PURCHASE, N.Y., July 20 /PRNewswire-FirstCall/ -- PepsiCo, Inc. (NYSE: PEP) today reported solid top- and bottom-line results for the second quarter of 2010, driven by the acquisition of its two anchor bottlers, broad-based gains across its snack and beverage portfolio in key international markets, disciplined investments in strategic initiatives and prudent cost controls.

"We posted a solid second quarter, exceeding our core constant currency EPS growth target for the first half of the year," said PepsiCo Chairman and CEO Indra Nooyi.  "Our results reflect our ability to generate sustainable growth across a global snack and beverage portfolio despite continued macroeconomic challenges.  In line with our plan, our bottler integration is on track and unlocking opportunities and efficiencies.  We continue to make investments in near- and long-term opportunities across both our developed and emerging markets, and I'm very pleased that we've taken a disciplined approach to our activities in North America.  All of these things give us confidence that we can generate strong, sustainable growth in the second half of 2010 and beyond."

PepsiCo Chief Financial Officer Hugh Johnston said: "We are benefiting from both the acquisition of our anchor bottlers earlier this year and from improving trends across our global business.  As planned, we have stepped up incremental investments around the world to capitalize on untapped consumer demand, including investments in marketplace infrastructure to support both our expanding China beverage business and innovation across our global snacks portfolio.  We remain confident in our ability to meet our full-year core constant currency EPS target of 11 to 13 percent."  

*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

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

In PepsiCo Americas Foods (PAF):

• Frito-Lay North America (FLNA) delivered volume and top-line results in line with expectations as it overlapped the "20% More Free" promotion launched in the second quarter of 2009.  Operating profit benefited from improved costs.  FLNA gained salty-snack dollar share in measured channels and unit growth was up low-single-digits as trends improved in both convenience-and-gas store channel and food service vending accounts.  
• Quaker Foods North America (QFNA) posted declines in volume, net revenue and core operating profit largely driven by declines in ready-to-eat cereals.  QFNA is making investments in innovation and value to refocus and extend the advantages for its hallmark health and wellness brand as PepsiCo seeks to expand its global "Good for You" portfolio of products.
• Latin America Foods (LAF) delivered increases in volume and net revenue demonstrating solid consumer demand, while profits declined as the region navigated challenging macroeconomic conditions in Venezuela, higher commodity costs and a one-time legal settlement.  LAF continues to make investments in both value and infrastructure which are expected to benefit operating results in the second half of the year.

PepsiCo Americas Beverages (PAB) volume, net revenue and operating profit results were driven by the favorable impact of the bottling acquisitions, improving sequential organic volume trends across the product portfolio and synergies.

• Reported volume grew 13 percent, and volume in North America, excluding the incremental volume from our agreement with Dr Pepper Snapple Group, declined one percent -- a 4.5 point sequential improvement versus the first quarter of 2010.  Improvement in organic volume growth was driven by the successful launch of Gatorade's G Series and Lipton ready-to-drink teas.  Volume performance was weighed down by softness in the carbonated soft drink (CSD) category and the company's focus on profitable growth in bottled water.

Europe volume, net revenue and operating profit growth were driven by improved sequential performance and broad-based gains across the region in both snacks and beverages, the favorable impact of the bottling acquisitions and successful implementation of growth and productivity initiatives.  

• Snack volume increased, driven primarily by strong commercial programs across most of Western Europe.  Key initiatives included progress on portfolio transformation with the launch of Matutano Seeds in Iberia and the expansion of locally relevant products in key growth markets like Russia.

• Reported beverage volume grew 10 percent, while volume excluding the impact of incremental brands related to our acquisitions of PBG and PAS increased four percent – a sequential improvement of nearly nine points from the first quarter of 2010.  Consumer-centric commercial programs drove especially strong beverage share performance in key markets – specifically Russia, Turkey, Spain, the U.K. and Germany.

AMEA's broad-based volume gains in both snacks and beverages drove strong top-line performance.  As planned, core profit growth decelerated versus the first quarter of 2010 as the region made significant investments to expand its footprint in key growth markets such as China and India.  A strong productivity agenda and tight cost controls helped to offset cost pressures.  Acquisitions had a nominal impact on net revenue growth and a half-percentage-point unfavorable impact on profit growth.

• Snack volume grew at a mid-teens rate – driven by double-digit growth in India, the Middle East and China – as the business focused on value, innovation and expanding its footprint. India had its highest volume month ever in May as it launched a local version of the highly successful "Do Us a Flavour" campaign which debuted in the U.K. last year.  Acquisitions contributed four percentage points to volume growth.

• Beverage volume grew at a high-single-digit rate, led by double-digit gains in India, Pakistan and Egypt.  Volume was up low-single-digits in China as very strong growth in non-carbonated beverages more than offset a sluggish CSD market.  The business gained CSD market share in China in the quarter.

Tax Rate

PepsiCo's reported tax rate was 29.9 percent in the second quarter, versus 25.4 percent in the prior-year period.  The increase in the rate was primarily driven by the resolution of certain tax matters in the prior year and the impact of the Patient Protection and Affordable Care Act (PPACA) in the current quarter. PepsiCo's core tax rate was 28.9 percent for the second 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 non-core items.

Cash Flow

Year-to-date cash flow from operating activities was $2.4 billion.  Management operating cash flow, which is net of capital expenditures, was $1.5 billion and included: $0.2 billion of merger and integration payments associated with our bottling acquisitions, $0.6 billion ($0.4 billion, net of tax) related to a discretionary contribution to PepsiCo's pension funds, $28 million related to 2009 restructuring charges and $100 million ($64 million, net of tax) related to a donation to the PepsiCo Foundation.  Management operating cash flow, excluding these items, was $2.2 billion.  

In the third quarter the company plans to make a $600 million discretionary contribution to PepsiCo's pension funds.

For the year, the company expects cash flow from operating activities to be about $7.9 billion and management operating cash flow, which is net of capital expenditures, to be about $4.3 billion, including: discretionary contributions to PepsiCo's pension funds of $1.2 billion, about $0.4 billion of merger and integration payments associated with our bottling acquisitions, the $100 million donation to the Foundation, $28 million related to 2009 restructuring charges, about $200 million in capital investments related to the bottler integration, and about $600 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 from its fiscal 2009 core EPS of $3.71.  Based on current spot rates, foreign exchange translation would represent a one percentage point unfavorable impact on the company's full-year, core EPS.  As a result, growth in core EPS for the year is expected to be in the 10 to 12 percent range.

Synergies

The company is targeting pre-tax annualized synergies from the bottling acquisitions of approximately $400 million once fully implemented by 2012, with 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 million to $150 million.  

Uses of Cash

In the second quarter, the company repurchased $2.6 billion in common stock, or 39 million shares.  The company also spent $739 million on dividends in the quarter.  The company plans to make a $600 million discretionary contribution to PepsiCo's pension funds in the third quarter, and it 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 Bolivars 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 re-measured 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.    

Please refer to the Glossary for more information about the items excluded from the company's fiscal 2010 core constant currency EPS guidance.  

At 8 a.m. (Eastern Time) today, the company will host a conference call with investors to discuss second quarter results and the outlook for full-year 2010. Further details, including a slide presentation accompanying the call, will be accessible on the company's website at www.pepsico.com/investors in advance of the call.

About PepsiCo  

PepsiCo offers the world's largest portfolio of billion-dollar food and beverage brands, including 19 different product lines that each generates more than $1 billion in annual retail sales. Our main businesses -- Frito-Lay, Quaker, Pepsi-Cola, Tropicana and Gatorade -- also make hundreds of other nourishing, tasty foods and drinks that bring joy to our consumers in more than 200 countries. With annualized revenues of nearly $60 billion, PepsiCo's people are united by our unique commitment to sustainable growth, called Performance with Purpose. By dedicating ourselves to offering a broad array of choices for healthy, convenient and fun nourishment, reducing our environmental impact, and fostering a diverse and inclusive workplace culture, PepsiCo balances strong financial returns with giving back to our communities worldwide. For more information, please visit www.pepsico.com.

Cautionary Statement  

Statements in this release that are "forward-looking statements," including PepsiCo's 2010 guidance, are based on currently available information, operating plans and projections about future events and trends. They inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted in such forward-looking statements. Such risks and uncertainties include, but are not limited to: changes in demand for PepsiCo's products, as a result of changes in consumer preferences and tastes or otherwise; damage to PepsiCo's reputation; trade consolidation, the loss of any key customer, or failure to maintain good relationships with PepsiCo's bottling partners; PepsiCo's ability to hire or retain key employees or a highly skilled and diverse workforce; unstable political conditions, civil unrest or other developments and risks in the countries where PepsiCo operates; changes in the legal and regulatory environment; PepsiCo's ability to build and sustain proper information technology infrastructure, successfully implement its ongoing business process transformation initiative or outsource certain functions effectively; unfavorable economic conditions and increased volatility in foreign exchange rates; PepsiCo's ability to compete effectively; increased costs, disruption of supply or shortages of raw materials and other supplies; disruption of PepsiCo's supply chain; climate change or changes in legal, regulatory or market measures to address climate change; PepsiCo's ability to realize the anticipated cost savings and other benefits expected from the acquisitions of The Pepsi Bottling Group, Inc. and PepsiAmericas, Inc.; failure to renew collective bargaining agreements or strikes or work stoppages; and any downgrade of PepsiCo's credit rating resulting in an increase of its future borrowing costs.

For additional information on these and other factors that could cause PepsiCo's actual results to materially differ from those set forth herein, please see PepsiCo's filings with the SEC, including its most recent annual report on Form 10-K and subsequent reports on Forms 10-Q and 8-K. Investors are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. PepsiCo undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.  

Miscellaneous Disclosures  

Reconciliation. In discussing financial results and guidance, the company may refer to certain non-GAAP measures. Reconciliations of any such non-GAAP measures to the most directly comparable financial measures in accordance with GAAP can be found in the attached exhibits, as well as on the company's website at www.pepsico.com in the "Investors" section under "News & Events." Our non-GAAP measures exclude from reported results those items that management believes are not indicative of our ongoing performance and how management evaluates our operating results and trends.  

Glossary

Beverage volume: Volume shipped to retailers and independent distributors from both PepsiCo and our bottlers.  

Core: Core results are non-GAAP financial measures. Second quarter 2009 core results exclude the commodity mark-to-market net gains included in corporate unallocated expenses of $100 million and restructuring charges of $11 million.  Second quarter 2010 core results exclude the commodity mark-to-market net losses included in corporate unallocated expenses of $4 million, merger and integration charges associated with our PBG and PAS mergers of $155 million and certain fair value adjustments to acquired inventory in connection with our PBG and PAS mergers of $76 million.  First-half 2009 core results exclude the commodity mark-to-market net gains included in corporate unallocated expenses of $162 million and restructuring charges of $36 million.  First-half 2010 core results exclude the commodity mark-to-market net gains included in corporate unallocated expenses of $42 million, merger and integration charges associated with our PBG and PAS mergers of $467 million, as well as our share of PBG's and PAS's respective merger costs recorded in bottling equity income of $9 million, the gain on previously held equity interests in PBG and PAS of $958 million, certain fair value adjustments to acquired inventory in connection with our PBG and PAS mergers of $357 million, the one-time charge related to the change to hyperinflationary accounting and devaluation in Venezuela of $120 million, an asset write-off for SAP software of $145 million and a contribution to the Foundation of $100 million. Full-year 2010 core constant currency EPS guidance excludes the commodity mark-to-market net impact included in corporate unallocated expenses, merger and integration charges associated with our PBG and PAS mergers, including our share of PBG's and PAS's respective merger costs recorded in bottling equity income of $9 million, the gain on previously held equity interests in PBG and PAS of $958 million, certain fair value adjustments to acquired inventory in connection with our PBG and PAS mergers, the one-time charge related to the change to hyperinflationary accounting and devaluation in Venezuela of $120 million, an asset write-off for SAP software of $145 million and a contribution to the Foundation of $100 million.  For more details and reconciliations of our 2010 and 2009 core and core constant currency results and full-year 2010 core constant currency EPS guidance, see "Reconciliation of GAAP and Non-GAAP Information" in the exhibits attached hereto.

Constant currency: Financial results (historical and projected) assuming constant foreign currency exchange rates used for translation based on the rates in effect for the comparable prior-year period. In addition, the impact on EPS growth is computed by adjusting core EPS growth by the after-tax foreign currency translation impact on core operating profit growth using PepsiCo's core effective tax rate.  

Division operating profit: The aggregation of the operating profit for each of our reportable segments, which excludes the impact of corporate unallocated expenses.  

Effective net pricing: The combined impact of mix and price.  

Management operating cash flow:  Net cash provided by operating activities less capital spending plus sales of property, plant and equipment.  This non-GAAP financial measure is our primary measure used to monitor cash flow performance.  See the attached exhibits for a reconciliation of this measure to the most directly comparable financial measure in accordance with GAAP (operating cash flow).

Management operating cash flow, excluding certain items:  Management operating cash flow, excluding: (1) discretionary pension contributions in both 2010 and 2009, (2) restructuring payments in connection with our Productivity for Growth initiative in 2009, (3) acquisition and integration payments paid in 2010 in connection with our PBG and PAS acquisitions, (4) a contribution to The PepsiCo Foundation in 2010, and (5) the tax impacts associated with each of these items, as applicable.  See the attached exhibits for a reconciliation of this non-GAAP financial measure to the most directly comparable financial measure in accordance with GAAP (operating cash flow).

Mark-to-market gain or loss or net impact: Change in market value for commodity contracts that we purchase to mitigate the volatility in costs of energy and raw materials that we consume. The market value is determined based on average prices on national exchanges and recently reported transactions in the marketplace.  

Net pricing: The combined impact of list price changes, weight changes per package, discounts and allowances.  

Net capital spending: Capital spending less cash proceeds from sales of property, plant and equipment.  

Pricing: The impact of list price changes and weight changes per package.  

Transaction foreign exchange: The foreign exchange impact on our financial results of transactions, such as purchases of imported raw materials, commodities, or services, occurring in currencies other than the local, functional currency.  

Division operating profit, core results and core constant currency results are non-GAAP financial measures as they exclude certain items noted below.  However, we believe investors should consider these measures as they are more indicative of our ongoing performance and with how management evaluates our operational results and trends.  

Commodity mark-to-market net impact

In the 12 weeks ended June 12, 2010, we recognized $4 million of mark-to-market net losses on commodity hedges in corporate unallocated expenses.  In the 24 weeks ended June 12, 2010, we recognized $42 million of mark-to-market net gains on commodity hedges in corporate unallocated expenses.  In the 12 and 24 weeks ended June 13, 2009, we recognized $100 million and $162 million, respectively, of mark-to-market net gains on commodity hedges in corporate unallocated expenses.  In the year ended December 26, 2009, we recognized $274 million of mark-to-market net gains on commodity hedges in corporate unallocated expenses.  We centrally manage commodity derivatives on behalf of our divisions.  Certain of these commodity derivatives do not qualify for hedge accounting treatment and are marked to market with the resulting gains and losses recognized in corporate unallocated expenses.  These gains and losses are subsequently reflected in division results when the divisions take delivery of the underlying commodity.

PBG/PAS merger and integration charges

In the 12 weeks ended June 12, 2010, we incurred merger and integration charges of $155 million related to our acquisitions of PBG and PAS, including $103 million recorded in the PAB segment, $28 million recorded in the Europe segment and $24 million recorded in corporate unallocated expenses.  In the 24 weeks ended June 12, 2010, we incurred merger and integration charges of $467 million related to our acquisitions of PBG and PAS, including $296 million recorded in the PAB segment, $29 million recorded in the Europe segment, $112 million recorded in corporate unallocated expenses and $30 million recorded in interest expense.  These charges are being incurred to help create a more fully integrated supply chain and go-to-market business model, to improve the effectiveness and efficiency of the distribution of our brands and to enhance our revenue growth.  These charges also include closing costs, one-time financing costs and advisory fees related to the acquisitions.  In addition, in the 24 weeks ended June 12, 2010 we recorded $9 million of charges, representing our share of the respective merger costs of PBG and PAS, recorded in bottling equity income.  In the year ended December 26, 2009, we incurred $50 million of costs associated with these acquisitions, as well as an additional $11 million of costs representing our share of the respective merger costs of PBG and PAS, recorded in bottling equity income.

2009 restructuring and impairment charges

As a result of our previously initiated Productivity for Growth program, in the 12 and 24 weeks ended June 13, 2009 we recorded $11 million and $36 million, respectively, of restructuring and impairment charges.  The program includes actions in all segments of the business, including the closure of six plants that we believe will increase cost competitiveness across the supply chain, upgrade and streamline our product portfolio and simplify the organization for more effective and timely decision-making.

Gain on previously held equity interests in PBG and PAS

In the first quarter of 2010, in connection with our acquisitions of PBG and PAS, we recorded a gain on our previously held equity interests of $958 million, comprising $735 million which is non-taxable and recorded in bottling equity income and $223 million related to the reversal of deferred tax liabilities associated with these previously held equity interests.

Inventory fair value adjustments

In the 12 weeks ended June 12, 2010, we recorded $76 million of incremental costs, substantially all in cost of sales, related to fair value adjustments to the acquired inventory and other related hedging contracts included in PBG's and PAS's balance sheets at the acquisition date, including $36 million recorded in the PAB segment and $40 million recorded in the Europe segment.  In the 24 weeks ended June 12, 2010, we recorded $357 million of incremental costs, substantially all in cost of sales, related to fair value adjustments to the acquired inventory and other related hedging contracts included in PBG's and PAS's balance sheets at the acquisition date, including $317 million recorded in the PAB segment and $40 million recorded in the Europe segment.

Venezuela currency devaluation

As of the beginning of our 2010 fiscal year, we recorded a one-time $120 million net charge related to our change to hyperinflationary accounting for our Venezuelan businesses and the related devaluation of the bolivar fuerte (bolivar).  $129 million of this net charge was recorded in corporate unallocated expenses, with the balance (income of $9 million) recorded in our PAB segment.  

Asset write-off for SAP software

In the first quarter of 2010, we recorded a $145 million charge related to a change in scope of one release in our ongoing migration to SAP software.  This change was driven, in part, by a review of our North America systems strategy following our acquisitions of PBG and PAS.  This change does not impact our overall commitment to continue our implementation of SAP across our global operations over the next few years.

Foundation contribution

In the first quarter of 2010, we made a $100 million contribution to The PepsiCo Foundation, Inc. (Foundation), in order to fund charitable and social programs over the next several years.  This contribution was recorded in corporate unallocated expenses.

Additionally, management operating cash flow is the primary measure management uses to monitor cash flow performance.  This is not a measure defined by GAAP.  Since net capital spending is essential to our product innovation initiatives and maintaining our operational capabilities, we believe that it is a recurring and necessary use of cash.  As such, we believe investors should also consider net capital spending when evaluating our cash from operating activities.

We are not able to reconcile our full-year projected 2010 core constant currency EPS to our full-year projected 2010 reported results because we are unable to predict the 2010 full-year impact of foreign exchange or the mark-to-market net gains or losses on commodity hedges due to the unpredictability of future changes in foreign exchange rates and commodity prices.  Therefore, we are unable to provide a reconciliation of these measures.