Milling & Baking News - April 6, 2004 - 12

B U S I N E S S

Interstate discontinues dividend
payment; credit ratings lowered
Continued from Page 1
review its dividend policy on a quarterly
basis. Its most recent quarterly dividend
payment was 7c per share on the common stock, aggregating $12.6 million on
an annualized basis.
In trading March 30 on the New York
Stock Exchange following the announcement, shares of I.B.C. fell 10%, to $11.37.
The dividend cut followed by one day
a credit rating downgrade by Moody's Investors Service in which the ratings agency suggested that I.B.C. could eliminate its
dividend as a way to generate enough free
cash flow to reduce debt. The agency said
that while Interstate has made considerable progress in cutting costs, expenses
have been rising at an even faster rate.
In addition to downgrading its credit
rating, Moody's gave the Kansas Citybased baking company a negative outlook. Affected by the ratings downgrade
were $700 million in credit facilities.
Moody's lowered to B1 from Ba2 debt,
including $300-million senior secured
revolver, maturing 2006; $291-million
term loan , maturing 2007; $122-million
term loan B, maturing 2008.
In the Moody's range of ratings going
from Aaa to C, the new B ranks sixth
of nine. Ba ranks fifth. According to
Moody's, B ratings (B1 is at the high end

of B ratings) "have speculative elements
and are subject to substantial credit risk."
An additional downgrade to Caa would
leave I.B.C. debt in "poor standing, subject to very high credit risk."
Moody's last downgraded
I.B.C. in April 2003, to Ba2
from Ba1. Three months ago,
Moody's said it was reviewing the I.B.C. rating.
Disappointing
financial
performance prompted last
week's ratings cut. "The ratings downgrade reflects the continuation
of weaker-than-expected performance
and the challenges in improving credit
measurements in a highly competitive
market with weak category volume and
sales trends and excess industry capacity,"
the agency said. "The negative outlook
reflects relatively tight revolver covenants
and material scheduled amortization over
the next year, which could pressure liquidity if performance remains weak.
"Moody's notes that, despite weak
profitability, the company has generated
modest free cash flow that was applied
to reduce debt over the past several quarters. The company also has been implementing its re-engineering initiatives
(Program SOAR) according to plans,
has generated meaningful cost savings

Strong results at PepsiCo yield
dividend increase, share buyback
PURCHASE, N.Y. - The owner of FritoLay, Inc. last week unveiled a slew of good
news for its investors.
PepsiCo, Inc., parent company of the
largest U.S. salty snacks business, said it expects to record first-quarter revenue growth
of 10% and earnings per share of 46c.
The per-share estimate exceeds by 2c the
consensus projection of Wall Street analysts. In
addition, the company said its full-year earnings would reach the high end of its previously
projected range of $2.27 to $2.29 per share.
"I am very pleased with the operating
momentum that all our businesses are
demonstrating at the start of the year," said
Steve Reinemund, chief executive, PepsiCo.
"This is our second consecutive quarter of
double-digit revenue growth. I am also very
pleased that we can step up our dividend
and share repurchase programs."
PepsiCo said it would raise its annual
dividend, payable in June, by 44%, to 92c
per share, up from 64c previously. It marks
the 32nd consecutive increase in the company's annual dividend payment.
12 / Milling & Baking News, April 6, 2004

Meanwhile, the company's board of
directors has authorized a common stock
repurchase program of up to $7 billion during the next three years.
That program can begin once the $5-billion reauthorization program that started
in August 2002 ends. Based on year-to-date
repurchases and the new authorization, the
company said it anticipates spending $2.5
billion to repurchase stock in 2004.
"Our strong cash generation, coupled
with our low debt levels, allows us to retain
financial flexibility to fund future growth
opportunities and, at the same time, significantly increase our cash returned to shareholders," Mr. Reinemund said.
In a conference call March 30, Indra K.
Nooyi, president and chief financial officer,
discussed the financial conditions leading to
the dividend hike. In questions and answers
following her presentation, Ms. Nooyi was
asked about what the company was doing
in the health and wellness category. She responded wryly that at PepsiCo, a definition
for health and wellness has proven elusive.

in some areas, and is enhancing systems
to better support marketing activities, but
the challenging industry environment
and other cost pressures are restraining
the ability of the company to turn around
overall sales and profitability trends."
Weak category trends in part reflect
growth of low-carbohydrate dieting,
Moody's said. "The company's sales,
margins and earnings have
declined despite moves to decrease its cost base and better
position its product offerings,"
Moody's added.
I.B.C. already is saddled
with considerable debt, and
reducing these obligations going forward may be difficult if sales and
earnings do not recover, Moody's said.
The agency noted, though, that I.B.C. has
some flexibility to cut capital spending
as well as the dividend discontinuation
if cash flows are not available.
Reduced financial maneuverability is behind the negative outlook
for I.B.C. credit. "The outlook would
stabilize if the company refinances
to provide a comfortable liquidity
cushion while it continues to execute
its programs to restructure and enhance its business position, assuming
negative sales and earnings trends also
moderate," Moody's said. "The ratings
would be pressured if covenants are not
loosened or if refinancing is not accomplished over the near term." MBN

In recent years, the company has divided its
products into three categories: fun-for-you
products such as soda pop and potato chips,
better-for-you products such as diet soda or
baked chips and good-for-you products
such as orange juice and oatmeal.
"We have products like meat snacks and
peanuts in the fun-for-you category because
they are high-calorie products," she said.
"Then, along came the Atkins diet, and all
of a sudden sales of these products shot
through the roof because they were no longer fun for you but truly good for you."
Ms. Nooyi said that Frito-Lay was intent on
introducing new products that, while targeting dieters, would endure beyond any fad
diet. As an example, she cited the Edge line
offered under the Doritos and Cheetos brands,
products that contain soy ingredients. "It's
great for people on low-carb diets, but even if
that fad goes away we want to stay with it going forward," she said. Ms. Nooyi said current
product development efforts at PepsiCo are
aimed at protein products, an area in which
she said the company is underrepresented.
PepsiCo's shares reached a new 52-week
high of $54, up 3%, or $1.79, on March 30,
the day the company revealed its first-quarter projections and dividend increase. MBN
bakingbusiness.com / world-grain.com

http://www.bakingbusiness.com http://www.world-grain.com

Milling & Baking News - April 6, 2004

Table of Contents for the Digital Edition of Milling & Baking News - April 6, 2004