PepsiCo, Inc. (NYSE: PEP) today reported organic revenue growth of 3.1 percent and core earnings per share of $1.36 for the third quarter.
"We delivered good third quarter results in the face of an ongoing challenged macroeconomic environment driven by increasing volatility in the emerging markets and continued sluggish consumer demand in developed markets," said Chairman and CEO Indra Nooyi.
"Our organic revenue grew three percent and we achieved positive effective net pricing through strong price/pack revenue management. Together with our relentless focus on productivity, this translated to both gross margin and operating margin expansion.
"We achieved these results because our brands are strong, our product portfolio is on-trend, our geographic footprint is broad and diverse, and we are executing well in the marketplace.
"Based on the strength of our year-to-date results and our outlook for the remainder of the year, we are raising our full year, core constant currency EPS growth target to nine percent."
Summary of Third Quarter Financial Performance:
- Organic revenue grew 3.1 percent and reported net revenue grew 2 percent. Foreign exchange translation had a 1-percentage-point unfavorable impact on reported net revenue.
- Developing and emerging market organic revenue grew 8 percent. On a reported basis, developing and emerging market net revenue grew 3 percent, reflecting unfavorable foreign exchange translation.
- Core gross margin and core operating margin expanded 45 basis points reflecting the implementation of effective revenue management strategies and productivity initiatives. Reported gross margin increased 55 basis points and reported operating margin increased 10 basis points.
- Core constant currency operating profit increased 5.5 percent. Results reflect gains associated with divestitures of $20 million in QFNA and $15 million in AMEA partially offset by a $23 million impairment charge in Europe associated with a brand in Greece in the current-year quarter, and the lapping of $28 million in incremental investments as well as net gains associated with divestitures in AMEA of $11 million recorded in the prior-year quarter. Reported operating profit increased 2 percent and included the net impact of mark-to-market losses on commodity hedges and restructuring and impairment charges.
- The company's core effective tax rate was 24.2 percent and the reported effective tax rate was 24 percent, both below the prior-year quarter.
- Core EPS was $1.36 and reported EPS was $1.32. Core EPS excludes a negative net impact of $0.01 per share related to mark-to-market net losses on commodity hedges and a $0.03 per share negative impact from restructuring and impairment charges. Mark-to-market net gains and losses on commodity hedges are subsequently reflected in core division results when the divisions recognize the cost of the underlying commodity in operating profit.
- On track to deliver targeted $1 billion of productivity savings in 2014.
- Cash flow provided by operating activities was $6.7 billion year to date. Free cash flow (excluding certain items) was $5.4 billion year to date.
- The company expects to return a total of $8.7 billion to shareholders in 2014 through approximately $3.7 billion in dividends and $5.0 billion in share repurchases.
Division Operating Summaries:
Frito-Lay North America (FLNA)
Organic and reported net revenue increased 3 percent, reflecting a 2-percentage-point increase from organic volume and 1 percentage point of effective net pricing.
Core constant currency operating profit grew 6 percent, reflecting the organic revenue gains, productivity savings and lower commodity costs, partially offset by operating cost inflation.
Latin America Foods (LAF)
Organic revenue grew 9 percent, reflecting 12 percentage points of effective net pricing, partially offset by a 2.5 percent organic volume decline. Reported net revenue grew 6 percent, reflecting a 3-percentage-point unfavorable impact from foreign exchange translation.
Organic revenue in Mexico was even and volume declined 3 percent, reflecting the adverse impact of the enactment of taxes on certain food products. The balance of our Latin America Foods business experienced double-digit organic revenue growth led by growth in Venezuela, Argentina and Brazil. Reported net revenue declined low-single digits in Mexico and increased double digits in the balance of our Latin America Foods business, each reflecting the impact of unfavorable foreign exchange translation.
Core constant currency operating profit increased 15 percent reflecting the organic revenue growth and productivity gains, partially offset by operating cost and commodity cost inflation.
Quaker Foods North America (QFNA)
Organic revenue declined 2 percent reflecting volume declines. Reported net revenue declined 3 percent, reflecting a 0.5-percentage-point unfavorable foreign exchange translation impact. Quaker gained value share in the quarter in each of its core categories in the U.S., which include hot cereal, ready-to-eat cereal and snack bars.
Core constant currency operating profit grew 10 percent driven by a gain associated with a divestiture, productivity gains, and improvement in the operating results of our Muller Quaker Dairy joint venture, which reflected start-up costs in the prior year, partially offset by the organic revenue decline and operating cost inflation. The gain associated with the divestiture contributed 14 percentage points to core operating profit growth.
PepsiCo Americas Beverages (PAB)
Organic and reported net revenue were even, reflecting even organic volume. During the quarter, PAB maintained its liquid refreshment beverage value market share position in the U.S. in measured channels.
In North America, non-carbonated beverage volume grew slightly and carbonated soft drink volume declined 1.5 percent. Latin America organic beverage volume increased 2.5 percent.
Core constant currency operating profit increased 4 percent, reflecting lower commodity costs, productivity gains, and effective net pricing, partially offset by operating cost inflation.
Europe
Organic revenue grew 1 percent, reflecting 2 percentage points of effective net pricing and volume growth of 2 percent in snacks partially offset by a 2 percent volume decline in beverages. Reported net revenue declined 1 percent, reflecting a 3-percentage-point unfavorable foreign exchange translation impact.
Core constant currency operating profit declined 6 percent, reflecting operating and commodity cost inflation and the impairment charge, partially offset by productivity savings. The impairment charge had a 4-percentage-point negative impact on core operating profit performance.
Asia, Middle East & Africa (AMEA)
Organic and reported net revenue grew 11 percent driven by 11 percent volume growth in snacks and 3 percent volume growth in beverages.
Core constant currency operating profit increased 8 percent, reflecting the organic revenue growth, productivity savings and the lapping of incremental investments in the prior-year quarter. In addition, the gain from a divestiture was partially offset by the lapping of gains from net divestitures in the prior-year quarter, which contributed 1 percentage point to core operating profit growth. These gains were partially offset by operating cost inflation and increased advertising and marketing expense.
2014 Guidance and Outlook:
The company now expects 9 percent (an increase from the company's previous target of 8 percent) core constant currency EPS growth in fiscal 2014 versus its fiscal 2013 core EPS of $4.37. Based on the current foreign exchange market consensus, the company expects foreign exchange translation to have an unfavorable impact of approximately 4 percentage points on full year core EPS growth in 2014. Excluding the impact of structural changes and foreign exchange translation, organic revenue in 2014 is expected to grow mid-single digits versus 2013, consistent with the company's long-term target. Based on the current foreign exchange market consensus, the company expects foreign exchange translation to have an unfavorable impact of approximately 3 percentage points on full year net revenue growth in 2014. For 2014, the company expects low-single-digit commodity inflation and productivity savings of approximately $1 billion. The company expects higher interest expense driven by increased debt balances and a core effective tax rate of approximately 25 percent. The company is targeting over $10 billion in cash flow from operating activities and more than $7 billion in free cash flow (excluding certain items) in 2014. Net capital spending is expected to be approximately $3 billion in 2014, 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 $8.7 billion to shareholders in 2014 through dividends of approximately $3.7 billion and share repurchases of approximately $5.0 billion.
