PepsiCo Delivers Solid First-Quarter Revenue and EPS Growth

PURCHASE, N.Y., April 22 /PRNewswire-FirstCall/ -- PepsiCo, Inc. (NYSE: PEP) today reported solid results for the first quarter of 2010, driven by the acquisition of its two anchor bottlers, volume gains in its worldwide snacks and international beverage businesses, balanced investments in value and innovation, and lower costs across its operations.

PepsiCo Chairman and CEO Indra Nooyi said: “PepsiCo’s broad portfolio performed well in the quarter as our operating agility and solid marketplace execution enabled us to deliver strong financial and operational performance.  Our macrosnacks business gained share in key markets and we posted solid performance in beverages supported by the benefits of the acquisition of our two largest bottlers, growth in developing markets and improving top-line trends in North America.” 

PepsiCo Chief Financial Officer Hugh Johnston said: “We delivered double-digit gains in both revenue and core constant currency operating profit in the quarter, while making incremental strategic investments in China and other key markets.  Through rigorous financial discipline we generated $794 million in management operating cash flow, excluding certain items, which was a significant increase from last year.  In the second quarter we are stepping up investments in innovation, R&D and infrastructure, all of which should help us accelerate our growth in the second half of the year.”

* Please refer to the Glossary for definitions of constant currency and core. Core results and core constant currency results are non-GAAP financial measures that exclude certain items. Please refer to “Reconciliation of GAAP and Non-GAAP information” in the attached exhibits for a description of these items.

All references below to net revenue and core operating profit are on a constant currency basis.

First-Quarter Operating Highlights:

• Frito-Lay North America (FLNA) expanded operating margins through cost discipline and lower commodity costs.  In the second quarter, FLNA is making targeted investments in infrastructure and innovation that are expected to accelerate performance in the second half of the year.
• PepsiCo Americas Beverages (PAB) successfully completed its bottling transactions and held volume share in carbonated soft drinks (CSDs) in the U.S. as top-line trends improved in the North American beverage business.  
• Asia, Middle East, Africa (AMEA) posted strong growth in key developing markets such as India and China, where both snacks and beverages posted double-digit volume growth.

Division Operating Summary

PepsiCo Americas Foods (PAF) continued to deliver consistent performance as it overlapped double-digit gains in net revenue and core operating profit in the first quarter of 2009.  

PAB posted a 32 percent increase in net revenue and a 28 percent increase in core operating profit, driven by the favorable impact of the acquisitions, a focus on profitable volume and ongoing productivity enhancements.

North America Beverages maintained volume share leadership in measured channels and showed improved CSD volume trends driven by Pepsi Refresh, Throwback versions of Pepsi and Mountain Dew and our Super Bowl value promotions.  

In the hydration segment, SoBe Lifewater continues to perform well, gaining both volume and value share.  In the second quarter, Gatorade has begun to roll out its G Series, which provides benefits to athletes before, during and after their sports activities.

PepsiCo Europe net revenue declined 3 percent and core operating profit grew 4 percent, reflecting disciplined financial management and a continued focus on productivity.  Performance in Europe reflected a challenging macroeconomic environment across the region, particularly in Eastern Europe.  

Europe snacks volume was down 4 percent in the quarter, reflecting poor weather in Western Europe and particularly challenging macroeconomic conditions in Eastern Europe.  In the U.K., double-digit growth in the Quaker portfolio of healthy snacks was more than offset by declines at Walkers as they overlapped the successful Do Us a Flavour promotion.  In the second quarter, Europe will drive innovation in its healthy snacks portfolio through the expansion of Baked Lays in Western Europe and its nuts platform in Spain and Portugal.

Europe beverage volume declined 4 percent, reflecting category weakness.  Europe’s CSD portfolio performed well in key markets, growing value share in Russia, the U.K., Turkey and Germany.  In the second quarter, Europe will launch Mountain Dew in the U.K. and deliver differentiated value across brands and countries through price/pack architecture initiatives and a strong promotional calendar.

AMEA drove strong top-line growth across both snacks and beverages, reflecting volume momentum in China and India due to improving demand and strong marketplace execution. AMEA net revenue increased 18 percent and core operating profit grew 12 percent, reflecting strategic investments in China.  Acquisitions impacted net revenue growth favorably by 1 percentage point and adversely impacted core operating profit growth by 2 percentage points.

AMEA snacks volume grew 13 percent, reflecting broad-based increases driven by double-digit growth in China and India.  In India, Kurkure grew double digits as the division built on the success of this product by launching a new flavor in the quarter.  Growth in China reflects powerful market execution of Chinese New Year promotions.  Acquisitions contributed almost 3 percentage points to volume growth.

AMEA beverage volume increased 10 percent year over year, including double-digit volume expansion in India and China.  AMEA continued to drive locally relevant innovation in the quarter, launching several new products, including blueberry-flavored Guo Bin Fen and expanding distribution of Tropicana Pulp Sacs in China.

Tax Rate

PepsiCo’s reported tax rate was a benefit of 2 percent for the first quarter, primarily reflecting the impact of the bottling transactions, which includes the reversal of deferred taxes attributable to the previously held equity interests in the acquired bottlers.  This is a change of 27 percentage points compared to the prior year.  The resolution of certain tax matters contributed about 1 percentage point to the decline in the reported tax rate compared to the prior-year period.  Excluding the impact of items affecting comparability, PepsiCo’s core tax rate was 23 percent for the first quarter.  The company expects its full-year reported tax rate to be roughly 23 to 24 percent, which reflects a benefit of about 4 percentage points from items affecting comparability, primarily due to the impact of the bottling transactions, as noted above.

Cash Flow

Cash flow from operating activities was $241 million.  Management operating cash flow, net of capital expenditures, was a use of $17 million, including a discretionary $600 million contribution to PepsiCo's pension funds, a $100 million donation to The PepsiCo Foundation, Inc. (the Foundation), $85 million of merger and integration payments associated with our bottling acquisitions, and $26 million related to 2009 restructuring charges.  Management operating cash flow, excluding these items, was $794 million.  

For the year, the company expects cash flow from operating activities to be about $8.3 billion and management operating cash flow, net of capital expenditures, to be about $4.7 billion, including: the discretionary $600 million contribution to PepsiCo's pension funds, about $400 million of merger and integration payments associated with our bottling acquisitions, the $100 million donation to the Foundation, $26 million related to 2009 restructuring charges, about $200 million in capital investments related to the bottler integration, and about $350 million of cash tax benefits related to these items. Management operating cash flow, excluding these items, is expected to be approximately $5.6 billion.  The company expects to invest about $3.6 billion in net capital spending in 2010.

Guidance

For fiscal 2010, the company is targeting an 11 to 13 percent growth rate for core constant currency EPS off of its fiscal 2009 core EPS of $3.71, with about 6 percent growth in core constant currency EPS in the first half of the year, which includes a charge of approximately $40 million related to the Patient Protection and Affordable Care Act (PPACA) – which was signed into law in the second quarter of 2010 -- and mid-teens core constant currency EPS growth in the second half of the year.  Based on current spot rates, foreign exchange translation would represent a one percentage point unfavorable impact on the company’s full-year, core constant currency EPS.  

Please refer to the glossary for more information about the items excluded from the company’s fiscal 2010 core constant currency EPS guidance.

About PepsiCo  

PepsiCo offers the world's largest portfolio of billion-dollar food and beverage brands, including 19 different product lines that each generates more than $1 billion in annual retail sales. Our main businesses - Frito-Lay, Quaker, Pepsi-Cola, Tropicana and Gatorade - also make hundreds of other nourishing, tasty foods and drinks that bring joy to our consumers in more than 200 countries. With annualized revenues of nearly $60 billion, PepsiCo's people are united by our unique commitment to sustainable growth, called Performance with Purpose. By dedicating ourselves to offering a broad array of choices for healthy, convenient and fun nourishment, reducing our environmental impact, and fostering a diverse and inclusive workplace culture, PepsiCo balances strong financial returns with giving back to our communities worldwide. For more information, please visit www.pepsico.com.

Cautionary Statement  

Statements in this release that are “forward-looking statements,” including PepsiCo’s 2010 guidance, are based on currently available information, operating plans and projections about future events and trends. They inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted in such forward-looking statements. Such risks and uncertainties include, but are not limited to: changes in demand for PepsiCo’s products, as a result of changes in consumer preferences and tastes or otherwise; damage to PepsiCo’s reputation; trade consolidation, the loss of any key customer, or failure to maintain good relationships with PepsiCo’s bottling partners; PepsiCo’s ability to hire or retain key employees or a highly skilled and diverse workforce; unstable political conditions, civil unrest or other developments and risks in the countries where PepsiCo operates; changes in the legal and regulatory environment; PepsiCo’s ability to build and sustain proper information technology infrastructure, successfully implement its ongoing business process transformation initiative or outsource certain functions effectively; unfavorable economic conditions and increased volatility in foreign exchange rates; PepsiCo’s ability to compete effectively; increased costs, disruption of supply or shortages of raw materials and other supplies; disruption of PepsiCo’s supply chain; climate change or changes in legal, regulatory or market measures to address climate change; PepsiCo’s ability to realize the anticipated cost savings and other benefits expected from the mergers with The Pepsi Bottling Group, Inc. and PepsiAmericas, Inc.; failure to renew collective bargaining agreements or strikes or work stoppages; and any downgrade of PepsiCo’s credit rating resulting in an increase of its future borrowing costs.

For additional information on these and other factors that could cause PepsiCo’s actual results to materially differ from those set forth herein, please see PepsiCo’s filings with the SEC, including its most recent annual report on Form 10-K and subsequent reports on Forms 10-Q and 8-K. Investors are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. PepsiCo undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.  

Miscellaneous Disclosures  

Conference Call. At 8 a.m. (Eastern Time) today, the company will host a conference call with investors to discuss first quarter results and the outlook for full-year 2010. For details, visit the company’s website at www.pepsico.com, in the “Investors” section.  

Reconciliation. In discussing financial results and guidance, the company may refer to certain non-GAAP measures. Reconciliations of any such non-GAAP measures to the most directly comparable financial measures in accordance with GAAP can be found in the attached exhibits, as well as on the company’s website at www.pepsico.com in the “Investors” section under “News & Events.” Our non-GAAP measures exclude from reported results those items that management believes are not indicative of our ongoing performance and how management evaluates our operating results and trends.  

Glossary

Beverage volume: Volume shipped to retailers and independent distributors from both PepsiCo and our bottlers.  

Core: Core results are non-GAAP financial measures. First quarter 2009 core results exclude the commodity mark-to-market net gains included in corporate unallocated expenses of $62 million and restructuring charges of $25 million.  First quarter 2010 core results exclude the commodity mark-to-market net gains included in corporate unallocated expenses of $46 million, merger and integration charges associated with our PBG and PAS mergers of $312 million, as well as our share of PBG’s and PAS’s respective merger costs recorded in bottling equity income of $9 million, the gain on previously held equity interests in PBG and PAS of $958 million, certain fair value adjustments to acquired inventory in connection with our PBG and PAS mergers of $281 million, the one-time charge related to the change to hyperinflationary accounting and devaluation in Venezuela of $120 million, an asset write-off for SAP software of $145 million and a contribution to The PepsiCo Foundation, Inc. (Foundation) of $100 million.  First-half 2010 core constant currency EPS guidance excludes the commodity mark-to-market net impact included in corporate unallocated expenses, merger and integration charges associated with our PBG and PAS mergers, including our share of PBG’s and PAS’s respective merger costs recorded in bottling equity income of $9 million, the gain on previously held equity interests in PBG and PAS of $958 million, certain fair value adjustments to acquired inventory in connection with our PBG and PAS mergers, the one-time charge related to the change to hyperinflationary accounting and devaluation in Venezuela of $120 million, an asset write-off for SAP software of $145 million and a contribution to the Foundation of $100 million. Second-half 2010 core constant currency EPS guidance excludes the commodity mark-to-market net impact included in corporate unallocated expenses and merger and integration charges associated with our PBG and PAS mergers.  Full-year 2010 core constant currency EPS guidance excludes the commodity mark-to-market net impact included in corporate unallocated expenses, merger and integration charges associated with our PBG and PAS mergers, including our share of PBG’s and PAS’s respective merger costs recorded in bottling equity income of $9 million, the gain on previously held equity interests in PBG and PAS of $958 million, certain fair value adjustments to acquired inventory in connection with our PBG and PAS mergers, the one-time charge related to the change to hyperinflationary accounting and devaluation in Venezuela of $120 million, an asset write-off for SAP software of $145 million and a contribution to the Foundation of $100 million.  For more details and reconciliations of our 2010 and 2009 core and core constant currency results and first-half, second-half and full-year 2010 core constant currency EPS guidance, see “Reconciliation of GAAP and Non-GAAP Information” in the exhibits attached hereto.

Constant currency: Financial results (historical and projected) assuming constant foreign currency exchange rates used for translation based on the rates in effect for the comparable prior-year period. In addition, the impact on EPS growth is computed by adjusting core EPS growth by the after-tax foreign currency translation impact on core operating profit growth using PepsiCo’s core effective tax rate.  

Division operating profit: The aggregation of the operating profit for each of our reportable segments, which excludes the impact of corporate unallocated expenses.  

Effective net pricing: The combined impact of mix and price.  

Management operating cash flow:  Net cash provided by operating activities less capital spending plus sales of property, plant and equipment.  This non-GAAP financial measure is our primary measure used to monitor cash flow performance.  See the attached exhibits for a reconciliation of this measure to the most directly comparable financial measure in accordance with GAAP (operating cash flow).

Management operating cash flow, excluding certain items:  Management operating cash flow, excluding: (1) discretionary pension contributions in both 2010 and 2009, (2) restructuring payments in connection with our Productivity for Growth initiative in 2009, (3) merger and integration payments paid in 2010 in connection with our PBG and PAS mergers, and (4) a contribution to The PepsiCo Foundation in 2010.  See the attached exhibits for a reconciliation of this non-GAAP financial measure to the most directly comparable financial measure in accordance with GAAP (operating cash flow).

Mark-to-market gain or loss or net impact: Change in market value for commodity contracts that we purchase to mitigate the volatility in costs of energy and raw materials that we consume. The market value is determined based on average prices on national exchanges and recently reported transactions in the marketplace.  

Net pricing: The combined impact of list price changes, weight changes per package, discounts and allowances.  

Net capital spending: Capital spending less cash proceeds from sales of property, plant and equipment.  

Pricing: The impact of list price changes and weight changes per package.  

Transaction foreign exchange: The foreign exchange impact on our financial results of transactions, such as purchases of imported raw materials, commodities, or services, occurring in currencies other than the local, functional currency.  

Division operating profit, core results and core constant currency results are non-GAAP financial measures as they exclude certain items noted below.  However, we believe investors should consider these measures as they are more indicative of our ongoing performance and with how management evaluates our operational results and trends.  

Commodity mark-to-market net gains

In the first quarter of 2010, we recognized $46 million of mark-to-market net gains on commodity hedges in corporate unallocated expenses. In the first quarter of 2009, we recognized $62 million of mark-to-market net gains on commodity hedges in corporate unallocated expenses.  In the year ended December 26, 2009, we recognized $274 million of mark-to-market net gains on commodity hedges in corporate unallocated expenses.  We centrally manage commodity derivatives on behalf of our divisions.  Certain of these commodity derivatives do not qualify for hedge accounting treatment and are marked to market with the resulting gains and losses recognized in corporate unallocated expenses.  These gains and losses are subsequently reflected in division results when the divisions take delivery of the underlying commodity.

PBG/PAS merger and integration charges

In the first quarter of 2010, we incurred merger and integration charges of $312 million related to our acquisitions of PBG and PAS, including $193 million recorded in the PAB segment, $1 million recorded in the Europe segment, $88 million recorded in corporate unallocated expenses and $30 million recorded in interest expense.  These charges are being incurred to help create a more fully integrated supply chain and go-to-market business model, to improve the effectiveness and efficiency of the distribution of our brands and to enhance our revenue growth.  These charges also include closing costs, one-time financing costs and advisory fees related to the acquisitions.  In addition, we recorded $9 million of charges, representing our share of the respective merger costs of PBG and PAS, recorded in bottling equity income.  In the year ended December 26, 2009, we incurred $50 million of costs associated with the these acquisitions, as well as an additional $11 million of costs representing our share of the respective merger costs of PBG and PAS, recorded in bottling equity income.

2009 restructuring and impairment charges

As a result of our previously initiated Productivity for Growth program, we recorded restructuring and impairment charges of $25 million in the first quarter of 2009.  In the first half of 2009, we recorded restructuring and impairment charges of $36 million in connection with this program.  The program includes actions in all segments of the business, including the closure of six plants that we believe will increase cost competitiveness across the supply chain, upgrade and streamline our product portfolio and simplify the organization for more effective and timely decision-making.

Gain on previously held equity interests in PBG and PAS

In the first quarter of 2010, in connection with our acquisitions of PBG and PAS, we recorded a gain on our previously held equity interests of $958 million, comprising $735 million which is non-taxable and recorded in bottling equity income and $223 million related to the reversal of deferred tax liabilities associated with these previously held equity interests.

Inventory fair value adjustments

In the first quarter of 2010, we recorded $281 million of incremental costs in cost of sales related to fair value adjustments to the acquired inventory and other related hedging contracts included in PBG's and PAS's balance sheets at the acquisition date.

Venezuela currency devaluation

As of the beginning of our 2010 fiscal year, we recorded a one-time $120 million net charge related to our change to hyperinflationary accounting for our Venezuelan businesses and the related devaluation of the bolivar fuerte (bolivar).  $129 million of this net charge was recorded in corporate unallocated expenses, with the balance (income of $9 million) recorded in our PAB segment.  

Asset write-off for SAP software

In the first quarter of 2010, we recorded a $145 million charge related to a change in scope of one release in our ongoing migration to SAP software.  This change was driven, in part, by a review of our North America systems strategy following our acquisitions of PBG and PAS.  This change does not impact our overall commitment to continue our implementation of SAP across our global operations over the next few years.

Foundation contribution

In the first quarter of 2010, we made a $100 million contribution to The PepsiCo Foundation, Inc. (Foundation), in order to fund charitable and social programs over the next several years.  This contribution was recorded in corporate unallocated expenses.

Additionally, management operating cash flow is the primary measure management uses to monitor cash flow performance.  This is not a measure defined by GAAP.  Since net capital spending is essential to our product innovation initiatives and maintaining our operational capabilities, we believe that it is a recurring and necessary use of cash.  As such, we believe investors should also consider net capital spending when evaluating our cash from operating activities.

We are not able to reconcile our first-half, second-half or full-year projected 2010 core constant currency EPS to our first-half, second-half or full-year projected 2010 reported results because we are unable to predict the 2010 first-half, second-half or full-year impact of foreign exchange or the mark-to-market net gains or losses on commodity hedges due to the unpredictability of future changes in foreign exchange rates and commodity prices.  Therefore, we are unable to provide a reconciliation of these measures.

SOURCE PepsiCo