PepsiCo: Reports Solid Fiscal Third-Quarter Results

Purchase / NY. (bw) PepsiCo Inc. reported solid profit performance in the third quarter of 2009, reflecting the company´s balanced approach to investing in value and innovation in key markets as well as productivity and cost discipline across its businesses. Reported EPS was 1,09 USD and in constant currency PepsiCo delivered 5,0 percent net revenue growth and an 8,0 percent increase in core EPS. Overview:

  • Reported EPS up ten percent, core constant currency EPS up eight percent.
  • Full-year 2009 cash flow from operations expected to reach 6,4 billion USD; seven billion USD excluding one time pension contribution.
  • Targets full-year fiscal 2010 core constant currency EPS growth of eleven to 13 percent.
  • Preparations for bottler integration on-track.

Statements:

Indra Nooyi, PepsiCo Chairman and Chief Executive Officer: «PepsiCo´s diversified food and beverage portfolio and our advantaged business model continued to drive solid results this quarter. Our teams around the world leveraged PepsiCo´s agile go-to-market system to deliver our brands at differentiated value to consumers, who are still feeling the pinch of the global recession despite improving macroeconomic indicators. We will continue to make targeted investments across our entire portfolio, and we expect these to ramp up next year as we begin to realize the benefits of the integration of our two anchor bottlers. These investments in innovation, infrastructure, key markets and people development, coupled with our operating agility and focus, give me great confidence in both the near-and long-term growth prospects of PepsiCo», Nooyi continued.

Richard Goodman, PepsiCo Chief Financial Officer: «As we prepare for 2010, we are targeting EPS growth of eleven to 13 percent in core constant currency. As we progress through 2010, if we do better than this range we will take the opportunity to make additional strategic broad-based investments in our business to enhance our competitiveness».

Operating Highlights:

Focused investments in consumer value and product innovation drove volume growth in global snacks and beverages.
PepsiCo Americas Foods gained share in virtually every market in which it operates.
PepsiCo Americas Beverages´ family of strong brands maintained its leadership position in the U.S. liquid refreshment beverage segment and took the leading position in carbonated soft drinks for both volume and value share in measured channels.
PepsiCo International posted strong gains in constant currency operating profit with improving volume trends in developing markets.

Division Operating Summary: All references to net revenue and operating profit are on a constant currency basis.

PepsiCo Americas Foods (PAF): delivered a seven percent increase in net revenue and a six percent increase in operating profit growth.

  • Frito-Lay North America (FLNA) reported a three percent increase in volume and a five percent increase in both net revenue and operating profit. Volume growth reflected high-single-digit growth in brand Lay´s, combined with strong gains in FLNA´s joint venture with Sabra and in variety packs. Product innovation highlights included Baked Lay´s inclusions, as well as successful additions of Sabritas-derived flavors to our Ruffles and Fritos lines. Operating profit growth in the quarter was impacted by investments in value and also by the overlapping of price increases in the year ago period. We expect that commodity inflation will continue to moderate through the year and FLNA will remain focused on value initiatives to grow market share.
  • Quaker Foods North America (QFNA) grew volume and net revenue eight percent, while operating profit declined one percent. Growth in volume and net revenue were favourably impacted by the overlap of last year´s flood-related production disruptions at the key Cedar Rapids manufacturing facility. Growth in operating profit was adversely impacted by the overlap of the flood-related insurance settlement.
  • Latin America Foods (LAF) saw a three percent decline in volume, while net revenue increased nine percent and operating profit grew eleven percent. Operating profit growth was muted by a one-time gain from a fire-related insurance settlement in the comparable prior year period. LAF´s results reflected pricing actions, including weight-outs, disciplined cost control and productivity improvements across the region, all of which helped to offset commodity and foreign-exchange-related input cost inflation. In Mexico, Sabritas and Gamesa both gained value share while delivering strong gains in operating profit. At Sabritas, a sequential improvement in salty volume was driven by the success of its value-oriented, salty-snack innovation as well as its Spinners promotion. In South America, there were broad-based value and volume share gains in key markets like Brazil, Argentina and Colombia.

PepsiCo Americas Beverages´ (PAB) performance reflected the continued softness in the overall liquid refreshment beverage category in North America, recording a six percent decline in volume, seven percent decline in net revenue and a five percent decline in operating profit. PAB continues to make progress on the company´s ongoing strategy to refresh its beverage business in North America and the overall liquid refreshment beverage category. In the U.S., PAB took the number one volume and value share position in carbonated beverages in measured channels. In non-carbonated beverages, the enhanced water portfolio gained share in the quarter, reflecting high-double-digit volume gains in SoBe LifeWater, and energy drink volume was also up double digits. While Gatorade volumes were down, this reflected modest improvement versus the first half of the year as expected. G2 continues to do well with the highest repeat purchase rate of any new LRB product in the past two years.

PepsiCo International (PI) delivered another strong quarter with net revenue up 13 percent and operating profit up 31 percent.

While the macroeconomic environment continued to be challenging in Europe this quarter, Europe drove margin expansion and profitability by balancing revenue growth, tight cost controls and productivity gains. Net revenue grew twelve percent and operating profit grew 18 percent. Acquisitions contributed ten percentage points to net revenue growth and six percentage points to operating profit growth.

Europe snacks volume declined one percent, reflecting pricing actions and weight-outs to offset commodity inflation. Acquisitions contributed three percentage points of growth. In the U.K., Walkers grew value share through disciplined pricing and its «Brit Trips» promotion, while in Russia the continued success of «locally relevant» flavour innovation on Lay´s and the «Hrusteam» crisp bread product drove share gains.

Europe beverage volume grew nine percent, driven by the Lebedyansky acquisition. Solid improvement in Western Europe and Türkiye also contributed to a sequential improvement in volume growth.

Asia/Middle East/Africa (AMEA) net revenue grew 13 percent and operating profit improved 52 percent. The net impact of acquisitions and divestitures contributed one percentage point to net revenue growth and 34 percentage points to operating profit growth primarily due to a one-time gain associated with the contribution of our snacks business in Japan to form a joint venture with Calbee Foods Company, the snacks market leader in Japan. The solid operating profit performance excluding this impact was driven by strong flow-through from the growth in volume and cost discipline across the businesses.

AMEA beverage volume grew nine percent. India delivered very strong volume growth across carbonated soft drinks and non-carbonated beverages as targeted investments in infrastructure, significant improvements in market execution and unseasonably dry weather conditions all contributed to better than 50 percent growth in the country. In China, sequential volume improvement in the quarter was driven by share gains in juice, particularly Tropicana´s GuoBinFen line of locally relevant juice drinks, as well as by Gatorade. PepsiCo continues to drive expanded distribution of key beverage products in China including Pepsi Max, Lipton ready-to-drink tea and Tropicana Juicy Pulp Sacs.

AMEA snacks volume grew eight percent, more than double its growth in the previous quarter. Strong sequential improvement resulted from broad-based geographic growth in India, South Africa and other emerging markets. In India, PepsiCo launched Aliva, a savoury cracker product; and in Australia, the company launched Grainwaves, a multi-grain salty snack, augmenting its health and wellness portfolio in the country.

Beverage System Transformation:

The company is on-track with its plans to acquire its two anchor bottlers The Pepsi Bottling Group (PBG) and PepsiAmericas Inc (PAS), subject to regulatory and stockholder approval. The company filed its Form S-4 Registration Statements in preliminary form on October 01, 2009 and still expects to close on the proposed transactions by late 2009 or early 2010.

Tax Rate:

PepsiCo´s reported tax rate was 24,9 percent for the third quarter, primarily reflecting the favourable resolution of certain foreign tax matters and certain deferred tax adjustments in the current quarter. Excluding the impact of items affecting comparability, PepsiCo´s core tax rate was 24,7 percent for the third quarter. The company expects its full-year reported and core tax rates to be about 26 percent.

Cash Flow:

The year-to-date cash flow from operating activities was 4,4 billion USD, compared to 4,7 billion USD in the prior year period; 2009 reflects both a discretionary one billion USD contribution to PepsiCo´s pension fund and 183 million USD of cash payments associated with the Productivity for Growth program. Excluding the impact of its one billion USD discretionary pension contribution (approximately 640 million USD after-tax) cash from operating activities is expected to be about seven billion USD. The company expects to invest about 2,1 billion USD in net capital spending.

Fiscal 2009 and 2010 Guidance:

The company reaffirms its full-year 2009 guidance for both net revenue and core EPS of mid-to high-single-digit core constant currency EPS growth off of fiscal 2008´s core EPS of 3,68 USD. Based on current spot rates, foreign exchange translation would represent a mid-single-digit percentage point adverse impact on the company´s full-year, core constant currency EPS. Because the company expects to close on the proposed acquisitions of PBG and PAS in late 2009 or early 2010, the company´s 2009 guidance does not include the impact of the proposed acquisitions. The company did not repurchase any of its shares in the third quarter and does not expect to repurchase any shares in its fourth quarter.

For fiscal 2010 the company is targeting an eleven to 13 percent growth rate for core constant currency EPS off of expected fiscal 2009 core EPS. This includes the modest year-one accretion related to the proposed acquisitions of PBG and PAS that the company disclosed on August 04, 2009 and the potential benefits from the acquisition-related accounting disclosed in the company´s Form S-4 Registration Statements filed in preliminary form on October 01, 2009. This target excludes one-time costs to achieve the synergies and it assumes the company completes its acquisition of PBG and PAS by early fiscal 2010.

Please refer to the glossary for more information about the items excluded from the company´s fiscal 2009 and 2010 constant currency core EPS guidance – see «PepsiCo Reports Solid Fiscal Third-Quarter Results with Increases in Profitability and Strong Cash Flow Sets Targets for Fiscal 2010» (PDF, 23 pages, 1’721 KB, press release).

The company has not yet received regulatory or shareholder approval for the acquisitions or comments from the Securities and Exchange Commission on its Form S-4 Registration Statements or with respect to its proposed accounting treatment of the acquisitions. In addition, the company is still in the process of completing its annual planning process and its integration planning. Any of these factors, as well as the risks described under «Cautionary Statement» later in this release (look at the advised PDF file, 23 pages, 1’721 KB), the risks described in our most recent annual report on Form 10-K and subsequent reports on Forms 10-Q and 8-K and in the company´s Form S-4 Registration Statements with respect to the acquisitions could materially adversely impact the company´s ability to achieve these results.

About: PepsiCo Inc. offers the world´s largest portfolio of billion dollar food and beverage brands, including 18 different product lines that each generate more than one billion USD in annual retail sales. The main businesses – Frito-Lay, Quaker, Pepsi-Cola, Tropicana and Gatorade – also make hundreds of other foods and drinks for consumers in over 200 countries. With more than 43 billion USD in 2008 revenues, PepsiCo employs 198’000 people who are united by a unique commitment to sustainable growth, called Performance with Purpose.