PepsiCo: Reports Q1/2016 Results and Reaffirms Outlook

Purchase / NY. (pci) PepsiCo Inc. reported organic revenue growth of 3.5 percent and 11 percent core constant currency EPS growth for the first quarter of 2016.

«We delivered strong first quarter operating results driven by balanced execution of our commercial agenda and productivity programs. Our marketing initiatives and new product launches are generating solid organic top line growth, and our focus on driving greater efficiency throughout our operations contributed significantly to attractive core gross margin expansion», said Chairman and CEO Indra Nooyi. «We are off to a strong start to the year and that gives us added confidence in achieving our financial objectives for 2016».

Summary First Quarter 2016 Performance (Percent Growth)

	Organic/Core			Reported (GAAP)
	Organic Volume(a)	Organic Revenue(a)	Core Constant Currency Operating Profit(b)	Net Revenue	Operating Profit(c)
FLNA	1	4	10	3	11
QFNA	(2)	(2)	67 (e)	(3)	68
NAB	1	2	7	1.5	7
Latin America	3 / 3 (d)	9	1 (f)	(26)	(20)
ESSA	1 / 2 (d)	2	(25)	(9)	(40)
AMENA	6 / 5 (d)	8	1 (g)	1	(164) (h)
Total Divisions	1.5 / 3 (d)	3.5	8 (i)
Total PepsiCo	1.5 / 3 (d)	3.5	12	(3)	(10) (h)

a	Organic results are non-GAAP financial measures that adjust for impacts of acquisitions, divestitures and other structural changes, including the previously announced Venezuela de-consolidation, and foreign exchange translation, as applicable. For more information about our organic results and the impact of the Venezuela de-consolidation, see “Reconciliation of GAAP and Non-GAAP Information” in the attached exhibits.
b	Core constant currency results are non-GAAP financial measures that exclude certain items affecting comparability and foreign exchange translation.
c	Reported operating profit performance was impacted by certain items excluded from our core results in both 2016 and 2015.
d	Snacks/Beverages.
e	3 percent decrease excluding the first quarter 2015 impairment charge associated with a dairy joint venture and the prior year operating performance associated with ceasing operations of a dairy joint venture.
f	Excluding the impact of results from our Venezuelan businesses from the Q1 2015 base, core constant currency operating profit increased 9 percent.
g	18 percent increase excluding the gain related to the refranchising of a portion of our India bottling operations recorded in the first quarter of 2015.
h	The Company recorded a pre- and after-tax non-core impairment charge of 373 million USD (0.26 USD per share) to reduce the value of the Company’s 5 percent indirect equity interest in Tingyi-Asahi Beverages Holding Co. Ltd. (TAB) to its estimated fair value.
i	9 percent increase excluding the impact of results from our Venezuelan businesses from the Q1 2015 base.

.

Summary of First Quarter Financial Performance:

• Organic revenue grew 3.5 percent and reported net revenue declined 3 percent. Foreign exchange translation had a 4.5-percentage-point unfavorable impact and the Venezuela deconsolidation had a 2-percentage-point unfavorable impact on reported net revenue.
• Core gross margin expanded 130 basis points and core operating margin increased 165 basis points. Margin expansion reflects the implementation of effective revenue management strategies and previously announced productivity initiatives, partially offset by a 65 basis point increase in advertising and marketing expense as a percentage of sales. Reported gross margin expanded 160 basis points, while reported operating margin contracted 105 basis points reflecting a 373 million USD non-core impairment charge related to our 5 percent indirect equity interest in TAB.
• Core constant currency operating profit increased 12 percent. Reported operating profit decreased 10 percent reflecting the non-core impairment charge mentioned above.
• The Company’s core effective tax rate was 24.7 percent, which compares to 23.0 percent in the prior-year quarter. The reported effective tax rate of 31.9 percent compares to 23.1 percent in the prior year quarter and was impacted by the non-core impairment charge referred to above, which had no tax benefit.
• Core EPS was 0.89 USD and reported EPS was 0.64 USD. Core EPS excludes a 0.26 USD per share non-core impairment charge related to our 5 percent indirect equity interest in TAB.
• Cash flow provided by operating activities was 131 million USD.

Discussion of First Quarter Division Core Constant Currency Operating Profit Results:

Core constant currency operating profit results for all divisions were impacted by organic revenue results. In addition, results for each division were impacted by the following:

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

Quaker Foods North America (QFNA): Positively impacted by the lapping of a first quarter 2015 impairment charge and the prior year operating performance associated with a dairy joint venture (operations of which ceased in the fourth quarter of 2015), productivity gains and lower raw material costs, partially offset by higher advertising and marketing expense and operating cost inflation.

North America Beverages (NAB): Positively impacted by productivity gains and lower raw material costs, partially offset by operating cost inflation and higher advertising and marketing expense.

Latin America: Positively impacted by productivity gains, partially offset by operating cost inflation, higher raw material costs (in local currency), driven by a strong U.S. dollar, and the impact of the deconsolidation of Venezuela.

Europe Sub-Saharan Africa (ESSA): Negatively impacted by higher raw material costs (in local currency), primarily driven by a strong U.S. dollar, operating cost inflation, increases in advertising and marketing expenses and an impairment charge associated with certain production assets in Russia, partially offset by productivity gains.

Asia, Middle East and North Africa (AMENA): Positively impacted by productivity gains and lower raw material costs, partially offset by the lapping of a prior year gain from the refranchising of a portion of our beverage business in India, operating cost inflation and higher advertising and marketing expenses.

2016 Guidance and Outlook

Consistent with its previous guidance for 2016, the Company expects:

• Approximately 4 percent organic revenue growth, excluding the impact of the 53rd week;
• Based on current foreign exchange market consensus rates, foreign exchange translation to negatively impact reported net revenue growth by 4 percentage points;
• The 53rd week to contribute approximately 1 percentage point to reported net revenue growth;
• 2016 core earnings per share of 4.66 USD, driven by the following expectations and factors (which remain unchanged):

2015 core earnings per share	4.57 USD
Expected core constant currency EPS growth (excluding Venezuela deconsolidation)	8 percent
Negative impact of Venezuela deconsolidation	(2) percent
Negative impact of foreign currency translation	(4) percent
Expected 2016 core earnings per share	4.66 USD

.
In addition, the Company continues to expect:

• Low-single-digit raw material deflation excluding the impact of transaction-related foreign exchange. Including the impact of transaction-related foreign exchange, raw materials are expected to have low-single-digit inflation;
• The benefit of a 53rd week will be reinvested in certain productivity and growth initiatives;
• 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.