Source: Seeking Alpha
PepsiCo, Inc. (NYSE:PEP)
Q2 2014 Earnings Conference Call
July 23, 2014 08:00 AM ET
Jamie Caulfield – SVP of IR
Indra Nooyi – Chairman and CEO
Hugh Johnston – CFO
John Faucher – JPMorgan
Bryan Spillane – Bank of America
Ali Dibadj – Bernstein
Bill Schmitz – Deutsche bank
Dara Mohsenian – Morgan Stanley
Steve Powers – UBS
Judy Hong – Goldman Sachs
Amit Sharma – BMO Capital Markets
Mark Swartzberg – Stifel Nicolaus
Good morning and welcome to PepsiCo’s Second Quarter 2014 Earnings Conference Call. (Operator Instructions) Today’s call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Jamie Caulfield, Senior Vice President of Investor Relations. Mr. Caulfield, you may begin.
Jamie Caulfield – SVP of IR
Thank you, operator. With me today are Indra Nooyi, PepsiCo’s Chairman and CEO; and Hugh Johnston, PepsiCo’s CFO. We’ll lead off today’s call with a review of our second quarter 2014 performance and outlook, and then we’ll move on to Q&A.
We have kept our comments brief this morning and intend to conclude the call by 08:45, to be respectful of your time during a busy earnings week, and we’ll do our best to get to as many of your questions as we can. Before we begin, please take note of our cautionary statement.
This conference call includes forward-looking statements, including statements regarding 2014 guidance and our long-term targets based on currently available information. Forward-looking statements inherently involve risks and uncertainties that could cause our actual results to differ materially from those predicted in such forward-looking statements. Statements made on this conference call should be considered together with cautionary statements and other information contained in today’s earnings release and in our most recent periodic reports filed with the SEC.
Unless otherwise indicated all references to EPS and operating profit growth are on a core basis. In addition, references to organic revenue results in this call exclude the impact of acquisitions and divestitures, structural changes and foreign exchange translation. To find disclosures and reconciliations of non-GAAP measures that we use when discussing PepsiCo’s financial results, you should refer to the glossary and other attachments to this morning’s earnings release and to the Investors section of PepsiCo’s website under the Events & Presentations tab.
As we discuss today’s results, please keep in mind that our second quarter comprises the 12 weeks ended June 14, for our North American operations in the months of March, April and May for most of our operations outside of North America. As we have mentioned in our earnings release this morning, core operating profit growth rates are impacted by lapping a $137 million gain from the re-franchising of our Vietnam beverage operations in the second quarter of 2013, partially offset by incremental investments of $46 million made in the prior year quarter
Now, it’s my pleasure to introduce Indra Nooyi.
Indra Nooyi – Chairman and CEO
Thank you, Jamie, and good morning, everyone. Thank you for joining us this morning. We are pleased with our second quarter and our first half results. Despite operating and what continues to be a challenging and volatile macro environment, we have been consistently meeting or exceeding our financial goals over the last two and half years. I believe our results reflect the hard work we have done over the last several years to position our business for sustainable success; specifically our investments to strengthen our brands, innovate more effectively, expand our geographic footprint with strategic acquisitions, drive better execution, and operate more efficiently by leveraging our global scale and complementary product portfolio.
Today, these actions and investments are producing consistent tangible results. Based on the strength of our first half results, in our outlook for the remainder of the year, we are increasing our full year core constant currency 2014 EPS growth outlook to 8%.
So let me share with you some of the performance highlights of the second quarter. Organic revenue grew approximately 4%, with global snacks up 5% and global beverages up 2%. We managed the business responsibly achieving three points of effective net pricing to effective price packed revenue management. Each of our four business units delivered organic revenue growth led by high single-digit growth in EMEA and mid-single digit growth in Europe and PepsiCo Americas Foods.
Developing and emerging markets posted solid 8% organic revenue growth led by low double-digit growth in China, high single-digit growth in Brazil and mid single-digit growth in Russia. Innovation continue to play an important role in our topline growth and accounted for 9% of our net revenue.
Core gross margins improved by 60 basis points. Excluding the Vietnam gain, that is incremental investment from the second quarter of 2013, our core constant currency operating profit rose 6%, core operating margin improved by 65 basis points and core constant currency EPS grew 9%. On a rolling four-quarter basis, our core net ROIC improved by 30 basis points and now stands at 16.5%. In the first half of 2014, we returned $4 billion to shareholders in the form of dividends and share repurchases, a 46% increase versus last year. As we previously announced, we expect to return $8.7 billion to shareholders in 2014 in the form of dividends and share repurchases, a 35% increase over our 2013 cash return to shareholders.
Importantly, we achieved our targeted productivity savings in the quarter and remain on track to achieve our full-year target of $1 billion, which represents approximately 3.5% of our operating cost base excluding commodities and A&M expense.
This year we successfully complete the three-year $3 billion productivity program we launched in 2012 and we are now focused on our next generation’s five-year 5 billion productivity programs for 2019 announced earlier this year which is really centered on four key areas.