After a solid first quarter,
) reported strong second-quarter earnings results beating both
the Zacks Consensus Estimate as well as the year-ago results. The
food and beverage giant also delivered positive top-line growth
and strong margins while retaining its 2013 outlook.
PepsiCo's second-quarter 2013 core earnings per share of $1.31
improved 17% from the year-ago levels driven largely by price
increases and productivity gains from restructuring activities.
However, the core earnings included a net gain of 7 cents per
share from refranchising activities in Vietnam. Excluding this
Vietnam gain, earnings were $1.24, which still beat the Zacks
Consensus Estimate of $1.19 per share by 4.2%. Earnings grew 19%
on a constant currency basis.
Core earnings excluded the impact of mark-to-market
adjustments on commodity hedges and restructuring and integration
charges. Including these factors, reported earnings per share
were $1.28, up 36%.
Top-Line and Volume Growth
Total sales in the quarter improved 2% year over year to
$16.81 billion. Structural changes, mainly beverage
re-franchising transaction in China and Vietnam pulled down
revenues by almost 1%, in line with managements' expectation.
Foreign exchange hurt revenue growth by 1.5%, less than
managements' expectation of 2%. Revenues also beat the Zacks
Consensus Estimate of $16.74 billion.
Excluding these factors, revenues increased 4.2% on an organic
basis. Higher pricing, strong snacks performance, improvement in
Europe and another quarter of healthy growth in emerging and
developing markets drove organic revenue growth. PepsiCo is
boosting its existing brands and categories with stepped-up
marketing and innovations which is driving market share
Pepsi witnessed an effective net pricing gain of 4% in the
quarter, better than first quarter's 3%. Volumes were, however,
flat in the quarter, slightly worse than last quarter's 1%
Both snacks and beverages showed positive organic volume
growth with snacks growing 3% and beverages up 1.5%.
The American snacks businesses, especially the Frito-Lay and
Latin American segments, once again did well in the quarter.
Organic volume of the American snacks segment increased 2%,
gaining from successful innovations and increased brand building
investments. Organic snacks volumes grew 3% in Europe and 6% in
Asia, Middle East & Africa (AMEA).
Though the organic beverage volumes grew a strong 9% in AMEA,
the American beverage business continued to be sluggish and
volumes declined 3.5%. Beverage volumes were flat in Europe.
Pepsi's American beverage business has been consistently
delivering sluggish results, especially the colas. Changing
consumer preferences, increasing health consciousness, rising
obesity concerns, possible new taxes on sugar-sweetened beverages
and growing regulatory pressures are affecting the company's
carbonated beverage sales. PepsiCo has increased marketing
investments and is driving package and product innovation to
boost its American beverage business.
Core gross margins expanded 120 basis points (bps) in the
quarter driven by strong pricing. Core constant currency
operating profit improved 11% in the quarter despite a 13%
increase in advertising and marketing costs. Solid top-line
growth and productivity savings from its restructuring program
drove profits in the quarter. Importantly, the Vietnam gain
added 3% to operating profit growth. Core operating margins grew
2013 Outlook Retained
With the strong results in the first half, management is now
confident of meeting its 2013 targets. PepsiCo continues to
expect core constant currency earnings to increase in 2013 by 7%
from 2012 core earnings of $4.10 per share.
However, the guidance now incorporates the second-quarter
Vietnam gain which was previously not included. The Vietnam gain
is expected to offset higher-than-previously expected headwinds
from currency and increased marketing investments. Currency
headwinds are expected to hurt 2013 earnings by 2%, higher than
prior expectations of 1%.
The target is in line with management's long-term goal of high
single-digit core constant currency earnings growth. Price/mix is
expected to be a tailwind in the year.
Excluding headwinds from currency and structural changes,
organic revenues are expected to grow in the mid single-digit
range, also in line with the long-term targets. The structural
changes in China and Vietnam as well as currency headwinds are
expected to pull down organic revenues by 1% each.
Commodity inflation is expected to be in the low single-digit
range in 2013. The company expects its
advertising/marketing expense to increase at a rate equal to or
higher than revenue growth. The core tax rate is expected to be
approximately 27% for 2013.
PepsiCo plans to reinvest any excess earnings to support brand
building, innovation and improve productivity, especially in the
U.S. Productivity savings are expected to amount to $900 million
in 2013 which will be used to offset headwinds from cost
inflation and thereafter, reinvest in the business.
PepsiCo currently carries a Zacks Rank #3 (Hold). The
quarterly results come a week after activist investor, Nelson
Peltz, announced plans to push Pepsi to take over food giant
Mondelez International, Inc.
) and then spin-off its underperforming beverage business. The
strong results may help Pepsi to fend off pressure from
The Coca-Cola Company
) reported weak second-quarter results, barely meeting the Zacks
Consensus Estimate for earnings but missing the revenue estimate.
Another beverage company,
Dr Pepper Snapple
) reported sluggish second quarter results today; meeting the
Zacks Consensus Estimate for earnings but missing the same for
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