PepsiCo Beats, Reaffirms Guidance

PepsiCo Inc. (PEP - Analyst Report) 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 - Analyst Report) and Pepsi Americas Inc. (PAS - Snapshot Report) 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.