PepsiCo Q3 '96
|
PepsiCo Q3 '96
|
|
(FOOL CONFERENCE CALL SYNOPSIS)* By Debora Tidwell (MF Debit)
PepsiCo, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> UNION CITY, Ca., October 16, 1996/FOOLWIRE/ --- PepsiCo reported third quarter results basically in line with what they expected when they pre-announced earnings on September 26, 1996. Earnings were $144 million or $0.09 per share on sales of $7.9 billion. The results reflect double-digit operating profit gains in 5 of PepsiCo's 8 major operating units. However, those gains were more than offset by one-time charges of $0.21 per share as well as an operating loss in international beverages, a significantly higher tax rate, and profit declines for Pizza Hut in the US.
PERFORMANCE BY SEGMENT. The domestic beverage business had a very solid quarter as they expected with mid-teens growth, solid volume growth of 5%. The domestic snack business came in at low double-digits with 10% profit growth and high single-digit (9%) volume growth. The international beverage division, which was the reason for the pre-announcement on September 26th, were down $19 million in revenues and down 4% in volume. International snacks had 20% profit growth and solid volume growth, particularly on the salty snack side which is their high-margin side of the business and drives the profits.
SNACK BUSINESS PERFORMS WELL. Frito Lay took some pricing action in the fourth quarter last year and that has been affecting them throughout the year. In addition, they are getting some mix-driven pricing. Baked Lays has a pretty attractive price point from their point of view and that has been a major contributor to volume growth. Lays was a big driver of volume growth and Baked Lays was a contributor to that. So the combination of some pricing taken in the fourth quarter of 1995 and the Baked Lays launch have given them a price lift throughout the year.
RESTAURANT OVERVIEW. In the restaurant business, they have known for some time that it would be a mixed quarter in terms of the concepts. KFC was solid, as predicted. Taco Bell was somewhat soft, as predicted. Pizza Hut was probably a little softer than anticipated. The refranchising numbers were approximately $0.01 per share, about where predicted. So the restaurant numbers, on balance, are close to what people expected, but are perhaps a little softer because of Pizza Hut (PepsiCo's largest restaurant business).
WHAT DOES ALL THIS MEAN GOING FORWARD? Looking forward, PepsiCo continues to expect very solid numbers out of the US beverage business and the US snack business. US snacks is now tracking at double-digit volume growth again. US beverages is having a good run and they are conservatively expecting volume growth of 4%, although it is tracking at 5% early in the current quarter. They think international snacks will continue to delivery good numbers for the balance of the year and into next year.
KFC & INTERNATIONAL RESTAURANTS. KFC, although they would expect the profit growth to slow down a little bit because they are rolling over some things that happened in the fourth quarter last year, they still expect to be pretty solid. They also expect the international restaurant business to continue to deliver solid numbers.
SEGMENTS THAT HAVE NOT BEEN PERFORMING WELL. That comes back to the toughest question which is international beverages and the other domestic restaurant concepts. International beverages is executing its reorganization now and they assume it will probably still have a relatively soft fourth quarter but nothing on the order of magnitude from an operating sense as what they reported this quarter. It is prudent to assume that volume and profits will still be a little bit soft. Looking into next year, PepsiCo is very hopeful that those numbers will pick up. There are many reasons for that including benefits from the restructuring. They gave a best estimate 10 days ago that they thought they would see earnings reduced by $0.10 per share from current analyst estimates next year based on international beverages and they think that is still a pretty good estimate for the impact. As profits come back in international beverages, the tax rate (which excluding one-time items is running about 34.7% year-to-date) will probably drift back toward the 34% rate, so they will get a little tax rate lift and some profits reinstated. As the organization gets into place and they have more detail they can get a little more optimistic about that hopefully.
OUTLOOK BY SEGMENT. Going forward, they think results from Europe will look better, Latin America will have an easier comparison. The company is focusing on emerging markets. They are defending well in a number of markets. In some cases they are doing very well, like in markets such as China, India, and Japan.
PIZZA HUT/TACO BELL UPDATE. A lot is happening in the restaurant business. They have announced a new person to head up Taco Bell who has a long successful history in the retailing business and has been credited with turning around Circle K. At Pizza Hut they began value pricing on stuffed crust pizza yesterday. They are about to launch some other things into test, working toward a logical launch window in the March timeframe. They want to give Pizza Hut management the time to fix things properly, but a lot is happening. Through the balance of the year there is not a new product launch and that will create some near-term potential for softness.
1997 ESTIMATE ADJUSTMENTS. So, for 1997, taking $0.10 off analyst estimates brings estimates somewhere in the low $1.50s and they think that is about right. The good news is that they have tremendous strength in several businesses and a couple of the restaurant businesses that had some issues this year are starting to generate some action and the others are pretty solid. The changes to international beverages are in motion. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
|
|
Copyright 1996, The Motley Fool |