(PEP) PepsiCo Beats, Reaffirms Guidance

October 8th, 2009

PepsiCo Inc. (PEP) reported strong third quarter results with earnings of $1.09 per share. This was 6 cents above the Zacks Consensus Estimate of $1.03 and up 10.1% year-over-year. The strong results were driven by the company’s balanced approach towards product innovation and cost control measures.

However, net sales for the quarter declined marginally by 1.5% year-over-year to $11.1 billion. The decline was attributable to negative sales in Latin America Foods – LAF (-9.6%), PepsiCo America Beverages – PAB (-9.1%) and Europe (-2%). This more than offset the growth in Frito-Lay North America – FLNA (+4.6%), Quaker Foods North America – QFNA (+6.9%), Middle East/Asia/Africa – MEAA (+8.6%) and PepsiCo International (+2.5%).

The FLNA segment reported a 3% increase in volume and a 5% increase in revenue. Volume growth reflects high single-digit growth in the Lay’s brand, coupled with strong gains in FLNA’s joint venture with Sabra and in variety packs.

The QFNA segment posted volume growth of 8% and net revenue growth of 7%. Growth in volume and net revenue were favorably impacted by the overlap of last year’s flood-related production disruptions at the key Cedar Rapids manufacturing facility.

In the PAB segment, volume declined 6% and net revenue contracted 7%. The overall performance of the segment reflects continued softness in the overall liquid refreshment beverage category in North America.

The LAF segment recorded a 3% decline in volume, while net revenue increased 10% percent. LAF’s results were driven by pricing actions, disciplined cost control and productivity improvements across the region, all of which helped to offset commodity and foreign-exchange-related input cost inflation.

In the European segment, snacks volume declined 1%, reflecting pricing actions and to offset commodity inflation. However, beverage volume of the segment grew 9% attributable to the Lebedyansky acquisition.

In the AMEA segment, net revenue grew 7% percent, beverage volume grew 9% and snacks volume grew 8%. These results were driven primarily driven by the company’s strong performance in key markets such as India and China.

Gross margins for the quarter improved marginally 9 basis points (bps) to 53.2% versus 53.1% in the comparable prior-year quarter. The increase was driven by effective pricing actions and cost-control measures, which fully offset the impact of commodity costs. The operating margin for the quarter expanded 243 bps to 20.1% from 17.7% in the prior-year quarter.

Cash and cash equivalents at the end of the first nine months were $3.3 billion and the company has a debt-to-capitalization ratio of 32%.

Based on the performance of the company year-to-date, management reaffirmed its 2009 guidance for both net revenue and EPS in the mid-to high-single-digit range. At current prices, foreign exchange translation will adversely impact results in the mid single-digit percentage range.

Since the company expects to close the proposed acquisitions of Pepsi Bottling Group (PBG) and Pepsi Americas Inc. (PAS) by late 2009 or early 2010, the company’s 2009 guidance does not include the impact of the proposed acquisitions.

For fiscal 2010, the company expects 11% to 13% growth for GAAP EPS.

Zacks Investment Research
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(PEP) PepsiCo Beats, Reaffirms Guidance

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