百事 (PEP) 2009 Q2 法說會逐字稿

Good morning, and welcome to PepsiCo's conference call.

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

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

It is now my pleasure to introduce Ms.

Lynn Tyson, Senior Vice President of Investor Relations.

Ms.

Tyson, you may begin.

Thank you, Brandy.

With me today are Chairman and CEO Indra Nooyi and CFO Richard Goodman.

Indra will lead off with a high level overview of our results and then Richard will review our quarterly results.

We will then move to Q&A where we'll be joined by Mike White, Vice Chairman of PepsiCo and CEO of PepsiCo International; John Compton, CEO of PepsiCo Americas Foods; and Massimo d'Amore, CEO of PepsiCo Americas Beverages.

After Q&A, we'll end with some closing comments from Indra.

I encourage you to review our earnings web deck which augments our comments today which is posted on our website at PepsiCo.com/investors.

Our IR activities in Q3 include presenting at the Barclays conference in Boston on September 10.

During today's call unless otherwise noted all references to EPS growth, net revenue growth and division operating profit growth are on a core constant currency basis.

I encourage you to release our Q2 earnings release for more detail.

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

And finally, you should refer to the investor section of PepsiCo's website under 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 that, I'll turn the call over to Indra.

Thank you, Lynn, and before I get started on my comments I just want to say a big thank you to Mike Nathanson, our outgoing head of Investor Relations for doing such a great job over the past few years, Mike, and, Lynn, I want to say a big welcome to you.

Thank you.

I'm very pleased to have the opportunity this morning to review with you both our very solid operating performance during the first half of this year as well as the progress that we continue to make against our long-term strategic priorities.

At a high level revenue grew 6% in both Q1 and Q2.

Division operating profit grew 6% in Q1 and 7% in Q2, EPS grew 8% in both Q1 and Q2, and management operating cash flow excluding restructuring and the Q1 pension contribution was up 25% year-to-date.

I think this is particularly impressive given the global macroeconomic situation, with significant declines in GDP across virtually the entirely developed world and slowdowns, and in some cases declines, in the developing world as well.

We were able to achieve these results for two main reasons.

First, our teams across the world have been very agile in handling the day-to-day decisions required to optimize top and bottom line performance.

And, second, we are benefiting from the aggressive actions we took last year to take costs out before the economic downturn.

For example, the cost savings from our productivity for growth initiatives are critical to sustaining growth in the years to come.

Areas of investment require our global SAP initiative, significantly enhanced R&D capabilities, increased infrastructure in key developing markets such as China, India, Russia and Brazil, and focused M&A.

Our goal is to capitalize on this difficult period to better position ourselves across both geographies and categories and also use this opportunity to make multi-generational investments that will drive growth well into the future.

There are a few accomplishments in the quarter we feel particularly good about.

Gross margin and operating margin increased in both quarter one and quarter two.

We delivered strong growth in our international markets and in our domestic food businesses, which together accounted for approximately 80% of our revenue and operating profit.

We generated top line growth across the globe, posting local currency revenue increases in countries that represent about 95% of our revenue base.

Naturally sweetened zero calorie beverages featuring stevia-based PureVia are beginning to show promise.

Significant advances in our environmental agenda were highlighted in June by the opening of our first overseas green plant in China.

We continue to build the Company through M&A and tuck-in deals.

We recently executed a strategic alliance with Calbee, the largest snack food company in Japan, giving us access to great innovative technology.

In addition, our Almarai dairy JV acquired 75% of a leading fresh dairy producer in Jordan.

Now, Richard will walk you through the Q2 performance of each of our businesses.

But before I turn it over to him, I want to take a few minutes and share with you what we are seeing around the world and the implications for our business.

Let me start with the positive news.

East of the Middle East most economies are growing at GDP rates four to nine points higher than the United States.

The consumer in these markets after a period of uncertainty in the first quarter of 2009 is regaining confidence.

In China, where I recently spent two weeks, the economic stimulus initiatives introduced by the Chinese government appear to be working.

GDP growth rates have improved and local consumption is good.

Similarly India also seems to be on track although growing at a rate a bit lower than the 8% to 9% GDP growth rate they were at before the economic crisis hit.

Here, again, in-country consumption is buoyant.

Latin American economies, ex-Mexico, are surprising resilient, where GDP growth rates flat to down only slightly and consumers continuing to cautiously consume.

And as all of you well know the developed economies of Western Europe and the United States and the economies of Eastern Europe and Russia are recording negative GDP growth rates ranging from down 5% in the UK to down 9% in Russia.

Interestingly while we have are not seeing growth in the underlying economic indicators like employment or capital goods purchases, we're beginning to see the cautious consumer slowly beginning to spend.

And in some countries manufacturing output seems to be slowly stabilizing and consumer and business confidence slowly improving.

We hope these signals green shoots of recovery.

It's obviously very difficult to predict how the global macroeconomic picture will evolve over the next 12 months.

However, I want to show you that to the extent that there is an early and sustainable uptick we will take full advantage of the opportunities.

Whether the recovery is delayed or the rebound is shallow we're prepared just as well, just as we have been this past year.

We will continue to very consciously manage our value equation and our product innovation on a country-by-country basis, focusing in every market on responding appropriately to the particular dynamics at play.

Our highest priority has been to protect the equity of our powerful brands.

Rather than driving for growth through broad-based deep discounting, we have focussed on providing value in a differentiated way through relevant innovation, price pack architecture initiatives, creative local promotions and bundling across snacks and beverages, and consumers have responded.

They're being understandably cautious amidst these economic pressures and the uncertain outlook, seeking value both to stretch their budgets and also as a way of finding opportunities to still enjoy some simple pleasures.

Among those simple pleasures are the convenient, satisfying and affordable products in our portfolio.

I know I've said it before, but it is good to be in the snack and beverage business in these times.

And more to the point , it is good to be at PepsiCo in times like these.

The geographic diversity and breadth of our snack and beverage portfolio combined with the strength and agility of our go-to-market systems means we can take advantage of favorable opportunities in snacks in some countries and in beverages in others.

It also means that we have the flexibility to take a longer view in handling competitive or channel issues making the right decisions for the long-term health of a given business while still delivering solid, consistent results for all of PepsiCo.

Before I turn it over to Richard, I want to remind everyone that we will not be discussing any aspect of our proposed acquisition of our anchor bottlers, PBG and PAS, today.

However, I do want to note that we and our bottling system are continuing to interact normally with respect both to our ongoing operations, as well as to our 2010 planning.

This is an intensely competitive beverage environment, and you can rest assured that the entire PepsiCo system remains maniacally focused on optimizing our collective performance.

So with that, let me turn it over to

Thanks, Indra.

I'd like to frame the discussion of our Q2 results by reminding you that this year we have focussed on four primary areas.

First, investing to deliver value to our consumers; second, concentrating on the drivers we can control in our business against the backdrop of global economic uncertainty; third, operating with strict financial discipline, including working capital management; and, fourth, driving long-term sustainable growth by investing in key markets and brand building and in innovation.

I'm pleased to report that this approach, together with our diversified global portfolio and advantage business model enabled us to drive solid performance in the second quarter.

EPS grew 8%, revenue grew 5.5%, and the businesses continued to generate strong cash flow from operations, plus overall gross margin and division operating margin increased in the quarter, as they had in Q1.

Our teams around the world did an outstanding job of executing against their growth plans.

Strong performance in our international businesses and in domestic snacks offset moderating declines in our North American beverage business.

Across the board, we successfully managed the middle of the P&L and we were disciplined in our use of working capital.

So let me turn to our operating divisions.

PepsiCo Americas Foods continued to deliver strong results.

Frito-Lay North America performed very well growing dollar and volume share while effectively managing price gaps to competition.

Frito's strong brands and consumer preferred innovation supported 3% volume growth.

The team executed strong net revenue management initiatives to drive 8% net revenue growth and their disciplined cost management approach and relentless focus on productivity resulted in an 8% increase to core operating profit despite input cost inflation.

Lay's did particularly well driven by strong in-store execution and the Lay's local campaign which highlights the local cultivation of the potatoes that go into our Lay's potato chips.

Dips and multipacks also drove growth and line extensions, such as Doritos Late Night and Giant Cheetos, performed well.

On the innovation front, Frito-Lay rolled out new shelf presentations at over 8,000 stores putting us more than half way through a major initiative designed both to attract consumers to the salty aisle and also to simplify their shopping experience once there.

The new shelf sets feature our dip products and give prominence to our health and wellness offerings.

In the third quarter, FLNA is maintaining its focus on delivering value to consumers in targeted ways across both small and large format stores.

To give you a couple of examples, in small format, FLNA will expand its $0.99 offerings across core brands as well as in its recently launched Hispanic flavor variations.

In large format, it will continue to offer its 20% more free and take-home size corn products.

Q3 will also see the rollout of a new variation of Doritos Late Night as well as in Doritos "Flavor Shots" which allow consumers to add just the right amount of extra flavoring to personalize their snacking experience.

Latin American Foods also had a very good quarter in a challenging environment.

The teams executed price pack architecture and effective net pricing initiatives to drive strong revenue growth, while exercising disciplined financial management to deliver excellent core operating profit performance.

In Mexico, we saw the usual portfolio effect during difficult economic times.

Volume is downed at Sabritas, in part driven by pricing to offset input costs, but volume grew at Gamesa, which benefited from innovation and its better-for-you line of Quaker snacks and also the fact that its offerings generally deliver greater value per peso.

Importantly both businesses drove increases in net revenue in core operating profit and they definitely managed through the adverse impact of the H1N1 virus outbreak.

South America experienced strong performance with mid-single-digit volume growth.

Our business in Brazil performed particularly well supported by the launch of a new line of Quaker healthy snacks and innovation aimed at Millennials in our core Doritos brand.

The southern cone also delivered solid performance as consumers responded well to locally relevant product introductions, such as new variants of our Twistos product, which is a baked bread snack that the Boomer cohort enjoys during incremental afternoon snacking occasions.

In PepsiCo Americas Beverages, the LRB category challenges continue to impact our result although we did see some positive signs.

In CSDs, brand Mountain Dew posted another quarter of positive volume growth, based on success with Mountain Dew Game Fuel and Voltage.

Brand Pepsi's "Refresh Everything" campaign continued to gain traction and we were successful with limited addition "Throwback" versions of both Pepsi and Mountain Dew featuring retro graphics and sweetened with all natural sugar.

In measured channels we gained overall CSD volume share versus our largest competitor and in diets we not only gained volume share in the total category, we also gained diet cola share versus our largest competitor.

We're also excited about the success of our new naturally-sweetened, zero-calorie products, featuring stevia-based PureVia.

Trop50 has been resonating with consumers since its launch earlier this year, and SoBe LifeWater recorded very impressive growth rates in the quarter led by the new zero-calorie product line.

Strong consumer repeat rates bode well for future stevia-based, zero-calorie and low-calorie innovations in our pipeline.

Turning to Gatorade, we know we have work to do here.

Although G2 posts double-digit volume growth the overall franchise experienced declines with most of the losses coming from casual users who are turning to less expensive LRBs in this challenging economy.

Our conscious strategy is to maintain the integrity of this terrific brand, not by following a private label like pricing strategy, but by sharpening our focus on core fitness users for whom the functionality of the product remains paramount.

The new campaign, which connects Gatorade to the competitive spirit across a wide range of athletic endeavors, has been very well received.

To drive the top line during this summer's consumption peak we just launched the unique six-bottle collection of Michael Jordan-signed labels to celebrate his September induction to the basketball Hall of Fame.

This limited time offer has already generated an unprecedented digital buzz among MJ's fans and will be leveraged with 360-degree communication anchored around a distinctive TV ad hitting the airwaves soon.

This offer is driving incremental inventory across most retail channels.

Overall, the fact that Gatorade brand regard scores within the core fitness cohort group are high and improving gives us confidence that our broader strategy is gaining traction.

There are clearly opportunities for growth going forward since Gatorade still accounts for fewer than one in seven core user occasions and we will be looking to increase both penetration and frequency with product innovation to be launched in 2010.

Net-net there is some green shoots in the LRB category, but it is clearly still being impacted by the overall macro softness.

In that challenging context we will continue to work closely with our bottling system, focusing on relevant innovation, enhanced execution and heightened productivity as the way to deliver sustainable long-term growth.

Moving on to PepsiCo International, we again saw solid performance despite the macro headwinds in many parts of the world.

PI delivered double-digit revenue and operating profit growth across both Europe and EMEA.

The teams did an excellent job of managing P&L while leveraging the power of our broad snacks and beverage portfolios and go-to-market systems.

Declines in GDP across both Western Europe and Eastern Europe continued to impact our businesses, but the strength of our brands allowed us to price to cover transaction forex and commodity inflation.

And so even in this difficult environment and even excluding acquisitions we were able to generate about a 9% increase in core operating profit while holding or gaining share in most of our markets.

And including acquisitions we generated a 15% increase in core operating profit on a 10% increase in net revenue.

Snack highlights include Walkers in the UK where the Walkers team drove strong net revenue management.

Its "Feet On the Street" initiative resulted in impulse channel and single-serve growth and it continued to execute creative promotional campaigns which in Q2 included launching the winning product of its high consumer engagement Do Us a Flavour promotion.

In Russia, where consumer spending was severely impacted by GDP declines, the business held snacks volume flat while growing market share six points, supported by the strength of our core brands as well as recently introduced locally relevant innovation such as red caviar-flavored Lay's.

In Europe Beverages, volume grew 2% reflecting the favorable impact of the acquisition of Lebedyansky.

While we saw macro-driven declines in Eastern Europe, our CSD business in the UK and our juice business in France delivered solid performance.

We expect European macros to continue to be challenging.

However, our teams are prepared and we saw some positive trends in both snacks and beverages in June which falls in our third quarter.

In EMEA, the economic environment was not as difficult as in Europe and our performance reflected that.

We had strong net revenue and core operating growth together with operating margin expansion.

In EMEA Beverages, volume grew 8% and was broad based across geographies and categories led by our businesses in India and the Middle East.

In India, we invested to expand cooler space and drive relevant innovation.

This investment helped to fuel 28% volume growth across both CSDs and NCBs in our reported Q2, which is March through May.

In June, volumes were up over 60%, which resulted in higher growth versus our major competitor in their Q2.

Nimbooz, our version of the traditional sweet lemonade served in most Indian households, is a good example of how we're introducing convenient and affordable locally relevant innovation to market.

In China, we expanded our beverage portfolio launching Pepsi Max and Mountain Dew and we expanded distribution of our Tropicana juice drinks.

In EMEA Snacks, volume grew 3% led by the Middle East and supported broadly by growth in both developed and emerging markets such as Australia, Indonesia and India.

We have an exciting innovation lineup in place across both beverages and snacks for EMEA in the third quarter.

To give a few examples from our key markets, in China we launched the Tropicana fruit drink featuring [pulp sac] as well as a beverage based on traditional Chinese medicine.

In India, we have introduced Aliva, a baked savory wheat cracker that will be a platform to capture incremental snacking occasions in this key market.

We also continue to make investments to scale up distribution and infrastructure in India, China and Russia and other emerging markets while maintaining a laser focus on operating costs in all of our markets ensuring that we can provide the value our consumers are looking for.

Now let me turn to some below the line items and guidance.

Our EPS of $1.02 included a tax rate of 24.9%, primarily reflecting the favorable resolution of a certain foreign tax matter.

For the full year expect our tax rate to be about the same as last year's core rate of 27%.

Offsetting that benefit was the absence of PBG and PAS share sales which represented a gain of $54 million last year.

Interest expense was also higher as a result of increased borrowings associated with last year's acquisitions.

The Company continued to generate strong management operating cash flow in the quarter, about $1.7 billion year-to-date excluding certain pension and restructuring payments, which represented 25% increase over last year.

We are on target in our full-year cash guidance.

Relative to earnings guidance for the full year we continue to expect to deliver mid to high-single-digit constant currency core EPS growth off of 2008 core EPS of $3.68.

Based on current spot rates, foreign exchange translation would represent about a 6% headwind to our full-year EPS, slightly more favorable than we were forecasting earlier this year.

As you think about where we may fall within our guidance range you should consider among other things not only forex rates but also the adverse impact on EPS of our not having repurchased any shares this year, and the fact we do not intend to resume purchases until there is a resolution of the proposed transactions with the Pepsi Bottling Group and Pepsi Americas.

Note as well that our tax rate in the first half of the year is a couple of percentage points below the expected 27% average rate for the full year and so that benefit is expected to reverse in the second half.

The impact of these items will create deleverage between operating profit and EPS in Q3.

We do expect, however, that we will continue to perform well in a challenging macro environment and we will continue to invest behind our brands and our businesses in order to sustain the long-term health and competitiveness of our operations around the world.

With that, I will turn the call over to the operator for Q&A and after that we will close with a few wrap-up comments from Indra.

Operator?

Thank you.

(Operator Instructions) Our first question is coming from John Faucher from JPMorgan.

Yes, good morning, everyone.

In terms of looking at the commentary on the LRB category and Gatorade specifically, it seems as though sort of hope for a rebound in the back half is being pushed back more towards 2010, and can you talk about whether in fact that is the case and how much of that is going to be related to, let's say, new products that are coming through, or is it just simply from an economic standpoint that's how long you think the consumer is going to continue to be trading down?

Thanks.

John, let me -- look, it is anybody's guess exactly how this market is going to shape up because in large part it is a function of how the GDP evolves.

Our best guess is that in 2010 the category will likely moderate and come back to a growth rate of around 0.5% to 1%.

We are not looking for a return to the old growth rates to the category as we have said before.

If the GDP improves in 2010 this category should come back to 0.5% to 1%.

That is the expectation today.

From our own perspective, we've always said this is a sequential improvement in performance as we get Gatorade down to its core athletic user, and right now all our actions are on track and the improvements we're seeing in the core metrics of the business are all as we planned.

So we feel good about the trajectory of our businesses.

Okay.

And sort of continuing with that it doesn't sound like we should expect things to get materially better on the back half of the year on Gatorade, then?

I don't know about materially better, but I think sequentially things are looking better.

Okay.

Thank you.

Your next question is coming from Mark Swartzberg from Stifel Nicolaus.

Thanks, good morning, everybody.

Good morning, Mark.

On Pepsi Americas beverages, the volume down 6% and profit down 5%, isn't the normal kind of relationship on the profit line.

Can you talk a little bit about why profits weren't down more, and what kind of relationship you expect over the next six to 12 months for that business?

No, we did the productivity for growth initiative last year in October and we've done a very good job managing the costs in the business.

The middle of the P&L management has gotten a lot better and more importantly the SAP tools are now coming into play in our businesses which we have a lot of control over for the operating businesses in Chicago.

So with SAP tools being increasingly deployed and with the fact that they're managing the middle of the P&L better, the relationship between the top line and the bottom line is getting better.

And from an outlook perspective, Indra?

Look, Mark, I tell you, we're looking at the overall portfolio.

At this point, I'd focus on the overall PepsiCo portfolio and the individual pieces.

It depends on the mix of products that we have selling through the beverage portfolio and that will largely determine what the relationship is going to be between the top line and the bottom line.

So given the many, many products in that portfolio, I don't want to single out just Gatorade to talk about it, but roughly speaking I think the early indications we're seeing between the top line and the bottom line growth trend are reflecting our careful management of the middle of the P&L.

Great.

Thank you.

Your next question is coming from Kaumil Gajrawala from UBS.

Hi, you've talked about maintaining pricing at Gatorade to sustain the brand equity, but it's been a little bit of time now volumes have continued to be weak.

At what point do you feel there might be a need to either change the marketing message or even to drop the price closer to your largest competitor?

Kaumil, let me go back and reiterate what we said on Gatorade, and I hope after that we can talk about our wonderful food business and our international business.

But let's talk about Gatorade for a second.

The best way to put this is to say that until about 2007 when the Gatorade business was growing at very, very high clips, one of the things that the Gatorade franchise did was attract into the franchise tremendous number of casual drinkers, and temperatures in the country were extremely warm and well above normal levels.

So when the Gatorade franchise was growing 12%, 15%, 18%, the franchise was built somewhat on the core athletic user who remained loyal to the Gatorade franchise, but also brought into the franchise many, many casual drinkers.

Over the last couple or three years, two things have happened.

One, there's many more alternatives for the casual drinker.

Two, average temperatures have been somewhat lower than they were in the four years preceding, and, third, we're in a major economic meltdown which is causing those consumers to trade down to other alternatives.

So our strategy in Gatorade as we've mentioned in our Q1 call and in our investor meetings is two-fold.

One, go back and focus on the core athletic user who remains extremely loyal to Gatorade.

In fact, if you look at the occasions that were lost out of Gatorade, that core athletic user has stayed loyal to Gatorade and the cut back in frequency of consumption is extremely small from the core athletic user.

And the core athletic user is even more loyal to Gatorade now.

The campaign is resonating with the athletic user.

And some of the comments we're getting back on our recent package changes and campaign is that after seeing what we've done to the product, packaging and the campaign, they feel like they want to exercise more and want to play sports even more.

So that core athletic user is looking good and our future strategy is to provide even more efficacious products to the core athletic user.

Then the question is, what do we do with the casual user who came into the Gatorade franchise?

Clearly some of those users switched to cheaper alternatives, like bottled water, tap water and in some cases even CSDs, because they didn't really have a right to exist in the Gatorade world but they sort of consumed the product because it is a great-tasting product.

Some of them have gone to G2.

We've picked up some in the rest of our portfolio and some of them have gone to tap water in this downturn.

To those casual users we are going to be offering other products as part of our innovation going into next year.

But what we are doing and what we have to be very, very careful is that we don't chart cheapening the Gatorade franchise and going down to private label type pricing, which some other people have chosen to do, because then what we're really saying is that Gatorade is not an efficacious drink, it is just another drink, which is not the case.

It is an isotonic sports drink formulated for the athlete.

So we're jealously guarding the equity of Gatorade and our plan is to build on it.

So in the short term, yes, the Gatorade franchise will shrink.

But in the long term it is the right thing to do, and I'll come back and say one thing to you, if you were to plot a line from about 2001 to 2009, year-to-date, the growth of the Gatorade franchise over that period, the volume growth, is somewhere in the 7% to 9%, which is really the right trajectory for that Gatorade franchise.

It's just that we're now seeing a bit of the price for the heady growth of three or four years and we have to give back some of those casual users.

In fact, we have to guide them into other products.

So the PepsiCo portfolio gives us the ability to be able to do what we need to do to Gatorade and still deliver the overall numbers.

So I'd like to focus on the fact that the portfolio works.

The fact we have to reposition the Gatorade franchise back to the core athlete is the right strategy.

All that I would ask you is patience.

Let us not try to do something in the short term that will impact this absolutely terrific franchise in the long term.

Got it.

Thank you.

Your next question is coming from Marc Greenberg from Deutsche Bank.

Thanks, good morning, Indra, Richard.

Good morning, Marc.

Good morning.

My question relates to potential for increased profit leverage at Frito in the second half and into next year.

Based on what your seeing now what kind of gross margin improvement do you think you might see from lower commodities?

What about the level of marketing spend versus the first half, might that moderate in the second half?

I guess with an 8% top line I'm a bit surprised that the operating profit wasn't in double-digits?

Thanks.

John?

Hey, Marc, it's John Compton.

Thank you for the question.

I think, again, the Frito-Lay business in the quarter performed really on the volume side ahead of our expectations.

If you go back to the Q1 call and the Q4 call, volume at Frito-Lay was flat or slightly down during those two quarters on around 8% to 9% pricing.

We still had 5 points of price mix in the quarter, and we basically have said all along that we'll price to cover our cost.

So it is true that in the back half of the year there will be less inflation, but there will still be inflation in the business, so we will still have a positive price mix in the back half, largely to cover our costs.

Any upsides that we have in productivity we're basically spending back to extend the DSD advantage that we have in the go-to-market systems, and to invest back into A&M.

The algorithm of 3-8-8 is at the top end of where Frito-Lay has performed over the last three or four years.

The other thing too, Marc, is to be very, very careful and I cannot reiterate enough we are in an economic downturn and the consumer is a value consumer.

The one thing that Frito does very, very well is alter its mix of products so that it can still keep the [pound]going out the door and deliver the top line.

And so as the mix changes to accommodate the value consumer the profitability of the business doesn't result in as much leverage as you would like to see given the top line and the revenue growth.

And so I think what we are trying to do is manage this business so we don't do anything in the short term to jeopardize our ability to gain share for the long term.

Thank you.

Your next question is coming from Bill Pecoriello with Consumer Edge Research.

Good morning, everybody.

Indra, I know you said you weren't going to talk on the deal.

I just had a question where you were quoted recently as saying the bottler deal wasn't a must-have and assuming it doesn't ultimately happen is there a Plan B in terms of system transformation that was worked on prior to the deal?

Cost saves, route to market changes, Gatorade through the bottlers in small format in kind of a Plan B scenario?

Bill, as I said up front we're not going to talk about the transaction at all.

Right now PepsiCo and the bottling system are working very well and managing this business and planning for 2010 and beyond.

And where we have talked about opportunities, where we can cooperate, I mean, all of those are on track.

Nothing has changed because of these discussions.

These discussions remain between an independent committee and PepsiCo.

So right now I don't want to discuss anything beyond what we've already said on these transactions.

Great.

I just had one very quick follow-up on hydration.

Some of the products you have out there like SoBe LifeWater, Propel, G2, how will you ensure that the new products coming in 2010 that go after the casual user grow the whole hydration portfolio and don't overly cannibalize those brands?

I don't know about overly cannibalize, Bill, but there will be some cannibalization.

It is very, very hard in this very crowded beverage space to launch products that are strictly incremental.

There will be some cannibalization, but the way we have to go about it and the way we have been going about it is to make sure the proposition of each product is clear and the cohort group for which it is targeted.

The way we talk to them delivers incrementality and that is our focus.

Thank you.

Your next question is coming from Lauren Torres from HSBC.

Good morning.

Good morning, Lauren.

Indra, my question relates more to just the macro environment, and as you spoke about the cautious consumer spending again, I was curious to get your comments maybe from a regional perspective about where you're seeing this health return?

And maybe also on the flip side some of the markets that aren't recovering that you think will take time to develop, and catch up?

Where do you think you're kind of slow or the market is slow to catch up if there is a recovery going on at this point?

You know, Lauren, if I could forecast GDP growth rates I'd feel great.

But let me tell you where we see some room for optimism.

As I said, east of the Middle East, most markets are doing okay.

Most of the developing and emerging markets are doing fine.

And I don't want to talk about those because I think the target of stimulus in China seems to be working, and India was never a hugely export-led country.

The local market consumption is carrying the country through.

So I'm relatively comfortable about those two major countries and the countries in the rim.

The real question is Western Europe, developed Western Europe, Eastern Europe, Russia and North America.

And it's anybody's guess what's going to happen, but one indicator has been sort of the OECD composite leading indicator, the CLI index.

And if you look at the OECD/CLI index which over many, many years has been a decent predictor of economies coming out of recession with all its limitations there are some green shoots in that CLI.

Some of the indicators on confidence, manufacturing, orders, seems to be ticking up just a little bit.

So if you look at those indicators and suggest that sometimes, in early 2010, you could potentially start seeing recovery led by the Euro zone, and the UK, and followed by the United States.

So the hope is that -- we're all looking for green shoots.

And if you look at that indicator ticking up along with the fact that some of our businesses in June are looking slightly better, you link the two and you say, perhaps this calls for optimism.

And on top of that, the cautious consumer is beginning to spend a little bit in these markets.

Now, is this a sea change?

Not really.

But we are beginning to see some pickup in the businesses.

So I think at this point we're looking at every indicator, and as we told new our last call, every month we get a country report from 20 countries around the world.

It's not a report on our businesses as much as it is a report from people on the ground from our businesses, who tell us about what's happening with retail sales, what's happening with foot traffic in the stores, and what our consumption pattern is looking like.

And even those reports are very realistic and talk about what's really happening and it is not super pleasant, we're beginning to see some indications of stabilization in those reports.

And that's why we're beginning to feel a bit more cautiously optimistic going forward into 2010.

And when you mention that better performance came through in June, which markets in particular were you referring to?

Western Europe is really where we're beginning to see some pickup.

Okay.

Thank you.

Your next question is coming from Alex Paterson from RCM.

Yes, good morning.

Good morning, Alex.

Just was curious, did you delineate the volume trends within the Gatorade franchise?

Between?

In Gatorade, just the overall franchise.

Yes, we mentioned that G2 is up very, very nicely.

In fact, it is up double-digits.

And core Gatorade Thirst Quencher is where we are working to reposition it back to the core athlete.

Interestingly, if you look at the core Gatorade franchise even holding G2 aside, which is the reduced calorie Gatorade, the core Gatorade franchise, the core athlete is still very loyal to the core Gatorade franchise, so that's not where we are losing business at all.

It is the casual drinker.

And really the casual drinker, I think the numbers show that 56% of the usage occasions is going to tap water and bottled water.

I think 26% is going to CSDs and other inexpensive beverages.

A very, very small percentage, 2% is going to other isotonics.

We're not losing to other isotonics that are cheaper.

People, the casual drinker is saying I want to switch out to tap water because I just don't have the money now.

How would you describe then your volume share within the isotonic category?

What, the --?

I think in some ways it is not the isotonic category, it is really not -- it is just two players and at the end of the day given the dynamics that Indra talked about it is sort of less and less relevant in some way because so much of the usage is actually not for core sports occasions and is actually being used in whole bunches of other things that are now in enhanced water and in other areas.

Alex, our database and the way we track it is that the core athlete and their consumption versus all other consumption.

If you look at our Gatorade base and you look at the core athlete's consumption, we are holding, if not gaining share with the core athlete.

Right now that is all we are focused on because that is the right metric for Gatorade.

So I presume at a certain point as those casual users diminish in impact the core user holds steady and the sequential trends in Gatorade improve is, I think, you alluded to that?

Absolutely, and we'll come back and talk to you more about that as we talk about 2010 innovation because that is something we track maniacally.

And the idea is not to lose the casual user, the idea is to transition those casual users to other beverages within the PepsiCo portfolio.

And that is what we are working on right now.

Okay.

And then just quickly, Richard, on the productivity for growth, I believe it was targeted to generate the bulk of it savings towards the end of this year, around $400 million, and that will be the run rate that's holding as opposed to some notions still out there about $1.2 billion total, but the $400 million is the run rate.

I just wanted you to confirm that and can you give me a sense has the spreading out of that across the divisions changed or is it pretty much still fairly evenly spread?

No, the productivity for growth initiative was very much on target.

We executed it and it's now completed through the second -- through the second half -- through the second quarter of this year, and the run rate going out is a little bit over $400 million, that's correct.

Okay.

Thank you.

Your next question is coming from Jonathan Feeney from Janney Montgomery Scott.

Good morning, thank you.

Good morning, Jonathan.

Indra, I want to do dig in a little bit, or maybe even, John, about the role of convenience store weakness in the second half of last year.

We've talked plenty about the Gatorade franchise, but if you could touch on the role that the -- the incredible deceleration in convenience stores played in some of the troubles in that franchise's second half and the headwind it was for the snacks franchise, and maybe talk about are convenience store trends still weak?

Do we seeing green shoots there, I'm talking here in North America?

Any color you can give us about that would be great and what it means for the second half of the year?

I'm going to toss it to John to talk about the overall C-store trends.

One more point on the Gatorade franchise as it relates to C-stores.

I was meeting with some C-store CEOs and there was an interesting observation that they made.

They said one of the things that used to happen is that the construction worker used to pull up with the pickup truck at 6:00 or 6:30 in the morning, buy six or seven bottles of 32-ounce Gatorade, a few bags of Doritos, throw it in the truck and pull off to the construction site.

With housing starts being down as much as they are, that construction worker is not coming through the C-store to pick up that Gatorade.

And so there is no question that we have lost that active thirst occasion related to the construction worker who was toiling in the hot sun.

So that occasion has gone away because housing starts are down, the economy is down.

But let me turn to John to talk to you about over all C-store trends and what he's seeing in the market overall in the United States.

(Inaudible) the combination of higher unemployment, double-digit unemployment, with the lower housing starts is certainly impacted the C-store channel.

We've seen that on the snack business here in the last three or four months particularly.

If you look more broadly though across what we call the up and down the street channel where consumers have a choice to go to convenience stores or to dollar stores or to drugstores, our total up and down the street business really hasn't changed very much.

It is the dollar segment that has picked up quite significantly.

So consumers are shifting, that is the benefit of DSD in that we're able to shift our portfolio pretty quickly to capture that opportunity.

So in total our UDS business really hasn't changed, but it has changed within channels.

Okay.

Could you just maybe talk about -- follow up a little bit about any recent changes in the way consumers have been behaving, even maybe in the past couple months, as we -- we're lapping the sort of peak of gas prices here, you would think maybe there would be a little bit of a positive trend.

Is there anything positive to report or negative?

I think just the trend toward value, everywhere we go we see that.

The 20% more free line that we put in on our corn-based products, largely in our take-home sizes, we're now complementing that with a return focus on the $0.99 line that we have to offer in the up and down the street segment.

If you have watched our business over the last three or four years, you've seen us trade that $0.99 line up and we introduced a new size, a $1.29 size.

We're now sort of pushing that back a little bit and we're bringing out new products, new flavors of Doritos and Lay's and Cheetos and others in the $0.99 size to get value back into the channel.

But there is no question that trips are still down in C-stores --

Trips are down.

And they haven't really recovered.

Good to know.

Thank you very much.

Your final question comes from the line of Damian Witkowski from Gabelli & Company.

Good morning, my question is PepsiCo International.

I just want to get a sense for what explains the difference, if I look at volume growth for snacks versus beverages, and I know there is some acquisition noise in those numbers, but even if you exclude those, looks like snacks are growing a lot slower than beverages.

And I'm just curious as to is there anything in terms of competition or level of market maturity that explains those numbers?

And just, secondly, if there are any updates on private label on the snack side here in the US, as well as internationally in terms of what's happening there?

Thanks.

Yes, Damian, it is Mike White.

You know, I think it is hard to generalize.

It is a bit of a mixed bag.

So on the snack side , if you take our developed markets, like the UK, our UK business is performing brilliantly and, in fact, we're probably having one of our best years ever.

And excluding weight outs, we're probably running flat, up 1%, something like that, in terms of our volume.

So weight outs is certainly one factor that has impacted the business.

You also get into different kind of mixes.

So in the emerging markets the snacks business has been impacted significantly as consumers kind of pulled back in term of our volume, maybe even a little bit more than beverages in some cases, which is different than the dynamic I've seen in the U.S.

or I would have seen in the UK.

So there has been a bit of a different dynamic there, albeit, we gained share and we gained share in Russia on flat volume growth.

I think we gained six points of share on our snacks business in Russia.

There has been some private label activity in Spain and Holland.

We're addressing that with value offerings there, and that's put a little bit of pressure there.

And, again, Spain has been disproportionately impacted in terms of the macro.

Think of it as the Florida of Europe, I guess.

It really has been hard hit.

And we have a particularly large business there.

But net-net in terms of our snacks business overall I think it is very healthy.

I'm very, very pleased with the progress, the innovation looks good.

The beverage business has also been impacted by the downturn in certain markets, but you got a lot of noise in the numbers.

But, again, overall we're performing in line or better than we expected.

As Indra said, our EMEA business, Asia, Middle East, Africa has been fine.

And kind of really some terrific performance in the Middle East and in India, whereas in Europe, I think our team was rightly so focused on ensuring that we cut costs, that we were street smart about pricing, and that we managed the margins.

I have to tell you, you look at the Q2 numbers in Europe and the fact that our gross margins were up and our net margins, I mean, that is exactly the agility that Indra referred to earlier in our teams.

And the good news is now we know we have to put a little more value in the marketplace and so I expect to see an improving volume trend in Europe in the second half, as

Thank you, Mike.

Did you want to add something?

He had a question too on the U.S.

healthy snacks share relative to private label.

In the category to date the share gainers have been Frito-Lay and private label.

And as the price gap has narrowed here in the last two or three months you're seeing Frito-Lay continue to sort of widen that share of lead.

Consistent with what Mike said around the world, if I go to Mexico we're gaining market share.

We gain market share in Brazil.

We gained 5 share points in Venezuela, we gained market share in Argentina and Chile.

So we are very maniacally focused on watching the value gap and ensuring that we continue to grow the value share of our businesses.

So with that, thank you all for joining us.

I want to say again that I'm extremely proud of how our teams navigated the macro challenges this quarter.

The solid top and bottom line growth and the increase in management and cash flow year-to-date excluding items are evidence that our teams stayed focused on their long-term growth plans while nimbly adjusting to the realities of the market.

And we're focused on investing to drive long-term sustainable growth, even in this challenging macro environment.

We are revitalizing our North American beverage business.

We are broadening our product portfolio into adjacent categories.

We're expanding in emerging markets and we're committed to increasing investments in R&D to drive innovation and enhance our brands.

Net-net we feel good about PepsiCo.

Thank you for your time today.

This concludes PepsiCo's conference call.

You may now disconnect.