PepsiCo: Reports Third Quarter 2015 Results

Purchase / NY. (pci) PepsiCo Inc. reported organic revenue growth of 7.4 percent and core earnings per share of 1.35 USD 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», said Chairman and CEO Indra Nooyi. Highlights:

• Organic/core results
• Organic revenue grew 7.4 percent
• Core gross margin expanded 120 basis points
• Core EPS was 1.35 USD
• Core constant currency EPS increased 14 percent
• Reported (GAAP) results
• Net revenue declined five percent reflecting a twelve-percentage-point impact of adverse foreign currency translation
• Gross margin expanded 115 basis points
• A change in accounting for Venezuela operations resulted in non-core pre- and after-tax charges of 1.4 billion USD, or 0.92 USD per share
• EPS of 0.36 USD, declined 73 percent and includes the Venezuela charges
• 2015 Outlook
• Core constant currency EPS growth target raised to nine percent (previously eight percent)
• Foreign exchange translation expected to adversely impact core earnings per share by eleven percentage points
• On track to deliver approximately one billion USD productivity savings and nine billion USD cash returns to shareholders

Nooyi: «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 nine percent. 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, five billion USD productivity savings target through 2019».

Summary of Third Quarter Financial Performance:

Organic revenue grew 7.4 percent and reported net revenue declined five percent. Foreign exchange translation had a twelve-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 twelve 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 Company Limited (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 USD and reported EPS was 0.36 USD. Core EPS excludes 0.92 USD per share of Venezuela charges, a 0.05 USD charge to write off the recorded value of the TAB call option, 0.03 USD per share related to restructuring charges, a 0.01 USD mark-to-market net impact on commodity hedges, partially offset by a 0.02 USD benefit for a pension-related settlement.

Summary of Year to Date 2015 Financial Performance:

Organic revenue grew 5.8 percent and reported net revenue declined five percent. Foreign exchange translation had a ten-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 nine 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 USD and reported EPS was 2.50 USD. Core EPS excludes 0.91 USD per share of Venezuela charges, 0.06 USD per share related to restructuring charges, a 0.05 USD charge to write off the recorded value of the TAB call option, partially offset by a 0.02 USD benefit for a pension-related settlement.

Cash flow provided by operating activities was 6.8 billion USD year to date, an increase of one percent from the prior-year period. Free cash flow excluding certain items was 5.6 billion USD year to date, an increase of four percent from the prior-year period.

2015 Guidance and Outlook

The Company expects mid-single-digit organic revenue growth and increased its core constant currency EPS growth target to nine percent from eight percent versus its fiscal 2014 core EPS of 4.63 USD.

Based on the current foreign exchange market consensus, the Company now expects foreign exchange translation to have an unfavorable impact of approximately ten percentage points on full year net revenue growth and approximately eleven 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 one billion USD;
• Higher net interest expense driven by higher interest rates and net debt balances;
• A core effective tax rate of approximately 25 percent;
• Over ten billion USD in cash flow from operating activities and more than seven billion USD in free cash flow (excluding certain items);
• Net capital spending to be approximately three billion USD, within the company’s long-term capital spending target of less than or equal to five percent of net revenue; and
• To return a total of approximately nine billion USD to shareholders through dividends of approximately four billion USD and share repurchases of approximately five billion USD.