PepsiCo: Reports Second Quarter 2017 Results

Purchase / NY. (pci) PepsiCo Inc. reported results for the second quarter 2017. «Our results for the second quarter were very much in line with our expectations and we remain on track to meet our 2017 financial goals. The power and durability of our brand and product portfolios, strong marketplace execution, and the balance of our geographic footprint enabled us to deliver strong operating results in the midst of pockets of macroeconomic challenges and increasingly dynamic retail and consumer landscapes», said Chairman and CEO Indra Nooyi.

Summary of Second Quarter Financial Performance

Reported second quarter 2017 and 2016 results were impacted by: Restructuring charges in conjunction with the multi-year productivity plan we publicly announced in 2014; and Commodity mark-to-market impacts. See A-6 to A-8 for further details on the above items.

Reported net revenue increased 2.0 percent. Foreign exchange translation had a 1.5- percentage-point unfavorable impact on reported net revenue. Organic revenue, which excludes the impacts of foreign exchange translation and structural changes, grew 3.1 percent.

Reported gross margin contracted 55 basis points and core gross margin contracted 5 basis points. Reported operating margin contracted 20 basis points and core operating margin expanded 50 basis points, both of which reflect a gain associated with the sale of our minority stake in Britvic plc (the Britvic gain). The Britvic gain positively impacted reported and core operating margin by 60 basis points.

Reported operating profit increased 1 percent and core constant currency operating profit increased 7 percent. Commodity mark-to-market adjustments reduced reported operating profit growth by 4 percentage points. Restructuring and impairment charges contributed 1 percentage point to reported operating profit growth. Foreign exchange translation reduced reported operating profit growth by 2 percentage points. The Britvic gain had a 3-percentage- point favorable impact on reported and core operating profit growth.

The reported effective tax rate was 23.7 percent in the second quarter of 2017 and 26.3 percent in the second quarter of 2016. The core effective tax rate was 23.5 percent in the second quarter of 2017 and 26.0 percent in the second quarter of 2016. The second quarter 2017 reported and core tax rates reflect the favorable resolution of certain international tax matters, as well as income mix shift.

Reported EPS was 1.46 USD, a 6 percent increase from the prior-year period. Foreign exchange translation reduced reported EPS growth by 2 percentage points.

Core EPS was 1.50 USD, an increase of 10 percent from the prior-year period. Excluding the impact of foreign exchange translation, core constant currency EPS increased 13 percent (see schedule A-10 for a reconciliation to reported EPS, the comparable GAAP measure).

The Britvic gain had a 6 cent favorable impact on reported and core EPS.

Net cash provided by operating activities was 2.4 billion USD.

Discussion of Second Quarter Division Results

In addition to the reported net revenue performance as set out in the tables on pages 2 and A-9, reported operating results were driven by the following:

Frito-Lay North America (FLNA): Positively impacted by productivity gains, partially offset by operating cost inflation and higher raw material costs.

Quaker Foods North America (QFNA): Negatively impacted by operating cost inflation and the impact of ceasing the operations of our Müller Quaker Dairy (MQD) joint venture in the prior year. These impacts were partially offset by productivity gains and favorable settlements of promotional spending accruals compared to the prior year.

North America Beverages (NAB): Positively impacted by productivity gains, higher operating results from our joint ventures, insurance adjustments, a favorable legal settlement and favorable settlements of promotional spending accruals compared to the prior year. Higher prior-year restructuring and impairment charges increased operating profit growth by 1 percentage point. These impacts were partially offset by operating cost inflation.

Latin America: Negatively impacted by operating cost inflation, higher advertising and marketing expenses, and higher raw material costs, partially offset by productivity gains. Unfavorable foreign exchange negatively impacted operating profit performance by 5 percentage points.

Europe Sub-Saharan Africa (ESSA): Positively impacted by productivity gains. Additionally, the Britvic gain and the impact of higher prior-year restructuring and impairment charges contributed 28 percentage points and 3 percentage points to operating profit growth, respectively. These impacts were partially offset by operating cost inflation, higher advertising and marketing expenses and higher raw material costs.

Asia, Middle East and North Africa (AMENA): Negatively impacted by higher raw material costs (in local currency terms, driven by a strong U.S. dollar) and operating cost inflation, partially offset by productivity gains. Unfavorable foreign exchange negatively impacted operating profit performance by 5 percentage points.

Summary of Year-to-Date Financial Performance

Reported year-to-date 2017 and 2016 results were impacted by: Restructuring charges in conjunction with the multi-year productivity plan we publicly announced in 2014 and commodity mark-to-market impacts.

Reported year-to-date 2016 results were also impacted by an impairment charge to reduce the value of our 5 percent indirect equity interest in Tingyi-Asahi Beverages Holding Co. Ltd. to its estimated fair value (charge related to the transaction with Tingyi).

See A-6 to A-8 for further details on the above items.

Reported net revenue increased 1.8 percent. Foreign exchange translation had a 1- percentage-point unfavorable impact on reported net revenue. Organic revenue, which excludes the impacts of foreign exchange translation and structural changes, grew 2.6 percent.

Reported gross margin contracted 50 basis points and core gross margin contracted 25 basis points. Reported operating margin expanded 90 basis points and core operating margin expanded 15 basis points. Reported operating margin expansion reflects the impact of the prior-year charge related to the transaction with Tingyi. Reported and core operating margin expansion reflect the Britvic gain, which contributed 35 basis points to reported and core operating margin expansion.

Reported operating profit increased 7 percent and core constant currency operating profit increased 4 percent. The impact of the charge related to the transaction with Tingyi in the prior year had an 8-percentage-point favorable impact on reported operating profit growth. Commodity mark-to-market adjustments reduced reported operating profit growth by 4 percentage points. Foreign exchange translation reduced reported operating profit growth by 2 percentage points. The Britvic gain had a 2-percentage-point favorable impact on reported and core operating profit growth.

The reported effective tax rate was 23.3 percent year-to-date 2017 and 28.2 percent for the same period in 2016. The year-to-date reported 2016 tax rate was impacted by the charge related to the transaction with Tingyi, which had no corresponding tax benefit. The core effective tax rate was 23.1 percent year-to-date 2017 and 25.5 percent for the same period in 2016. The year-to-date 2017 reported and core tax rates reflect the positive impact of a change in the accounting for certain aspects of share-based payments to employees.

Reported EPS was 2.38 USD, an 18 percent increase from the prior-year period, primarily reflecting the impact of the year-ago charge related to the transaction with Tingyi. Foreign exchange translation reduced reported EPS growth by 2 percentage points.

Core EPS was 2.44 USD, an increase of 9 percent. Excluding the impact of foreign exchange translation, core constant currency EPS increased 10 percent (see schedule A-10 for a reconciliation to reported EPS, the comparable GAAP measure).

The Britvic gain had a 6 cent favorable impact on reported and core EPS.

Net cash provided by operating activities was 2.2 billion USD.

Discussion of Year-to-Date Division Results

In addition to the reported net revenue performance as set out in the tables on pages 5 and A-9, reported operating results were driven by the following:

Frito-Lay North America (FLNA): Positively impacted by productivity gains, partially offset by operating cost inflation and higher raw material costs.

Quaker Foods North America (QFNA): Negatively impacted by operating cost inflation and the impact of ceasing the operations of our MQD joint venture in the prior year. These impacts were partially offset by productivity gains, favorable settlements of promotional spending accruals compared to the prior year and lower raw material costs.

North America Beverages (NAB): Positively impacted by productivity gains, lower raw material costs, higher operating results from our joint ventures, favorable settlements of promotional spending accruals compared to the prior year and insurance adjustments. These impacts were partially offset by operating cost inflation.

Latin America: Negatively impacted by operating cost inflation, higher advertising and marketing expenses, and higher raw material costs, partially offset by productivity gains. Unfavorable foreign exchange and restructuring and impairment charges negatively impacted operating profit performance by 7 percentage points and 6 percentage points, respectively.

Europe Sub-Saharan Africa (ESSA): Positively impacted by productivity gains. Additionally, the Britvic gain and the impact of higher prior-year restructuring and impairment charges contributed 22 percentage points and 8 percentage points to operating profit growth, respectively. These impacts were partially offset by operating cost inflation, higher advertising and marketing expenses and higher raw material costs.

Asia, Middle East and North Africa (AMENA): Positively impacted by a year-ago charge related to the transaction with Tingyi and productivity gains. These impacts were partially offset by higher raw material costs (in local currency terms, driven by a strong U.S. dollar) and operating cost inflation. Unfavorable foreign exchange reduced operating profit growth by 4 percentage points.

2017 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.

Consistent with its previous guidance for 2017, the Company expects organic revenue growth of at least 3 percent. Based on current market consensus rates, foreign exchange translation is expected to negatively impact reported net revenue growth by approximately 2 percentage points and the 53rd week in 2016 is expected to negatively impact reported net revenue growth by 1 percentage point.

Based on current market consensus rates, foreign exchange is now expected to negatively impact core EPS by approximately 2 percentage points (previously 3 percentage points). In addition, the Company intends to reinvest the Britvic gain in the balance of the year.

As a result, the Company now expects core earnings per share of 5.13 USD. The Company continues to expect:

  • Approximately 10 billion USD in cash flow from operating activities and approximately 7 billion USD in free cash flow (excluding certain items);
  • Net capital spending of approximately 3 billion USD;
  • Dividend payments of approximately 4.5 billion USD; and
  • Share repurchases of approximately 2 billion USD.
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