PepsiCo. Reports Strong Quarter

25/07/07 PepsiCo has reported a 15% increase in second-quarter earnings per share to $0.94. Growth was broad based, with each of the Company's operating divisions contributing to the 10% revenue and 9% division operating profit growth. The results also reflected a decrease in the quarterly tax rate.

PepsiCo Chairman and CEO Indra Nooyi said, "Our excellent top- and bottom- line performance in the second quarter reflects the underlying strength of our businesses, the high level of execution by our associates across the world, and the balance within our portfolio. All of our lines of business performed at or above our expectations, enabling us to generate strong division profit growth while lapping last year's best quarter.

"In North America, Frito-Lay maintained its strong momentum. Balanced revenue growth coupled with productivity resulted in expanded operating margins and 8% operating profit growth. Our beverage business grew operating profits 4%, lapping 13% growth in the prior year, marking another quarter of sequential improvement.

"On the International side, strong volume gains in snacks and beverages resulted in continued double-digit revenue and operating profit growth. Profit growth was broad based across our geographies."

Ms. Nooyi continued, "Our strong performance in the first half demonstrates the health of the business and supports our balance-of-year outlook. Accordingly, we are raising our full year earnings guidance to at least $3.35 per share. This change reflects a number of factors for the second half of the year: an increase in long-term R&D expenditures; investment spending to sustain our growth in key segments and geographies; and tax rates in the second half that will be above our average tax rate for the year, which we're now projecting at 27.3%.

Frito-Lay North America (FLNA) generated 6% revenue growth and 8% operating profit, resulting from margin expansion. Net revenue grew 6%, reflecting 3% volume growth, positive net pricing and favorable mix. Revenue growth was led by double-digit growth in trademark Doritos, SunChips, multipacks, dips and Quaker rice snacks, partially offset by modest declines in Trademark Lay's.

Operating margins expanded almost 40 basis points. Revenue gains, manufacturing productivity and favorable casualty insurance adjustments from improved safety performance more than offset increased commodity costs and a double-digit increase in advertising and marketing expenses.

PepsiCo Beverages North America (PBNA) profits grew 4%, lapping 13% growth in the prior year. Bottler case sales volume declined less than 1% in the quarter, cycling 8% growth in the second quarter of 2006. Carbonated soft drinks (CSD) declined 4% while non-carbonated beverages grew 3%. Non-carbonated volume performance was led by Lipton ready-to-drink teas, growing over 30%, and trademark Aquafina, growing high-single-digits. NCB growth was partially offset by modest declines in Tropicana and Gatorade sports drinks as Tropicana faced significant price increases and Gatorade cycled 29% volume growth in the second quarter of 2006.

Net revenue grew 5%, driven by positive net pricing and favorable mix. Acquisitions contributed 2 percentage points of growth. Operating profits grew 4%, reflecting net revenue gains that more than offset higher input costs. Operating profit growth would have been 2 percentage points higher excluding the net impact of a $29 million favorable insurance settlement recorded in the second quarter of 2006 and lower amortization expenses in this quarter.

Quaker Foods North America (QFNA) revenue increased 4%. Net revenue grew 4%, reflecting price increases taken earlier in the year and the resulting modest volume declines. Operating profit increased 2% on the net revenue growth, partially offset by increased raw materials costs.

PepsiCo International (PI) profits increased 18% on strong snacks and beverage growth. Snacks volume grew 9%, reflecting double-digit growth in Russia, India and Gamesa in Mexico, partially offset by a 1% decline in its Walkers business in the U.K. Consistent with planned pricing actions, volume at Sabritas in Mexico declined 1%.

Beverage volume grew 8%, cycling 10% in the second quarter of 2006, led by double-digit growth in Pakistan, Russia, the Middle East, the U.K. and China, partially offset by declines in Mexico and Thailand. In total, CSDs grew at a high-single-digit rate, posting growth in each of the division's four largest trademarks -- Pepsi, 7-Up, Mirinda and Mountain Dew. Non-carbonated beverages grew at a double-digit rate, with solid performance across the non-carbonated portfolio.

Net revenue grew 18%, reflecting the volume growth and favorable effective net pricing. Foreign currency translation contributed 5 percentage points of growth and acquisitions contributed 4 points of growth. Operating profit grew 18% driven by the revenue growth, scale leverage and lower amortization expenses. This was partially offset by increased raw material costs and expenses associated with a product recall in Brazil. Foreign currency translation contributed 5 percentage points of growth. Acquisitions had no impact on operating profit growth in the quarter.

Reduced tax rate and share repurchases contributed to EPS growth. Corporate unallocated expenses increased $21 million, primarily reflecting higher deferred compensation costs. This increase was substantially offset, in interest income, by gains on investments used to economically hedge these costs. A 220-basis-point reduction in the Company's quarterly tax rate and a 1.4% reduction in weighted-average shares outstanding also contributed to EPS growth. The tax rate in the quarter was lower than the expected full-year tax rate due primarily to an audit settlement recorded in the quarter.

2007 earnings guidance increased to reflect strength of the business year- to-date. Given the strength of the business, the Company expects earnings of at least $3.35 per share which includes accelerated second half investments both in long-term R&D as well as in key segments and geographies. Cash provided by operating activities is expected to be approximately $7 billion and net capital spending to be approximately $2.6 billion. The Company's earnings guidance assumes a full-year tax rate of 27.3%, which includes a favorable adjustment associated with an audit settlement recorded in 2006.