PepsiCo: Reports Third Quarter 2013 Results

Purchase / NY. (pci) PepsiCo Inc. reported core earnings per share of 1,24 USD for the third quarter and organic revenue growth of 3,3 percent for the quarter. Organic revenue grew 3,9 percent year to date and core constant currency EPS increased twelve percent year to date. Reported net revenue grew two percent year to date.

«We are pleased with our performance. PepsiCo has delivered double-digit core constant currency earnings per share growth year to date, despite ongoing macro-economic volatility in many markets. We´re able to perform well in these conditions because our brands are strong, our product portfolio is on-trend, and our geographic footprint is broad and diverse. Importantly, we have continued to make marketplace investments to strengthen our foundation for sustainable growth», said Chairman and CEO Indra Nooyi.

«We remain focused on growing our business by building our brands, innovating, driving marketplace execution, and delivering higher returns on invested capital through disciplined capital allocation. Our year-to-date results give us confidence in achieving our 2013 financial goals and we continue to believe that we have the right strategies in place to create long-term value for our shareholders».

Operating and Marketplace Highlights

  • Organic revenue increased 3,9 percent year to date and core constant currency operating profit increased eight percent year to date. Reported operating profit increased six percent year to date.
  • Core gross margin expanded 70 basis points in the quarter reflecting implementation of effective revenue management strategies.
  • Core operating margin expanded in the quarter, including an eight percent increase in advertising and marketing expense. Reported operating margin declined 35 basis points in the quarter.
  • PepsiCo Americas Foods organic revenue grew seven percent in the quarter driven by mid-single-digit organic revenue growth at Frito-Lay North America and double-digit organic revenue growth in Latin America Foods. Reported net revenue increased five percent in the quarter driven by mid-single-digit net revenue growth at Frito-Lay North America and high-single-digit net revenue growth at Latin America Foods.
  • In the U.S., the company´s largest market, grew value, volume and unit market share in salty snacks in the quarter.
  • Despite a challenging North America LRB category, NAB sequentially improved both volume and value market share performance in measured channels while leading the industry in net price realization at retail.
  • AMEA organic revenue grew six percent in the quarter reflecting organic volume growth in both snacks and beverages, despite political and marketplace volatility in certain markets, notably Egypt and India. Year-to-date, AMEA organic revenue increased eleven percent. Reported net revenue in AMEA declined three percent in the quarter and three percent year to date, reflecting the impact of structural changes and foreign exchange translation.
  • Developing and emerging market organic revenue grew nine percent in the quarter. On a reported basis, developing and emerging market net revenue grew four percent in the quarter reflecting structural changes and unfavourable foreign exchange translation.
  • On track to deliver targeted 900 million USD of productivity savings during 2013 and three billion USD in productivity savings in 2012 through 2014.
  • Management operating cash flow (excluding certain items) was 5,5 billion USD year to date, an increase of twelve percent. Cash flow from operations was 6,7 billion USD year to date, an increase of 30 percent.
  • Net capital spending was 4,1 percent of net sales over the past four quarters, within our long term objective of at or below five percent of net sales.
  • On track to return a total of 6,4 billion USD to shareholders in 2013 through approximately 3,4 billion USD in dividends and approximately 3,0 billion USD in share repurchases.

Summary of Third Quarter Financial Performance

  • Organic revenue grew 3,3 percent and reported net revenue grew 1,5 percent. Structural changes, principally the re-franchising of the company´s beverage operations in Vietnam, negatively impacted reported net revenue performance by nearly half a percentage point and foreign exchange translation had a more than 1-percentage-point unfavourable impact in the quarter.
  • Core constant currency operating profit rose three percent reflecting increased advertising and marketing expense and 28 million USD of incremental investments. Reported operating profit declined one percent and included the net impact of mark-to-market losses on commodity hedges, and certain restructuring and impairment and merger and integration costs in both 2013 and 2012. The incremental investments negatively impacted operating profit growth by one percentage point.
  • The company´s core effective tax rate was 25,5 percent and the reported effective tax rate was 25,4 percent, both below the prior year quarter due to geographic mix shift in the current year and the lapping of an adjustment to international deferred taxes in the prior year, partially offset by the lapping of tax benefits from an acquisition in the prior year. The reported tax rate was also impacted by lapping net tax expense related to gains recognized on commodity hedges in the prior year.
  • Core EPS was 1,24 USD and reported EPS was 1,23 USD. Core EPS includes a 0,01 USD impact from incremental investments. Core EPS excludes a net impact of 0,01 USD per share related to mark-to-market net losses on commodity hedges and a nominal impact each from merger and integration charges and restructuring and impairment charges. Mark-to-market gains and losses on commodity hedges are subsequently reflected in core division results when the divisions recognize the cost of the underlying commodity in net income.

Division Operating Summaries

PepsiCo Americas Foods (PAF): Organic revenue grew seven percent in the quarter driven by three percentage points of organic volume growth and five percentage points of effective net pricing. Reported net revenue increased five percent, reflecting a 2-percentage-point unfavourable impact from foreign exchange translation. Core constant currency operating profit increased seven percent, reflecting organic revenue gains and productivity initiatives, partially offset by increased advertising and marketing expense.

Frito-Lay North America (FLNA): Organic and reported net revenue increased five percent in the quarter, reflecting a three-percentage-point increase in organic volume and two percentage points of effective net pricing. Core constant currency operating profit grew six percent in the quarter, reflecting organic revenue gains, productivity initiatives, increased advertising and marketing expense and lower commodity costs.

Latin America Foods (LAF): Organic revenue grew 14 percent in the quarter, reflecting three percentage points of organic volume growth and twelve percentage points of effective net pricing. Reported net revenue grew nine percent in the quarter, reflecting a 6-percentage-point unfavourable foreign exchange translation impact. Core constant currency operating profit increased 24 percent. These results reflect revenue growth and productivity gains partially offset by commodity cost inflation and increased advertising and marketing expense.

Quaker Foods North America (QFNA): Organic revenue declined one percent in the quarter. Reported net revenue declined two percent, reflecting half-a-percentage point of unfavourable foreign exchange translation impact. Core constant currency operating profit declined eleven percent, driven by operating results of a dairy joint venture, unfavourable product mix and commodity cost inflation.

PepsiCo Americas Beverages (PAB): Organic revenue declined 1,5 percent in the quarter reflecting organic volume that declined four percent and the negative impact of concentrate shipment timing, offset by effective net pricing of three percentage points. Latin America beverage volume increased 0,5 percent. In North America, non-carbonated beverage volume declined low-single digits, and CSD volume declined mid-single digits. Reported net revenue declined two percent reflecting a 1-percentage-point impact of unfavourable foreign exchange translation. Core constant currency operating profit was even with the prior year quarter, reflecting the volume decline partially offset by favourable effective net pricing, lower commodity costs and productivity gains.

Europe: Organic revenue grew three percent, primarily reflecting effective net pricing. Snacks volume rose three percent while beverage volume declined one percent. Reported net revenue grew three percent in the quarter, including a slight favourable foreign exchange translation impact. Core constant currency operating profit rose five percent in the quarter, reflecting effective net pricing and continued productivity initiatives, partially offset by higher commodity costs.

Asia, Middle East + Africa (AMEA): Organic revenue grew six percent in the quarter driven by effective net pricing. Ongoing macro-economic volatility negatively impacted our third quarter results in this region. Reported net revenue declined three percent, reflecting a 5-percentage-point negative impact from the re-franchising of bottling operations in Vietnam, and an unfavourable 4-percentage-point impact from foreign exchange translation. Core constant currency operating profit declined seven percent, reflecting incremental investments and a significant increase in advertising and marketing expense, partially offset by effective net pricing. Incremental investments negatively impacted operating profit by seven percentage points. The net impact of divestitures positively impacted operating profit by three percentage points.

2013 Guidance and Outlook

Consistent with its previous guidance 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 currently expects that foreign exchange translation will have an unfavourable impact of at least two percentage points on the company´s full-year core EPS performance in 2013.

The company´s full year 2013 core constant currency EPS guidance includes the impact of a gain in the second quarter related to re-franchising its Vietnam beverage operations. The impact of this gain is expected to be offset by the company´s incremental investments in the second, third and fourth quarters of 2013.

Excluding the impact of structural changes and foreign exchange translation, organic revenue is expected to grow mid-single digits versus 2012, consistent with the company´s long-term guidance. The impact of structural changes, principally beverage re-franchising, is expected to reduce net revenue growth by approximately one percentage point for the full year. Based on the current foreign exchange market consensus, the company currently expects foreign exchange translation to have an unfavourable impact of approximately two percentage points on the company´s full year net revenue growth.

For 2013, the company expects low-single-digit commodity inflation, and productivity savings of approximately 900 million USD. The company expects advertising and marketing expense to increase at or above the rate of net revenue growth. 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.

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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