PepsiCo Inc.'s profit fell 21 per cent in the second quarter, as a deal to
expand its business in China and a stronger dollar offset growth overseas.
The company, whose brands include Frito-Lay, Gatorade and Tropicana, said on Wednesday that it booked charges in the quarter related to the refranchising of its beverage business in China to Tingyi Holding Corp. The move is considered key because it dramatically expands PepsiCo's reach in a fast-growing region.
The company, based in Purchase, N.Y., also faces another wrinkle in its plans to revive its business this year: a strengthening dollar.
When the dollar is strong, companies that do a lot of business overseas take a hit. That's because their sales in other countries translate into fewer dollars back home.
Meanwhile, price hikes around the world helped offset rising costs for ingredients; organic sales, or those of existing brands, rose by 5 percent.
Rather than relying on sales and discounts to boost volumes, PepsiCo is increasing advertising to strengthen its brands. That gives the company more flexibility to raise prices without scaring off customers, even when competitors offer lower prices.
In the key Americas beverages unit - which includes sodas such as Pepsi and Mountain Dew - the company hiked prices by 3.5 per cent to offset ingredient costs. Volume was down 1 per cent.
Operating profit fell 15 per cent in part because of a 40 per cent increase in media spending. PepsiCo has made it a priority this year to strengthen its flagging U.S. soda business, which has lost market share to The Coca-Cola Co. in recent years.
Even though PepsiCo is increasingly moving beyond sodas, Pepsi bears the corporate name and invariably colors perceptions about the broader company.
The company is also hoping that new products - such as its Pepsi Next, which has about half the calories of regular soda - will increasingly contribute to revenue growth.
Sales volume for the Frito-Lay unit in North America was flat while price hikes helped lift revenue by 3 per cent. For the Quaker Foods unit, a 2 per cent price hike offset a volume decrease of 1 per cent. Operating profit fell 8 per cent as a result of higher commodity costs.
Since PepsiCo locks in its pricing for ingredients several months in advance, Chief Financial Officer Hugh Johnston said that record corn prices - a result of the severe Midwestern drought - shouldn't impact commodity prices for the rest of this year. He declined to speculate on the impact on prices in 2013, but noted that corn is just one of the many ingredients PepsiCo uses for its food and drinks.
Excluding the impact of unfavorable exchange rates, operating profit in Europe rose 15 per cent partly due to price hikes. Food volumes rose 1 percent, driven by gains in Russia and Eastern Europe.
In the region encompassing Asia, the Middle East and Africa, snacks volume rose 16 per cent and operating profit excluding the impact of currency exchange rates rose 7 per cent.
Earlier this year, PepsiCo also announced a company-wide cost-cutting program that it says will help refresh its business and ultimately save it money in the years ahead. But the plan, which includes a 3 percent workforce reduction, comes with upfront restructuring costs, which are expected to continue through the year.
For the three months ended June 16, PepsiCo said it earned $1.48 billion, or 94 cents per share. That's down from $1.89 billion, or $1.17 per share, in the same period last year.
Excluding one-time items, PepsiCo said it earned $1.12 per share. Analysts polled by FactSet expected $1.09 per share.
Revenue slipped to $16.5 billion from $16.8 billion, which the company said was primarily the result of refranchising its beverage businesses in China and Mexico. PepsiCo has partnered with local beverage companies in those countries to distribute its drinks. That means revenue is now recorded by those companies.
The company stood by its forecast that its adjusted full-year profit will decline by 5 per cent.
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