Purchase / NY. (pci) PepsiCo Inc. reported organic revenue growth of 4.4 percent and core earnings per share of 0.83 USD for the first quarter 2015. First quarter highlights include:
Organic/core1 results
- Organic revenue grew 4.4 percent
- Core gross margin expanded 150 basis points
- Core EPS increased one percent to 0.83 USD
- Core constant currency EPS increased twelve percent
Reported (GAAP) results
- Net revenue declined three percent reflecting the impact of adverse foreign exchange translation
- Gross margin expanded 100 basis points
- EPS increased three percent to 0.81 USD
2015 outlook
- Reaffirms seven percent core constant currency EPS growth target for 2015
- Foreign exchange translation now expected to adversely impact core EPS by eleven percentage points
- On track to deliver approximately one billion USD productivity savings and 8.5 to nine billion USD 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 three percent. Foreign exchange translation had an 8-percentage-point unfavorable impact on reported net revenue.
Developing and emerging market organic revenue grew ten percent. On a reported basis, developing and emerging market net revenue declined twelve 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 eight percent. Core results include the impacts of a 39 million USD pre-tax gain related to a re-franchising and a 65 million USD pre-tax impairment charge in the current-year quarter, as well as the lapping of a 31 million USD pre-tax gain related to the sale of agricultural assets in the prior year. Excluding these items, core constant currency operating profit increased eleven percent. Reported operating profit was down one 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 USD and reported EPS was 0.81 USD. Core EPS excludes a negative net impact of 0.02 USD per share from restructuring charges.
Cash flow provided by operating activities was 270 million USD, which compares to 181 million USD in the prior-year quarter. Free cash flow excluding certain items was 57 million USD, which compares to a 135 million USD use of cash in the prior-year quarter.
Division Core Constant Currency Operating Profit Results
Core constant currency operating profit results for all divisions were positively impacted by organic revenue increases as presented in the tables on pages three and A-6. 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 re-franchising 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 six 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 seven percent core constant currency EPS growth versus its fiscal 2014 core EPS of 4.63 USD, 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 ten percentage points on full year net revenue growth and approximately eleven 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 one billion USD;
- Higher interest expense driven by increased debt balances;
- A core effective tax rate of approximately 25 percent;
- Over ten billion USD in cash flow from operating activities and more than seven billion USD in free cash flow (excluding certain items);
- Net capital spending to be approximately three billion USD, within the company´s long-term capital spending target of less than or equal to five percent of net revenue; and
- To return a total of 8.5 to nine billion USD to shareholders through dividends of approximately four billion USD and share repurchases of 4.5 to five billion USD.
