PepsiCo, Inc. today reported core earnings per share of $1.24 for the third quarter and organic revenue growth of 3.3 percent for the quarter. Organic revenue grew 3.9 percent year to date and core constant currency EPS increased 12 percent year to date. Reported net revenue grew 2 percent year to date.
"We're pleased with our performance. PepsiCo has delivered double-digit core constant currency earnings per share growth year to date, despite ongoing macro-economic volatility in many markets. We're able to perform well in these conditions because our brands are strong, our product portfolio is on-trend, and our geographic footprint is broad and diverse. Importantly, we have continued to make marketplace investments to strengthen our foundation for sustainable growth," said Chairman and CEO Indra Nooyi.
"We remain focused on growing our business by building our brands, innovating, driving marketplace execution, and delivering higher returns on invested capital through disciplined capital allocation. Our year-to-date results give us confidence in achieving our 2013 financial goals and we continue to believe that we have the right strategies in place to create long-term value for our shareholders."
Operating and Marketplace Highlights
Organic revenue increased 3.9 percent year to date and core constant currency operating profit increased 8 percent year to date. Reported operating profit increased 6 percent year to date.
Core gross margin expanded 70 basis points in the quarter reflecting implementation of effective revenue management strategies.
Core operating margin expanded in the quarter, including an 8 percent increase in advertising and marketing expense. Reported operating margin declined 35 basis points in the quarter.
PepsiCo Americas Foods organic revenue grew 7 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 at Latin America Foods.
In the U.S., the company's largest market, grew value, volume and unit market share in salty snacks in the quarter.
Despite a challenging North America LRB category, NAB sequentially improved both volume and value market share performance in measured channels while leading the industry in net price realization at retail.
AMEA organic revenue grew 6 percent in the quarter reflecting organic volume growth in both snacks and beverages, despite political and marketplace volatility in certain markets, notably Egypt and India. Year-to-date, AMEA organic revenue increased 11 percent. Reported net revenue in AMEA declined 3 percent in the quarter and 3 percent year to date, reflecting the impact of structural changes and foreign exchange translation.
Developing and emerging market organic revenue grew 9 percent in the quarter. On a reported basis, developing and emerging market net revenue grew 4 percent in the quarter reflecting structural changes and unfavorable foreign exchange translation.
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 $5.5 billion year to date, an increase of 12 percent. Cash flow from operations was $6.7 billion year to date, an increase of 30 percent.
Net capital spending was 4.1 percent of net sales over the past four quarters, within our long term objective of at or below 5 percent of net sales.
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 Third Quarter Financial Performance
Organic revenue grew 3.3 percent and reported net revenue grew 1.5 percent. Structural changes, principally the refranchising of the company's beverage operations in Vietnam, negatively impacted reported net revenue performance by nearly half a percentage point and foreign exchange translation had a more than 1-percentage-point unfavorable impact in the quarter.
Core constant currency operating profit rose 3 percent reflecting increased advertising and marketing expense and $28 million of incremental investments. Reported operating profit declined 1 percent and included the net impact of mark-to-market losses on commodity hedges, and certain restructuring and impairment and merger and integration costs in both 2013 and 2012. The incremental investments negatively impacted operating profit growth by 1 percentage point.
The company's core effective tax rate was 25.5 percent and the reported effective tax rate was 25.4 percent, both below the prior year quarter due to geographic mix shift in the current year and the lapping of an adjustment to international deferred taxes in the prior year, partially offset by the lapping of tax benefits from an acquisition in the prior year. The reported tax rate was also impacted by lapping net tax expense related to gains recognized on commodity hedges in the prior year.
Core EPS was $1.24 and reported EPS was $1.23. Core EPS includes a $0.01 impact from incremental investments. Core EPS excludes a net impact of $0.01 per share related to mark-to-market net losses on commodity hedges and a nominal impact each from merger and integration charges and restructuring and impairment 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.
Division Operating Summaries
PepsiCo Americas Foods (PAF)
Organic revenue grew 7 percent in the quarter driven by 3 percentage points of organic volume growth and 5 percentage points of effective net pricing. Reported net revenue increased 5 percent, reflecting a 2-percentage-point unfavorable impact from foreign exchange translation.
Core constant currency operating profit increased 7 percent, reflecting organic revenue gains and productivity initiatives, partially offset by increased advertising and marketing expense.
Frito-Lay North America (FLNA)
Organic and reported net revenue increased 5 percent in the quarter, reflecting a 3-percentage-point increase in organic volume and 2 percentage points of effective net pricing.
Core constant currency operating profit grew 6 percent in the quarter, reflecting organic revenue gains, productivity initiatives, increased advertising and marketing expense and lower commodity costs.
Latin America Foods (LAF)
Organic revenue grew 14 percent in the quarter, reflecting 3 percentage points of organic volume growth and 12 percentage points of effective net pricing. Reported net revenue grew 9 percent in the quarter, reflecting a 6-percentage-point unfavorable foreign exchange translation impact.
Core constant currency operating profit increased 24 percent. These results reflect revenue growth and productivity gains partially offset by commodity cost inflation and increased advertising and marketing expense.
Quaker Foods North America (QFNA)
Organic revenue declined 1 percent in the quarter. Reported net revenue declined 2 percent, reflecting half-a-percentage point of unfavorable foreign exchange translation impact. Core constant currency operating profit declined 11 percent, driven by operating results of a dairy joint venture, unfavorable product mix and commodity cost inflation.
PepsiCo Americas Beverages (PAB)
Organic revenue declined 1.5 percent in the quarter reflecting organic volume that declined 4 percent and the negative impact of concentrate shipment timing, offset by effective net pricing of 3 percentage points. Latin America beverage volume increased 0.5 percent. 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 1-percentage-point impact of unfavorable foreign exchange translation.
Core constant currency operating profit was even with the prior year quarter, reflecting the volume decline partially offset by favorable effective net pricing, lower commodity costs and productivity gains.
Europe
Organic revenue grew 3 percent, primarily reflecting effective net pricing. Snacks volume rose 3 percent while beverage volume declined 1 percent. Reported net revenue grew 3 percent in the quarter, including a slight favorable foreign exchange translation impact.
Core constant currency operating profit rose 5 percent in the quarter, reflecting effective net pricing and continued productivity initiatives, partially offset by higher commodity costs.
Asia, Middle East & Africa (AMEA)
Organic revenue grew 6 percent in the quarter driven by effective net pricing. Ongoing macro-economic volatility negatively impacted our third quarter results in this region. Reported net revenue declined 3 percent, reflecting a 5-percentage-point negative impact from the refranchising of bottling operations in Vietnam, and an unfavorable 4-percentage-point impact from foreign exchange translation.
Core constant currency operating profit declined 7 percent, reflecting incremental investments and a significant increase in advertising and marketing expense, partially offset by effective net pricing. Incremental investments negatively impacted operating profit by 7 percentage points. The net impact of divestitures positively impacted operating profit by 3 percentage points.
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 currently expects that foreign exchange translation will have an unfavorable impact of at least 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 a gain in the second quarter related to refranchising its Vietnam beverage operations. The impact of this gain is expected to be offset by the company's incremental investments in the second, third and fourth quarters of 2013.
Excluding the impact of structural changes and foreign exchange translation, organic revenue is expected to grow mid-single digits versus 2012, consistent with the company's long-term guidance. The impact of structural changes, principally beverage refranchisings, is expected to reduce net revenue growth by approximately 1 percentage point for the full year. Based on the current foreign exchange market consensus, the company currently expects foreign exchange translation to have an unfavorable impact of approximately 2 percentage points 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 expects advertising and marketing expense to increase at or above the rate of net revenue growth. 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.
