PepsiCo: Reports Q4 and Full Year 2012 Results

Purchase / NY. (pci) PepsiCo Inc. reported core earnings per share of 1,09 USD for the fourth quarter of 2012 and 4,10 USD for the full year, on organic revenue growth of five percent for both the quarter and the full year.

«In 2012, we delivered five percent organic revenue growth, reflecting PepsiCo´s many strengths: we are well positioned in attractive and highly complementary growth categories, our portfolio is diversified with products that have broad appeal and a global footprint that is balanced and we have an enviable portfolio of iconic brands», said Chairman and CEO Indra Nooyi.

«We also took a number of significant steps in 2012 that will even better position our business for sustainable, long-term growth; we increased our brand investment, stepped up our innovation, improved our marketplace execution and embarked on an aggressive productivity program that will contribute to our profitability and act as a funding source of future investment».

«Our recent brand-building initiatives and innovation across the portfolio, including Quaker Real Medleys, Gatorade Energy Chews, Pepsi Next and Doritos Locos Tacos, are translating into success in the marketplace».

«Just as importantly, we remain highly focused on generating attractive returns for our shareholders. We returned 6,5 billion USD to shareholders in 2012 through a combination of share repurchases and dividends and today announced an increase in our quarterly dividend that will take effect in June».

«We are encouraged by the progress we´re making and expect performance in the coming year to be consistent with our long-term targets».

Operating and Marketplace Highlights

  • Achieved five percent organic revenue growth in the quarter and for the full year with a good balance between volume growth(2) and price realization.
  • PepsiCo Americas Foods organic revenue grew eight percent in the quarter driven by organic revenue gains in all divisions, including Frito-Lay North America, Quaker Foods North America and Latin America Foods. Reported net revenue increased 3,5 percent in the quarter, with declines at FLNA and QFNA due to the impact of an extra reporting week in the fourth quarter of 2011.
  • Frito-Lay North America and PepsiCo Americas Beverages market share trends in the U.S. improved sequentially in the fourth quarter reflecting disciplined execution and significant investments in advertising and marketing.
  • AMEA organic revenue grew eight percent in the quarter driven by low-double-digit organic volume growth in snacks and mid-single-digit organic volume growth in beverages. Reported net revenue in AMEA declined 13 percent in the fourth quarter, reflecting the impact of structural changes.
  • On an organic basis, emerging and developing market revenue grew nine percent in the quarter. On a reported basis, emerging and developing market net revenue was even with the prior year quarter, primarily due to beverage refranchisings in China and Mexico.
  • Substantially increased advertising and marketing expense by 50 basis points to 5,7 percent of net revenue during 2012, supporting the company´s long-term brand-building initiatives.
  • Delivered more than one billion USD of productivity savings during 2012 through disciplined cost management programs. The company remains on track to deliver three billion USD in productivity savings by 2015.
  • Management operating cash flow (excluding certain items) was 7,4 billion USD in 2012. Cash flow from operations was 8,5 billion USD.
  • Delivered a 20 percent reduction in net capital spending to 4,0 percent of 2012 net revenue.
  • Returned 6,5 billion USD to shareholders in 2012 through 3,2 billion USD in share repurchases and 3,3 billion USD in dividends.

Summary of Fourth Quarter Financial Performance

  • Organic revenue grew five percent and reported net revenue declined one percent. Organic revenue growth was driven by balanced volume growth and effective net pricing. Structural changes, primarily refranchisings in China and Mexico, negatively impacted reported net revenue performance by three percentage points. An extra reporting week in the prior year quarter negatively impacted reported net revenue performance by three percentage points and foreign exchange translation had less than a one percent unfavourable impact in the quarter.
  • Core constant currency operating profit declined seven percent reflecting the impact of increased commodity costs, increased advertising and marketing expense, higher pension expense, lapping gains related to certain divestitures and asset disposals in the fourth quarter of 2011, partially offset by productivity initiatives. Reported operating profit declined 1,5 percent and included the impacts of a lump sum pension settlement charge in the current year and an extra reporting week in 2011, partially offset by lower restructuring and certain impairment charges and merger and integration charges in the current year.
  • The company´s core effective tax rate was 26,7 percent, below the prior year quarter primarily due to an adjustment to deferred tax liabilities. The company´s reported effective tax rate was 15,4 percent reflecting the benefit of a tax court decision.
  • Core EPS was 1,09 USD and reported EPS was 1,06 USD. Core EPS excludes a 0,14 USD per share tax benefit related to a tax court decision, an 0,08 USD per share charge related to a pension lump sum settlement, a 0,06 USD per share impact of certain restructuring, impairment and integration charges and a 0,02 USD per share impact from mark-to-market net losses on commodity hedges. Mark-to-market gains and losses on commodity hedges are subsequently reflected in core division results when the divisions take delivery of the underlying commodity.

PepsiCo Americas Foods (PAF)

Organic revenue grew eight percent in the quarter driven by five percentage points of organic volume growth and three percentage points of effective net pricing. Reported net revenue increased 3,5 percent reflecting a 4-percentage-point negative impact from the extra reporting week in 2011 and a less than 1-percentage-point unfavourable impact from foreign exchange translation. Core constant currency operating profit declined two percent, reflecting higher commodity costs and increased advertising and marketing investments across all PAF divisions, partially offset by productivity initiatives and effective net pricing.

For the full year, organic revenue grew seven percent driven by two percentage points of organic volume growth and five percentage points of effective net pricing. Reported net revenue grew four percent reflecting a 1-percentage-point negative impact from the extra reporting week in 2011 and a 2-percentage-point unfavourable impact from foreign exchange translation. Core constant currency operating profit was even with the prior year, reflecting revenue gains and productivity initiatives, offset by higher commodity costs and increased advertising and marketing investments across all PAF divisions.

Frito-Lay North America (FLNA)

Organic revenue increased five percent in the quarter, reflecting a 5-percentage-point increase in organic volume and even effective net pricing. Reported revenue declined one percent reflecting the impact from the extra reporting week in the prior year quarter. For the full year, organic revenue grew four percent, reflecting a 1-percentage-point contribution from organic volume and three percentage points of effective net pricing. Full year reported revenue grew two percent, including two percentage points of negative impact from the extra reporting week in 2011.

Core constant currency operating profit grew three percent in the quarter and two percent for the full year. These results reflect organic revenue gains and productivity initiatives, partially offset by higher commodity costs and a significant increase in advertising and marketing investments.

Latin America Foods (LAF)

Organic revenue grew 13 percent in the quarter, reflecting three percentage points of organic volume growth and ten percentage points of effective net pricing. Reported net revenue also grew 13 percent in the quarter, with a 1-percentage-point benefit from acquisitions and divestitures offset by a 1-percentage-point unfavourable foreign exchange translation impact.

Full-year organic revenue grew 14 percent, reflecting four percentage points of organic volume growth and ten percentage points of effective net pricing. Reported net revenue increased nine percent and included a 2-percentage-point benefit from acquisitions and divestitures and a 7-percentage-point unfavourable impact from foreign exchange translation.

Core constant currency operating profit declined 4,5 percent in the quarter and rose four percent for the full year. These results reflect revenue growth and productivity gains offset by increased advertising and marketing expense and commodity cost inflation in both periods as well as lapping a gain from the sale of a fish business in Brazil in the fourth quarter of 2011.

Quaker Foods North America (QFNA)

Organic revenue grew five percent in the quarter and one percent for the full year driven primarily by organic volume gains. Reported net revenue declined 0,5 percent in the quarter and one percent for the full year, reflecting the impact from the extra reporting week in 2011.

Core constant currency operating profit declined 18 percent for the quarter and declined twelve percent for the full year. This was driven principally by higher commodity costs and increased advertising and marketing expense in the quarter and the full year and by lapping gains from a divestiture and an asset sale in the fourth quarter of 2011.

PepsiCo Americas Beverages (PAB)

Organic revenue grew 2,5 percent in the quarter reflecting organic volume that was even with the prior year and 2,5 percentage points of effective net pricing. Non-carbonated beverages volume grew low-single-digits led by mid-single-digit volume growth at Gatorade and CSD volume declined approximately one percent in the quarter.

For the full year, organic revenue grew 1,5 percent reflecting a 1-percentage-point organic volume decline, three percentage points of effective net pricing and the impact of concentrate shipment timing.

Reported net revenue declines included the impacts of refranchising the division´s Mexican bottling operation in 2011, which had a negative 2-percentage-point impact for the quarter and a negative 5-percentage-point impact for the full year and of the extra reporting week in 2011, which had a negative 5-percentage-point impact for the quarter and a negative 1-percentage-point impact for the year.

Core constant currency operating profit declined eight percent in the quarter and eleven percent for the full year, primarily reflecting increased commodity costs and higher advertising and marketing expense, partially offset by favorable effective net pricing and productivity initiatives. Operating profit comparisons were also impacted by a gain associated with the refranchising of the division´s Mexico bottling operation in the fourth quarter of 2011.

Europe

Organic revenue grew 3,5 percent in the quarter and four percent for the full year. This reflected even organic volume and three percentage points of effective net pricing in the quarter and even organic volume performance on four percentage points of effective net pricing for the full year. Continued healthy volume growth in Russia and parts of Eastern Europe partially offset softer trends in Western Europe for the quarter and the full year.

Reported net revenue grew one percent in the quarter, including a 1-percentage-point unfavourable impact from foreign exchange translation and a 1-percentage-point negative impact from the extra reporting week in 2011. Reported net revenue declined one percent for the full year, including a 7-percentage-point unfavourable impact from foreign exchange translation.

Core constant currency operating profit declined ten percent in the quarter and grew three percent for the full year, reflecting significantly higher marketing investments and commodity cost inflation partially offset by productivity savings.

Asia, Middle East + Africa (AMEA)

Organic revenue grew eight percent in the quarter, led by low double-digit organic volume growth in snacks and mid-single-digit organic volume growth in beverages. Reported net revenue declined 13 percent reflecting a 19-percentage-point negative impact from structural changes, principally the refranchising of bottling operations in China and an unfavourable 1-percentage-point impact from foreign exchange translation.

For the full year, organic revenue grew ten percent led by double-digit organic volume growth in snacks and mid-single-digit organic volume growth in beverages. Including structural changes and foreign exchange translation, reported net revenue declined ten percent reflecting a 17-percentage-point negative impact from structural changes, principally the refranchising of bottling operations in China and an unfavourable 3-percentage-point impact from foreign exchange translation.

Core constant currency operating profit declined 20 percent for the fourth quarter and was up four percent for the full year. These results include the impact of lapping a gain on divestiture associated with the sale of the division´s minority interest in its franchise bottler in Thailand in the fourth quarter of 2011.

2013 Outlook

For 2013, the company expects seven percent core constant currency EPS growth versus its fiscal 2012 core EPS of 4,10 USD. Based on the current foreign exchange market consensus, the company expects that foreign exchange translation will have an unfavourable impact of up to one point on the company´s full-year core EPS performance in 2013. Excluding the impact of structural changes and foreign exchange translation, organic revenue is expected to grow mid-single-digits, consistent with the company´s long-term targets. The impact of structural changes, principally beverage refranchisings, are expected to reduce organic revenue growth by approximately one percentage point for the full year.

For 2013, the company expects low-single-digit commodity inflation and productivity savings of approximately 900 million USD. The company also expects advertising and marketing expense to increase at or above the rate of net revenue growth. Below the operating line, the company expects higher interest expense driven by increased debt balances and a core effective tax rate of approximately 27 percent.

The company is targeting over nine billion USD in cash flow from operating activities and more than seven billion USD in management operating cash flow (excluding certain items) in 2013. Net capital spending is expected to be approximately three billion USD in 2013, within the company´s long-term capital spending target of less than or equal to five percent of net revenue.

Reflecting its commitment to return capital to shareholders, the company announced a new share repurchase program providing for the repurchase of up to ten billion USD of PepsiCo common stock from July 1, 2013 through June 30, 2016, which will succeed the current repurchase program that expires on June 30, 2013. The company also announced a 5,6 percent increase in its annualized dividend to 2,27 USD per share from 2,15 USD per share, to take effect with the June 2013 payment. Under these programs, the company expects to return a total of 6,4 billion USD to shareholders in 2013 through dividends of approximately 3,4 billion USD and share repurchases of approximately 3,0 billion USD.

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