PepsiCo Inc. (NYSE: PEP) reported organic revenue growth of 4.4 percent and core earnings per share of $0.83 for the first quarter.
- Organic revenue grew 4.4 percent
- Core gross margin expanded 150 basis points
- Core EPS increased 1 percent to $0.83
- Core constant currency EPS increased 12 percent
Reported (GAAP) results
- Net revenue declined 3 percent reflecting the impact of adverse foreign exchange translation
- Gross margin expanded 100 basis points
- EPS increased 3 percent to $0.81
- Reaffirms 7 percent core constant currency EPS growth target for 2015
- Foreign exchange translation now expected to adversely impact core EPS by 11 percentage points
- On track to deliver approximately $1 billion productivity savings and $8.5 to $9 billion cash return to shareholders
"We are pleased with our performance for the first quarter of 2015. Our focus on innovation, brand-building, and marketplace execution, funded in part by our productivity initiatives, continues to drive strong, fundamental business performance," said PepsiCo Chairman and CEO Indra Nooyi. "In the quarter, we generated 4.4 percent organic revenue growth and we once again expanded both gross and operating margins.
"However, foreign exchange translation and transaction headwinds persist. We have and will continue to take actions to manage through the current volatile macroeconomic environment by taking responsible pricing actions, tightly controlling costs, and optimizing our global sourcing to minimize and mitigate the impacts of the current foreign exchange challenges.
"At the same time, we will not let cyclical macroeconomic issues divert us from our focus to drive sustainable shareholder value creation. We intend to continue to invest across our markets and brands to generate organic revenue growth, drive greater efficiency and productivity, deliver attractive free cash flow growth and cash return to shareholders, and enhance our returns on invested capital."
Summary of first quarter financial performance:
- Organic revenue grew 4.4 percent and reported net revenue declined 3 percent. Foreign exchange translation had an 8-percentage-point unfavorable impact on reported net revenue.
- Developing and emerging market organic revenue grew 10 percent. On a reported basis, developing and emerging market net revenue declined 12 percent, reflecting unfavorable foreign exchange translation, in particular, related to the Russian ruble, Venezuelan bolivar, euro, and Mexican peso.
- Core gross margin and core operating margin expanded 150 basis points and 20 basis points, respectively. Operating margin improvement reflects the implementation of effective revenue management strategies and productivity initiatives, partially offset by an impairment charge and increased advertising and marketing expense. Reported gross margin increased 100 basis points while reported operating margin increased 40 basis points.
- Core constant currency operating profit increased 8 percent. Core results include the impacts of a $39 million pre-tax gain related to a refranchising and a $65 million pre-tax impairment charge in the current-year quarter, as well as the lapping of a $31 million pre-tax gain related to the sale of agricultural assets in the prior year. Excluding these items, core constant currency operating profit increased 11 percent. Reported operating profit was down 1 percent and also reflects unfavorable foreign exchange translation, restructuring charges, and the mark-to-market net impact on commodity hedges.
- The company's core effective tax rate was 23.0 percent, which compares to 23.7 percent in the prior-year quarter. The reported effective tax rate was 23.1 percent, below the prior-year quarter of 24.1 percent.
- Core EPS was $0.83 and reported EPS was $0.81. Core EPS excludes a negative net impact of $0.02 per share from restructuring charges.
- Cash flow provided by operating activities was $270 million, which compares to $181 millionin the prior-year quarter. Free cash flow excluding certain items was $57 million, which compares to a $135 million use of cash in the prior-year quarter.
Discussion of division core constant currency operating profit results
Core constant currency operating profit results for all divisions were positively impacted by organic revenue increases. In addition, results for each division were impacted by the following:
- Frito-Lay North America (FLNA): Positively impacted by productivity gains and lower commodity costs, partially offset by operating cost inflation and a double-digit increase in advertising and marketing expense.
- Quaker Foods North America (QFNA): Negatively impacted by an impairment charge associated with our dairy joint venture, a double-digit increase in advertising and marketing expense and operating cost inflation, partially offset by productivity gains. Core constant currency operating profit increased 2.5 percent excluding the impairment charge.
- Latin America Foods (LAF): Positively impacted by productivity gains, partially offset by operating cost and commodity cost inflation.
- PepsiCo Americas Beverages (PAB): Positively impacted by productivity gains and lower commodity costs, partially offset by higher operating cost inflation, a high-single-digit increase in advertising and marketing expense, and the lapping of a prior year adjustment recognized through our share of the results of a joint venture.
- Europe: Negatively impacted by operating and commodity cost inflation and a gain on the sale of agricultural assets in the prior year, partially offset by productivity gains. Core constant currency operating profit increased 23 percent excluding the gain on the sale of agricultural assets in the prior year.
- Asia, Middle East & Africa (AMEA): Positively impacted by the gain related to the refranchising of a portion of our India bottling operations, productivity gains and lower commodity costs, partially offset by operating cost inflation. Core constant currency operating profit increased 6 percent excluding the gain.
2015 guidance and outlook
Consistent with its previous guidance for 2015, the company expects mid-single-digit organic revenue growth and 7 percent core constant currency EPS growth versus its fiscal 2014 core EPS of $4.63, in each case in-line with its long-term targets.
Based on the current foreign exchange market consensus, the company now expects foreign exchange translation to have an unfavorable impact of approximately 10 percentage points on full year net revenue growth and approximately 11 percentage points on full year core EPS performance in 2015, reflecting current expectations for continued strengthening of the U.S. dollar.
In addition, the company expects:
- Low- to mid-single-digit commodity inflation, which includes the estimated impact of transaction-related foreign exchange
- Productivity savings of approximately $1 billion
- Higher interest expense driven by increased debt balances
- Core effective tax rate of approximately 25 percent
- Over $10 billion in cash flow from operating activities and more than $7 billion in free cash flow (excluding certain items)
- Net capital spending to be approximately $3 billion, within the company's long-term capital spending target of less than or equal to 5 percent of net revenue
- Return a total of $8.5 to $9 billion to shareholders through dividends of approximately $4 billion and share repurchases of $4.5 to $5 billion