PepsiCo profit beats expectations on North American demand; stock rises

By Melissa Fares and Sruthi Ramakrishnan

(Reuters) - PepsiCo Inc reported a better-than-expected profit for the second quarter on Thursday, buoyed by lower raw material costs and higher demand for Frito-Lay snacks and new beverages in North America, lifting shares to a record in early trading.

The maker of Pepsi and Gatorade also boosted its forecast for adjusted profit for the year.

PepsiCo's shares rose to an all-time high of $109, before giving up some gains to trade at $108.61 in morning trading on the New York Stock Exchange.

Drinks like Propel flavored water and Naked Cold Pressed juice, Smartfood Popcorn and "Simply" brand snacks helped drive sales, the company said.

PepsiCo and other consumer companies are spending more to develop new products to meet the changing tastes of consumers who are increasingly seeking healthier options.

PepsiCo doubled its research and development spending over the last 5 years and new products now account for 9 percent of PepsiCo's revenue, up from 5 percent in past years.

"The North American strength is a big driver behind raising guidance for the year because North America really is performing strongly right now," Hugh Johnston, PepsiCo's chief financial officer told Reuters.

"Consumers are willing to pay for affordable treats that they find are new and interesting and, frankly, a differentiated product."

Argus Research Co analyst John Staszak agreed.

"People don't really have any concerns about spending money on minor discretionary products like Frito-lays," Staszak said.

'INSULATED'

PepsiCo is somewhat insulated from potential trade disruptions relating to the recent "Brexit" vote, when Britain voted to leave the European Union, because ingredients like potatoes used in British Walkers chips are grown locally, Johnston said.

Also, the company's products are affordable for consumers in developed countries, so any possible Brexit disruption to the global economy will have less impact on PepsiCo, Johnston said.

PepsiCo's cost of sales fell 6 percent in the three months ended June 11.

That helped net income attributable to PepsiCo increase 1.3 percent to $2.01 billion, or $1.38 a share.

Excluding items, the company earned $1.35 per share, beating the average analyst estimate of $1.30, according to Thomson Reuters I/B/E/S.

Net revenue fell 3.3 percent to $15.395 billion, but inched past the average analyst estimate of $15.37 billion.

Net revenue in the North America Beverages unit, PepsiCo's biggest business, rose 1 percent, the slowest growth since PepsiCo started breaking out beverage sales from the region a year ago.

Revenue from the Frito-Lay business, which includes Doritos, Lay's and the Simply line of snacks, grew 3 percent.

The Purchase, New York-based company said it now expects 2016 adjusted earnings of $4.71 per share, up from its previous forecast of $4.66 per share.

(Reporting by Sruthi Ramakrishnan in Bengaluru and Melissa Fares in New York; Editing by Savio D'Souza and Bernadette Baum)