US: Strong Q3 for PepsiCo, FY upped
A strong performance in international markets has helped PepsiCo report a 73% increase in third quarter earnings per share to US$0.88, compared to the same period last year.
The company said yesterday (12 October) that it was raising its full year earnings estimates, despite a fall in carbonate volumes in the key North American market.
Earnings growth included the impact of a $0.27 per share tax charge incurred in the prior year related to the company's repatriation of cash. Excluding the impact of the prior year tax charge, EPS increased 12%.
PepsiCo CEO Indra Nooyi said: "We are very pleased with our performance for the quarter, especially as we are cycling very strong performance from the third quarter of 2005 - when revenue was up 13% and division operating profit increased 14%.
"Each of our businesses had very strong top line growth," she continued. "Our international business in particular performed very well, with double-digit sales and operating profit gains. This quarter demonstrates the flexibility we have within our portfolio to overcome cost challenges and competitive pressures to deliver strong top line and bottom line results."
The company said that, whilst operating profit performance benefited from sales gains, operating margins were affected by higher costs and increased marketplace spending, principally within the PepsiCo Beverages North America (PBNA) division.
In particular, cost increases were driven by higher orange costs - a key input for the company's Tropicana Pure Premium product - and by higher supply chain costs for Gatorade to meet increases in peak seasonal demand. In addition, the company increased discretionary marketplace investment at PBNA. The impact of the higher costs and the marketplace investment accounted for more than the total operating margin decline.
"We are very confident in our outlook for the balance of the year as all our businesses are performing well," said Nooyi. "Given the strength of the company's performance through the first three quarters of 2006 and our outlook for the fourth quarter, we are increasing our full-year 2006 earnings guidance to at least $2.98 per share, which represents a double-digit increase to both our reported and core 2005 earnings, and exceeds by $0.05 per share the earnings target we set at the beginning of 2006."
At PBNA, volume growth was driven by a 13% increase in non-carbonated beverages, partially offset by a 2% decline in carbonated soft drinks (CSDs) in the quarter. The non-carbonated portfolio performance was driven by double-digit gains in Aquafina, Lipton ready-to-drink teas and Propel fitness water, and high-single-digit growth in Gatorade sports drinks.
The CSD decline reflected a low-single-digit decline in trademark Pepsi, offset slightly by a positive performance for Mountain Dew and Sierra Mist. Diet CSDs across all trademarks posted a slight gain, while regular CSDs declined low-single digits.
Net revenue grew in line with volume. Positive mix benefits, reflecting the strength of non-carbonated beverages, and price increases were offset by higher trade incentives and the timing of concentrate shipments to bottlers. Favourable Canadian foreign exchange rates contributed approximately 0.5%age point to net revenue growth.
Operating profit declined 4%, as the division faced its most difficult comparison from the prior year, when operating profit increased 16%, the company said.
Meanwhile, international beverage volume grew 8%, driven by mid-single-digit growth in CSDs and double-digit growth in non-carbonated beverages. Broad-based gains were led by double-digit growth in the Middle East, China, Russia and Argentina.
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