Pepsi Delivers Strong Q2

The results at PepsiCo Americas Foods (PAF) reflected solid top- and bottom-line performance across all segments of the business in spite of difficult macroeconomic conditions and rapidly escalating commodity costs.

24/07/08 PepsiCo, Inc. has reported strong second-quarter operating results, with 14 percent net revenue and 12 percent operating profit growth. The Company delivered earnings per share of $1.05. Excluding current and prior year mark-to-market gains on commodity positions included in corporate unallocated expenses, earnings per share would have totaled $1.03, up 11 percent.

PepsiCo Chairman and Chief Executive Officer, Indra Nooyi said, "The strength and breadth of our global portfolio and geographic footprint delivered another quarter of solid results. PepsiCo continued to drive growth across its worldwide snacks and beverage businesses primarily through strong product innovation, well-executed pricing actions and focus on expense control and productivity." Nooyi continued, "We are proud of our first-half performance and confident that we are well-positioned to deliver on our outlook amidst a challenging macroeconomic environment."

Frito-Lay North America (FLNA). Our strong brands enabled 2 percent volume growth even as high-single-digit net price increases were realized from weight-outs and visual pricing to offset commodity inflation. FLNA revenue growth of 8 percent was broad based, and operating profit grew 8 percent, driven by net revenue growth and productivity, partially offset by higher costs for cooking oil, energy and fuel.

Volume growth was driven by double-digit growth in trademark Cheetos, Ruffles, Quaker Chewy Granola and SunChips. Innovation was the key for both Cheetos (e.g. Cracker Trax) and SunChips, which introduced new flavors and was supported by the 'Made From the Sun' marketing campaign. Weight-outs and a promotional shift to help manage potato supply constraints led to a high-single-digit volume decrease in trademark Lay's; but revenues were up high-single-digits. While pricing actions also contributed to a mid-single-digit volume decrease in trademark Doritos, revenues were up low-single digits. Single serve packages continued to provide volume growth.

At Quaker Foods North America (QFNA), volume grew 2 percent, reflecting an increase in Quaker Oatmeal, grits and Rice-A-Roni. Revenue and operating profit grew 4 percent.

At the end of the second quarter, flooding in Cedar Rapids, Iowa, shut down our major Quaker manufacturing facility. The Company expects to be back to full production levels by mid-August, but we are experiencing supply disruptions, and many Quaker products have been on allocation. We expect insurance to cover asset damage and business interruption exposures in the second half of the year.

At Latin America Foods (LAF) organic revenue and profit increased 10 percent and 21 percent, respectively, despite higher commodity costs. Revenue growth was driven by broad based pricing actions at our key businesses of Sabritas and Gamesa. At Sabritas unit volumes grew mid-single digits; kilo volume declined by low-single digits as expected, largely due to weight-outs. Also consistent with expectations, Gamesa experienced double-digit net revenue growth due to favorable pricing actions; its volume was essentially flat in the quarter lapping double-digit growth in the prior year. In total, LAF volume grew 4 percent, benefiting from the Lucky brands acquisition in Brazil in the fourth quarter of 2007.

PepsiCo Americas Beverages (PAB). In North America, the economic slowdown continues to pressure the liquid refreshment beverage category with a decline across convenience channels and a reduction in the growth of unflavored water. In this environment, PAB volume decreased 1 percent during the quarter, driven by a 3 percent decline in North America that was partially offset by a mid- single-digit volume increase in Latin America. As a result, net revenue grew 1 percent and operating profit declined 7 percent.

The North American carbonated soft drink (CSD) portfolio gained market share in measured channels. While showing sequential improvement, CSD volume declined 2 percent due to category softness. Trademarks Mountain Dew and Sierra Mist both grew low-single digits, partially offsetting a mid-single digit decline in trademark Pepsi. Non-carbonated beverages (NCB) volume declined 4 percent primarily due to a double-digit decline in unflavored water. Volume growth in the Company's North American energy drinks portfolio -- led by triple-digit volume growth for Amp Energy and more than 50 percent volume growth for SoBe Life Water -- was partially offset by mid-single-digit declines in juice. Gatorade volume was up slightly for the quarter.

The Company's Latin America Beverage business (LAB) continues to produce strong top- and bottom-line growth. LAB's broad-based volume growth was driven by mid-single-digit growth in the CSD portfolio and double-digit growth in NCBs.

PepsiCo International (PI) continued to deliver strong performance while lapping over 20 percent revenue growth and over 30 percent profit growth from prior year. PI captured broad-based volume gains in snacks and beverages even as the Company continued to implement pricing actions across its markets.

In the UK/Europe (UKEU) segment, broad-based snack volume growth of 8 percent was driven by double-digit growth in Russia and high-single-digit growth in Poland. Additionally, Walkers in the United Kingdom grew at a mid-single-digit rate. The acquisition of the Penelopa nuts and seeds business in Bulgaria increased total snack volume by 1 point. UKEU beverage volume grew 20 percent, primarily reflecting the Sandora acquisition and the expansion of the Pepsi Lipton International joint venture, which together contributed 17 percentage points to volume growth. UKEU net revenue increased 24 percent, reflecting volume growth and effective net pricing in major markets; foreign exchange contributed 11 percentage points and acquisitions 4 percentage points of growth. Operating profit grew 19 percent driven by net revenue growth and partially offset by increased commodity costs; foreign exchange added 9 percentage points and acquisitions 4 percentage points to growth.

Middle East/Africa/Asia (MEAA) segment snack volume grew 13 percent, led by double-digit growth across the Middle East, India, South Africa and China. In beverages, 10 percent volume growth in the MEAA segment reflected broad-based gains led primarily by double-digit growth in the Middle East, China and India. CSD volume grew at a high-single-digit rate and NCBs grew at a double-digit rate. Net revenue for snacks and beverages increased 25 percent, reflecting volume growth and effective net pricing; foreign exchange contributed 6 percentage points to net revenue growth. Operating profit grew 16 percent as a result of revenue growth, partially offset by higher commodity costs; foreign exchange contributed 4 percentage points to growth.

For the quarter, corporate unallocated expenses decreased $71 million compared to last year, primarily due to increased mark-to-market gains on commodity hedges ($61 million this quarter compared with $13 million in the second quarter last year). Excluding this net $48 million mark-to-market valuation change, corporate unallocated costs would have decreased $23 million compared to last year, driven by lower employee-related costs, which were partially offset by continued investment in our business transformation initiative and higher investments in research and development. Net interest expense increased $21 million. For the quarter, the reported tax rate was 26.7 percent versus 26.5 percent in the previous year.

For the Company in total, foreign exchange contributed 4 percentage points to revenue growth and 3 percentage points to operating profit growth. Acquisitions accounted for 3 percentage points to revenue growth and 1 percentage point to operating profit growth.

The Company expects full-year 2008 performance of three to five percent volume growth, low-double-digit net revenue growth (including acquisitions and foreign exchange) and EPS of at least $3.72 excluding the impact of any mark- to-market gains/losses. The Company is not able to provide guidance on the 2008 projected EPS growth including the impact of the mark-to-market gains or losses on commodity hedges due to the unpredictability of future changes in commodity prices.

Cash provided by operating activities is expected to be approximately $7.6 billion and capital spending about $2.7 billion. In 2008, the Company intends to repurchase at least $5.3 billion of its shares, subject to market conditions. This represents an increase of at least $1 billion from its previously announced intention to spend $4.3 billion in share repurchases in 2008. As of the end of the second quarter, the Company spent $2.9 billion repurchasing its shares in 2008.