Good morning and welcome to PepsiCo’s Third Quarter 2013 Earnings Conference Call. Your lines have been placed on listen-only until the question-and-answer session. (Operator Instructions) Today’s call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Jamie Caulfield, Senior Vice President of Investor Relations. Mr. Caulfield, you may begin.

Thanks, Jacky. With me today are Indra Nooyi, PepsiCo’s Chairman and CEO and Hugh Johnston, PepsiCo’s CFO. We’ll lead off today’s call with a review of our third quarter performance and 2013 outlook and then we’ll move on to Q&A. In an effort to get to as many analyst questions as possible within the hour, we have kept our prepared remarks relatively short this morning, and we are going to have a one question limit, so we should be able to get through the full queue of analysts when we get to the Q&A. Before we begin, please take note of our cautionary statement. This conference call includes forward-looking statements, including statements regarding 2013 guidance and our long-term targets based on currently available information. Forward-looking statements inherently involve risks and uncertainties that could cause our actual results to differ materially from those predicted in such forward-looking statements. Statements made on this conference call should be considered together with cautionary statements and other information contained in today’s earnings release and in our most recent periodic reports filed with the SEC. Unless otherwise indicated all references to EPS and total operating profit growth are on a core basis. In addition, references to organic revenue results in this call exclude the impact of acquisitions and divestitures, structural changes and foreign exchange translation. To find disclosures and reconciliations of non-GAAP measures that we may use when discussing PepsiCo’s financial results, please refer to the glossary and other attachments to this morning’s earnings release and to the Investors section of PepsiCo’s website under the Events & Presentations tab. As we discuss our results today, please keep in mind that our Q3 reporting period reflects the 12 weeks ended September 7 for our North America businesses and the months of June, July and August for the vast majority of our businesses outside North America. Now, it’s my pleasure to introduce Indra Nooyi.

Thank you, Jamie and good morning everyone. I am pleased to report good results for the third quarter despite significant volatility experienced in a couple of our AMEA region markets. From a top line perspective, our business largely maintained the top line momentum we saw in the first half and our year-to-date and expected full year organic revenue growth is right in line with our long-term mid-single-digit growth target. Our organic revenue growth reflected each of the four business units achieving positive net price realization in the quarter and we had particularly good organic revenue growth at Frito-Lay North America, which was up mid-single-digits and Latin America foods, which was up double-digits. And this was both in the quarter and year-to-date as well as in key developing and emerging markets such as China, where we had strong double-digit organic revenue growth both in the quarter and year-to-date; Brazil, where we had 9% organic revenue growth both in the quarter and year-to-date and Turkey, where we had 7% organic revenue growth in the quarter and 9% organic revenue growth year-to-date. Snacks volume grew 3% and our beverage volume grew 1% on an organic basis globally both in the quarter and year-to-date. Our international beverage volume growth was strong, up 4% on an organic basis in the quarter and 5% year-to-date. Operating performance was solid. We had good gross profit flow through with core gross margins improving 70 basis points in the quarter. We improved core operating margin even as we continued to invest in A&M with A&M as a percent of sales up 40 basis points and we made incremental marketplace investments of almost $30 million as part of the incremental investment program we announced last quarter. In addition our three year productivity program remains on track; we project delivering $900…

Great, thanks Indra. I will spend just a minute covering the financial results and guidance in a little more detail and then we will open up the lines to your questions. For Q3, organic volume grew 3% in snacks and 1% in beverages. Organic revenue grew 3.3%. Commodity inflation was up low single-digits. Our core gross margins improved by about 70 basis points and we increased A&M expense by 8%. Core constant currency operating profit grew 3%. Incremental investments totaled $28 million pre-tax in the quarter. Excluding the impact of incremental investments, core constant currency operating profit grew 4%. Our core effective tax rate was 25.5%, approximately 80 basis points below Q3 2012. And core constant currency EPS grew 5% and 6% excluding the incremental investment. So between core constant currency division operating profit growth of 3% and core constant currency EPS growth of 5%, we got about 1.5 points of leverage including nearly a point of de-leverage from higher net interest expense, 1 point of leverage from a lower tax rate which will reverse in the fourth quarter as we are forecasting the full year core effective tax rate to come in at approximately 27% and 1 point from weighted average share count, which was down 1% year-on-year. Overall, the quarter came in largely as expected with pricing actions, commodity inflation and productivity all in line with our expectations. On a reported basis, net revenue was up 1.5% reflecting over a 1 point drag from foreign exchange and about a 0.5 point negative impact from the Vietnam refranchising. We generated over $6.6 billion in cash flow from operations year-to-date, an improvement of $1.5 billion versus last year. This was driven by lower pension contributions and strong working capital improvements. Year-to-date management operating cash flow excluding certain items was approximately…

(Operator Instructions). Our first question is coming from Bryan Spillane with Bank of America Merrill Lynch.

So question about America’s beverages you know if you look at the profitability in the quarter the margins held up you know pretty consistent with last year even despite the volume declines and understanding that there is some price that help that, could you talk a little bit more about the nature of the productivity that’s flowing through, try to get a sense for how much productivity is actually helping most margins and maybe connected to that the types of initiatives you’re taking and how that might change the structure of that business as we all begin thinking about you know whether you refranchise or do something structurally different with the business going forward, just trying to understand I guess what types of changes you’re actually making to that business today that might be different than what we would have known before you put it together?

Okay. Bryan I’m going to answer the second part of the question and then Hugh is going to answer the first part of the question. So you know when we talked to you about structural options way back in February of 2012 we said we would look at range of structural options, JVs, collaborations, any sort of structural separation we look at every option and at the end of the day we will do something that makes sense for PepsiCo for the beverage business globally and for North American beverage business. So we want to approach this in a very sensible way because buying, spinning, buying, spinning is lot of sustainable way to run any business especially one that has terrific possibility and generates extraordinary U.S. cash flow and more importantly houses some of our most important global beverage brands. So we are approaching this in a very, very sensible way and we are looking at every structural option possible that will allow us to manage the global beverage business in a sensible way, not jeopardized PepsiCo overall by any sort of loss of the U.S. cash flow and in a way that’s long-term shareholder value creating. So we are looking at fundamental operational improvements in the North American beverage business also. And our strategy has been very simple focus on innovation, focus on R&D investments to create disruptive innovation so that we can get incrementally and think about how to price very, very sensibly in a segment that’s going through a lot of volatility. It’s still a very big market, very profitable, very important to retailers, but in 2012 second half and 2013, it did go through a slowdown and was very important that we don’t start competing strictly on price. This category has been competing on price for years. And last couple of years, we have been trying our best to become a lot more disciplined and inch the pricing up and play a very, very disciplined game and that’s really what we have been doing. So with that here, let me turn it to Hugh to talk about the mix between pricing and productivity and everything else in between.

Yes, sure, happy to do that, Indra. Good morning, Bryan. If you look at the margin performance, you really do have to look at it from three perspectives. First is from kind of net pricing in the marketplace and from that perspective, as we look at a category that doesn’t have a lot of growth in it, we do believe the right and responsible way to manage this category is for us to be very consistent in taking that price. We have been consistently articulate about that over the couple of years. And I think if you look back at our performance, we have consistently led the industry in ensuring that we do take that net price and we have taken in an appropriate and responsible way. So that’s driver number one. Driver number two is net revenue management. We have gotten more sophisticated on that over the course of the last couple of years. I think that’s been a product of the reintroduction of the bottling businesses back into PepsiCo. And I would look at it from two perspectives. One is package management, where the array of packages that we have and the opportunity to extract incremental margin from those packages has actually increased substantially compared to where we were three or four years ago, where we were much more heavily focused on just 2-liters and 12-packs. And then second from a channel management perspective, I think we have gotten much more granular using technology and much more specific in the way that we price cross channels in a manner that allows us to also drive margin. The third area as you mentioned is productivity. There is little question that the productivity has ramped up in the business and I’d explain it this way if you think about the…

And Bryan, I’d just add one last thing for you to keep in mind. As we said in the script, the North American beverage business is big. It’s an $85 billion category. The velocity of this business is somewhere between 40 and 80 turns a year. So it is the retailer who generates an enormous amount of cash, because they pay us net 30. It’s a huge traffic driver. So it’s a very important category. It’s very profitable across the industry to margins range from low to mid-teens. So it’s a very profitable business. It generates a ton of U.S. cash. And in today’s volatile global environment, we are in the North American beverage business, which actually is a pretty damn good business today in terms of generating U.S. cash and profitability. So I would frame that with that context.

Our next question comes from the line of John Faucher with JPMorgan.

You highlighted the $30 million of I believe it's $30 million of extra spending in Q3 related to the gain, can you give us a little bit more of an indication in terms of where those investments are going, you know are you still planning on spending the full gain back as we look into the fourth quarter and you know what’s the time frame in terms of seeing pay back on that incremental spending kind of given the investments you’re making? Thanks.

Yeah I’m happy to handle that, John I really the money is being spent in two areas, number one is where we see a good ROI we’re spending on incremental advertising and marketing, you’re going to see that more in the AMEA region then you will anywhere else so some of it clearly plays back into the developed markets as well. The secondary where we have chosen to make investments is in the growth markets and it's largely going to be in opportunities to expand distribution, leveraging cooler, leveraging racks again to enable us to further accelerate our growth and to create further advantage in those markets which obviously still have lots of growth potential left in them. Regarding your question about doing tend to fully spend back the gain the answer is absolutely yes. We intend to fully spend back again. So the investments are really going fundamentally to what we believe are the volume and growth and ultimately shareholder value creating drivers for the business. We think they are good investments for shareholders for the long run and we feel quite comfortable in making them and assuring that we’re going to get a good return on them. In terms of timing typically those types of investments have about a 1 to 2 year payback.

Your next question comes from the line of Ali Dibadj with Bernstein.

I did want to focus a little bit more on PB so just mid-single digits decline okay you can there are a lot of reasons for that potential one can argue but the non-carb area declining low single digits to, I’m trying to figure out that is really your internal plan giving some of the industry dynamics you’ve described as substitution into non-carbs. And in particular where there any bright spots in non-carbs given the portfolio that you’ve and last part if you step back can you say okay look going forward sounds like pricing aggressiveness is behind us competitively on the safety front what should we think about both the non-carb and the CSD business growing going forward for you?

Regarding non-carbs I actually think they were quite a number of bright spots, we have seen year-to-date the Gatorade business continued to perform very well. It's been gaining share, we certainly feel good about where Gatorade is and even more importantly feel good about the fact that we have repositioned the business very strongly for within consumers’ minds in terms of the brand being really the sports nutrition brand so that’s number one. Number two the ready to drink tea business is certainly doing quite well in particular Lipton Pure Leaf, the innovation that we have had there both in terms of the smaller and the larger packages is performing extremely well and that business is now back on track in terms of market share. The chilled juice business as well both in terms of Tropicana as well as the innovation that we’ve with Tropicana Farmstand and Trop50 all continued to perform well. Now you’re right as you look at the aggregate non-carb number the volume as we mentioned was a low single digit decline, the real challenge therefore is in the packaged water business, we look at that business as something that is scale enabler but we also look at it as a business where we’re not willing to invest to lose money in order to just hold volume. We just don’t think that’s a good use of shareholders of money we don’t think it creates value overtime, we’re obviously going to be in the space with our distribution system, we will continue to sell packaged water but it's not a priority for us from an investment perspective. So as you see the balance of the market at various times choose to invest in bottled water often times to change volume and to chase share you’re going to see…

But there is no question that there has been an industry dynamic which has seen a shift away from CSDs to non-carbs and we have talked about that many times. It’s now at 50:50 or 60:40 the other way and it could potentially settle at that number.

Your next question comes from the line of Dara Mohsenian with Morgan Stanley.

Good morning.

Good morning Dara.

So looking at the U.S. beverage business, how concerned are you about the volume pressures specifically on the diet CSD side of the business with the health and wellness concerns and what are the strategies to combat those issues going forward? You sounded optimistic that innovation could help earlier this year, but we haven’t heard much since. So I just want to get an update on the innovation side. And then on the pricing side, appreciating the focus on disciplined pricing, but you did see a mid-single-digit volume decline on the CSD side in North America in the quarter. So do you think that pricing balance has gotten out of whack at all versus competitors might you need to make some adjustments going forward? And also can you give us an update on promotional levels in the industry post the Labor Day discounting and if you are seeing any improvement?

Let me speak to the first part of the question Dara. Couple of years ago, we started to see the decline in full sugar CSDs, no question about that, especially in colas, we started to see the decline in full sugar colas and diets were holding up. Recently especially in the last, I would say, six months to nine months, there has been an accelerated decline in diet drinks as people say they don’t even want artificial sweeteners, they want more natural sweeteners, they don’t mind some calories, but they want natural sweeteners, they want to go back to sugar in some cases. So we are seeing a fundamental shift in consumer habits and behaviors. We anticipated some of these the diet slowdown has been a little more rapid than we expected. The good news is that our overall portfolio as Hugh mentioned is very balanced. And our diet – I am sorry our Dew consumer likes regular Dew, likes Diet Dew, likes Kickstart. So our Dew consumer is very different than the consumer for colas and consumer for lemon lime. We are staying on the path of innovating along natural sweeteners and thinking about flavoring agents to make sugar taste more sugary and so that’s all we are focused on. We talked about our products coming to market in 2014. That’s really the track we are on and we are not talking about it now, because we haven’t yet got a launch date. Once we have a launch date, you will hear a lot more about it. And our goal is to bring to the market a product that tastes great. We don’t want to rush a product to the market and then have to wonder why we launched something that wasn’t that great tasting. So that’s our focus.…

Our next question comes from the line of Caroline Levy with CLSA. Caroline Levy – CLSA: Couple of questions, internationally I was just wondering if you could talk to us introduce us a little bit to the new head of international after your sad loss, and tell us about how the moves have been. I believe that he came out of India and you know just to give us some confidence in that important market that you know your team is strong and I know that [indiscernible] also came out of Russia so your two big important markets have probably new leadership and then just secondly in your U.S. CSD business, do you think the innovation you’re working on is such that it could actually stops declines or do you think it just sort of slows declines is this something you think will come with some premium pricing, will it be truly differentiated, is really the question.

So let me start with our Head of AMEA it's not international it's just Head of Asia, Middle-East, Africa. You know Saad was an amazing leader and we truly miss him but as you know the strength of PepsiCo is that we have very good succession plans, literally every position in the company. Sanjeev Chadha has been in PepsiCo forever almost 20 years if I recall and started his career in PepsiCo India then went on to Asia-Pacific was a Commercial Director there. From there he came to our Middle-East business and was running the Middle-East business. So essentially he has run every aspect of Asia, Middle-East, Africa, knows the region very well and is a great successor to Saad and so feel very good about Sanjeev’s appointment into the Head of the Asia, Middle-East, Africa. He knows snacks, he knows beverages, he knows franchise, he knows company owned operations because he has done both in India in ASPAC and the Middle-East which is a big franchise market for beverages as well as company owned operations in Jordan and Egypt and we have a big company owned snacks business. So Sanjeev is a very seasoned executive, has done turnarounds, has done big growth, so I think as all of you get introduced to him we will certainly bring him around. I think he is going to be very pleased how well the succession has worked. He knows everybody in the region, the bottlers, the employees, they all know him too and so I don’t think there is going to be any issue in the AMEA region. Quite a seamless transition. In terms of Europe, Zein was the Sector Head for Europe. The good news is Russia we have a phenomenal talent base of Russian managers, you know Silviu Popovich who…

Your next question comes from the line of Judy Hong with Goldman Sachs.

Thanks. Good morning.

Judy, good morning.

So first on the emerging markets Indra, so obviously many companies have talked about the slowdown that they are seeing in the emerging markets and you have talked about the AMEA markets a little bit, but as you think about the next 6 to 12 months some of the markets like Russia, China, Brazil, can you just give us your assessment of how you see those markets playing out and whether the differences that you are seeing in snacks versus beverages is something to really call out here? And then secondly I just wanted to clarify the comment you have made about the North American market and how you think about the structural solutions to that market. It sounded to me like on this call, given some of volatility that you are seeing in markets outside the U.S. and the increased scale that’s really needed in North America with a lot of the retailers, perhaps the sense of urgency in terms of making some of the structural solutions may not be there as it was a year or so ago when you made that announcement. So I wanted to just clarify if that assessment is appropriate or we should still be thinking about sometime early next year you are coming up with a decision on that issue?

Well, Judy, let me speak to the second one very quickly. As we said we will tell you in early next year what we are going to do. And we have told you all the structural solutions we are looking at. And that’s what we are doing. We are looking at structural solutions, but I want to underline sensible, value creating structural solutions. So keep that in mind. Let me now come to emerging markets. Emerging markets, emerging and developing markets by definition are going to be volatile. In today’s world where you have got turmoil in the developed markets, I think that tends to hail on to emerging markets and that creates more sort of variance around the mean if you want to call it that. Very quick walkthrough, I think because we are on the staples business, the swings in our business are probably going to be less than swings you might see in hard goods or, white goods or durables. The thing to be very, very careful about, if you just focus on market share, especially against local competitors, B brands in those markets and start doing crazy things with pricing, what you lose, exacerbate the volatility into your business. So again what we have told, so I have told all of the sector heads is to make sure that you manage share across the narrow corridor. Don’t try to chase pricing down with B brands, local brands, don’t try to hit the pricing so much just to drive volume, because in these volatile times, buying volume is like renting volume. So we have been directing our people to manage the business sensibly, balanced volume, pricing, revenue, profitability and build frequency and penetration deliberately and carefully. Do not rent volume, build it carefully, build the brand equity, build the consumption occasion very, very carefully and that’s what we have told everybody to do. Is there volatility? Yes. But I think for companies like PepsiCo, given our broad geographic and product portfolio and brand portfolio that company becomes a natural hedge against all of these variabilities. So again we feel pretty good.

Our final question comes from the line of Amit Sharma with BMO Capital Markets.

I just wanted to focus on Frito-Lay I mean the business is positioned to post the strongest volume growth that you have seen in at least the last five years and you have talked about some of the innovation coming through. Can you provide us a little bit more color of sustainability of the current volume trend and what should we expect in the next 6 to 12 months?

You know Frito-Lay North America is a terrific franchise. The business is well run and I think the incredible way that our snacks business and beverage business works together to really bring solutions to customers is what makes that business so successful. And the virtuous circle of driving top line growth, focusing on productivity, taking the benefit from that investing some back into the company to keep the virtuous circle going, putting the rest to the bottom line is what has kept Frito-Lay business going. What Frito-Lay has been known for is every 3 or 5 years looking at breakthrough productivity to drive another 3 to 5 years of profit growth. And that thinking continues at Frito-Lay. But Amit I tell you, the most important thing is we have segmented the Frito-Lay business in a very interesting way, where we look more at demand spaces rather than just cohorts or day-parts. And looking at demand spaces now, we can see how we can expand the Frito-Lay eating occasions. So, as you look at the overall macro-snack environment, we know how to push salty snacks into taking away cookie occasions, cracker occasions, chocolate occasions by looking at various demand spaces and looking to see what consumers consume for each of those demand spaces. So we look at macro-snacks as our feeding ground. Salty snacks is just a sub-segment of that. And as long as there is lot of space with all macro-snacks and we have a very strong distribution and great innovation capabilities, we feel good about the fact that we can go after some of those occasions and that's the growth story of Frito-Lay. Thank you all for your questions and in closing our performance to-date in 2013 is a good indicator of how a well-constructed and developed portfolio coupled with disciplined execution and reinvestment can drive high quality top and bottom line results on a sustainable long term basis and this is the purpose of PepsiCo. I thank you for your time this morning and for the confidence you have placed in us with your investment. Have a great day.

This concludes today's conference call. You may now disconnect.