Purchase / NY. (pci) PepsiCo Inc. announced its financial results for the fourth quarter and full-year 2017, ended December 30. «We are pleased with our performance for the fourth quarter and full year 2017. We met or exceeded most of the financial goals we set out at the beginning of the year. We delivered these results in the midst of a dynamic retail environment and rapidly shifting consumer landscape», said Chairman and CEO Indra Nooyi.
«The provisions of recently enacted tax legislation are expected to result in lower income taxes in 2018 for our operations in the United States, our largest market. We expect the benefits of the TCJ Act will enable us to further strengthen our business by enhancing the skills of our front line associates to ready them for the future; adding new digital and e-commerce capabilities to become more competitive; accelerating capital investments to add manufacturing capacity and make our operations more efficient; and enhancing cash returns to our shareholders over time.
«As a reflection of our confidence in the growth prospects for our business, we expect to deliver 9 percent growth in core constant currency earnings per share in 2018 and we announced today a 15 percent increase in our annualized dividend per share beginning with the June 2018 payment, representing our 46th consecutive annual increase».
Summary of Fourth Quarter Financial Performance
- Reported fourth quarter 2017 and 2016 results were impacted by:
- A provisional net tax expense of USD 2.5 billion associated with the enactment of the TCJ Act in the fourth quarter of 2017. Included in the net tax expense is a provisional mandatory one-time transition tax of approximately USD 4.0 billion on undistributed international earnings, partially offset by a provisional benefit of USD 1.5 billion resulting from the required remeasurement of our deferred tax assets and liabilities to the new, lower U.S. corporate income tax rate;
- Restructuring charges of USD 226 million which include an expansion and extension of the multi-year productivity plan we publicly announced in 2014, compared to USD 54 million in the prior-year period;
- Commodity mark-to-market impacts;
- A 2016 charge resulting from the redemption of certain senior notes in accordance with the «make-whole» redemption provisions (debt redemption charge);
- A 2016 pension-related settlement charge; and
- A 53rd reporting week and the reinvestment of the corresponding operating profit benefit in certain productivity and growth initiatives (incremental investments) in 2016.
- Reported net revenue was even with the prior year. Organic revenue, which excludes the impacts of foreign exchange translation, structural changes and the 53 rd reporting week in the prior year, grew 2.3 percent.
- Reported gross margin contracted 65 basis points and core gross margin contracted 50 basis points. Reported operating margin expanded 110 basis points and core operating margin expanded 90 basis points.
- Reported operating profit increased 9 percent and core constant currency operating profit increased 6 percent. Items impacting reported operating profit included a pension-related settlement charge in the prior year, which contributed 14 percentage points to reported operating profit growth, partially offset by higher restructuring charges and commodity mark- to-market impacts which reduced reported operating profit growth by 10 percentage points and 2 percentage points, respectively. In addition, a gain from the refranchising of our bottling operations in Jordan (Jordan refranchising gain) contributed 6 percentage points. The benefit from the 53rd reporting week in the prior-year period was offset by incremental investments. Foreign currency translation increased reported operating profit growth by 1 percentage point.
- The reported effective tax rate was 129.8 percent in the fourth quarter of 2017 and 22.7 percent in the fourth quarter of 2016. The fourth quarter 2017 reported tax rate reflects the impact of the provisional net tax expense of USD 2.5 billion as a result of the TCJ Act. The core effective tax rate was 25.0 percent in the fourth quarter of 2017 and 24.0 percent in the fourth quarter of 2016.
- Reported loss per share was USD 0.50, a decrease of 152 percent, primarily reflecting the impact of the USD 2.5 billion provisional net tax expense ( USD 1.73 per share) as a result of the TCJ Act. Foreign exchange translation positively impacted EPS by 1 percentage point.
- Core EPS was USD 1.31, an increase of 9 percent. Excluding the impact of foreign exchange translation, core constant currency EPS increased 8 percent (see schedule A-10 for a reconciliation to reported LPS, the comparable GAAP measure).
- Net cash provided by operating activities was USD 3.9 billion.
Summary of Full-Year 2017 Financial Performance
- Reported full-year 2017 and 2016 results were impacted by:
- A provisional net tax expense of USD 2.5 billion associated with the enactment of the TCJ Act;
- Restructuring charges of USD 295 million which include an expansion and extension of the multi-year productivity plan we publicly announced in 2014, compared to USD 160 million in 2016;
- Commodity mark-to-market impacts;
- A 2016 debt redemption charge;
- A 2016 pension-related settlement charge;
- A 53rd reporting week and related incremental investments in 2016; and
- A prior-year impairment charge to reduce the holding 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).
- Reported net revenue increased 1.2 percent. Organic revenue, which excludes the impacts of foreign exchange translation, structural changes and the 53 rd reporting week in the prior year, grew 2.3 percent.
- Reported gross margin contracted 40 basis points and core gross margin contracted 30 basis points. Reported operating margin expanded 95 basis points and core operating margin expanded 45 basis points. Reported operating margin expansion reflects the impacts of the prior-year charge related to the transaction with Tingyi and the pension-related settlement charge. Reported and core operating margin expansions reflect the Jordan refranchising gain in the fourth quarter and a gain associated with the sale of our minority stake in Britvic plc (Britvic gain) in the second quarter of 2017.
- Reported operating profit increased 7 percent and core constant currency operating profit increased 5 percent. The impacts of the charge related to the transaction with Tingyi and a pension-related settlement charge, both in the prior year, contributed 4 percentage points and 3 percentage points, respectively, to reported operating profit growth. Higher commodity mark-to-market impacts and restructuring charges reduced reported operating growth by 2 percentage points and 1.5 percentage points, respectively. Unfavorable foreign exchange translation reduced reported operating profit growth by 1 percentage point.
- The reported effective tax rate was 48.9 percent in 2017 and 25.4 percent in 2016. The reported 2017 tax rate reflects the impact of the provisional net tax expense of USD 2.5 billion as result of the TCJ Act. The reported 2016 tax rate was negatively impacted by the charge related to the transaction with Tingyi, which had no corresponding tax benefit. The core effective tax rate was 23.3 percent in 2017 and 24.5 percent in 2016. Both the 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 USD 3.38, a 23 percent decrease from the prior year, primarily reflecting the USD 2.5 billion provisional net tax expense as a result of the TCJ Act in 2017 and partially offset by the prior-year charge related to the transaction with Tingyi, a pension-related settlement charge and the debt redemption charge. Foreign exchange translation reduced reported EPS growth by 1 percentage point.
- Core EPS was USD 5.23, an increase of 8 percent. Excluding the impact of foreign exchange translation, core constant currency EPS increased 9 percent (see schedule A-10 for a reconciliation to reported EPS, the comparable GAAP measure).
- Net cash provided by operating activities was USD 10 billion. Free cash flow (excluding certain items) was USD 7.3 billion.
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. For 2018, the Company expects:
- Full-year organic revenue growth to be at least in line with the 2017 growth rate.
- 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.
The Company announced a 15 percent increase in its annualized dividend per share to USD 3.71 from USD 3.22 per share, effective with the dividend expected to be paid in June 2018. This represents the Company’s 46th consecutive annual dividend per share increase. Total dividends to shareholders are expected to be approximately USD 5 billion and share repurchases are expected to be approximately USD 2 billion.
The Company also announced a new share repurchase program providing for the repurchase of up to USD 15 billion of PepsiCo common stock commencing on July 1, 2018 and expiring on June 30, 2021. This will replace the USD 12 billion repurchase program which commenced on July 1, 2015 and expires on June 30, 2018.
