百事 (PEP) 2008 Q4 法說會逐字稿

Good morning and welcome to PepsiCo's fourth quarter 2008 earnings conference call.

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

(Operator Instructions).

You may remove yourself from the queue by pressing the pound key.

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.

You may begin.

Thank you, Operator and good morning, everyone.

Thanks to all of you for joining us.

Today's Webcast includes a slide presentation that can be accessed at our PepsiCo.com website.

Before we begin, please take note of our cautionary statement.

This conference call includes forward-looking statements based on 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 10-K and subsequent reports on Form 10-Q and 8-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 financial news 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.

Now for a couple of housekeeping items.

During today's call all references to EPS growth and division operating profit growth are core, and exclude net mark-to-market gains or losses on commodity positions included in corporate unallocated expenses, restructuring and impairment charges including the impact of our productivity for growth program, and our share of PBG's restructuring and impairment charges and the impact of certain tax benefits in 2007.

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

Thank you, Mike and good morning everyone.

I'd like to open today's call by saying that I'm very proud of the way PepsiCo performed in 2008.

Global snacks and global beverage volumes were both up 3% with international beverages up 10% and international snacks up 5.5%.

Revenue was up 10% to $43.3 billion.

EPS for the year was up 9%.

Cash flow was a robust $7 billion, and we returned over $7 billion to shareholders in the form of dividends and share buybacks, and we achieved these very good results in spite of a very tough macroenvironment which is a great testament to the way in which our teams around the world responded realtime to the challenges.

Timely actions and revenue management, a solid innovation calendar and a continuing focus on cost discipline and productivity allowed us to maintain momentum with our consumers and deliver strong results for our shareholders.

Looking across our businesses, what we saw in 20008 was that the majority of our portfolio performed extremely well and that includes our snack and food businesses around the world as well as our beverage businesses outside North America.

Let me just quickly give you the highlights of each.

Frequently North America was rock solid throughout the year.

They adjusted rapidly to the changing commodity picture with excellent revenue management which enabled them to sustain volume momentum while achieving 8% revenue growth and 7% profit growth.

Quaker Foods responded heroically to the flooding of our main Cedar Rapids plant, restored operations within a matter of weeks, and delivered 8% profit growth.

Latin America foods had an absolutely terrific year with revenue and profit growth above 20%, reflecting solid operating performance in our key businesses in Mexico as well as very strong growth in the developing countries of South America.

Latin American beverages grew volume mid single digits on the strength of its diversified portfolio of carbonated soft drinks and non-carbs, and PepsiCo International had another year of midteens earnings growth reflecting balance of solid performance in our developed markets and continued high growth in our developing markets of Eastern Europe, the Mideast as well as China and India, and we expect these businesses to continue to perform well in 2009.

The piece of the portfolio that didn't perform up to expectations was our North American beverage business which continued to be buffeted by the category dynamics.

As you know, this was an unprecedented year for the LRB category in North America with the first decline in category volume in at least the last half century.

Clearly, this remains our key area of focus.

I'll come back to you in a few minutes with our thoughts on why we believe this will turn around and what actions we are taking to change the trajectory.

During the middle of last year we anticipated some of the macroeconomic headwinds we will be facing in 2009 and began formulating our productivity for growth initiative, which we announced on the third quarter call.

We will be generating savings of $350 million to $400 million in 2009 and a cumulative total of $1.2 billion over a three year period.

The majority of these savings will be invested to drive growth in key businesses, to enable us to maintain value for consumers, and to enhance our long term R & D capability, and as you would expect, we will use a portion to provide us with the flexibility to respond appropriately to the uncertainties in the current environment, and I'm proud to report that our productivity for growth program has been largely implemented flawlessly.

Which brings me to our outlook for 2009.

Clearly, this is going to be a challenging year from a macroeconomic standpoint.

Virtually all of the developed world will be experiencing a decline in GDP.

Developing countries, particularly those East of the Middle East will fare better, but they too will see their growth rates slowing, and the first half of the year will be particularly difficult, even as governments around the world work diligently on measures to maintain the solvency of key financial institutions, and get credit flowing and also to provide some much needed stimulus to their economies.

The good news is that even these times consumers eat and drink, and so our categories are less impacted than some others.

The other good news for us is the leverage that we get across the globe from our direct store delivery system, whether it's operated by us or by our bottling partners, because it gives us unparalleled reach at a time whenever are customer and consumer is important.

It provides us with phenomenal flexibility to adjust products, prices and promotional calendars in response to changing consumer and competitive dynamics and in combination with the rapid velocity of our products and their higher margins, it provides huge cash flow benefits to the retailers we serve.

Now this business system is a big competitive advantage especially in these difficult times.

In that context, we expect continued solid performance in 2009 from our global snack and food business, as well as our beverage business outside the United States.

In these operations, we fully understand the task and have granular plans in place to achieve critical objectives in every market around the world, and while the plans differ in detail, all leverage PepsiCo's experience in managing in difficult times and all are focused on the same key elements as follows: one, value initiatives that engage consumers in new and relevant ways at a time when they are being increasingly discriminating about each and every purchase; two, managing the business drivers under our control to generate both top and bottom line growth in local currency.

This means continued flawless revenue management, strong innovation, relentless cost discipline and enhanced productivity across the entire business system; three, delivering on the imperative of driving long term sustainable growth by continuing to invest in key markets, in grant building, in R & D to drive innovation, in building out our SAP infrastructure and in the development of our people, and we will do this without taking our eye off the performance of purpose agenda that underpins our commercial success, and four, maintaining a maniacal focus on cash, with reductions in capital spending on top of the pairing back that we did in the second half of 2008, as well as improved working Capital Management.

Now, in North American beverages, we will be focused on the challenge of rejuvenating growth, as you would expect this is a multi-dimensional effort that we will execute in partnership with our bottlers across our entire beverage system.

Our plan includes reenergizing our brand and you've already see in the marketplace many of the initiatives we've planned for the year.

Brand Pepsi's refresh everything campaign is well under way, connecting with consumers through shared values of hope and optimism, an especially relevant message during these difficult times.

Similarly, you've seen the birth of a new identity for Gatorade building on the notion of "G." A key element in all of this is new packaging and new graphics which brings these concepts to life.

It also means introducing new products, a great example is the new zero calorie Sobe Light water which is sweetened with PureVia, an all natural FDA approved sweetener and PureVia is also being used in our new Trop 50 orange juice which has half the calories of regular OJ and is shipping to stores now.

Of course, you need to make all of this happen in store.

In partnership with our bottlers and retailers, we've flawlessly executed the largest brand identity change over in the history of the North American NRB category, refreshing over 1200 SKUs in all channels across the entire U.S.

in less than six weeks, beginning at the end of the fourth quarter, and culminating with a full scale launch of our creative campaign for the Super Bowl, and to change the category trajectory, we need to provide enhanced value to our consumers as well.

So we are partnering with our bottlers and retailers to develop price packed architecture offerings to deliver better consumer value by channel.

We've seen some positive early read results in the 18 pack architecture and we will be in the market with a 16-ounce can priced at $0.99.

We're also jointly developing promotional plans to deliver consumer value through a full calendar, and our bottlers are working to gain incremental space core vaults and standalone coolers in key growth categories in national CNG chains while investing in high margin single serve value programs.

Now, our entire system is pushing together in the same direction as we move to restore the category back to growth.

While the environment remains difficult, I believe we are positioning the North American beverage business exactly where it needs to be in order to win when the economy turns.

With that, I'd like to take a moment to cover our guidance for 2009.

We remain confident about the underlying strength of our business and our long term goals continue to be the same as in the past.

Mid single digit volume growth, revenue growing ahead of volume, and EPS growth of at least 10%.

The challenge of course is navigating through the current macroeconomic downturn.

We have managed through tough times around the world before, and we have a sound playbook and experienced and capable teams, but no one has the ability in this environment to predict with any degree of accuracy how the macroeconomic situation will progress over the coming months, or what currency rates will be or exactly how consumers will respond to all of this.

In this context, after thoroughly stress testing our model, we believe it is prudent for PepsiCo to offer a broader guidance range for 2009 than we have in the past and to do so in constant currency terms.

So as you saw in our press release, we are providing a full year 2009 constant currency guidance range for both net revenue and core EPS of mid to high single digit growth.

Please note that our guidance assumes that we won't sell any shares of our anchor bottlers in 2009 given the current market conditions.

Just to give you an idea of what that means for our EPS performance, shared sale gains amounted about $0.06 in 2008 are an impact of almost 2% on growth.

As we've indicated, the first and second half of 2009 will look very different from a profitability standpoint even on a constant currency basis.

One major driver of the difference is commodity.

We will see benefits during the second half of the year from the recent decrease in commodity prices but the overlap in the first half are indeed challenging.

In addition our profit overlaps are more difficult than the first half and particularly in the first quarter, and finally, we expect that the programs we have launched to revitalize our North American beverage business will have an increasing impact as the year progresses.

As we manage the business in 2009, we are clearly focusing on gaining value share while keeping a vigilant eye on volume share.

We are sensitive to our operating margin, cash is king in this environment, and we are tightening our belts both in working capital and capital spending although not at the expense of growth in key markets and categories.

We expect to use our strong free cash flow to continue to return cash to shareholders in the form of dividends and share repurchases.

Importantly, we are also looking to make sure that we are well set up going into 2010 and so we will be making the appropriate investments in R & D, in brand building and in our IT infrastructure to insure that we can continue to take more than our fair share of growth.

Before we close I want to make sure we have the opportunity to discuss some of the key issues facing each of our businesses, so I'd like the CEO of each of our sectors to hit these topics straight on and John Compton is going to begin with his thoughts on PepsiCo Americas Foods.

John?

Well thank you, Indra.

Let me begin by saying that I am extremely proud of the PepsiCo Americas Foods teams.

The business results in the quarter and the full year were very strong, balancing volume, revenue, and profit growth and I remain optimistic for 2009 and let me tell you why.

First, our biggest business, Frito-Lay North America, is performing exceptionally well, despite unprecedented levels of pricing required in 2008 to offset commodity inflation, we have been able to hold volume virtually flat.

With the price increases we took in November, all the 2009 pricing is now in the market and we are continuing to see better than expected price elasticity.

As a result, the salty snack category lead by Frito- Lay is one of the fastest growing consumer package good categories in the terms of dollar growth.

The strong top line combined with DSD service and credit terms yields a very attractive proposition for our retail partners.

In fact, in 2008, in measured channels, Frito-Lay scanned revenue growth was almost 9%, three times faster than the average scan growth in the total store.

Now as you might imagine we're watching our volume equation very closely, beginning in late March we will begin putting 20% more product in selected brands and packages.

This should add to our strong consumer value proposition, and beginning in Q2, we will begin to see our volume growth return.

So as I look at 2009, Frito-Lay has a balanced approach to innovation and value initiatives.

I am optimistic that 2009 will be another strong year and to use Indra's words, Frito-Lay is rock solid.

Second, our Latin American businesses had a terrific year.

On an organic basis, volume was up 1%, revenues were up 11% and profits grew 20%.

Our teams across all of the Latin American countries, Mexico, Venezuela, Brazil, Argentina, have faced challenging economic conditions before.

They understand the effects of currency, both translation and transaction.

They understand both money in the pocket for the consumer and money in the cash box for the customer, so they know how to juggle mix, price, wait-outs and engaging consumer promotions is a means to drive growth.

A recent example is Sabrita's Money in the Bag promotion.

Historically we have run promotions targeting sought after collectibles, like tados, but the Sabritas teams understood the need Mexican consumers have for more pesos in the pocket so the promotion we are just now ending has been very successful.

Likewise, Gamesa is off to a strong start and South America continues to perform well.

Third, Quaker Foods is our foundation for nutritious, healthy products.

We are investing in new products like True Delight Bars targeting adults.

True Delights will add to our very successful mom for kid franchise in chewy bars.

Last, we've enabled to bring together our leadership teams across these businesses during the past 12 months harnessing the commonalities for additional sources of productivity.

These new sources can be used for innovation, for brand building or extending our DSD advantage.

So, for all of these reasons, I remain bullish about PepsiCo America's foods and I look forward to sharing our global food and snacks division with you at Cagney next week.

Now let me turn it over to Mike White, CEO of PepsiCo International to talk about PI.

Mike?

Thanks, John.

Good morning, everyone.

I too am particularly proud of the year that we've had all across the world with our PepsiCo international teams and I think they really have shown their strengthen this challenging macroeconomic environment.

Now I'm going to address our PI business in terms of constant currency performance because that's how we manage the business.

Let me look first at our developed markets, which by and large continued to perform well in the fourth quarter.

Combined, Walkers in the United Kingdom and our developed European snacks portfolio in countries like Spain, Portugal, France, Belgium and Holland had high single digit revenue and profit growth with volumes off only modestly, and our carbonated soft drink business in Europe also performed with low single digit volume growth and margins consistent with what we've seen previously.

I must say I was particularly pleased with our performance of the carbonated soft drinks business in the United Kingdom where we delivered low double digit volume growth and positive share gains on the strength of our Pepsi Max, no sugar product line.

Now, we did, however face some challenges in the Tropicana juice business in both the United Kingdom and France.

Our profits were hit by some unfavorable one-time items as well as a significant increase in our juice costs in the fourth quarter.

Looking ahead to 2009, in terms of our developed markets I expect our developed snacks businesses will continue to perform well in constant currency.

Our Walkers business, our flagship, is off to a good start on the strength of a Do Us the Flavor promotion, with consumers designing the flavor of their choice and Walkers will be running another Brit trips promotion this summer which prove to offer great value with discounts on local UK tourist destinations last year.

Across Europe, we're closely monitoring our price gaps with private label to insure we hold our relative market share.

And I expect our carbonated soft drink business will also continue to perform in developed markets with our primary focus on Pepsi Max.

In terms of Tropicana, we're working hard to improve our net revenue management as well as driving significantly lower costs across the juice supply chain, which should enable us to deliver operating profit growth for the full year.

Now let me turn to PI's emerging markets.

There we're still seeing good growth overall, and I might say in Asia, Africa and the Middle East in particular we continue to experience very good growth, although certainly a little bit slower than the rates we saw in early 2008.

Starting with snacks, our snacks businesses continue to perform especially well.

Both China and Russia grew volumes 17% in the fourth quarter and I'm personally very excited about our newest local flavor in Russia, our red caviar Lays.

You just have to try it.

Transactional ForEx will certainly pressure some of our snacks input costs in 2009 so we're redoubling our focus on both smart revenue management as well as productivity.

In emerging market beverages, we had a strong fourth quarter with volume in China up 20% and India up 25%, and I might add both countries were over 25% if you just looked at the last three months of the year, October, November, and December, and we're seeing continued strong momentum in January.

I also think that it's important to mention that just this week, we received approval for four new beverage plants in China which we'll begin construction on later this year.

Overall, we have a terrific marketing calendar, increased investment in marketplace presence in critical strategic emerging markets and an exciting new product launch calendar for 2009 which emphasizes a variety of non-carbonated better for you beverages like tea, juice drinks, as well as hydration products.

Now, we are seeing some macroeconomic challenges in the Ukraine and Russia this year and we've taken steps to insure that we can deliver growth in constant currency.

Our juice businesses in the Ukraine and Russia have been particularly hard hit due to transactional ForEx and we're focused on reengineering their product costs, leveraging the power and breadth of our full brand portfolio that happens to span both premium and value offerings, and driving even greater leverage from our combined go to market muscle across our full snacks and beverages portfolio.

Truly looking to even greater leverage from the power of one.

Now with that said, I'm confident that we'll continue to lead the market in Russia and Ukraine and deliver good top and bottom line results in constant currency.

We have a broad portfolio spanning both carbonated and non-carbonated beverages as well as a powerhouse snacks business combined with a flexible go to market set of systems and I think additional opportunities for even greater leverage from our power of one strategies.

I'm also overall optimistic about our long term prospects for all of our emerging markets as per capita consumption levels are still low by any standard and convenience is increasingly important to time starved consumers.

Most importantly, our teams are savvy local operators, and importantly, they've managed through currency crisis before, so I'm confident they will be taking the right steps to deliver solid local currency results in 2009.

Finally, let me make a couple comments about the progress we're making on our strategic transformation, making our portfolio increasingly focused on health and wellness.

In fact just this week, we signed a new joint venture agreement with El Marai.

El Marai is the leading dairy and juice Company in the Middle East.

This joint venture called International Dairy and Juice Limited will be 52% held by PepsiCo and will focus on developing opportunities in Southeast Asia, Africa, and the Middle East, excluding the GCC for a range of high quality dairy and juice products.

We'll be able to draw on El Marai's in depth knowledge of the dairy industry as well of course to draw on PepsiCo's Marketing capabilities and experience as a world leader in juice.

Now while this joint venture is still very much in the start up phase, we think it's going to provide us some exciting opportunities in growing categories that very directly address consumers interest in health and wellness in these emerging markets.

So in general, I believe we've got a strong value and innovation line up all across our markets and PI supported by a heightened focus on cost control and combined that will deliver solid local currency results for 2009.

Now let me turn it over to my good friend, Massimo D'Amore, CEO of PepsiCo America's beverages to discuss our North American beverage business.

Thank you, Mike.

Let me open by saying that PepsiCo Americas beverages was in itself a tale of two businesses.

First, our Latin America beverage business, which is the smaller part of the portfolio, performed well on both top and bottom line.

Second, our North America beverage business on the other hand did not meet expectations.

Category dynamics impacted our performance as the LRB business as a whole declined for the first time ever on a year-over-year basis.

As you know, by mid 2008, we put in place a plan to completely refresh and rejuvenate our entire North American beverage line, from our brand identities to consumer campaigns to innovation.

And most of these initiatives are now appearing in the marketplace.

We expect that during the course of the year the new beverage line up will gain traction and are supporting campaigns with healed increasing results.

The first half of the year will still be a work in process but we believe our investments will yield the results later in 2009.

Now, one question still on your minds might be why are we optimistic about the prospects of this business?

First of all, the LRB category in North America is attractive.

It is large, at 20 billion cases and $95 billion at retail, and delivers attractive profitability and cash flow.

It has also recorded positive growth every year for which data has been kept except for last year.

It is a vibrant category with a tremendous amount of innovation emanating from the players every year.

We do believe that the LRB category decline we experienced in 2008, which may continue into 2009, is not driven by the number of drinking occasions, which actually are still growing, but by the shift in occasions from conveniently packaged offerings to cheaper non-LRB alternatives which reflect the current economic situation.

This rate is a question about the long term growth prospects for the category.

We conducted in depth consumer research and our analysis indicates that the category will return to growth, at least in line with population growth once we come out of this economic downturn, we are confident about this.

We expect the shape of the growth to be a bit different going forward.

We see a large opportunity in three main areas.

First, the underserved cords of women and boomers.

Second, in beverages providing functional benefits and better nutrition.

Third, the opportunity still to be addressed at the intersection of unfulfilled occasions and unmet needs.

As the leaders in the North American LRB business our strategy in 2009 is built on five pillars, first, rejuvenate and refresh our brand identities and line up, which is supported by breakthrough marketing by the consumer at a time when it is cost efficient to do so.

So far, we successfully refreshed over 1200 SKUs, and kicked off our advertising campaigns which culminated with our great presence at the Super Bowl.

Second, we increased our focus on consumer value, as evidenced by the new multi-packs and the 16-ounce can priced at $0.99.

Third, we are executing flawlessly at the shelf in close partnership with our bottlers.

Fourth, we are taking Power of One to a new level, and fifth, we are delivering innovation pipeline for superior value and breakthrough products for 2010 and beyond.

Finally, 20009, especially the first half is a work in progress as we begin to see our efforts gaining traction with consumers.

We expect the results of our actions to positively impact our business in the second half of 2009 and beyond.

Now I will turn it over to Richard Goodman, the CFO of PepsiCo.

Thanks, Massimo.

I'd like to cover several companywide programs as well as provide some additional detail on below the line items.

Our productivity for growth program is right on track and most of our flanked productivity initiatives have been implemented and we're on track to meet expectations both in terms of the overall cost of the program as well as the benefits.

The $350 million to $400 million in savings we expect to realize in 2009 will be invested across our businesses as well as to provide us with the flexibility to respond appropriately amidst the uncertainties in the current environment.

Clearly, a critical investment priority is restoring growth to the North American beverage business as Massimo talked about.

This includes the brand building and product and package innovation that Indra and Massimo talked about earlier.

At Frito-Lay we will be investing in increased A& M, adding value to our products and further optimizing our go to market system, including some significant resets of the salty snack aisle that will enable us to enhance our presence with key cohorts while reducing SKUs.

Internationally we will be stepping up our investments in our go to market capabilities in China and India, as well as new product launches in these and other key developing markets.

And we will be significantly increasing our committment to long term R & D.

Turning to commodities, in 2009, we are expecting about 6% input cost inflation, down from 10% in 2008.

Inflation in snacks will be higher than in beverages, and based on the forward cover, we had coming into this year, we will be seeing significantly higher inflation in the first half of the year than the second.

That sequential improvement will help lift our quarterly growth rates as we progress throughout the year, and in 2010, we would expect commodities to be deflationary.

On guidance, as Indra mentioned, we expect to deliver mid to high single digit constant currency core EPS growth for full year 2009.

Based on current spot rates, foreign exchange translation would represent a head wind of about 8% to core EPS.

Within this guidance, we expect very little below the line leverage in 2009.

A key reason is that given current market conditions, we do not anticipate selling any shares of our anchor bottlers this year.

That represents a head wind of almost two percentage points of EPS growth, since in 2008, these shares resulted in the gain of $147 million or about $0.06 a share.

In addition, our interest expense will be higher in 2009 given the $2 billion in acquisitions we made last year.

And while corporate departmental expansions will be reduced versus a year ago, we are investing significantly in long term R & D.

Finally, we expect our full year tax rate to be about the same as in 2008.

In terms of uses of cash we will be making a discretionary $1 billion contribution to our pension fund given the adverse impact on our pension assets of the recent market declines.

This contribution has about a $640 million impact from a cash standpoint because it's tax deductible.

In addition, we intend to spend up to $2.5 billion repurchasing our shares in 2009 subject to market conditions.

With that, I will turn it back over to Indra for some closing comments.

Thanks, Richard, thanks, John, Massimo, and Mike.

In closing, we feel good about the way the PepsiCo team delivered in 2008, and in 2009, we will drive growth by aggressively managing the business drivers within our control in order to deliver our top and bottom line committment.

We intend to do this while continuing to invest for the future.

Now, there is no doubt that these are challenging times, but we are entering the New Year cautiously optimistic with a renewed focus, a can do attitude with a must do sense of responsibility.

With that, I'd like to open it up for questions.

Thank you.

(Operator Instructions).

Our first question comes from John Faucher from JP Morgan.

Yes, good morning.

Good morning, John.

Quick question for Massimo.

One of the themes we heard over the past couple of days is CC, PBG, and Coke has reported is that maybe the North American business, while definitely hasn't recovered and I understand you're looking for more of a back half recovery, it at least seems to have stabilized and doesn't appear to be getting any worse, so can you comment on that and relative to what we've been hearing from your bottler and the red system and then also, reading through the press release it looks as though you maybe have had a little bit of an inventory drawdown that hurt the Q4 numbers on the North American beverage side.

Should we expect a little bit of that reverse in the first quarter?

John, let me provide opening comments before I toss it to Massimo.

I think given the economic environment and given the changes in consumer spending patterns, it's very hard to make a call and say that the market either bottomed out or has not bottomed out.

I think we have to take every month as it comes and watch and see what happens over the first couple of quarters because it's the overall economy that's going to impact consumer buying patterns, so let's just take a period of time.

And the second thing is when you're refreshing 1200 SKUs, you are going to have some disruption in the system because people hold off ordering waiting for the new products to come in so clearly, we saw some of that towards the back half of Q4, and we probably will see some of that in Q1 too because it's still in the process of changing our larger skews.

I think we'll start seeing real progress in Q2 and beyond so with that, did you want to add anything to that?

Yeah, just without repeating what Indra said, John, there is the transition to the new SKUs as well obviously as the overlap we had on our Gatorade business versus the launch of G2, which took place in the last two months of the quarter.

Great.

Thanks.

Our next question is coming from Marc Greenberg with Deutsche Bank.

Thanks, good morning.

Good morning, Marc.

I just wanted to briefly financially, did you see any restructuring benefit in the fourth quarter on the expense line and I'm wondering how much if any of the restructuring savings you're now thinking about dropping to the bottom line in 2009 and then Richard, you gave us the dollars on the pension expense.

Can you give us any insights into whether or not that's incremental in '09 versus '08 and by how much?

Richard?

On the pension question, we made a contribution to the pension plan because the assets have gone down, we had lost money on the pension plan just like every other pension plan did and so this was really to get us closer to ABO levels and then we'll get a benefit on the one hand for the inside of the accounting for the pension because we will grow the pension assets based on the increase in assets and on the other hand we obviously have an interest expense line on that.

And on the financial benefit, our productivity for growth the real benefit kicks in in 2009 and the savings that flow through 2008 were extremely small Marc.

Okay, great and then just a quick M & A question.

In light of the difficult environment, are you seeing increase in anything beyond the normal pipeline activities, bigger deals potentially or more deals and how would you characterize your access to the capital markets right now?

I think companies that are financially solid can still act as a financial market.

The real thing is the food and beverage industry is doing just fine overall, and so in our sector there aren't that many deals that are cheap enough to create value.

Thank you.

Another question?

Our next question is coming from Christine Farkas from Banc of America/Merrill Lynch.

Thank you very much.

Good morning everyone.

Good morning, Christine.

A question regarding your CapEx.

The guidance was modestly lower for '09 yet you have some big plans for investment overseas.

I'm wondering if you can talk a little bit about those buckets or the offsets in that CapEx number, and then on the back of that, Mike, perhaps on [Libiganski], are there any surprises there, juices seem a bit tough in some emerging Markets.

Could you remind us perhaps a strategy there and if in fact that acquisition is expected to be accretive in '09.

Thank you.

Richard?

Christine just to put it in context as you over the past couple of years, CapEx has gone up because we've had higher growth particularly internationally in that volume growth is driven CapEx.

Now that volumes are -- the growth is a little bit slower and domestically clearly slower we've really pruned that capital spending so at the end of last year, we cut capital spending you saw as we went into the year, we were talking about $2.6 billion, $2.7 billion and we came in closer to $2.3 billion, and $2.4 billion and we would expect that to go back down again by maybe 10% in 2009.

Yeah, but Christine the thing to remember is we're not starving any growth business in CapEx.

We are being more efficient in the way we procure.

We are being judicious in the use of the assets we have on the ground but we want to make sure that you understand that there is no growth business that needs CapEx that's not getting the CapEx it needs.

That's clear, thank you.

And Mike?

Just on the CapEx, Christine, I think our plan for PI is just slightly south of $1 billion in CapEx this year and that's well above where we were two or three years ago so we're still planning on some aggressive funding, for example, those four new plants in China.

On Libiganski, first of all I think what we've been very pleased with is the breadth of the portfolio, one of the reasons when we acquired it that we were excited is it had some terrific brands, the Ya brand which is a beautiful premium product as well as [Privyet] which is a value brand on the other end of the spectrum.

I think it has given us more flexibility to begin to adapt to this environment.

Second thing I would say is the team there has been terrific about kind of ripping off best practices.

We add them to our plant in Belgium to look at how we do Tropicana and Western Europe, and they immediately went back and implemented a bunch of waste reduction techniques, it's one of the strengths in Russia you can kind of command things pretty quickly.

Certainly, we weren't planning for the currency to devalue by 30 or 40% in the short period of time that we faced, and that has certainly put pressure on our gross margins because a lot of the juices from concentrate and imported from overseas, but we've got a pretty talented team that's already looking for ways to reengineer some things.

I would say the export business has been a little soft as well, but I'm still very optimistic.

This is a terrific Company for the long run for PepsiCo.

It's got a great team of people.

It's got a great infrastructure with capability to make a wide range of juices and great brands and juice is still a core category in Russia, so we'll certainly see some challenges on the gross margin line that we're working our way through and the currency certainly was different than we expected, but frankly, I'd been very pleasantly surprised with the quality of the team and the quality of the operations that we've got and I guess the other upside surprise is we're finding more ways to leverage the power of one.

Keep in mind we're working together with PBG, our bottler in Russia, who also is distributing snacks and so we think there's some additional go to market opportunities for us to leverage and that we're accelerating those plans in this tough environment, but and our juice drink business there is off to a great start this year.

Great.

That's all very helpful.

Thanks a lot.

Your next question comes from Kaumil Gajrawala with UBS.

Good morning, Kaumil.

Particularly South America,--

We missed the first part of your question.

Oh, in emerging Markets, I believe your snacks business skews a bit more away from home as versus at home.

Can you talk about some of the trends in these regions and if you're seeing similar shifts to at home consumption and what you might be doing to address it?

And then the second question if you can give an update on what you're seeing in USC store trends as it relates to Frito.

John?

Do you want to take South American markets and Mike maybe add something on emerging markets and snacks?

Yeah, I'll take South America.

As we reported our business remains strong there.

On a full year basis South America continued to grow 4% in total and very strong profit growth there.

To your question around the shift from the up and down the street business to more of a grocery centric business, we haven't seen that shift occur.

In fact it's actually shifting a little bit back the other way, and that's why we're so conscious of the absolute price point and any time we tend to take pricing in those businesses we tend to do it through wait outs and our unit growth has remained strong.

We've also been focused on new categories to go target and in South America we have a big success under way in Argentina with a product called Twistos which targets the wheat/bread market and it's up to 8% of our revenues in that market, so South America overall continues to perform very well.

In C-stores, as we've talked about in the beverage business, sea store traffic has been down.

Our Frito-Lay business has remained fairly strong.

We grew again in 2008.

Not as fast as our overall average but it did grow.

I think our revenue growth was around 4 to 5%, so we're pleased with what we've seen in C-stores despite the difficult traffic questions that the channel has faced.

And I think looking at both Eastern Europe, Russia, and Middle East/Africa and Asia, I'd say probably pretty much the same thing.

It's primarily a single serve business sold in small mom and pop stores and I really haven't seen any shift in that regard to a big organized trade move but frankly, again, our emerging market snacks business has just been a terrific strength in the portfolio.

Fourth quarter Russia was up 17%, South Africa was up midteens, Middle East was up double digits in both Egypt and Saudi Arabia, China was up 17, really across-the-board, our snacks business continues to be I would say robust.

Thank you.

Our next question comes from Lauren Torres from HSBC.

Good morning.

Good morning, Lauren.

I guess as a follow-up Mike to your comment just to Kaumil's question, talking about these great double digit growth rates be it in snacks and beverages in markets like China and India and Russia, I'm just curious about your thoughts of the sustainability of those growth rates considering the market conditions.

I think you have a great platform but can you just talk about consumer trends just how consumers are behaving, kind of how do you offset this and keep those growth rates as high as they are?

Sure, Lauren.

Look, I'm not Pollyanna-ish about the external environment.

We had some pluses in China with Chinese New Year moving forward that I think account for some of the growth that we had in the fourth quarter and it's important to keep those in mind and I would tell you that our plans for 2009 have been very disciplined.

I mean when we put our planning process together in November and October, I met with my teams and we said we're going to plan volume conservatively, so I do think we are seeing challenges in many of these markets.

We shouldn't ignore that, but I would say to you that I continue to see growth in the snacks business and it's pretty much across-the-board as I look at it, so I'm not in any way suggesting that we're going to see the kind of growth rates we saw in the first part of last year.

I don't believe we will, but frankly, I continue to see very good growth rates in all of these emerging markets and it looks pretty sustainable to me.

I mean snacks is still a treat and we've reengineered our single serve products to stay within a good attractive price point for consumers and we've got some good innovation for the year as well, but we've been very very disciplined in our planning process and I don't think one can ignore the external environment.

I do think in countries like India they will hold up better than most, the banking system is broader, you don't have lots of credit cards or mortgages and things like that.

We will see some probably some challenges in China as exports slow, so again, I'm not in any way suggesting we'll see the kind of growth rates we had in the first quarter of last year but still, our fourth quarter numbers were terrific and I have to tell you the reports i've got from the field for first quarter are still solid in terms of the emerging market growth rates.

And with that said, you still see some good pricing opportunities?

Yeah.

I mean, on snacks, we're pretty good about knowing how to change the bag size in order to hit a price point if we have to weight out, so I think that's a real skill in the snacks business globally and then we kind of get little smart ideas like the Money In the Bag promotion that John talked about and Sabritas that we've done before in other markets and probably will be looking at as well for later this year but I think we've got a lot of ways to manage the economics of that business.

Lauren, one other thing I would add is all of us have sort of a pretty good pulse on the marketplace.

I mean Mike and John, in terms of managing their businesses and Massimo watch their markets all the time.

Every month, about 20 countries send me a report which is not really macroeconomic statistics but really what's happening on the ground in terms of shopper behavior, and this allows us to really have good intelligence on the marketplace in each of these key Markets and because of the power of the DSD system that we talked about we can actually put in remedial actions very very quickly, so the snacks business more than anything else, I think we feel very comfortable about.

Great.

Thanks.

Our next question comes from Mark Swartzberg from Stifel Nicolaus.

Good morning everyone.

Good morning Mark.

Really continuing the conversation you're having in these last couple questions, I was hoping that John, you could give us a little more granularity of kind of a report card on Mexico specifically what you're seeing, not only broadly from a consumer behavior and retailer perspective but for each of the three businesses there, and then similarly Mike, could you focus on the UK and give us a bit of a report card on what you're seeing in your outlook there?

Let me build on what Mike was saying and I'll speak to Mexico.

As you know, we have a very strong business with Sabritas in the salty snack business and then we have the leading cookie and cracker business with Gamesa, so as consumers look for value they will often move between these two categories and fortunately we have leadership positions in both.

Obviously Gamesa on a peso per kilo basis is a better value than Sabritas, so when people move we're actually okay with that decision because we're largely margin indifferent when they make that choice, and we're very conscious about how we put our plans together and the Gamesa business, had a very strong 2008 and continues to have strength in the early part of 2009, so we have seen a little bit of a slowdown in the consumer confidence side in Mexico as you might imagine.

The remittances from the United States are down, the GDP in Mexico is slowing but our business overall continues to perform well.

Mark, in terms of the UK as well as, I'm just so proud of the team there, Walkers in particular had a terrific fourth quarter.

Volume was off 1%.

Revenues and profits were up significantly.

First quarter's off to a great start.

Actually we're seeing kilo growth in the first quarter so far.

We had record high market share in the month of January.

I would say Pepsi Max in the UK was up double digits last year and continues strong this year.

Clearly, the Tropicana business we're having to do some reengineering of the cost structure but even there, we continue to see modest volume growth, so we are seeing volume growth and share growth with the Tropicana business, but we've got some work to do on the gross margins of that business because of the weakness of the pound relative to both the Euro and the dollar, with the juice coming in from overseas.

So that's the one challenge we've got in the UK, but my goodness, our Quaker business with all of the snow they've had is flying off the shelves so in pounds, local currency, we're really rock solid with that business which I've been really pleased to see and all of our pricing is in the marketplace, so we don't have any further pricing we have to take.

We're watching private label carefully but as I said Walkers hit record share numbers in the month of January and the Do Us a Flavor promotion that we've got on the market right now is doing very well.

That's great and if I could just close this topic, could we ask Massimo to tell us a little bit about beverages in more detail in Mexico?

Sure Mark.

First of all, the economic trends of the ones that John described and in this environment we continue to do well with our Gatorade business.

Our Gatorade market share as you know is 80% in Mexico and is really a corner stone of our efforts there, and you also know that PBG executed the significant risk factoring of their business in Mexico during the quarter so this is now behind us and we are much better positioned for next year.

And carbonated I guess it's challenging and any comments on carbonated?

Well that's what I was addressing with the PBG restructuring.

It is challenging, the environment is challenging.

In this environment we know that private labels grow, so we have put in place together with PBG a very effective price architecture but at the same time, the cost base of PPG has been reduced because they are implemented a big restructuring in quarter four.

Got it.

Thank you, gentlemen.

Sure.

Our final question is coming from Judy Hong from Goldman Sachs.

Thanks, good morning.

Hi, Judy.

I was wondering if I could ask a question of Frito-Lay North America and clearly trends have been pretty healthy from a revenue and profit perspective.

Maybe if you can speak to the volume trend a little bit more, fourth quarter being down 1%, some of this is obviously weight out driven and the dollar share has been pretty healthy but the scanner data does seem to show that the volume share has been under a little bit of pressure, so I'm wondering if you can just sort of speak to the value proposition of Frito versus some of the regional private label players and how we should think about '09 in that context.

Judy, I'm going to have John talk about that.

But before island it off to John, I just want to talk a little bit about Frito-Lay in North America.

I think Frito-Lay in North America had a simply outstanding year in 2008 and has opened the year with a big bang, and it performed fantastic on the top and bottom line, in spite of highest commodity inflation ever and the way they've managed their price pack architecture, the way they've managed their market presence has been simply spectacular so Judy I want you to know that before I toss it over to John to give you details on the Frito-Lay North America performance.

Judy, thank you for the question.

As you know in the fourth quarter, we had as you're seeing in the IRI data, we've had almost 15% price per volume flowing through our P & L as we were lapping the highest commodity inflation that we were going to have during the course of the year.

We will see that again through sort of January and February and then as that commodity cost starts to mitigate a little bit for us, we immediately start to return to put pounds back into the bags, and that will hit the market mid March to early April.

As I said in my prepared comments, we will begin to see the volume growth return in the second quarter.

I would expect north of 1%, and it will grow faster than that in Q3 and Q4.

Clearly, as we enter 2010, it's our expectation that commodities will be deflationary to some degree and the normal algorithm that we've all come to expect will return to that business and I could not be more pleased with the business overall.

We do watch as you know share daily and weekly and we're very optimistic and we're doing much better relative to regional competition.

Private label in the last two or three reported periods have done well but relative to our regional competitors we've done very well, so I'm pleased overall with the Frito-Lay business and I'm very optimistic about 2009.

Thanks, John.

Let me just close this call by leaving you with five things: First, PepsiCo, the overall portfolio is resilient and it works.

Second, PepsiCo delivered a great 2008.

Three, PepsiCo's cautiously optimistic about 2009.

Four, we've stress tested our operating model and believe we have provided prudent guidance for 2009 but our long term guidance is still intact, and five, we have a competent and tested team for these volatile times so with this, thank you for joining our call.

This concludes today's PepsiCo's fourth quarter 2008 earnings conference call.

You may now disconnect.