PepsiCo Reports Strong Third Quarter 2007 Results

12/10/07 PepsiCo reported continued strong performance in the third quarter of 2007. Net revenue increased 11%; division operating profit grew 10%; and the Company generated core earnings of $0.99 per share, an increase of 11%. On a reported basis, net income grew 17% and earnings per share grew 19%, and included non-cash tax benefits of $115 million related to the resolution of certain foreign tax matters.

PepsiCo Chairman and CEO Indra Nooyi said, "Our third quarter performance was very strong, with double-digit revenue and operating profit growth. All of the Company's operating divisions successfully navigated through an environment of higher input costs in order to deliver balanced top- and bottom-line performance.

"In PepsiCo International, broad-based volume gains in snacks and beverages coupled with foreign currency tailwinds resulted in continued double-digit revenue and operating profit growth. Favorable foreign currency upsides allowed us to reinvest in several international markets in the quarter. In North America, our profit growth accelerated to 7%. Frito-Lay's strong performance continued, and 7% profit growth in our domestic beverage business marked another quarter of sequential improvement.

"Importantly, we laid the groundwork for future growth. Our successful partnerships with Unilever and Starbucks expanded internationally. We closed on the acquisition of Sandora Beverages and, with Pepsi Americas, became the leading Ukraine beverage company. In North America, we have strengthened our hydration portfolio with major product innovations and by leveraging the reach of our bottling system.

"We also advanced our efforts in sustainability and corporate social responsibility. At Frito-Lay, the Jonesboro, AR, plant received the Environmental Protection Agency's Performance Track Program distinction for its efforts to reduce waste and conserve energy. PepsiCo retained its place on the Dow Jones Sustainability North America Index, and we were proud to be added to the Dow Jones Sustainability World Index in late September."

Ms. Nooyi continued, "I am confident our strong operating performance will continue into our fourth quarter and provides a solid foundation for 2008."

Frito-Lay North America (FLNA) continued strong performance with 7% operating profit growth.

Net revenue grew 6%, reflecting volume growth and favorable effective net pricing. Revenue growth was led by double-digit growth in trademark Doritos, Sunchips, multipack and dips, partially offset by modest declines in Trademark Lay's. Quaker Chewy Granola and Rice Snacks led the Quaker snacks portfolio, growing revenue double-digits.

Operating profit grew 7%, reflecting the revenue and continued productivity gains, partially offset by higher commodity costs and increased marketing investments.

PepsiCo Beverages North America (PBNA) profits grew 7% on revenue growth of 3%.

Bottler case sales volume declined 1% in the quarter. Carbonated soft drinks (CSD) declined 3% while non-carbonated beverages grew 2%. Non- carbonated volume performance was led by Lipton ready-to-drink teas and energy drinks, growing strong double-digits, and trademark Aquafina, growing mid- single-digits. Gatorade sports drinks and our portfolio of juice and juice drinks both declined mid-single digits. The juice and juice drinks decline was primarily a result of the increased pricing to offset input costs.

Net revenue grew 3%, driven by positive net pricing. Acquisitions contributed 2 percentage points of growth.

Operating profits grew 7%, driven by the revenue gains partially offset by higher input costs. Lower amortization expenses related to a prior acquisition added 3 percentage points of growth. Acquisitions reduced operating profit by 1 percentage point.

Quaker Foods North America (QFNA) increased both revenue and operating profit 2%.

PepsiCo International (PI) revenue grew 22%, and profits increased 19% on strong snacks and beverage growth.

Snacks volume grew 7%, driven by double-digit growth at Gamesa in Mexico, Russia, the Middle East, Brazil, China and India. Walkers in the U.K. had modest declines as a result of category softness. Sabritas volume was down mid-single-digits, but this was in line with our expectations following pricing actions taken towards the end of 2006.

Beverage volume grew 8%, led by double-digit growth in Pakistan, China, the Middle East and Russia, partially offset by a slight decline in Mexico. 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, led by 40% growth in Lipton ready-to-drink tea and solid performance across the remaining non- carbonated portfolio.

Net revenue grew 22%, driven by the volume growth and favorable effective net pricing. Foreign currency translation contributed 6 percentage points of growth. The net impact of acquisitions and divestitures contributed 7 percentage points of growth.

Operating profit grew 19%, driven by the revenue growth and scale leverage, partially offset by increased raw material costs. Foreign currency translation was less than 6 percentage points of growth, and the net impact of acquisitions and divestitures was minimal. The combination of several other items - lower amortization expenses, higher costs related to international SAP implementation and favorable items in 2006 - reduced operating profits by 3 percentage points.

Division operating profit and share repurchases drove EPS growth.

Corporate unallocated expenses were up slightly with increased mark-to- market commodity hedge losses of $28 million offset by lower deferred compensation and other gains. Net interest expense increased $24 million, reflecting both losses on investments used to hedge deferred compensation expenses as well as higher net debt balances due to acquisitions. Bottling equity income increased $14 million on higher income at our anchor bottlers. Share repurchases in the quarter reduced shares outstanding by 2.2%. Year-to- date, cash returned to shareholders was up 34%, consisting of $1.6 billion in dividends and $3.1 billion in share repurchases.

The Company's reported tax rate was 22.3%, which included tax benefits of $115 million related to the resolution of certain foreign tax matters. Excluding this item, our comparable tax rate was 27.4%, an increase versus last year's rate of 27.0%. For the full year 2007, the reported tax rate is expected to be 26.2%.

2007 core earnings and cash flow guidance unchanged.

The Company reiterated its previous guidance of full-year core earnings of at least $3.35 per share. This guidance now includes the expectation that the tax rate will be affected both in 2007 and in subsequent years by the recent tax law changes in Mexico. The impact of this legislation is still under review, but the Company estimates that the core rate in 2007 will be greater than the previous guidance of 27.3% and probably not exceed 27.7%. The 2007 change relates to the deferred tax impact of the new Mexican legislation.