PepsiCo Delivers Solid First-Quarter Revenue and EPS Growth

PepsiCo, Inc. /quotes/comstock/13*!pep/quotes/nls/pep (PEP 64.63, -0.39, -0.60%) today reported solid results for the first quarter of 2010, driven by the acquisition of its two anchor bottlers, volume gains in its worldwide snacks and international beverage businesses, balanced investments in value and innovation, and lower costs across its operations.

PepsiCo Chairman and CEO Indra Nooyi said: “PepsiCo’s broad portfolio performed well in the quarter as our operating agility and solid marketplace execution enabled us to deliver strong financial and operational performance. Our macrosnacks business gained share in key markets and we posted solid performance in beverages supported by the benefits of the acquisition of our two largest bottlers, growth in developing markets and improving top-line trends in North America.”

PepsiCo Chief Financial Officer Hugh Johnston said: “We delivered double-digit gains in both revenue and core constant currency operating profit in the quarter, while making incremental strategic investments in China and other key markets. Through rigorous financial discipline we generated $794 million in management operating cash flow, excluding certain items, which was a significant increase from last year. In the second quarter we are stepping up investments in innovation, R&D and infrastructure, all of which should help us accelerate our growth in the second half of the year.”

* Please refer to the Glossary for definitions of constant currency and core. Core results and core constant currency results are non-GAAP financial measures that exclude certain items. Please refer to “Reconciliation of GAAP and Non-GAAP information” in the attached exhibits for a description of these items.

Summary of First-Quarter 2010 Performance*

Constant Currency**
——————-
Core** Core**
Division Division
Net Operating Net Operating Operating
% Growth Volume Revenue Profit Revenue Profit Profit
—— ——– ———- ——– ——— ———
PAF 1 2 3 4 2.5 3
FLNA 1 1 9 2 10 10
QFNA (1) (3) (14) (1) (13) (12)
LAF 1 8 (5) 13 (13) (12)

PAB (4) 32 28 32 23 (83)

Europe (4)/(4)*** (3) 4 5 14 16

AMEA 13/10*** 18 12 23 15 17
Total
Divisions 1/(0.5)*** 11 10 13 9 (17)
———- ———- — — — — —
Total PepsiCo (47)*

* The reported operating profit decline was primarily driven by items
excluded from our core results in both 2010 and 2009, including
restructuring costs in 2009, the net impact of mark-to-market
gains on hedges in both years, and in 2010, the currency devaluation
in Venezuela, a foundation contribution and an SAP asset write-off;
and with respect to the bottling acquisitions in 2010, merger and
integration costs and inventory fair value adjustments. Please
refer to the Glossary for the definition of Core.
**The above core results and core constant currency results are non-
GAAP financial measures that exclude merger and integration costs
associated with our acquisitions of The Pepsi Bottling Group, Inc.
(PBG) and PepsiAmericas, Inc. (PAS), inventory fair value
adjustments recorded in connection with our acquisitions of PBG and
PAS, $9 million of income (recorded in our PAB segment) related to
the currency devaluation in Venezuela, and certain restructuring
actions in 2009. For more information about our core results and
core constant currency results, see “Reconciliation of GAAP and Non-
GAAP Information” in the attached exhibits. Please refer to the
Glossary for definitions of “Constant Currency” and “Core”
*** Snacks/Beverage

All references below to net revenue and core operating profit are on a constant currency basis.

First-Quarter Operating Highlights:

Frito-Lay North America (FLNA) expanded operating margins through cost discipline and lower commodity costs. In the second quarter, FLNA is making targeted investments in infrastructure and innovation that are expected to accelerate performance in the second half of the year.

PepsiCo Americas Beverages (PAB) successfully completed its bottling transactions and held volume share in carbonated soft drinks (CSDs) in the U.S. as top-line trends improved in the North American beverage business.

Asia, Middle East, Africa (AMEA) posted strong growth in key developing markets such as India and China, where both snacks and beverages posted double-digit volume growth.

Division Operating Summary

PepsiCo Americas Foods (PAF) continued to deliver consistent performance as it overlapped double-digit gains in net revenue and core operating profit in the first quarter of 2009.

FLNA gained volume share, expanded margins and delivered strong core
operating profit growth of 9 percent. Increased margins were
driven by both cost discipline and lower input costs as the
division took minimal pricing in the quarter. FLNA grew net
revenue 1 percent as it overlapped strong growth in the year-ago
period due to pricing actions to offset commodity inflation.
Volume also grew 1 percent, reflecting strong performance in
trademark Lay’s and variety packs, both of which grew volume share
in their respective sub-categories. Outside the snack aisle,
Stacy’s Pita Chips and Sabra dips continued to drive strong growth.
In the quarter, FLNA introduced innovative, better-for-you
snacking options for consumers, including all-natural versions of
Lay’s potato chips and lightly salted versions of Fritos corn chips
and Ruffles potato chips.
Quaker Foods North America (QFNA) volume was down 1 percent, net
revenue was down 3 percent and core operating profit was down 14
percent, driven almost entirely by the overlap of an insurance
settlement.
Latin America Foods (LAF) volume grew 1 percent and net revenue was
up 8 percent in the first quarter. Core operating profit declined
5 percent as LAF lapped nearly 30 percent core operating profit
growth in the first quarter of last year. LAF is currently making
investments in both value and infrastructure which are expected to
benefit operating results in the second half of this year.

PAB posted a 32 percent increase in net revenue and a 28 percent increase in core operating profit, driven by the favorable impact of the acquisitions, a focus on profitable volume and ongoing productivity enhancements.

North America Beverages maintained volume share leadership in measured channels and showed improved CSD volume trends driven by Pepsi Refresh, Throwback versions of Pepsi and Mountain Dew and our Super Bowl value promotions.

In the hydration segment, SoBe Lifewater continues to perform well, gaining both volume and value share. In the second quarter, Gatorade has begun to roll out its G Series, which provides benefits to athletes before, during and after their sports activities.

PepsiCo Europe net revenue declined 3 percent and core operating profit grew 4 percent, reflecting disciplined financial management and a continued focus on productivity. Performance in Europe reflected a challenging macroeconomic environment across the region, particularly in Eastern Europe.

Europe snacks volume was down 4 percent in the quarter, reflecting poor weather in Western Europe and particularly challenging macroeconomic conditions in Eastern Europe. In the U.K., double-digit growth in the Quaker portfolio of healthy snacks was more than offset by declines at Walkers as they overlapped the successful Do Us a Flavour promotion. In the second quarter, Europe will drive innovation in its healthy snacks portfolio through the expansion of Baked Lays in Western Europe and its nuts platform in Spain and Portugal.

Europe beverage volume declined 4 percent, reflecting category weakness. Europe’s CSD portfolio performed well in key markets, growing value share in Russia, the U.K., Turkey and Germany. In the second quarter, Europe will launch Mountain Dew in the U.K. and deliver differentiated value across brands and countries through price/pack architecture initiatives and a strong promotional calendar.

AMEA drove strong top-line growth across both snacks and beverages, reflecting volume momentum in China and India due to improving demand and strong marketplace execution. AMEA net revenue increased 18 percent and core operating profit grew 12 percent, reflecting strategic investments in China. Acquisitions impacted net revenue growth favorably by 1 percentage point and adversely impacted core operating profit growth by 2 percentage points.

AMEA snacks volume grew 13 percent, reflecting broad-based increases driven by double-digit growth in China and India. In India, Kurkure grew double digits as the division built on the success of this product by launching a new flavor in the quarter. Growth in China reflects powerful market execution of Chinese New Year promotions. Acquisitions contributed almost 3 percentage points to volume growth.

AMEA beverage volume increased 10 percent year over year, including double-digit volume expansion in India and China. AMEA continued to drive locally relevant innovation in the quarter, launching several new products, including blueberry-flavored Guo Bin Fen and expanding distribution of Tropicana Pulp Sacs in China.

Tax Rate

PepsiCo’s reported tax rate was a benefit of 2 percent for the first quarter, primarily reflecting the impact of the bottling transactions, which includes the reversal of deferred taxes attributable to the previously held equity interests in the acquired bottlers. This is a change of 27 percentage points compared to the prior year. The resolution of certain tax matters contributed about 1 percentage point to the decline in the reported tax rate compared to the prior-year period. Excluding the impact of items affecting comparability, PepsiCo’s core tax rate was 23 percent for the first quarter. The company expects its full-year reported tax rate to be roughly 23 to 24 percent, which reflects a benefit of about 4 percentage points from items affecting comparability, primarily due to the impact of the bottling transactions, as noted above.

Cash Flow

Cash flow from operating activities was $241 million. Management operating cash flow, net of capital expenditures, was a use of $17 million, including a discretionary $600 million contribution to PepsiCo’s pension funds, a $100 million donation to The PepsiCo Foundation, Inc. (the Foundation), $85 million of merger and integration payments associated with our bottling acquisitions, and $26 million related to 2009 restructuring charges. Management operating cash flow, excluding these items, was $794 million.

For the year, the company expects cash flow from operating activities to be about $8.3 billion and management operating cash flow, net of capital expenditures, to be about $4.7 billion, including: the discretionary $600 million contribution to PepsiCo’s pension funds, about $400 million of merger and integration payments associated with our bottling acquisitions, the $100 million donation to the Foundation, $26 million related to 2009 restructuring charges, about $200 million in capital investments related to the bottler integration, and about $350 million of cash tax benefits related to these items. Management operating cash flow, excluding these items, is expected to be approximately $5.6 billion. The company expects to invest about $3.6 billion in net capital spending in 2010.

Guidance

For fiscal 2010, the company is targeting an 11 to 13 percent growth rate for core constant currency EPS off of its fiscal 2009 core EPS of $3.71, with about 6 percent growth in core constant currency EPS in the first half of the year, which includes a charge of approximately $40 million related to the Patient Protection and Affordable Care Act (PPACA) – which was signed into law in the second quarter of 2010 — and mid-teens core constant currency EPS growth in the second half of the year. Based on current spot rates, foreign exchange translation would represent a one percentage point unfavorable impact on the company’s full-year, core constant currency EPS.

Synergies
The company is targeting pre-tax annualized synergies from the
bottling acquisitions of approximately $400 million once fully
implemented by 2012, and now expects one-time costs of
approximately $650 million to achieve these synergies. Of the
approximate $650 million in costs, roughly $225 million is non-
cash and represents the impact of the consolidation and
rationalization of certain manufacturing assets. Synergies to be
realized in 2010 are expected to total approximately $125-$150
million.

Share Repurchase
In the first quarter, the company repurchased $940 million in common
stock (of which $205 million was paid in the second quarter), or 14
million shares. The company anticipates that share repurchases
will total approximately $4.4 billion in 2010.

Impact of Venezuelan Devaluation
As of the beginning of the company’s 2010 fiscal year, Venezuela is
accounted for under hyperinflationary accounting rules, and the
functional currency of our Venezuelan entities has changed from the
Bolivar to the U.S. dollar. Effective January 11, 2010, the
Venezuelan government devalued the Bolivar by resetting the
official exchange rate from 2.15 Bolivars per dollar to 4.3 Bolivar
per dollar, with certain activities permitted to access an exchange
rate of 2.6 Bolivars per dollar.

In 2010, the company expects that the majority of its Venezuelan
foreign exchange transactions will be remeasured at the 4.3
exchange rate. As a result of the change to hyperinflationary
accounting and the devaluation of the Bolivar, the company recorded
a one-time net charge in the first quarter of 2010 of $120
million.

Src: www.marketwatch.com

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