Food and beverage giant PepsiCo, Inc. (PEP) on Thursday reported a 9% year-over-year growth in profit for the third quarter, helped by productivity and cost control across its businesses, despite a marginal 1.5% decline in revenues.
Excluding items, core earnings per share for the quarter grew 2%, and topped analysts' expectations by five cents. The company also reaffirmed its guidance for the full year 2009, and provided initial earnings forecast for fiscal 2010.
PepsiCo holds about one-third of the U.S. market share and is the second largest soft drink major in the world. It owns Frito-Lay snacks and other businesses. Pepsi soft drinks include brands such as Pepsi, Diet Pepsi, Slice, Mountain Dew and Mug Root Beer.
In a statement, chairman and chief executive officer, Indra Nooyi said, "PepsiCo's diversified food and beverage portfolio and our advantaged business model continued to drive solid results this quarter. Our teams around the world leveraged PepsiCo's agile go-to-market system to deliver our brands at differentiated value to consumers, who are still feeling the pinch of the global recession despite improving macroeconomic indicators."
"We will continue to make targeted investments across our entire portfolio, and we expect these to ramp up next year as we begin to realize the benefits of the integration of our two anchor bottlers," Nooyi added.
The company also noted that it is on-track with its plans to acquire its two anchor bottlers, The Pepsi Bottling Group or PBG, and PepsiAmericas, Inc. or PAS, subject to regulatory and stockholder approval.
Third Quarter Results
The Purchase, New York-based maker of Lay's potato chips and Cheetos cheese flavored snacks reported net income of $1.72 billion or $1.09 per share for the third quarter, higher than $1.58 billion or $0.99 per share in the prior-year quarter.
Excluding mark-to-market net gains/losses as well as PBG/PAS merger costs, core earnings for the quarter edged up to $1.71 billion or $1.08 per share from $1.69 billion or $1.06 per share in the
year-ago quarter. Core constant currency earnings per share were up 8%.
On average, eleven analysts polled by Thomson Reuters expected earnings of $1.03 per share for the third quarter. Analysts' estimates typically exclude special items.
Net revenue for the quarter edged down 1.5% to $11.08 billion from $11.24 billion reported in the same quarter last year, and missed nine Wall Street analysts' consensus estimate of $11.25 billion. However, net revenue grew 5.0% on a constant currency basis.
Among PepsiCo's peers, Atlanta, Georgia-based Coca-Cola Co. (KO) in July reported a 42% year-over-year surge in profit for the second quarter to $2.04 billion or $0.88 per share, helped by lower one-time charges and unit volume growth. Meanwhile, quarterly adjusted earnings per share fell 9% on negative currency impact. Coca-Cola also reported a 9% decline in quarterly operating revenues to $8.27 billion. Coca-Cola is now scheduled to report financial results for the third quarter on October 20, 2009. Analysts currently expect the company to report earnings of $0.81 per share for the third quarter, on total revenues of $8.12 billion.
Another non-alcoholic beverages maker, Plano, Texas-based Dr Pepper Snapple Group, Inc. (DPS) reported back in August a 46% year-over-year surge in profit for the second quarter to $158 million or $0.62 per share, as the year-ago quarter had charges. However, adjusted earnings per share only grew 3.3%, despite a 4% revenue decline to $1.48 billion. The company was formerly the American beverage unit of British confectionery manufacturer Cadbury Plc (CBY, CBRY.L, CDSCF.PK) before it spun off in May 2008.
Segmental Details
The company operates through three divisions: PepsiCo Americas Foods, PepsiCo Americas Beverages, and PepsiCo International. The company distributes its products through direct-store-delivery, broker-warehouse, and food service and vending distribution networks.
PepsiCo Americas Foods or PAF reported $5.01 billion in third-quarter revenues, up from $4.99 billion last year. Under PAF, Frito-Lay North America generated $3.20 billion during the third quarter, 5% more than $3.06 brought in last year. Quaker Foods North America's quarterly revenues grew 7% to $418 million from $391 million in the previous year. At Latin America Foods, revenues for the quarter dropped 10% to $1.40 billion from last year's $1.54 billion.
However, PepsiCo Americas Beverages or PAB, revenues for the quarter declined 9% to $2.66 billion from $2.92 billion in the third quarter of 2008.
PepsiCo International brought in a total of $3.41 billion, up 2.5% from $3.33 billion last year. Under PepsiCo International, Europe contributed $1.87 billion in revenues, down 2% from last year's $1.91 billion. Middle East, Africa & Asia generated $1.54 billion, 9% higher than the previous year's $1.42 billion.
Other Metrics
Operating profit for the third quarter grew 12% to $2.23 billion from $1.99 billion in the prior-year quarter. Selling, general and administrative expenses was $3.65 billion, down 8% from $3.97 billion in the year-ago quarter.
The company ended the third quarter with cash and cash equivalents of $3.25 billion, compared to $1.52 billion at end of the prior-year quarter.
In August, PepsiCo reached definitive agreements with its two largest anchor bottlers, The Pepsi Bottling Group (PBG) and PepsiAmericas (PAS), to acquire the remaining outstanding shares of common stock it does not already own in its bottlers for about $7.8 billion in cash or stock.
The acquisitions, which would create one of the largest food and beverage companies globally, are anticipated to close in late 2009 or early 2010, and are estimated to create annual pre-tax synergies of over $300 million by 2012. Further, it is anticipated to be accretive to PepsiCo's earnings by about $0.15 per share, when synergies are fully realized in 2012.
PepsiCo said Monday that it plans to form a new entity comprising the bottling businesses, effective upon closure of the two mergers. The new unit will be called PepsiCo Bottling North America or PBNA, and the current chairman and chief executive officer of PBG, Eric Foss, will become the units chief executive officer, reporting to Nooyi.
PepsiCo, which also makes Tropicana juices and Gatorade sports drinks, is already trying to strengthen its focus on international business, especially in developing markets. Consistent with its ongoing strategy to expand in emerging markets, in early July, PepsiCo together with its bottling partner Pepsi Bottling, announced its plans to invest US$1 billion in Russia over three years. PepsiCo noted that it will bring the total investment in Russia by both companies to over $4 billion. PepsiCo opened in Russia its largest bottling plant in its world network.
Under other expansions, PepsiCo in June announced the opening of its first overseas 'green' plant in China in the western city of Chongqing as it reiterated plans to invest $1 billion in the country. The facility is designed to use 22% less water and 23% less energy than the average PepsiCo plant in China. Over the next two years, the company expects to open five new beverage manufacturing plants in the country. It also announced its plans to invest to strengthen its local research and development capabilities and broaden its portfolio of Chinese-designed and developed products such as Tropicana Guo Bin Fen juices, Lay's Lychee potato chips and Cao Ben Le drinks.
PepsiCo also announced its plans to form a strategic joint venture with Japanese snack company Calbee Foods Co. to jointly produce and sell a wide range of food products in Japan, such as potato chips, vegetable snacks, breakfast cereal and prawn crackers.
Nine Month Highlights
For the nine month period, PepsiCo reported net income of $4.51 billion or $2.87 per share, higher than $4.42 billion or $2.74 per share in the prior-year period.
Excluding special items, core earnings for the period was $4.42 billion or $2.81 per share, compared to $4.50 billion or $2.79 per share in the year-ago period.
Net revenues for the year-to-date period decreased 2% to $29.94 billion from $30.52 billion in the same period last year.
Outlook
Looking ahead to fiscal 2009, PepsiCo reaffirmed its guidance for net revenue and core earnings per share of mid-to high-single-digit constant currency growth over its fiscal 2008 core earnings per share of $3.68. Analysts currently expect the company to report earnings of $3.72 per share for the full year 2009, on revenues of $43.35 billion.
Full-Year 2009 cash flow from operations is expected to reach $6.4 billion, and $7 billion excluding one time pension contribution.
Richard Goodman, PepsiCo Chief Financial Officer said, "As we prepare for 2010, we are targeting EPS growth of 11 to 13 percent in core constant currency. As we progress through 2010, if we do better than this range we will take the opportunity to make additional strategic broad-based investments in our business to enhance our competitiveness."
For fiscal 2010, the company is targeting an 11% to 13% growth rate for core constant currency earnings per share growth from the expected fiscal 2009 core earnings per share. Analysts expect the company to report earnings of $4.12 per share for fiscal 2010.
Stock Quote
Most recently, Credit Suisse reiterated its rating on Pepsico at 'Outperform' and increased the price target to $70 from $60. The brokerage also raised its 2009 earnings estimate to $3.70 per share from $3.66 per share, and 2010 estimate to $4.10 per share from $4.06 per share.
In Thursday's regular trading session, PEP is currently trading at $60.37, down $0.80 or 1.31% on a volume of 5.39 million shares. In the past 52-week period, the stock has been trading in a range of $43.78 to $65.78.
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