“We’re focused on growing our business by providing consumers around the globe with great tasting products they love at a good value, and we believe this quarter’s performance is a good indication that our efforts are working,” said PepsiCo chairman and CEO Indra Nooyi. “We had strong revenue growth across our product portfolio and across our key geographic markets. We were able to achieve pricing to partially offset commodity cost inflation and at the same time stimulate consumer demand for our products. The result in the quarter was well-balanced top-line and bottom-line growth.”
Worldwide snacks volume increased 8%, reflecting broad-based gains in the snacks portfolio and the impact of the WBD acquisition. Excluding the impact of the WBD acquisition, snacks volume grew 3%. Worldwide beverage volume increased 4%, including a 3-percentage-point impact from the WBD acquisition. Volume performance was led by growth in emerging markets, where organic volume increased 8% in snacks and 3% in beverages.
Reported net revenue increased 13% reflecting the benefits of volume growth, effective net pricing and favorable foreign exchange. Reported net revenue grew 33% in emerging markets. Excluding the WBD acquisition, net revenue grew 9% worldwide and 18% in emerging markets.
Total operating profit increased 4% on a reported basis, reflecting higher corporate unallocated costs in 2011 that were driven by a postretirement gain in the prior year. Total division operating profit increased 7%. Reported net income increased 4%, and reported EPS increased 5% to $1.25.
Core division operating profit increased 6%, reflecting the benefits of net revenue gains, synergies from the anchor bottler acquisitions, productivity, favorable foreign exchange and the impact of the WBD acquisition, somewhat offset by inflation in commodity and other operating costs. Core EPS of $1.31 increased 7%, driven by operating profit growth and a lower year-over-year core income tax rate.
All comparisons are on a year-over-year basis unless otherwise noted.
Division Operating Summaries
PepsiCo Americas Foods (PAF)
Frito-Lay North America (FLNA)
FLNA volume increased 1% and net revenue grew 4% in the quarter driven by strong growth in club, convenience, dollar and drug channels. Lay’s, Doritos, Cheetos and Ruffles posted strong revenue growth driven by innovation and price realization as the division executed its planned pricing actions in the quarter. Operating margins expanded in the quarter reflecting the benefits of net revenue growth and productivity.
Latin America Foods (LAF)
Volume grew 3.5% in the quarter reflecting solid gains in the division’s largest markets, Mexico and Brazil, and strong growth in a number of key markets across Central and South America. Growth was driven by a strong innovation agenda, successful brand promotions, consumer value initiatives and marketplace execution. Strong price realization led to double-digit revenue and operating profit growth, although operating profit growth was impacted by higher commodity inflation.
Quaker Foods North America (QFNA)
Strong effective net pricing led to net revenue growth and operating profit growth. Both gross margins and operating margins expanded in the quarter, reflecting strong effective net pricing and solid cost controls offsetting commodity inflation.
PepsiCo Americas Beverages (PAB)
PAB volume increased slightly and net revenue increased 3% reflecting incremental pricing actions taken in the quarter across much of the portfolio. Mid-single-digit volume growth in non-carbonated beverages offset declines in CSDs. Non-carbonated beverage volume growth in North America was led by a 9% increase in Gatorade which was overlapping a 15% increase in the prior year. Within the U.S., the company’s volume share of the liquid refreshment beverage category grew slightly in the quarter. Latin America Beverages delivered solid volume growth in the quarter driven primarily by strength in Mexico, Central America and Brazil.
Operating profit declined as a result of increased commodity and other operating costs in the quarter which offset the benefits of net pricing, productivity and synergies from the anchor bottler acquisitions.
Europe
Europe reported double-digit volume gains in both snacks and beverages, including the impact of the WBD acquisition. Organic snacks volume increased 4% led by double-digit growth in Turkey and France. Organic beverage volume declined mid-single digits, lapping 10% organic volume growth in the third quarter of 2010, resulting in two-year organic beverage volume growth of 6%. Net revenue increased 37% reflecting the benefit of the WBD acquisition and solid effective net pricing.
Operating profit performance benefited from the impact of the WBD acquisition and effective net pricing, offset somewhat by high levels of input cost inflation and timing of concentrate shipments.
Asia, Middle East & Africa (AMEA)
Snacks volume increased 16% and beverage volume grew 6%, led by strong performance in key emerging markets. Net revenue increased 25%, driven by favorable pricing and volume growth.
Snacks volume grew double-digits in the Middle East, India, China and Thailand. Beverage volume growth was driven by double-digit gains in India and Saudi Arabia. China beverage volume growth was impacted by the introduction of a consumer-preferred 500ml PET value package, which drove strong unit and net revenue growth but adversely impacted reported volume growth.
Operating profit growth of 21% reflected volume gains and effective net pricing offset by higher commodity costs and timing of concentrate shipments.
Tax Rate
PepsiCo’s reported and core tax rate was 25.4% in the third quarter of 2011 versus a reported and core tax rate of 27.4% in the third quarter of 2010. The reduction in the tax rate was driven primarily by adjustments to previous estimates of geographic earnings mix. The company’s reported tax rate was 26.0% year to date in 2011, compared to 21.7% in 2010. The company’s core tax rate was 25.8% year to date in 2011, compared to 26.9% in 2010.
Cash Flow
Year-to-date cash flow from operating activities was $5.8 billion. Management operating cash flow, net of capital spending, was $3.9 billion, including $223 million of merger and integration payments associated with the bottler and WBD acquisitions and $91 million of capital spending related to the bottler integrations. Management operating cash flow excluding these items was $4.2 billion.
2011 Guidance
For 2011, the company is targeting high-single-digit earnings per share growth on a core, 52-week basis, including an estimated foreign exchange translation benefit of approximately 1%age point, from its fiscal 2010 core EPS of $4.13. The company’s guidance reflects uncertainty regarding macroeconomic and consumer trends for 2011 and anticipates high global commodity cost inflation and ongoing support of strategic initiatives in emerging markets and brand building activities. The company expects 2011 earnings to benefit from synergies from the bottler acquisitions and the acquisition of WBD. In addition, the company expects higher net interest expense as compared to the prior year and a core tax rate of approximately 27%. The company anticipates share repurchases of approximately $2.5 billion in 2011.
From the October 12, 2011, Prepared Foods' Daily News.
