FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (TMF Debit)

PepsiCo
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700 Anderson Hill Road
Purchase, NY 10577-1444
(914) 253-2000
http://www.pepsico.com

ALEXANDRIA, VA (July 23, 1997)/FOOLWIRE/ --- PepsiCo released their Q2 1997 results yesterday. The press release issued by PepsiCo detailed major accomplishments for the quarter and is available on PepsiCo's web site at http://www.pepsico.com/. In summary, they are on target for the year. They have been saying that they thought the quarter would be flat and although it was better than that, the underlying operations came in basically as predicted. They got some unexpected upside in the operating earnings from refranchising activity. They had a significant gain from the sale of their distribution business PFS and they had the opportunity to look at ways to strengthen the balance sheet and take actions on packaged goods that would strengthen those businesses. They reported net earnings of $0.42 per share, $0.40 excluding unusual items, and if you adjust for net facility actions they were probably slightly better than flat.

PERFORMANCE AGAINST PLAN. Their original plans called for the acknowledgement that the first half of this year would be tough comparisons and the last half would be easy comparisons based on the way their profits rolled out last year. They are very pleased with the first half against their goals. They continue to look at the same kind of full-year numbers that they always looked at and that does entail a back-half growth rate which is more robust than what they saw in the first half. And, they are still very much on target against that goal. They cautioned people that this is probably the last quarter in which we will see PepsiCo report in this fashion. They hope to spin restaurants in the fourth quarter and if they have the tax ruling and other things by the time they announce the fourth quarter they will be reporting the restaurant operations as discontinued operations. There are some tricky things to transition their current reporting to discontinued operations but when you add the pieces up, they are very much on track.

OUTLOOK FOR BEVERAGES. For Q3, there is no real change to what they were forecasting before for Q3. The pieces may be different, but on the bottom line basically no real change. PepsiCo in North America continues to have a good Summer. Volume picked up over the Fourth of July. Although they are cautiously optimistic about what they see they assume that PepsiCo in North America will have modest growth in the quarter, in the low single digits. PepsiCo International, on the other hand, will have a significant year-over-year gain. They had a lost last year and they expect a profit in the third quarter and expect it to be greater than the profit reported on an underlying basis in this quarter.

OUTLOOK FOR FRITO-LAY. Frito-Lay North America should be growing in the low-to-mid-teens. The margin gains this quarter they believe will sustain into the third quarter and added to that they'll be rolling over some unusually high steel levels that they don't expect to continue and their mix continues to be very solid with a good corn portion of the mix which helps their margins as well. Frito-Lay International will report in the higher teens. They will have passed over some Gamesa wheat and other issues.

OUTLOOK FOR RESTAURANTS. They are forecasting that the run rate for domestic restaurants will continue to be in the high single digits and profit growth, excluding any net facility actions. They expect the international restaurants will continue to be a very solid double-digit number.

TAX RATE AND CONTINUED SHARE REPURCHASE. They believe the tax rate will be in the 34-35% range and shares will continue to track down because they are having a very robust cash-out consequence of the activity to date and obviously they have received a significant amount of cash from the PFS transaction and many of the offsetting items from a P&L point of view are non-cash in nature. So, net cash is being rolled into share repurchase activity and that will continue to be very aggressive. Basically they continue to operate on a astrategy of portfolio management.

WHAT'S BEHIND THE SPECIAL CHARGES. None of the unusual charges is current marketing money or current operating money and most of it was non-cash. They are taking the opportunity to look at things to affect their strategy. For example, they have positioned in international beverages a bias toward franchising, a categorization of their countries into different buckets and that determines what kind of franchisee they need. They are basically taking actions to facilitate their ability to transition any franchise operation that may be inappropriate given its strategic positioning -- in a competitive market or a low share market. They think that virtually all of the items they are taking to strengthen their balance sheet will fundamentally yield a cash benefit over the next 12 months as well as an operating benefit as they reposition the business. The productivity activities involve things like consolidating facilities in the snack business around the world. They haven't been more specific for competitive reasons and for reasons involved with communicating to employees. But they will disclose actions as appropriate. Those activities, although they are non-cash today, should actually free up cash over the next 12 months which will further enhance their ability to propel the EPS growth forward against their targets through whatever means.

QUESTION & ANSWER SESSION

FRITO-LAY VOLUME. The company was asked about volume numbers for Frito-Lay North America. They responded that for a near term they are looking at 3-4% growth in volume for 1997 and cycling around that number for 1998 and going forward. It is a little less robust than they had originally thought primarily because although Baked Lays is having a fabulous year and the Lays volume growth is very robust, they pushed their expectations a little bit. Their position in volume going forward is that they think they will have some double-digit years, but they think is prudent to think about something that is in the mid-to-high single digits on a compound growth basis. It is very likely they could have a robust volume year and then a year that was more margins followed by that as they digest the impact of the more robust volume year which is what we are seeing last year to this year. They got unexpected volume and were somewhat inefficient. They think that might be a distinct possibility and that would end up with a compound growth rate that might be less robust than they had seen. They would love to get back up to double digits. They think it is imprudent to position themselves for that being the whole story. For next year, with a product like olestra, it is very hard to tell where that will come out. They think there is significant opportunity, but think it is premature to make statements about how significant. They are pulling together some of their facilities and that is helping them deliver product at lower cost.

RESTAURANT MARGIN IMPROVEMENT DETAIL. They were asked, in restaurants, how much margin improvement did they get from the ongoing activity of closing underperforming stores and what is the impact of backing out New Zealand. They answered that they recorded, excluding any unusual items, for the quarter restaurant profits up 8% domestically and a huge increase internationally to accomplish 40% for the line of business. That includes net facility actions. If you back out the unusual charges in the net facility action from the domestic, that 8% goes up to 18%. So the underlying operating profit excluding any net facility actions expanded about 18%. At least half of that is coming from the fact that KFC had an unusually large number of franchise contract renewals. The run rate they would use for domestic restaurants is more in the high single digit range rather than 18%, although that is a legitimate operating income. On the international side, following the same logic, those profits were up quite a bit because of the facility actions. The largest transaction in the quarter was the New Zealand IPO and that is included in the net facility actions. If you back that out, that leaves about a 10% increase in the international restaurant business.

INTERNATIONAL BEVERAGES. The company was asked to detail international beverages. They answered that the volume they reported was down 2% for the quarter. They reported volume down 3% last quarter and they pointed out that sequentially they are rolling over a tougher comparison. They feel it is a little bit better but feel a lot better about where it is going. They had very strong numbers in places like China and solid double-digit growth but much lower than China in India. The Middle East was flattish. They had some places that were off. In Russia they have been disappointed with the volume but they have actions in place. In Latin America, they have Argentina which is up double digits but they still have Brazil off a little bit. Venezuela is really driving the Argentine region. They are back in about 1/3 of the markets though. The volume is still going to be off 2/3 to 3/4 what it was last year. Around the world, last year when their volumes started to soften they said that a certain amount of softening is happening in each location and there are some reasons for that. What they are now seeing that the places that have been strong continue to be strong, but they are seeing a certain amount of improvement in each location. China and India growing as fast as they are will make a big impact because they are such large markets. Overall, they are making progress and are defending where they need to defend. They expect that volume would turn positive next quarter and would forecast that now.

POST-SPIN FORECASTS FOR BEVERAGES. The company was asked about post-spin forecasts for the beverage business and what the various components of the business did this quarter. They responded that this quarter Mountain Dew was the huge contributor. Brand Pepsi was a little soft as was Diet Pepsi. Brisk was a grower. In terms of real points of growth, it was coming from Mountain Dew given the size of the brand and the double-digit growth rate. Part of that might have been that Mountain Dew was in Pepsi Stuff this year and wasn't last year. Part of the Pepsi numbers may be that they are rolling over a pretty big push on Pepsi Stuff which embraced the entire quarter whereas Pepsi Stuff really didn't come until Memorial Day weekend which was the tail end of the quarter this year. They only reported April and May volume and that is their consistent practice in both the domestic and international beverage businesses because of the cutoff of the quarter. They think that the quarter will show better volume performance and they will see better brand Pepsi performance as being the swing factor with continued strong performance from Mountain Dew and continued strong performance from Brisk. The spin is irrelevant to Pepsi Cola North America. They think it is just what Pepsi Cola North America will do in the second half. They are taking the position that they will probably grow single digits. That may be conservative and cautious but what they are seeing in the third quarter so far is some elements of pricing coming back, but because a number of pricing deals are locked in for the third quarter, they think the third quarter will probably be a low single digit number for Pepsi Cola North America and that being such a big part of the entire year (it's their biggest quarter), that probably puts them in the position to have single digit growth on the full-year basis. They are confortable with that in the portfolio context. They think there are offsetting pieces to that. For the packaged goods side of the business, there is going to be a significant lift that will start to be seen from interest expense because that will be repaid down and how big it will be will depend on how early they can spend in the fourth quarter. The cash is going to continue to give them a very aggressive lift from share repurchase and Frito Lay has some easier comparisons. They are still cautious on Pepsi Cola International. In terms of what PepsiCo reports as continuing operations in the third quarter, they believe will be north of 20% or as high as 25%. They will see how the pieces shake out once some of the spin activities occur.

SWEET VS. SALTY SNACK VOLUMES. The company was asked about the international snack business. The salty snack business was up 12% and they were asked to talk about the sweet snack portion. They responded that they don't report salty and sweet together because it tends to be misleading. Sweet snack is dominated by Gamesa's performance. The reason is that sweet snacks tend to be very heavy relative to salty snacks so when you do a comparison on a kilo basis, sweet snacks could be 50% of their kilo volume but only 20% of their sales dollars. They could report a blended volume number which would be extremely misleading in terms of profitability in the quarter so they don't think that is the way to go. Sweet snacks was down low double digits, driven by Gamesa. This has been consistent since the fourth quarter because they did some pricing strategy that they thought would be good for the bottom line. Fundamentally that has been the case, they have gained share in the industry. The pricing tactics they took were consistent with industry practice and they were built around some commodity costs. It was a very carefully fashioned strategy to get where they wanted to be on the bottom line and still gain share and so far they are succeeding in that strategy. But, to blend sweet and salty would diminish the overall kilo growth. The salty kilo growth is far and away the higher store door value per kilo and tends to be a greater driver of profits and that is why they set that apart. They are not hiding what is going on in the sweet business. They are comfortable with what is going on and where they are positioning Gamesa.

UPDATE ON OLESTRA PRODUCTS. They were asked to comment on olestra further and recent actions by a Congresswoman to get them to go back for more testing. They responded that the Center for Science in the Public Interest has taken a position against olestra and olene and someone who works on this Congresswoman's staff is tied in to the Center for Science in the Public Interest and got her involved in this. They don't think she is getting a particularly positive response in Washington. They think the press far outweighs the demonstrated concern on the part of consumers. They think in the olestra test market, far too much has been made of analyzing test market data because the purpose of a test market is to try new things. There is a lot of noise in the equation because they are constantly doing things like resetting the shelves. In some of the recent period data, they had reset the shelves very purposefully over the Memorial Day weekend to have less shelf space given to the olestra products because it was a big weekend and Frito Lay has to sell other products. The fact there was a lower number of olestra products related to cannibalization that they did themselves over a holiday weekend. They are in a learning process and are fine-tuning their shelf set. They also originally came out of the blocks with a high rate of trial. In fact, it has received the highest trial in Frito-Lay's history. They are in the early stages of analyzing repeat and would say that data is still sketchy because you have to get a good long period of repeat before you can draw any conclusions. They drove trial with sample-size bags so the bags were much smaller and they had a lot more shelf space given to small size bags than they normally would have in their shelf sets. All of those things, since they know people are looking at the IRI data, you cannot calculate the space effect or the impact of those changes in package size. They are very comfortable. The market looks like it could be two to three times the size of Baked Lays. They are going to be cautious at this point because it is early and they are still in test market and learning things. They are comfortable with what they have and some of the key things are that it is the highest trial they have ever had on a new product in Frito-Lay history, that some of the volume data they can track back to some shelf resets and package size mixings that they have purposefully done to test. They get very strong response from the general populace in Indiana. Center for Science in the Public Interest is something they will watch very carefully and take very seriously but they don't think that what went on this week with the particular Congresswoman is something that should be taken out of proportion.

SOFT DRINK VOLUME AND PRICING. They were asked about pricing and volume in the soft drink business. They responded that pricing is down 3-4% in the second quarter and they think that is very consistent with the marketplace when you compute in on the same basis as their competitors. CCE obviously sent out a letter saying that they had to take pricing up after the Fourth of July. In certain markets, Pepsico is seeing evidence that this is happening in certain markets on certain package sizes. However, it bleeds into the marketplace and it is their understanding that there are deals cut for Labor Day that aren't going to be amended. They believe they certainly see evidence in the marketplace of price discounting easing off. It is not such a massive trned that anyone is going to see massive turnaround in the market dynamics in Q3. First of all, if you go through the Fourth of July you have a significant chunk of the third quarter for Pepsico because their third quarter goes from June 17th to early September. Their viewpoint on the third quarter is that they are cautiously optimistic in terms of what they see. They do not believe that we will see something heroic in the numbers because it will move into the marketplace selectively. They will remain competitive and will do what is appropriate.

EARNINGS GUIDANCE. The company was asked to clarify earnings guidance. They responded that they had given guidance in the mid-$1.40s or approximately $1.45. When they say they are comfortable with how the year shakes out, they were thinking of that number. They think that there will be some upside and downside and give or take a penny around that, they can still be comfortable absorbing some spin costs and the potential that if they spin TRICON in the fourth quarter early, that operation will be financed at a higher interest expense in the fourth quarter and so they have to absorb a little higher interest expense theoretically. They can deal with the fact that maybe the tax rate will be a little bit higher based on the breaking apart the parts than they originally thought and still come in at that basic range.

NEW SNACK COMPETITOR. They were asked to respond to a competitor's claim that they were going to pursue the small package, multi-pack market. They responded that they have a huge market in the small package, multi-pack market and have a distribution system that they tend to leverage against their competitors. If someone is entering into the market they look at it pretty carefully but tend to rely on the strength of their distribution and the quality of their products. They think it is good to have competition because it gives them incentive to execute better. But, they don't see it as a major threat and they have a lot of things they can do to compete effectively.

USE OF CASH FOR DEBT PAYDOWN. They were asked if any of the free cash flow would be allocated to paying down debt prior to the TRICON spinoff. They responded that they will be paying down debt when they get the dividends from TRICON. Up until that point, the cash flow they are receiving is tending to be dedicated more toward share repurchase than debt repayment. Over the course of the year, debt will be paid down. So, in the fourth quarter, interest expense should be substantially lower than it would have otherwise been.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.