PepsiCo Reports 5% Decline in Profit

PepsiCo Chairman and CEO Indra Nooyi: "Our disciplined pricing and sustained investment in brand building drove 5 percent organic net revenue growth reflecting 1 percent organic volume growth and 4 percent effective net pricing.

18 Oct 2012 --- PepsiCo, Inc. has reported a decline in third quarter net revenue of 5 percent, reflecting a negative 5-percentage-point impact from previously announced structural changes (primarily beverage refranchisings in China and Mexico), and a negative 5-percentage-point impact from foreign exchange translation.  Excluding these items, third quarter net revenue grew 5 percent on an organic basis.

Reported EPS was $1.21 and core EPS was $1.20.  Management reaffirmed both its 2012 core constant currency net revenue and core constant currency EPS guidance 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.  "Our disciplined pricing and sustained investment in brand building drove 5 percent organic net revenue growth reflecting 1 percent organic volume growth and 4 percent effective net pricing.

"We remain focused on our five priorities.  We will continue to invest aggressively to build our brands, accelerate innovation to drive growth, focus on execution and deliver our productivity agenda while returning cash to shareholders."

Organic net revenue growth 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 5 percentage points.  Structural changes, primarily refranchisings in China and Mexico, negatively impacted reported net revenue performance by 5 percentage points. 

Reported operating profit declined 4 percent and core operating profit declined 8 percent.  Core operating profit performance reflected the impact of increased commodity costs, increased advertising and marketing expense, higher corporate unallocated expenses reflecting increased pension expense and a negative 3 percentage point impact of foreign exchange translation.  Core operating profit excluded mark-to-market net gains on commodity hedges, restructuring and certain impairment charges as well as merger and integration charges.

Net interest expense was $181 million and included $24 million in mark-to-market gains on investments related to deferred compensation liabilities.  There is a corresponding offset to these gains within selling, general and administrative expense resulting in no net benefit to earnings.

The company's reported effective tax rate was 27 percent.  The company's core effective tax rate was 26.3 percent, 90 basis points above the prior year quarter due to an adjustment to international deferred taxes, partially offset by tax benefits generated from an international acquisition.

Reported EPS was $1.21 and core EPS was $1.20. Core EPS excludes a $0.04 per share impact of certain restructuring, impairment and integration charges and a $0.05 per share impact from mark-to-market net gains 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 $5.1 billion year to date. Management operating cash flow (excluding certain items) was $4.9 billion. The company has returned $4.8 billion to shareholders through dividends and share repurchases through the end of the third quarter, and expects to return more than $6 billion to shareholders for the full year 2012.

Division Operating Summaries
PepsiCo Americas Foods (PAF): Organic net revenue grew 6 percent in the quarter, and reported net revenue grew 2.5 percent. Net revenue growth was driven by effective net pricing supported by contributions from innovation and increased media support. Core constant currency operating profit declined 1 percent, reflecting higher commodity costs and increased advertising and marketing investments across all PAF divisions, partially offset by productivity initiatives.

Frito-Lay North America (FLNA): Organic net revenue increased 3 percent driven by a 1 percent increase in volume coupled with 2 percent effective net pricing.  Volume was negatively impacted in the quarter by a calendar shift related to the Labor Day holiday.  Net revenue growth was driven by the C-store, club, dollar and foodservice channels.  Reported net revenue grew 3 percent.
Operating profit growth of 1 percent in the quarter reflected higher commodity costs and a significant increase in advertising and marketing investments offset by effective net pricing and productivity initiatives.

Latin America Foods (LAF): On an organic basis, LAF net revenue grew 13 percent.  Net revenue growth reflected 4 percentage points of organic volume growth and 9 percentage points of effective net pricing.  Reported net revenue grew 2 percent, reflecting a 2-percentage-point benefit from acquisitions and divestitures, offset by a 13-percentage-point unfavorable foreign exchange translation impact. 
Core constant currency operating profit was even with the prior year quarter reflecting increased advertising and marketing expense and commodity cost inflation.

Quaker Foods North America (QFNA): Organic net revenue grew modestly.  Reported net revenue performance was even with the prior year quarter, reflecting 2 percentage points of volume growth offset by lower pricing and mix.
Core constant currency operating profit in the quarter declined 11 percent driven principally by higher commodity costs and increased advertising and marketing expense.

PepsiCo Americas Beverages (PAB): On an organic basis, net revenue was even with the prior year quarter.  Effective net pricing increased by 3 percentage points and bottler case volume declined 3 percent.  Volume was negatively impacted by 1 percentage point in the quarter due to a calendar shift related to the Labor Day holiday.  Positive volume and pricing trends continued within the convenience and gas channel.  Reported net revenue declined 7 percent, primarily reflecting a negative 6-percentage-point impact of the refranchising of the division's Mexican beverage business in the fourth quarter of 2011 and a negative 1-percentage-point impact from foreign exchange translation.
Operating profit declined in the quarter primarily reflecting increased commodity costs and higher advertising and marketing expense, partially offset by favorable effective net pricing and savings resulting from productivity initiatives. The refranchising of the division's Mexican beverage business negatively impacted operating profit performance by more than 2 percentage points.