百事 (PEP) 2008 Q1 法說會逐字稿

Good morning and welcome to PepsiCo's first quarter 2008 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 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 statements.

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 forward-looking statements, but we undertake no obligation to update any such statements.

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

You should refer to the investor section of PepsiCo's website at www.pepsico.com, 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 Chief Executive Officer; John Compton, CEO of PepsiCo Americas Foods; Massimo d'Amore, CEO of PepsiCo Americas Beverages; Mike White, PepsiCo's Vice Chairman and COE of PepsiCo International; and Richard Goodman, PepsiCo's CFO.

Today we will review our Q1 2008 results in the context of our new organization structure.

Our prior-year's financial results and MD&A recap under the new structure were released earlier in the quarter in our 8-K filings.

Please refer to the investor section of our PepsiCo website for these filings.

After our prepared remarks this morning, we will leave time for questions and answers.

With that I'll turn the call over to Indra.

Thank you, Jane, and good morning, everyone, and thank you very much for joining us this morning.

I appreciate the opportunity to discuss PepsiCo's first quarter performance and our outlook for 2008.

Now before we begin let me just refer back to this morning's release where we are reiterating our full-year guidance of 3% to 5% volume growth, high single-digit revenue growth and earnings per share of at least $3.72 for the year.

In the quarter the strength of our portfolio, together with the breadth of our global footprint, enable us to manage the challenges of a slowing U.S.

economy and rising commodity inflation, yet deliver solid overall business results.

Worldwide snacks volume grew 4%, worldwide beverages grew 4%, net revenue was up 13%, division operating profit grew 10% and EPS grew 7%.

Before Mike, Massimo, and John talk in more detail about their businesses, let me share my thoughts on the environment in which we are operating and how we are managing our businesses to deliver results.

The first factor is the rapidly changing macroeconomic picture across the globe, and let me start with the U.S.

where the economy has significantly slowed and consumer confidence is low, and this is not news to any of you.

The good news, however, is that in past U.S.

slowdowns, our categories have done quite well, in part due to the relative affordability of our products and in part due to consumers economizing during hard time and shifting to an at-home eating occasion.

Indeed, we've seen that shift taking place over the past few months, where traffic has declined in two channels; food service and to a certain extend, C&G, causing volumes in the highly-penetrated beverage business to slow in these two channels.

Interestingly, our snacks volume in these channels have held up very nicely.

On the other hand, volume across large format channels is pretty good, as consumers shift to food and beverages consumed at home.

In markets outside the United States, the global macros are still very good, particularly in the developing economies where robust economic growth, coupled with low per capita consumption levels of our products creates vibrant growth opportunities.

The geographically-diverse portfolio that we have built over the past decade allows us to take full advantage of this international growth.

You see this in our strong Q1 results, where our businesses outside the United States, both in beverages and snacks, posted very healthy results.

In addition, the currency diversification from our international businesses has provided some counter balance to the falling dollar's impact on commodity prices, which brings me to the second factor, commodity inflation.

We see commodity prices going up in almost every country in the world, particularly in grain, cooking oil and energy, and this trend accelerated through Q1 of this year.

In the U.S.

we have the somewhat unusual circumstance of both an economic slowdown and significant commodity inflation, and to be honest, we are dusting off long-forgotten lessons on operating in this (inaudible) environment.

Our commodity inflation estimate for the year is 9% to 10% worldwide versus the 6% we had indicated on the Q4 call.

The good news is that at this point we are largely covered for full year on key commodities, but to address this cost spike we are taking additional pricing and tightening our belt.

We have been pacing our pricing execution in the marketplace, including both weightouts and visual pricing, to minimize the impact on consumers.

Importantly, our early reads on the pricing we have taken in a number of markets suggests that elasticities are better than anticipated and show our brands' pricing power in the marketplace.

Now, as consumer outlay is going up, we are watching very carefully to see how that expenditure is going to be allotted across categories so that we can take the appropriate actions to drive growth of our categories.

For the year as a whole, our focus remains on managing our portfolio, to achieve our full-year performance objectives.

John, Mike, and Richard will cover the specific action plans in place to address this high level of input inflation, but before I hand it off to them I want to reinforce PepsiCo's considerable capability advantages.

First, our culture of innovation.

We have a robust innovation pipeline that enables us to sustain consumer momentum while also achieving the price realization required to help offset significant input cost inflation.

We intend to fully leverage this pipeline for growth throughout the year and to continue to transform our portfolio with health and wellness options.

Second, we have a productivity culture and a passion for execution, both critical to ensure that we derive all the benefits possible across our businesses.

Our team are focused on both cost initiatives and targeted price pack management so that we can provide strong relative value across all our brands.

Third, our tuck-in acquisition strategy continues to advance.

Importantly this quarter we announced a deal to acquire the largest juice company in Russia, Lebedyansky, which builds our portfolio and infrastructure across the growing Russian marker and compliments the strong position we already have in juices in Europe, including Tropicana in the UK, France and Benelux, and the recently-acquired Sandora in the Ukraine.

We also announced a chilled dips venture with Sabra, adding yet another new platform for growth.

And we will continue to take advantage of tuck-in acquisitions to expand our reach and enhance our portfolio.

Fourth, we will continue our important investments in our business transformation initiative and stepping up our research and development capability, both so critical to help us maintain and enhance our long-term performance.

Lastly, and most importantly, we have a terrific management team with local savvy and tremendous commitment, giving us the skills and experience to navigate the changing dynamics of the marketplace.

Our goal is to manage the portfolio of businesses that constitutes PepsiCo prudently and to deliver our full-year guidance, 3% to 5% volume growth, high single-digit revenue growth and earnings per share of at least $3.72 in 2008.

So with that, let me turn the call over to John Compton.

John?

Well, thanks Indra, and good morning to everyone.

This morning I'd like to review the Q1 results of PepsiCo Americas Foods, which, as you know, encompasses our food businesses across North America and Latin America.

As you saw in the press release, on a reported basis we generated 3% volume growth, 13% revenue growth and 8% operating profit growth, solid results in the face of considerable commodity headwinds.

So let me take you through each of our divisions and I'll start first with Frito-Lay North America, which has generated 2% volume growth, 7% revenue growth and 4% operating profit growth.

Let me first focus on the strong top line performance and then I'll address profitability.

On the volume side I am very encouraged by our 2% growth, especially in light of the impact on pounds of the weightouts we took this quarter.

Weightouts impacted volume growth by a couple of points.

Across the portfolio we saw strength across our core products with mid single-digit volume growth in our Lay's and Ruffle trademarks, and high single-digit growth in Cheetos and dips.

Now at the same time, we did see declines in our Quaker rice cakes business and a modest decline in trademark Doritos, but remember, Doritos was lapping double-digit growth from the prior year.

Overall, Frito-Lay continued to drive both volume and value share gains in measured channels.

So I look at the 2% volume growth and 7% revenue growth, coupled with our strong share gains, and it reflects to me the ongoing strength of our brands.

Now on the profit side, our 4% growth was about three points below our historical average and there was one primary factor.

At Frito-Lay we plan pricing four to five months ahead of in-market timing, In the first quarter, based on the commodity forecasts we had in September of '07, we executed the first phase of pricing, primarily as you know through weightouts, but we did take some visual pricing.

The net effect was to realize about four points of positive price per pound.

However, with the run-up of commodity costs we saw at the end of Q4 and the beginning of Q1, we experienced a gap between our phase one pricing actions and our actual commodity costs, which did impact profit growth in the quarter.

The second phase of our planned pricing will address this issue for the balance of the year, and effective April 20th we have taken visual price increases, primarily on our larger take-home sizes.

Now we will maintain our promotional frequency in depth, but at higher price points.

Once fully implemented in Q3, total pricing actions -- the combination of the weightouts and visual pricing -- will be in the high single-digit range for Frito-Lay North America.

And as you might imagine, these pricing actions will likely lead to volume growth below our historical levels.

But based on our full-year coverage of key ingredients, materials, and energy, we believe we now have the appropriate level of pricing in the marketplace to cover our costs.

Importantly, we feel that our innovation calendar is strong over the balance of the year to keep our revenue growth strong.

As an example, during March we introduced TrueNorth nut brand in key customers and held sampling events in over 1,300 target and Sam's Clubs.

We will complete our full rollout during the second quarter and TrueNorth is off to a very good start.

We launched two new baked snacks, Lay's Cracker Crisps and Cheetos Cracker Trax, both smart spot qualified and targeting incremental cracker occasions.

Responding to our number one consumer request for lower sodium versions of our core brands is our new Pinch of Salt line.

It has 30% to 50% less sodium than the original products with all the great taste that you've known to love behind Lay's Ruffles, Tostitos and Fritos brands.

During the quarter we completed the formation of the joint venture we announced earlier with the Strauss Group, makers of the fast-growing Sabra hummus and dips.

Under the new JV Frito-Lay and Strauss will each own 50% of the Sabra dip business.

Sabra expands Frito-Lay's role in providing healthier snack options and aligns with this fresh trend that's taking place in the marketplace.

We are delighted to add Sabra's Mediterranean dips to our portfolio.

Now the final element of our operating profit story is always our continued progress on productivity at Frito-Lay.

Frito expects to cover about a quarter of its commodity cost inflation with productivity.

One example is our prepacked weekender merchandising initiative in small format.

It's a stand-alone, pre-stocked merchandising unit that reduces merchandising costs and drives display execution.

The success of this initiative is in combination with our broader up-and-down the street growth plan, helped to drive our C&G sales up over 3% in the quarter.

That's despite traffic declines in this channel.

So in total, our productivity plans are on track across the supply chain, both to mitigate cost and more importantly to help drive sales.

So to sum up Frito-Lay North America, while the challenges in the commodity costs requires incremental pricing and productivity, the entire Frito-Lay team is working to continue our share gains, to maintain our relative value, to minimize the pricing impact to pound growth and the return to profitability to more typical levels for Frito-Lay.

Now let me turn to Quaker Foods North America.

Our Quaker Foods division reported about flat volume for the first quarter, bit strong top-line growth of 7%.

Quaker's top line was driven by volume growth in Quaker oats and ready-to-eat cereals.

Net price realization and positive mix resulted in 7% revenue growth and helped offset commodity inflation.

All in all, Quaker Foods North America delivered a strong 7% operating profit growth.

And like Frito-Lay, Quaker Foods will be executing additional pricing through Q2 to keep pace with inflation pressures.

Now turning to Latin America, our Latin American food businesses had an excellent first quarter.

Each of its segments, Sabritas, Gamesa and South American Foods contributed to strong and balanced results.

Latin American Foods reported growth was 8% volume, 37% revenue, and 27% profit growth.

Now excluding the impact of M&A with the consolidation of a JV and the ForEx tailwind, Latina Americas Foods growth was 5% volume, 11% revenue, and 15% profit growth.

Sabritas delivered strong performance during the quarter, driven by an effective weightout and pricing actions coupled with successful promotions that delivered unit volume and revenue growth.

Gamesa also posted a strong performance, with high single-digit volume growth and continued top-line momentum, especially in its high-end cookies and its expanding line of healthy Quaker cookies, bars, and snacks.

And turning to South America, South America contributed significantly to growth in the quarter, especially in the light of the capacity constraints in Brazil as the result of a fire in one of our major production facilities at the very end of last year.

Brazil has been executing very successfully on its contingency plan, which included SKU rationalization and leveraging the newly-acquired Lucky production ability to its maximum level.

The Brazil snack business will continue to benefit from the integration of the Lucky snacks business and the launch of its new Twistos platform, which a healthy bread snack.

So in summary for PepsiCo Americas Foods, there will continue to be lots of moving parts in the business equation over the next couple of quarters.

However, I am pleased with PepsiCo Americas Foods overall performance in Q1, as well as with the initives we have in place to manage commodity inflation while maintaining strong consumer momentum and delivering appropriate profit growth for the year.

With that, let me now turn the call over to my friend, Massimo.

Thank you, John, and good morning.

I'll provide an overview of PepsiCo Americas Beverages Q1 performance, including specific reviews of both our North American and Latin American markets.

In Q1 total PAB volume growth decreased slightly versus prior year.

However, (inaudible) 6% revenue growth and total operating profit increased 7%.

Although I am pleased about the profit performance of this seasonally-small quarter in our beverage business, volume growth in North America was below our long-term objectives, driven by category softness.

So let me try to put our North American performance in context.

Clearly, the economic slowdown has pressured the LRB category.

In quarter LRB declined almost two points in measured channels, and we see continued pressure on the category, with all channel growth for the full year probably only flat to up slightly.

This impact (inaudible) the slowdown in the unflavored water category, which has helped to fuel overall category growth over the past several years and a softness in the food service and (inaudible) channels.

Turning to our own performance for quarter one, we were pleased to hold (inaudible) share in the measured channels, but profitable top-line growth for us and our bottlers continues to be a priority as we move forward.

For Q1 in PAB we held overall volume share in the face of a challenging consumer and competitive environment, in part reflecting our strong performance over the Easter holidays.

Our Mountain Dew trademark continued to deliver growth, and heading into the summer, we are further strengthening the trademark with our distinctive (inaudible) promotion.

This engages Mountain Dew's loyal user base to create and choose their next flavor innovation.

Although we experienced mid single-digit declines on brand Pepsi, we did begin to see the (inaudible) connection and engagement in consumers via our Pepsi Stuff loyalty program and the continued growth of Diet Pepsi Max.

This year's iteration of Pepsi Stuff is on track to be our biggest consumer promotion ever.

We already have more than one million (inaudible) spending about ten minutes each on the pepsistuff.com website, consumers have redeemed over 400,000 prizes to date.

Diet Pepsi Max growth has accelerated on the heels of the hugely successful communication campaign we kicked off during the Super Bowl.

Max repeat rates are very high, so we'll continue to invest in [driving] trials, building its user base and expanding its footprint.

Accordingly we expect Max to continue to win market share.

We are also pleased with our total Gatorade performance, which grew almost 6% in quarter one.

Our line extensions, G2 and Tiger, and performing very well in the market.

G2's trial progression is the steepest we have ever achieved for a Gatorade innovation.

Even more encouraging is G2s level of repeat purchase, which is a good indicator of the sustainability of our innovation.

After 16 weeks in market it continues to grow from a very solid base.

Now it is also important to note that for both, G2 and Tiger, we quickly gained distribution, achieving our 90% target in just eight weeks.

However, we know that the speed did not allow us to get to all the incremental space we will ultimately obtain, and this, combined with aggressive G2 prelaunch (inaudible) in quarter four, restricted Gatorade's overall volume growth for this quarter.

We have planned aggressive shelf resets to capture incremental share and cold wall space gains for entire Gatorade trademark, and we are working with key customers to complete this ahead of the summer consumption peak.

Therefore, I remain confident that volume growth will continue to improve as we approach the warmer peak season and that Gatorade will generate high single-digit growth for full-year 2008.

In the water category, unflavored base Aquafina declined mid single-digits.

We continue a rational approach to managing this lower-margin segment, which saw some aggressive pricing in the (inaudible) channels.

However, we remain highly focused on the enhanced water segment.

Sobe Life Water is generating strong consumer (inaudible), which has translated into triple-digit growth and share gains in quarter one.

We are seizing on this momentum, continuing to drive trial and distribution for the brand and launching take-home four-packs enlarged from (inaudible) in Q2.

Looking to second half of the year, I can assure you that our Sobe leaders will be dancing with more (inaudible) uses for Life Water.

Our Lipton Tea business continued our non-carbs growth and build our leading share position in the ready-to-drink tea category.

To better capture new consumption occasions, we are continuing to add the new packaging to appeal to a broader range of consumers.

For example, we are rolling out a jock package in selected geographies targeted at heavy tea drinkers.

On the energy front we are focusing on the Amp brand, which grew more than 60% in the quarter and drove overall volume growth of 14% in our energy portfolio.

The Amp brand gives us [basic installed share presence] and a more targeted execution focus.

We recently Introduced three new Amp flavors, each with specifically-targeted energy benefits to meet the unique needs of energy consumers as they segment their [usage locations.] Our Tropicana juice volume declined consistent with our expectations in the quarter.

Our innovation pipeline began to hit the market in March.

First, we started national of our Premium Pure Valencia juice line and expect full distribution before Memorial Day.

Second, our easy-pour Tropicana Pure Premium pitcher will also roll out nationally during Q2, adding functional convenience to our core brand.

We will continue to (inaudible) supply chain productivity and invest to drive (inaudible) awareness of our [news].

I also would like to note that Naked Juice posted 10% volume growth and had an important food service swing.

You can now enjoy a Naked Juice at Starbucks across the country, a new (inaudible) outlet for the brand that will increase trial and drive growth.

Clearly the dynamics are changing in the North American liquid refreshment beverage category; however, we have some clear advantages that give us confidence going forward.

We have the leading non-carb portfolio in North America.

Our Mountain Dew brand continues its growth.

Our innovations like G2 and Max are doing well in the marketplace.

Our exposure to the food service channel is limited, we have a strong calendar of programs with our customers, and very importantly, we have a constructive relationship with our bottling partners.

Now turning to south of the border, I continue to be encouraged by the positive results of our beverage business in Latin America.

Volume in the region grew mid single-digits during quarter one.

Trademark Pepsi grew well and we enjoyed CSD market share gains across many of our key markets.

H2O, our winning product line at the intersection of CSD and flavored water, continues to grow and is growing in its appeal with new flavors, like apple and citrus.

Non-carbs set the pace in Latin America, with strength across virtually all our brands, particularly Lipton, [B-Lite Flavored Water] and Tropicana.

Gatorade grew mid single-digits and continues to lead the sports drink category in Latin America by far.

So in summary, I expect 2008 to be a year of growth and rebuilding for PAB beverages.

I am convinced that we are making the right bets and we will continue to show progress, especially in hydration tea, energy and Latin America (inaudible).

Now let me turn it over to Mike.

Thanks, Massimo.

Good morning, everyone.

Let me start by saying that I'm particularly pleased with PIs first quarter results from three perspectives.

We had strong double-digit volume growth and strong profit growth, as well.

The growth was very broad-based across all our markets, both developed and emerging, and both of our categories, snacks and beverages.

And we made some strategic progress with our major acquisition of Lebedyansky and several important product launches under the Tropicana brand globally.

Now as a reminder, PI includes all of our snacks and beverages businesses outside of the Americas.

The strong momentum from 2007 has continued into 2008, with our businesses delivering double-digit volume growth in both snacks and beverages, as I mentioned; 27% revenue growth, and 26% operating profit growth.

Nos on an organic basis, excluding the benefits of the positive foreign currency translation and acquisitions, which we completed, PI still delivered very robust and balanced Q1 growth; 10% snack and beverage volume growth, 12% revenue growth and 14% operating profit.

The comparable operating margin, excluding ForEx acquisitions and consolidations, was 13.9%, up almost 30 basis points versus prior year.

Now before I give you an overview of our two key regions, let me make a couple of broader comments about PI in total.

First, PI showed great top-line strength in the quarter.

Our volume growth in both beverages and snacks was broad-based, but was especially robust in our emerging markets.

And as I mentioned, even without the tailwind of acquisitions, snacks and beverages each grew 10%.

Second, innovation, as Indra mentioned, continues to be a significant driver of our growth in both volume and in revenue, and our focus on innovation has been in PI in three broad areas.

First, adding local relevance and food authenticity to our core brands.

For instance, our new BBQ Doritos flavor in Saudi Arabia is growing, and Doritos is becoming a significant new platform for growth all across the Middle East.

Our Chinese New Year campaign, which featured our new Lay's warm winter flavors, like lychee and mango, also had sensational results.

On the beverage side, Pepsi Raw in the UK is seeing success in our food service accounts, as a more natural, all natural premium Pepsi option.

Our second area of focus is the regional expansion of successful new products across several markets.

We expanded the geographic footprint of Pepsi Max in China and we'll be launching Max in India, Vietnam, and Pakistan in Q2.

Also in Q2 we'll be launching H2O in China, Lebanon, Finland and Switzerland.

And third and perhaps most strategic, we're extending our better-for-you platforms in both snacks and beverages.

Our bread snacks in in turkey, and our baked Lay's product in Belgium and the Netherlands are off to a strong start.

Importantly, we've jump-shifted our juice and juice drink business on the beverage side,both organically as well as through acquisition.

Our Tropicana juice platform expanded meaningfully in the quarter.

We launched Tropicana Twister in India, supported by extensive sampling and national media, to build awareness and trial, and we'll be expanding our current PET package offering by adding returnable glass in Q2.

And in China Tropicana juice drinks, with their unique fruit and flavor blends, has proved to be a big hit with consumers.

Our Tropicana Smoothies innovation in the UK is off to a terrific start on top of solid growth from the base Tropicana business, as well..

And finally, as Indra mentioned, the pending acquisition of the Lebedyansky juice business in Russia, which we bought in partnership with PBG, complements our beverage portfolio, providing greater scale, additional distribution muscle, a strong and entrepreneurial group of managers in Russia, as well as a juice portfolio of leading brands from the health and wellness space in that critically-important emerging market.

So we're very excited about our progress, particularly in juice and adding this exciting business, Lebedyansky, to PI.

Finally, although it's early days in our pricing journey, I would say, in many markets, our Q1 volume trends were very good as we matched commodity dollar cost increases with price realization.

However, we are as always vigilant and need to keep in mind that costs have continued to rise past our estimates earlier in the year, particularly in our expectations for the second half of the year with a new crop, and we have more pricing planned for the end of Q2 and Q3.

We're encouraged by the success of our pricing so far and we're doing better than our elasticity models would have suggested, but we will, of course, remain alert to the consumer affordability issues that may arise, as well as the relative value in the marketplace that we have in the consumers' food basket as we move forward with our pricing actions.

So with that let me review each of the two areas major geographic areas in our reported segments.

Our Q1 UK-Europe segment delivered strong top and bottom-line results.

Excluding the impact of foreign exchange and acquisitions, our UK-Europe businesses grew snack volume by 7%, beverage volume by 8%, net revenue by 8%, and operating profit by 11%.

In snacks, the most notable drivers of our volume growth were Russia, with over [30%] growth, and even in developed countries Spain had growth in the high single digits.

In the UK our Walkers business had a slight decline but solid revenue growth, right in line with plan and expectations, reflecting the success of our great British potato campaign, as well as the growth of our baked Walkers line and our Sun Bites whole grain product, which is similar to the U.S.

Sun Chips product.

In the UK-Europe, beverage volumes are fueled by double-digit growth in Russia and other Eastern European markets.

We also, of course, benefited from last year's acquisition of Sandora in the Ukraine, with our beverage partner PAS, as well as the phase two of the PepsiCo Lipton joint venture, which we announced last fall.

In the UK Tropicana delivered terrific volume growth, driven by both core not from concentrate, as well as from the newly-introduced Tropicana Smoothies product.

Our bottom line in the UK-Europe grew 18% in spite commodity-cost headwinds, and excluding ForEx and acquisitions operating profit margins grew by about 30 basis points.

In total, I think we made very, very good progress in our UK-Europe sector.

Moving across the globe to our developing Middle East, Africa, Asia segment, I am very pleased to report that we had another terrific quarter.

On a reported basis, our snacks volume grew 15% and beverages grew 11%, net revenue was up 30% and operating profit expanded 32%.

Our volume growth was not impacted significantly by acquisitions or consolidations.

Revenue increased 16% and operating profit 17%, net of the combination of ForEx benefits and some M&A.

In China we had an outstanding performance during the Chinese New Year celebration.

The result was strong double-digit growth in both of our snacks and beverage businesses during January and February.

We continue to make aggressive investments in China, as we expand our footprint, as we nationally launched our Tropicana juice drink.

Consumer engagement continues to be high on our list of marketing priorities in China through our Go-China campaign and our distinctive Pepsi icon of two thumbs up.

In the Middle East, Saudi Arabia also turned in a double-digit volume growth performance in both snacks and beverages.

On the snack side volume was bolster by the strength of Doritos, and beverage top-line momentum benefited from the expansion of H2O and was further accelerated by positive mix shift towards juices.

And in India I'm very encouraged by our ongoing double-digit snack volume growth, driven by growth in the northern regions and some successful promotional activities.

And in beverages as well, our Tropicana Twister launch in India provided incremental growth as a whole new non-carb platform.

In summary, Q1 was a solid start to the year for PI, with strong top-line volume momentum continuing as we had in 2007.

Volume momentum is broad-based across the portfolio and I'm encouraged by the continued vibrancy of all our markets.

As I look to the balance of the year, commodity cost inflation will certainly continue to be a significant factor to manage.

However, we in the PI team are confident in our revenue management and productivity measures to help offset those headwinds and allow us to continue to deliver the profit growth rates I've spoken about in the past of mid teen profit growth.

So with that let me turn it to Richard.

Thanks, Mike, and good morning to everyone.

We had strong operating results in Q1, with revenues up 13% and division operating profit up 10%.

However, as we discussed in our fourth quarter call, we experienced a few points of deleverage below the line, primarily as a result of mark-to-market accounting and a higher Q1 tax rate.

In Q1, the overlaps of certain mark-to-market commodities, for which we don't get hedge accounting, produced a significant year-over-year delta.

We had a gain last year of $17 million and a loss this year of $4 million.

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

In addition, our tax rate for the quarter was 26.7%, which was up 110 basis points versus last year.

Yes, this quarter's rate was still below our full-year guidance of 27.5% but the benefit didn't impact our EPS of $0.70..

Finally our weighted average diluted share count declined by 2.5%, which reflected the impact of our share repurchase program.

Moving on to cash flow we're on pace to achieve our full-year cash flow and CapEx targets.We expect $7.6 billion in cash from operating activities and $2.7 billion in capital spending.

And in the quarter we returned $2.1 billion to shareholders; $610 million in dividends and $1.5 billion in share repurchases.

Let me turn now to our balance of year outlook.

As Indra mention, our full-year outlook for commodity cost inflation is 9% to 10% for total PepsiCo in 2008.

The gap versus the 6% guidance on the Q4 call largely reflects the continued run-up in prices for cooking oil, grain, and energy over the course of Q1.

Importantly, we now have forward purchases, or hedges in place for a very high percentage of our requirements through the balance of the year, with open positions largely reflecting the limited number of areas where coverage is not feasible.

As Mike and John have indicated, we've taken additional pricing and have tightened expenses in order to offset these higher commodity costs, and those costs are impacting our competitors, as well.

And I want to note that part of the increase in commodity prices is obviously a reflection of the continued weakness in the U.S.

dollar, but we're seeing the benefit of that in foreign cur -- ForEx translation upsides from our international businesses.

Looking ahead to Q2 and the balance of year we're expecting that the additional pricing, both in the form of visual pricing and weightouts, will result in slightly lower volume growth in our snacks businesses than we've seen in the past several quarters.

In Q2 there will be some puts and takes below the division operating profit line, primarily the lapping of mark-to-market gains we had the prior year offset by the lower share count.

Tax rates for the quarter are expected to be relatively consistent with last year's.

With solid overall results in the first quarter, we are reiterating our guidance for the full year; volume of 3% to 5%, high single-digit revenue growth, and EPS of at least $3.72 a share, which represents 10% growth off our core 2007 EPS of $3.38.

Let me turn it back now to Indra.

Thanks, Richard, and to sum up again, as all of us said we've had a solid start to the year, the portfolio is working, and importantly we feel pretty about the prospects for the balance of the year.

So with that, operator, we'll now be glad to open the line for questions.

Thank you.

(OPERATOR INSTRUCTIONS) Your first question is from Marc Greenberg with Deutsche Bank.

Please go ahead.

Thanks, good morning, Indra.

Morning, Marc

I understand the commodity pressure you're seeing.

I guess my question relates to the fact that in year's past you've had a great ability with procurement and supply chain to mitigate some of these pressures, I wonder if you or RIchard could talk about what's different now, if it's harder to hedge or lock up on key inputs as you become more global and what kind of factors we should consider as we look at ongoing inflation risks?

Well, I think what you're ta -- really seeing is, we had come out with a 6% forecast for commodities and now we're at 9% to 10%, and really the issue is around -- not fundamental procurement but around what's happening in the commodity markets and it's really related to grains and in cooking oil and energy.

We were largely covered in the first half of the year on those commodities as we normally would be, and we were large -- but we were largely open in the second half of the year, particularly on grains and to some degree in energy, and that was in keeping with where we would normally be based on crop cycles.

It also reflected our view and then you saw at the end of 2004 that there were huge spikes in grains and at the beginning of 2008 we were assuming that some of that would reverse as we went into 2008.

Not to prior historical levels, but certainly levels below the peaks that we had been seeing, and clearly that didn't happen.

Oil prices rose dramatically, vegetable oil, corn, and also increased substantially above it.

So right now we've taken -- as we said in the prepared remarks, we've taken significant coverage where we have forward purchases or hedges available and that encompasses a large percentage of our requirements.

On an ongoing basis I think what you'll see is us beginning to work a little bit harder and a little bit more diligently at trying to take more forward cover to the extent that we can.

Marc, et me just add to what Richard just said.

The fact of the matter is, for many years now,we've been operating in a deflationary environment, so in the last 12 months or so inflation is coming back to commodities and the last quarters it has accelerated.

The unfortunate part is that all the pundits in the market who follow commodities and on whose opinions forward curves are set have all said that commodity prices are actually going to come down and that's why you've seen forward curves actually lower than current spot prices.

What we are doing now is rebuilding our commodity assessment capability in an inflationary environment ,which almost bucks the trend which the forward curves indicate.

So it's taken us a quarter of two to catch up and I think we've rebuilt that capability inside and that's why we've gone on and largely hedged for the balance of the year.

Just it was just a question of catchup and going forward we are watching the commodity markets very, very carefully and we will start locking up positions as and when we feel comfortable that we should protect the P&L.

Thanks, Indra.

I think by now you should know better than to listen to analysts.

(LAUGHTER)

I said pundits, not analysts.

Thank you.

Your next question is from Bill Pecoriello Morgan Stanley.

Please go ahead.

Good morning, everybody.

Morning, Bill.

Question on Frito-Lay North America and again on the commodity outlook, you mentioned the four points or eight in the first quarter moving toward high single digit balance a year and what kind of volume moderation are your building in do you expect from that, because it's a significant change as the consumer sees more of that visual price increase to deliver what you -- what John had termed as appropriate operating profit growth?

Yes, it's a great question, Bill.

John?.

Good morning, BIll, this is John.

As you know, our approach has been a combination of both weightouts, which, as you know, has zero elasticity because we don't see any unit falloff with the weightouts although you do see volume falloff, and visual pricing.

And as Indra said,we've taken some visual pricing in the first quarter and we're encouraged about the elasticity that we've seen so far on that.

The actions that we took on April 20th on our -- primarily our XXL sizes, but we did take some on our smaller sizes, the XL size.

Those products are sold at full revenue in some cases and they're dealt on promotion in others.

We look at the relative value that we have relative to other salty snacks and to other macro snacks, and right now everyone is pricing up so we're very mindful of our gap to competition and we're encouraged by what we've seen so far on the elasticity of the visual prices that we've taken.

And we would be -- we'd be honest to say that we do expect some volume falloff.

We won't know until we get further into the quarter, but we do see volume mitigating somewhat.

We reported 2% in Q1 and I think it will fall below that as we go forward, but it will cover the cost and therefore return us back to the profitability levels that we expect to achieve.

And we watch market share every week by channel by customer, so we're mindful of our share position in the marketplace at the same time.

Bill, and you know we also talked about price pack architecture, the fact that we're looking at it very, very carefully.

We will start looking at what should be the right price pack architecture going forward and our expectation's that unit growth will still continue even though pound growth will moderate quite a bit.

And then just a follow up on the commodities.

I know '09's a bit off, but given that you had that coverage in place in the first half, if the spot prices don't back off we would assume some significant increases, at least in the first half of '09 that would be moving through the P&L as well?

Bill, that's what we're working through right now and again, if you listen to the pundit, not the analyst, if you listen to the pundit the forward curves are still looking like they're going to be lower than spot prices, but trust me, everybody's focused on not just locking up 2008, which we have done, but it's really focused on 2009 at this point.

Thank you.

Thank you.

Your next question is from John Faucher with JPMorgan.

Please go ahead.

Yes, thank you very much.

So, a question for Mike here.

We're seeing news about food riots related to rice and issue like that, can you talk a little bit about the overall food inflation environment in your markets, particularly more the emerging markets, what you're seeing on the staples side and how that impacts how you're going to be able to price to consumers over the next 12 months or so?

Thanks.

Yes, John, first of all, again, so far literally to the day, I've not seen a falloff in any of our emerging market growth rates.

Keep in mind we've got a very diversified emerging market portfolio, so it's pretty broad-based and I'm not really worried about one country or another.

And a lot of what I think you're referring to, John, has been literally in the last two weeks, so prior to that I would say we were pricing mid single-digits in developed countries and high single-digits in emerging markets.

Also, keep in mind the overall inflation rate in these emerging markets has been recently then in high single digits or low double digits, so that's not, frankly, that unusual or that different.

In the last couple of weeks you are seeing some increases on staples, as you mentioned, but I would say more than anything, that's impacting probably the bottom end of the consumer.

That is those that are on the margin from an affordability standpoint for our products to begin with, so at least so far, our volumes continue to be very solid.

I keep a very close eye on it.

We've got some additional commodity cost issues to deal with and, therefore, some incremental pricing in Q2 and Q3, but again, at least so far the economic activity in all these markets continues very strong and they're also -- the other thing to keep in mind, if you take a look at the price of a barrel in oil in euros, instead of in dollars you'll see a quite different curve.

The weakness in the dollar has exacerbated this for the United States.

In a lot of these markets, like Russia and India and China, the currencies have been very strong and therefore the commodity cost impact has not been quite as severe.

We've had no supply issues in terms of our contracts and our expectations for balance of year, and our innovation pipeline continues to be very strong.

So I can only say so far, so good.

I'm on my way tonight to China, another emerging market, over the weekend and next week, but the markets I've been to and all of the words I hear so far are solid, but you are seeing significant commodity cost inflation in the food basket.

There's no doubt about it.

John, what do you see in Brazil?

Yes, I was going to add, John, in Brazil, Argentina, Chile, Columbia, Venezuela, even Mexico, we've had to take pricing in those markets as well to cover inflation, and to date we haven't seen much of a fall off.

Our businesses, as we reported, are very strong.

I just had a call on how we were doing so far in April and it's continuing to do well.

Thanks.

Thank you.

Your next question is from Judy Hong Goldman Sachs.

Please go ahead.

Hi, good morning, everyone.

Morning, Judy.

Historically, PepsiCo has been effective in managing through a cost inflation through a combination of pricing, mix management, and productivity, and I'm sensing that maybe you're being a bit more reliant on pricing at this point, and I'm wondering, first of all, whether my assessment is indeed correct?

And secondly, whether there are enough productivity buckets out there that you could continue to get savings to offset cost inflation and that being also a part of the driver of offsetting the cost inflation in addition to pricing?

Well, you know, we're talking about pricing for first time.

It's been a long time since we've talked about pricing.

We've always talked to you about productivity and that's why you never heard pricing, Judy, because we've been in a deflationary environment.

Productivity's still going to be 25% to 30% of how we cover the commodity cost inflation, but I don't believe anybody who's seeing 9% to 10% commodity cost inflation can cover everything with productivity, especially in such a short time.

Productivity programs take -- major productivity programs take a while to implement and get the benefits from the system.

Yes, we have productivity programs.

as we talked about.

John talked about it in Frito-Lay.

All of that is going through the system.

It's giving us very robust savings and we're adding additional productivity programs as we go along.

But when you have runaway commodity inflation, we have to cover some of that with pricing and that's what we're doing.

And the good news is the elasticities are looking pretty good at this point.

Okay, and then just a follow-up question to John.

In terms of Frito-Lay Anerica margin progression going forward, it sounds like you're going to get all the pricing in place in the third quarter, so should we think about second quarter margin being down again and then that going up in the second part of the year?

Yes, I think, Judy, you'll see, as I said, a sequential improvement in Q2 and the full impact of the pricing will be in the beginning of Q3.

Okay, thank you.

Because we're midway through the quarter right now.

Yes, thanks.

Okay.

Thank you.

Your next question is from Christine Farkas with Merrill Lynch.

Please go ahead.

Thank you very much and good morning.

Good morning, Christine.

I have a question for Massimo and then a broader question on elasticity.

Just looking at your Tropicana business we're seeing, certainly in the measure channels, an improvement in the juice business -- or refrigerated juice business and it sounds like Tropicana still posted some modest declines, can you talk about your positioning there or what you're seeing in the category?

Yes.

So, Christine, your observation is right and what we have been saying is that the -- our core business is really the Chill, the Tropicana Pure Premium, together with the recent innovation we just launched, which is Pure.

And we see growth potential for the two combined, which really represent the opportunity we have of going forward, both from consumer appeal at some point, as well as from a competitive advantage.

And the other innovation that we're bringing to the market that is going to help us significantly because new drag we'll have a much better functionality especially without heavy consumers.

And on a competitive basis, some of your peers or the category seems to be moving up, finally recovering in the category.

Is there anything specific of why Tropicana might be lagging that trend?

Christine, the Tropicana trademark is still awesome.

It's the strongest brand equity in the orange juice business.

All our brand equity studies show it's still the strongest.

It still has the leading share.

So if you took Tropicana, Naked and if you look at that whole business and the new Tropicana Pure that's going in, the innovation.s all kicking in Q2.

Yes, last year -- early part of last year we had a tremendous shortage of NFC orange juice, so we couldn't really execute too much innovation, but going into this year, Q2 and beyond, you'll start seeing the trend improving.

Okay, that sounds like innovation timing.

And then with respect to my broader question, Indra, on elasticity, given Frito-Lay and trends in beverages, could you explain the greater resiliency in snacks versus beverages?

For example, in C stores when the economy is softer is there a way to look at that?

The point we made -- and John and Massimo might want to chip in, too -- beverages are highly penetrated in C stores and there's a proliferation of beverages and a tremendous variety of them, so you can get incremental space and incremental growth for beverages, so a lot of new products came in, but it cannibalized a lot of existing products.

Snacks, on the other hand, our DSC system takes snacks into the C stores and snacks are more food-like and so people actually -- when they switch from food away from home to food at home, actually buy snacks because they're food like and there's a lot of opportunity to increase penetration of snacks in C stores, so that's why we are continuing to see snacks growth in C stores.

And I think C stores and food service are the only two areas where you're seeing channel softness which has actually contributed to overall category softness in liquid refreshment beverages.

John, did you want to add something?

Christine, I would just add that that's the one channel in C store where the primary bulk of our business is the $0.99 line, and we haven't taken any visual price there, we took weight out, so it's a great value when you walk in the door.

You couple that with good innovation like Doritos' Collisions that we launched, plus the pre-pack weekenders that we put in the marketplace, that helped us offset the decline in traffic by having more inventory in the store and that's why our growth was up around 3.5%, I think as I reported.

Great, thanks a lot.

That's helpful.

Thank you.

Your next question is from Lauren Torres HSBC.

Please go ahead.

Good morning.

Morning, Lauren,

In the quarter your mentioned that you made a substantial increase, I think it's in your advertising and marketing investment of Pepsi International, I was just hoping you could talk a bit about how you're thinking about the investment spend -- or your investment spend for the remainder of the year, and just give us a sense of both your plans in the U.S.

and out of the U.S.?

Hey, Mike?

Yes, it was up but so was our revenue, so keep in mind our revenue was up over 20%, I think, and so our marketing kind of really goes proportionately with revenue.

I would say certainly from our standpoint we are making some important investments.

We launched Tropicana Smoothies in the UK, we launched Tropicana juice drinks nationally in China, we had Chinese New Year, a very aggressive marketing campaign there, but I would say our marketing approach overall was pretty consistent with prior years.

We advertised around innovation, particularly in the first part of the year, and I don't know that there's anything else that would be unusual or extraordinary that I'd comment on.

I think it was driven by our new product launches, but it's pretty much growing in line with revenues.

So I guess as we think about your rising costs and expenses we shouldn't think A&M is an area where you may consider pulling back, that's something that you're going to continue to -- on a proportionate base just go for?

Our first and most important priority is always to stay relevant to the consumer and competitive in the marketplace and we'll always continue to do that.

And support innovation.

Yes.

Okay, thank you.

Thank you.

Your next question is from Carlos Laboy with Credit Suisse.

Please go ahead.

Good morning.

Good morning, Carlos.

Good morning.

Mike, what are your top priorities with Lebedyansky?

I was hoping you could expand on the upside that you see for this business over the next couple of years, and is this a business you would expect to integrate further PBG over time?

Well, first of all -- thank you, Carlos --I think that Lebedyansky is a strategic home run for PepsiCo and for PBG, as well.

It's the sixth largest use company in the world and the largest juice company in Russia.

It is a group that has, I think, both powerful brands, it has a tremendous infrastructure and capability in Russia, as well as a terrific management team that's very entrepreneurial and very talented.

In terms of the up-side opportunities, we certainly have in our business plans some plans for aggressive procurement synergies.

We certainly think that between Sandora and Lebedyansky and our other juice businesses there is some significant opportunities on both packaging and on concentrate for some synergies.

We also, second of all, believe on the cost front that there are synergy opportunities that the Siberia plant that they're building comes online at the end of the year and that will reduce transportation cost.

Third, we certainly believe there are opportunities for top-line growth in the area of juice drinks, which is really quite nascent in Russia as a whole.

They have a new product called Frustyle, it's off to a terrific start, and I think juice drinks is a whole arena.

Smoothies, there aren't any smoothies in Russia.

If I look at our global juice portfolio of products, I've got enough new products to launch for the next in Russia from a top-line standpoint.

And lastly, in terms of integration, we certainly think that there will be selective opportunities, particularly probably first in the more rural areas, let's say in Siberia.

Areas where drop sizes are lower will go faster in working with PBG on either integrating, distributors, warehouses, or the go-to-market side.

But frankly, it is a large scale, very complex business in its own right, so our intent is -- at this point is to look selectively for those integration opportunities.

I have no doubt that we will both benefit from best practice sharing and then I'm sure we'll find some opportunities as we go, but really our business case has really been made more on the juice business in its own right and the juice drink business and I have no doubt both PBG will bring great expertise from their local talent on the ground and together this is going to be a great acquisition for us.

Thank you.

Thank you.

Your next question is from Kaumil Gajrawala with UBS.

Please go ahead.

Thank you and good morning, everybody.

Hi, Kaumil.

First one a quick one for Richard.

In the past there was no input that was more than 10% of your COGS and I just wanted to see if that was still true?

That is still true.

Okay, great.

And then the other thing, Massimo, to follow up you talked Amp and that it was up about up about 60% or so.

Can you talk about your plan to either portfolio manage between Sobe Adrenaline Rush and Amp, or is the plan to slowly phase out Sobe?

And then just to expand on that, where you see the incremental shelf space coming from for Amp?

So as far as Amp is concerned it's our number one priorities, as I said, but we have absolutely no plans to phase out the Sobe Energy line extensions because they have a very specific benefit to consumers and they have a loyal user base.

So what you have seen is that we have launched first Amp and then we just recently added three more flavors and we are having the incremental shelf space, because actually the category continues to grow and we have been growing shelf space.

As the new resets take place, especially in the cold vault, we aim to increase our shelf space, but with Amp managing the portfolio across the three -- out of three key offerings and then multiple flavors and we'll continue to do so going forward.

Thank you.

Thank you.

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

Please go ahead.

Good morning.

Hey, Bryan, how are you?

Good, thanks.

Indra, can you talk a little bit about how the Company is adjusting its approach to planning, I guess thinking about '09 in the median term.

Obviously, the environment has been very volatile and very difficult to predict.

Your long-term growth rates were set at a time when cost inflation wasn't really much of an issue.

Is there something you're doing differently now in your planning cycle to try to get a better handle on it, first?

And then second, does it make sense to chase long-term growth goals that -- at least in the median term, that were set when inflation was so much lower?

Bryan, I tell you, we are in the middle of our [stress] planning cycles right now and if we believed that the long-term goals that we have don't make sense, we'd be the first to come and tell you.

At this point, based on everything we're seeing, including our outlook for what's likely to happen in 2009 and 2010, we don't see any reason to back off our long-term goals.

Why am I saying that?

We are pretty good at productivity initiatives and we've got lots of work going on on how we can take additional productivity.

We are very good at innovation and premium innovation definitely helps drive the top line and the bottom line.

So, it's been a while since we've done a lot of price pack work, especially in North America, because that's another area where you can drive top-line and bottom-line growth.

And lastly, one of the things we all have to watch out for is not to write off the commodity markets and say everything is going to keep going up for the next five or ten years.

Let's watch and see how it shapes up, because with grains, in particular, these are not five year realization markets.

In six months you can have the market turned in fairly interesting ways, and as laws of supply and demand work, with this sort of price inflation you should see more supply coming to the market and we're already beginning to hear of additional plantings around the world.

And all that it takes is one action by the government on biofuels for 25% more crop to come into the marketplace.

So trust this management team to look at each of these issues carefully.

We will look at innovation, visual pricing, price-backed architecture, productivity, all of it very carefully, and at this point, we don't see any reason to back off the long-term guidance we've given you.

Bryan, this is Mike.

One other comment I would make, though,, is that -- and Indra mentioned it in her earlier comments, maybe it wasn't quite as clear -- but clearly, in the procurement function we are clean-sheeting all of our practices, all the advisers that we look to, and there's no doubt that we are fine tuning our approach to what I call risk management in the way we look at it in this kind of an environment.

So there are certainly some changes that we are driving, I would say, more on a tactical basis in terms of how we're doing our planning and that.

But to be honest with you, nobody's crystal ball is perfect and as Indra said, there are a lot of factors that play here right now.

But I wouldn't want you to think that we're also not relooking at how we're looking at the commodity markets, as Indra mentioned at the beginning.

Actually we've had a fairly extensive piece of work over the last 60 days going on in that regard.

Bryan, the one other thing I'd add is what we talked about in our international markets.

Our categories are so under-penetrated in almost all markets outside the United States, excluding perhaps Mexico and the United Kingdom, but our opportunities are tremendous.

And remember, we're not going after the C, D, and E consumer, we're really talking about penetration with the A and B consumer who has the income to buy treats, to help -- eats the entire portfolio of products, so we have a lot more growth in those international markets and we're just getting started.

So you put it all together our growth still looks pretty good.

Thank you.

Thank you.

Your next question is from Ann Gurkin with Davenport.

Please go ahead.

Hello.

Hi, Ann, how are you?

I just wanted to get an update on where you are with implementing SAP.

I think you were going live maybe in Quaker or Tropicana?

Mike?

Yes, hi, Ann, it's Mike White.

All of our go-lives in both the U.S.

and international have been absolutely flawless.

We had teams doing tremendous work in -- particularly in the first quarter, we had a number of go-lives at several of our Gatorade and Quaker plants.

They've all gone flawlessly.

Some normal bumps in the road that you would get in the first week or two, but I must say the team's worked tirelessly on that.

We've had successful go-lives, by the way, in two snacks plants.

The first two snacks plants in the world in Mexico with our project devolved down with Sabritas and that actually went very, very well.

In fact I had a review on that earlier this week.

We've had go-lives in China and also in the Middle East with our non-carb business and they've all gone flawlessly.

So, so far in terms of the -- any kind of operating disruption or whatever, there really has been very little to wort.

A couple of challenges in a couple of areas that we worked our way through, as you might expect, particularly in our food service business, but to be honest, it was fairly short lived and really the teams have worked tirelessly and have done a terrific job.

Great, that's all I have left, thanks.

Thank you for all your questions and thank you for your time and attention today.

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

Thank you.

Thank you.

This does conclude today's PepsiCo conference call.

You may now disconnect.