CORPORATE
PARTICIPANTS
Mike
Nathenson
PepsiCo,
Inc. - SVP of IR
Indra
Nooyi
PepsiCo,
Inc. - Chairman and CEO
Richard
Goodman
PepsiCo,
Inc. - CFO
Mike
White
PepsiCo
International - CEO
John
Compton
PepsiCo
North America - CEO
Massimo
d'Amore
Americas
Beverages - CEO
CONFERENCE CALL
PARTICIPANTS
Bill
Peccoriello
Consumer
Edge Research - Analyst
Marc
Greenberg
Deutsche
Bank - Analyst
Carlos
Laboy
Credit
Suisse - Analyst
Kaumil
Gajrawala
UBS
- Analyst
John
Faucher
JPMorgan
- Analyst
Christine
Farkas
Merrill
Lynch - Analyst
Lauren
Torres
HSBC
- Analyst
PRESENTATION
Operator
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 Mr. Mike Nathenson, Senior Vice President of Investor
Relations. Mr. Nathenson, you may begin.
Mike
Nathenson - PepsiCo, Inc. -
SVP of IR
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, including the 8-K that we file today.
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 Q1 EPS
growth, revenue growth, and division operating profit growth are on a constant
currency core basis 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 in 2008, our share of Pepsi Bottling Group's restructuring and impairment
charges and the impact of certain tax benefits.
With
that, I will turn the call over to Indra.
Indra
Nooyi - PepsiCo, Inc. -
Chairman and CEO
That you,
Mike, and I know that all of you have had a chance to read the two press
releases we issued this morning, the first announcing our offer to acquire the
shares we don't currently hold of our two largest anchor bottlers; and second,
our first-quarter earnings report.
Let me
start by explaining our proposal this morning to acquire all of the outstanding
shares of common stock in both the Pepsi Bottling Group, PBG, and PepsiAmericas,
PAS, at a value of $29.50 per share for PBG and $23.27 per share for PAS. You
know at PepsiCo we have a track record of making proactive moves to better
position ourselves for the future.
As a
leader in the LRB category, it has become very clear to us that we need to
reshape our North American business in a fundamentally different way. The
formation of our anchor bottlers a decade ago was the right decision at a time
when the category had strong growth, CSDs dominated the market, the overall
profit pool was expanding steadily, and there were really only two major
players. In the more mature market of today, there is a need to be more nimble
given the increasing role of non-carbs, retailer consolidation, and the changing
competitive landscape.
In
addition, we acquired Tropicana and Gatorade, which enormously expanded our
non-carb footprint but also brought [bottling] manufacturing in both warehouse
and chilled go-to-market platforms. In short, almost every aspect of the
business has changed. In this environment, it is clear that reshaping the
business requires a fundamental change in the North American business model and
we can take PepsiCo's liquid refreshment beverage business to a whole new level
by re-consolidating our two anchor bottlers with PepsiCo's combined LRB
operating and franchise company. This would result in a fully integrated CSD and
CB supply chain and go-to-market business model.
In short,
we would be creating another Frito-Lay type operating company within PepsiCo.
This agile North American beverage system will generate significant cost savings
as well as incremental topline growth over the long term and improve our cost
structure and allow us to more effectively meet the needs of both our customers
and consumers.
We expect
that this transaction will have many benefits. First and foremost, it expands
the overall system profit pool by eliminating redundant costs across the value
chain. In headquarters, back office, operations, supply chain, and sales, we
believe we can unlock more than $200 million of pretax synergies on an annual
basis, most of them related to overlapping costs and scale
efficiencies.
Next,
this integrated entity which will now include 80% of our total beverage volume
in North America would improve speed of decision making across the company and
eliminate friction points resulting from competing manufacturing and
distribution systems.
Let me
give you an example. We would now have the ability to shift product between
warehouse and DAC systems more easily, selecting the right system based on
channel, customer, and type of products. The outcome of this distinct
flexibility is that we can now incubate new products that start out small in one
distribution system and switch it to another with little friction.
Third,
this transaction will allow us to take our existing Power of One to a new level
on several dimensions. In North America, we would step up Power of One offerings
across food and beverages. We could now offer compelling bundled beverage
offering without wondering whether they are DAC-delivered or
warehouse-delivered. We would accelerate the work currently underway at
Frito-Lay North America on a next-generation low-cost high lift [DAC] system and
this will allow us to rapidly transfer new technologies to the beverage system
also.
We would
be able to better serve both large and small format retailers and food service
operators in the territories we own. We will provide one phase to beverage
customers in 80% of the country. And importantly, it would facilitate our
bringing to market innovative new products that advance our human sustainability
agenda with a greater range of nutritious offerings.
Turning
to the international business is also part of this transaction. Our skill and
know-how would enable us to more quickly and efficiently address international
opportunities. Let me remind you that our beverage businesses in Russia and the
Ukraine are successful joint ventures and that we are actively involved in their
operations. Similarly in international markets like Mexico, Eastern Europe, and
Russia, we could derive greater synergies between our existing snacks and the
bottlers beverage businesses. In particular, we will capitalize on many of the
Power of One opportunities from bundling promotions to joint delivery and
merchandising in these markets.
And
finally, this transaction would open up a whole new level of strategic
flexibility for us. As most of you know, nearly all of the sales of Tropicana
and Gatorade are distributed through PepsiCo's warehouse system. This
transaction will facilitate consolidation of the manufacturing network, which
would have significant downstream cost benefits for the entire system. Overall,
we feel very good about this transaction. It will enable us both franchisor and
franchisee to immediately compete more effectively in the North American
beverage market while providing significant additional opportunities for future
growth.
On the
people side, we will have an expanded base of experience operating executives we
could move seamlessly across the company to staff our various needs. Our close
working relationship with our largest anchor bottlers has enabled the current
system to function at already high levels. We share similar values and mutual
commitment to operating excellence in the US and globally and I am confident
that this would facilitate a smooth integration process. We truly look forward
to welcoming our PBG and PAS Associates to the PepsiCo family.
Now let
me turn it over to Richard to cover some of the financial aspects of the
transaction before I come back and talk about our Q1 results.
Richard?
Richard
Goodman - PepsiCo, Inc. -
CFO
Thanks,
Indra. Before I cover the financials, I do want to remind all of you that the
offers we made for the shares of PBG and PAS are cross conditional and our
discussion therefore assumes both are completed successfully. In addition, our
offer to acquire these shares are only proposals and are subject to us
negotiating and signing definitive agreements with PBG and
PAS.
As Indra
mentioned, we believe there are considerable synergies both in the near and
medium term which together with an increase in leverage would result in EPS
accretion of at least $0.15 when the synergies are fully realized and would also
accelerate our EPS growth over the next three years by about 100 basis points.
We expect the transaction would unlock more than $200 million of synergies on an
annual basis mostly in cost reductions of which we would expect to be able to
realize more than half within the first 18 months.
Immediate
cost synergies include G&A savings related to overlapping functions at the
corporate and operating levels both in the US and internationally; the reduction
of warehouse transport and other supply chain costs; and the rationalization of
selling and other go-to-market functions. Topline and customer-related benefits
that we can realize increasingly over the next couple of years relate to
increased speed to market and package innovations; go to market flexibility by
product and channel; streamline national account coordination; and the ability
to react quickly to technological advances.
Of course
there would be one-time costs to achieve some of these synergies with the cost
of savings ratio of about one to one. The transaction would not significantly
alter the ratio of our North America and international revenue. Although we
believe the change in mix would reduce our operating margins by about 200 basis
points, our EBIT growth would remain the same off a substantially higher
base.
In terms
of the impact to our balance sheet, we do not believe this transaction would
materially change our financial flexibility because we already own large
minority stakes in these businesses and the rating agencies already evaluate us
on a collective indebtedness of the system. On a combined basis, we are offering
$6 billion for the equity in PBG and PAS that we do not already own. The offer
is expected to be 50% stock and 50% cash and we feel confident we can finance
these transactions.
As with
any acquisition, our ROIC would decrease in this case from the mid-20s to the
high teens. We would continue to return free cash to shareholders in the form of
dividends and share repurchases and we would of course continue to
opportunistically pursue acquisitions both in North America and internationally.
Overall, our financial policies are aligned with the goal of creating long-term
value for our shareholders.
Let me
close by saying that the analysis of this transaction has been completed with
PepsiCo's typical rigor and thoroughness and that we have a track record of
completing value-enhancing acquisitions. We are very excited about the strategic
benefits of the proposed combination might afford us and we feel confident that
the combined company would create a business model that is better positioned to
execute efficiently and to accelerate our growth.
Now let
me turn it back to Indra.
Indra
Nooyi - PepsiCo, Inc. -
Chairman and CEO
Thanks,
Richard. You know, throughout this process, there were several big picture
questions this transaction raised for us which I know are on your minds as well.
So let me proactively address a few of these and then we will move on to cover
our Q1 performance before we turn it over to questions from
you.
So the
first question, why increase your investments in the domestic beverage category?
Let me tell you why, because first and foremost, we believe that the North
American LRB category remains attractive and that maintaining our strong
position in this business will be a key component of PepsiCo's overall success.
As most of you know, the LRB category in North America is valued at more than
$100 billion at wholesale and we have conviction that the category responds well
to fundamental innovation.
As we
come out of the current downturn, we believe we can sustain volume growth in
line with populations just about 1% to 2%. And believe me, there are not too
many consumer categories where expected volume growth alone could add $1 billion
to $2 billion a year in category revenues. It's also a category that is very
profitable for our retail partners and one that because of our DAC system
generates significant cash flow for them. Our retail customers therefore have
every incentive to work actively with us to stimulate the category's
development.
The other
reason we are bullish about the LRB category is because we are at an advantaged
position in the North American LRB business with the absolute best portfolio of
leading brands in CSDs, water, and non-carbs. We believe this transaction will
enable us to perform significantly better going forward.
Second
question, how will this impact the independent bottlers? Our independent
bottlers will absolutely continue to play an important role in our North
American beverage system. We value their capabilities and their ability to
execute effectively in their markets. We will be working even more closely with
them to take full advantage of manufacturing and distribution efficiencies that
can significantly decrease costs and can do so without compromising the
effectiveness of the entire system as we respond to a changing
marketplace.
We have
seen this work extremely well in certain areas of the country and are in active
discussions to take advantage of other [near in] opportunities.
The last
question, what about the integration risks? At our company, PepsiCo, integrating
acquisitions is one of our core competencies and we believe the integration of
our largest anchor bottlers will be successful since the risks are both well
understood and manageable. Our largest acquisition to date was Quaker Oats and
as you will all remember, we more than delivered on our target synergies. And
Productivity for Growth, our restructuring program that we announced last
October and our global SAP implementations have all been executed flawlessly. I
believe we are pretty good at major project management.
So before
we move to our first-quarter review, I want to emphasize that the other element
that gives me confidence in the potential success of the transaction is that
Eric Foss, CEO of PBG; Bob Pohlad, CEO of PAS; and their respective
organizations have been great partners with us. Our organizations know each
other extremely well and we share similar values. Both organizations are
world-class operators and collectively we can make a strong business even
stronger by creating advantages that will enable us to optimize our performance
in the future and enhance value to all of our shareholders.
So that
concludes the overview of the proposed transaction and now we will move into the
regular Q1 earnings discussion and then take your questions.
So let me
say at the outset that I am very pleased with the overall performance of PepsiCo
in the first quarter of the year. Our balanced global portfolio delivered 6%
constant currency net revenue growth and 8% constant currency core EPS growth.
PepsiCo Americas Foods continues to be rock solid. PepsiCo International is off
to a good start and Pepsi Americas Beverages came in just about where we were
expecting them to.
And we
are looking for it to show improvement throughout the year as the restaging of
the North American beverage portfolio is complete and starts to gain
traction.
You know
as we approached this year, we were very pragmatic about the challenges we would
face from the global slowdown. In many markets, the impact has been more
pronounced on beverages than on snacks and they have hit certain countries more
than others. But PepsiCo's hallmark is our operating agility. I am proud of the
way our teams anticipated challenges in the quarter quickly adjusting key
operating levers to deliver solid top and bottom line growth while continuing to
invest for the long term.
In the
months ahead, we will continue to adjust on a country-by-country basis as the
macros evolve. And while nothing is linear in these turbulent times, we have
stress tested our operating plans and remain confident in our ability to manage
the levels in our business system to deliver performance consistent with our
2009 guidance.
Now
before Richard reviews the performance of each of our divisions, let me remind
you of the four key elements we are focusing on across the company in 2009.
First, we are investing in value initiatives to engage consumers in new and
relevant ways, tailoring our approach to meet differing needs across markets and
we are managing relative price gaps to private label and local competitors as
consumers become even more mindful of each purchase.
Seconds,
we are focusing on the drivers under our control to grow both top and bottom
line results in local currency. These include flawless revenue management,
consumer-preferred innovation, relentless cost discipline, and enhanced
productivity.
Third, we
are continuing to operate with strict financial discipline, maintaining a
maniacal focus on cash. We are also closely managing all of our costs,
renegotiating contracts around the world, localizing our sourcing, and
variablizing our costs.
Lastly,
we are maintaining our focus on driving long-term sustainable growth by
investing in key markets around the world, investing in brand building, in
R&D to drive innovation, in building out our SAP infrastructure, and the
development of our people. And we are doing all of these investments while
respecting the values of our performance with Performance with Purpose agenda
that underpins our commercial success.
So with
that, Richard will now review with you how each of our businesses performed in
the quarter and how we expect them to perform going forward.
Richard?
Richard
Goodman - PepsiCo, Inc. -
CFO
Thanks,
Indra. PepsiCo Americas Foods have started the year very strong with
double-digit top and bottom line growth on a constant currency basis. Frito-Lay
North America continues to perform exceptionally well. Pricing actions
contributed to topline growth across all channels while disciplined cost control
resulted in 12% constant currency core operating profit growth. And the
elasticities continued to be better than expected. Despite pricing actions at
the end of last year to cover inflation, the division held volume close to flat
in the quarter and grew total retail unit sales.
In this
difficult macro environment, we are closely managing FLNA's consumer value
equation. I will just note here that while syndicated data shows that
private-label has recently gained share, it has mostly been at the expense of
others and consumers continue to prefer our products. In fact, Frito-Lay had
stronger revenue and value share growth than any major consumer goods
company.
As we
head into Q2, our focus is to ensure that we are balancing value and volume
share and to that end, we are investing to lower relative price gaps to branded
competitors and private label. At the end of the first quarter, we began adding
20% more product back into take home Doritos, Cheetos, Tostitos, and Fritos
without raising the price. And we recently introduced a $2 value line that
includes Santitas and Munchos products to offer consumers compelling everyday
value.
In
addition to focusing on greater value, we are introducing consumer-preferred
innovation across our core brands such as Hispanic flavor variations across our
trademark Lay's, Doritos, and Cheetos. And we've launched innovation with
functional benefits like our Smart Food popcorn snack, which delivers calcium
and other important nutrients in a snack women already love to
consume.
Given
these efforts, we anticipate a return to volume growth at Frito-Lay North
America beginning in the second quarter and as we begin to lap our pricing
action from last year, we should see a more normalized spread between volume and
revenue resulting in a Frito algorithm that is more in line with historical
performance levels. So in total, Frito remains rock solid.
Our Latin
American businesses did a good job in the quarter combining pricing actions with
price-back architecture in these initiatives, cost control, and value-added
promotions to deliver double-digit topline and bottom-line growth on a constant
currency basis. In Mexico, our Sabritas and Gamesa teams quickly adjusted weight
and price pack architecture to deliver the right value equation for consumers
amidst a challenging economic environment. The teams drove the topline by
running value-added promotions like Sabritas' Money in the Bag, which has
performed very well at a time when consumers are increasingly mindful of the
number of pesos in pocket.
The
macros in Mexico are clearly challenging, but the complementary nature of our
powerful Gamesa and Sabritas businesses gives us confidence that we will
continue to be successful.
Turning
to PepsiCo Americas Beverages, our performance in Q1 is wholly consistent with
our plan. Our focus for the quarter was largely on brand restages and innovation
launches and both have been executed successfully. The magnitude of these
changes was massive. We successfully reset tens of thousands of shelves across
the country and merchandised over 1000 new SKUs with the support of our bottling
partners and retail customers all on schedule and we are beginning to see the
results of this effort.
For
example, our consumer campaigns across television, print, out of home, and the
Internet have all recorded great consumer reaction starting with the Super Bowl.
In addition, we are also beginning to see the volume impact of our refreshed
approach to North America Beverages. In CSDs, our business showed sequential
improvement in Q1 and significantly outperformed our largest competitor. More
impressively, Mountain Dew continued to grow and our overall diet CST portfolio
outperformed our competitors' diet offerings in both volume and value
share.
Despite
the fact that the Easter season fell in Q1 last year, which added about a couple
of points of headwind this quarter, our CSD business showed sequential
improvements for the quarter.
As we go
into the critical summer season, we have great innovation and value initiatives
hitting the market. We recently launched the first permanent Sierra Mist line
extension called Mist Ruby Splash, a delicious new entry into the grapefruit CSD
segment. We have also just launched throwback versions of Pepsi and Mountain Dew
featuring their classic packaging and sweetened with real sugar.
To
deliver value in the CSD space, we are running two liter programs and at our
largest customer and in grocery, we are offering four-pack and six-pack value
offerings that hit hot price points. And in the C store channel, we are offering
a $0.99 16-ounce can. Overall, we like the momentum we are seeing in CSDs. Our
marketing and promotion calendar looks solid and this critical segment of the
LRB business is on a steady track.
Turning
now to the energy drink segment, we performed extremely well and continued to
grow share. AMP had excellent growth and gained share and we introduced three
new SKUs, lemonade, green tea, and black tea flavored AMP. The Rockstar
distribution deal we signed in the quarter will extend our reach to a new energy
drink consumer segment as Rockstar targets a different consumer than AMP. And
Starbucks Energy Coffee continued to grow well.
Now let's
turn to our hydration offerings, which include Gatorade, G2, Tiger, SoBe Life
Water, Aquafina, and Propel. Our strategy is to continue to grow the entire
hydration franchise in a sustainable way. Let me touch on some of our
initiatives and what you can expect going forward.
SoBe Life
Water is showing strong performance in Q1 on the strength of our stevia-based
all-natural zero calorie offering. The zero calorie product alone gained a point
of value share in Q1. We have two additional summer flavors hitting the shelf
soon and we are featuring a 10 for $10 promotion in grocery. This brand is
performing ahead of our expectation.
Propel
has just been relaunched into the market in a new lightweight bottle featuring
25% less PET. In addition to the original lineup of great flavors, we are
launching two new sublines, Propel Body, which contains 10% of the daily
recommended dose of fiber, and Propel Mind, which contains antioxidants, vitamin
E, and choline. And we are supporting the Propel relaunch with a great engaging
campaign. We are optimistic about the prospects for this business.
Which
brings me now to the Gatorade G2 Tiger portfolio. Overall, these products
combined still command about 75% share of the sports drink category. However,
the business has declined in the past year. In addition, we have also seen
stepped-up competitive activity in this segment, but mostly price-based private
label like competition. The Gatorade franchise is one of the most powerful names
in the LRB space. G2 was recognized as the most successful 2008 new product
innovation in the food and beverage category, earning it the top spot in IRI's
pacesetter rankings.
Our Tiger
product was also ranked as one of the most successful new product introductions
of 2008. Core Gatorade did decline and we are taking several steps to address
this business. Our shelf reset with the new Gatorade packaging is complete. New
on-air programming will launch in the next few weeks and our summer programming
at all our key customers is in place.
G2 volume
trends are very robust. We will continue to support this brand with great
advertising and in-store activation. Tiger has been reformulated with lower
levels of carbs and theanine, an ingredient which has been shown to increase
mental focus during physical activity when combined with carbs and advanced
hydration.
Summer is
critical for the Gatorade franchise. We expect the business to sequentially
improve over the next few months. However 2009 will likely remain a work in
process year. Looking forward, we are excited about the innovations we have
planned on core Gatorade for 2010.
The good
news is that our overall LRB portfolio and our overall PepsiCo portfolio was
working well, giving us the breathing room required to get this great franchise
growing again.
Moving
onto PepsiCo International, we are off to a good start with constant currency
net revenue growth of 17% and core constant currency operating profit up 11%
despite significant macroeconomic challenges and fewer trading days in a
relatively short two-month quarter. Across PI, our management teams are
exercising strong cost discipline and revenue management skills in the face of a
fast changing environment and expanding Power of One initiatives to leverage the
go-to-market power of our three scale businesses across snacks, CSDs and
juices.
Europe as
expected faced challenging macro conditions and difficult commodity overlaps in
the first quarter. However, our teams managed well in this tough environment,
delivering 17% net revenue growth and 10% core operating profit growth, each on
a constant currency basis. They accomplished this by taking effective net
revenue management actions in order to cover commodity cost increases, running
creative value-added promotions and resetting price pack architectures to hit
hot price points across both snacks and beverages.
Given
consumer purchasing constraints, we were particularly mindful of our price gaps
with private labels to ensure that we held our relative market share. And we
continued to invest behind key platforms to build brands for future
growth.
Snack
volume in Europe was up slightly in the quarter despite the negative impact of
fewer trading days and the combination of visual pricing and weight outs to
offset commodity inflation and transaction foreign exchange.
Walkers
in the UK delivered strong double-digit net revenue and core operating profit
growth, each on a constant currency basis. The team also drove value share
across all channels on the strength of promotions like the Do Us a Flavor
campaign, which asked consumers to vote on their favorite consumer generated
flavor innovation. This summer Walkers will reprise its successful Brit trips
promotion.
In Russia
snacks, we maintained double-digit volume momentum on the back of flavor
innovation in our core Lay's line and through a successful line extension of our
bread snacks platform. European beverage volume grew 7% on the strength of
recent acquisitions and strong CST performance in the UK. However, the macro
situation in Eastern Europe and Russia clearly impacted volume there. And in
Russia, a conscious decision to carefully manage third-party distributor sales
due to liquidity concerns also hit our top line in the quarter. Looking forward,
we are cautiously optimistic about Europe despite the continued macroeconomic
pressure in the short term.
Our
Asia/Middle East/Africa region performed extremely well in Q1 led by India, the
Middle East, and China beverages, particularly considering that some of the
Chinese New Year build was recorded in Q4. Net revenue grew 18% and core
operating profit also grew double-digit. But we are seeing some pressure from
commodity inflation on our input costs, the teams have redoubled their revenue
management, productivity, and cost discipline efforts. This approach has allowed
us to invest in delivering consumer value while minimizing the impact to our
margins.
Strong
beverage volume growth in EMEA was broad-based geographically and across both
CSDs and NCBs. EMEA snacks volume saw high single-digit growth in part due to
strong innovations such as our new Twistos bread snack in the Middle East. And
we have an exciting locally relevant innovation calendar across EMEA in the
second quarter. In India, we are introducing a baked cracker line and we are
scaling up Nimbooz, which is our version of a traditional sweet lemonade made in
most Indian households.
In China,
we are introducing a new beverage line that delivers functional beverage
benefits, leveraging traditional Chinese medicine, and we are launching Mountain
Dew and Pepsi Max. Across the board, our PI businesses are healthy. We are happy
with the way the team have been responding in the marketplace and managing their
margins. We have seasoned managers on the ground who know how to operate in
adverse conditions and we have good plans in place for the summer.
While we
expect continued ForEx weakness and macro challenges during the second quarter
especially in Europe, we are on track to deliver our plans for the full year.
And we expect to see improvement in the second half of the year as commodity
costs and ForEx overlaps become less challenging. We remain optimistic about the
outlook for PI across the rest of the year.
Let me
cover off of a couple of below the line items. Our core EPS of $0.71 included a
tax rate of 24.2% primarily reflecting the favorable settlement of an
outstanding international tax matter and the closing of several state tax
audits. This benefit was worth about $0.03 per share in the quarter. For the
full year, we are still expecting our tax rate to be about the same as last
year's 27% core rate.
Offsetting
that benefit was the absence of PBG and PAS share sales, which represented a
gain of $46 million last year in the quarter and higher interest expense as a
result of increased borrowings associated with last year's acquisitions, the $1
billion discretionary pension contribution we made this quarter and last year's
share buybacks. Excluding a discretionary $1 billion contribution to the pension
plan and $124 million in cash payments associated with our Productivity for
Growth program, cash from operating activities was significantly higher than
last year.
On
guidance, we expect to deliver mid to high single digit constant currency core
EPS growth for full year based on $3.68 in 2008. Using current spot rates,
foreign-exchange translation would represent a high single digit headwind to our
full year constant currency core EPS. The impact of the proposed transaction is
not included in our guidance.
As a
reminder, we expect very little below the line leverage in 2009. A key reason is
the overlap of last year's $174 million in gains from the sale of our shares in
our anchor bottlers. That represents a headwind of almost 2 percentage points of
EPS growth.
As we
mentioned on our fourth-quarter earnings call, our performance in 2009 will be a
tale of two halves. We expect that second-half operating profit will look better
than the first even on a constant currency basis as commodities, overlap fees,
our beverage refresh gains traction, and the negative impact of transaction
ForEx subsides.
With
that, I will turn it back to Indra for closing commentary.
Indra
Nooyi - PepsiCo, Inc. -
Chairman and CEO
Thanks,
Richard. Before I make some of my closing comments, I just want to make a small
correction to what Richard just said. We expect very little below the line
leverage in 2009 and the key reason is the overlap of last year's $147 million
in gains from the sale of shares in our anchor bottlers, not $174 million in
gains. It is $147 million in gains and that represents a headwind of almost 2
points of EPS growth.
In
closing, before I open it up to your questions, I would like to say that in this
difficult macroeconomic environment I am really glad to be in the food and
beverage business because people everywhere still need to eat and drink.
However, to be successful in this environment, a company must be able to adjust
quickly to local circumstances. PepsiCo is certainly a global company but our
businesses are run locally. We have local cost structures and as I shared with
you earlier, the decisions we are making in China are different than those we
make in Mexico in the UK or here in the United States.
So to sum
up, I would certainly be happy if the world economy were doing better, but we
are off to a great start in the year with each of our businesses performing in
line with or exceeding our expectations. There is no company I would rather be a
part of as we navigate through this environment.
Finally,
I want to reiterate that our proposed acquisition of our two anchor bottlers is
strategically sound and financially compelling for shareholders of all three
companies and we feel confident about our ability to execute the integration of
these businesses.
With
that, let me open it up for your questions.
QUESTION AND
ANSWER
Operator
(Operator
Instructions) Bill Peccoriello, Consumer Edge Research.
Bill
Peccoriello - Consumer Edge
Research - Analyst
Good
morning, Indra and Richard. A question on the proposed transaction. One, the
synergy number seems very low considering the combination of PBG PepsiAmerica,
the International, and duplication with PepsiCo. It seems like you are being
conservative there. Could it even be double that?
And
second question, as you are changing route to market things like maybe moving
Gatorade small format DSD or some other brands from DSD to warehouse, is it an
obstacle that 25% of the bottling network is still independent and it is a
complication changing the distribution format?
Indra
Nooyi - PepsiCo, Inc. -
Chairman and CEO
Bill,
thank you, and I'm going to have Mike White, who is on the call with us, take
your call. Mike, do you want to answer this question?
Mike
White - PepsiCo International
- CEO
Sure,
Bill, in terms of the synergies, we've done a fair amount of work over the last
six or 12 months on the business model as a whole. We cleaned sheeted and looked
at everything. We are quite comfortable that we have set an appropriate set of
expectations on synergies. Clearly as and when and if we have a deal, we
recognize we would always communicate with our investors in a good deal more
specificity the final numbers that we would expect to get.
But we
feel quite comfortable that these are deliverable hard synergies that investors
could count on within the first two or three years of the close of the
transaction. So I think that's important to keep in mind.
Indra
Nooyi - PepsiCo, Inc. -
Chairman and CEO
Bill, let
me just add that typically when we do synergy numbers and we report them on the
day that we are announcing a transaction, we usually report like we did during
the Quaker Oats transaction synergies that we are very, very comfortable with.
And then we start from there and work our way upwards because you are right,
there should be additional synergies offset by the fact that procurement is an
area where there is usually a lot of synergies. In this case, we already run
procurement for our anchor bottlers, so that area is
minimized.
Regarding
distribution, the opportunities are limitless. We can think about several
options for distribution but we want to be very, very sensitive to the fact that
we do have an independent bottling system out there and our goal is to work
constructively with the independent bottlers so that all of us can work to
expand this profit pool in LRB. This is about a win-win transaction between us,
CBG, PAS, and the independent bottlers so that together we can find a new way of
competing in this rather difficult environment today.
Bill
Peccoriello - Consumer Edge
Research - Analyst
Thank you
very much.
Operator
Marc
Greenberg, Deutsche Bank.
Marc
Greenberg - Deutsche Bank -
Analyst
Thanks,
Indra, and good morning. I guess a couple of questions here. First, can you
elaborate a little bit on the potential competitive advantages that
consolidating the bottler might have for PepsiCo? Did anything that Dr. Pepper
Snapple has been doing over the last year inform this transaction? And how might
it impact your competitive advantage with Coke? Beyond that just briefly,
Richard, can you talk about why you feel it's appropriate to use PepsiCo equity
in this transaction as opposed to all cash? Thanks.
Indra
Nooyi - PepsiCo, Inc. -
Chairman and CEO
Mark, let
me take the first part of your question and then Richard will talk to you about
the 50-50 cash/stock split that we've offered for this transaction. You know, as
we said in the script, life has changed dramatically in the LRB business in
North America over the past four or five years. The balance has shifted from
CSDs to non-cards. Hot fill is a much bigger force in the marketplace. The
competitive environment has changed. And we strongly believe that given the
nature of the business, the profit pool that's not growing substantially, an
integrated operating model which enables fast decision-making, reduces costs, is
much more aligned will result in the best system performance now and in the
years ahead.
Now we
also believe that this combined company will allow us to bring innovation to the
market much faster because the shape of the innovation going forward is going to
be different from the shape of the innovation that we had some years ago. More
niche products, stuff that doesn't stick for a long time. We are going have to
be very, very flexible in the distribution system and not spend too much time
negotiating final aspects of profit splits rather than focusing on the customer
and the consumer and being extremely nimble.
The other
thing is and as I've said many times over the last few months in various
conferences, the overall system could be a lot more cost-efficient especially in
manufacturing and go-to-market between hot fill and cold fill and within the
cold fill system itself. We can get tremendous efficiencies in transportation
and all the destination centers. It requires us all to work together and this
will allow us to get it all done faster.
It will
also enable us to optimize routes to market for about 75% of the country in
which PAS and PBG operate. Going to the DSD system, it makes more sense and
through warehouse where it's most cost-effective. It will allow us to present a
more unified face to our retail and food service customers and we have the
unique advantage of having Frito-Lay and the whole ability to offer Power of One
bundled programs between food and beverage.
Now we
don't have to worry about how to make it all happen across multiple parties. We
have -- we will have influence over 80% of the system so we can go off and make
it happen to benefit our retail partners and the consumers in a difficult
environment.
And
lastly, Frito-Lay is the absolute leader in reconceptualizing a go-to-market
system, the whole DSD system, and Frito-Lay has some very, very interesting
ideas on how to lower the cost and improve the efficiency of the DSD systems.
This gives us the ability to take those ideas, quickly bring it to the beverage
DSD system, and actually deploy it across both DSD and the warehouse system. So
we feel very, very enthused about the prospect that this transaction offers us
and we think this is the right transaction at the right time.
Let me
close this part before I toss it to Richard by saying, you know, the last year
or so, all the beverage discussions we have been having with all of you has been
punctuated by talking about the issues in this business, issues related to
growth, issues related to the shape of the growth, issues related to the split
profit pool. I think this announcement today gets to the realm of solutions. I
feel good about where we are. Not let me turn it to Richard.
Richard
Goodman - PepsiCo, Inc. -
CFO
I think
that the 50-50 provides both a compelling offer to the PAS and PBG shareholders.
It does help in some instances from a tax standpoint as well and it works for us
as well from an accretion standpoint. And I think that the combination is a
better one than just doing either all stock are all cash and it gives them as
partners in this enterprise going forward an ability to see some of the upside
in our combined entities.
Operator
Carlos
Laboy, Credit Suisse.
Carlos
Laboy - Credit Suisse -
Analyst
Good
morning, everyone. Indra, what gives you comfort that antitrust will not slow or
stall this deal? And how will this impact the non-Pepsi suppliers in PBG and
PAS?
Indra
Nooyi - PepsiCo, Inc. -
Chairman and CEO
Antitrust,
we are consolidating our own business back into PepsiCo and it's a vertical
integration. So -- and beyond that, I can't comment any more,
Carlos.
Carlos
Laboy - Credit Suisse -
Analyst
Beyond
that, Indra, why stop at PBG and PAS? I mean, domestically why not the small
bottlers since they seem to be even more disadvantaged than PBG and PAS? Then on
the international front, could you expand on how you are thinking or whether you
have any objections to integrating ownership of beer at some point into your
existing portfolio?
Indra
Nooyi - PepsiCo, Inc. -
Chairman and CEO
Boy, we
are just beginning to think about reshaping North American beverage business.
There are many steps ahead of us, Carlos. We haven't even thought about any of
those at this point and I think it is premature to think about all of
that.
This PAS,
PBG acquisition is a North American play. Internationally, you know, we like our
bottling system the way it exists today. We would like to leave it there. This
is strictly a North American play. And regarding our independent bottlers, as we
said earlier in our prepared comments, we have a great partnership with our
independent bottlers. Our Independent Bottlers Association works very well with
us.
So there
are no issues with the Pepsi-Cola Bottlers Association, the Independent Bottlers
Association. We actually look forward to working with the Independent Bottlers
Association, PepsiCo, the combined operating and franchise company in
partnership with the independent bottlers to accomplish our aim. So let's wait
and see and see how all of this evolves over the next weeks and
months.
Carlos
Laboy - Credit Suisse -
Analyst
Thanks,
Indra.
Operator
Kaumil
Gajrawala, UBS.
Kaumil
Gajrawala - UBS -
Analyst
Thanks.
Good money, everyone. First, you know, many of these concepts of course make a
lot of sense, but I can't help but think that some of these synergies are things
that you potentially could have achieved without an outright purchase. So can
you talk a little bit about some of the roadblocks you've been running into over
the last -- I guess, Mike, you said it was 12 months that you've been analyzing
the business model -- to try to get some of these benefits without an outright
deal?
Indra
Nooyi - PepsiCo, Inc. -
Chairman and CEO
Mike, do
you want to take that?
Mike
White - PepsiCo International
- CEO
Yes. I
don't know that I want to go into all the details, but I have to tell you I
think most of them could not be gotten any other way, to be honest, Kaumil.
First of all, you've got two sets -- well, you've got three sets of corporate
headquarters between PepsiCo, PBG, and PAS. So that's all overlapping. You've
got two sets of information systems between PBG and PAS in North
America.
Just the
logistics of looking at the Gatorade business have been a challenge, given the
price that we paid for Quaker Oats and the size of that business at PepsiCo
without significant challenge of how you would get it, for instance, in the
small format channel onto the bottlers trucks in a shareholder value-friendly
way.
And then
even in international, I would tell you that the complexity of the business
models we are running in many of these countries, I mean in Russia we have three
different structures. We have a joint venture on the juice side that we lead. We
have a joint venture that PBG leads on the rest of the beverage side. And we
have a Frito-Lay business that PBG does a great job of disturbing.
So
there's a lot of, I would say, structural inefficiency in these governance
structures, and in some ways they are more financially engineering driven than
they are fundamentals. And if there's one thing I would say about today's
economy is this is a challenging economy where you really have to really look
hard at your operating model and your business model and make sure you've got
the fundamentals that are sound. And we really feel that way about
this.
Kaumil
Gajrawala - UBS -
Analyst
Got it,
understood. Then could you maybe provide some perspective on the $200 million in
synergies? How much of that is coming from combining the PAS, PBG operations and
then how much from combining the bottling operations with the
PepsiCo?
Indra
Nooyi - PepsiCo, Inc. -
Chairman and CEO
Kaumil,
that is not a level of detail we want to go into right now. Let's just say that
overall this transaction offers $200 million of synergies as we see it now. And
who knows, it could go up as we get into the operations and look more at
it.
I will
just say one more thing. Mike talked about the fact that over the last six to 12
months, we've been clean sheeting this whole thing. We have been seeing this LRB
business in North America evolve. We have seen this profit pool remain flat and
sometimes even shrink. We have been thinking about every possible way we can
reconceptualize this system so that all of us can make a healthy living in this
business. That's what we've been engaged on the last six to 12
months.
Believe
me, no stone was left unturned as we thought through things we could do with the
current system, things we could do by trading back and forth between the
systems. We looked at every option and the typical PepsiCo rigorous way, we
concluded recently that consolidating the anchor bottlers into PepsiCo presented
the most value-creating option for their shareholders and ours and the best way
to create competitive advantage for PepsiCo in the North American LRB
business.
Kaumil
Gajrawala - UBS -
Analyst
Got it,
thanks. Last one, a very quick one is your -- has your estimates changed at all
for long-term LRB growth?
Indra
Nooyi - PepsiCo, Inc. -
Chairman and CEO
In North
America, look, as I've said before, Kaumil, we are forecasting from a [trust]
and at this point as we come out of this downturn, we think population growth is
really what is a number we should work with. If it's above that, that's great,
but I think population growth will drive LRB growth, volume growth.
Kaumil
Gajrawala - UBS -
Analyst
Got it,
thank you very much.
Operator
John
Faucher, JPMorgan.
John
Faucher - JPMorgan -
Analyst
Yes, good
morning. So I want to talk a little bit about ROIC here. So this has been a big
focus for PepsiCo really since the restaurant has been off back in the 1990s and
historically, it seems like you've been willing to take a hit on the ROIC in
terms of buying a faster growth business. That's obviously not the case in terms
of looking at the bottlers.
So I
guess how should we view your ROIC strategy going forward given the fact that
you are willing to take a big hit on something that is going to grow slower
longer-term when historically you seem to have tried to avoid doing those type
of acquisitions?
Indra
Nooyi - PepsiCo, Inc. -
Chairman and CEO
Richard?
Richard
Goodman - PepsiCo, Inc. -
CFO
Yes, I
mean I think clearly the ROIC does go down, but this is also -- but that happens
in any large transaction just given the nature of the accounting for those
transactions. I think what we are focused on here is that we do believe that we
can drive the business, that our EBIT growth actually will accelerate based on
this. And that the transaction overall will have a positive impact on EPS and
that including the synergies and with all of the revenue enhance things that we
can be doing both in the United States and outside the United States that we can
get higher growth out of the businesses than the businesses have going into this
transaction.
Indra
Nooyi - PepsiCo, Inc. -
Chairman and CEO
John, I
will just add one more thing. We are running PepsiCo for the long-term and you
cannot run a company just on one metric. We look at a bunch of metrics and look
at how best to ensure that PepsiCo stays competitively advantaged in each of its
businesses in each of the countries and product lines going forward. This time
it made absolute sense to take a minimal ROIC hit. But don't forget our ROIC is
still in the high teens, which is a very attractive return on invested capital,
well above the cost of capital and well in the top tier of all CPG
companies.
So we
feel very good about where the ROIC is but it allows us to generate great
earnings growth sustainably and solidifies the North American liquid refreshment
beverage business model. So overall I wouldn't focus just on one metric. I think
I would look at the holistic set of things that have been managing this company
for the long-term.
John
Faucher - JPMorgan -
Analyst
Okay, I
understand that, but it's not necessarily just one metric. But I guess the
question to follow up on that from Richard is so do you think not just through
the synergies, but you think the underlying growth rates of these businesses can
be accelerated noticeably let's say over a longer period of time -- in your
opinion that makes it more like deals you have considered in the past that would
hurt your ROIC? Is that a fair statement?
Richard
Goodman - PepsiCo, Inc. -
CFO
Yes, I
think that is fair. And Indra talked about a number of the response to one of
the other questions -- a number of the things that we can be doing in order to
enhance revenue growth to be putting things through -- to make sure that we are
putting stuff through the -- in small format for DSD that we haven't been able
to do. We will also see some of those same benefits internationally as well in
our ability to leverage off of the businesses that we have.
So on the
one hand, there's a lot of cost synergies. On the other hand, there's a lot of
revenue opportunities that are out there that we absolutely need to take
advantage of and we firmly believe that this is absolutely the best way to be
able to do it. That really is the end of our analysis. If you were to clean
sheet how you approach this business given the current environment and given the
trends that the best to take advantage of it is to put this combined system
together.
Mike
White - PepsiCo International
- CEO
Indra and
John, it's Mike. If I could just add and maybe amplify a little bit to your
question, John. On the carbonated soft drink side, look, this is not primarily
driven by that part of the business. There has certainly been -- this certainly
enables us to remove some friction points when you have a more mature business
than historically. But I would say what Indra was saying earlier is I think the
primary competitive rationale is you have to look at not only where we have been
but where we are going.
Ten years
ago when we spun it off, CSDs were over 60% of LRB. Last year they were around
45% in the US. If you throw that forward five or 10 years, it will probably be
closer to what it is in the rest of the world somewhere between 30% and 40% of
LRB. I think there will always be a healthy CSD business, but consumers want
variety and the economics and the complexity, the manufacturing technologies,
all of our R&D focus has been frankly on how to create new and exciting
non-carbs. And this is acquiring the distribution arm and the pipe, if you
will.
So when
you talk about accelerating growth, to me the key thing is this is going to
enable us to accelerate our non-carb strategy more flexibly and more efficiently
as we go forward and frankly, we think that's where the preponderance of growth
will be in LRB in the future.
John
Faucher - JPMorgan -
Analyst
Thanks.
Operator
Christine
Farkas, Merrill Lynch.
Christine
Farkas - Merrill Lynch -
Analyst
Thank you
very much. I'm actually going to switch gears. Hello, Indra and Richard and
Mike. I'm going to ask about the quarter, if I could. Latin America, we saw
snack volumes decline a little bit there. I realize there were some one-time
factors and the Easter shift etc. But do you think that where the trends are now
that you would see some growth resume later in the year? Could you comment about
the trends in beverages in Latin America as well?
Indra
Nooyi - PepsiCo, Inc. -
Chairman and CEO
Let me
have John Compton take the snack business and Massimo will talk a bit about the
Latin American business beverage trends.
John
Compton - PepsiCo North
America - CEO
Christine,
this is John. Thank you for the question. Yes, you are right, the shift in Lent
impacted the businesses notably in Mexico between -- it was a huge volume
business in Gamesa so we were certainly impacted there. The second is as you
know most of the pricing that we've taken in Sabritas is largely through weight
outs of our small bag. So we don't price up the line beyond sort of 5 pesos in
the up and down streets channel.
So all
the pricing we took was through weight outs. Our businesses remain strong. If
you look the revenue growth, we continue to do well and obviously the overall
profitability in Latin American foods on a constant currency basis was
outstanding with 27% growth. The rest of South America by the way, Chile,
Argentina is doing outstanding. Brazil is back on track doing well. Columbia,
Venezuela is doing fine. So overall in Latin America I feel good about the
snacks business.
Massimo
d'Amore - Americas Beverages -
CEO
And
Massimo here. Building on what John said, on beverages, we had a similar
picture. We were hit in Mexico like other consumer group companies because of
the macro situation there. But south of Mexico, we are actually performing very
well and above expectation. And the two strengths of our business, the same we
have said before which is first of all a very healthy Gatorade business which
shares in the 80s plus across all the markets of Latin America. As well as a CSD
business which in the south of Mexico is associated with very strong bottling
partners, which allows us to perform well.
Christine
Farkas - Merrill Lynch -
Analyst
Massimo,
if I could follow up on Tropicana, are you seeing some improvements intraquarter
as you put the new or the old packaging back onto the shelf?
Massimo
d'Amore - Americas Beverages -
CEO
Yes, we
have already said that Tropicana as is picking up its topline performance and in
association with the fact that our launch of Trop 50, which was about four weeks
ago now is doing very well. We have built very fast ACB distribution of Trop 50
and the initial consumer response in terms of trial is very
positive.
Christine
Farkas - Merrill Lynch -
Analyst
Thank you
for that and if I could just follow up with Mike on China, you mentioned high
single digit volumes given the load into the fourth quarter. If you are looking
at the weekly progression I guess into April or on your quarter going into March
and April, are you seeing trends resume back a little bit to more normal
level?
Richard
Goodman - PepsiCo, Inc. -
CFO
You know,
China has been a bit of a mixed bag, to be honest with you. The North and the
West have been just continuing to rocket forward with double-digit growth. The
South where a lot of the plant closures have occurred as the exports dried up
has been -- has really been very, very difficult. And the East has been a little
bit challenging as well. So it's not even kind of a one country phenomenon at
the moment.
I would
say also you've got to remember we had huge growth last year and I think our
snacks business was lapping 50% growth in Q1 and our beverage business almost
20% growth in Q1. And we had some load for Chinese New Year in December because
Chinese New Year moved forward this year. So there's a lot of noise. I'm quite
happy with our performance in China up high single digits considering the lap
and the earlier Chinese New Year. I think our teams performed well.
But I
would say, we are keeping a close eye on it. You are seeing very, very strong
continued growth in half the country and some challenges in the other half of
the country driven by macroeconomics.
Christine
Farkas - Merrill Lynch -
Analyst
Great,
thank you very much.
Indra
Nooyi - PepsiCo, Inc. -
Chairman and CEO
Last
question.
Operator
Lauren
Torres, HSBC.
Lauren
Torres - HSBC -
Analyst
Good
morning. Indra, you did already touch upon this, but I was just curious if you
could talk a bit more about the timing of this announcement. You mentioned that
the competitive environment has been tough for four or five years. And I was
just curious if there was anything that stimulated this, because I think on a
couple conference calls you may have been asked about this and you were somewhat
slow to respond that you would make moves like this so quickly.
Indra
Nooyi - PepsiCo, Inc. -
Chairman and CEO
Well, you
know, it reinforces something I just said a short time ago, Lauren. We have been
looking very, very carefully at this North American liquid refreshment beverage
business and looking at all of the options to improve the size of the profit
pool, how we work with our bottling partners. We've been doing this work over
the last six to 12 months as the LRB category fundamentally started to take some
interesting twists and turns. And when the work was completed and we realized
that this was the best option to create value for the whole system, we pushed
the button.
And so
there's nothing magical about the date. It's just that we were embarked on a
strategic analysis and the strategic analysis reached its logical conclusion and
therefore we made the offers.
Lauren
Torres - HSBC -
Analyst
I'm not
sure if you would like to address this but once you get volume growing again and
you take costs out of the system, how are you thinking about this business going
forward? Is the combined beverage business the way to go going forward or is it
something once again that you will look to get out of some point when things are
where you want them to be?
Indra
Nooyi - PepsiCo, Inc. -
Chairman and CEO
Oh boy,
Lauren. Let's get this done and let's get the system working again. And if this
sort of a discussion is needed many years down the line, let's come back and
talk about it. The thing to remember is that the very essence of strategy is
being able to modify your approach based on marketplace reality. That's what
strategy is are about and our point is 10 years ago the strategy that we
embarked on made all the sense in the world given the shape of that market, as
Mike White mentioned.
The
market situation the last 12 to 18 months is vastly different and if you want to
be strategically nimble, you've got to make the required changes. And we did
that. So let's see how long this can go on and if it requires another change, we
will come back and talk to you. But at this point, this is the right thing to do
at this time in the marketplace.
Lauren
Torres - HSBC -
Analyst
Great,
thank you.
Indra
Nooyi - PepsiCo, Inc. -
Chairman and CEO
So with
that, let me just say thank you to all of you for joining us on the call and we
look forward to a continuing dialogue with you over the next days and weeks.
Thank you.
Operator
Thank
you. That does conclude today's PepsiCo conference call. You may now
disconnect.
Cautionary
Statement
This
communication does not constitute an offer to sell or the solicitation of an
offer to buy any securities or a solicitation of any vote or approval. If
PepsiCo, Inc. (“PepsiCo”) enters into
definitive agreements in connection with the proposed transactions with The
Pepsi Bottling Group, Inc. (“PBG”) and PepsiAmericas,
Inc. (“PAS”)
(the “Proposed
Transactions”), PepsiCo plans to file with the Securities and Exchange
Commission (“SEC”)
registration statements on Form S-4 containing proxy statements/prospectuses and
other documents with respect to each of the Proposed Transactions and definitive
proxy statements/prospectuses would be mailed to shareholders of PBG and PAS.
INVESTORS AND SECURITY HOLDERS
OF PBG AND PAS ARE URGED TO READ THE PROXY STATEMENTS/PROSPECTUSES AND OTHER
DOCUMENTS THAT WOULD BE FILED WITH THE SEC CAREFULLY IN THEIR ENTIRETY WHEN THEY
BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE
PROPOSED TRANSACTIONS.
If
PepsiCo enters into definitive agreements in connection with the Proposed
Transactions, investors and security holders will be able to obtain free copies
of the registration statements and the proxy statements/prospectuses (when
available) and other documents filed with the SEC by PepsiCo through the website
maintained by the SEC at http://www.sec.gov. Free copies of the registration
statements and the proxy statements/prospectuses (when available) and other
documents filed with the SEC will also be available free of charge on PepsiCo’s
internet website at www.pepsico.com
or by contacting PepsiCo’s Investor Relations Department at
914-253-3035.
PepsiCo
and its directors and executive officers and other persons may be deemed to be
participants in the solicitation of proxies in respect of the Proposed
Transactions. Information regarding PepsiCo’s directors and executive officers
is available in its Annual Report on Form 10-K for the year ended
December 27, 2008, which was filed with the SEC on February 19, 2009,
and its proxy statement for its 2009 annual meeting of shareholders, which was
filed with the SEC on March 24, 2009. Other information regarding the
participants in the proxy solicitations and a description of their direct and
indirect interests, by security holdings or otherwise, will be contained in the
proxy statements/prospectuses and other relevant materials to be filed with the
SEC when they become available.
Statements in this release that are
“forward-looking statements”, including PepsiCo’s 2009 guidance, are based on
currently available information, operating plans and projections about future
events and trends. They inherently involve risks and uncertainties that could
cause actual results to differ materially from those predicted in such
forward-looking statements. Such risks and uncertainties include, but are not
limited to: PepsiCo’s ability to enter into definitive agreements with respect
to the Proposed Transactions; PepsiCo’s ability to achieve the synergies and
value creation contemplated by the Proposed Transactions; PepsiCo’s ability to
promptly and effectively integrate the businesses of PBG, PAS and PepsiCo; the
timing to consummate the Proposed Transactions and any necessary actions to
obtain required regulatory approvals; the diversion of management time on
transaction-related issues; changes in demand for our products, as a result of
shifts in consumer preferences or otherwise; increased costs, disruption of
supply or shortages of raw materials and other supplies; unfavorable economic
conditions and increased volatility in foreign exchange rates; our ability to
build and sustain proper information technology infrastructure, successfully
implement our ongoing business process transformation initiative or outsource
certain functions effectively; damage to our reputation; trade consolidation,
the loss of any key customer, or failure to maintain good relationships with our
bottling partners, including as a result of the Proposed Transactions; our
ability to hire or retain key employees or a highly skilled and diverse
workforce; changes in the legal and regulatory environment; disruption of our
supply chain; unstable political conditions, civil unrest or other developments
and risks in the countries where we operate; and risks that benefits from our
Productivity for Growth initiative may not be achieved, may take longer to
achieve than expected or may cost more than currently anticipated.
For additional information on these and
other factors that could cause PepsiCo’s actual results to materially differ
from those set forth herein, please see PepsiCo’s filings with the SEC,
including its most recent annual report on Form 10-K and subsequent reports on
Forms 10-Q and 8-K. Investors are cautioned not to place undue reliance on any
such forward-looking statements, which speak only as of the date they are made.
All information in this communication is as of April 20, 2009. PepsiCo
undertakes no obligation to update any forward-looking statements, whether as a
result of new information, future events or otherwise.
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