Improving pricing power and a gain from the sale of a minority interest in British beverage manufacturer Britvic undergirded PepsiCo's (PEP +0.67%) second-quarter 2017 earnings results, which were released Tuesday. Beginning with the headline numbers, let's delve into the details of the quarter, and look ahead to the remainder of the year.
PepsiCo results: The raw numbers
| Metric | Q2 2017 | Q2 2016 | Year-Over-Year Change |
|---|---|---|---|
| Revenue | $15.71 billion | $15.40 billion | 2% |
| Net income | $2.11 billion | $2.01 billion | 5% |
| Diluted EPS | $1.46 | $1.38 | 5.8% |
Data source: PepsiCo.
What happened with PepsiCo this quarter?
- As in the first quarter of the year, PepsiCo was able to achieve its reported revenue increase through firmer product pricing.
- Again following a cue from the first quarter, PepsiCo's two largest segments -- Frito-Lay North America (FLNA) and North America Beverages (NAB) -- led the top line, generating net revenue increases of 3% and 2%, respectively, although both reported flat volume.
- Organic revenue growth (i.e., reported revenue growth after currency effects, acquisitions, divestitures, and structural items) hit 3% during the quarter, an improvement from Q1's 2.1% organic growth. As I recently pointed out, it was important for PepsiCo to hit this 3% threshold to credibly continue to forecast full-year organic growth of at least 3%.
- All of PepsiCo's operating segments reported positive revenue after adjusting for currency effects except Quaker Foods North America (QFNA). QFNA experienced a 1% decline in organic revenue due to its termination of a joint venture with Muller Quaker Dairy in the prior year.
- During the quarter, the company sold a long-held stake in British soft drink maker Britvic, which holds exclusive agreements to bottle PepsiCo's soft drinks in Great Britain and Ireland. PepsiCo realized a $95 million before-tax gain on the transaction.
- The Britvic sale contributed roughly 3 percentage points to PepsiCo's nearly 1% gain in operating income, to $2.99 billion. Management attributed the pressure on reported operating profit to higher commodity prices and foreign currency translation.
- PepsiCo increased its quarterly dividend by 7% to $0.805 per share. The annualized dividend of $3.22 yields about 2.8% at the current share price. PepsiCo has continued its protracted streak of annual dividend increases; 2017 marks the company's 45th consecutive year of bigger quarterly checks for shareholders.
Promotional image for PepsiCo's new enhanced water product, LIFEWTR. Image source: PepsiCo.
What management had to say
Recently, PepsiCo has made progress in its long-term goal to reduce its dependence on revenue from sweetened carbonated beverages, which have suffered from volume declines over the last several years. On the company's earnings conference call, CEO Indra Nooyi emphasized progress in the company's efforts to expand its stable of "stills" (non-carbonated) labels:
We are encouraged by continued strength in our stills portfolio, with good growth in Gatorade, our total water portfolio which benefited from the strong introduction of LIFEWTR, Lipton, and our distribution of Rockstar. In fact, in just five months of sales since its launch in Q1, LIFEWTR has already reached $70 million in retail sales across measured channels, was the top brand contributing to [liquid refreshment beverage] retail sales growth of the second quarter, and is on track to generate approximately $200 million in retail sales on an annualized basis.
Launched in February of this year, LIFEWTR is an "enhanced water" product. It's pH-balanced, purified by reverse osmosis, and contains added electrolytes. The beverage symbolizes the wide shift occurring in consumer beverage tastes. LIFEWTR's success is encouraging: Even for PepsiCo, which boasts 22 billion-dollar brands, first-year sales of $200 million counts as an extremely strong showing, and provides evidence that the company is successfully transitioning its drinks portfolio.
Looking forward
Management left most of its full-year guidance items unchanged during the second-quarter reporting period. However, the impact of foreign currency translation is expected to moderate in the back half of the year, so PepsiCo did issue a slight revision on "core," or adjusted diluted earnings per share (EPS). The organization now expects to earn $5.13 in 2017 core diluted EPS, versus the estimate of $5.09 provided last quarter. To date, PepsiCo has earned $2.38 in core diluted EPS, and appears well on its way to meeting its shareholder guidance for the full year.
