PepsiCo Reports First Quarter 2018 Results

Purchase / NY. (pci) PepsiCo Inc. reported results for the first quarter 2018. «We generated solid overall results in the first quarter. The majority of our businesses performed very well, including particularly strong performances in our international divisions propelled by accelerated net revenue growth in developing and emerging markets», said Chairman and CEO Indra Nooyi. «Although we continued to face challenges in North America Beverages, the sector had sequential improvement in top line momentum since the fourth quarter of 2017. We continued investing in and growing share in a number of faster-growing, future-facing categories. However, competitively we recognize the need to step up investments in core carbonated soft drinks, which we intend to responsibly do. We believe our plans will drive further improvement as the year progresses. Importantly, we remain on track to achieve the financial targets we set out at the beginning of the year».

Summary of First Quarter Financial Performance

Reported first quarter and year-ago results were impacted by restructuring charges and commodity mark-to-market impacts. See A-6 to A-8 for further details.
Reported net revenue increased 4.3 percent. Foreign exchange translation had a 2-percentage point favorable impact on reported net revenue growth. Organic revenue, which excludes the impacts of foreign exchange translation, structural and other changes, grew 2.3 percent.
Reported gross margin contracted 110 basis points and core gross margin contracted 75 basis points. Reported and core operating margin each contracted 110 basis points.
Reported operating profit declined 3 percent and core constant currency operating profit declined 5 percent. Commodity mark-to-market net impact negatively impacted reported operating profit performance by 6 percentage points and lower restructuring charges positively contributed to reported operating profit performance by 6 percentage points. Foreign currency translation positively contributed 2 percentage points to reported operating profit performance. Both reported and core operating profit performances were negatively impacted by a bonus extended to certain U.S. employees in connection with the Tax Cuts and Job Act (TCJ Act) by 4.5 percentage points.
The reported and core effective tax rates were 18.3 percent in the first quarter of 2018. The reported and core effective tax rates in the first quarter of 2017 were 22.7 percent and 22.5 percent, respectively. The decrease is primarily as a result of the reduced U.S. corporate income tax rate related to the enactment of the TCJ Act.
During the first quarter of 2018, we recorded an additional provisional transition tax expense of USD 1 million, reflecting the impact of actions taken by states within the United States that adopted the TCJ Act. Additionally, during the second quarter of 2018, the Internal Revenue Service issued new transition tax guidance. As a result of this guidance, we expect to record additional provisional transition tax expense in the second quarter of 2018 of approximately USD 700- USD 800 million.
Reported EPS was USD 0.94, an increase of 3 percent over the first quarter of 2017. Foreign exchange translation contributed 2 percentage points to EPS growth.
Core EPS was USD 0.96, an increase of 3 percent over the first quarter of 2017. Excluding the impact of foreign exchange translation, core constant currency EPS was even with the prior year period (see schedule A-11 for a reconciliation to reported EPS, the comparable GAAP measure).
Net cash used in operating activities was USD 1.3 billion.

Discussion of First Quarter 2018 Division Results

In addition to the reported net revenue performance as set out in the tables on pages 3 and A-9, reported operating results were driven by the following:

Frito-Lay North America (FLNA)

Negatively impacted by operating cost inflation, as well as a bonus extended to certain U.S. employees in connection with the TCJ Act and higher raw material costs, which decreased operating profit performance by 4 percentage points and 2 percentage points, respectively. These impacts were offset by productivity gains.

Quaker Foods North America (QFNA)

Negatively impacted by operating cost inflation, as well as higher raw material costs and a bonus extended to certain U.S. employees in connection with the TCJ Act, which decreased operating profit performance by 3 percentage points and 1 percentage point, respectively. These impacts were partially offset by productivity gains and lower advertising and marketing expenses.

North America Beverages (NAB)

Negatively impacted by operating cost inflation, as well as higher raw material costs and a bonus extended to certain U.S. employees in connection with the TCJ Act, which each decreased operating profit performance by 8 percentage points. These impacts were partially offset by productivity gains and lower advertising and marketing expenses, as well as a gain on the sale of an asset that positively contributed 3.5 percentage points to operating profit performance.

Latin America

Positively impacted by productivity gains, lower restructuring charges and favorable foreign exchange, as well as insurance settlement recoveries related to the 2017 earthquake in Mexico which contributed 5 percentage points to operating profit growth. These impacts were partially offset by operating cost inflation and higher advertising and marketing expenses, as well as higher raw material costs which reduced operating profit growth by 10 percentage points.

Europe Sub-Saharan Africa (ESSA)

Positively impacted by productivity gains and favorable foreign exchange, partially offset by operating cost inflation, higher advertising and marketing expenses, as well as higher raw material costs, which reduced operating profit growth by 5 percentage points.

Asia, Middle East and North Africa (AMENA)

Positively impacted by productivity gains and favorable foreign exchange, partially offset by operating cost inflation, higher restructuring charges, as well as higher raw material costs, and the impact of refranchising our beverage business in Jordan, which reduced operating profit growth by 3 percentage points and 2.5 percentage points, respectively.

2018 Guidance and Outlook

The Company provides guidance on a non-GAAP basis as the Company cannot predict certain elements which are included in reported GAAP results, including the impact of foreign exchange translation and commodity mark-to-market impacts. Consistent with its previous guidance for 2018, the Company expects:

Full-year organic revenue growth to be at least in line with the 2017 growth rate of 2.3 percent.
Based on current market consensus rates, foreign exchange translation to have a neutral impact on revenue and earnings per share.
A core effective tax rate in the «low 20s», reflecting benefits of the TCJ Act.
The benefit of the TCJ Act to be substantially reinvested in initiatives to benefit the Company’s U.S.-based front line workforce and to otherwise increase the Company’s capabilities.
Core earnings per share of USD 5.70, a 9 percent increase compared to 2017 core earnings per share of USD 5.23.
Approximately USD 9 billion in cash from operating activities and free cash flow of approximately USD 6 billion, which assumes net capital spending of approximately USD 3.6 billion and a discretionary pension contribution of USD 1.4 billion.
Total cash returns to shareholders of approximately USD 7 billion. Total dividends to shareholders are expected to be approximately USD 5 billion and share repurchases are expected to be approximately USD 2 billion.