Last updated: April 17, 2014 9:18 pm

Snack appetite fuels PepsiCo profit

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PepsiCo’s profit rose 13 per cent in the first quarter, as higher snack sales offset a flat drinks business, while the food and beverage maker also trimmed costs.

Net income increased to $1.22bn, or 79 cents a share, from $1.08bn, or 69 cents a share, a year ago. Stripping out restructuring charges and commodity hedges, earnings lifted nearly 8 per cent to 83 cents a share, beating analysts’ forecasts of 75 cents.

Revenue of $12.62bn was 0.3 per cent higher than $12.58bn in the first quarter of 2013 and exceeded Wall Street’s estimate of $12.4bn. Excluding restructuring changes and currency effects, organic revenue was up 4 per cent.

Global sales of food, including Lay’s crisps, Quaker oatmeal and Sabra hummus, rose 2 per cent, while sales of drinks such as Pepsi-Cola, Gatorade and Tropicana juice were flat around the world. Organic revenue rose 5 per cent for global snacks and 3 per cent for beverages.

“This was a solid global performance for PepsiCo,” said Nik Modi, analyst at RBC Capital Markets, noting that the company beat estimates for volume growth in most regions.

Pepsi and its rivals Coca-Cola and Dr Pepper Snapple have been grappling with a long-term decline in fizzy drinks consumption in developed markets like the US, where consumers are cutting back on sugar. More recently, the companies have also seen diet soda sales shrink, which executives and industry watchers attribute to concerns over artificial sweeteners.

In North America, Pepsi’s biggest market, beverage volumes were flat, with a 1 per cent drop in fizzy drinks offsetting a 2 per cent increase in non-carbonated drinks like water, tea and juice. Still, the results were better than the 2.7 per cent drop in drink volumes analysts had expected.

On Tuesday, Coke reported its first fall in global sparkling beverages in nearly 15 years and said first-quarter profit was down 7.5 per cent from a year ago.

Pepsi’s Frito-Lay North America snack businesses posted 3 per cent volume growth, beating estimates of 1.7 per cent.

In Latin America, beverage sales fell 1 per cent and snack sales were down 3 per cent as Mexico’s tax on sugary drinks and junk food went into effect.

Overall emerging market organic revenue increased 9 per cent in the quarter, led by growth in Russia, Brazil and India, but net revenue was down 2 per cent due to restructuring and unfavourable foreign exchange rates.

Pepsi has come under additional pressure from Nelson Peltz, the activist investor whose Trian Partners owns a 0.8 per cent stake in the company, to split its fast-growing food business from the slower beverage unit.

Indra Nooyi, Pepsi chief executive, has pushed back against Mr Peltz, saying the businesses can grow better together. On Thursday she said: “Our results reflect the power of our portfolio of products and brands and our geographic footprint.”

Hugh Johnston, chief financial officer, pointed to the company’s 9 per cent net profit growth in 2013, saying, “it’s not clear that anyone would want to disrupt that kind of performance with large-scale M&A transactions.”

Ms Nooyi has said Pepsi expects about two-thirds of future revenue growth to come from snack sales, and two-thirds to be driven by emerging markets.

She said the company was on track with its plan to cut $1bn in costs this year, part of an existing three-year plan. Pepsi said in February it would cut another $5bn over five years starting in 2015.

Mark Swartzberg of Stifel said the better than expected sales in the Frito-Lay North American and Americas drinks units “aids management’s defence of its one-company decision but [we] also think management remains in an active conflict with shareholders”.

Pepsi shares rose 0.8 per cent to $85.55 on Thursday in New York.

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