Beverage and snack giant PepsiCo (PEP 115.74, +3.15, +2.80%) trades
2.8% higher on Friday in response to what is largely being viewed as good
enough full year 2019 guidance, which draws aid from cost cutting measures.
PepsiCo’s guidance was perhaps the point that drew the most investor attention in this morning’s report. Management sees full year 2019 core earnings per share (EPS) of $5.50, a 3% decline compared to 2019 core earnings of $5.56. PepsiCo’s earnings outlook hinges on market consensus rates implying a 2-percentage point foreign exchange translation headwind to both reported net revenues and EPS. The outlook also considers the company’s expectations for:
- Full-year organic revenue growth of 4%.
- A core effective tax rate of approximately 21%, which compares to a rate of 18.8% in 2018.
- A decline in core constant currency EPS of approximately 1%, which incorporates lapping a number of strategic asset-sale and refranchising gains from 2018, the expected increased core effective tax rate, and expected 2019 incremental investments to strengthen the business.
- Approximately $9 bln in cash from operating activities and free cash flow of approximately $5 bln, which assumes net capital spending of approximately $4.5 bln.
- Total cash returns to shareholders of approximately $8 bln, comprised of approximately $5 bln in dividends and share repurchases of approximately $3 bln.
PepsiCo management also outlined long-term financial expectations for 4-6% organic revenue growth, core operating margin expansion of 20 to 30 basis points, high-single-digit core constant currency EPS growth, and increasing core net returns on invested capital.
To offset certain headwinds, the company expects to generate
productivity savings of at least $1 bln annually through 2023 (an extension of
the company’s previous target of $1 bln annual savings through the end of
Contributing to the productivity goal are expected savings from certain restructuring actions that are intended to enable the company to leverage new technology and business models to further simplify, harmonize, and automate processes; re-engineer its go-to-market and information systems, including deploying the right automation for each market; simplify its organization and optimize its manufacturing and supply chain footprint. In connection with these restructuring actions, the company expects to incur pre-tax charges of approximately $2.5 bln through 2023 (of which the cash portion is approximately $1.6 bln).
In connection with this program pre-tax charges will consist of approximately 70% of severance and other employee-related costs, 15% for asset impairments (all non-cash) resulting from plant closures and related actions, and 15% for other costs associated with the implementation of these productivity initiatives. PepsiCo expects that these pre-tax charges will result in cash expenditures of approximately $1.6 bln, of which PepsiCo expects approximately $450 mln to be reflected in its 2019 cash flows and the balance to be reflected in its 2020 through 2023 cash flows. PepsiCo expects to incur the majority of the pre-tax charges and cash expenditures in its 2019 and 2020 results.
The guidance came in conjunction with the fourth quarter print, which was largely in-line with what the Street had expected. Specifically, Q4 EPS came in at $1.49 and revenues were unchanged on a year-over-year basis at $19.52 bln.
By far the strongest segment was perhaps PepsiCo’s most well-known: Frito-Lay North America. Sales in the segment were up 4% to $5.00 bln in the period while the North American Beverages business saw revenue growth of 2% in the quarter to $6.01 bln. All other groups turned in revenue declines compared to last year – Quaker Foods North America -0.5%, Latin America -1%, Europe Sub-Saharan Africa -3%, and Asia, Middle East, and North Africa -8%. Simply put, although smaller as a percentage of overall sales, operations outside of North America served to offset domestic strength.
PepsiCo’s mostly “okay” outlook comes just a day after peer Coca-Cola (KO 45.71, +0.12, +0.25%) gave expectations for slowing sales in the next fiscal year. Specifically, the Atlanta-based beverage maker stated that it expects 4% organic revenue growth in 2019 compared to the 5% growth it saw in the just-finished full year 2018 period as the company is cognizant of slowing growth in emerging and developing markets.