PepsiCo posted a net income increase of 35% in the second quarter to $2.01 billion

PepsiCo Inc. reported higher profit and revenue in the second quarter even as sales at its U.S. drink business continued to slip.

The mostly positive results coincide with heightened investor scrutiny after activist shareholder Nelson Peltz last week urged the maker of Lay's potato chips and Pepsi colas to buy Mondelez International Inc. and create a snack powerhouse while spinning off PepsiCo's slower growing beverage unit.

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PepsiCo Chairman and Chief Executive Indra Nooyi reiterated Wednesday that she doesn't see the need for any large-scale acquisitions and that the company benefits from its geographic and product mix. About half of PepsiCo's sales are fueled by snacks and the other half from beverages; roughly half of overall revenue is outside the U.S.

But Mrs. Nooyi again left the door open for potentially significant changes at PepsiCo's North American beverage unit, reiterating management is "exploring every possible alternative'' to improve results. That includes the possibility of refranchising regional bottling operations or spinning off the business entirely.

She repeated that shareholders will be updated early next year on its strategic review of the unit, which has been losing market share to Coca-Cola Co.

Net income rose 35% to $2.01 billion for the 12 weeks ended June 15, compared with 1.49 billion a year earlier. Adjusted earnings per share rose to $1.31 from $1.12. About 11 cents came from a $137 million, one-time gain from refranchising bottling operations in Vietnam and a temporary tax-rate drop.

Revenue rose 2.1% to $16.81 billion from $16.46 billion, with strong growth in Asia, the Middle East, Africa and its Americas-wide snacks business.

PepsiCo reiterated that it expects full-year per-share earnings to rise 7% on a constant-currency basis, and a mid-single-digit percentage rise in "organic" revenue. Organic revenue strips out the effects of acquisitions, divestitures and foreign-currency translations. But it now expects currency headwinds to have a negative impact of two percentage points on net income, up from its earlier estimate of one percentage point.

The company also expects $900 million in productivity gains.

Advertising and marketing expenses are expected to increase "at or above the rate of revenue growth'' in 2013. Such expenses were boosted to 5.7% from 5.2% of sales last year, as part of a restructuring drive, after PepsiCo rejected calls from some investors to split up the company. The bulk of any extra marketing investments this year would go to international operations, Chief Financial Officer Hugh Johnston told investors.

Operating profit at PepsiCo's Americas-wide beverage unit rose 5% to $882 million, boosted by higher pricing and cost-cutting, but revenue dropped 2% to $5.26 billion as volume fell 3.5%. For North America, the company reported a mid-single-digit percentage decline in soda volumes and a low-single-digit percentage decline in noncarbonated drink volumes. PepsiCo's beverage brands include Gatorade sports drinks, Tropicana juices and Mountain Dew soda.

Beverage companies say unseasonably chilly and wet U.S. weather damped sales, particularly soda. Coke last week reported a 1% volume decline in North American beverages in the second quarter, reversing 12 straight quarters of increases. Dr Pepper Snapple Group Inc., the third-largest soda company in the U.S., reported Wednesday its second-quarter revenue slipped 0.6% to $1.61 billion amid a 4% volume drop.

Mrs. Nooyi acknowledged the U.S. beverage business still has "challenges,'' especially when it comes to soda. But she said PepsiCo has made market-share gains in tea, Gatorade and Mountain Dew, and is confident last year's stepped-up marketing investments will pay dividends. PepsiCo also has been developing new low-calorie sweeteners to try to win back lapsed soda drinkers.

Other parts of PepsiCo's business performed better, with global snack and beverage volumes in the second quarter growing 3% and 1.5%, respectively. Revenue at its Americas-wide snack unit, whose brands also include Doritos, Cheetos and Tostitos chips, rose 5% to $6.03 billion, including a 4% increase in North America.

Revenue at its Asia, Middle East and Africa division grew 6% to $1.87 billion, boosted by a 9% volume increase in beverages and 6% in snacks. PepsiCo said beverage revenue soared 22% in China amid heightened distribution following last year's drinks joint venture with Tingyi (Cayman Islands) Holding Corp. and Asahi Group HoldingsLtd. By contrast, Coke reported flat volume in China in the second quarter.

Revenue in Europe inched 1% higher to $3.65 billion, powered by a 3% increase in snack volumes, despite tough economic conditions.

But results worsened at the company's Quaker Foods North America unit, which has been struggling with sluggish oatmeal sales. Revenue at the unit shrank 1% to $577 million and operating profit fell 14% to $133 million as the company ramped up investments to bring new products to market.

Stifel Nicolaus analyst Mark Swartzberg said in a research note Wednesday that the second-quarter results indicate PepsiCo's restructuring push "is working'' after profit fell last year but that it is too early to rule out bigger structural changes.

"We continue to think buying Mondelez is unlikely but that PepsiCo management may ultimately revise its attitude to splitting up,'' wrote Mr. Swartzberg.

Mr. Peltz, the prominent activist investor, said last week that PepsiCo should split its snack and beverage businesses even if it doesn't buy Mondelez, whose snack portfolio includes Cadbury chocolate bars, Oreo cookies and Trident gum.

A spokeswoman at Mr. Peltz's Trian Fund Management LP, which amassed stakes of more than $1 billion in each of PepsiCo and Mondelez earlier this year, declined Wednesday to comment on PepsiCo's second-quarter results.

Article written by Mike Esterl (at mike.esterl@wsj.com) for the Wall Street Journial and can be found here.

New Twinkie Maker Cold-Shoulders Union Labor

New Twinkie Maker Cold-Shoulders Union Labor

(Written by author By RACHEL FEINTZEIG for the Wall Street Journial. Original article can be located here.)

The company that bought the Twinkie, HoHo and Ding Dong brands out of bankruptcy is gearing up to reopen plants and hire workers, but it won't be using union labor.

 

Hostess Brands LLC—Metropoulos & Co. and Apollo Global Management LLC's new incarnation of the baking company that liquidated in Chapter 11—is reopening four bakeries in the next eight to 10 weeks, aiming to get Twinkie-deprived consumers the classic snack cake starting in July.

 

Chief Executive C. Dean Metropoulos said the company will pump $60 million in capital investments into the plants between now and September and aims to hire at least 1,500 workers. But they won't be represented by unions, including the one whose nationwide strike sparked the 86-year-old company's decision to shut down in November.

"We do not expect to be involved in the union going forward," Mr. Metropoulos said in an interview Wednesday.

Hostess Brands Inc., the company that filed for bankruptcy protection in January 2012 and eventually sold off its brands and plants to several buyers, was once powered by 19,000 workers, 15,000 of whom were represented by unions. The company's largest union, the Teamsters, had agreed to a new labor contract following a contentious bankruptcy trial. But the second-largest union, the Bakery, Confectionery, Tobacco Workers & Grain Millers International Union, launched a work stoppage after the company imposed new labor terms on the union's members. Hostess said the strike crippled its operations, forcing it to shut down.
A Teamsters spokeswoman declined to comment. A spokeswoman for the bakers union couldn't be reached for comment Wednesday.

In February, before the $410 million sale to Metropoulos and Apollo was finalized, the president of the bakers union expressed confidence that his thousands of out-of-work members would find opportunity at the Hostess facilities once they were reopened by their new owners. President David Durkee said the strike had left the union in "a position of strength," and he expressed confidence its workers would get a better deal from the new owners than Hostess offered during the bankruptcy case, its second in recent years.
He added that the only way for the brands to have a "seamless restart" would be to hire back unionized bakers. "Only our members know how to get that equipment running," Mr. Durkee said. "A work force off the street will not be able to accomplish that."

But Mr. Metropoulos and his son, Daren, the co-CEO of Pabst Brewing Co. who is also heading up the reborn Hostess's marketing strategy, expressed confidence they would be able to find skilled, nonunion workers near the four plants, which are in areas with high unemployment.

"We're trying to find the most qualified people in these local markets to come work for the company," Daren Metropoulos said.

The new Hostess is firing up plants in Columbus, Ga.; Emporia, Kan.; Schiller Park, Ill.; and Indianapolis, Ind. It's also considering whether to reopen a fifth plant it purchased, in Los Angeles. Previously, the Hostess products that Metropoulos and Apollo bought were made at 11 plants, but the elder Mr. Metropoulos said those plants were running at less than 50% capacity under the old model. The new Hostess plants will run at 85% to 90% capacity, making the business "as efficient as possible," he said. The new company expects total capacity to be back to where it was before Hostess's shutdown by September.
The elder Mr. Metropoulos said he wasn't sure how many employees it used to take to produce the classic Hostess snack cakes now under the control of Metropoulos and Apollo. The new Hostess plans to use third-party drivers and an outside sales organization. It will also switch distribution models, delivering Hostess Twinkies and Cup Cakes directly to supermarket warehouses instead of individual locations.
"Ultimately, the consumer will be getting fresher products sooner through this model," Daren Metropoulos said.

The company also aims to increase distribution to locations that Hostess couldn't reach before, including smaller convenience stores and dollar stores.

The snack-cake company will begin considering new products, including healthier options like 100-calorie packs and whole-wheat or organic varieties, in the fall. But for now, it is focusing on getting the classic treats back on the market. In some cases, that may require the company to compete with similar products that rivals Grupo Bimbo SAB and Flowers Foods Inc. launched to fill the void during Hostess's hiatus, according to the Metropouloses.

A Bimbo spokesman declined to comment and a Flowers spokesman wasn't immediately available for comment Wednesday.

"We feel very, very confident that the originality of this brand is going to win out and the copycats will fade out," the elder Mr. Metropoulos said.

Write to Rachel Feintzeig at rachel.feintzeig@dowjones.com

A version of this article appeared April 25, 2013, on page B3 in the U.S. edition of The Wall Street Journal, with the headline: Twinkie's New Owners Will Shun Union Labor.

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