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PepsiCo's profit dips amid turnaround push

NEW YORK -- PepsiCo Inc.'s net income dipped 5 percent in the third quarter, as the food and beverage maker poured more money into bolstering its flagship brands and developing new products that position it for the future.

The company, which makes Frito-Lay snacks, Tropicana juice and Quaker Oats, stood by its guidance for the year and profit came in above Wall Street expectations.

As part of a turnaround push that began this year, PepsiCo is working to raise the stature of its key brands, such as its namesake cola and Gatorade sports drink. The company, based in Purchase, N.Y., is betting that this will help cultivate customer loyalty and make the products more resilient to competition and price hikes.

In its flagship beverages unit in the Americas, however, the company said sales volume fell 3 percent during the period; sodas fell 2 percent and non-carbonated drinks such as water fell 7 percent. Without giving details, the company said the drop in the latter figure was partly because it got rid of less-profitable juice packages.

Operating profit also fell as costs for ingredients and marketing rose. After losing market share to Coca-Cola in recent years, the company has been staging an advertising blitz with pop stars and athletes to burnish its Pepsi brand.

CEO Indra Nooyi said in a conference call with investors that results for the North America beverages unit were "mixed" and that a few areas were a "work in progress."

For example, she said Gatorade volume was down in the high-single digits in part because of pricing actions. But she said the company didn't want to fall back into the trap of marketing Gatorade as a general hydration drink, as it did in 2004-2006, just to boost volumes.

"If we go back to that, we are again renting volume," she said. By instead positioning Gatorade as a drink developed specifically for athletes, Nooyi said PepsiCo will be able to charge higher prices over the long term.

The same was true of packaged bottled waters; Nooyi noted that there was a "hell of a price war" in the segment and that PepsiCo was moving away from simply chasing short-term volume spikes. PepsiCo's water brands include Aquafina.

PepsiCo is also developing drinks and snacks that cater to shifting consumer tastes. Next year, for example, Nooyi said the company has launches planned for the rapidly growing energy drink market.

She also noted that people still love the taste of cola, even if they have concerns about sugar and artificial sweeteners. As such, she said PepsiCo is looking at the launch of a "differentiated core product" toward the end of 2013, suggesting the company is working on a diet cola with natural sweeteners.

Overall, the company said new products accounted for 8 percent of revenue. Some of those products include a mid-calorie soda called Pepsi Next, Gatorade chews and Real Medleys, which are instant oatmeal cups that come packed with fruits and nuts.

In the company's Frito-Lay North America unit, volume edged up by 1 percent, and Quaker Oats saw a 2 percent increase. But the operating profits of both units were pressured by higher costs for ingredients and marketing. Volumes for the Latin America foods division and the Asia, the Middle East and Africa unit saw double-digit gains.

In China, Nooyi said PepsiCo isn't feeling the impact of the economic slowdown because people still spend on small-ticket items, such as sodas and chips.

"If you're on the ground in China, you don't really sense the slowdown," she said.

Overall, the company's core operating profit declined 8 percent, reflecting higher costs for ingredients, increased advertising and marketing and higher pension expenses.

For the period ended Sept. 8, PepsiCo said it earned $1.9 billion, or $1.21 per share. That's compared with $2 billion, or $1.25 per share, a year ago. Earnings from core operations were $1.20 per share, better than the $1.16 per share analysts expected.

Total revenue fell 5 percent to $16.65 billion, partly because of unfavorable currency exchange rates and the refranchising of its business in China and Mexico. That means that revenue in those countries is now recorded by PepsiCo's local partners.

Analysts expected revenue of $16.96 billion.

When excluding the impact of unfavorable currency exchange rates and other structural changes, the company said its revenue rose by 5 percent in the quarter. The increase reflected a 1 percent jump in sales volume and 4 percent bump in pricing.

PepsiCo expects costs for ingredients to moderate in the fourth quarter. But for the full year, the company still expects adjusted earnings to fall by 5 percent.

Shares of PepsiCo rose 19 cents to $70.49 in morning trading.

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