PepsiCo Delivers Fourth-Quarter and Full-Year Core EPS In-Line with Previous Guidance

Revenue grew 10 percent for the full year to $43.3 billion, worldwide beverage and snacks volume both up 3 percent for the year, international full-year volume growth of 10 percent for beverages and 5.5 percent for snacks, full-year reported EPS was $3.21; core EPS up 9 percent to $3.68.

13/02/09 PepsiCo, Inc. reported solid results for the fourth quarter and full year 2008. For the full year, the company grew net revenue 10 percent to $43.3 billion and delivered earnings per share (EPS) of $3.21 on a reported basis. Excluding the impact of items affecting comparability, PepsiCo's full-year core EPS was up 9 percent to $3.68, in-line with previous guidance, reflecting the company's balanced global portfolio of strong brands, consumer preferred innovation and net revenue management.

In the fourth quarter, PepsiCo delivered a 3 percent increase in net revenue and reported EPS of $0.46. Excluding the impact of items affecting comparability, the company's fourth-quarter core EPS was up 11 percent to $0.88, in-line with previous guidance, reflecting strong net revenue management and cost discipline. Foreign exchange adversely impacted net revenue growth in the quarter by 5.5 percentage points and core EPS by $0.05.

Indra Nooyi, PepsiCo Chairman and Chief Executive Officer said, "PepsiCo's operating agility and disciplined execution delivered solid results in an extremely difficult year. We expect 2009 will present a challenging environment. However, I am confident that we have robust plans and an experienced team in place to navigate capably through the turbulent environment. More importantly, we are well positioned to manage our business to deliver short-term results while also driving long-term sustainable growth."

PepsiCo Americas Foods (PAF) delivered double-digit core division operating profit growth for both the full year and the fourth quarter, despite continued commodity cost pressure. In the quarter, net revenue grew 5 percent and core operating profit grew 11 percent. Foreign exchange adversely impacted net revenue and core operating profit growth by 5 percentage points and 4.5 percentage points, respectively.

Frito-Lay North America (FLNA) performed well in the fourth quarter. Net revenue grew 7 percent, reflecting growth across all retail channels in the United States. Core operating profit grew 9 percent, driven by successful net revenue management and favorable price elasticity, partially offset by higher commodity costs. Volume was down less than one percent in the quarter, attributable to weight outs.

A broad innovation line-up is expected to contribute to continued top-line growth in 2009. In the second quarter of 2009, FLNA intends to increase its value offerings to consumers on its corn-based Tostitos, Fritos, Cheetos and Doritos by adding 20 percent more product into its take-home bags without increasing the price.

At Quaker Foods North America (QFNA) in the fourth quarter, net revenue grew 2 percent and core operating profit grew 13 percent. Production returned to normal levels in the fourth quarter following a flood at QFNA's major manufacturing facility in Cedar Rapids, Iowa, at the end of the second quarter. In addition, effective net pricing and cost discipline contributed to core operating profit growth.

At Latin America Foods (LAF) net revenue increased 1 percent and core operating profit grew 15 percent, despite unfavorable foreign exchange impact. Foreign exchange adversely impacted net revenue and core operating profit growth by 11 percentage points and 16 percentage points, respectively. Net revenue growth was driven by favorable effective net pricing. An insurance recovery associated with asset losses resulting from a 2007 fire at a snack plant in Brazil contributed 4 percentage points to core operating profit growth.

Volume increased nearly 1 percent in the quarter, reflecting mid-single-digit volume growth at both Gamesa in Mexico and also in our foods businesses in South America. Volume growth was partially offset by a double-digit volume decline at Sabritas in Mexico, primarily attributable to weight outs.

PepsiCo Americas Beverages (PAB) navigated a challenging year in the United States as the liquid refreshment category declined for the first time on a year-over-year basis. PAB volume declined 3 percent for the year. In the fourth quarter, volume declined 6 percent and net revenue declined 10 percent partly due to the lapping of the launch of G2 and SoBe Lifewater in the year ago period as well as the timing of shipments related to the revitalization of our North American beverage portfolio. Core operating profit declined 16 percent, largely due to softer volume and higher input costs. Foreign exchange adversely impacted net revenue and core operating profit growth by 2 percentage points and 3.5 percentage points, respectively.

At the end of the fourth quarter, PAB started the rollout of a revitalized beverage portfolio into the North American market. PAB's portfolio features new brand identities for trademarks Gatorade, Pepsi, Sierra Mist and Mtn Dew, as well as key product innovations such as a new formulation of SoBe Lifewater, sweetened with PureViaTM, an all-natural, zero-calorie sweetener recently approved by the FDA. The revitalized portfolio is supported by all-new, multi-platform marketing campaigns.

The company's LAB business continues to generate solid top-line volume and bottom-line results.

PepsiCo International (PI) delivered core operating profit growth for the year of 16 percent on snack volume growth of 8 percent and beverage volume growth of 13 percent. For the quarter, core operating profit was up 4 percent on similar volume growth, reflecting a 15 percentage point adverse foreign exchange impact.

In the quarter, the Middle East/Africa/Asia (MEAA) segment grew snack volume by 8 percent, driven by double-digit growth in China, and growth in other emerging markets such as South Africa and the Middle East. MEAA snack growth was slightly offset by a low-single-digit volume decline in India due in part to a potato shortage. Beverage volume grew 13 percent and was broad-based, driven by double-digit growth in India and China.

MEAA net revenue grew 15 percent and core operating profit improved 63 percent in the quarter off of a relatively small base. Core operating profit growth was driven by positive net pricing and favorable mix. Foreign exchange negatively impacted net revenue growth by 8 percentage points and core operating profit growth by 29 percentage points. The net impact of acquisitions and divestitures contributed 1 percentage point to net revenue growth and decreased core operating profit by 3 percentage points.

In the quarter the UK/Europe (UKEU) segment grew snack volume 8 percent, including 5 percentage points from PI's Marbo and Penelopa acquisitions. In Russia, double-digit volume growth in snacks resulted from improved distribution and the strength of locally relevant brand extensions. At Walkers in the United Kingdom, volume was down low-single-digits, reflecting pricing to offset increased input costs.

UKEU beverage volume grew 16 percent in the fourth quarter. The expansion of the Pepsi Lipton joint venture across Western Europe and the Lebedyansky acquisition in Russia were the primary drivers of beverage volume growth.

For the full year, UKEU grew net revenue 17 percent and core operating profit 10 percent. In the quarter, net revenue grew 10 percent and core operating profit was down 9 percent, impacted by commodity inflation. Foreign exchange adversely impacted both net revenue and core operating profit growth by 12 percentage points in the quarter; acquisitions contributed 14 percentage points to net revenue growth and 7 percentage points to operating profit growth. Financial results for the Marbo acquisition in Serbia and the Lebedyansky acquisition in Russia are reflected in this quarter's reported performance for the first time.

Corporate Unallocated

For the quarter, net mark-to-market losses on commodity hedges were $227 million, compared with an $18 million gain in the comparable period a year ago. Other corporate unallocated costs decreased $100 million compared to the fourth quarter of last year, reflecting reductions in deferred compensation costs (which were offset by an increase in net interest expense from losses on investments used to economically hedge these costs) and lower employee-related costs. Net interest expense increased $108 million, due to hedge losses on investments associated with deferred compensation, debt associated with the Lebedyansky acquisition and share repurchases.

PepsiCo's reported tax rate was 28.9 percent for the fourth quarter and 26.8 percent for the full year. Excluding the impact of items affecting comparability, PepsiCo's core tax rate was 27.7 percent for the fourth quarter and 26.9 percent for the full year.

As part of its commitment to returning cash to its shareholders, the company spent $4.7 billion repurchasing its shares in 2008.

Productivity for Growth

The company expects its productivity program will produce cumulative pre-tax savings of more than $1.2 billion over the next 3 years with $350 million to $400 million of cost savings flowing through in 2009. As a result of the program, the company incurred a pre-tax charge of $543 million in the fourth quarter of 2008, comprised of: $212 million of severance and other employee-related costs associated with the termination of about 3,500 employees; $149 million for asset impairments (all non-cash) resulting from plant closures and related actions; and $182 million for other costs. In total, the charges related to the Productivity for Growth program are expected to be $575 million to $600 million. The bulk of the program was completed by year-end, and the company expects the remaining initiatives will take place in the first half of 2009.

2008 Cash Flow

PepsiCo generated $7.0 billion in cash provided by operating activities, including $159 million of cash payments associated with Productivity for Growth. Net capital spending totaled $2.3 billion.