PepsiCo: North American Bevs Up 2.5% in Q3

PepsiCo’s North American beverages division enjoyed a 2.5 percent increase in revenue during the fiscal third quarter of this year, despite a 14 percent decline in profit.

The 2.5 percent increase is the best in eight quarters for the North American beverages unit, said PepsiCo CEO Indra Nooyi during an earnings call this morning. Nooyi credited the rise to retail sales growth in ready-to-drink products from Starbucks, Lipton, Gatorade, Pepsi, Mountain Dew and PepsiCo’s water brands, such as bubly and LIFEWTR.

According to Nooyi, LIFEWTR generated over $150 million in measured retail sales in 2017, its first year on the market, and is on pace to achieve more $200 million in 2018. Bubly, the canned zero-calorie flavored sparkling water introduced in July, is projected to surpass $100 million in retail sales this year.

However, advertising and marketing expenses impacted the division’s profitability during the quarter. When asked about recent spending increases in those areas, PepsiCo CFO Hugh Johnston said, according to a transcript: “Our intention generally speaking is to be competitive on advertising and spending levels, but not to accelerate beyond competition.”

Commodity and operating cost inflation, as well as rising aluminum prices and transportation costs, were also cited as contributors to declining profits. In response, PepsiCo raised prices for its beverage products by approximately 3 percent in September.

Overall organic revenue grew 4.9 percent, generating $16.5 billion in net revenue during the third quarter. Full-year organic revenue growth is now expected to be at least 3 percent, up from 2.3 percent previously.

Regarding a potential refranchising of the company’s bottling partners, Johnston said there was “nothing new to report on that.”

The earnings report comes against the backdrop of recent significant shifts at the Purchase, N.Y.-based beverage and snack giant. In July, Nooyi announced she was stepping down as CEO of PepsiCo after a 12-year tenure at the helm, while the company completed its largest ever acquisition — $3.2 billion for at-home carbonated drink maker Sodastream — just a month later in August.

This morning’s earnings call marked Nooyi’s 75th and final earnings call with PepsiCo. In closing, she thanked analysts on the call for “a lot of spirited and fascinating conversations.” She continued: “I’ve always valued your perspectives even in those instances when we may have disagreed. You often challenged me, offered your opinions and provided different perspectives. My interactions with you over the years helped make me a better executive and helped make PepsiCo a better company.”

Bonnie Herzog, analyst with Wells Fargo Securities, wrote that while volume increases for non-alcoholic beverages were encouraging, rising commodity prices would continue to be a concern across all segments for PepsiCo.