Moneycontrol
Jul 25, 2013 01:52 PM IST | Source: ft.com

PepsiCo argues against break-up with results

PepsiCo's profits rose in the second quarter as it raised prices and increased sales while cutting costs. Net income at the maker of Mountain Dew and Doritos rose 35 per cent to USD 2.01bn, or USD 1.28 a share, from USD 1.49bn, or 94 cents a share last year.


PepsiCo's profits rose in the second quarter as it raised prices and increased sales while cutting costs, results that the company said bolstered its case for keeping its snacks and drinks businesses together.


Net income at the maker of Mountain Dew and Doritos rose 35 per cent to USD 2.01bn, or USD 1.28 a share, from USD 1.49bn, or 94 cents a share last year.


On the basis preferred by the company and analysts, core profits rose to USD 1.31 a share from USD 1.12 a year ago, including gains from the sale of Vietnam bottling operations. That blew past Wall Street's estimates of USD 1.19.


Revenue grew 2.1 per cent to USD 16.8bn from USD 16.5bn, in line with expectations, as stronger food sales offset weak drinks performance in the US and Europe.


The results came as chief executive Indra Nooyi has been pushing back against calls from activist investor Nelson Peltz to break up PepsiCo's snacks and soda businesses. Ms Nooyi said she was "pleased" with the results and hailed the strength of the company's "diverse but highly complementary portfolio of brands and products".


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The company said its range of products, from Tropicana juices and Gatorade sports drinks to Quaker oatmeal and Lay's potato crisps, enabled it to improve its results in the quarter despite a cold, wet spring that damped sales of rival Coca-Cola's beverages.


"The portfolio is what enables you to power through these things," Hugh Johnston, chief financial officer, told CNBC on Wednesday.


However, Ms Nooyi acknowledged that PepsiCo faces structural difficulties in its largest drinks market. "The fact remains that the beverage category in the US has its challenges, especially [carbonated soft drinks]," she said. Global drinks sales volumes rose 1.5 per cent, while snacks were up 3 per cent.


Beverage sales in the Americas fell 3.5 per cent, with North American sales dropping in the mid-single digits. As a result, the division's revenue fell 2 per cent. Drinks sales were flat in Europe.


By contrast, the Americas food business showed 2 per cent sales growth combined with price increases to help boost revenue 5 per cent, continuing the trend of higher demand for salty snacks and offsetting the impact of falling US soft drink consumption.


International growth was also strong, with revenue rising 6 per cent in Asia, the Middle East and Africa as snacks and beverages sales volume rose 6 per cent and 9 per cent, respectively.


On a call with investors, Ms Nooyi reiterated her resistance to Mr Peltz's push for PepsiCo to combine its fast-growing snacks business with Oreo and Cadbury maker Mondelez and spin off its slow-growth beverage division.
"We do not need large scale M&A to achieve our financial goals," she said.
Mr Johnston also rebuffed Mr Peltz's plan, telling CNBC: "The complexity of taking on an USD 80bn acquisition and somehow trying to do all that integration, frankly, will distract the business from doing what it is that we're doing right now, which is creating a lot of value for shareholders."


The company maintained its full-year outlook for a 7 per cent rise in earnings on a core currency basis, but said it now expects foreign exchange fluctuations to shave 2 percentage points from profits, higher than an earlier forecast of 1 percentage point.


After earlier pressure from investors to split up food and drinks, Ms Nooyi last year announced a "reset" that saw the company increase advertising and marketing spending on its biggest brands while trimming costs.
"We take this as evidence last year's rebasing is working, producing broadly improved revenue trends," said Mark Swartzberg, Stifel analyst, on Wednesday.

PepsiCo has said it is considering restructuring its underperforming North American beverage business, which has lost share to Coca-Cola in recent years, and will update investors in February. Analysts say options include a spin-off of the unit or new distribution deals with independent bottlers.
The company's shares fell 0.1 per cent to USD 86.08 in early trading in New York.

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