PepsiCo Delivers Solid Third Quarter 2011 Results

PURCHASE, N.Y., Oct. 12, 2011 /PRNewswire/ --

• Worldwide snacks volume grew 8 percent in the quarter and 7 percent year to date
• Worldwide beverage volume grew 4 percent in the quarter and 6 percent year to date
• Reported net revenue increased 13 percent to $17.6 billion
• Net revenue increased 9 percent excluding the impact of the Wimm-Bill-Dann transaction
• Reported net income increased 4 percent and core* net income increased 6 percent
• Reported EPS increased 5 percent to $1.25 and core EPS grew 7 percent to $1.31
• Company reaffirms 2011 target of high-single-digit EPS growth on a core, 52-week basis

PepsiCo, Inc. (NYSE: PEP) today reported growth in volume, net revenue, operating profit and earnings per share for the third quarter of 2011 driven by top-line gains across its worldwide snacks and beverage businesses and from the acquisition of Wimm-Bill-Dann (WBD), the leading dairy and juice company in Russia.  

"We're focused on growing our business by providing consumers around the globe with great tasting products they love at a good value, and we believe this quarter's performance is a good indication that our efforts are working," said PepsiCo Chairman and CEO Indra Nooyi.  "We had strong revenue growth across our product portfolio and across our key geographic markets.  We were able to achieve pricing to partially offset commodity cost inflation and at the same time stimulate consumer demand for our products.  The result in the quarter was well-balanced top-line and bottom-line growth."    

Worldwide snacks volume increased 8 percent reflecting broad-based gains in the snacks portfolio and the impact of the WBD acquisition.  Excluding the impact of the WBD acquisition, snacks volume grew 3 percent.  Worldwide beverage volume increased 4 percent, including a 3-percentage-point impact from the WBD acquisition.  Volume performance was led by growth in emerging markets, where organic volume increased 8 percent in snacks and 3 percent in beverages.  

Reported net revenue increased 13 percent reflecting the benefits of volume growth, effective net pricing and favorable foreign exchange.  Reported net revenue grew 33 percent in emerging markets.  Excluding the WBD acquisition, net revenue grew 9 percent worldwide and 18 percent in emerging markets.

Total operating profit increased 4 percent on a reported basis, reflecting higher corporate unallocated costs in 2011 that were driven by a postretirement gain in the prior year. Total division operating profit increased 7 percent.  Reported net income increased 4 percent and reported EPS increased 5 percent to $1.25.  

Core division operating profit increased 6 percent, reflecting the benefits of net revenue gains, synergies from the anchor bottler acquisitions, productivity, favorable foreign exchange and the impact of the WBD acquisition, somewhat offset by inflation in commodity and other operating costs.  Core EPS of $1.31 increased 7 percent, driven by operating profit growth and a lower year-over-year core income tax rate.

*Please refer to the Glossary for the definition of core. Core 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.  

*The above core results and core constant currency results are non-GAAP financial measures that exclude certain items affecting comparability.  For more information about our core results and core constant currency results, see "Reconciliation of GAAP and Non-GAAP Information" in the attached exhibits.  Please refer to the Glossary for definitions of "Constant Currency" and "Core".

**Snacks/Beverage

*** The reported operating profit growth was impacted by certain items excluded from our core results in both 2011 and 2010.  See "Reconciliation of GAAP and Non-GAAP Information" in the attached exhibits for more information about these items.  Please refer to the Glossary for the definition of "Core".

All comparisons are on a year-over-year basis unless otherwise noted.

Division Operating Summaries

PepsiCo Americas Foods (PAF)  

Frito-Lay North America (FLNA)

FLNA volume increased 1 percent and net revenue grew 4 percent in the quarter driven by strong growth in club, convenience, dollar and drug channels.  Lay's, Doritos, Cheetos and Ruffles posted strong revenue growth driven by innovation and price realization as the division executed its planned pricing actions in the quarter.  Operating margins expanded in the quarter reflecting the benefits of net revenue growth and productivity.

Latin America Foods (LAF)

Volume grew 3.5 percent in the quarter reflecting solid gains in the division's largest markets, Mexico and Brazil, and strong growth in a number of key markets across Central and South America. Growth was driven by a strong innovation agenda, successful brand promotions, consumer value initiatives and marketplace execution. Strong price realization led to double-digit revenue and operating profit growth, although operating profit growth was impacted by higher commodity inflation.

Quaker Foods North America (QFNA)

Strong effective net pricing led to net revenue growth and operating profit growth. Both gross margins and operating margins expanded in the quarter, reflecting strong effective net pricing and solid cost controls offsetting commodity inflation.

PepsiCo Americas Beverages (PAB)

PAB volume increased slightly and net revenue increased 3 percent reflecting incremental pricing actions taken in the quarter across much of the portfolio.  Mid-single-digit volume growth in non-carbonated beverages offset declines in CSDs.  Non-carbonated beverage volume growth in North America was led by a 9 percent increase in Gatorade which was overlapping a 15 percent increase in the prior year.  Within the U.S., the company's volume share of the liquid refreshment beverage category grew slightly in the quarter.   Latin America Beverages delivered solid volume growth in the quarter driven primarily by strength in Mexico, Central America and Brazil.

Operating profit declined as a result of increased commodity and other operating costs in the quarter which offset the benefits of net pricing, productivity and synergies from the anchor bottler acquisitions.  

Europe

Europe reported double-digit volume gains in both snacks and beverages, including the impact of the WBD acquisition.  Organic snacks volume increased 4 percent led by double-digit growth in Turkey and France.  Organic beverage volume declined mid-single digits, lapping 10 percent organic volume growth in the third quarter of 2010, resulting in two-year organic beverage volume growth of 6 percent.  Net revenue increased 37 percent reflecting the benefit of the WBD acquisition and solid effective net pricing.

Operating profit performance benefited from the impact of the WBD acquisition and effective net pricing, offset somewhat by high levels of input cost inflation and timing of concentrate shipments.

Asia, Middle East & Africa (AMEA)

Snacks volume increased 16 percent and beverage volume grew 6 percent, led by strong performance in key emerging markets.  Net revenue increased 25 percent, driven by favorable pricing and volume growth.  

Snacks volume grew double-digits in the Middle East, India, China and Thailand.  Beverage volume growth was driven by double-digit gains in India and Saudi Arabia.  China beverage volume growth was impacted by the introduction of a consumer-preferred 500ml PET value package, which drove strong unit and net revenue growth but adversely impacted reported volume growth.

Operating profit growth of 21 percent reflected volume gains and effective net pricing offset by higher commodity costs and timing of concentrate shipments.

Tax Rate

PepsiCo's reported and core tax rate was 25.4 percent in the third quarter of 2011 versus a reported and core tax rate of 27.4 percent in the third quarter of 2010.  The reduction in the tax rate was driven primarily by adjustments to previous estimates of geographic earnings mix.  The company's reported tax rate was 26.0 percent year to date in 2011, compared to 21.7 percent in 2010.  The company's core tax rate was 25.8 percent year to date in 2011, compared to 26.9 percent in 2010.

Cash Flow

Year-to-date cash flow from operating activities was $5.8 billion.  Management operating cash flow, net of capital spending, was $3.9 billion, including $223 million of merger and integration payments associated with the bottler and WBD acquisitions and $91 million of capital spending related to the bottler integrations. Management operating cash flow excluding these items was $4.2 billion.

2011 Guidance

For 2011, the company is targeting high-single-digit earnings per share growth on a core, 52-week basis, including an estimated foreign exchange translation benefit of approximately 1 percentage point, from its fiscal 2010 core EPS of $4.13.  The company's guidance reflects uncertainty regarding macroeconomic and consumer trends for 2011 and anticipates high global commodity cost inflation and ongoing support of strategic initiatives in emerging markets and brand building activities.  The company expects 2011 earnings to benefit from synergies from the bottler acquisitions and the acquisition of WBD.  In addition, the company expects higher net interest expense as compared to the prior year and a core tax rate of approximately 27 percent.  The company anticipates share repurchases of approximately $2.5 billion in 2011.  

Please refer to the glossary for more information about the items excluded from the company's 2011 core tax rate guidance and 2011 core EPS guidance.

Conference Call

At 8 a.m. (Eastern Time) today, the company will host a conference call with investors to discuss third-quarter results and the outlook for 2011. Further details, including a slide presentation accompanying the call, will be accessible on the company's website at www.pepsico.com/investors in advance of the call.    

About PepsiCo

PepsiCo offers the world's largest portfolio of billion-dollar food and beverage brands, including 19 different product lines that generate more than $1 billion in annual retail sales each. Our main businesses -- Quaker, Tropicana, Gatorade, Frito-Lay, and Pepsi Cola -- also make hundreds of other enjoyable foods and beverages that are respected household names throughout the world. With net revenues of approximately $60 billion, PepsiCo's people are united by our unique commitment to sustainable growth by investing in a healthier future for people and our planet, which we believe also means a more successful future for PepsiCo. We call this commitment Performance with Purpose: PepsiCo's promise to provide a wide range of foods and beverages for local tastes; to find innovative ways to minimize our impact on the environment, including by conserving energy and water usage, and reducing packaging volume; to provide a great workplace for our associates; and to respect, support, and invest in the local communities where we operate. For more information, please visit www.pepsico.com.

Cautionary Statement

Statements in this communication that are "forward-looking statements," including our 2011 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; PepsiCo's ability to grow its business in developing and emerging markets or unstable political conditions, civil unrest or other developments and risks in the countries where PepsiCo operates; trade consolidation or the loss of any key customer; changes in the legal and regulatory environment; PepsiCo's ability to build and sustain proper information technology infrastructure, successfully implement its ongoing business transformation initiative or outsource certain functions effectively; unfavorable economic conditions in the countries in which PepsiCo operates; fluctuations 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 legal, regulatory or market measures to address climate change; PepsiCo's ability to hire or retain key employees or a highly skilled and diverse workforce; failure to successfully renew collective bargaining agreements or strikes or work stoppages; and failure to successfully complete or integrate acquisitions and joint ventures into PepsiCo's existing operations.

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

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 "Investor Presentations." 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 which exclude the following items in our historical results:  the commodity mark-to-market net impact included in corporate unallocated expenses; as well as merger and integration costs and certain inventory fair value adjustments in connection with our acquisitions of The Pepsi Bottling Group, Inc. (PBG), PepsiAmericas, Inc. (PAS) and WBD.  With respect to our 2011 guidance, our core results exclude: the commodity mark-to-market net impact included in corporate unallocated expenses; certain inventory fair value adjustments and merger and integration charges related to PBG, PAS and WBD; and the impact of the 53rd week.  For more details and reconciliations of our 2010 core results, 2011 core and core constant currency results, full-year 2011 core tax rate guidance and full-year 2011 core 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.

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) a discretionary pension contribution in the prior year,  (2) restructuring payments in connection with our Productivity for Growth initiative, (3) merger and integration payments in connection with our PBG, PAS and WBD acquisitions, (4) a contribution to The PepsiCo Foundation in the prior year, (5) capital investments related to the bottling integration, and (6) the tax impacts associated with each of these items, as applicable. 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.  

Organic: A measure that excludes the impact of acquisitions.

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.

*Core results and core constant currency results are financial measures that are not in accordance with Generally Accepted Accounting Principles (GAAP) and, in 2011, exclude the commodity mark-to-market net impact included in corporate unallocated expenses, as well as merger and integration costs and certain inventory fair value adjustments in connection with our acquisitions of The Pepsi Bottling Group, Inc. (PBG), PepsiAmericas, Inc. (PAS) and Wimm-Bill-Dann Foods OJSC (WBD).  Core results also exclude, in 2010, the commodity mark-to-market net impact included in corporate unallocated expenses, a one-time net charge related to the change to hyperinflationary accounting and currency devaluation in Venezuela, a contribution to The PepsiCo Foundation, Inc. and an asset write-off charge for SAP software.  Additionally, with respect to our acquisitions of PBG and PAS, 2010 core results also exclude our gain on previously held equity interests, merger and integration costs, as well as our share of PBG's and PAS's respective merger and integration costs, and certain inventory fair value adjustments.  Core growth, on a constant currency basis, assumes constant foreign currency exchange rates used for translation based on the rates in effect for the comparable period during 2010.  In addition, core constant currency 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.  See schedules A-7 through A-16 for a discussion of these items and reconciliations to the most directly comparable financial measures in accordance with GAAP.

Reconciliation of GAAP and Non-GAAP Information
(unaudited)

Net revenue excluding the impact of WBD, 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 impact

In the 12 and 36 weeks ended September 3, 2011, we recognized $53 million and $31 million, respectively, of mark-to-market net losses on commodity hedges in corporate unallocated expenses.  In the 12 and 36 weeks ended September 4, 2010, we recognized $16 million and $58 million, respectively, of mark-to-market net gains on commodity hedges in corporate unallocated expenses.  In the year ended December 25, 2010, we recognized $91 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.  

Merger and integration charges

In the 12 weeks ended September 3, 2011, we incurred merger and integration charges of $61 million related to our acquisitions of PBG, PAS and WBD, including $24 million recorded in the PAB segment, $11 million recorded in the Europe segment, $10 million recorded in corporate unallocated expenses and $16 million recorded in interest expense.  In the 36 weeks ended September 3, 2011, we incurred merger and integration charges of $174 million related to our acquisitions of PBG, PAS and WBD, including $77 million recorded in the PAB segment, $17 million recorded in the Europe segment, $64 million recorded in corporate unallocated expenses and $16 million recorded in interest expense.  These charges also include closing costs and advisory fees related to our acquisition of WBD.  In the 12 weeks ended September 4, 2010, we incurred merger and integration charges of $69 million related to our acquisitions of PBG and PAS, including $38 million recorded in the PAB segment, $15 million recorded in the Europe segment and $16 million recorded in corporate unallocated expenses.  In the 36 weeks ended September 4, 2010, we incurred merger and integration charges of $536 million related to our acquisitions of PBG and PAS, including $334 million recorded in the PAB segment, $44 million recorded in the Europe segment, $128 million recorded in corporate unallocated expenses and $30 million recorded in interest expense.  These charges also include closing costs, one-time financing costs and advisory fees related to our acquisitions of PBG and PAS.  In addition, in the 36 weeks ended September 4, 2010, we recorded $9 million of charges, representing our share of the respective merger costs of PBG and PAS, in bottling equity income.  In the year ended December 25, 2010, we incurred merger and integration charges of $799 million related to our acquisitions of PBG and PAS, as well as advisory fees in connection with our acquisition of WBD, including $467 million recorded in the PAB segment, $111 million recorded in the Europe segment, $191 million recorded in corporate unallocated expenses and $30 million recorded in interest expense.  These charges also include closing costs, one-time financing costs and advisory fees related to our acquisitions of PBG and PAS.  In addition, in the year ended December 25, 2010, we recorded $9 million of charges, representing our share of the respective merger costs of PBG and PAS, in bottling equity income.

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 12 and 36 weeks ended September 3, 2011, we recorded $3 million and $41 million, respectively, of incremental costs in cost of sales related to fair value adjustments to the acquired inventory included in WBD's balance sheet at the acquisition date and other related hedging contracts included in PBG's and PAS's balance sheets at the acquisition date.  In the 12 and 36 weeks ended September 4, 2010, we recorded $17 million and $374 million, respectively, of incremental costs, substantially all 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.  In the year ended December 25, 2010, we recorded $398 million of incremental costs, substantially all 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.  

Reconciliation of GAAP and Non-GAAP Information (cont.)
(unaudited)

Asset write-off

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.

Interest expense incurred in connection with debt repurchase

In the year ended December 25, 2010, we paid $672 million in a cash tender offer to repurchase $500 million (aggregate principal amount) of our 7.90% senior unsecured notes maturing in 2018.  As a result of this debt repurchase, we recorded a $178 million charge to interest expense, primarily representing the premium paid in the tender offer.

Management operating cash flow

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.

2011 guidance

Our 2011 core tax rate guidance and our 2011 core EPS guidance exclude the commodity mark-to-market net impact included in corporate unallocated expenses; merger and integration charges related to PBG, PAS and WBD; and the impact of the 53rd week in 2011.  We are not able to reconcile our full-year projected 2011 core tax rate to our full-year projected 2011 reported tax rate or our full-year projected 2011 core EPS to our full-year projected 2011 reported EPS because we are unable to predict the mark-to-market net gains or losses on commodity hedges due to the unpredictability of future changes in commodity prices.  Therefore, we are unable to provide a reconciliation of these measures.

SOURCE PepsiCo, Inc.