Purchase, N.Y., Oct. 14 - PepsiCo, Inc. today reported third-quarter operating results of 11 percent net revenue growth and 6 percent core EPS growth, excluding mark-to-market losses on commodity positions and prior-year tax benefits.
PepsiCo Chairman and Chief Executive Officer, Indra Nooyi, said, "In the third quarter, our worldwide snacks and international beverage businesses performed well once again. We had solid top- and bottom-line results in the face of a challenging macro environment and the most difficult quarterly comparisons on commodity cost inputs. We were adversely impacted by continued weakness in the U.S. liquid refreshment beverage category, which resulted in disappointing performance in our domestic beverage business. We are taking important steps to revitalize our beverage portfolio."
On its quarterly earnings call today, the company will discuss its Productivity for Growth initiative. Nooyi said, "While we can't control the macro economic situation, we can enhance PepsiCo's operating agility to respond to the changing environment. To do so, we are implementing a broad-based productivity program, which we expect will produce $1.2 billion in pre-tax savings over three years. The majority of the savings will be invested in our businesses. A primary focus will be restoring growth to our North American beverage business. At the same time, we will increase our investment in developing markets, make selective investments to continue growing our global snacks business and accelerate our global R&D initiatives to help secure our future innovation pipeline. We firmly believe that now is the time to invest in our future growth."
Frito-Lay North America (FLNA) produced solid results in the third quarter. Net revenue grew 9 percent, driven by strong performance across all FLNA mega-brands including double-digit growth at Tostitos, Ruffles and Cheetos and high single-digit growth in trademark Lay's and Doritos. FLNA revenue grew across all retail channels. Single- serve and multi-pack snack offerings performed well and merchandising efforts drove double-digit revenue growth in dips. Operating profit grew 6 percent, driven by net revenue growth and partially offset by commodity costs, including cooking oil and fuel.
The business unit's strong snack brands enabled 1.5 percent volume growth even as net price increases to offset inflation were realized from weight-outs and visual pricing. FLNA has fully realized its pricing initiatives for the year -- and, as in previous years, it will take judicious pricing in the fourth quarter to prepare for 2009.
At Quaker Foods North America (QFNA) volume declined 9 percent and revenue was down 5 percent, due to the July flood at Quaker's major manufacturing facility in Cedar Rapids. Despite volume and revenue declines, operating profit grew 7 percent, largely due to a business disruption insurance payment received in the third quarter. The company expects production to be almost fully normalized in the fourth quarter.
At Latin America Foods (LAF) revenue and operating profit increased 23 percent and 22 percent, respectively, despite higher commodity costs. Revenue growth was driven by broad-based pricing actions at key businesses Sabritas and Gamesa in Mexico. Volume grew 3 percent, largely driven by the Lucky acquisition in Brazil. Low-single-digit volume growth at Gamesa, driven by innovation and increased distribution, was offset by a mid-single-digit decline at Sabritas, attributable to weight-outs. An insurance recovery resulting from asset replacements following a 2007 fire at a snack plant in Brazil, generated gains that contributed 8 percentage points to operating profit growth. Foreign exchange and acquisitions added 12 percentage points to revenue and operating profit growth.
PepsiCo Americas Beverages (PAB) In North America, the economic slowdown continues to pressure the liquid refreshment beverage category (LRB). In the third quarter, the LRB category was down 3 percent in measured channels, reflecting a decline across the two largest channels, grocery and convenience, and a decline in unflavored water. In this environment, PAB volume decreased 2.5 percent during the quarter, reflecting a 4 percent decrease in North America partially offset by an increase at Latin America Beverages. Net revenue was flat for the quarter and operating profit declined 11 percent, largely due to higher input costs, particularly higher fuel costs, and expenses associated with the implementation of information technology initiatives.
North American carbonated soft drink (CSD) volume declined 3 percent due to category softness. Trademark Mountain Dew volume grew low-single-digits, partially offsetting a mid-single-digit decline in our other CSD brands. In non-carbonated beverages, volume was down 5 percent, reflecting double-digit declines in unflavored water and Propel. Despite a low-single-digit volume decline, trademark Gatorade gained 1.4 points of share in the sports drink category. The North American energy drinks portfolio continued to perform well, moving into the number 3 spot in measured channels led by strong growth in AMP energy drink and Starbucks Energy Coffee. Tropicana Chilled Juices grew mid-single-digits, while SoBe Life Water continues to build trial and repeat purchase on strengthened consumer awareness and broader distribution.
The company's Latin America Beverage business continues to produce strong top- and bottom-line growth. CSDs grew at a low-single-digit rate and non-carbonated beverages grew at a double-digit rate.
PepsiCo International (PI) again delivered strong performance while lapping 20 percent revenue growth in the prior year period. PI's diverse brand portfolio continued to enjoy growing demand across most markets outside the Americas, despite pricing actions across the board to cover commodity inflation. Revenue grew 20 percent while operating profit grew 18 percent.
In the Middle East/Africa/Asia (MEAA) segment, snack volume growth of 9 percent was broad based, led by double-digit growth in the Middle East, China, and India. The snacks business in Turkey grew high- single-digits, while Australia experienced a low-single-digit decline, primarily due to increased pricing.
Beverage volume increased 10 percent, driven by mid-teens growth in China and in the Middle East, and high-single-digit growth in India. Growth was slightly offset by a low-single-digit decline in Pakistan, reflecting a challenging environment, and by a high-single-digit decline in Turkey.
Revenue grew 22 percent and operating profit was up 18 percent. Foreign exchange and acquisitions contributed 5 percentage points to revenue growth and 4 percentage points to operating profit growth.
The UK/Europe (UKEU) segment performed well despite significant commodity cost inflation, macro economic challenges, and unseasonably cool weather during the summer months. Amidst these conditions, snack volume was largely in line with expectations given pricing across the category to address inflationary pressures. Due to a reporting calendar change in Iberia that excluded about three weeks of performance compared with the third quarter a year ago, snack volume grew 1 percent. Looking at the third quarter on a comparable reporting period basis, snack volume would have grown 4 percent.
In the UK, low-single-digit growth at Walkers reflected the success of the value-added "Walkers' Brit Trips" promotion and solid pricing execution and cost control to offset significant commodity input costs. Strong top-line growth in the rest of Europe was led by high- teens snack growth in Russia and by mid-single-digit snack growth in the Netherlands.
In beverages, 13 percent volume growth primarily reflects the acquisition of Sandora and the expansion of the Pepsi Lipton International joint venture, which together contributed 14 percentage points of growth. Additionally, UK volume grew mid-single-digits and volume in Poland grew double-digits. This growth was offset by a high-single-digit decline in Russia and a low-single-digit decline in Western Europe, driven by pricing, weather and general category softness.
Revenue and operating profit each grew 17 percent. The reporting period change in Iberia decreased revenue and operating profit by about 3 percentage points. Foreign exchange and acquisitions contributed 12 percentage points to revenue growth and 14 points to operating profit growth. UKEU closed on its Marbo acquisition in Serbia and its Lebedyansky acquisition in Russia at the end of the third quarter. Financial results for these acquisitions will be reflected in PepsiCo's income statement beginning in the fourth quarter of 2008.
Corporate Unallocated
For the quarter, mark-to-market losses on commodity hedges increased by $147 million ($176 million compared with $29 million in the comparable period a year ago). The company enters into commodity hedges to manage its cost structure and pricing in a volatile inflationary environment. Other corporate unallocated costs increased $19 million compared to last year, primarily reflecting higher investments in R&D and the company's global SAP implementation. Net interest expense increased $23 million.
For the third quarter, PepsiCo's reported tax rate was 25.9 percent. Last year, the company's reported tax rate for the comparable period was 22.3 percent, primarily due to a $115 million one-time tax benefit related to the favorable resolution of certain foreign tax matters. The tax rate excluding this benefit in the year-ago period was 27.4 percent. The company expects a full-year tax rate of approximately 27 percent.
Last quarter, the company announced its intent to repurchase at least $5.3 billion of its shares in 2008, subject to market conditions. As of the end of the third quarter, the company had spent $4.2 billion repurchasing its shares in 2008. Since maintaining financial flexibility is critical in the current environment, any additional share repurchases during the balance of the year will depend upon the company's assessment of market conditions.
For PepsiCo, foreign exchange added 3 percentage points to revenue growth and 2 percentage points to operating profit growth. Acquisitions accounted for 1 percentage point of both revenue growth and operating profit growth.
Productivity for Growth
The company expects its productivity program will produce pre-tax savings of more than $1.2 billion over the next 3 years with $350 million - $400 million of cost savings flowing through in 2009. The program includes actions in all segments of the business that the company believes will simplify the organization for more effective and timely decision-making; increase cost competitiveness across the supply chain; and upgrade and streamline the product portfolio. Globally, approximately 3,300 positions will be eliminated in connection with the productivity program, of which about 40 percent relate to the closing of up to six plants and other capacity rationalization actions, which will be announced by the end of the year. As a result of the program, the company expects to incur a pre-tax charge of approximately $550 million - $600 million in the fourth quarter of 2008, comprised of: approximately $275 million of severance and other employee-related costs; approximately $200 million for asset impairments (substantially all non-cash) resulting from plant closures and related actions; and approximately $100 million for other costs. The company expects that approximately $325 million - $375 million of this charge will result in cash expenditures during the fourth quarter of 2008 and into 2009. The company currently expects to complete the productivity program during the first quarter of 2009.
The company expects that the recent surge in the U.S. dollar will likely have an adverse impact on fourth-quarter earnings. At current rates, the incremental impact would be about $0.04-$0.05 per share. As a result, the company would expect to report full-year core 2008 earnings per share in the range of $3.67 - $3.68 (excluding any commodity mark-to-market impact and Productivity for Growth costs), versus our prior EPS guidance of $3.72. The company expects full-year 2008 performance of 3 percent to 5 percent volume growth and low-double-digit net revenue growth (including acquisitions and foreign exchange). The company has revised its 2008 guidance with respect to cash provided by operating activities to be approximately $7.3 billion and capital spending to be approximately $2.5 billion, excluding Productivity for Growth costs.
Due to the unpredictability of future changes in commodity prices, the company is not able to provide guidance on 2008 projected EPS including the impact of mark-to-market gains/losses on commodity hedges.
Regarding guidance beyond 2008, Nooyi commented, "We are confident in the fundamentals of our business and the benefits we will derive from our Productivity for Growth initiatives. Given the macro economic turbulence and volatility in the currency markets, it is not feasible at this time to provide precise earnings guidance beyond fiscal year 2008." Consistent with prior practice, the company intends to provide 2009 guidance when it reports its fourth-quarter results.