Frito-Lay Buoys PepsiCo

But fuel costs chip away at profits

PLANO, Texas -- Energy costs helped weigh down the first-quarter operating profit at Plano-based Frito-Lay North America, but the snack maker still was the largest revenue and profit contributor to parent PepsiCo Inc., said The Dallas Morning News.

PepsiCo said late last week that net income grew 13% to $912 million, or 53 cents a share. Frito-Lay, the company's largest unit, saw its operating profit grow 6% to $539 million.

The figure was significantly lower than the 20% growth at PepsiCo's international unit, said the report, [image-nocss] but it was in line with profits at its North American beverages unit.

Frito-Lay's margins were hurt by higher energy costs, which added to the cost of freight, plant operations and fuel for delivery trucks, the company said. The real cost increase has been in transportation, Steve Reinemund, chairman and CEO, told analysts, adding that fuel costs have hit us significantly.

If prices continue to rise in the second half of the year, you'll see continued pressure on the Frito-Lay cost structure, he said.

Merrill Lynch analyst Christine Farkas, in a report to investors, noted that Frito-Lay's profit growth was lighter than expected. But she said that while softer growth could dampen sentiment towards an otherwise strong quarter, we would point out that volume and revenue growth remain impressive.

Companywide, revenue was $6.6 billionup from $6.1 billion a year ago, according to the newspaper. Despite the energy crunch, Frito-Lay led all units with $2.3 billion in revenue, followed by the international unit with $2.1 billion.

To boost sales, the company plans stepped-up ad spending for its Lay's Stax products, including the recently introduced Hidden Valley Ranch Flavored potato crisps and KC Masterpiece BBQ Flavored potato crisps, the report said.

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