PepsiCo, Inc. Reports 2 Percent Second Quarter Earnings Decline

July 25, 2012

PepsiCo, Inc. reported a decline in second quarter net revenue of 2 percent, reflecting a negative 4-percentage-point impact from previously announced structural changes (primarily beverage refranchisings in China and Mexico), and a negative 3-percentage-point impact from foreign exchange translation. Excluding these items, net revenue grew 5 percent in the quarter on an organic basis.

Reported earnings per share (EPS) was $0.94, and core EPS was $1.12, in line with management's expectations. Management reaffirmed both its 2012 core constant currency EPS guidance and long-term financial targets 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 in a prepared statement. "We were able to achieve significant pricing in the second quarter, reflecting the strength of our brand portfolio and the success of our packaging initiatives. Our disciplined approach to pricing and continued focus on brand investment drove 5 percent organic net revenue growth and allowed us to substantially offset approximately $350 million in commodity cost inflation.

"Our focus for the second half of the year is squarely on executing against our strategic priorities.  We will continue to step up our brand support through increased advertising and marketing, accelerate our innovation to drive growth, and drive our aggressive productivity agenda.

"The work we are doing will enhance our competitiveness while positioning PepsiCo for sustainable growth and value creation for the long term."

The company grew net revenue in one of four business units on a reported basis, while achieving net revenue growth in all four business units on an organic basis.

It achieved 4 points of effective net pricing globally.

The company grew global snacks net revenue on a reported basis. It grew both global snacks and global beverage net revenue on an organic basis.

Emerging and developing markets reported net revenue declined 8 percent, primarily due to beverage refranchisings in China and Mexico. On an organic basis, emerging and developing market net revenue grew 9 percent.

The company increased media spending in the U.S. by over 40 percent in the second quarter supporting the company's long-term brand-building initiatives.

It launched first ever global campaign for brand Pepsi – Live for Now.

The company decreased net capital spending by $338 million year to date with net capital spending 4.4 percent of net revenue over the last four quarters, an improvement of more than 100 basis points over the comparable prior four quarters.

Organic net revenue growth, excluding the impact of acquisitions and divestitures and foreign exchange translation, 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 3 percentage points. Structural changes, primarily refranchisings in China and Mexico, negatively impacted reported net revenue performance by 4 percentage points. 

Reported operating profit declined 14 percent and core operating profit declined 5 percent. Operating profit performance was in line with management's expectations and reflected the impact of division operating profit performance and higher corporate unallocated expenses reflecting increased pension expense. Core operating profit excluded mark-to-market net losses on commodity hedges and restructuring, impairment and integration charges.

Division operating profit declined 9 percent and core division operating profit declined 3 percent.  Division operating profit performance reflected structural changes, a negative 3 percentage point impact of foreign exchange translation, and approximately $350 million of commodity cost inflation.   

Net interest expense was $208 million, an increase of $29 million, primarily driven by lower interest income and higher debt balances.

The company's reported effective tax rate was 30.8 percent. The company's core effective tax rate was 27.8 percent, 180 basis points above the prior year quarter, reflecting comparisons against a prior year tax benefit related to a portion of our international business operations, partially offset by the favorable resolution of certain tax matters in the current year.

Reported EPS was $0.94 and core EPS was $1.12, in line with management's expectations. Core EPS reflects a $0.04 negative impact of foreign exchange translation and excludes a $0.04 per share impact of restructuring, impairment and integration charges, a $0.10 per share impact from restructuring and other charges related to the transaction with Tingyi and a $0.04 per share impact from mark-to-market net losses 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 $1.2 billion year to date. Management operating cash flow (excluding certain items) was $1.4 billion. The company has returned $2.8 billion to shareholders through dividends and share repurchases through the end of the second quarter, and expects to return more than $6 billion to shareholders for the full year 2012.

For PepsiCo Americas Foods, organic net revenue grew 7 percent in the quarter, and reported net revenue grew 4 percent. Net revenue growth was driven by positive effective net pricing across all three PAF divisions (FLNA, LAF, and QFNA) supported by strong contributions from innovations and increased media support.

For Frito Lay North America, organic net revenue increased 4 percent. Effective net pricing and disciplined channel revenue management strategies drove particularly strong net revenue growth in the c-store, club, dollar and foodservice channels and unit growth was positive overall. Reported net revenue grew 3 percent.

Operating profit growth of 1 percent in the quarter reflected the net revenue growth and productivity gains, partially offset by higher commodity cost inflation and increased advertising and marketing investments.

For Quaker Foods North America, organic net revenue increased 1 percent. Reported net revenue performance was even with the prior year quarter, reflecting 2 percentage points of effective net pricing, including weight outs in certain product segments, and supported by innovation such as the launch of Quaker Medleys.  

Core constant currency operating profit in the quarter declined 7 percent driven by higher commodity cost inflation, partially offset by productivity initiatives. Core constant currency operating profit was also impacted by less-favorable settlements of promotional spending accruals in the current year, which negatively impacted performance by 3 percentage points. 

For PepsiCo Americas Beverages, on an organic basis, net revenue increased 2 percent in the quarter on 3.5 percentage points of effective net pricing with strength in the small format and wholesale club channels. Reported net revenue declined 5 percent, primarily reflecting the impact of the refranchising of the division's Mexican beverage business in the fourth quarter of 2011. The refranchising negatively impacted net revenue performance by 7 percentage points in the quarter. 

Operating profit declined in the quarter primarily reflecting increased commodity costs and higher advertising and marketing spending, partially offset by favorable effective net pricing and savings resulting from productivity initiatives.


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