Purchase / NY. (pci) PepsiCo Inc. reported results for the second quarter 2018. «We are pleased with our results for the second quarter and we remain on track to achieve the financial targets we set out at the beginning of the year», said Chairman and CEO Indra Nooyi. «The majority of our businesses performed very well, particularly our international divisions propelled by continued growth in developing and emerging markets, and our North America Beverages sector posted sequential net revenue and operating profit performance improvement».
Summary of Second Quarter Financial Performance
- Reported second quarter and year-ago results were impacted by a provisional transition tax expense related to the Tax Cuts and Jobs Act (TCJ Act), a non-cash tax benefit associated with our resolution with the Internal Revenue Service (IRS) of all open matters related to the audits of our taxable years 2012 and 2013 (the 2012 and 2013 audit resolution), restructuring charges and commodity mark-to- market net impacts. See A-6 to A-8 for further details.
- Reported net revenue increased 2.4 percent. Foreign exchange translation had a 1-percentage-point favorable impact on reported net revenue growth. Organic revenue, which excludes the impacts of foreign exchange translation, structural and other changes, grew 2.6 percent.
- Reported gross margin contracted 20 basis points and core gross margin contracted 35 basis points. Reported operating margin expanded 25 basis points and core operating margin expanded 5 basis points.
- Reported operating profit increased 4 percent and core constant currency operating profit increased 2 percent. Commodity mark-to-market net impacts positively impacted reported operating profit growth by 1 percentage point and restructuring charges had a nominal impact. A gain from refranchising our beverage business in Thailand positively contributed 5 percentage points to both reported and core operating profit growth. The prior-year gain associated with the sale of our minority stake in Britvic plc (Britvic) negatively impacted both reported and core operating profit growth by 3 percentage points. Foreign currency translation positively contributed 1 percentage point to both reported and core operating profit growth.
- The reported and core effective tax rates in the second quarter of 2018 were 36.9 percent and 21 percent, respectively. The reported and core effective tax rates in the second quarter of 2017 were 23.7 and 23.5 percent, respectively. Based primarily on new transition tax guidance related to the TCJ Act issued by the IRS during the second quarter of 2018, we recorded an additional provisional transition tax expense of USD 777 million which negatively impacted the reported effective tax rate by 27 percentage points. The 2012 and 2013 audit resolution positively impacted the reported effective tax rate by 11 percentage points.
- Reported EPS was USD 1.28, a decrease of 13 percent from the second quarter of 2017. Foreign exchange translation positively contributed 1 percentage point to reported EPS performance.
- Core EPS was USD 1.61, an increase of 8 percent from the second quarter of 2017. Excluding the impact of foreign exchange translation, core constant currency EPS increased 7 percent from the prior-year period (see schedule A-11 for a reconciliation to reported EPS, the comparable GAAP measure).
- Net cash provided by operating activities was USD 2.4 billion.
Discussion of Second Quarter 2018 Reported Division Results
Frito-Lay North America (FLNA): Operating profit grew 5 percent, primarily reflecting the net revenue growth and planned cost reductions across a number of expense categories, partially offset by certain operating cost increases.
Quaker Foods North America (QFNA): Operating profit was flat, reflecting the net revenue performance, as well as less favorable settlements of promotional spending accruals compared to the prior year, which negatively impacted operating profit performance by 4 percentage points. In addition, higher commodity costs negatively impacted operating profit performance by 3 percentage points. These impacts were partially offset by planned cost reductions across a number of expense categories and lower advertising and marketing expenses. Additionally, insurance settlement recoveries related to the 2017 earthquake in Mexico and other insurance adjustments positively contributed 2 percentage points and 2.5 percentage points, respectively, to operating profit performance.
North America Beverages (NAB): Operating profit decreased 16 percent, reflecting certain operating cost increases, including increased transportation costs, and the net revenue performance, as well as higher commodity costs, which negatively impacted operating profit performance by 5 percentage points. These impacts were partially offset by planned cost reductions across a number of expense categories, as well as certain insurance adjustments which positively contributed 2 percentage points to operating profit performance. Less favorable settlements of promotional spending accruals compared to the prior year and a favorable legal settlement in the prior year negatively impacted operating profit performance by 2 percentage points and 1 percentage point, respectively.
Latin America: Operating profit increased 18 percent, reflecting planned cost reductions across a number of expense categories and effective net pricing. Additionally, insurance settlement recoveries related to the 2017 earthquake in Mexico and the impact of a promotional spending accrual adjustment contributed 5 percentage points and 4 percentage points, respectively, to operating profit growth. These impacts were partially offset by certain operating cost increases and the volume declines, as well as higher commodity costs, which reduced operating profit growth by 8 percentage points. Lower restructuring and impairment charges contributed 11 percentage points to operating profit growth.
Europe Sub-Saharan Africa (ESSA): Operating profit decreased 11 percent, reflecting a prior-year gain associated with the sale of our minority stake in Britvic, which negatively impacted operating profit performance by 19 percentage points, certain operating cost increases and higher advertising and marketing expenses. Additionally, higher commodity costs negatively impacted operating profit performance by 3 percentage points. These impacts were partially offset by the net revenue growth and planned cost reductions across a number of expense categories. Favorable foreign exchange positively contributed 4 percentage points to operating profit performance.
Asia, Middle East and North Africa (AMENA): Operating profit increased 61 percent, primarily reflecting the net impact of refranchising our beverage businesses in Thailand in 2018 and Jordan in 2017, which increased operating profit growth by 42 percentage points. Additionally, the effective net pricing, planned cost reductions across a number of expense categories and the volume growth contributed to operating profit growth. These impacts were partially offset by certain operating cost increases, as well as higher commodity costs, which reduced operating profit growth by 3 percentage points.
Summary of Year-to-Date Financial Performance
- Reported year-to-date 2018 and 2017 results were impacted by a provisional transition tax expense related to the TCJ Act, a non-cash tax benefit associated with the 2012 and 2013 audit resolution, restructuring charges and commodity mark-to-market net impacts. See A-6 to A-8 for further details.
- Reported net revenue increased 3.2 percent. Foreign exchange translation had a 1 percentage-point favorable impact on reported net revenue growth. Organic revenue, which excludes the impacts of foreign exchange translation, structural and other changes, grew 2.5 percent.
- Reported gross margin contracted 60 basis points and core gross margin contracted 50 basis points. Reported operating margin contracted 35 basis points and core operating margin contracted 45 basis points.
- Reported operating profit increased 1 percent and core constant currency operating profit decreased 1 percent. Commodity mark-to-market net impacts and lower restructuring charges positively contributed to reported operating profit growth by 1 percentage point on a combined basis. A gain from refranchising our beverage business in Thailand positively contributed 3 percentage points to both reported and core operating profit growth. The prior-year gain associated with the sale of our minority stake in Britvic and the payment of a bonus extended to certain U.S. employees in connection with the TCJ Act in the first quarter of 2018 each negatively impacted both reported and core operating profit growth by 2 percentage points. Foreign currency translation positively contributed 1 percentage point to both reported and core operating profit growth.
- The reported and core effective tax rates year-to-date 2018 were 30.2 percent and 20 percent, respectively. The reported and core effective tax rates year-to-date 2017 were 23.3 and 23.1 percent, respectively. Based primarily on transition tax guidance related to the TCJ Act issued by the IRS during the second quarter, we recorded an additional provisional transition tax expense of USD 777 million, which negatively impacted the reported effective tax rate by 17 percentage points. The 2012 and 2013 audit resolution positively impacted the reported effective tax rate by 7 percentage points.
- Reported EPS was USD 2.21, a decrease of 7 percent from year-to-date 2017. Foreign exchange translation positively contributed 2 percentage points to reported EPS performance.
- Core EPS was USD 2.58, an increase of 6 percent over year-to-date 2017. Excluding the impact of foreign exchange translation, core constant currency EPS increased 4 percent over the prior-year period (see schedule A-11 for a reconciliation to reported EPS, the comparable GAAP measure).
- Net cash provided by operating activities was USD 1.1 billion.
Discussion of Year-to-Date Reported Division Results
Frito-Lay North America (FLNA): Operating profit grew 3 percent, primarily reflecting the net revenue growth and planned cost reductions across a number of expense categories, partially offset by certain operating cost increases, as well as a bonus extended to certain U.S. employees in connection with the TCJ Act, which reduced operating profit growth by 2 percentage points. Additionally, higher commodity costs, primarily potatoes and motor fuel, reduced operating profit growth by 2 percentage points.
Quaker Foods North America (QFNA): Operating profit declined 3 percent, reflecting the net revenue performance and certain operating cost increases, as well as higher commodity costs, which negatively impacted operating profit performance by 3 percentage points. These impacts were partially offset by planned cost reductions across a number of expense categories and lower advertising and marketing expenses.
North America Beverages (NAB): Operating profit decreased 18 percent, reflecting certain operating cost increases, including increased transportation costs, and the net revenue performance, as well as higher commodity costs, which negatively impacted operating profit performance by 6 percentage points. These impacts were partially offset by planned cost reductions across a number of expense categories, as well as certain insurance adjustments and a gain associated with a sale of an asset, each of which positively contributed 1 percentage point to operating profit performance. A bonus extended to certain U.S. employees in connection with the TCJ Act negatively impacted operating profit performance by 3 percentage points.
Latin America: Operating profit increased 27 percent, reflecting planned cost reductions across a number of expense categories and effective net pricing, as well as insurance settlement recoveries related to the 2017 earthquake in Mexico, which contributed 5 percentage points to operating profit growth. These impacts were partially offset by certain operating cost increases and the volume declines, as well as higher commodity costs, which reduced operating profit growth by 9 percentage points. Lower restructuring and impairment charges and favorable foreign exchange contributed 12 percentage points and 4 percentage points, respectively, to operating profit growth.
Europe Sub-Saharan Africa (ESSA): Operating profit decreased 5.5 percent, reflecting a prior-year gain associated with the sale of our minority stake in Britvic, which negatively impacted operating profit performance by 16 percentage points, certain operating cost increases and higher advertising and marketing expenses. Additionally, higher commodity costs negatively impacted operating profit performance by 3.5 percentage points. These impacts were partially offset by the net revenue growth and planned cost reductions across a number of expense categories. Favorable foreign exchange positively contributed 5 percentage points to operating profit performance.
Asia, Middle East and North Africa (AMENA): Operating profit increased 43 percent, primarily reflecting the net impact of refranchising our beverage businesses in Thailand in 2018 and Jordan in 2017, which increased operating profit growth by 26 percentage points. Additionally, the net revenue growth and planned cost reductions across a number of expense categories contributed to operating profit growth. These impacts were partially offset by certain operating cost increases, as well as higher commodity costs, which reduced operating profit growth by 3 percentage points.
2018 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 translation and commodity mark-to-market impacts. Consistent with its previous guidance for 2018, the Company expects:
- Full-year organic revenue growth to be at least in line with the 2017 growth rate of 2.3 percent.
- Based on current market consensus rates, foreign exchange translation to have a neutral impact on revenue and earnings per share.
- A core effective tax rate in the «low 20s», reflecting benefits of the TCJ Act.
- The benefit of the TCJ Act to be substantially reinvested in initiatives to benefit the Company’s U.S.- based front line workforce and to otherwise increase the Company’s capabilities.
- Core earnings per share of USD 5.70, a 9 percent increase compared to 2017 core earnings per share of USD 5.23.
- Approximately USD 9 billion in cash from operating activities and free cash flow of approximately USD 6 billion, which assumes net capital spending of approximately USD 3.6 billion and a discretionary pension contribution of USD 1.4 billion.
- Total cash returns to shareholders of approximately USD 7 billion. Total dividends to shareholders are expected to be approximately USD 5 billion and share repurchases are expected to be approximately USD 2 billion.
