PepsiCo (PEP) Q2 2017 earnings summary

Executive summary

• Q2 net revenue rose 2.0% to $15.710B and organic revenue grew 3.1%; results were in line with expectations and 2017 targets were reaffirmed.

• Core EPS was $1.50, up 10% year over year and 13% at constant currency; reported diluted EPS was $1.46, up 6%.

• Core constant-currency operating profit increased 7%; organic revenue accelerated sequentially, with growth in developed, developing and emerging markets.

Financial highlights

• Q2 reported operating profit rose 1% to $2.990B and net income attributable to shareholders increased 5% to $2.105B.

• For 24 weeks, revenue rose 2% to $27.759B, operating profit increased 7% to $4.923B and net income grew 17% to $3.423B.

• 24-week reported diluted EPS was $2.38, up 18%; core EPS was $2.44, up 9% reported and 10% at constant currency. Prior-year TAB impairment aided comparisons.

• Q2 reported gross margin contracted 55 bps and core gross margin contracted 5 bps; reported operating margin contracted 20 bps, while core operating margin expanded 50 bps, including the Britvic gain.

Outlook and guidance

• 2017 targets remained at least 3% organic revenue growth and 8% core constant-currency EPS growth, with core EPS of $5.13 and an expected 2-point FX headwind.

• FX and the 53rd week in 2016 were expected to reduce reported revenue growth by 2 and 1 percentage points, respectively; the FX impact on core EPS improved from 3 to 2 points.

• Core EPS growth for the balance of the year was expected to be weighted toward Q4; Q3 faced the strongest quarterly organic revenue comparison and a tough North America Beverages comparison.

• Raw-material inflation was expected from commodity costs and transaction FX; productivity was expected to support core margin expansion, with a ~24% core effective tax rate.