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Pepsico Reports First Quarter 2016 Results And Reaffirms Full Year Outlook

The following excerpt is from the company's SEC filing.

First-Quarter 2016 Performance

Organic/Core

Reported (GAAP)

Revenue growth

Gross margin expansion

130 bps

160 bps

EPS growth

Core constant currency EPS growth

- PepsiCo, Inc. (NYSE: PEP) today reported organic revenue growth of 3.5 percent and 11 percent core constant currency EPS growth for the first quarter of 2016

“We delivered strong first quarter operating results driven by balanced execution of our commercial agenda and productivity programs. Our marketing initiatives and new product launches are gen erating solid organic top line growth, and our focus on driving greater efficiency throughout our operations contributed significantly to attractive core gross margin expansion,” said Chairman and CEO Indra Nooyi. “We are off to a strong start to the year and that gives us added confidence in achieving our financial objectives for 2016.”

Unless otherwise indicated, the reference to revenue is organic and the remaining metrics are on a core basis. Please refer to the Glossary for the definitions of Non-GAAP financial measures including core, constant currency, organic and free cash flow.

Summary First Quarter 2016 Performance (Percent Growth)

ORGANIC/CORE

REPORTED (GAAP)

Volume

Core Constant

Currency

Operating Profit

Revenue

Latin America

Total Divisions

Total PepsiCo

Organic results are non-GAAP financial measures that adjust for impacts of acquisitions, divestitures and other structural changes, including the previously announced Venezuela deconsolidation, and foreign exchange translation, as applicable. For more information about our organic results and the impact of the Venezuela deconsolidation, see “Reconciliation of GAAP and Non-GAAP Information” in the attached exhibits. Please refer to the Glossary for the definition of “Organic.”

Core constant currency results are non-GAAP financial measures that exclude certain items affecting comparability and foreign exchange translation. For more information about our core constant currency results, see “Reconciliation of GAAP and Non-GAAP Information” in the attached exhibits. Please refer to the Glossary for definitions of “Core” and “Constant Currency.”

Reported operating profit performance was impacted by certain items excluded from our core results in both 2016 and 2015. See “Reconciliation of GAAP and Non-GAAP Information” in the attached exhibits for more information about these items.

Snacks/Beverages.

3 percent decrease excluding the first quarter 2015 impairment charge associated with a dairy joint venture

and the prior year operating performance associated with ceasing operations of a dairy joint venture

Excluding the impact of results from our Venezuelan businesses from the Q1 2015 base, core constant currency operating profit increased 9 percent

18 percent increase excluding the gain related to the refranchising of a portion of our India bottling operations recorded in the first quarter of 2015.

The Company recorded a pre- and after-tax non-core impairment charge of $373 million ($0.26 per share) to reduce the value of the Company’s 5% indirect equity interest in Tingyi-Asahi Beverages Holding Co. Ltd. (TAB) to its estimated fair value.

9 percent increase excluding the impact of results from our Venezuelan businesses from the Q1 2015 base.

Summary of First Quarter Financial Performance:

Organic revenue grew 3.5 percent and reported net revenue declined 3 percent

Foreign exchange translation had a 4.5-percentage-point unfavorable impact and the Venezuela deconsolidation had a 2-percentage-point unfavorable impact on reported net revenue

Core gross margin expanded 130 basis points and core operating margin increased 165 basis points. Margin expansion reflects the implementation of effective revenue management strategies and previously announced productivity initiatives, partially offset by a 65 basis point increase in advertising and marketing expense as a percentage of sales. Reported gross margin expanded 160 basis points, while reported operating margin contracted 105 basis points reflecting a $373 million non-core impairment charge related to our 5% indirect equity interest in TAB.

Core constant currency operating profit increased 12 percent. Reported operating profit decreased 10 percent reflecting the non-core impairment charge mentioned above

The Company’s core effective tax rate was 24.7 percent, which compares to 23.0 percent in the prior-year quarter. The reported effective tax rate of 31.9 percent compares to 23.1 percent in the prior year quarter and was impacted by the non-core impairment charge referred to above, which had no tax benefit.

Core EPS was $0.89 and reported EPS was $0.64. Core EPS excludes a $0.26 per share non-core impairment charge related to our 5% indirect equity interest in TAB

Cash flow provided by operating activities was $131 million.

Discussion of First Quarter Division Core Constant Currency Operating Profit Results:

Core constant currency operating profit results for all divisions were impacted by organic revenue results as presented in the tables on pages 2 and A-6. In addition, results for each division were impacted by the following:

Frito-Lay North America (FLNA)

Positively impacted by productivity gains and lower raw material costs, partially offset by operating cost inflation and higher advertising and marketing expense.

Quaker Foods North America (QFNA)

Positively impacted by the lapping of a first quarter 2015 impairment charge and the prior year operating performance associated with a dairy joint venture (operations of which ceased in the fourth quarter of 2015), productivity gains and lower raw material costs, partially offset by higher advertising and marketing expense and operating cost inflation.

North America Beverages (NAB)

Positively impacted by productivity gains and lower raw material costs, partially offset by operating cost inflation and higher advertising and marketing expense.

Latin America

Positively impacted by productivity gains, partially offset by operating cost inflation, higher raw material costs (in local currency), driven by a strong U.S. dollar, and the impact of the deconsolidation of Venezuela.

Europe Sub-Saharan Africa (ESSA)

Negatively impacted by higher raw material costs (in local currency), primarily driven by a strong U.S. dollar, operating cost inflation, increases in advertising and marketing expenses and an impairment charge associated with certain production assets in Russia, partially offset by productivity gains.

Asia, Middle East and North Africa (AMENA)

Positively impacted by productivity gains and lower raw material costs, partially offset by the lapping of a prior year gain from the refranchising of a portion of our beverage business in India, operating cost inflation and higher advertising and marketing expenses.

2016 Guidance and Outlook

Consistent with its previous guidance for 2016, the Company expects:

Approximately 4 percent organic revenue growth, excluding the impact of the 53rd week;

Based on current foreign exchange market consensus rates, foreign exchange translation to negatively impact reported net revenue growth by 4 percentage points;

The 53rd week to contribute approximately 1 percentage point to reported net revenue growth;

2016 core earnings per share of $4.66, driven by the following expectations and factors (which remain unchanged):

2015 core earnings per share

Expected core constant currency EPS growth (excluding Venezuela deconsolidation)

Negative impact of Venezuela deconsolidation

Negative impact of foreign currency translation

Expected 2016 core earnings per share

In addition, the Company continues to expect:

Low-single-digit raw material deflation excluding the impact of transaction-related foreign exchange. Including the impact of transaction-related foreign exchange, raw materials are expected to have low-single-digit inflation;

The benefit of a 53rd week will be reinvested in certain productivity and growth initiatives;

Productivity savings of approximately $1 billion;

Lower corporate unallocated expense, driven primarily by lower pension expense;

Higher net interest expense driven by higher debt balances;

A core effective tax rate approximately even with the 2015 full-year core effective tax rate;

Over $10 billion in cash flow from operating activities and more than $7 billion in free cash flow (excluding certain items);

Net capital spending of approximately $3 billion; and

To return a total of approximately $7 billion to shareholders through dividends of approximately $4 billion and share repurchases of approximately $3 billion

PepsiCo’s fiscal year ends on the last Saturday of each December, resulting in an additional week of results every

five or six years. PepsiCo’s 2016 fiscal year includes 53 weeks of results.

Based on current foreign exchange market consensus rates.

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 2016 results and the outlook for 2016. Further details will be accessible on the Company’s website at

www.pepsico.com/investors

Contacts:

Investors

Jamie Caulfield

Jay Cooney

Senior Vice President, Investor Relations

Vice President, Communications

914-253-3035

914-253-2777

jamie.caulfield@pepsico.com

jay.cooney@pepsico.com

PepsiCo, Inc. and Subsidiaries

Condensed Consolidated Statement of Income

(in millions except per share amounts; unaudited)

12 Weeks Ended

3/19/2016

3/21/2015

Change

Net Revenue

11,862

12,217

Cost of sales

Gross profit

Selling, general and administrative expenses

Amortization of intangible assets

Interest expense

Interest income and other

Income before income taxes

Provision for income taxes

Net income

Less: Net income attributable to noncontrolling interests

Net Income Attributable to PepsiCo

Diluted

Net Income Attributable to PepsiCo per Common Share

Weighted-average common shares outstanding

Cash dividends declared per common share

0.7025

(a) Reclassifications were made to prior years’ amounts to conform to the current year presentation, including the presentation of certain functional support costs associated with the manufacturing and production of our products within cost of sales. These costs were previously included in selling, general and administrative expenses. These reclassifications resulted in an increase in cost of sales of $347 million and $354 million for the full years 2015 and 2014, respectively, with corresponding reductions to gross profit and selling, general and administrative expenses in the same periods. The quarterly impact of these reclassifications increased cost of sales by $61 million, $84 million, $95 million and $107 million for the quarters ended March 21, 2015, June 13, 2015, September 5, 2015 and December 26, 2015, respectively, with corresponding reductions to gross profit and selling, general and administrative expenses in the same periods. These reclassifications reflect changes in how we are classifying costs of certain support functions as a result of ongoing productivity and efficiency initiatives. These reclassifications had no impact on our consolidated net revenue, operating profit, net interest expense, provision for income taxes, net income or earnings per share.

Supplemental Financial Information

(in millions and unaudited)

Asia...


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