentrated and he referred to helping to maintain the strong momentum in '08 in those markets.

Sure.

Be happy to, Bill.

If you recall, we said there was about 10 points.

That's about $50 million, $10 million of it was SAP launches in China, in Holland, and in Mexico.

The other $40 million are the marketplace investments that we talked about, Bill.

About 60% of those were beverages, about 40% were snacks, the snacks investments were kind of the normal thing that we do opportunistically when we have room which is for instance racks, we increased a fair number of racks in Mexico with Gamesa and Sabritas in the fourth quarter on the snack side.

On the beverage side we were ramping up both launches of non-carbs like Tropicana Twister in India and China as well as Gatorade in China in anticipation of the Olympics.

We also were investing in coolers in a higher level of coolers and beverages, again targeted at key high growth emerging markets.

Thank you.

Thank you.

Your next question is from Lauren Torres with HSBC.

Good afternoon.

Hi, Lauren.

Hi.

Indra, I was hoping you could talk a little bit about your acquisition strategy for this year.

As your competition has become more active lately, are you thinking about building your business differently, particularly your U.S.

beverage business?

Our acquisition strategy has been relatively unchanged for the last few years, Lauren, and I suspect it will remain unchanged for the next few years.

We basically focus on tuck-in acquisitions, defined as those that help us fill up white spaces or add capabilities to our Company in related and adjacent markets, and that's really what we've been focused on.

Our tuck-in strategy pipeline for 2008 again is very robust.

We talked about $1.3 billion of acquisitions that we concluded in 2007.

I hope we can keep up that pace in 2008 because our pipeline is looking very, very impressive at this point.

Also one quick question for Richard.

Is there any guidance you could provide us with respect to Corporate expense for this year?

Corporate expenses actually were pretty flat in 2007, and we would expect them to be sort of flat to slightly down in 2008.

What you're seeing though in 2008 is you will see some increased expenditures for our SAP transformation both internationally and domestically.

Some of it just really a mix difference between expense and capital.

All right.

Thank you.

Thank you.

Your next question is from Bill Leach with Neuberger Berman.

Good morning.

Richard, could you be little bit more specific on what kind of bottling capital gains you're budging for the year in your 372 guidance?

I think we indicated that we would continue to sell down some of the PBG shares that we own and that we have begun selling some of PAS shares as well, and so I think you'll see numbers that are -- it sort of depends upon what the market -- where the market takes us obviously their stock prices have changed over the last month, so it is not a budget issue.

It is just a gradual move down in the ownership percentages.

What was the gain last year?

Was it about $0.08 a share?

Gain was I think around $150 million, I think.

So you'd expect a comparable gain this year just roughly?

I think we're not going to comment on the gains that we would expect.

We don't know the price.

That's why.

All right.

Congratulations on a great year.

Thank you, Bill.

Thank you.

Your next question is from Bryan Spillane with Banc of America Securities.

Good morning.

Hi, Brian.

Question on, in 2008 you're facing pretty high or very high commodity costs.

You've taken pretty extraordinary actions both in terms of pricing and productivity kind of relative to the average in order to combat that.

If we look out over a three-year time horizon, how much of what you're doing do you view for budgeting purposes as being incremental and how much of it is just pulling forward some things that may have been later in your three-year plan?

And I guess what I am driving at is as we think about our earnings model going out over three years, have we just pulled forward some of those levers or do you think this is incremental to that plan?

Tough to answer because pricing we clearly have pulled forward.

We would not have had this level of pricing, we would have had a slow increase in pricing over time.

We've had to pull forward pricing, so that's very incremental.

Some of the productivity programs, they ingenuity are the PepsiCo associates really comes out, Bryan, because when faced with inflation the teams got together and said what new ideas can you come up, and Mike referred to our style programs, ideas seemed to be coming forward from every corner on how we can cover some of the inflation.

So I don't know if it is pulling forward because our core productivity programs which are multi-year programs, those are continuing on, what we are seeing in 2008 is extraordinary new programs that are coming in place to cover extraordinary inflation, so I suspect year-over-year you're going to see more of those combined.

I don't know, Mike or John if you want to add something or Massimo?

Let me comment on it because I spent a fair amount of time with the procurement guys going through a number of the grain complexes and cooking oils.

And all of the outside advisors would tell you that there has been if you will a correction, that as ethanol and kind of the use of food for fuel has -- the connection has been made, and in fact the markets have -- are beyond what they should be if you look at the economics of fuel for food.

Having said that, the markets are where they are, so all of the perspective we get is that longer term I don't expect them to go back down.

There has been a one-time I would say adjustment in the commodity markets, and who knows where oil and kind of fuel oil will go over the next several years, but none of the models that we have looked at from external advisors would suggest that there is another massive increase in commodities that one would expect over the next three years even adjusting for the ethanol and that.

Having said that, commodity markets are pretty hard to predict.

I think also, this is Richard, some of the changes in energy or in food costs also create opportunities for new productivity certainly against those both from a formulation standpoint as well as from a manufacturing standpoint, so I think part of it is bringing forward stuff that we saw.

Part of it is there will be new programs, and part of it is the circumstances themselves create opportunities for us from a productivity standpoint.

Is it reasonable to assume there may bit more pricing in your long-term model than there was two years ago?

I think it really at the end of the day depends upon where the commodity prices are.

We have no intention of doing any more pricing than we need to in the current environment, and it is a little hard to have a crystal ball on exactly whether 2009 is going to have -- whether the prices will stay stable or whether they will continue to increase, but we're certainly have no interest in taking any more pricing than we need to.

Great.

Richard, if I could follow-up, just on net interest expense, any guidance there for this year?

I mean, I think overall you'll probably see net interest expense increasing just simply because we are borrowing to -- for acquisitions, and so what you saw this year was the average debt balance went up and roughly in line with our acquisitions, and as we do more acquisitions, you'll see that interest expense go up.

The flip side is of course that we'll have the earnings from those businesses.

Great.

Thank you very much.

Thank you.

Your next question is from Justin Hott with Bear Stearns.

Can you answer a couple of questions on Russia, the growth you're seeing in the metropolitan areas and Moscow and St.

Petersburg versus other areas of the country and how it is going on juices and cooler placements out there?

Justin, it is Mike.

I actually was in Moscow just a couple weeks ago.

We're very, very pleased and bullish on our business in Russia.

On the snack side we had a very strong fourth quarter with terrific growth in our Russia business of almost 30%, key load growth in Q4, and we're off to a terrific start in Russia this year as well with our snacks business with a strong double-digit performance there as well.

So I am very optimistic about our Russia business.

Our biggest challenge on the snack side is getting another PC 50 fryer in there fast enough so that we can continue to support the growth that's there with the consumer.

On the beverage side as well we had a very good fourth quarter.

We're very pleased with the performance.

We had terrific growth particularly on non-carbs.

We were double-digit growth overall in Russia for the quarter with very, very strong growth from energy as well as water as well as our Lipton trademark which is a fabulous story in Russia.

We have a very balanced portfolio, 50% is carbonated soft drinks, 50% is non-carbs.

We're seeing good growth there.

I'm optimistic as well about this year, and certainly if you look at the country and then you split it by region or by city, you're seeing disproportionate growth from outside of Moscow and St.

Pete but even Moscow and St.

Pete continue to be healthy, but I think you are seeing trickle down of the GDP per capita income growth all across the country.

Mike, your juice strategy out there?

Sorry?

Juices, can you talk a little bit about what you're doing out there?

Our Tropicana business had a good year last year in Russia, and juices overall, again you have to factor in some of the commodity cost challenges, so I think we're seeing certainly some price increases in juices commensurate with some of the commodity cost challenges particularly on apples, and that may create some headwinds for the juice category in the short run, but again the growth in juices continues to be healthy, and I expect over the long run will continue to be a very, very health and I attractive category in Russia.

Okay.

Thanks.

Thanks a lot.

Thanks, Justin.

Thank you.

Your next question is from Kaumil Gajrawala with UBS.

Good afternoon, everyone.

Hi, Kaumil.

I guess, Richard, first we talked a lot about input costs and what you're doing but not much about hedging.

Could you help us on hedging so we can maybe monitor the volatility in some of the key inputs over the course of the year?

From clearly we have more coverage as you would expect in the first half of the year than we do in the second half of the year, but we're constantly as a, just as a Company we do forward buys, and we use some hedging mechanisms as well in order to be able to cover our commodity costs, and we've done that over the last several years and clearly we did that coming into 2008 as well.

What you're seeing what I had talked about earlier was clearly with the ramp-up in the commodity costs in the second half of 2007 clearly the year-over-year lapse in the first half of the year, even when we have coverage is going to be a little bit higher than it is in the second half of the year.

Okay.

And then quickly on AMP and the relationship with the bottlers, if we can get an update, I understand there's discussions in moving the manufacturing over and is that having any impact on execution as we go into the big rollout?

Massimo.

Yes, Kaumil, indeed absolutely no impact on the execution because the bottler were already selling the product before so that has not changed, and there is some rebalancing of the supply indeed from co-pack to the bottlers, but this will have absolutely no impact whatsoever.

Thank you.

Thank you.

Your final question is from Eric Katzman with Deutsche Bank.

Hi.

Good morning.

Hi, Eric.

Actually good afternoon.

Just a quick follow-up on the volume and demand elasticity on Frito-Lay.

Indra, you noted that you have the flexibility of the DSD network, and that's true, but it differs from manufacturing warehouse distribution in that the fixed cost of running the trucks out every day are kind of on you, so if, like how do we think about if the demand elasticity is worst, does the pricing cover that or is that a risk to the numbers?

John, do you want to take that?

Eric, as I have said Frito-Lay for the year did right at 3% volume growth.

While we're going into a little bit of uncharted territory, again, we're still expecting good volume growth in the business.

We're talking moderate coming down 0.5 point to 1 point overall.

We won't know of course until we get into the middle of the year.

So far so good coming out of the gate.

You can see the share, the scan numbers in the month of January.

As it relates to the DSD system, route engineering is a source of productivity as well, so that's something that we did in the fourth quarter.

That's an ongoing tool that Frito-Lay uses, so they're constantly updating the route engineering models as is Sabritas and Gamesa and our DSD systems in Latin America.

I don't expect deleverage in selling expense in our S&D costs.

That has been a source of leverage for us in our P&s, and I think it will continue to be one.

Eric, the advantage of having DSDs is as fast as you can add routes you can take out routes.

It is a fixed cost if you want to look at it that way but it is also a semi variable cost because it gives you the flexibility to take out the routes.

That's helpful.

Thank you.

Thank you for your time and attention, and we truly appreciate your interest in PepsiCo and look forward to speaking with you soon, perhaps at CAGNY.

Thank you.

Thank you.

This concludes PepsiCo's fourth quarter 2007 earnings conference call.

You may now disconnect.