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INTERNATIONAL

PepsiCo posts first quarter results for 2018; Net revenue growth 4.3%
Wednesday, 09 May, 2018, 08 : 00 AM [IST]
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PepsiCo, Inc reported results for the first quarter of 2018.

Summary of Q1 financial performance
  • Reported first quarter and year-ago results were impacted by restructuring charges and commodity mark-to-market impacts
  • Reported net revenue increased 4.3 per cent. Foreign exchange translation had a two-percentage-point favourable impact on reported net revenue growth. Organic revenue, which excludes the impacts of foreign exchange translation, structural and other changes, grew 2.3 per cent
  • 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 three per cent and core constant currency operating profit declined five per cent. Commodity mark-to-market net impact negatively impacted reported operating profit performance by six percentage points and lower restructuring charges positively contributed to reported operating profit performance by six percentage points. Foreign currency translation positively contributed two percentage points to reported operating profit performance. Both reported and core operating profit performances were negatively impacted by a bonus extended to certain employees in the United States 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 per cent in the first quarter of 2018. The reported and core effective tax rates in the first quarter of 2017 were 22.7 per cent and 22.5 per cent, respectively. The decrease is primarily as a result of the reduced US 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 $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 $700-$800 million
  • Reported earnings per share (EPS) were $0.94, an increase of three per cent over the first quarter of 2017. Foreign exchange translation contributed two percentage points to EPS growth
  • Core EPS was $0.96, an increase of three per cent over the first quarter of 2017. Excluding the impact of foreign exchange translation, core constant currency EPS was even with the prior-year period
  • Net cash used in operating activities was $1.3 billion
“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 Indra Nooyi, chairman and chief executive officer, PepsiCo.

“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 recognise 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,” she added.

Discussion of first-quarter 2018 division results
The company’s 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 employees in the United States in connection with the TCJ Act and higher raw material costs, which decreased operating profit performance by four percentage points and two 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 employees in the United States in connection with the TCJ Act, which decreased operating profit performance by three percentage points and one 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 employees in the United States in connection with the TCJ Act, which each decreased operating profit performance by eight 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 favourable foreign exchange, as well as insurance settlement recoveries related to the 2017 earthquake in Mexico which contributed five 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 favourable 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 five percentage points.

Asia, the Middle-East and North Africa (AMENA)
Positively impacted by productivity gains and favourable foreign exchange, partially offset by operating cost inflation, higher restructuring charges, as well as higher raw material costs, and the  impact of refranchising the company’s beverage business in Jordan, which reduced operating profit growth by three percentage points and 2.5 percentage points, respectively.

Guidance and outlook for 2018
The company provides guidance on a non-generally accepted accounting principles (GAAP) basis as it 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 per cent
  • 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 the benefits of the TCJ Act
  • The  benefit  of  the  TCJ  Act  to  be  substantially  reinvested  in  initiatives  to  benefit  the company’s  US-based  front  line  workforce  and  to  otherwise  increase its capabilities
  • Core earnings per share of $5.70, a nine per cent increase compared to 2017 core earnings per share of $5.23
  • Approximately $9 billion in cash from operating activities and free cash flow of approximately $6 billion, which assumes net capital spending of approximately $3.6 billion and a  discretionary pension contribution of $1.4 billion
  • Total cash returns to  shareholders  of  approximately  $7  billion. Total  dividends  to  shareholders  are  expected  to  be  approximately $5  billion  and  share  repurchases  are  expected to be approximately $2 billion
 
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