PepsiCo sticks by North American drinks unit despite struggles

NEW YORK, N.Y. – PepsiCo plans to hang onto its struggling North American drinks unit, with hopes that the introduction of naturally sweetened, lower-calorie sodas will help revive sales.

The company has been under pressure to spin off the business and focus on its stronger Frito-Lay snack unit, most notably by activist investor Nelson Peltz of Trian Fund Management.

The calls for a split come as PepsiCo’s drinks, which include Mountain Dew, Tropicana and Aquafina, have lost ground to bigger rival Coca-Cola Co. in recent years. U.S. soda consumption in general has also been on the decline, with people worried about the calories in regular soda and the artificial sweeteners in diet sodas.

But PepsiCo said Thursday that it concluded after an “exhaustive” review involving “bankers and consultants” that its current combined snacks and drinks structure would maximize shareholder value.

“That decision has been made for a good period of time going forward,” Chief Financial Officer Hugh Johnston said in a call with reporters.

The strength in snacks and weakness in drinks played out again in the company’s fourth quarter, with Frito-Lay delivering volume growth of 3 per cent in North America. Volume for carbonated soft drinks, by contrast, fell in the “mid-single digits” despite stepped-up marketing. Non-carbonated drinks, which include Gatorade and Aquafina, increased in the “low-single digits.”

Still, CEO Indra Nooyi stressed that PepsiCo’s drinks and snacks are complementary to each other. She also downplayed the company’s exposure to colas, noting that they make up less than 25 per cent of North American beverages.

Nooyi also noted that PepsiCo plans to test new natural sweeteners in carbonated drinks this year that could help improve results. Dr Pepper Snapple Group Inc. announced similar plans this week. Coca-Cola, which introduced a similar concept in Argentina last year, reports next week.

In the meantime, PepsiCo also announced another cost-cutting program that will save $5 billion over the next five years from actions including factory closures and investments in automated manufacturing. The company says about 40 per cent of the savings will come from work force cuts, although it did not specify how many jobs would be affected.

PepsiCo has about 278,000 employees, according to FactSet.

For the period ended Dec. 28, the company earned $1.74 billion, or $1.12 per share. That compares with $1.66 billion, or $1.06 per share, a year ago.

Excluding charges and other items, earnings were $1.05 per share, topping the $1 per share Wall Street expected.

Revenue rose 1 per cent to $20.12 billion, helped by results in Latin America and Asia. Analysts on average were looking for revenue of $20.1 billion, according to FactSet.

For the year, PepsiCo earned $4.32 per share, up from $3.92 per share in the previous year.

PepsiCo Inc.’s annual dividend will be raised by 15 per cent. It will boost 2014 share repurchases to about $5 billion.

Its stock was down 3 per cent at $78.89 in morning trading.