Business News

PepsiCo Delivers Solid Third-Quarter Results, Posting Strong Gains in Net Revenue, Net Income and EPS and Broad-based Sequential Gains in Operating Performance; Establishes New Global Group to Drive Nutrition Innovation

Monday 11. October 2010 - PepsiCo, Inc. (NYSE: PEP) today reported solid volume, revenue and profit results for the third quarter of 2010, driven by broad-based gains across its snack and beverage portfolio and the acquisition of its two anchor bottlers.

“Even in a macroeconomic environment that continues to be challenging, we believe we have achieved top-tier performance among leading consumer staple companies,” said PepsiCo Chairman and CEO Indra Nooyi. “This reflects our steadfast commitment to managing both the short-term and long-term, by driving balanced growth across our portfolio while making the right strategic investments.”

The company also announced the creation of a new Global Nutrition Group to allow PepsiCo to deliver breakthrough innovation in the areas of fruits and vegetables, grains, dairy and functional nutrition. Based in Chicago, it will be run by PepsiCo’s chief scientific officer, Dr. Mehmood Khan, who has been named CEO of the new group and retains responsibility for the company’s research and development organization.

“The creation of this Global Nutrition Group is part of our long-term strategy to grow our nutrition businesses from about $10 billion in revenues today to $30 billion by 2020,” Ms. Nooyi continued.

“The market potential is significant, our stable of brands – Quaker, Tropicana, Lebedyansky, Sabra, Alvalle – impressive, and our go-to-market systems powerful. We have been actively ramping up our innovation capabilities and developing strong partnerships with the scientific community, including with universities and research institutions around the world. I believe we are well equipped to deliver authentically nutritious products advantaged by science in an accessible and affordable way to consumers globally.”

In PepsiCo Americas Foods (PAF) all businesses posted sequential improvements in volume and operating profit growth:

Frito-Lay North America (FLNA) drove a sequential improvement in volume growth, consistent with expectations, as it continued to overlap the “20% More Free” promotion launched in the second quarter of 2009. The sequential improvement in operating profit growth was aided by lower costs and growth in net revenue driven by investments in innovation and brand building earlier in the year. Unit growth remained in the low single digits as the division gained salty-snack dollar share and posted the fastest value growth among top-20 food and beverage companies in measured channels.
Quaker Foods North America (QFNA) gained both value share and volume share in the quarter in a category that was down, benefiting from investments in value, quality, innovation and increased advertising and marketing.
Latin America Foods (LAF) drove double-digit gains in net revenue and operating profit, led by continued focus on value, marketplace execution, innovative promotions, investments in infrastructure and effective cost controls.
PepsiCo Americas Beverages (PAB) volume, net revenue and operating profit results were driven by the favorable impact of the bottling acquisitions, synergies and improving sequential organic volume trends across the product portfolio in North America.

Volume in North America, excluding the incremental volume from our agreement with Dr Pepper Snapple Group, was flat in the quarter – a one percentage point sequential improvement versus the second quarter of 2010. In the U.S., PAB realized a positive liquid refreshment beverage volume share swing versus our closest competitor in measured channels, aided by the very successful launch of Gatorade’s G Series, which drove a mid-teens increase in Gatorade volume, and ready-to-drink teas, which grew at a high-single-digit rate. PAB’s relative carbonated soft drink volume share position also strengthened sequentially in the U.S., aided by the re-launch of Pepsi Max.
Europe volume, net revenue and operating profit growth were driven by broad-based gains across the region in both snacks and beverages as the business balanced net revenue realization with innovative consumer value programs while keeping a sharp focus on productivity. The division also benefited from the favorable impact of the bottling acquisitions.

Growth in snack volume was driven by a significant improvement in sequential performance in Eastern Europe, underpinned by strong commercial programs such as “Do Us a Flavor” in Poland and a travel promotion in Russia. In the quarter, the business also continued its expansion into adjacencies by launching its Benenuts nuts brand in Poland and Iberia.
Reported beverage volume grew 17 percent, while volume excluding the impact of incremental brands related to our acquisitions of PBG and PAS increased 10 percent – a sequential improvement of six points from the second quarter of 2010. While both Eastern and Western Europe experienced gains, most of the positive growth came from Eastern Europe, driven by a strong commercial calendar combined with an unusually hot summer that drove category growth. The business captured dollar share gains in key markets such as Russia, Turkey, Spain and the U.K.
In Asia, Middle East and Africa (AMEA) volume gains in both snacks and beverages drove strong top-line performance. As expected, operating profit growth declined in the quarter as the region overlapped 31 points of growth in the third quarter of fiscal 2009 related to a gain recorded in connection with the contribution of our snacks business in Japan to form a joint venture with Calbee Foods, the snacks market leader in Japan. Operating profit performance in the division was also impacted by the step-up of investments in emerging markets as we continue to expand our footprint and build capability in both snacks and beverages.

Snack volume grew at a mid-teens rate – driven by double-digit growth in the Middle East, India, China and Indonesia. In India, volume was up over 20 percent behind the continued success of our marketing efforts such as Lay’s “Give Us Your Delicious Flavor,” product innovations and strong performance of the Quaker brand. Acquisitions contributed 1.5 percentage points to volume growth.
Beverage volume growth benefited from high-single-digit growth in China, which was driven by continued strong growth in both carbonated and non-carbonated beverages as we stepped up marketplace investments in routes, coolers and advertising and marketing.
Tax Rate

PepsiCo’s reported tax rate was 27.4 percent in the third quarter, versus 24.9 percent in the prior-year period. The increase in the rate versus the prior-year period was primarily driven by the favorable resolution of certain foreign tax matters and certain deferred tax adjustments recorded in the prior year. PepsiCo’s core tax rate was 27.4 percent for the third quarter. The company expects its full-year reported tax rate to be roughly 23 to 24 percent, which reflects a benefit of about four percentage points from non-core items.

Cash Flow

Year-to-date cash flow from operating activities was $5.8 billion. Management operating cash flow, which is net of capital expenditures, was $4.2 billion and included: $0.3 billion ($0.2 billion net of tax) of merger and integration payments associated with our bottling acquisitions, $1.2 billion ($0.8 billion, net of tax) related to discretionary contributions to PepsiCo’s pension funds, $29 million related to 2009 restructuring charges, $100 million ($64 million, net of tax) related to a donation to the PepsiCo Foundation and $33 million in capital investments related to the bottler integration. Management operating cash flow, excluding these items, was $5.3 billion.

For the year, the company expects cash flow from operating activities to be about $8.0 billion and management operating cash flow, which is net of capital expenditures, to be about $4.7 billion, including: discretionary contributions to PepsiCo’s pension funds of $1.2 billion, about $0.4 billion of merger and integration payments associated with our bottling acquisitions, the $100 million donation to the Foundation, $29 million related to 2009 restructuring charges, about $200 million in capital investments related to the bottler integration, and about $600 million of cash tax benefits related to these items. Management operating cash flow, excluding these items, is expected to be approximately $6.1 billion. The company expects to invest about $3.3 billion in net capital spending in 2010.

Guidance

For fiscal 2010, the company is targeting an 11 to 12 percent growth rate for core constant currency EPS from its fiscal 2009 core EPS of $3.71, which is within the previous guidance range of 11 to 13 percent. Based on current spot rates, foreign exchange translation would represent a one percentage point unfavorable impact on the company’s full-year, core EPS. As a result, growth in core EPS for the year is expected to be in the 10 to 11 percent range.

Synergies

The company is targeting pre-tax annual synergies from the bottling acquisitions of approximately $400 million once fully implemented by 2012, with one-time costs of approximately $650 million to achieve these synergies. Of the approximately $650 million in costs, roughly $225 million is non-cash and represents the impact of the consolidation and rationalization of certain manufacturing assets. Synergies to be realized in 2010 are expected to total approximately $150 million.

Uses of Cash

In the third quarter, the company repurchased $1.1 billion in common stock, or 17 million shares. The company also spent $767 million on dividends in the quarter.

Impact of Venezuelan Devaluation

As of the beginning of the company’s 2010 fiscal year, Venezuela is accounted for under hyperinflationary accounting rules, and the functional currency of our Venezuelan entities has changed from the Bolivar to the U.S. dollar. Effective January 11, 2010, the Venezuelan government devalued the Bolivar by resetting the official exchange rate from 2.15 Bolivars per dollar to 4.3 Bolivars per dollar, with certain activities permitted to access an exchange rate of 2.6 Bolivars per dollar.

In 2010, the majority of the company’s Venezuelan foreign exchange transactions continue to be remeasured at the 4.3 exchange rate, and as a result of the change to hyperinflationary accounting and the devaluation of the Bolivar, the company recorded a one-time net charge in the first quarter of 2010 of $120 million.