PepsiCo Reports Second Quarter 2013 Results

PURCHASE, N.Y., July 24, 2013 /PRNewswire/ -- PepsiCo, Inc. (NYSE: PEP) today reported core earnings per share of $1.31 for the second quarter, an increase of 17 percent on organic revenue growth of 4.2 percent.

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"We're pleased with our performance in the second quarter and for the first half of 2013.  PepsiCo delivered another quarter of mid-single-digit organic revenue growth, driven by our balanced food and beverage product portfolio and global geographic footprint.  We continue to invest in advertising and marketing, innovation, and other marketplace initiatives to sustain our organic revenue growth and we are driving a robust productivity agenda that serves as a funding source for these investments," said Chairman and CEO Indra Nooyi.

"Importantly, we maintained disciplined, balanced pricing that, together with our productivity initiatives, translated to healthy margin improvement.  In the second quarter, we increased both gross margins and operating margins by more than 100 basis points.

"Our results in the first half give us even greater confidence in achieving our financial goals for the full year.  We remain focused on driving marketplace execution, maintaining discipline in our capital allocation and delivering on our financial targets to create long-term value for our shareholders."

⁽¹⁾Please refer to the Glossary for the definitions of Non-GAAP financial measures including core, constant currency, organic and management operating cash flow.

Operating and Marketplace Highlights

• Achieved 4.2 percent organic revenue growth.
• PepsiCo Americas Foods organic revenue grew 6 percent in the quarter driven by mid-single-digit organic revenue growth at Frito-Lay North America and double-digit organic revenue growth in Latin America Foods. Reported net revenue increased 5 percent in the quarter driven by mid-single-digit net revenue growth at Frito-Lay North America and high-single-digit net revenue growth in Latin America Foods.
• PepsiCo Americas Beverages core constant currency operating profit grew 4 percent in the quarter reflecting 3 percentage points of effective net pricing and productivity gains. Reported operating profit was up 5 percent.
• In the U.S., the company's largest market, held value market share in salty snacks and improved both volume and value market share performance sequentially in liquid refreshment beverages.
• AMEA organic revenue grew 14 percent in the quarter driven by organic volume growth in both snacks and beverages. Reported net revenue in AMEA rose 6 percent, reflecting the impact of structural changes and foreign exchange translation.
• On an organic basis, developing and emerging market revenue grew 11 percent in the quarter. The refranchising of our beverage businesses in Vietnam and China and unfavorable foreign exchange impacted developing and emerging markets net revenue growth by 5 percentage points. On a reported basis, emerging and developing market net revenue grew 6 percent in the quarter.
• Core gross margin expanded 120 basis points.
• Core operating margin expanded 120 basis points, including a 13 percent increase in advertising and marketing expense. Reported operating margin expanded 260 basis points.
• On track to deliver targeted $900 million of productivity savings during 2013 and $3 billion in productivity savings in 2012 through 2014.
• Management operating cash flow (excluding certain items) was $2.3 billion year to date. Cash flow from operations was $3 billion year to date. 
• Net capital spending was 4.0 percent of net sales over the past four quarters, an improvement of 40 basis points over the comparable prior four quarters.
• On track to return a total of $6.4 billion to shareholders in 2013 through approximately $3.4 billion in dividends and approximately $3.0 billion in share repurchases.

Summary of Second Quarter Financial Performance

• Organic revenue grew 4.2 percent and reported net revenue grew 2 percent.  Structural changes, principally the refranchising of the company's beverage operations in Vietnam and China, negatively impacted reported net revenue performance by nearly 1 percentage point and foreign exchange translation had a 1.5-percentage-point unfavorable impact in the quarter. 
• Core constant currency operating profit increased 11 percent reflecting solid revenue growth, productivity gains, and a $137 million gain related to refranchising the company's bottling operations in Vietnam, partially offset by increased advertising and marketing expense and $46 million of incremental investments. The gain, net of the $46 million incremental investments, contributed 3 percentage points to core constant currency operating profit growth.  Reported operating profit increased 21 percent and included the net impact of mark-to-market losses on commodity hedges, and certain restructuring and integration costs in both 2013 and 2012.  The Vietnam gain, net of incremental investments, contributed 4 percentage points to reported operating profit growth.
• The company's core effective tax rate was 24.5 percent, below the prior year quarter primarily due to favorable resolution of certain tax matters in the quarter.  The company's reported tax rate was 24.4 percent, below the prior year quarter primarily due to favorable resolution of certain tax matters in the quarter and lapping the prior year tax impact of the China refranchising transaction with Tingyi.
• Core EPS was $1.31 and reported EPS was $1.28. Core EPS includes a $0.09 per share gain related to refranchising the company's bottling operations in Vietnam, partially offset by a $0.02 impact from incremental investments. Core EPS excludes a net impact of $0.02 per share related to mark-to-market losses on commodity hedges, and a $0.01 impact from restructuring and integration charges. Mark-to-market gains and losses on commodity hedges are subsequently reflected in core division results when the divisions recognize the cost of the underlying commodity in net income.

Summary Second Quarter 2013 Performance (Percent Growth)

^a All 2013 volume growth measures reflect an adjustment to the base year for divestitures that occurred in 2012.
^b Core constant currency results are non-GAAP financial measures that exclude certain items affecting comparability. For more information about our core constant currency results, see "Reconciliation of GAAP and Non-GAAP Information" in the attached exhibits. Please refer to the Glossary for definitions of "Core" and "Constant Currency."
^c Organic results are non-GAAP financial measures that adjust for impacts of acquisitions, divestitures and other structural changes and foreign exchange translation. For more information about our organic results, see "Reconciliation of GAAP and Non-GAAP Information" in the attached exhibits. Please refer to the Glossary for the definition of "Organic."
^d The reported operating profit performance was impacted by certain items excluded from our core results in both 2013 and 2012. 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."
^e Snacks/Beverages. 

Division Operating Summaries

PepsiCo Americas Foods (PAF) 
Organic revenue grew 6 percent in the quarter driven by 2 percentage points of organic volume growth and 5 percentage points of effective net pricing. Reported net revenue increased 5 percent, reflecting a 1-percentage-point unfavorable impact from foreign exchange translation.

Core constant currency operating profit increased 6 percent, reflecting effective net pricing and productivity initiatives, partially offset by increased advertising and marketing expense. 

Frito-Lay North America (FLNA)
Organic revenue increased 4.5 percent in the quarter, reflecting a 3-percentage-point increase in organic volume and 2 points of effective net pricing. Reported net revenue increased 4 percent.  

Core constant currency operating profit grew 6 percent in the quarter, reflecting organic revenue gains and productivity initiatives. 

Latin America Foods (LAF)
Organic revenue grew 12 percent in the quarter, reflecting 1 percentage point of organic volume growth and 10 percentage points of effective net pricing.  Reported net revenue grew 9 percent in the quarter, reflecting a 3-percentage-point unfavorable foreign exchange translation impact.  

Core constant currency operating profit increased 17 percent. These results reflect revenue growth and productivity gains partially offset by commodity cost inflation, increased advertising and marketing expense and incremental investments.  The incremental investments negatively impacted core constant currency operating profit by 2 percentage points.

Quaker Foods North America (QFNA)
Organic revenue and reported net revenue each declined 1 percent. Core constant currency operating profit declined 14 percent, driven principally by product innovation and the impact of incremental investments.  The incremental investments negatively impacted core constant currency operating profit by 2 percentage points.

PepsiCo Americas Beverages (PAB)
Organic revenue declined 1 percent in the quarter reflecting organic volume that declined 3.5 percent offset by effective net pricing of 3 percentage points. Latin America beverage volume declined less than 1 percentage point. In North America, non-carbonated beverage volume declined low-single digits, and CSD volume declined mid-single digits.

Reported net revenue declined 2 percent reflecting a 0.5-percentage-point impact of unfavorable foreign exchange translation.

Core constant currency operating profit increased 4 percent primarily reflecting favorable effective net pricing and productivity gains. 

Europe
Organic revenue grew 4 percent, reflecting 2 percentage points of volume growth and 2 percentage points of effective net pricing.  Reported net revenue grew 1 percent in the quarter, including a 3-percentage-point unfavorable impact from foreign exchange translation.

Core constant currency operating profit declined 2 percent in the quarter, reflecting incremental investments and increased advertising and marketing expense partially offset by disciplined revenue mix management and continued productivity initiatives.  The impact of more favorable settlements of promotional spending accruals in the current year positively impacted operating profit by 2 percentage points.  The incremental investments negatively impacted operating profit by 4 percentage points.

Asia, Middle East & Africa (AMEA)
Organic revenue grew 14 percent in the quarter, led by 6 percent organic volume growth in snacks and 9 percent organic volume growth in beverages.  Reported net revenue rose 6 percent, reflecting a 6-percentage-point negative impact from structural changes, principally the refranchising of bottling operations in Vietnam and China, and an unfavorable 3-percentage-point impact from foreign exchange translation.

Core constant currency operating profit increased 71 percent, reflecting organic revenue growth and the gain related to the Vietnam refranchising, partially offset by a significant increase in advertising and marketing expense.  Core constant currency operating profit rose 27 percent excluding the pre-tax gain mentioned above.

2013 Guidance and Outlook
Consistent with its previous guidance for 2013, the company expects 7 percent core constant currency EPS growth versus its fiscal 2012 core EPS of $4.10. Based on the current foreign exchange market consensus, the company now expects that foreign exchange translation will have an unfavorable impact of approximately 2 percentage points on the company's full-year core EPS performance in 2013.

The company's full year 2013 core constant currency EPS guidance includes the impact of the second quarter Vietnam gain, which is expected to be offset by the company's incremental investments in the second quarter and over the remainder of 2013.

Excluding the impact of structural changes and foreign exchange translation, organic revenue is expected to grow mid-single digits, consistent with the company's long-term targets. The impact of structural changes, principally beverage refranchisings, is expected to reduce organic revenue growth by approximately 1 percentage point for the full year. Foreign exchange translation is expected to have an unfavorable impact of approximately 1 percentage point on the company's full year net revenue growth.

For 2013, the company expects low-single-digit commodity inflation, and productivity savings of approximately $900 million. The company also expects advertising and marketing expense to increase at or above the rate of net revenue growth. Below the operating profit line, the company expects higher interest expense driven by increased debt balances and a core effective tax rate of approximately 27 percent.

The company is targeting over $9 billion in cash flow from operating activities and more than $7 billion in management operating cash flow (excluding certain items) in 2013.  Net capital spending is expected to be approximately $3 billion in 2013, within the company's long-term capital spending target of less than or equal to 5 percent of net revenue.

The company expects to return a total of $6.4 billion to shareholders in 2013 through dividends of approximately $3.4 billion and share repurchases of approximately $3.0 billion.

Conference Call
At 8 a.m. (Eastern Time) today, the company will host a conference call with investors to discuss second-quarter results and the outlook for 2013. 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.

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Cautionary Statement
Statements in this communication that are "forward-looking statements," including our 2013 guidance, are based on currently available information, operating plans and projections about future events and trends. Terminology such as "believe," "expect," "intend," "estimate," "project," "anticipate," "will," "expressed confidence," "position" or similar statements or variations of such terms are intended to identify forward-looking statements, although not all forward-looking statements contain such terms. Forward-looking statements 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; changes in the legal and regulatory environment; PepsiCo's ability to compete effectively; PepsiCo's ability to grow its business in emerging and developing markets or unstable political conditions, civil unrest or other developments and risks in the markets where PepsiCo's products are sold; unfavorable economic conditions in the countries in which PepsiCo operates; increased costs, disruption of supply or shortages of raw materials and other supplies; failure to realize anticipated benefits from PepsiCo's productivity plan or global operating model; disruption of PepsiCo's supply chain; damage to PepsiCo's reputation; failure to successfully complete or integrate acquisitions and joint ventures into PepsiCo's existing operations or to complete or manage divestitures or refranchisings; PepsiCo's ability to hire or retain key employees or a highly skilled and diverse workforce; trade consolidation or the loss of any key customer; any downgrade or potential downgrade of PepsiCo's credit ratings; PepsiCo's ability to build and sustain proper information technology infrastructure, successfully implement its ongoing business transformation initiative or outsource certain functions effectively; fluctuations in foreign exchange rates; climate change, or legal, regulatory or market measures to address climate change; failure to successfully renew collective bargaining agreements or strikes or work stoppages; any infringement of or challenge to PepsiCo's intellectual property rights; and potential liabilities and costs from litigation or legal proceedings.

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 Securities and Exchange Commission, 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
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 "Events & Presentations." Our non-GAAP measures exclude from reported results those items that management believes are not indicative of our ongoing performance and reflect how management evaluates our operating results and trends.

Glossary 
Acquisitions and divestitures: All mergers and acquisitions activity, including the impact of acquisitions, divestitures and changes in ownership or control in consolidated subsidiaries and nonconsolidated equity investees.

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

Constant currency: Financial results assuming constant foreign currency exchange rates used for translation based on the rates in effect for the comparable prior-year period. In order to compute our constant currency results, we multiply or divide, as appropriate, our current year U.S. dollar results by the current year average foreign exchange rates and then multiply or divide, as appropriate, those amounts by the prior year average foreign exchange rates.

Core: Core results are non-GAAP financial measures which exclude certain items from our historical results. In 2013, core results exclude the commodity mark-to-market net impact included in corporate unallocated expenses, merger and integration charges in connection with our acquisition of Wimm-Bill-Dann Foods OJSC (WBD), restructuring and impairment charges and a charge related to the Venezuela currency devaluation. In 2012, core results exclude the commodity mark-to-market net impact included in corporate unallocated expenses, merger and integration charges in connection with our acquisition of WBD, restructuring and impairment charges, restructuring and other charges related to the transaction with Tingyi, a pension lump sum settlement charge and a tax benefit related to a tax court decision. See "Reconciliation of GAAP and Non-GAAP Information" for additional information.

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: Reflects the year-over-year impact of discrete pricing actions, sales incentive activities and mix resulting from selling varying products in different package sizes and in different countries.

Management operating cash flow: Net cash provided by operating activities less capital spending plus sales of property, plant and equipment. See above for a reconciliation of this non-GAAP financial 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 and retiree medical contributions, (2) merger and integration payments in connection with The Pepsi Bottling Group, Inc. (PBG), PepsiAmericas, Inc. (PAS) and WBD acquisitions, (3) payments related to restructuring and other charges, (4) payments related to income tax settlements, (5) capital investments related to the bottling integration, (6) net capital investments related to restructuring plan, (7) payments for restructuring and other charges related to the transaction with Tingyi and (8) the tax impacts associated with each of these items, as applicable. This non-GAAP financial measure is our primary measure used to monitor cash flow performance. See above for a reconciliation of this non-GAAP financial measure to the most directly comparable financial measure in accordance with GAAP (operating cash flow). See "Reconciliation of GAAP and Non-GAAP Information" for additional information.   

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

Organic: A measure that adjusts for impacts of acquisitions, divestitures and other structural changes, and in the case of organic revenue, foreign exchange translation. In excluding the impact of foreign exchange translation, we assume constant foreign exchange rates used for translation based on the rates in effect for the comparable prior-year period. See the definition of "Constant currency" for additional information.

Reconciliation of GAAP and Non-GAAP Information (unaudited)
Division operating profit, core results, core constant currency results and organic 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 reflect how management evaluates our operational results and trends.

Commodity mark-to-market net impact

In the 12 weeks ended June 15, 2013, we recognized $39 million of mark-to-market net losses on commodity hedges in corporate unallocated expenses. In the 24 weeks ended June 15, 2013, we recognized $55 million of mark-to-market net losses on commodity hedges in corporate unallocated expenses. In the 12 weeks ended June 16, 2012, we recognized $79 million of mark-to-market net losses on commodity hedges in corporate unallocated expenses. In the 24 weeks ended June 16, 2012, we recognized $5 million of mark-to-market net gains on commodity hedges in corporate unallocated expenses. In the year ended December 29, 2012, we recognized $65 million of mark-to-market net gains on commodity hedges in corporate unallocated expenses. We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives include agricultural products, metals and energy. 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 recognize the cost of the underlying commodity in net income.

Merger and integration charges

In the 12 weeks ended June 15, 2013, we recorded income of $1 million related to our acquisition of WBD. This income was recorded in selling, general and administrative expenses in the Europe segment representing adjustments of previously recorded amounts. In the 24 weeks ended June 15, 2013, merger and integration charges were nominal. In the 12 weeks ended June 16, 2012, we incurred merger and integration charges of $3 million related to our acquisition of WBD, including $1 million recorded in the Europe segment and $2 million recorded in corporate unallocated expenses. In the 24 weeks ended June 16, 2012, we incurred merger and integration charges of $5 million related to our acquisition of WBD, including $3 million recorded in the Europe segment and $2 million recorded in corporate unallocated expenses. In the year ended December 29, 2012, we incurred merger and integration charges of $16 million related to our acquisition of WBD, including $11 million recorded in the Europe segment and $5 million recorded in interest expense.

Restructuring and impairment charges

In the 12 weeks ended June 15, 2013, we incurred restructuring and impairment charges of $19 million in conjunction with our Productivity Plan, including $2 million recorded in the FLNA segment, $1 million in the QFNA segment, $1 million recorded in the LAF segment, $5 million recorded in the PAB segment, $8 million recorded in the Europe segment, $1 million recorded in the AMEA segment and $1 million recorded in corporate unallocated expenses. In the 24 weeks ended June 15, 2013, we incurred restructuring and impairment charges of $30 million in conjunction with our Productivity Plan, including $4 million recorded in the FLNA segment, $5 million recorded in the LAF segment, $5 million recorded in the PAB segment, $12 million recorded in the Europe segment, $2 million recorded in the AMEA segment and $2 million recorded in corporate unallocated expenses. In the 12 weeks ended June 16, 2012, we incurred restructuring and impairment charges of $77 million in conjunction with our Productivity Plan, including $24 million recorded in the FLNA segment, $1 million recorded in the QFNA segment, $6 million recorded in the LAF segment, $35 million recorded in the PAB segment, $8 million recorded in the AMEA segment and $3 million recorded corporate unallocated expenses. In the 24 weeks ended June 16, 2012, we incurred restructuring and impairment charges of $110 million in conjunction with our Productivity Plan, including $32 million recorded in the FLNA segment, $6 million recorded in the QFNA segment, $12 million recorded in the LAF segment, $43 million recorded in the PAB segment, $17 million recorded in the AMEA segment, $1 million recorded in corporate unallocated expenses and income of $1 million recorded in the Europe segment representing adjustments of previously recorded amounts. In the year ended December 29, 2012, we incurred restructuring charges of $279 million in conjunction with our Productivity Plan, including $38 million recorded in the FLNA segment, $9 million recorded in the QFNA segment, $50 million recorded in the LAF segment, $102 million recorded in the PAB segment, $42 million recorded in the Europe segment, $28 million recorded in the AMEA segment and $10 million recorded in corporate unallocated expenses. The Productivity Plan includes actions in every aspect of our business that we believe will strengthen our complementary food, snack and beverage businesses by leveraging new technologies and processes across PepsiCo's operations, go-to-market and information systems; heightening the focus on best practice sharing across the globe; consolidating manufacturing, warehouse and sales facilities; and implementing simplified organization structures, with wider spans of control and fewer layers of management.

Venezuela currency devaluation

In the 24 weeks ended June 15, 2013, we recorded a $111 million net charge related to the devaluation of the bolivar fuerte for our Venezuela businesses. $124 million of this charge was recorded in corporate unallocated expenses, with the balance (equity income of $13 million) recorded in our PAB segment.

Restructuring and other charges related to the transaction with Tingyi

In the 12 and 24 weeks ended June 16, 2012, we recorded restructuring and other charges of $137 million in the AMEA segment related to the transaction with Tingyi. In the year ended December 29, 2012, we recorded restructuring and other charges of $150 million in the AMEA segment related to the transaction with Tingyi.

Pension lump sum settlement charge

In the year ended December 29, 2012, we recorded a pension lump sum settlement charge of $195 million in corporate unallocated expenses.

Tax benefit related to tax court decision

In the year ended December 29, 2012, we recognized a non-cash tax benefit of $217 million associated with a favorable tax court decision related to the classification of financial instruments.

Management operating cash flow (excluding certain items)

Additionally, management operating cash flow (excluding the items noted in the Net Cash Provided by Operating Activities Reconciliation table) 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. Additionally, we consider certain other items (included in the Net Cash Provided by Operating Activities Reconciliation table) in evaluating management operating cash flow which we believe investors should consider in evaluating our management operating cash flow results.

2013 guidance

Our 2013 core tax rate guidance and our 2013 core constant currency EPS guidance exclude the commodity mark-to-market net impact included in corporate unallocated expenses, merger and integration charges in connection with our acquisition of WBD, restructuring and impairment charges and charges related to the Venezuela currency devaluation. Our 2013 organic revenue guidance excludes the impact of acquisitions, divestitures and other structural changes. In addition, our 2013 organic revenue guidance and our 2013 core constant currency EPS guidance exclude the impact of foreign exchange. We are not able to reconcile our full-year projected 2013 core tax rate guidance to our full-year projected 2013 reported tax rate or our 2013 core constant currency EPS guidance to our full-year projected 2013 reported EPS growth because we are unable to predict the 2013 impact of foreign exchange or the mark-to-market net impact on commodity hedges due to the unpredictability of future changes in foreign exchange rates and commodity prices. In addition, we are unable to reconcile our full-year projected 2013 organic revenue guidance to our full-year projected 2013 reported net revenue growth because we are unable to predict the 2013 impact of foreign exchange due to the unpredictability of future changes in foreign exchange rates. Therefore, we are unable to provide a reconciliation of these measures.

SOURCE PepsiCo, Inc.