PepsiCo Reports 4.2 Percent Organic Revenue Growth

25 July 2013 --- PepsiCo, Inc. has reported core earnings per share of $1.31 for the second quarter, an increase of 17 percent on organic revenue growth of 4.2 percent.

"We're pleased with our performance in the second quarter and for the first half of 2013. PepsiCo delivered another quarter of mid-single-digit organic revenue growth, driven by our balanced food and beverage product portfolio and global geographic footprint. We continue to invest in advertising and marketing, innovation, and other marketplace initiatives to sustain our organic revenue growth and we are driving a robust productivity agenda that serves as a funding source for these investments," said Chairman and CEO Indra Nooyi.

"Importantly, we maintained disciplined, balanced pricing that, together with our productivity initiatives, translated to healthy margin improvement. In the second quarter, we increased both gross margins and operating margins by more than 100 basis points.

"Our results in the first half give us even greater confidence in achieving our financial goals for the full year. We remain focused on driving marketplace execution, maintaining discipline in our capital allocation and delivering on our financial targets to create long-term value for our shareholders."

Operating and Marketplace Highlights:

•Achieved 4.2 percent organic revenue growth.

•PepsiCo Americas Foods organic revenue grew 6 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 in Latin America Foods.

•PepsiCo Americas Beverages core constant currency operating profit grew 4 percent in the quarter reflecting 3 percentage points of effective net pricing and productivity gains. Reported operating profit was up 5 percent.

•In the U.S., the company's largest market, held value market share in salty snacks and improved both volume and value market share performance sequentially in liquid refreshment beverages.

•AMEA organic revenue grew 14 percent in the quarter driven by organic volume growth in both snacks and beverages. Reported net revenue in AMEA rose 6 percent, reflecting the impact of structural changes and foreign exchange translation.

•On an organic basis, developing and emerging market revenue grew 11 percent in the quarter. The refranchising of our beverage businesses in Vietnam and China and unfavorable foreign exchange impacted developing and emerging markets net revenue growth by 5 percentage points. On a reported basis, emerging and developing market net revenue grew 6 percent in the quarter.

•Core gross margin expanded 120 basis points.

•Core operating margin expanded 120 basis points, including a 13 percent increase in advertising and marketing expense. Reported operating margin expanded 260 basis points.

•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 $2.3 billion year to date. Cash flow from operations was $3 billion year to date.

•Net capital spending was 4.0 percent of net sales over the past four quarters, an improvement of 40 basis points over the comparable prior four quarters.

•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.

•Organic revenue grew 4.2 percent and reported net revenue grew 2 percent. Structural changes, principally the refranchising of the company's beverage operations in Vietnam and China, negatively impacted reported net revenue performance by nearly 1 percentage point and foreign exchange translation had a 1.5-percentage-point unfavorable impact in the quarter.

•Core constant currency operating profit increased 11 percent reflecting solid revenue growth, productivity gains, and a $137 million gain related to refranchising the company's bottling operations in Vietnam, partially offset by increased advertising and marketing expense and $46 million of incremental investments. The gain, net of the $46 million incremental investments, contributed 3 percentage points to core constant currency operating profit growth. Reported operating profit increased 21 percent and included the net impact of mark-to-market losses on commodity hedges, and certain restructuring and integration costs in both 2013 and 2012. The Vietnam gain, net of incremental investments, contributed 4 percentage points to reported operating profit growth.

•The company's core effective tax rate was 24.5 percent, below the prior year quarter primarily due to favorable resolution of certain tax matters in the quarter. The company's reported tax rate was 24.4 percent, below the prior year quarter primarily due to favorable resolution of certain tax matters in the quarter and lapping the prior year tax impact of the China refranchising transaction with Tingyi.

•Core EPS was $1.31 and reported EPS was $1.28. Core EPS includes a $0.09 per share gain related to refranchising the company's bottling operations in Vietnam, partially offset by a $0.02 impact from incremental investments. Core EPS excludes a net impact of $0.02 per share related to mark-to-market losses on commodity hedges, and a $0.01 impact from restructuring and integration 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.

Organic revenue for PepsiCo Americas Foods (PAF) grew 6 percent in the quarter driven by 2 percentage points of organic volume growth and 5 percentage points of effective net pricing. Reported net revenue increased 5 percent, reflecting a 1-percentage-point unfavorable impact from foreign exchange translation.

Core constant currency operating profit increased 6 percent, reflecting effective net pricing and productivity initiatives, partially offset by increased advertising and marketing expense.

Frito-Lay North America (FLNA) organic revenue increased 4.5 percent in the quarter, reflecting a 3-percentage-point increase in organic volume and 2 points of effective net pricing. Reported net revenue increased 4 percent.

Core constant currency operating profit grew 6 percent in the quarter, reflecting organic revenue gains and productivity initiatives.

Latin America Foods (LAF) organic revenue grew 12 percent in the quarter, reflecting 1 percentage point of organic volume growth and 10 percentage points of effective net pricing. Reported net revenue grew 9 percent in the quarter, reflecting a 3-percentage-point unfavorable foreign exchange translation impact.

Core constant currency operating profit increased 17 percent. These results reflect revenue growth and productivity gains partially offset by commodity cost inflation, increased advertising and marketing expense and incremental investments. The incremental investments negatively impacted core constant currency operating profit by 2 percentage points.

Quaker Foods North America (QFNA) organic revenue and reported net revenue each declined 1 percent. Core constant currency operating profit declined 14 percent, driven principally by product innovation and the impact of incremental investments. The incremental investments negatively impacted core constant currency operating profit by 2 percentage points.

PepsiCo Americas Beverages (PAB) organic revenue declined 1 percent in the quarter reflecting organic volume that declined 3.5 percent offset by effective net pricing of 3 percentage points. Latin America beverage volume declined less than 1 percentage point. 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 0.5-percentage-point impact of unfavorable foreign exchange translation.

Core constant currency operating profit increased 4 percent primarily reflecting favorable effective net pricing and productivity gains.

In Europe, organic revenue grew 4 percent, reflecting 2 percentage points of volume growth and 2 percentage points of effective net pricing. Reported net revenue grew 1 percent in the quarter, including a 3-percentage-point unfavorable impact from foreign exchange translation.

Core constant currency operating profit declined 2 percent in the quarter, reflecting incremental investments and increased advertising and marketing expense partially offset by disciplined revenue mix management and continued productivity initiatives. The impact of more favorable settlements of promotional spending accruals in the current year positively impacted operating profit by 2 percentage points. The incremental investments negatively impacted operating profit by 4 percentage points.

In Asia, Middle East & Africa (AMEA), organic revenue grew 14 percent in the quarter, led by 6 percent organic volume growth in snacks and 9 percent organic volume growth in beverages. Reported net revenue rose 6 percent, reflecting a 6-percentage-point negative impact from structural changes, principally the refranchising of bottling operations in Vietnam and China, and an unfavorable 3-percentage-point impact from foreign exchange translation.

Core constant currency operating profit increased 71 percent, reflecting organic revenue growth and the gain related to the Vietnam refranchising, partially offset by a significant increase in advertising and marketing expense. Core constant currency operating profit rose 27 percent excluding the pre-tax gain mentioned above.

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 now expects that foreign exchange translation will have an unfavorable impact of approximately 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 the second quarter Vietnam gain, which is expected to be offset by the company's incremental investments in the second quarter and over the remainder of 2013.

Excluding the impact of structural changes and foreign exchange translation, organic revenue is expected to grow mid-single digits, consistent with the company's long-term targets. The impact of structural changes, principally beverage refranchisings, is expected to reduce organic revenue growth by approximately 1 percentage point for the full year. Foreign exchange translation is expected to have an unfavorable impact of approximately 1 percentage point 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 also expects advertising and marketing expense to increase at or above the rate of net revenue growth. Below the operating profit line, 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.