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Issue Date: Vol. 48, No. 10, October 2008, Posted On: 10/22/2008

Pepsi Q3 Net Drops, Discloses $1.2 Billion Cost-Reduction Program

Emily Jed

PURCHASE, NY — PepsiCo Inc. reported a 9.6% decline in third-quarter net income, citing weak U.S. beverage sales, and lowered its profit forecast for the year as a result of the rebounding dollar. Year to date, PepsiCo's net revenue was $30.52 billion, versus $27.13 billion during the comparable period in fiscal 2007. Net income was $4.42 billion, up slightly from $4.40 billion a year earlier.

Third-quarter net revenue for the period ending September 8 grew 11% to $11.24 billion from $10.17 billion in the comparable prior-year period.

Coinciding with the release of its quarterly financial report, the Purchase, NY-based maker of Pepsi-Cola and Frito-Lay snacks announced the launch of its "Productivity for Growth" initiative, which it anticipates will produce pretax savings of more than $1.2 billion over the next three years. The reduction program includes actions in all segments of the business that the company believes will simplify the organization for more effective and timely decision making; increase cost competitiveness across the supply chain; and upgrade and streamline the product portfolio.

Globally, approximately 3,300 positions will be eliminated in connection with the productivity program, according to PepsiCo, of which about 40% relate to the closing of up to six plants and other capacity rationalization actions, which it says will be announced by the end of the year.

During the third quarter, Frito-Lay North America delivered 9% net revenue growth across all retail channels, driven by strong performance across all major brands including double-digit growth in Tostitos, Ruffles and Cheetos and high-single-digit growth in Lay's and Doritos. Operating profit grew 6%, driven by net revenue growth and partially offset by commodity costs, including cooking oil and fuel.

Quaker Foods North America volume declined 9% and revenue was down 5% due to the impact of the July flood at Quaker's major manufacturing facility in Cedar Rapids, IA. The company expects production to be almost fully normalized in the fourth quarter.

PepsiCo Americas Beverages volume decreased 2.5% during the third quarter. A 4% decrease in North America was partially offset by an increase in Latin America Beverages. Net revenue was flat for the quarter and operating profit declined 11%, largely due to higher input costs.

In North America, Mountain Dew volume grew in the low-single-digits, partially offsetting a mid-single-digit decline in the company's other CSD brands. In noncarbonated beverages, volume was down 5%, reflecting double-digit declines in unflavored water and Propel. Despite a low-single-digit volume decline, Gatorade reportedly gained 1.4 points of share in the sports drink category. The North American energy drinks portfolio continued to perform well, according to PepsiCo, led by strong growth in Amp energy drink and Starbucks Energy Coffee. Tropicana chilled juices grew by mid-single-digits, while SoBe Life Water reportedly continues to build trial and repeat purchase as a result of strengthened consumer awareness and broader distribution.

In Latin America, CSDs grew at a low-single-digit rate and noncarbonated beverage volume climbed at a double-digit rate.

PepsiCo said it expects that the recent surge in the U.S. dollar will have an adverse impact on fourth- quarter earnings and thus adjusted guidance to $3.67- $3.68 per share, versus $3.72 initially projected. The company anticipates full-year 2008 performance of 3% to 5% volume growth and low-double-digit net revenue growth, with cash provided by operating activities of approximately $7.3 billion and capital spending in the $2.5 billion range. Due to the unpredictability of future changes in commodity prices, the company said it is not able to provide guidance on 2008 projected EPS.

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