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PepsiCo beats expectations despite soda struggles

Thursday - 4/18/2013, 6:43pm  ET

In this Friday, April 12, 2013, photo, Seattle Mariners starting pitcher Hisashi Iwakuma warms up next to a Pepsi advertisement before a baseball game against the Texas Rangers, in Seattle. PepsiCo Inc. reports quarterly financial results before the market opens on Thursday, April 18, 2013. (AP Photo/Ted S. Warren)

CANDICE CHOI
AP Food Industry Writer

NEW YORK (AP) -- PepsiCo is selling more its snacks and drinks around the world, even as the maker of Frito-Lay, Tropicana and Quaker Oats tries to figure out how to sell more soda in the United States.

The company on Thursday reported a first-quarter profit that beat Wall Street expectations as it saw strong growth in emerging markets and benefited from a lower tax rate.

PepsiCo's North American snacks unit also saw gains, with premium offerings such as Stacy's pita chips and Sabra hummus performing particularly well. The popularity of its Doritos and Lay's also helped pick off market share from competitors. As such, PepsiCo said it's confident it can raise prices in the year ahead without scaring off customers.

For its beverage unit in the Americas, however, revenue was flat as price hikes offset a drop in volume. Soft drink volume in North America declined in the mid-single digits.

"The cola category continues to be a challenge," CEO Indra Nooyi noted in a conference call with analysts.

Over the past year, PepsiCo has significantly stepped up marketing for its namesake drink, including an endorsement deal with the pop star Beyonce. But it's struggling to win back market share from Coca-Cola Co. at a time when Americans are continuing to cut back on soda in favor of water, sports drinks and bottled teas.

PepsiCo, based in Purchase, N.Y., offers a variety of drinks in all those categories, including Aquafina, Gatorade and Lipton. But Nooyi noted that the company has to be careful about investing more heavily in one brand at the expense of another. Soda, for example, is generally more profitable than bottled water and still makes up the bulk of its beverage sales.

"Any growth we achieve in one area takes from another area where we compete," Nooyi said, noting that the company is still working on the "reinvention" of its carbonated soft drinks.

The remark was in part a reference to work on a natural sweetener mix for sodas that PepsiCo hopes will let it reduce sugar content without sacrificing taste. The company has declined to provide specifics, but Nooyi has said the innovation could "potentially alter the trajectory of our cola business in a meaningful way."

With growth sluggish in the U.S., PepsiCo and rival Coca-Cola Co. are trying to improve profit margins by reducing costs wherever they can. Earlier this week, for example, Coca-Cola announced preliminary deals to start refranchising its U.S. business. By handing over distribution responsibilities to its independent bottlers, the Atlanta company would lower its own expenses by exchanging direct revenue from beverage sales in favor of franchising fees.

PepsiCo also is reviewing a restructuring of its North American beverage business but a more radical change may be in the cards. Analysts have speculated that activist investors, including Ralph Whitworth who disclosed a stake last year, could pressure for the split if results don't improve.

In a call with reporters, Chief Financial Officer Hugh Johnston declined to rule out the possibility of a spinoff but emphasized that the company wouldn't provide an update on the matter until early next year.

Separately, PepsiCo noted that it expects to continue improving profit margins with about $900 million in cost savings this year.

Despite its better-than-expected results, PepsiCo stood by its forecast that core profit would grow 7 percent, noting that the global economy remains volatile and that it could opt to reinvest any savings.

For the quarter, the company earned $1.08 billion, or 69 cents per share. That's down from $1.13 billion, or 71 cents per share, a year earlier.

Excluding the impact of Venezuela's currency devaluation and other items, it earned 77 cents per share. Analysts expected 70 cents, according to FactSet.

Revenue rose 1 percent to $12.58 billion, beating analysts' prediction of $12.54 billion.

When adjusting for the impact of refranchising its business in China and foreign currency exchange rates, the company said revenue rose 4.4 percent.

Shares closed up $2.40, or 3 percent, at $81.85.

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AP Business Writer Michelle Chapman contributed to this report.


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