Purchase / NY. (pci) PepsiCo Inc. reported results for the second quarter of 2016. «We are pleased with our results for the third quarter and year to date. We are executing our strategy well and managing what is in our control. Our product portfolio, geographic mix and capability centers are enabling us to deliver balanced revenue and productivity», said Chairman and CEO Indra Nooyi. «Based on our year-to-date performance and our outlook for the fourth quarter, we are raising our full-year core constant currency EPS growth objective».
Summary of Third Quarter Financial Performance:
- Reported net revenue declined 1.9 percent. Foreign exchange translation and the Venezuela de-consolidation each had a 3-percentage-point unfavorable impact on reported net revenue. Organic revenue, which excludes the impacts of foreign exchange translation and structural changes, grew 4.2 percent.
- Reported gross margin expanded 40 basis points and reported operating margin expanded 895 basis points. Reported operating margin expansion in the current year benefited from the 2015 Venezuela impairment charges. Core gross margin expanded 50 basis points and core operating margin expanded 30 basis points. Reported and core operating margin expansion reflect the implementation of effective revenue management strategies and productivity gains partially offset by a 65-basis-point increase in advertising and marketing expense as a percentage of sales.
- Reported operating profit increased 99 percent (reflecting the impact of the 2015 Venezuela impairment charges) and core constant currency operating profit increased 2 percent. The Venezuela impairment charges and the Venezuela deconsolidation (see page 4) had a net 91-percentage-point favorable impact on reported operating profit growth and the Venezuela de-consolidation had a 4-percentage-point unfavorable impact on core operating profit growth.
- The reported effective tax rate was 23.0 percent in 2016 and 54.5 percent in 2015 (due to the 2015 Venezuela impairment charges, which had no corresponding tax benefit). The core effective tax rate was 23.3 percent in 2016 and 24.6 percent in 2015.
- Reported EPS was 1.37 USD, a 282 percent increase from the prior year, reflecting the impact of the 2015 Venezuela impairment charges. Foreign exchange translation negatively impacted reported EPS by 3 percentage points.
- Core EPS was 1.40 USD, an increase of 4 percent. Excluding the impact of foreign exchange translation, core constant currency EPS increased 7 percent.
- The 2015 Venezuela impairment charges and the Venezuela de-consolidation had a net 260-percentage-point favorable impact on reported EPS growth and the Venezuela de-consolidation had a 5-percentage-point unfavorable impact on core EPS growth.
- Cash flow provided by operating activities was 3.7 billion USD.
2015 Venezuela Impairment Charges and De-consolidation
- Effective as of the end of the third quarter of 2015, the Company began accounting for its investments in its wholly-owned Venezuelan subsidiaries and joint venture using the cost method of accounting and de-consolidated assets and liabilities of its wholly-owned Venezuelan subsidiaries from its consolidated balance sheet.
- Impairment charges of 1.4 billion USD were recognized in the third quarter of 2015 to reduce the carrying value of these investments. These charges had no corresponding tax benefit.
53rd Week and Incremental Investments
- PepsiCo’s fiscal year ends on the last Saturday of each December, resulting in an additional week of results every five or six years. PepsiCo’s 2016 fiscal year includes 53 weeks of results.
- As previously disclosed, the Company expects to reinvest the operating profit benefit of the 53rd week in certain productivity and growth initiatives («incremental investments») in 2016. The consolidated incremental investments during the third quarter totalled approximately 50 million USD pre-tax.
- During the fourth quarter of 2016, the company intends to continue to make incremental investments. For the full year, the company expects such incremental investments will offset the operating profit impact of the extra week.
Discussion of Third Quarter Division Results:
Reported operating results were driven by the following:
Frito-Lay North America (FLNA)
Positively impacted by productivity gains and lower raw material costs, partially offset by operating cost inflation, higher advertising and marketing expenses and the impact of incremental investments.
Quaker Foods North America (QFNA)
Negatively impacted by higher advertising and marketing expenses, operating cost inflation and the impact of incremental investments, partially offset by productivity gains and lower raw material costs. The impact of ceasing the operations of our dairy joint venture benefited operating profit performance by 3 percentage points.
North America Beverages (NAB)
Positively impacted by productivity gains and lower raw material costs, partially offset by operating cost inflation, a pension-related settlement in the prior year (5 percentage points) and higher advertising and marketing expenses.
Latin America
Positively impacted by the 2015 Venezuela impairment charges and productivity gains, partially offset by operating cost inflation, the impact of the Venezuela de-consolidation (which negatively impacted operating profit growth by 34 percentage points), higher raw material costs (in local currency terms, driven by a strong U.S. Dollar), higher advertising and marketing expenses, adverse foreign exchange translation, and incremental investments.
Europe Sub-Saharan Africa (ESSA)
Negatively impacted by higher raw material costs (in local currency terms, driven by a strong U.S. Dollar), operating cost inflation, adverse foreign exchange translation, higher advertising and marketing expenses, and incremental investments, partially offset by productivity gains.
Asia, Middle East and North Africa (AMENA)
Positively impacted by a prior-year charge related to a transaction with Tingyi-Asahi Beverages (36 percentage points) and productivity gains. Additionally, the impacts of a prior-year impairment charge associated with a joint venture in the Middle East and contract termination charge positively contributed to operating profit growth by 10 percentage points and 4.5 percentage points, respectively. These impacts were partially offset by higher advertising and marketing expenses and operating cost inflation.
Summary of Year-to-Date 2016 Financial Performance
- Reported net revenue declined 2.7 percent. Foreign exchange translation had a 4-percentage-point unfavorable impact and the Venezuela de-consolidation had a 2.5-percentage-point unfavorable impact on the reported net revenue change. Organic revenue, which excludes the impacts of foreign exchange translation and structural changes, grew 3.7 percent.
- Reported gross margin expanded 100 basis points and reported operating margin expanded 335 basis points. Reported operating margin expansion benefited from the 2015 Venezuela impairment charges. Core gross margin expanded 80 basis points and core operating margin expanded 85 basis points. Reported and core operating margin expansion reflect the implementation of effective revenue management strategies and productivity gains, partially offset by a 60-basis-point increase in advertising and marketing expense as a percentage of sales.
- Reported operating profit increased 21 percent (reflecting the impact of the 2015 Venezuela impairment charges) and core constant currency operating profit increased 5 percent. The 2015 Venezuela impairment charges and the Venezuela de-consolidation had a net 20-percentage-point favorable impact on reported operating profit growth and the Venezuela de-consolidation had a 3-percentage-point unfavorable impact on core operating profit growth.
- The reported effective tax rate was 26.2 percent in 2016 and 31.4 percent in 2015 (due to the 2015 Venezuela impairment charges, which had no corresponding tax benefit). The core effective tax rate was 24.7 percent in 2016 and 24.8 percent in 2015.
- Reported EPS was 3.39 USD, a 35 percent increase from the prior year, reflecting the impact of the 2015 Venezuela impairment charges. Foreign exchange translation negatively impacted reported EPS by 3 percentage points.
- Core EPS was 3.65 USD, an increase of 4 percent from the prior year. Excluding the impact of foreign exchange translation, core constant currency EPS increased 7 percent.
- The 2015 Venezuela impairment charges and the Venezuela deconsolidation had a net 35-percentage-point favorable impact on reported EPS growth and the Venezuela de-consolidation had a 3-percentage-point unfavorable impact on core EPS growth.
- Cash flow provided by operating activities was 6.6 billion USD.
Discussion of Year-to-Date 2016 Division Results
Reported operating results were driven by the following:
Frito-Lay North America (FLNA)
Positively impacted by productivity gains and lower raw material costs, partially offset by certain operating cost increases and higher advertising and marketing expenses.
Quaker Foods North America (QFNA)
Positively impacted by an impairment charge in the prior year related to our dairy joint venture and ceasing of its operations (21 percentage points), productivity gains and lower raw material costs, partially offset by higher advertising and marketing expenses and operating cost inflation.
North America Beverages (NAB)
Positively impacted by productivity gains, lower raw material costs and favorable settlements of promotional spending accruals and insurance adjustments, partially offset by operating cost inflation, a pension-related settlement in the prior year (2 percentage points) and higher advertising and marketing expenses.
Latin America
Positively impacted by the 2015 Venezuela impairment charges and productivity gains, partially offset by operating cost inflation, the impact of the Venezuela de-consolidation (which negatively impacted operating profit growth by 23 percentage points), higher raw material costs (in local currency terms, driven by a strong U.S. Dollar), adverse foreign exchange translation and higher adverting and marketing expenses.
Europe Sub-Saharan Africa (ESSA)
Negatively impacted by higher raw material costs (in local currency terms, driven by a strong U.S. Dollar), operating cost inflation, higher advertising and marketing expenses, adverse foreign exchange translation and incremental investments, partially offset by productivity gains.
Asia, Middle East and North Africa (AMENA)
Negatively impacted by charges related to the transaction with Tingyi-Asahi Beverages (38 percentage points), operating cost inflation and higher advertising and marketing expenses, partially offset by productivity gains. Additionally, the impact of a prior-year gain from the re-franchising of a portion of our beverage business in Indian egatively impacted operating profit performance by 4.5 percentage points. A prior-year impairment charge associated with a joint venture in the Middle East positively contributed 3 percentage points to operating profit performance.
2016 Guidance and Outlook
The Company provides guidance on a non-GAAP basis as the Company cannot predict certain elements which are included in reported GAAP results, including the impact of foreign exchange and commodity mark-to-market adjustments. The Company expects:
- Based on current foreign exchange market consensus, foreign exchange translation to negatively impact reported net revenue growth by approximately 3 percentage points;
- The 53rd week to contribute approximately 1 percentage point to reported net revenue growth;
- Approximately 4 percent organic revenue growth, excluding the impact of the 53rd week and structural changes, including the de-consolidation of our Venezuelan operations;
- 2016 core earnings per share of 4.78 USD, driven by the following expectations and factors:
- 2015 core earnings per share 4.57 USD
- Expected core constant currency EPS growth (excluding Venezuela de-consolidation) – previously 9 percent 10 percent
- Negative impact of Venezuela de-consolidation (2) percent
- Negative impact of foreign currency translation4 – previously 4 percent (3) percent
- Expected 2016 core earnings per share 4.78 USD
In addition, the Company continues to expect:
- Low-single-digit raw material inflation including the impact of transaction-related foreign exchange, and low-single-digit deflation excluding the impact of transaction-related foreign exchange;
- The benefit of the 53rd week will be reinvested in certain productivity and growth initiatives in 2016;
- Productivity savings of approximately 1 billion USD;
- Lower corporate unallocated expense, driven primarily by lower pension expense;
- Higher net interest expense driven by higher debt balances;
- A core effective tax rate approximately even with the 2015 full-year core effective tax rate;
- Over 10 billion USD in cash flow from operating activities and more than 7 billion USD in free cash flow (excluding certain items);
- Net capital spending of approximately 3 billion USD; and
- To return a total of approximately 7 billion USD to shareholders through dividends of approximately 4 billion USD and share repurchases of approximately 3 billion USD.
(4) Based on current foreign exchange market consensus rates.
