The FINANCIAL — PepsiCo, Inc. on July 9 reported organic revenue growth of 5.1 percent and core earnings per share of $1.32 for the second quarter.
“PepsiCo achieved strong financial performance in the second quarter. We delivered mid-single digit organic revenue growth, strong gross margin expansion and double-digit core constant currency EPS growth. Based on our year-to-date results and positive momentum in the businesses, we are increasing our full-year core constant currency EPS growth target to 8 percent,” said Chairman and CEO Indra Nooyi.
“Our results also reflect our keen focus on innovation, brand building and marketplace execution. Through scientific R&D and strategic insights, we are developing sustainable innovation to offer consumers the range of food and beverage choices they’re looking for and creating a powerful platform for growth. As a result, we continue to drive growth for our retail partners. Notably, in the second quarter, PepsiCo was once again the largest contributor to retail sales growth in the U.S., our largest market, among all food and beverage manufacturers, with over $400 million of retail sales growth in all measured channels.
“The macroeconomic environment around the world remains volatile and foreign exchange headwinds persist in many of our international markets. The steps we are taking to manage our businesses responsibly – such as taking pricing actions and optimizing our global sourcing – are clearly contributing to high-quality top and bottom-line year-to-date results and position us well for the remainder of 2015.
“Additionally, our emphasis on productivity continues to help fund investments in our business while also contributing to our margin improvement. We remain on track to deliver our 5 year, $5 billion productivity savings through 2019.
“We believe we have the right strategies in place to continue delivering strong constant currency operating results and healthy cash returns to shareholders.”
Summary of Second Quarter Financial Performance:
Organic revenue grew 5.1 percent and reported net revenue declined 6 percent. Foreign exchange translation had a 10-percentage-point unfavorable impact on reported net revenue.
Developing and emerging market organic revenue grew 11 percent. On a reported basis, developing and emerging market net revenue declined 13 percent, reflecting unfavorable foreign exchange translation, in particular, related to the Russian ruble, Venezuelan bolivar, euro and Mexican peso.
Core gross margin and core operating margin expanded 115 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 and reported operating margin expanded 105 basis points and 110 basis points, respectively.
Core constant currency operating profit increased 8 percent. Reported operating profit was even with the prior-year quarter and reflects unfavorable foreign exchange translation, restructuring charges and the mark-to-market net impact on commodity hedges.
The company’s core effective tax rate was 26 percent, which compares to 26.3 percent in the prior-year quarter. The reported effective tax rate was 26.1 percent, below the prior-year quarter of 26.5 percent.
Core EPS was $1.32 and reported EPS was $1.33. Core EPS excludes $0.02 per share related to the mark-to-market net impact on commodity hedges and a $0.01 per share negative impact from restructuring charges.
Discussion of Second Quarter Division Core Constant Currency Operating Profit Results:
Core constant currency operating profit results for all divisions were 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:
Frito-Lay North America (FLNA)
Positively impacted by productivity gains and lower commodity costs, partially offset by operating cost inflation and an increase in advertising and marketing expense.
Quaker Foods North America (QFNA)
Negatively impacted by an increase in advertising and marketing expense, partially offset by favorable product mix. Productivity gains more than offset operating cost inflation.
Latin America Foods (LAF)
Positively impacted by productivity gains, partially offset by cost inflation.
PepsiCo Americas Beverages (PAB)
Positively impacted by productivity gains, lower commodity costs and certain insurance adjustments, partially offset by operating cost inflation.
Europe
Negatively impacted by cost inflation, partially offset by productivity gains.
Asia, Middle East & Africa (AMEA)
Positively impacted by productivity gains and lower commodity costs. These impacts were partially offset by operating cost inflation, an increase in advertising and marketing expense and a 6-percentage-point impact of refranchising a portion of the beverage businesses in India and the Middle East.
Summary of Year to Date 2015 Financial Performance:
Organic revenue grew 4.8 percent and reported net revenue declined 5 percent. Foreign exchange translation had a 9-percentage-point unfavorable impact on reported net revenue.
Developing and emerging market organic revenue grew 11 percent. On a reported basis, developing and emerging market net revenue declined 13 percent, reflecting unfavorable foreign exchange translation, in particular, related to the Russian ruble, Venezuelan bolivar, euro and Mexican peso.
Core gross margin and core operating margin expanded 130 basis points and 40 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 and reported operating margin expanded 100 basis points and 75 basis points, respectively.
Core constant currency operating profit increased 8 percent. Reported operating profit was even with the prior year and reflects unfavorable foreign exchange translation, restructuring charges, and the mark-to-market net impact on commodity hedges.
The company’s core effective tax rate was 24.9 percent, which compares to 25.3 percent in the prior-year period. The reported effective tax rate was 25 percent, below the prior-year period of 25.6 percent.
Core EPS was $2.15 and reported EPS was $2.14. Core EPS excludes a $0.03 per share negative impact from restructuring charges and $0.02 per share related to the mark-to-market net impact on commodity hedges.
Cash flow provided by operating activities was $2.8 billion year to date. Free cash flow excluding certain items was $2.1 billion year to date, an increase of 7% from the prior-year period.
Discussion of Year to Date 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:
Frito-Lay North America (FLNA)
Positively impacted by productivity gains and lower commodity costs, partially offset by operating cost inflation and an increase in advertising and marketing expense.
Quaker Foods North America (QFNA)
Negatively impacted by an increase in advertising and marketing expense, partially offset by favorable product mix. Productivity gains more than offset operating cost inflation. Core constant currency operating profit declined 1 percent excluding the impairment charge associated with a dairy joint venture in the first quarter of 2015.
Latin America Foods (LAF)
Positively impacted by productivity gains, partially offset by cost inflation.
PepsiCo Americas Beverages (PAB)
Positively impacted by productivity gains and lower commodity costs, partially offset by operating cost inflation and an increase in advertising and marketing expense.
Europe
Negatively impacted by cost inflation, partially offset by productivity gains. Core constant currency operating profit was even excluding the gain on the sale of agricultural assets in the first quarter of 2014.
Asia, Middle East & Africa (AMEA)
Positively impacted by productivity gains, lower commodity costs and a 3-percentage-point impact of refranchising a portion of the beverage businesses in India and the Middle East, which included a 7-percentage-point positive impact related to the pre-tax India gain. This was partially offset by operating cost inflation and an increase in advertising and marketing expense.
2015 Guidance and Outlook
The company expects mid-single-digit organic revenue growth and increased its core constant currency EPS growth target to 8 percent from 7 percent versus its fiscal 2014 core EPS of $4.63.
Based on the current foreign exchange market consensus, the company expects foreign exchange translation to have an unfavorable impact of approximately 9 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 $8.5 to $9 billion to shareholders through dividends of approximately $4 billion and share repurchases of $4.5 to $5 billion.
Changes to the Reportable Segments Structure:
Beginning with the third quarter of 2015, PepsiCo will realign certain of its reportable segments. As a result, its food and beverage businesses in Latin America will be combined and reported as Latin America. This realignment will create a Latin America segment consistent with PepsiCo’s other international segments, Europe and AMEA, which are managed as integrated food and beverage businesses and will enable greater synergies within the segment. PepsiCo Americas Beverages will be renamed as North America Beverages and will no longer include the Latin America beverages business.
In addition, PepsiCo’s Sub-Saharan Africa business, which is currently part of the Asia, Middle East and Africa (AMEA) segment, will move to the Europe segment. As a result, the AMEA segment will be renamed as Asia, Middle East and North Africa (AMENA) and the Europe segment will be renamed Europe Sub-Saharan Africa (ESSA). These changes do not impact the Frito-Lay North America or Quaker Foods North America reportable segments.
Within the next 30 days, PepsiCo expects to provide reclassified summary segment reporting for 2013, 2014 and the first two quarters of 2015 to reflect the company’s new structure.
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