PepsiCo reports Q1 net earnings of US$1.22B, up 13% from year-ago period as revenue rises 0.3% to US$12.62B

Nevin Barich

PURCHASE, New York , April 17, 2014 (press release) – -- Core1 EPS increased 7 percent to $0.83. Core constant currency1 EPS increased 10 percent. Reported EPS increased 15 percent to $0.79

-- Organic1 revenue grew 4.0 percent in the quarter. Reported net revenue was even versus the prior-year quarter, reflecting the impacts of foreign exchange translation and structural changes

-- Core constant currency operating profit increased 7 percent. Reported operating profit increased 9 percent.

-- Company expects to return approximately $8.7 billion to shareholders through dividends and share repurchases in 2014, a 35 percent year-over-year increase

-- Company reaffirms 7 percent core constant currency EPS growth target for 2014

-- On track to deliver approximately $1 billion in annual productivity savings in 2014

PepsiCo, Inc. (NYSE: PEP) today reported core earnings per share of $0.83 for the first quarter, an increase of 7 percent. Core constant currency EPS increased 10 percent on organic revenue growth of 4.0 percent.

"We're pleased with our performance in the first quarter of 2014. PepsiCo delivered mid-single-digit organic revenue growth and double-digit core constant currency earnings per share growth, despite ongoing macroeconomic volatility, political instability and other challenging marketplace conditions in a number of our key markets," said Chairman and CEO Indra Nooyi.

"We continue to perform well, in part, because we have strong, balanced portfolios of brands, products and geographies that enable us to capture growth opportunities across multiple demand spaces while we responsibly manage through the volatility and challenges in other parts of the business.

"We're also benefiting from the investments we've recently made to strengthen our brands, innovate more effectively, and drive better execution; all while operating more efficiently by leveraging our global scale and capabilities.

"We remain confident in achieving our financial goals for the full year and believe that we have the right strategies in place to create long-term value for our shareholders."

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

Summary First Quarter 2014 Performance (Percent Growth)

Summary of First Quarter Financial Performance:

Organic revenue grew 4.0 percent and reported net revenue was even versus the prior-year quarter. Structural changes negatively impacted reported net revenue performance by nearly half a percentage point and foreign exchange translation had a 3-percentage-point unfavorable impact in the quarter.

Organic revenue grew 5 percent for global snacks and 3 percent for global beverages in the quarter. On a reported basis, revenue grew 1 percent for global snacks and declined 1 percent for global beverages, reflecting unfavorable foreign exchange translation and structural changes. Each operating segment had organic revenue growth in the quarter.

Developing and emerging market organic revenue grew 9 percent in the quarter. On a reported basis, developing and emerging market net revenue declined 2 percent in the quarter, reflecting structural changes and unfavorable foreign exchange translation.

Core gross margin expanded 40 basis points in the quarter reflecting implementation of effective revenue management strategies and productivity initiatives. Core operating margin expanded 50 basis points in the quarter. Reported gross margin increased 80 basis points and reported operating margin increased 110 basis points in the quarter.

Core constant currency operating profit increased 7 percent and included a $31 million one-time gain related to the sale of agricultural assets in Europe. Reported operating profit increased 9 percent and included the net impact of mark-to-market gains on commodity hedges, certain restructuring costs in 2014 and the lapping of the devaluation of net monetary assets in Venezuela in the prior-year quarter.

The company's core effective tax rate was 23.7 percent and the reported effective tax rate was 24.1 percent, both below the prior-year quarter.

Core EPS was $0.83 and reported EPS was $0.79. Core EPS includes a $0.02 impact from the one-time gain related to the sale of agricultural assets in Europe. Core EPS excludes a net impact of $0.01 per share related to mark-to-market net gains on commodity hedges and a $0.05 negative impact from restructuring 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.

Cash flow provided by operating activities was $181 million.

Company is on track to deliver targeted $1 billion of productivity savings in 2014.

Company expects to return a total of $8.7 billion to shareholders in 2014 through approximately $5.0 billion in share repurchases and $3.7 billion in dividends.

Division Operating Summaries:

PepsiCo Americas Foods (PAF)

Organic revenue grew 5 percent in the quarter driven by 1 percentage point of organic volume growth and 4 percentage points of effective net pricing. Each division within PAF had organic revenue growth in the quarter. Reported net revenue increased 1 percent, reflecting a 4-percentage-point unfavorable impact from foreign exchange translation.

Core constant currency operating profit increased 5 percent, reflecting organic revenue gains and productivity initiatives, partially offset by increased advertising and marketing expense.

Frito-Lay North America (FLNA)

Organic revenue increased 4 percent in the quarter, reflecting a 3-percentage-point increase in organic volume and 1 percentage point of effective net pricing. Reported net revenue increased 3 percent, reflecting a 1-percentage-point unfavorable foreign exchange translation impact.

Core constant currency operating profit grew 6 percent in the quarter, reflecting organic revenue gains and productivity savings, partially offset by operating cost inflation and a double-digit increase in advertising and marketing expense.

Latin America Foods (LAF)

Organic revenue grew 9 percent in the quarter, reflecting 12 percentage points of effective net pricing, partially offset by a 3 percent volume decline. Reported net revenue declined 2 percent in the quarter, reflecting an 11-percentage-point unfavorable foreign exchange translation impact.

Organic revenue in Mexico declined low-single digits 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. Reported net revenue declined mid-single-digits in Mexico and increased low-single-digits in the balance of our Latin America Foods business, also reflecting the impact of unfavorable foreign exchange translation.

Core constant currency operating profit increased 13 percent reflecting organic revenue growth and productivity gains, partially offset by operating cost and commodity cost inflation.

Quaker Foods North America (QFNA)

Organic revenue increased 1 percent in the quarter. Reported net revenue was even versus the prior-year quarter, reflecting a 1-percentage-point unfavorable foreign exchange translation impact. Core constant currency operating profit declined 9 percent, reflecting the impact of oat supply disruptions, unfavorable net pricing and operating cost inflation, partially offset by productivity gains.

PepsiCo Americas Beverages (PAB)

Organic revenue increased 1 percent in the quarter, reflecting 1 percentage point of effective net pricing and even organic volume. During the quarter, PAB maintained its value market share position in the U.S. in measured channels. Reported net revenue was even versus the prior-year quarter, reflecting a 1-percentage-point impact from unfavorable foreign exchange translation.

In North America, non-carbonated beverage volume grew 2 percent, and carbonated soft drink volume declined 1 percent. Latin America beverage volume decreased 1 percent driven by volume declines in Mexico related to the enactment of taxes on certain beverage products.

Core constant currency operating profit declined 3 percent, reflecting operating cost inflation and the adverse impact of the tax in Mexico, partially offset by effective net pricing, productivity gains and adjustments recognized through the company's share of the results of a joint venture.

Europe

Organic revenue grew 7 percent, reflecting balanced volume growth and effective net pricing. Snacks and beverage volume each rose 3 percent. Reported net revenue increased 1 percent, including a 6-percentage-point unfavorable foreign exchange translation impact.

Core constant currency operating profit growth of 64 percent in the quarter included a $31 million contribution from the one-time gain on the sale of agricultural assets and reflects organic revenue growth and productivity savings, partially offset by commodity cost and operating cost inflation.

Asia, Middle East & Africa (AMEA)

Organic revenue grew 6 percent in the quarter, lapping double-digit organic growth in the prior-year quarter. Growth was driven by snacks volume growth and effective net pricing.
Reported net revenue declined 5 percent, reflecting a 5-percentage-point negative impact from the refranchising of bottling operations in Vietnam and a 5-percentage-point unfavorable impact from foreign exchange translation.

Core constant currency operating profit increased 10 percent, reflecting organic revenue growth and productivity gains, partially offset by operating cost inflation.

2014 Guidance and Outlook:

Consistent with its previous guidance for 2014, the company expects 7 percent core constant currency EPS growth versus its fiscal 2013 core EPS of $4.37. Based on the current foreign exchange market consensus, the company currently 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 currently 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.

Conference Call:

At 8 a.m. (Eastern Time) today, the company will host a conference call with investors and financial analysts to discuss first-quarter 2014 results and the outlook for 2014. Further details, including a slide presentation accompanying the call, will be accessible on the company's website at www.pepsico.com/investors.

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