PepsiCo: Reports Second Quarter 2016 Results

Purchase / NY. (pci) PepsiCo Inc. reported results for the second quarter of 2016. «In what continues to be an incredibly volatile global macro environment, we are pleased with our results for the second quarter. While reported net revenue performance was negatively impacted by foreign exchange translation and the de-consolidation of our Venezuelan operations, we delivered balanced volume growth and positive price/mix driven by relentless execution of our commercial agenda and leading to solid organic revenue growth. At the same time, our focus on driving greater efficiency throughout our operations contributed significantly to attractive margin expansion while we continued to invest in our business», said Chairman and CEO Indra Nooyi. «Based on our year-to-date performance, we are raising our full-year core constant currency EPS growth objective».

Summary of Second Quarter Financial Performance

• Reported net revenue declined 3.3 percent. Foreign exchange translation had a 4-percentage-point unfavorable impact and the Venezuela de-consolidation had a 2.5-percentage-point unfavorable impact on reported net revenue. Organic revenue, which excludes the impacts of foreign exchange translation and structural changes, grew 3.3 percent.
• Reported gross margin expanded 115 basis points, while reported operating margin expanded 105 basis points. Core gross margin expanded 75 basis points and core operating margin expanded 80 basis points. Reported and core margin expansion reflects the implementation of effective revenue management strategies and productivity gains, partially offset by a 50-basis-point increase in advertising and marketing expense as a percentage of sales.
• Reported operating profit increased 2 percent and core constant currency operating profit increased 4 percent. The de-consolidation of our Venezuela operations had a 2.5-percentage-point unfavorable impact on both reported and core operating profit.
• The reported and core effective tax rates were approximately 26 percent in 2016 and 2015.
• Reported EPS was 1.38 USD, a 4 percent increase from the prior year. Foreign exchange translation negatively impacted reported EPS by 3.5 percentage points.
• Core EPS was 1.35 USD, an increase of 2 percent. Excluding the impact of foreign exchange translation, core constant currency EPS increased 6 percent.
• The de-consolidation of our Venezuelan operations had an unfavorable 3-percentage-point impact on both reported and core EPS.
• Cash flow provided by operating activities was 2.8 billion USD.

Discussion of Second Quarter Division Results

In addition to the net revenue performance, reported operating results were driven by the following:

Frito-Lay North America (FLNA): Positively affected by productivity gains and lower raw material costs, partially offset by impacts of operating cost inflation and higher advertising and marketing expense.

Quaker Foods North America (QFNA): Positively affected by lower raw material costs, productivity gains and the impact of ceasing the operations of a dairy joint venture (5 percentage points), partially offset by the impact of higher advertising and marketing expense, operating cost inflation and unfavorable product mix.

North America Beverages (NAB): Positively impacted by productivity gains, lower raw material costs, favorable settlements of promotional spending accruals and insurance adjustments, partially offset by operating cost inflation.

Latin America: Negatively impacted by operating cost inflation, the impact of the Venezuela de-consolidation (21 percentage points), higher raw material costs (in local currency terms, driven by a strong U.S. Dollar), adverse foreign exchange translation (13 percentage points), restructuring and impairment charges and higher advertising and marketing expenses, partially offset by productivity gains.

Europe Sub-Saharan Africa (ESSA): Negatively affected by higher raw material costs (in local currency terms, driven by a strong U.S. Dollar), operating cost inflation, increases in advertising and marketing expenses and adverse foreign exchange translation (6 percentage points), partially offset by productivity gains.

Asia, Middle East and North Africa (AMENA): Positively impacted by productivity gains and lower raw material costs, partially offset by operating cost inflation, increases in advertising and marketing expenses and adverse foreign exchange translation (4 percentage points).

Summary of Year-to-Date 2016 Financial Performance

• Reported net revenue declined 3.1 percent. Foreign exchange translation had a 4-percentage-point unfavorable impact and the Venezuela de-consolidation had a 2-percentage-point unfavorable impact on reported net revenue. Organic revenue, which excludes the impacts of foreign exchange translation and structural changes, grew 3.4 percent.
• Reported gross margin expanded 135 basis points, while reported operating margin expanded 10 basis points. Reported operating margin was impacted by an impairment charge associated with our 5 percent indirect equity interest in our Chinese bottler. Core gross margin expanded 100 basis points and core operating margin expanded 115 basis points. Core margin expansion reflects the implementation of effective revenue management strategies and productivity gains, partially offset by a 55 basis point increase in advertising and marketing expense as a percentage of sales.
• Reported operating profit declined 2 percent and core constant currency operating profit increased 7 percent. The Venezuela de-consolidation had a 2-percentage-point unfavorable impact on reported and core operating profit.
• The reported effective tax rate was 28.2 percent and core effective tax rate was 25.5 percent. For the same period of the prior year, the reported and core effective tax rates were approximately 25 percent.
• Reported EPS was 2.01 USD, a 6 percent decline from the prior year. Impairment charges related to the indirect interest in our Chinese bottler had a 0.26 USD per share impact on reported EPS (12 percentage points). Foreign exchange translation negatively impacted reported EPS by 4 percentage points.
• Core EPS was 2.24 USD, an increase of 4 percent. Excluding the impact of foreign exchange translation, core constant currency EPS increased 8 percent.
• The Venezuela de-consolidation had an unfavorable 2-percentage-point impact on both reported and core EPS.
• Cash flow provided by operating activities was 2.9 billion USD.

Discussion of Year-to-Date 2016 Division Results

In addition to the net revenue performance, reported operating results were driven by the following:

Frito-Lay North America (FLNA): Positively affected by productivity gains and lower raw material costs, partially offset by the impacts of operating cost inflation and higher advertising and marketing expense.

Quaker Foods North America (QFNA): Positively affected by an impairment charge related to our dairy joint venture and ceasing of its operations in the prior year (34 percentage points), lower raw material costs and productivity gains, partially offset by higher advertising and marketing expense, unfavorable product mix, operating cost inflation and the impact of foreign exchange translation (1 percentage point).

North America Beverages (NAB): Positively impacted by productivity gains, lower raw material costs, favorable settlements of promotional spending accruals and insurance adjustments, partially offset by operating cost inflation and higher advertising and marketing expense.

Latin America: Negatively impacted by operating cost inflation, higher raw material costs (in local currency terms, driven by a strong U.S. Dollar), adverse foreign exchange translation (17 percentage points), the impact of the Venezuela de-consolidation (16 percentage points) and restructuring and impairment charges (4 percentage points), partially offset by productivity gains.

Europe Sub-Saharan Africa (ESSA): Negatively affected by higher raw material costs (in local currency terms, driven by a strong U.S. Dollar), operating cost inflation, increases in advertising and marketing expenses, adverse foreign exchange translation (6 percentage points) and restructuring and impairment charges (2 percentage points), partially offset by productivity gains.

Asia, Middle East and North Africa (AMENA): Negatively impacted by the impairment charge related to our indirect interest in our Chinese bottler (62 percentage points), operating cost inflation, the impact of a gain in the prior year from the refranchising of a portion of our beverage business in India (6 percentage points), increases in advertising and marketing expenses and adverse foreign exchange translation (3 percentage points), partially offset by productivity gains and lower raw material costs.

2016 Guidance and Outlook

• The Company provides guidance on a non-GAAP basis as the Company cannot predict certain elements which are included in reported GAAP results, including the impact of foreign exchange and commodity mark-to-market adjustments. The Company expects:
• Based on current foreign exchange market consensus rates, foreign exchange translation to negatively impact reported net revenue growth by 4 percentage points;
• The 53rd week2 to contribute approximately 1 percentage point to reported net revenue growth;
• Approximately 4 percent organic revenue growth, excluding the impact of the 53rd week2 and structural changes, including the de-consolidation of our Venezuelan operations;
• 2016 core earnings per share of 4.71 USD;
• Low-single-digit raw material inflation including the impact of transaction related foreign exchange, and low-single-digit deflation excluding the impact of transaction related foreign exchange;
• The benefit of a 53rd week will be reinvested in certain productivity and growth initiatives in 2016;
• Productivity savings of approximately 1 billion USD;
• Lower corporate unallocated expense, driven primarily by lower pension expense;
• Higher net interest expense driven by higher debt balances;
• A core effective tax rate approximately even with the 2015 full-year core effective tax rate;
• Over 10 billion USD in cash flow from operating activities and more than 7 billion USD in free cash flow (excluding certain items);
• Net capital spending of approximately 3 billion USD; and
• To return a total of approximately 7 billion USD to shareholders through dividends of approximately 4 billion USD and share repurchases of approximately 3 billion USD.