The FINANCIAL — PepsiCo, Inc. on October 6 reported organic revenue growth of 7.4 percent and core earnings per share of $1.35 for the third quarter.
“We are pleased with our performance for the third quarter of 2015. Despite ongoing volatility in many of our key international markets, we delivered strong organic revenue growth, gross margin expansion and double-digit core constant currency EPS growth.
“Based on our year-to-date results and our outlook for the remainder of the year, we are increasing our full-year core constant currency EPS growth target to 9 percent,” said Chairman and CEO Indra Nooyi.
“In addition, despite our change in the accounting for our Venezuela operations and the related accounting charges, we remain dedicated to serving the Venezuelan marketplace with our leading food and beverage brands.
“Our year-to-date mid-single-digit organic revenue growth and double-digit core constant currency EPS growth reflect our focus on managing those things that are in our control in a challenging environment, namely innovation, brand building, marketplace execution, and productivity. Productivity, in particular, continues to simultaneously fund investments in our business and contribute to margin enhancement, and we remain on track to deliver our five-year, $5 billion productivity savings target through 2019.”
Summary of Third Quarter Financial Performance:
Organic revenue grew 7.4 percent and reported net revenue declined 5 percent. Foreign exchange translation had a 12-percentage-point unfavorable impact on reported net revenue.
Core gross margin and core operating margin expanded 120 basis points and 60 basis points, respectively. Operating margin improvement reflects the implementation of effective revenue management strategies and productivity initiatives, partially offset by increased advertising and marketing expense as a percent of sales. Reported gross margin expanded 115 basis points while reported operating margin declined 785 basis points, primarily reflecting the Venezuela charges.
Core constant currency operating profit increased 12 percent. Reported operating profit declined 50 percent and reflects the Venezuela charges, unfavorable foreign exchange translation, a charge to write off the recorded value of the Tingyi-Asahi Beverages Holding Co. Ltd. (TAB) call option, a pension-related settlement benefit, restructuring charges, and the mark-to-market net impact on commodity hedges.
Company’s core effective tax rate was 24.6 percent, which compares to 24.2 percent in the prior-year quarter. The reported effective tax rate was 54.5 percent, above the prior-year quarter of 24.0 percent, primarily due to the impact of the Venezuela charges.
Core EPS was $1.35 and reported EPS was $0.36. Core EPS excludes $0.92 per share of Venezuela charges, a $0.05 charge to write off the recorded value of the TAB call option, $0.03 per share related to restructuring charges, a $0.01 mark-to-market net impact on commodity hedges, partially offset by a $0.02 benefit for a pension-related settlement, according to PepsiCo.
Venezuela
Effective as of the end of the third quarter of 2015, the Company began accounting for its investments in its wholly-owned Venezuelan subsidiaries and joint venture using the cost method of accounting and deconsolidated assets and liabilities of its wholly-owned Venezuelan subsidiaries from its consolidated balance sheet.
Non-core charges of $1.4 billion, or $0.92 per share, were recognized in the third quarter to reduce the carrying value of these investments. Beginning in the fourth quarter of 2015, the Company will no longer include the results of its local Venezuelan subsidiaries and joint venture in its Consolidated Financial Statements and will include only revenue relating to the sales of inventory to its Venezuelan subsidiaries and joint venture to the extent cash is received for those sales. Any dividends from the Company’s Venezuelan subsidiaries and joint venture will be recorded as operating income upon receipt of the cash.
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)
Positively impacted by productivity gains, lower commodity costs and favorable product mix, partially offset by the lapping of the gain associated with the divestiture of a cereal business in the prior year, operating cost inflation and higher advertising and marketing expense.
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 and higher advertising and marketing expense.
Europe Sub-Saharan Africa (ESSA)
Positively impacted by productivity gains and the net impact of the prior-year impairment charge associated with a brand in Greece, partially offset by operating cost inflation, higher advertising and marketing and higher commodity costs.
Asia, Middle East and North Africa (AMENA)
Negatively impacted by operating cost inflation, an impairment charge associated with a joint venture in the Middle East, and the impact of refranchising a portion of the beverage businesses in India and the Middle East, including the lapping of a prior-year gain associated with our Middle East beverage refranchising. These impacts were partially offset by productivity gains, lower advertising and marketing expenses, and lower commodity costs.
Summary of Year to Date 2015 Financial Performance:
Organic revenue grew 5.8 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 125 basis points and 45 basis points, respectively. Operating margin improvement reflects the implementation of effective revenue management strategies and productivity initiatives, partially offset by increased advertising and marketing expense as a percent of sales. Reported gross margin expanded 105 basis points while reported operating margin declined 240 basis points, primarily reflecting the Venezuela charges.
Core constant currency operating profit increased 9 percent. Reported operating profit was down 19 percent and reflects the Venezuela charges, unfavorable foreign exchange translation, a charge to write off the recorded value of the TAB call option, a pension-related settlement benefit, restructuring charges, and the mark-to-market net impact on commodity hedges.
Company’s core effective tax rate was 24.8 percent, which compares to 24.9 percent in the prior-year period. The reported effective tax rate was 31.4 percent, above the prior-year period of 25.0 percent.
Core EPS was $3.50 and reported EPS was $2.50. Core EPS excludes $0.91 per share of Venezuela charges, $0.06 per share related to restructuring charges, a $0.05 charge to write off the recorded value of the TAB call option, partially offset by a $0.02 benefit for a pension-related settlement.
Cash flow provided by operating activities was $6.8 billion year to date, an increase of 1% from the prior-year period. Free cash flow excluding certain items was $5.6 billion year to date, an increase of 4% from the prior-year period.
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 an impairment charge associated with a dairy joint venture in the first quarter of 2015, operating cost inflation, higher advertising and marketing expense and the lapping of a gain associated with our cereal business in the prior year. These impacts were partially offset by productivity gains and favorable product mix.
North America Beverages (NAB)
Positively impacted by productivity gains and lower commodity costs, partially offset by operating cost inflation, higher advertising and marketing expense, as well as the lapping of favorable settlements of promotional spending accruals in the prior year.
Latin America
Positively impacted by productivity gains, partially offset by operating cost inflation and higher commodity costs.
Europe Sub-Saharan Africa (ESSA)
Positively impacted by productivity gains and the net impact of the prior-year impairment charge associated with a brand in Greece, partially offset by operating cost inflation, higher commodity costs and the lapping of a prior-year gain associated with the sale of agricultural assets in the first quarter of 2014.
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 and an impairment charge associated with a joint venture. In addition, the net impact of the refranchising of our beverage businesses in India and the Middle East had a slight negative impact, which includes a gain from the India refranchising in the current year and lapping of a prior year gain in the Middle East.
2015 Guidance and Outlook
The Company expects mid-single-digit organic revenue growth and increased its core constant currency EPS growth target to 9 percent from 8 percent versus its fiscal 2014 core EPS of $4.63.
Based on the current foreign exchange market consensus, the Company now expects foreign exchange translation to have an unfavorable impact of approximately 10 percentage points on full year net revenue growth and approximately 11 percentage points on full year core EPS performance in 2015, reflecting current expectations for strength of the U.S. dollar.
In addition, the Company expects:
Low- to mid-single-digit commodity inflation, which includes the estimated impact of transaction-related foreign exchange;
Productivity savings of approximately $1 billion;
Higher net interest expense driven by higher interest rates and net debt balances;
A core effective tax rate of approximately 25 percent;
Over $10 billion in cash flow from operating activities and more than $7 billion in free cash flow (excluding certain items);
Net capital spending to be approximately $3 billion, within the company’s long-term capital spending target of less than or equal to 5 percent of net revenue; and
To return a total of approximately $9 billion to shareholders through dividends of approximately $4 billion and share repurchases of approximately $5 billion.
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