But for its largest segment, North America Beverages (NAB), PepsiCo, Inc. (NASDAQ:PEP) would have been able to claim a fairly impressive quarter when it released its fiscal third-quarter 2017 earnings Wednesday morning. PepsiCo's beverage business sagged unexpectedly, causing the company to pull back on projections for full-year organic revenue growth. Yet strength in snacking division Frito-Lay North America (FLNA) and other segments allowed management to raise fiscal 2017 earnings-per-share guidance. We'll dive into these disparities after reviewing the headline numbers directly below.
PepsiCo results: The raw numbers
|Metric||Q3 2017||Q3 2016||Year-Over-Year Change|
|Revenue||$16.24 billion||$16.02 billion||1.4%|
|Net income||$2.14 billion||$1.99 billion||7.5%|
What happened with PepsiCo this quarter?
While PepsiCo recorded a net revenue increase of 1.4%, the important barometer of organic revenue growth (i.e., reported revenue growth adjusted primarily for currency effects, acquisitions, and divestitures) hit just 1.7%, well below the pace of the first two quarters and the full-year target of 3%.
Organic revenue growth fell victim to unexpected weakness in the NAB segment. Despite years of declining soda volumes, NAB had stabilized over the past several quarters, and in the first half of 2017 eked out 2% reported revenue growth and 1% organic revenue growth. In the third quarter, however, NAB booked steep declines in reported and organic growth of 3% and 5%, respectively.
NAB volume decreased 6%, but in a bright spot, net pricing increased 1%. This is likely due to the continued positive impact of smaller packaging such as 7.5-ounce "mini" cans, which have provided the company with better margins on its carbonated soft drinks.
All other segments, with the exception of Asia, Middle East, and North Africa (AMENA), presented positive revenue growth. Performance was led by FLNA, which chalked up both reported and organic revenue growth of 3%.
As I wrote in my earnings preview, as goes Frito-Lay, so goes PepsiCo, and this turned out to be the case in the third quarter. FLNA is PepsiCo's second-largest segment, accounting for a full quarter of company revenue in the first three quarters of 2017. But increasingly, the segment powers the organization's bottom line. In the last three months, FLNA achieved $1.2 billion of segment profit, which was significantly higher than NAB's $817 million haul, and made up 40% of total company operating profit.
Quaker Foods North America (QFNA), Latin America, and Europe Sub-Saharan Africa (ESSA) clinched revenue increases of 1%, 6%, and 8%, respectively, versus the prior-year quarter.
The AMENA segment continued to struggle, posting a 4% revenue decline against the third quarter of 2016. This number is actually an improvement from the two sequential preceding quarters: In the first half of fiscal 2017, AMENA's revenue dropped by 9%. AMENA is PepsiCo's fifth-largest segment, so its top line of $1.6 billion isn't the most important piece of the company's total sales, or $16.2 billion for the quarter. Still, the division is mired in a year-to-date slump due to a currency devaluation in Egypt and persistently depressed oil prices in the region, which hamper consumer spending.
What management had to say
In the company's earnings press release, CEO Indra Nooyi acknowledged the somewhat surprising slump in North America Beverages, but was also quick to highlight the outperformance of the business as a whole:
Overall, our businesses performed well in the third quarter in what continues to be a challenging environment. Each of our operating sectors delivered results in line with or ahead of our expectations, with the exception of North America Beverages (NAB) where revenues declined following two consecutive years of very strong third-quarter growth. Despite the challenges in our NAB business, the PepsiCo portfolio overall generated revenue, operating profit and earnings-per-share growth. Although we have moderated our full-year organic revenue growth outlook, we are now on track to exceed the full-year earnings-per-share target we set at the beginning of the year.
In the recent past, PepsiCo's non-carbonated portfolio, which includes drinks like Gatorade, Tropicana orange juice, and the new LIFEWTR enhanced water product, has been able to absorb soft-drink volume declines within NAB. Thus, it's possible that NAB's weak numbers are a temporary blip in what has been a relatively stable trend of flattish volume and revenue growth.
Even so, PepsiCo acknowledged this headwind on its overall business by removing its companywide organic revenue growth target of 3%, and projecting instead that organic growth will match final full-year reported revenue growth. That number sits at 1.8% through the first three quarters of the fiscal year.
However, the robust showing in the remainder of PepsiCo's revenue streams, powered by FLNA's outsized impact on total net income, allowed management to raise the outlook for core (adjusted) earnings per share, as CEO Nooyi indicated above. PepsiCo now expects to earn $5.23 per share for the full year, versus a previous expectation of $5.13. While the company is still thirsting for revenue growth, it's snacking on higher profits.