PepsiCo Profit Rises 31% 

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The FINANCIAL — PepsiCo, Inc. on February 11 reported organic revenue growth of 4 percent for the fourth quarter of 2015 and 5 percent for the full year, and core earnings per share of $1.06 for the quarter and $4.57 for the year.

“We are happy to report that we met or exceeded every financial goal we set for 2015, demonstrating consistent performance in the face of volatile macros,” said Chairman and CEO Indra Nooyi.

“Our portfolio has been strategically designed to weather the current macroeconomic challenges. Our results reflect the balance of our brand portfolio, geographic footprint, consistent marketplace execution and a relentless focus on productivity. While facing the challenges of a choppy macro environment, we continued to make thoughtful investments in our future. By making investments in our brands, product innovation and supply chain, we have fortified our business for sustained growth. Notably, we increased advertising and marketing expense as a percentage of sales by 40 basis points for the full year and 85 basis points in the fourth quarter.

“Our financial performance translated into strong cash generation, enabling us to continue to provide attractive cash returns to our shareholders. In 2015 we returned more than $9 billion to shareholders in the form of dividends and share repurchases, bringing our cumulative 10-year shareholder cash returns to more than $65 billion.

“Looking ahead to 2016, we expect solid financial performance despite expected continued macroeconomic challenges, particularly in certain key developing and emerging markets. Returning cash to shareholders remains a top priority. We are increasing our dividend per share for the 44th consecutive year, beginning with our June 2016 payment, and we expect to return approximately $7 billion to shareholders through a combination of dividends and share repurchases.”

Summary of Fourth Quarter Financial Performance:

Organic revenue grew 4 percent and reported net revenue declined 7 percent. Foreign exchange translation had an 8-percentage-point unfavorable impact on reported net revenue.

Core gross margin expanded 165 basis points and core operating margin decreased 20 basis points. Operating margin was negatively impacted by an 85 basis point increase in advertising and marketing expense as a percent of sales, partially offset by the implementation of effective revenue management strategies and previously announced productivity initiatives. Reported gross margin and operating margin both expanded 185 basis points.

Core constant currency operating profit declined 2 percent. The impact of the deconsolidation of Venezuela negatively impacted fourth quarter operating profit performance by 2 percentage points. Reported operating profit increased 10 percent and benefited from lower restructuring and impairment charges, pension-related settlements, including the lapping of a pension lump sum settlement charge, the mark-to-market net impact on commodity hedges, and the lapping of a re-measurement of certain net monetary assets of our Venezuelan businesses, partially offset by unfavorable foreign exchange translation.

Company’s core effective tax rate was 22.5 percent, which compares to 25.5 percent in the prior-year quarter. The reported effective tax rate was 11.2 percent, below the prior year quarter of 25.6 percent, as a result of a non-cash tax benefit.

Core EPS was $1.06 and reported EPS was $1.17. Core EPS excludes a $0.16 per share non-cash tax benefit and a $0.01 per share benefit for a pension-related settlement, partially offset by $0.06 per share of restructuring and impairment charges related to our previously announced productivity initiatives.

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

Core constant currency operating profit results for all divisions were positively impacted by organic revenue results as presented in the tables on pages 3 and A-6. In addition, results for each division were impacted by the following:

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Frito-Lay North America (FLNA)

Positively impacted by productivity gains and lower commodity costs, partially offset by operating cost inflation.

Quaker Foods North America (QFNA)

Positively impacted by productivity gains and lower commodity costs, offset by higher advertising and marketing expense, operating cost inflation and an impairment charge associated with ceasing operations of a dairy joint venture.

North America Beverages (NAB)

Positively impacted by lower commodity costs and productivity gains, partially offset by operating cost inflation and higher advertising and marketing expense.

Latin America

Negatively impacted by operating cost inflation, including strategic investments, higher commodity costs, primarily from transaction-related foreign exchange, the impact of the deconsolidation of Venezuela, the net impact of efficiency initiatives, a true up for a contingent liability and higher advertising and marketing expense, partially offset by productivity gains.

Europe Sub-Saharan Africa (ESSA)

Positively impacted by productivity gains and the net impact of efficiency initiatives, partially offset by higher commodity costs, primarily from transaction-related foreign exchange, operating cost inflation and higher advertising and marketing expense.

Asia, Middle East and North Africa (AMENA)

Positively impacted by productivity gains, lower commodity costs and the net impact of efficiency initiatives, partially offset by operating cost inflation and higher advertising and marketing expense.

Summary of Full-Year 2015 Financial Performance:

Organic revenue grew 5 percent and reported net revenue declined 5 percent. Foreign exchange translation had a 10-percentage-point unfavorable impact on reported net revenue.

Core gross margin and core operating margin expanded 140 basis points and 30 basis points, respectively. Operating margin improvement reflects the implementation of effective revenue management strategies and productivity initiatives, partially offset by impairment charges related to a dairy joint venture and a 40 basis point increase in advertising and marketing expense to 6.3 percent of sales. Reported gross margin expanded 130 basis points while reported operating margin declined 110 basis points, primarily reflecting the Venezuela charges.

Core constant currency operating profit increased 6 percent. Reported operating profit declined 13 percent reflecting the Venezuela charges, unfavorable foreign exchange translation and a charge to write off the recorded value of the Tingyi-Asashi Beverages Holding Co. Ltd. (TAB) call option, partially offset by pension-related settlements, including the lapping of a pension lump sum settlement charge, lower restructuring and impairment charges, the mark-to-market net impact on commodity hedges and the lapping of a re-measurement of certain net monetary assets of our Venezuelan businesses.

Core effective tax rate was 24.3 percent for 2015, which compares to 25.0 percent in the prior-year. Reported effective tax rate was 26.1 percent, above the prior-year’s rate of 25.1 percent.

Core EPS was $4.57 and reported EPS was $3.67. Core EPS excludes $0.91 per share of Venezuela charges, $0.12 per share of restructuring and impairment charges related to our previously announced productivity initiatives and $0.05 per share to write off the recorded value of the TAB call option, partially offset by $0.15 per share for a non-cash tax benefit and a $0.03 per share benefit for pension-related settlements.

Cash flow provided by operating activities was $10.6 billion for the year. Free cash flow excluding certain items was $8.1 billion for the year.

Core net return on invested capital was 19.6 percent for the year, an increase of 210 basis points from the prior year. Reported return on invested capital was 13.1 percent for the year, a decrease of 10 basis points from the prior year.

Discussion of Full-Year Division Core Constant Currency Operating Profit Results:

Core constant currency operating profit results for all divisions were positively impacted by organic revenue increases as presented in the tables on pages 6 and A-6. In addition, results for each division were impacted by the following:

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Frito-Lay North America (FLNA)

Positively impacted by productivity gains and lower commodity costs, partially offset by operating cost inflation and higher advertising and marketing expense.

Quaker Foods North America (QFNA)

Negatively impacted by impairment charges related to a dairy joint venture, operating cost inflation, higher advertising and marketing expense and the lapping of a gain associated with the divestiture of a cereal business in the prior year. These impacts were partially offset by productivity gains, lower commodity costs and favorable product mix.

North America Beverages (NAB)

Positively impacted by productivity gains and lower commodity 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 commodity costs, primarily from transaction-related foreign exchange, the fourth-quarter impact of the deconsolidation of Venezuela as well as the net impact of efficiency initiatives.

Europe Sub-Saharan Africa (ESSA)

Positively impacted by productivity gains, the net impact of efficiency initiatives and the net impact of prior-year impairment charges associated with a brand in Greece, partially offset by higher commodity costs, primarily from transaction-related foreign exchange, operating cost inflation, higher advertising and marketing expense and the lapping of a prior-year gain associated with the sale of agricultural assets.

Asia, Middle East and North Africa (AMENA)

Positively impacted by productivity gains and lower commodity costs. These impacts were partially offset by operating cost inflation, higher advertising and marketing expense and an impairment charge associated with a joint venture. In addition, the net impact of the refranchising of a portion of our beverage businesses in India and in the Middle East had a slight positive impact, which includes a gain from the India refranchising in the current year and lapping of a prior-year gain in the Middle East.

2016 Guidance and Outlook

The Company expects 2016 organic revenue growth of approximately 4 percent, excluding the impact of the 53rd week. Based on current foreign exchange market consensus rates, foreign exchange translation is expected to negatively impact reported net revenue growth by 4 percentage points and the 53rd week in 2016 is expected to contribute approximately 1 percentage point to reported net revenue growth.

Core earnings per share guidance includes the following detailed expectations:

Low-single-digit commodity deflation excluding the impact of transaction-related foreign exchange. Including the impact of transaction-related foreign exchange, commodities 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;

Lower corporate unallocated expense, driven primarily by lower pension expense;

Higher net interest expense driven by higher debt balances; and

A core effective tax rate approximately even with the 2015 full-year core effective tax rate.

Further, the Company expects:

Over $10 billion in cash flow from operating activities and more than $7 billion in free cash flow (excluding certain items); and

Net capital spending of approximately $3 billion.

The Company also announced a 7.1 percent increase in its annualized dividend to $3.01 per share from $2.81 per share, effective with the dividend expected to be paid in June 2016. Total dividends to shareholders are expected to be approximately $4 billion in 2016. In addition, the Company anticipates share repurchases of approximately $3 billion, resulting in expected total cash returned to shareholders of approximately $7 billion in 2016.

 

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