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PepsiCo Reports Strong Third Quarter 2007 Results

PURCHASE, N.Y., Oct. 11 /PRNewswire-FirstCall/ -- PepsiCo reported continued strong performance in the third quarter of 2007. Net revenue increased 11%; division operating profit grew 10%; and the Company generated core earnings of $0.99 per share, an increase of 11%. On a reported basis, net income grew 17% and earnings per share grew 19%, and included non-cash tax benefits of $115 million related to the resolution of certain foreign tax matters.

PepsiCo Chairman and CEO Indra Nooyi said, "Our third quarter performance was very strong, with double-digit revenue and operating profit growth. All of the Company's operating divisions successfully navigated through an environment of higher input costs in order to deliver balanced top- and bottom-line performance.

"In PepsiCo International, broad-based volume gains in snacks and beverages coupled with foreign currency tailwinds resulted in continued double-digit revenue and operating profit growth. Favorable foreign currency upsides allowed us to reinvest in several international markets in the quarter. In North America, our profit growth accelerated to 7%. Frito-Lay's strong performance continued, and 7% profit growth in our domestic beverage business marked another quarter of sequential improvement.

"Importantly, we laid the groundwork for future growth. Our successful partnerships with Unilever and Starbucks expanded internationally. We closed on the acquisition of Sandora Beverages and, with Pepsi Americas, became the leading Ukraine beverage company. In North America, we have strengthened our hydration portfolio with major product innovations and by leveraging the reach of our bottling system.

"We also advanced our efforts in sustainability and corporate social responsibility. At Frito-Lay, the Jonesboro, AR, plant received the Environmental Protection Agency's Performance Track Program distinction for its efforts to reduce waste and conserve energy. PepsiCo retained its place on the Dow Jones Sustainability North America Index, and we were proud to be added to the Dow Jones Sustainability World Index in late September."

Ms. Nooyi continued, "I am confident our strong operating performance will continue into our fourth quarter and provides a solid foundation for 2008."

    Items Affecting Diluted EPS Comparability

                               Third Quarter              Year-to-Date
                           2007     2006  % Growth    2007     2006  % Growth
    Reported Diluted EPS  $1.06    $0.89      19     $2.64     $2.26      17
    Tax Item              (0.07)     ---     ---     (0.07)      ---     ---
    Diluted EPS Excluding
     Tax Item             $0.99    $0.89      11     $2.57     $2.26      14

    Summary of PepsiCo Third Quarter 2007 Results

                                                      % Growth Rate
                                               Quarter Alone    Year to Date
    Volume (Servings)                               4                 4
    Net Revenue                                    11                10
    Division Operating Profit                      10                10
    Reported Net Income                            17                15
    Reported Earnings Per Share                    19                17
    Core EPS (excludes tax item)                   11                14

    Summary of Division Third Quarter 2007 Results

                                           % Growth Rate
                              Quarter Alone              Year to Date
                                  Net     Oper.              Net     Oper.
                        Volume  Revenue  Profit    Volume  Revenue  Profit
    FLNA                   2       6       7        2.5       6       7
    PBNA                  (1)      3       7          0       4       4
    QFNA                  (2)      2       2          1       4       2
    PI                   7/8*     22      19        9/8*     20      21
    Total Divisions    4.5/3.5*   11      10        6/4*     10      10


Frito-Lay North America (FLNA) continued strong performance with 7% operating profit growth.

Net revenue grew 6%, reflecting volume growth and favorable effective net pricing. Revenue growth was led by double-digit growth in trademark Doritos, Sunchips, multipack and dips, partially offset by modest declines in Trademark Lay's. Quaker Chewy Granola and Rice Snacks led the Quaker snacks portfolio, growing revenue double-digits.

Operating profit grew 7%, reflecting the revenue and continued productivity gains, partially offset by higher commodity costs and increased marketing investments.

PepsiCo Beverages North America (PBNA) profits grew 7% on revenue growth of 3%.

Bottler case sales volume declined 1% in the quarter. Carbonated soft drinks (CSD) declined 3% while non-carbonated beverages grew 2%. Non- carbonated volume performance was led by Lipton ready-to-drink teas and energy drinks, growing strong double-digits, and trademark Aquafina, growing mid- single-digits. Gatorade sports drinks and our portfolio of juice and juice drinks both declined mid-single digits. The juice and juice drinks decline was primarily a result of the increased pricing to offset input costs.

Net revenue grew 3%, driven by positive net pricing. Acquisitions contributed 2 percentage points of growth.

Operating profits grew 7%, driven by the revenue gains partially offset by higher input costs. Lower amortization expenses related to a prior acquisition added 3 percentage points of growth. Acquisitions reduced operating profit by 1 percentage point.

Quaker Foods North America (QFNA) increased both revenue and operating profit 2%.

PepsiCo International (PI) revenue grew 22%, and profits increased 19% on strong snacks and beverage growth.

Snacks volume grew 7%, driven by double-digit growth at Gamesa in Mexico, Russia, the Middle East, Brazil, China and India. Walkers in the U.K. had modest declines as a result of category softness. Sabritas volume was down mid-single-digits, but this was in line with our expectations following pricing actions taken towards the end of 2006.

Beverage volume grew 8%, led by double-digit growth in Pakistan, China, the Middle East and Russia, partially offset by a slight decline in Mexico. In total, CSDs grew at a high-single-digit rate, posting growth in each of the division's four largest trademarks - Pepsi, 7-Up, Mirinda and Mountain Dew. Non-carbonated beverages grew at a double-digit rate, led by 40% growth in Lipton ready-to-drink tea and solid performance across the remaining non- carbonated portfolio.

    PI Regional Volume Growth Third Quarter 2007 Results

                                 Snacks                     Beverages
    % Growth Rate     Quarter Alone  Year to Date  Quarter Alone  Year to Date
    Latin America           5              7             3             4
    Europe, Middle East
     and Africa             7             10             9            10
    Asia                   20             19            12             8
       Total PI             7              9             8             8

Net revenue grew 22%, driven by the volume growth and favorable effective net pricing. Foreign currency translation contributed 6 percentage points of growth. The net impact of acquisitions and divestitures contributed 7 percentage points of growth.

Operating profit grew 19%, driven by the revenue growth and scale leverage, partially offset by increased raw material costs. Foreign currency translation was less than 6 percentage points of growth, and the net impact of acquisitions and divestitures was minimal. The combination of several other items - lower amortization expenses, higher costs related to international SAP implementation and favorable items in 2006 - reduced operating profits by 3 percentage points.

Division operating profit and share repurchases drove EPS growth.

Corporate unallocated expenses were up slightly with increased mark-to- market commodity hedge losses of $28 million offset by lower deferred compensation and other gains. Net interest expense increased $24 million, reflecting both losses on investments used to hedge deferred compensation expenses as well as higher net debt balances due to acquisitions. Bottling equity income increased $14 million on higher income at our anchor bottlers. Share repurchases in the quarter reduced shares outstanding by 2.2%. Year-to- date, cash returned to shareholders was up 34%, consisting of $1.6 billion in dividends and $3.1 billion in share repurchases.

The Company's reported tax rate was 22.3%, which included tax benefits of $115 million related to the resolution of certain foreign tax matters. Excluding this item, our comparable tax rate was 27.4%, an increase versus last year's rate of 27.0%. For the full year 2007, the reported tax rate is expected to be 26.2%.

2007 core earnings and cash flow guidance unchanged.

The Company reiterated its previous guidance of full-year core earnings of at least $3.35 per share. This guidance now includes the expectation that the tax rate will be affected both in 2007 and in subsequent years by the recent tax law changes in Mexico. The impact of this legislation is still under review, but the Company estimates that the core rate in 2007 will be greater than the previous guidance of 27.3% and probably not exceed 27.7%. The 2007 change relates to the deferred tax impact of the new Mexican legislation.

The reported numbers for the year will also include a non-cash gain of $115 million, or $0.07 per share, related to the settlement of certain foreign tax matters. The Company expects to record charges in the fourth quarter of approximately $0.03 per share related to certain restructuring actions, primarily related to plant closings and the rationalization of production lines.

Cash provided by operating activities is expected to be at least $7 billion, slightly ahead of prior guidance, and net capital spending to be approximately $2.6 billion -- in-line with prior guidance.

About PepsiCo

PepsiCo (NYSE:PEP) is one of the world's largest food and beverage companies, with 2006 annual revenues of more than $35 billion. The company employs approximately 168,000 people worldwide, and its products are sold in approximately 200 countries. Its principal businesses include: Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices and Quaker foods. The PepsiCo portfolio includes 17 brands that generate $1 billion or more each in annual retail sales. PepsiCo's commitment to sustainable growth, defined as Performance with Purpose, is focused on generating healthy financial returns while giving back to communities the company serves. This includes meeting consumer needs for a spectrum of convenient foods and beverages, reducing the company's impact on the environment through water, energy and packaging initiatives, and supporting its employees through a diverse and inclusive culture that recruits and retains world-class talent. PepsiCo is listed on the Dow Jones Sustainability North America Index and Dow Jones Sustainability World Index. For more information, please visit

Cautionary Statement

This release contains statements concerning PepsiCo's expectations for future performance. Any such forward-looking statements are inherently speculative and are based on currently available information, operating plans and projections about future events and trends. As such, they are subject to numerous risks and uncertainties. Actual results and performance may be significantly different from expectations. The Company undertakes no obligation to update any such forward-looking statements. Please see the Company's filings with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K, for a discussion of specific risks that may affect performance.

Miscellaneous Disclosures

Conference Call. At 11 a.m. (Eastern Time) today, the Company will host a conference call with investors to discuss third-quarter 2007 results and the outlook for the full-year 2007. For details, visit the Company's website at

Reconciliation. In discussing financial results and guidance, the Company may refer to certain non-GAAP measures. Reconciliations of any such non-GAAP measures to the most directly comparable financial measures in accordance with GAAP can be found under "PepsiCo Financial Press Releases" on the Company's website at in the "Investors" section.

Bottler Volume. Volume for products sold by PepsiCo's bottlers is reported by PepsiCo on a monthly basis, with the third quarter comprising June, July and August.

Bottler Case Sales (BCS). BCS represents physical beverage volume shipped to retailers and independent distributors from both PepsiCo and our bottlers.

Concentrate Shipment Equivalents (CSE). CSE represents PepsiCo's physical beverage volume shipments to bottlers, retailers and independent distributors.

"Effective net pricing" refers to the combined impact of mix and price. "Net pricing" refers to the combined impact of list price changes, discounts and allowances. "Pricing" refers to the impact of list price changes.

    Acquisition impacts to PI regional volume growth:  For the quarter,
acquisitions contributed 10 points to Asia Pacific region snacks volume and 1
point to total snacks.   For the year to date, acquisitions contributed 2
points to EMEA snacks, 10 points to Asia Pacific snacks and 2 points to total

                        PepsiCo, Inc. and Subsidiaries
                  Condensed Consolidated Statement of Income
              (in millions except per share amounts, unaudited)

                                          12 Weeks Ended     36 Weeks Ended
                                          9/8/07   9/9/06    9/8/07   9/9/06

    Net Revenue                          $10,171   $9,134   $27,128  $24,567
    Costs and Expenses
     Cost of sales                         4,627    4,108    12,254   10,932
     Selling, general and administrative
      expenses                             3,467    3,129     9,397    8,614
     Amortization of intangible assets        15       41        37      108
    Operating Profit                       2,062    1,856     5,440    4,913
    Bottling Equity Income                   218      204       465      440
    Interest Expense                         (57)     (51)     (153)    (172)
    Interest Income                           21       39        82      110
    Income before Income Taxes             2,244    2,048     5,834    5,291
    Provision for Income Taxes               501      554     1,438    1,475
    Net Income                            $1,743   $1,494    $4,396   $3,816
     Net Income Per Common Share           $1.06    $0.89     $2.64    $2.26
     Average Shares Outstanding            1,651    1,688     1,663    1,690

                        PepsiCo, Inc. and Subsidiaries
                      Supplemental Financial Information
                           (in millions, unaudited)

                                       12 Weeks Ended       36 Weeks Ended
                                       9/8/07    9/9/06     9/8/07    9/9/06
    Net Revenue
    Frito-Lay North America            $2,800    $2,642     $8,076    $7,602
    PepsiCo Beverages North America     2,698     2,608      7,411     7,104
    PepsiCo International               4,262     3,482     10,377     8,643
    Quaker Foods North America            411       402      1,264     1,218
    Total Net Revenue                 $10,171    $9,134    $27,128   $24,567

    Operating Profit
    Frito-Lay North America              $742      $694     $2,034    $1,897
    PepsiCo Beverages North America       649       603      1,724     1,657
    PepsiCo International                 707       595      1,762     1,460
    Quaker Foods North America            126       123        399       389
    Division Operating Profit           2,224     2,015      5,919     5,403
    Corporate                            (162)     (159)      (479)     (490)
    Total Operating Profit             $2,062    $1,856     $5,440    $4,913

                        PepsiCo, Inc. and Subsidiaries
                Condensed Consolidated Statement of Cash Flows
                           (in millions, unaudited)

                                                             36 Weeks Ended
                                                           9/8/07     9/9/06
    Operating Activities
       Net income                                          $4,396     $3,816
       Depreciation and amortization                          948        940
       Stock-based compensation expense                       182        191
       Excess tax benefits from share-based payment
        arrangements                                         (118)       (91)
       Pension and retiree medical plan contributions        (155)       (90)
       Pension and retiree medical plan expenses              362        370
       Bottling equity income, net of dividends              (398)      (381)
       Deferred income taxes and other tax charges and
        credits                                                (3)        48
       Change in accounts and notes receivable               (844)      (785)
       Change in inventories                                 (244)      (246)
       Change in prepaid expenses and other current assets     51          2
       Change in accounts payable and other current
        liabilities                                           324        263
       Change in income taxes payable                         830        242
       Other, net                                            (161)        (8)
    Net Cash Provided by Operating Activities               5,170      4,271

    Investing Activities
       Capital spending                                    (1,260)    (1,130)
       Sales of property, plant and equipment                  23         37
       Proceeds from (Investment in) finance assets             3        (11)
       Acquisitions and investments in noncontrolled
        affiliates                                           (988)      (444)
       Cash proceeds from sale of The Pepsi Bottling Group
        (PBG) stock                                           296        285
       Short-term investments, net                            (23)     1,099
    Net Cash Used for Investing Activities                 (1,949)      (164)

    Financing Activities
       Proceeds from issuances of long-term debt            1,005         25
       Payments of long-term debt                            (542)      (136)
       Short-term borrowings, net                            (402)    (2,034)
       Cash dividends paid                                 (1,598)    (1,359)
       Share repurchases - common                          (3,123)    (2,157)
       Share repurchases - preferred                           (8)        (7)
       Proceeds from exercises of stock options               666      1,008
       Excess tax benefits from share-based payment
        arrangements                                          118         91
    Net Cash Used for Financing Activities                 (3,884)    (4,569)

    Effect of Exchange Rate Changes on Cash and Cash
     Equivalents                                               47         12
    Net Decrease in Cash and Cash Equivalents                (616)      (450)

    Cash and Cash Equivalents - Beginning of year           1,651      1,716
    Cash and Cash Equivalents - End of period              $1,035     $1,266

                        PepsiCo, Inc. and Subsidiaries
                     Condensed Consolidated Balance Sheet
                                (in millions)

                                                          9/8/07    12/30/06
    Assets                                             (unaudited)
    Current Assets
       Cash and cash equivalents                          $1,035      $1,651
       Short-term investments                              1,203       1,171

       Accounts and notes receivable, net                  4,764       3,725

         Raw materials                                     1,086         860
         Work-in-process                                     209         140
         Finished goods                                      988         926
                                                           2,283       1,926

       Prepaid expenses and other current assets             662         657
            Total Current Assets                           9,947       9,130

    Property, plant and equipment, net                    10,397       9,687
    Amortizable intangible assets, net                       662         637

    Goodwill                                               4,814       4,594
    Other nonamortizable intangible assets                 1,227       1,212
            Nonamortizable Intangible Assets               6,041       5,806

    Investments in noncontrolled affiliates                3,997       3,690
    Other assets                                           1,364         980
               Total Assets                              $32,408     $29,930

    Liabilities and Shareholders' Equity
    Current Liabilities
       Short-term obligations                                $27        $274
       Accounts payable and other current liabilities      7,291       6,496
       Income taxes payable                                  785          90
            Total Current Liabilities                      8,103       6,860

    Long-term debt obligations                             2,954       2,550
    Other liabilities                                      4,781       4,624
    Deferred income taxes                                    326         528
            Total Liabilities                             16,164      14,562

    Commitments and Contingencies

    Preferred stock, no par value                             41          41
    Repurchased preferred stock                             (128)       (120)

    Common Shareholders' Equity
       Common stock                                           30          30
       Capital in excess of par value                        461         584
       Retained earnings                                  27,526      24,837
       Accumulated other comprehensive loss               (1,837)     (2,246)
                                                          26,180      23,205
       Less: Repurchased common stock                     (9,849)     (7,758)
            Total Common Shareholders' Equity             16,331      15,447
             Total Liabilities and Shareholders' Equity  $32,408     $29,930

                        PepsiCo, Inc. and Subsidiaries
             Supplemental Share and Stock-Based Compensation Data
             (in millions, except dollar amounts, and unaudited)

                                    12 Weeks Ended          36 Weeks Ended
                                 9/8/07       9/9/06      9/8/07       9/9/06
    Beginning Net Shares
     Outstanding                  1,621        1,650       1,639        1,656
    Options Exercised/ Restricted
     Stock Units Converted            6            8          19           27
    Shares Repurchased              (17)         (11)        (48)         (36)
    Ending Net Shares Outstanding 1,610        1,647       1,610        1,647

    Weighted Average Basic        1,615        1,648        1,627       1,652
    Dilutive Securities:
     Options                         30           33           30          32
     Restricted Stock Units           4            5            4           4
     ESOP Convertible Preferred
      Stock/Other                     2            2            2           2
    Weighted Average Diluted      1,651        1,688        1,663       1,690

    Average Share Price for
     the Period                  $66.93       $62.52       $65.73      $60.05
    Growth Versus Prior Year         7%                        9%

    Options Outstanding             119          133          126         141
    Options in the Money            119          133          122         141
    Dilutive Shares from Options     30           33           30          32

    Dilutive Shares from Options
     as a % of Options in the
     Money                          25%          25%          25%         23%

    Average Exercise Price of
     Options in the Money        $46.84       $44.12       $45.92      $43.82

    Restricted Stock Units
     Outstanding                      7            8            8           8
    Dilutive Shares from
     Restricted Stock Units           4            5            4           4

    Average Intrinsic Value of
     Restricted Stock Units
     Outstanding*                $58.50       $52.94       $58.46      $52.95

    * Weighted-average intrinsic value at grant date

               Reconciliation of GAAP and Non-GAAP Information
              (in millions except per share amounts, unaudited)

In the third quarter of 2007, we recognized $115 of non-cash tax benefits related to the favorable resolution of certain foreign tax matters. Additionally, in the fourth quarter of 2007, we have approved certain restructuring actions, and are considering others, relating to plant closings, as well as the rationalization of certain production lines in both our international and domestic businesses.

The financial measures listed below are not measures defined by generally accepted accounting principles (GAAP). However, we believe investors should consider these measures as we believe they are more indicative of our ongoing performance and with how management evaluates our operational results and trends. Specifically, investors should consider the following with respect to our results:

    -- Our 2007 division operating profit and division operating profit
    -- Our 2007 north american operating profit growth;
    -- Our 2007 effective tax rate without the impact of the tax benefits;
    -- Our 2007 full-year effective tax rate guidance without the impact of
       the tax benefits and the restructuring actions;
    -- Our 2007 diluted EPS and diluted EPS growth without the impact of the
       tax benefits; and
    -- Our 2007 full-year diluted EPS guidance without the impact of the tax
       benefits and the restructuring actions.

    Operating Profit Growth Reconciliation

                                              12 Weeks       36 Weeks
                                              Ended          Ended
                                              9/8/07         9/8/07
    Total operating profit growth                11%            11%
    Impact of corporate unallocated              (1)            (1)
    Division operating profit growth             10%            10%

    PepsiCo North American Operating Profit Growth Reconciliation

                                              12 Weeks       12 Weeks
                                              Ended          Ended
                                              9/8/07         9/9/06    Growth
    PepsiCo north american operating profit   $1,517         $1,420        7%
    PepsiCo International operating profit       707            595
    Corporate unallocated                       (162)          (159)
    Total PepsiCo reported operating profit   $2,062         $1,856       11%

    Effective Tax Rate Reconciliation

                                              12 Weeks       12 Weeks
                                              Ended          Ended
                                              9/8/07         9/9/06
    Reported effective tax rate                 22.3%          27.0%
    Tax benefits                                 5.1              -
    Effective tax rate excluding tax benefits   27.4%          27.0%

    Full-Year Effective Tax Rate Guidance Reconciliation
    Reported effective tax rate                                       26.2%
    Tax benefits                                                       1.5
    Restructuring actions                                                -
    Effective tax rate excluding above items                          27.7%

    Full-Year Diluted EPS Guidance Reconciliation
    Reported diluted EPS                                            $ 3.39+
    Tax benefits                                                     (0.07)
    Restructuring actions                                             0.03
    Diluted EPS excluding tax benefits and restructuring actions    $ 3.35+

Source: PepsiCo, Inc.

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