百事 (PEP) 2008 Q3 法說會逐字稿

Good morning.

Welcome to PepsiCo's third 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, Mr.

Mike Nathanson, Senior Vice President of Investor Relations.

Mr.

Nathanson, 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 your cautionary statement.

This conference call includes forward-looking statements based on currently available information, operating plans and projections about future events and trends.

Our actual results could differ materially from those predicted in such forward-looking statements.

But we undertake no obligation to update any such statements whether as a result of new information, future events or otherwise.

Please see our filings with the Securities and Exchange Commission including our annual report on Form 10K and subsequent reports on Form 10Q and 8K for a discussion of specific risks and 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 nonGAAP financial measures that may be used by management when discussing PepsiCo's financial results with investors and analysts.

Just one housekeeping items, during today's call our references to core EPS growth exclude the one time tax benefit recorded in the third quarter of last year, as well as mark to market gains or losses on commodity positions included in corporate unallocated expenses in both this year's and last year's third quarter.

Also all references to core EPS guidance exclude any commodity mark to market impact as well as productivity for growth costs.

This mornings prepared remarks will be made by Indra Nooyi, PepsiCo's Chairman and CEO, and Richard Goodman, PepsiCo's CFO.

Also after our prepared remarks the following executives will be available to answer questions during the Q&A session: John Compton, CEO of PepsiCo America's Foods, Massimo D'Amore, CEO of Pepsico America's Beverages, and Michael White, PepsiCo's Vice Chairman and CEO of PepsiCo International.

With that, I will turn the call over to Indra.

Thank you, Mike, and good morning, everyone, and thank you for joining us.

I know that all of you have had a chance to review the press release we issued this morning, and on this call we will be focusing our remarks in five key areas which will leave ample time for a robust Q&A session.

So let me outline the key points and cover each of them in more detail.

First, we had solid business results for most of our portfolio.

PepsiCo International and PepsiCo Americas Foods performed were well.

And they did so in the context of a challenging and volatile macro economic environment.

As we've indicated on prior calls, the third quarter represented our most difficult commodity cost comparison versus prior year.

And so it is especially encouraging to see solid volume growth in our snacks businesses around the world which reflects clearly the strength of our brand, the positive impact of innovation and the successful execution of our price backed strategy.

We also saw strong performance across both our snack and beverage portfolios in key developing markets.

The second point I would like to make to you is that our North American beverage business was soft reflecting a large measure category challenges, regaining growth is a major priority for us and I will be talking in a few minutes about the actions we will be taking.

So, it is no news to you about the macro economic climate is turbulent and there are uncertainties and volatilities in every part of the environment.

The constants however are the basic strengths of our business model, our terrific management team and our ability to execute at the field level.

We will be agile in our planning and in our operations.

Fourth, we are implementing a productivity for growth initiative which we expect will produce $1.2 billion in pretax savings over the next three years.

This will enable us to invest in our businesses, to further improve our competitiveness and to give us breathing room to respond to changes in the marketplace.

And fifth and most importantly, we continue to have robust free cash flow which provides a sound financial base for us at a time when the financial markets are uncertain.

Let me go into detail on each one, turning first to Q3.

PepsiCo International delivered solid performance in Q3, while lasting 20% revenue growth in the prior year period.

PI's, diverse brand portfolio continued to benefit from growing demand across most markets outside the Americas, despite significant pricing actions to offset the impact of commodity cost increases.

Revenue increased 20%, and operating profit increased 18%.

Growth across the Middle East, Africa, Asia segment was broad based with revenue up 22% and operating profit up 18%.

Snack volume increased 9% led by high teens growth in the Middle East and double digit growth in China and India.

On the beverage side, volume increased 10% driven by a combination of mid teens growth in China, double digit growth in the Middle East and high single digit growth in India.

In the UK Europe segment, PI performed well despite increased inflation, macro economic challenges and unseasonally cool weather during the summer months which particularly impacted beverage results.

Revenue and operating profit each grew 17%, benefiting in part from the weaker dollar.

The soft spot in Q3 was beverages.

The UK Europe volume growth of 13% entirely reflects the benefit of two acquisitions, the [sandora] the Ukrainian juice business and the expansion of the Pepsi Lipton joint venture in Europe.

Excluding M&A activity, volume was down slightly with a mid single digit increase in the UK, entirely offset by category softness across the continent and Russia in part related to poor summer weather.

Note however that in September we saw an improvement in volume in the UK Europe -- as volume in the UK Europe segment was up high single digits on a organic basis.

Snack volume in Q3 was largely in line with expectations and reflected visual pricing and [weight] across the category to address inflationary pressures.

Snack volume grew 4% on an apples to apple basis excluding a calendar reporting change in Iberia that excluded about three weeks of performance versus the year ago period.

Russia led the segment with high teens growth.

Overall, Q3 was a good quarter for PI and at the end of the quarter PI closed with the snack acquisition in Serbia and Lebedyansky juice acquisition in Russia.

We will report the financial performance of these two businesses in Q4.

Let me now turn to PepsiCo Americas Foods where revenue was up 12% and profits were up 9%.

Frito-Lay North America snack brand grew volume 1.5%, even as we realized net price increases from wait outs and visual pricing to offset inflation.

Revenue growth of 9% was broad based.

In addition to growing across all major brands, Frito-Lay North America sales also increased across all retail channels and gained dollar market share in measured channels in the savory snack category.

We are pleased that the brand equity and pricing power of our brands with consumer response to our pricing coming in about where we expected.

In Q3 we fully realized our 2008 pricing initiatives for the year and as is customary we plan to implement another round of judicious pricing in Q4 as we prepare for 2009.

Quaker Foods North America experienced significant reduction in shipment disruptions from the quarter as a result of flooding at the beginning of Q3 in Cedar Rapids, Iowa where our major Quaker plant is located.

The extraordinary efforts of our teams enabled us to restart production within four weeks and we are now operating at about 85% of capacity, but we were not able to ship some products normally during Q3 which resulted in volume and revenue declines versus prior year.

Nevertheless, profitability was up 7% in the quarter, largely because we received business disruption insurance payments related to the flooding.

Latin America foods reported revenue growth of 23% and profit growth of 22%.

Organic revenue growth was driven by net price realization, both in the form of [wait outs] and visual pricing across all of our businesses.

Let me now turn to Pepsi America's beverages.

It is clear that this business is not performing where we would like it to be, in large part because the economic slowdown continues to pressure the North American liquid refreshment beverage category.

In measured channels, category volume was down 3% and overall category revenues were flat, in part, as a result of significant discounting and unflavored water.

The C&G channel remains soft with consumer shopping and items purchased per trip both down, and beverages have been particularly hard hit.

In this environment, PAB volumes declined 2.5% reflecting a 4% decrease in North America, partially offset by an increase in Latin American beverages.

Net revenue was flat for the quarter and operating profit declined 11% largely due to a combination of higher input costs particularly higher fuel costs, deleveraged from the soft volume, and expenses related to the implementation of SAP.

Now, revitalizing this business is a huge priority for us.

And I want to show you that over the past several months, we have been busy at this, and we have lined up initiatives we are going to launch in 2009.

We have completely revamped every aspect of the brand proposition for our key CSD brands, how they look, how they are packaged, how they will be merchandised on the shelves and how they connect with consumers.

You will see more over the next few weeks and I think you are going to be very impressed.

We are initiating similar upgrades for the entire Gatorade line which will have an entirely new contemporary identity and exciting invasion for both G2 and TAVA and a renewed Propel platform.

Tropicana will also be differentiated enabling us to reengage consumers with this iconic brand.

And we will be supporting all of this activity with increased investment in innovation and A&M using savings from the productivity for growth initiative that we announced this morning.

It is our belief that, especially in this economic downturn, we should be investing in the category to get consumers to stay with, and some to return to, the packaged liquid refreshment beverage category and to our brands in particular.

This is the beginning of a multifaceted effort to restore growth and profitability to the North American beverage business.

It will take a little while to realize all the benefits of all of these changes, but I am confident that you will see significant progress during the course of 2009.

So overall, solid results for most of the PepsiCo portfolio in Q3, particularly given the challenging macro economic situation and commodity cost overlaps.

And please note that our guidance for the full year implies currency neutral high single digit divisional operating profit growth in Q4.

I would now like to take a couple of minutes to provide our perspective on the macroeconomic environment and the impact on our business outlook going forward.

The incredible turmoil we have seen in the financial and commodity markets over the past month has given us a vivid reminder that the world is in a very uncertain place right now.

We are uncertain about how the global economic situation will evolve, how it will differentially impact countries, how the [four X] markets will move, and ultimately how consumers around the world will respond as they digest these events.

The impact of all of this is now as much about Main Street as it is about Wall Street, as consumers in many parts of the world are indeed feeling the pressure.

One of the trends we are noticing is that the impacts are not uniform.

In the mideast and eastward, growth continues to be robust and our expectation is that it will remain so.

The absolute growth rates may come down as the developed economy slows.

But [there] GDP growth differential versus developed countries will probably remain at the mid to high single digits.

Turning to our neighbors in the south, Mexico is expected to increasingly feel the impact of the slower US economy and the rest of Latin America is beginning to feel the pressure too.

East Europe's outlook is mixed and you are all aware of the unfavorable outlook for GDP in both the US and the Europe.

Now, we do not control these macro economic forces and our portfolio is not immune to their impacts, but at PepsiCo, we are confident in the fundamentals of our business model and the agility of our people, and in our ability to execute on the ground in each country in which we operate.

We are able to drive growth in the categories in which we participate in.

We provide simple pleasures at affordable prices to consumers across the world.

And consistent with our experience during the last two economic downturns in the US, as consumers economize by eating more at home, they tend, for the most part, to consume more of our products, particularly snacks.

In addition, in many parts of the world, per capita consumption of our products is still relatively low which gives us the opportunity to drives sales ahead of GDP growth.

Our wide product portfolio within our categories and our broad geographic footprint helps us balance out the ups and downs in any given market.

And even as the economic turmoil progresses we are seeing our business maintain its volume momentum with consumers around the world.

Overall volumes for September for example were pretty consistent with what we have been experiencing all year.

For all of these positives, there is no certainty about how this current economic crisis will play out.

While we are quietly confident about our ability to execute, we are being sober in our planning.

So over the past several months we have been looking across all our businesses to ensure we are doing everything we can to enhance our operating agility and financial sensibility.

A major outcome of our detailed work is the productivity for growth program.

It is a broad-based set of initiatives that cuts across the entire company with the objective of improving cost competitiveness, simplifying decision making, and upgrading and streamlining our product portfolio.

We expect it will produce pretax savings of more than $1.2 billion over the next three years enabling us to make significant investments in our future growth.

A primary focus is investment in our North American beverage business, in A&M to support the restaging of our key brands and in stepped-up product package and process invasion.

We will also be investing to drive additional growth in key developing markets across the world in both snacks and beverages.

We are also making targeted marketplace investments to further secure our competitive position in developed snack markets.

And we are increasing our investments in R&D with particular focus on long-term investments in innovation to sustain our long term growth.

Taken together, these actions are intended to position the business for success into the future in support of our long term strategies.

They will also enable us to better handle the marketplace prices that are inevitable in this volatile environment.

I also want to emphasize that in our planning for 2009, we have a focus on balancing premium product innovations with a corresponding emphasis on our value offerings.

We are maintaining a signal on the pulse our consumers reality and we will not allow private label or discount brands to exploit this economic downturn at our expense.

There's nothing normal about what we are seeing in the economy or in the markets, whatever volatility and commodities, whatever uncertainty in the credit markets and financial markets, whatever uncertainty in consumer behavior we have seen for the first three quarter, it simply pales in comparison with the gyration that we've experienced globally over the past couple of weeks.

We normally talk about the coming year's guidance on the fourth quarter call at the beginning of February.

Advancing the timing, given the current turbulent conditions, is simply not prudent.

There's no clear base for forecasting currencies, the impact of the evolving financial crisis on GDP growth rates, or the effect all of this will have on consumer spending patterns.

Please make no mistake, however, we have full confidence in the fundamentals of our business, the capabilities of our exceptional management teams across the globe and most importantly, the breathing room we have created for ourselves with our productivity for growth initiative.

We are working with the highest level of urgency on the things we can control and leveraging PepsiCo's operational agility to succeed in this changing environment.

The steps we are taking will position the business to maintain our competitive edge in the near term and to sustain leading performance over the long term.

With that, let me turn it over to Richard.

Thank, Indra, and good morning, everyone.

Indra has covered the line of business results, and so let me focus on the below the line items, provide some additional information about our productivity for growth initiative, and discuss cash flow.

As we have previously discussed, our approach to commodity coverage has evolved over the past year to provide increased predictability on our cost structure for the coming year, which enables us to proactively manage our pricing and price back architectures so they work well with consumers as well as retailers.

That approach means we have higher levels of coverage for next year than we would have in the past.

Most of our purchases receive hedge accounting treatment.

The forward coverage that does not is largely related to energy and we have to mark those positions to market each quarter.

In Q2 we reported mark to market gains of $61 million as energy prices significantly increased.

This quarter, we reported mark to market losses of $176 million as energy prices reversed course.

This mark to market loss compared to a $29 million loss in the previous year for a net change of $147 million versus last year.

Let me remind you that over the duration of our contract, the mark to market impact on corporate costs nets out to zero with hedging impacts ultimately reflected in division cost of goods sold.

That's why we focus our discussion and our guidance on EPS and EPS growth excluding the impact of mark to market in both the current and prior year.

We believe this provides a better perspective on our ongoing business performance.

Setting mark to market aside, other corporate unallocated costs were up $19 million primarily due to higher investments in R&D and the Company's global SAP implementation.

Our tax rate for the quarter was 25.9%, that was down 150 basis points versus last year's comparable rate of 27.4%, a rate that excludes $115 million one time tax benefit related to the favorable resolution of certain foreign tax matters which we reported in last year's third quarter.

We expect a 2008 full-year tax rate of about 27%.

Turning now to cash flow, I want to emphasize PepsiCo's ability to generate cash.

Cash provided by operating activities is expected to be approximately $7.3 billion, capital expenditures about $2.5 billion excluding the productivity for growth costs.

Our management operating cash flow is expected to be $4.8 billion.

Clearly in the current environment we are placing more emphasis on cash management both in terms of working capital and capital spending.

I also want to point out that we maintain a strong credit rating, A+ from S&P and AA2 from Moody's which is a major asset in the current environment.

Our commercial paper is A1P1 and has continued trading very well even amidst the turmoil of the past several weeks.

Through the end of the third quarter we repurchased $4.2 billion of our shares.

As a result, our weighted average diluted share count declined by 3.5%.

Given the volatility in the credit markets it is prudent to maintain financial flexibility and so any further repurchases during the balance of the year will depend on our assessment of market conditions.

Turning to productivity for growth, total one-time charges in Q4 are expected to be between $550 million and $600 million, of which of that 60% are cash and 40% noncatch.

The effort is across the globe.

Of the charges, approximately 45% relate to our North American beverage business, 25% to North American snacks and food, 25% to our international businesses, both PI and in the Americas, and the balance at corporate.

To improve cost competitiveness, Pepsi American Beverage is improving its capacity utilization and distribution efficiency by aligning North America [inaudible] capacity.

PAF is continuing to focus on supply chain efficiency and superior execution through plant rationalization and equipment upgrades.

And to simplify decision making, Pepsi America's Beverage is creating a unified beverage structure to eliminate redundancy and increased spans of control.

PepsiCo International is continuing to evolve the organizational structure to empower regional leadership.

Over the past five years our global employee base has increased from about 142,000 to over 185,000 employees as our businesses have expanded.

Our productivity actions will result in the elimination of about 3,300 positions with the impact felt across all of our business segments globally.

Relative to its employee base, a higher portion of managerial positions versus plant and other supply chain related positions will be eliminated as we move to streamline decision making.

Productivity for growth is expected to generate pretax savings of about $350 million to $400 million in 2009, and accumulative pretax total of over $1.2 billion other the next three years.

In total, the productivity for growth enhancements will enable us to invest in our businesses as Indra described earlier and also maintain the flexibility we will need in the current environment.

We are confident that these initiatives will position the business for sustainable long term growth and that we will benefit disproportionately when the market turns.

We have established a program management office to ensure that the individual initiatives are flawlessly executed, that we embed the organizational changes quickly, and that we realize all of the anticipated savings in the appropriate time frames.

As you may remember, we were very successful in doing all of this during the Quaker integration and we have every confidence we can do so again.

One final word on the 2008 guidance -- full-year 2008 guidance, the dramatic appreciation of the US dollar versus just about every currency in the world will have an adverse impact on our Q4 results at current spot rates that translates to a potential $0.04 to $0.05 down side in our prior full year 2008 core EPS guidance of $3.72.

We do continue to expect full-year volumes of between 3% and 5% and low double digit net revenue growth including acquisitions and [four X].

Please note as Indra mentioned our guidance applies currency neutral high single digit division operating profit growth in Q4.

With that let me turn it back to Indra.

Thank, Richard.

And before I open it up for questions, let me just reprise my opening comments.

Both Pepsi America's Foods and Pepsi International delivered solid performance in Q3 in a very challenging environment.

We are taking major actions to restore the vitality of our North American beverage business.

We believe the macro economic environment will continue to be challenging, but we have confidence in our basic business model and our ability to navigate through turbulent times.

Productivity for growth will give us the ability to invest in key areas and provide breathing room in this uncertain environment and our businesses continue to generate strong cash flow.

PepsiCo remains a great operating company and our biggest assets are the strength of our brands, our go to market capabilities and the enthusiasm and talent of our associates across the globe.

We know what needs to get done.

Operator, we'd be glad to open it up for questions.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from John Faucher from JPMorgan.

Yes.

Thank you very much.

So quick question on the long term impact of the restructuring program.

As you look at the extra investment that you are getting, how should we look at this relative to the organic top line growth you guys have been delivering over the past couple of years?

And it sounds like it is mostly investment in the short term, should we expect a big ramp up in investment in '09, and then maybe a little bit more leverage off the higher level of investment as we look out over the next two or three years?

Thanks.

Good morning, John.

As we mentioned a lot of the savings from productivity for growth is going to go into North American beverages, selected investments in key developing markets, and then snacks in developed markets from market base investment and then R&D.

Now, when we talk about investments in North American beverages, you start seeing some of these benefits especially in the second half of 2009, because we have to make the investments and it takes a couple of quarters before they start really working their way through the system.

So you should start seeing the benefits in the second half of 2009.

In the case of developing market initiatives, these are not one year that we are making.

We are reinvesting to grow our position in certain developing markets that's going to again take the second half of 2009, 2010 before they really play out.

Our increased investment in R&D especially our big bets.

Right now, the little that we invested in 2008 is showing great promise and that is why we are stepping up our investment.

I don't believe you will see the benefit of an increased R&D savings -- I'm sorry, investment in 2009, but I think if things turn out the way we think they're going to turn out, starting about 2010 you should start seeing some of the benefits from this reinvestment.

Again this is subject to how the economic situation plays out.

We are doing our part and feel comfortable if the economic situation improves you should see a big ramp up in our own performance.

Got it.

And then if I could just follow up with one other question for Richard.

Richard you talked about an acceleration in divisional operating profit for Q4, which you guys have hinted at when you gave your conference call after Q2.

So if we look at it $0.02 below consensus this quarter, $0.04 to $0.05 from currency implies a $0.06 to $0.07 reduction, yet you are taking the full year down by $0.04 to $0.05.

So it seems like your expectations for the fourth quarter have -- at least relative to consensus are higher.

So, what drives the confidence that you can accelerate the organic divisional operating profit number?

It is a good question, John.

We didn't, we don't govern the consensus.

We had indicated on a prior call that we expected Q3 to be lower and Q4 to be higher and excluding the impacts of the recent changes in the currency, that's where we would have been.

So if you do actually just simply do the math you would wind up with currency neutral high single digit [LRB] growth.

That's what we have been expecting all along to take place.

The only real in the change in the guidance has been the change in the [four X] and we expected Q3 to be lower and Q4 to be more robust.

Got it.

Thanks.

Your next question comes from Kaumil Gajrawala from UBS.

Thanks, everybody.

First it seems beverages are a lot more economically sensitive than your food businesses.

Can you maybe offer some thoughts on why you think that is, and then also what your expectations are for overall LRB growth in North America assuming normal economic environment?

Kaumil, good morning.

We talked about this in our last call, and I think the situation is exactly the same.

In North America in particular, beverages is a much more penetrated category than snacks.

And so what we are seeing is really the fact that it is so well penetrated some pull back.

The second reason liquid refreshment beverages are impacted is because of the free substitute called tap water, which doesn't exist for snacks.

And that's why you are seeing the beverage category more impacted than the snacks category.

Now coming to your second question, in terms of projection, the normal growth rate that we expect given population growth rate should be somewhere between like a .8% to 1.5%.

That's what we would expect the LRB category to grow.

The last 12 to 18 months have been unprecedented for all of the measuring periods we've had in this category we have never seen a decline.

This is the first time we've seen a decline, and it is very hard to predict in the trough what the shape of this category is going be.

Since we are such a large portion of the category we are going to do our part, we are going to reinvest heavily in this category, we are going to give people a reason to come back to the category or stay in the category by providing more interest, more excitement the liquid refreshment beverage category and that's really what we are going to do in 2009.

Based on everything that we have done so far, that we have shared with our bottlers, we feel, very, very optimistic about what 2009 could bring.

Okay.

Thank you.

And Richard, a quick one for you.

It looks like receivable days and inventory days have gone up quite a bit versus last year, if you could just offer what's behind that.

We had some -- if you go through the statistics we had some timing issue, some of our international businesses actually wound up closing on a Sunday which changed some of the patterns.

So we did have both payables and receivables both went up slightly.

So I think almost all of the changes that we saw this quarter really are simply timing changes.

There was some [VAT] things that were really temporary we would expect to -- that we know will reverse in Q4, we should see much more normal levels then.

Having said that, Kaumil, in response to the current environment, we have refreshed our controls on capital spending, working capital, so the entire company is focused tremendously on making sure that we manage every element of the cash flow very, very carefully.

Okay.

Thank you.

Your next question comes from Christine Farkas from Merrill Lynch.

Morning, Christine.

Good morning.

Thanks for taking the question.

A question on pricing.

Indra, you were quite clear about volumes and volume patterns around the world, but in looking at the top line and stripping out currency there's a couple of regions that to me are unclear whether or not pricing was successful.

Clearly Frito-Lay and Quaker Foods and even Middle East Africa appears to have gotten some good pricing.

Can you comment on Latin America and the UK or any other regions and how those are plans shaping up both in the third quarter and going forward?

Mike, you take UK, and, John, Latin America.

Sure.

Good morning, Christine.

Actually the UK has been terrific.

We had solid low single digit volume growth in quarter and our revenue growth in local currency grew well ahead of that.

And so we've had a lot of revenue management strategies in place to get more productivity out of trade spending in the UK and we have been successful at that this year.

In terms of revenue flow through in the UK, we were fine.

The issue in the UK is just the magnitude of the commodity cost impact is impacted our profit results just a tad in the quarter.

But actually we are right in line with expectation and I couldn't be more pleased.

We had a strong summer with the Brit Trips promotion in the UK from a top line standpoint.

Christine, this is John.

In Latin America, Mexico and Brazil, we were able to get our pricing through the rising commodities relative to our pricing were pretty much in balance.

In Chile, Venezuela, and Columbia, the innovations stacked out very quickly and we weren't able to price as fast as we hoped, but we have corrected that.

It was really those three markets within all of Latin America that had an impact on us.

Okay.

Great.

That's helpful.

And if I can follow up with a question, Richard, on SAP, there was a comment about SAP costs hitting the profit growth at Pepsi America's Beverages I believe.

Is that done now in the quarter?

I think the, what we saw in -- as we begin to implement the modules from SAP, then the amortization costs and the running costs transferred from being a corporate cost, development cost to being an actual operating cost, and we are seeing that as the roll out in all of the -- in both Pepsi, America's beverages as well as in the Quaker, Trop and Gatorade, those costs are beginning to hit the P&L.

So in 2009, you saw the first impacts of those costs.

The good news is that the SAP implementation has been doing extremely well, the execution has been really basically flawless, both with our customers and internally as well.

But yes, the costs are beginning to hit.

There's no way to quantify for us what kind of margin or how many basis points we might see due to that SAP amortization?

No we are not going to -- we don't want to get into that level but it did obviously begin to deleverage the P&L slightly in those businesses, at the same time we are increasingly being able to get the benefits of those in the top line and other part in the middle of the P&L.

Okay.

Thanks a lot.

Your next question comes from Bill Pecoriello from Morgan Stanley.

Morning, everybody.

My question on the -- is on the '09 cost outlook which I know is highly uncertain but you had mentioned on the last conference call that you had some meaningful coverage in place for '09.

So when we look at the first half of '09, is it reasonable to expect mid to high single digit input cost inflation?

And then you had said that a majority of the savings are reinvested.

So should we assume you'll take incremental pricing to cover 100% of that input cost inflation or will some of the productivity savings be used to help offset that?

Bill, yes, your assumption is correct.

We have been taking as I mentioned we have been lengthening out our coverage and so we have a good deal of coverage in place, both in the United States and outside of the United States for 2009.

Obviously, more in the first half of the year than in the second half of the year and so we will have inflation during the course of the year.

We haven't finalized on exactly what that amount is because we don't have all of the coverage.

But yes, that will be the case and we will have -- we will be taking pricing and starting at the end of, end of the fourth quarter, in order to be able to offset the inflation.

But you wind up really with the inflation like it is a rolling inflation, some of the benefits we had from early purchases in 2008 were favorable in -- were -- that we had done in 2007 helped us cushion 2008, some of the purchasing we are doing now will impact us in 2009.

But by the second half of the year we should be sort of being closer to market if you will.

So then just two follow ups on that, the big fall we have seen in some of these commodities would be more flow through your P&L and the second half of 2009.

And then just on the pricing do you worry about the snack categories with the weak consumer any regional snack companies or more discount brands taking share as you roll through that share of the pricing?

One of the things we mentioned on the script was we are going to watch private label and regional competitors very carefully.

One reason we want to keep some breathing room in our productivity for growth saving is to be able to reinvest in the value equation if we ever felt that was going out of kilter.

Okay.

Thanks.

Your next question comes from Bryan Spillane from Banc of America.

Morning, Bryan.

Good morning.

Now looking at the question relative to the implications to long term growth objectives, I guess you strip out the volatility in the economy and in commodities in foreign exchange for a minute, do -- assuming that the long term growth objectives haven't changed, is the primary objective here to sustain the growth in international and stabilize the slide in profitabilities in the Americas, as we are watching the effectiveness of this and we were looking for -- to be able to mark whether or not the long term growth objectives are still intact, is that the right way to think about it is the primary objective to improve profitability in North America?

The long term objective of our company remains unchanged, Bryan, just to repeat what you said.

And there's nothing in our portfolio that indicates that that long-term objective needs to change.

Let just come back.

In the past, the reason the portfolios worked very well is because if there has been a problem in one part of the portfolio something else has picked up the slack.

That's why this combination of beverages and snacks, investments across developed markets has worked very well, and I don't believe that that is going to change going forward.

What we are doing right now is we are seeing an incredible opportunity to streamline our internal operations, to reinvest.

One to revitalize this North American beverage business because we are one of the largest players in that business, but more important we are seeing opportunities in developing markets that we think we ought to invest in now.

We are finding ways to double down investments in developed markets in snacks.

But more importantly we are seeing promising areas in R&D that we believe now is the time to investment in.

So a lot of this productivity program is to reinvest offensively as much as it is defensively.

So overall the portfolio is still working, the long term objective remains unchanged and we just want to make sure the portfolio works the way we want it to and we want to make sure that we create the breathing room to be able to cover any challenges that happen because of macro economic volatility.

And then as a follow up, just as we are looking over the medium term, without really knowing how the volatility in the economy and commodities, how long it will last, is the objective internally different now in terms of -- are we looking at targets that will be sort of excluding those items or somehow just looking at maybe different growth objectives than the long term growth objective given the volatility?

Well, that's a tough question, Bryan, because what we do every year, let's take FX for example, we have set goals for the plans that I set for next year, budget numbers are based on some number that we think FX rates will settle at the next year and everybody goes off and does their planning based on some forecast of FX rates.

But if FX rates widely vary from the last couple of three weeks, that forces us to stop and rethink how to manage the year.

So we pick a number and we engineer the whole company around that number, around that set of numbers and we leave ourselves some breathing room for volatility.

It is when it goes way beyond the volatility range that we have to stop and ask ourselves the question, is this prudent to do something radical to deliver numbers in that extreme volatility.

The answer is no, because we are running the company for the long term.

You never run a company where you for the short term.

That's the wrong thing to do.

So that's how we set our plans.

Thank you.

Your next question comes from Marc Greenberg from Deutsche Bank.

Good morning.

Hi, Indra.

I hate what furniture burns.

Good we are not doing that.

My question relates to the chronic weakness in US beverages and specific steps you might take to turn things.

I guess first, any sense that pricing particularly in take home may have gone too far and perhaps lower prices are needed to stimulation demand?

Do you feel comfortable that the portfolio is where it needs to be?

And if you start to see some benefits on the cost side as a result of lower commodities, how readily can you share those savings with the trade if you felt that you needed to bring down retail prices?

Marc, you ask a great set of questions because you are right in saying that pricing has gone up significantly in North American beverages.

But then, don't forget input costs have also gone up.

So in many ways, the bottlers are taking pricing to cover that input cost increase.

Now, would we like -- as a franchise company would we like for prices to be lower?

Of course we would like it to be lower, but we also have to make sure that the bottlers make a fair return.

I think the real challenge for all of us is how do we figure out how to make our overall system more efficient by stripping out all of the redundancies and additional cost in the system so we can then take that extra cost and reinvest it back to provide more value.

And then from PepsiCo's perspective, the additional (inaudible) is how can we leverage our programs to provide more value to the consumer through some sort of bundle deals which is what we have done very effectively.

So this is a work in process and I wouldn't use the word chronic weakness in the US beverages.

I would just say that the US beverage business is going through some interesting times.

And as a leader in the business it behooves us to do our part to figure out how to revitalize it.

Thanks, Indra.

Richard, one follow up, please.

The credit crisis is obviously at top of mind for a lot of us.

Can you speak to whether or not you, PepsiCo, or any of your bottlers are having any changes with regard to lines or banks, and do you still feel as though you have enough dry powder if the right M&A opportunities were to arise?

In the current circumstance we are commercial paper and that of our bottlers has been trading very, very well.

Obviously we have a high credit rating we have cash in a number of different locations that we can access and we have credit lines as well.

So, in the current circumstance, neither us nor our bottlers has the experienced any issues so far.

As far as M&A is concerned obviously, we, most of the deals we do have relatively small deals and those are both very attractive and usually very accretive, and we have the ability to continue to do those.

And larger deals -- we just closed on a very large deal in Russia and have within able that just happened at the beginning of the fourth quarter and we were able to finance that.

So I think we feel pretty good about our ability to maneuver, recognizing that obviously life has changed over the last couple of weeks out there, and we will see how recent bond offerings and other things are going to fair in the marketplace.

Hopefully the intervention we have just seen from the governments to provide liquidity is going to settle the markets and make it easier for all of us.

Yes, but so far so good.

Right.

So far we are okay.

Thank you.

Your next question comes from Judy Hong from Goldman Sachs.

Thanks, good morning.

Morning.

Is -- just going back to Marc's question about your efforts to revive the US beverage trends, and if I look back at your comment about the total LRB category growth outlook I think you are now expecting growth to be more in line with the population growth rather than getting a some lift by shifting from top order, et cetera, to commercial package beverage categories.

So first, whether that assessment is correct.

Secondly, as you emphasize reviving also your carbonated soft drink part of the business, I am just wondering sort of your confidence level in increased A&P kind of restaging all of your brands, et cetera, how confident you are that this time around that you are going to actually see improvement in the carbonated soft drink categories as we look out six to 12 months out.

I will make a couple of points and Massimo if you want to add, please do.

Judy, for a couple of years now we have been saying that the underlying growth of the LRB category has come down to population growth.

I think the shift from tap water to LRB, that existed when the category was growing 2%, 2.5%, 3%, and the category growth slowed down to .8% to 1.2%, 1.3%, that shift from tap water was gone.

So it is just population growth.

So let's just say that's the underlying category growth.

Let now turn to confidence in CSDs.

Let me be clear.

CSDs are declining between 3% and 4%, all right.

And we are not talking about begin to go have the CSD category grow at 1% or 2%, that's not what we are talking about -- we are saying goal one is to make it decline maybe 1% to 2% and then get it to flat.

If we did that that would be enormous because it is a $20 billion eight-ounce base business of which -- most of the bottler are committed to CSDs.

Most of the bottler (inaudible) are committed to CSDs, so it is a critical source of profitability and it is very, very important that we don't let the slide get out of hand so that people completely switch out of the assets that are really in the ground.

So what we are trying to do step one, slow done the decline from down 3% to 4% to down 1% to 2% and then to flat.

To really get it to grow requires a break through.

And we have talked about this many times.

We have said CSD is a combination of caffeine, bubbles and sugar.

People love the caffeine, people love the bubbles.

We have to address the sugar.

There are people who like the nonnutritive sweeteners like aspartame and Splenda.

There are those that want a natural low calorie sweetener.

Once we have a break through on natural low calorie sweetener that can be used in colas, we will have a reason to talk about this category growing again.

So I think we have to take this in steps, meanwhile the focus should be on the overall LRB category, without taking our eyes off the core CSD business.

Massimo, did you want to add anything?

Judy, the only thing can I can add to what Indra said about our confidence in reviving CSDs, I tell you that last week we had a major conventions of our bottlers over 500 beverage experts with us, and the overall energy was very positive, their confidence was very high and many principles said they have not seen plans as strong as these for a long time.

Okay.

And just a follow up, following up on that, as you think about then I mean obviously your clear focus is to improve the system wide profitability, but is there any changes to your thinking in terms of sort of how the profit system wide profit gets split up between you guys and the bottlers and whether you are thinking about taking higher concentrated prices up or anything of that sort?

See, even if we took up concentrate prices or not it is going to go through to bottler pricing increases, volume will go down.

This is a loop that continues on.

The fact that there's a bottling system and a franchise company and both are independent is in a funny way system that keeps the whole beverage business in equilibrium.

So we have no issues with the core break out between the bottling system and franchise company.

All that we have to do is, step one, not fight for a larger share of a shrinking pie or a constant pie, but we have to talk about how to increase the pie.

Obviously, the elegant way to increase the pie is to grow the volume.

But volume growth is not robust, we have to increase the profit pie so that we can then use the savings to fund higher volume growth.

So we have to change your mind set.

We had a brilliant bottler meeting last week, as Massimo just explained, and talked about how to increase the profit in the last meeting.

So I am optimistic about where we are with our bottlers.

We have an outstanding group of bottlers, a great partnership with them, and I think we will make progress in this area.

Okay.

And then just my final question, Indra, I think you said in September you saw a better volume growth for some of the international markets in your beverage business.

Can you talk about what you think drove that improvement in September?

Mike, do you want to take that?

I think, Judy, as we mentioned in both the release and in the script, the European business included Russia is very seasonal with the summer and the weather this summer in Europe and in Russia was quite poor.

So frankly when you kind of work your way through that and you get to September the weather was fine in September.

So I mean, a big part of it is that we saw stabilization of our volume growth rate in Russia.

We're still not growing at the rate I'd like to see, but we stabilized it and Europe came back quite well.

So I'd say those are the biggest drivers in September.

The rest of the businesses are performing pretty much in line.

China is performing similarly, India had a terrific September.

So when I -- Middle East is still strong.

When I look around the world, both frankly both in snacks and beverages, the trends are still very consistent with what we have seen really year to date as opposed to the quarterly trends, I would say.

Okay.

Thank you.

Your next question comes from Lauren Torres from HSBC.

Morning, Lauren.

Good morning.

I guess as a follow up to Mike, some of your comments on the international business, a lot of consumer products companies are are talking about a slow down in trends.

I was just curious, obviously you are benefiting from acquisitions from brands, territories and whatnot, but I was just curious as far as just general trends here why you are not seeing that it seems like you are very optimistic and I am hearing negative comments from other companies.

What's the difference here and where is that upside coming from?

Mike?

Well, I think Indra said it the script, Lauren, that the trends are not uniform.

I will give you a good example.

Take CSDs in the UK.

Our CSD business this year is up double digits.

We are very a terrific year with Pepsi Max in the UK.

Clearly I'd say in Australia where there has been some significant macro economic issues, we have, I am not saying we are immune to anything going on in the external environment by any means.

I would say Russia has seen some softness although our snacks business has held up very, very well in Russia.

So, I think again you got to remember the categories outside the United States, CSDs in the US is unique.

You have 858 ounce per capita per person.

The highest outside the US is probably 300 and in most emerging markets it's less than 50.

So the penetration levels are much, much lower and we are still as Indra said an affordable treat both in snacks and beverages.

Certainly I am keeping a close eye on private label trends in Europe, particularly on snacks, but again continue to find that our brands are are holding up very, very well.

So, I would say we are not without some challenges in a few pockets, but I don't think you can call it by any stretch of the imagination uniform.

And as Indra said, Middle East and Asia, in particular, still very, very healthy growth rates.

And I know you didn't want to get too involved with respect to next year's outlook but in the past you have talked about division operating profit around this 8% plus level.

Seeing what we are seeing here in US maybe versus what you are seeing at your international business, do you feel that a lot of the weakness here can still be offset by your international business, or is that number at risk?

Mike?

Well, the international business as Mike said, and again we look at international as Mike's businesses in PI as well as our Latin American businesses.

And I think taken together they continue to perform very well.

And our outlook for the future, again let's be very careful.

We don't know where these macro economies are going, but given what we have seen today, we still seem bullish about our outlook for our international businesses.

We're also feeling good about our North American stack business and believe me going forward we are feeling better and better about our North American beverage business too.

So we are not providing our guidance for 2009 as of yet because we want to see where the FX lands where the macro economic situation lands, but at this point we feel good about our future.

Just to echo I spoke to investors in early September at a conference.

I think I was clear, and I think I was the only person who said, be careful about the 4X rates, now even I didn't predict how much they would change in the last two weeks, but excluding 4X I feel good about our plans for next year and our international business and I think we will have another very strong year.

Okay.

Thank you.

Is that done?

Thank you.

At this time I would like to turn the call back to management for closing comments.

Thank you all for participating in our call today.

Let me just close by saying, we feel very confident about the fundamentals of our business and we are facing challenges that are really out of our control that affect others as well.

But we feel strong -- we feel very confident about the capability of our people, our brand, the investment we are making our go to market systems, we feel very, very good about all of that.

Our snack business globally is performing exceedingly well.

Internationally our beverage business is performing very strong too.

Our North American beverage business is our only work in process, and based on the plans we have in place, the reinvestments we are making, we think that's going to be a great success story next year too.

Our portfolio balance is a great asset and we think our productivity for growth program is far reaching and gives us a breathing room to reinvestment in the business.

We are focused on sustainable long term growth and we have created the flexibility to weather any short term challenges.

So we remain a great operating company and our biggest assets as I said are the strength of our brands, our go to market capabilities, but most importantly, the tremendous people we have in PepsiCo, and we know what we need to get done going into the future.

So thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.