- Third quarter reported EPS of $1.21 and core EPS of $1.20
- Company reaffirms 2012 core constant currency net revenue and core constant currency EPS guidance
- Reflecting the impact of previously announced structural changes and negative foreign exchange translation, reported net revenue declined 5 percent, in line with expectations. Excluding these impacts, organic net revenue grew 5 percent
- Company expects to return more than $6 billion to shareholders through dividends and share repurchases in 2012
- Company expects to deliver more than $1 billion in productivity savings in 2012 and $3 billion in savings by 2015
PepsiCo, Inc. (NYSE: PEP) reported a decline in third quarter net revenue of 5 percent, reflecting a negative 5-percentage-point impact from previously announced structural changes (primarily beverage refranchisings in China and Mexico), and a negative 5-percentage-point impact from foreign exchange translation. Excluding these items, third quarter net revenue grew 5 percent on an organic basis.
Reported EPS was $1.21 and core EPS was $1.20. Management reaffirmed both its 2012 core constant currency net revenue and core constant currency EPS guidance and stated that its 2012 strategic initiatives are on track.
“PepsiCo is diligently executing the strategy we set forth at the start of the year, and we remain on track to achieve our full-year targets,” said PepsiCo chairman and CEO Indra Nooyi. “Our disciplined pricing and sustained investment in brand building drove 5 percent organic net revenue growth reflecting 1 percent organic volume growth and 4 percent effective net pricing.
“We remain focused on our five priorities. We will continue to invest aggressively to build our brands, accelerate innovation to drive growth, focus on execution and deliver our productivity agenda while returning cash to shareholders.”
Operating and marketplace highlights
- Achieved 5 percent organic net revenue growth with a good balancebetween volume growth and price realization.
- Grew global snacks net revenue on a reported basis. Grew both globalsnacks and global beverage net revenue on an organic basis.
- Emerging and developing market net revenue declined 13 percent, primarily due to beverage refranchisings in China and Mexico. On an organic basis, emerging and developing market net revenue grew 11 percent.
- While reported net revenue in AMEA and Europe declined 21 percent and 6 percent, respectively, organic net revenue grew 10 percent and 7 percent, respectively.
- PAF saw balanced revenue growth driven by volume growth and effective net price realization.
- Substantially increased advertising and marketing expense in the quarter, supporting the company’s long-term brand building initiatives.
- Activated our expanded partnership with the NFL across snacks and beverages with retail programming in 22 of 32 team markets and announced that Pepsi will be the official sponsor of the 2013 Super Bowl.
Summary of third quarter financial performance
- Organic net revenue growth was 5 percent. Reported net revenue benefited from 1 percentage point of volume growth and 4 percentage points of effective net pricing, offset by negative foreign exchange translation of 5 percentage points. Structural changes, primarily refranchisings in China and Mexico, negatively impacted reported net revenue performance by 5 percentage points.
- Reported operating profit declined 4 percent and core operating profit declined 8 percent. Core operating profit performance reflected the impact of increased commodity costs, increased advertising and marketing expense, higher corporate unallocated expenses reflecting increased pension expense and a negative 3 percentage point impact of foreign exchange translation. Core operating profit excluded mark-to-market net gains on commodity hedges, restructuring and certain impairment charges as well as merger and integration charges.
- Net interest expense was $181 million and included $24 million in mark-to-market gains on investments related to deferred compensation liabilities. There is a corresponding offset to these gains within selling, general and administrative expense resulting in no net benefit to earnings.
- The company’s reported effective tax rate was 27 percent. The company’s core effective tax rate was 26.3 percent, 90 basis points above the prior year quarter due to an adjustment to international deferred taxes, partially offset by tax benefits generated from an international acquisition.
- Reported EPS was $1.21 and core EPS was $1.20. Core EPS excludes a $0.04 per share impact of certain restructuring, impairment and integration charges and a $0.05 per share impact from mark-to-market net gains on commodity hedges. Mark-to-market gains and losses are subsequently reflected in core division results when the divisions take delivery of the underlying commodity.
- Operating cash flow was $5.1 billion year to date. Management operating cash flow (excluding certain items) was $4.9 billion. The company has returned $4.8 billion to shareholders through dividends and share repurchases through the end of the third quarter, and expects to return more than $6 billion to shareholders for the full year 2012.
Division operating summaries
PepsiCo Americas Foods (PAF)
Organic net revenue grew 6 percent in the quarter, and reported net revenue grew 2.5 percent. Net revenue growth was driven by effective net pricing supported by contributions from innovation and increased media support. Core constant currency operating profit declined 1 percent, reflecting higher commodity costs and increased advertising and marketing investments across all PAF divisions, partially offset by productivity initiatives.
Frito-Lay North America (FLNA)
Organic net revenue increased 3 percent driven by a 1 percent increase in volumecoupled with 2 percent effective net pricing. Volume was negatively impacted inthe quarter by a calendar shift related to the Labor Day holiday. Net revenuegrowth was driven by the C-store, club, dollar and foodservice channels. Reportednet revenue grew 3 percent.
Operating profit growth of 1 percent in the quarter reflected higher commodity costs and a significant increase in advertising and marketing investments offset by effective net pricing and productivity initiatives.
Latin America Foods (LAF)
On an organic basis, LAF net revenue grew 13 percent. Net revenue growthreflected 4 percentage points of organic volume growth and 9 percentage points ofeffective net pricing. Reported net revenue grew 2 percent, reflecting a 2-percentage-point benefit from acquisitions and divestitures, offset by a 13-percentage-point unfavorable foreign exchange translation impact.
Core constant currency operating profit was even with the prior year quarter reflecting increased advertising and marketing expense and commodity cost inflation.
Quaker Foods North America (QFNA)
Organic net revenue grew modestly. Reported net revenue performance waseven with the prior year quarter, reflecting 2 percentage points of volume growthoffset by lower pricing and mix.
Core constant currency operating profit in the quarter declined 11 percent driven principally by higher commodity costs and increased advertising and marketing expense.
PepsiCo Americas Beverages (PAB)
On an organic basis, net revenue was even with the prior year quarter. Effectivenet pricing increased by 3 percentage points and bottler case volume declined 3percent. Volume was negatively impacted by 1 percentage point in the quarterdue to a calendar shift related to the Labor Day holiday. Positive volume andpricing trends continued within the convenience and gas channel. Reported netrevenue declined 7 percent, primarily reflecting a negative 6-percentage-pointimpact of the refranchising of the division’s Mexican beverage business in thefourth quarter of 2011 and a negative 1-percentage-point impact from foreignexchange translation.
Operating profit declined in the quarter primarily reflecting increased commodity costs and higher advertising and marketing expense, partially offset by favorable effective net pricing and savings resulting from productivity initiatives. The refranchising of the division’s Mexican beverage business negatively impacted operating profit performance by more than 2 percentage points.
On an organic basis, net revenue grew 7 percent with a focus on product mixmanagement to drive margin accretion and healthy growth in Russia partiallyoffset by softer trends in Western Europe. Reported net revenue declined 6percent, reflecting 6 percentage points of effective net pricing which was morethan offset by an unfavorable foreign exchange translation impact of 12percentage points.
Core constant currency operating profit grew 3 percent in the quarter with significantly higher marketing investments and commodity cost inflation offset by productivity savings. Operating profit performance was negatively impacted by 4 percentage points due to an impairment charge associated with operations in Greece. Operating profit performance was positively impacted by 8 percentage points attributable to net favorable adjustments of certain operating items and favorable comparisons related to timing of concentrate shipments in connection with our global SAP implementation in the third quarter of 2011.
Asia, Middle East & Africa (AMEA)
On an organic basis, net revenue grew 10 percent, led by double-digit organicvolume growth in snacks and high-single-digit organic volume growth inbeverages. Reported net revenue declined 21 percent reflecting a 27-percentagepointnegative impact from structural changes, principally the refranchising ofbottling operations in China, and a negative 4-percentage-point impact fromforeign exchange translation.
Core constant currency operating profit grew 14 percent, driven by volume growth and effective net pricing partially offset by higher commodity costs. The impact of acquisitions and divestitures reduced operating profit by 5 percent while a favorable comparison related to timing of concentrate shipments in connection with our global SAP implementation in the third quarter of 2011 increased operating profit by 7 percent.
As previously announced, the company has committed to a multi-year productivityprogram. The company incurred pre-tax, non-core restructuring charges of$83 million in the third quarter of 2012 and has incurred $193 million year to date.
The company anticipates additional charges of approximately $205 million in the balance of 2012 and $129 million from 2013 through 2015. Charges under this program resulted in cash expenditures of $103 million in the third quarter of 2012 and $243 million year to date. The company anticipates additional cash expenditures of approximately $175 million in the remainder of 2012, with the balance of approximately $287 million of related cash expenditures expected in 2013 through 2015.
2012 guidance and outlook
Consistent with its previous guidance for 2012, the company expects a decline incore constant currency EPS of approximately 5 percent from its fiscal 2011 coreEPS of $4.40. Based on the current foreign exchange market consensus, foreignexchange translation would have an unfavorable impact of approximately three percentage points on the company’s full year core EPS performance in 2012.
Consistent with its previous guidance, the company expects core constant currency net revenue growth of low-single-digits reflecting the impact of structural changes, principally refranchisings, which are expected to reduce core constant currency net revenue growth by approximately three percentage points for the full year. Excluding these structural changes, core constant currency net revenue is expected to grow mid-single-digits, consistent with the company’s prior guidance.
The company is targeting approximately $8 billion in cash flow from operating activities and more than $6 billion in management operating cash flow (excluding certain items) in 2012, which includes the favorable impact of an expected 10 percent reduction in capital spending and improved working capital efficiency. The company also made a pre-tax discretionary pension and retiree medical contribution of $1 billion in the first quarter of 2012.
Reflecting its commitment to return capital to shareholders, the company anticipates more than $3 billion in share repurchases for 2012, and expects to pay $3.3 billion in dividends.