PepsiCo Beats Consensus In Q1 2019; Maintains FY 2019 Outlook

PepsiCo Inc. (NYSE: PEP) released its Q1 2019 results on April 17, 2019, followed by a conference call with analysts. The company beat market expectations for revenue as well as earnings. PEP reported revenue of $12.88 billion in Q1 2019, marking a year-on-year growth of 2.6%. Higher revenue was mainly driven by strong growth of 5.5% in the Frito-Lay segment, effective net pricing and higher volumes for healthy snacks, juice and water products, and non-carbonated drinks (NCDs). The company’s core EPS came in at $0.97 per share in Q1 2019, slightly higher than $0.96 in the year-ago period and much higher than the consensus of $0.92 per share. Higher earnings were primarily a reflection of stronger revenue growth, productivity savings, and lower interest burden, partially offset by an increase in the effective tax rate.

We have summarized the key announcements in our interactive dashboard – How did PepsiCo fare in Q1 2019 and what is the outlook for the full year? In addition, here is more Consumer Staples data.

Key Factors Affecting Earnings

Frito-Lay North America

• Revenue from Frito-Lay North America (FLNA), which contributes a little over a quarter of the company’s total revenue, increased by 5.5% (y-o-y) in Q1 2019.
• Higher revenue was primarily driven by effective net pricing and volume growth of 2%.
• Higher volume was driven by strong sales of its trademark Doritos and Ruffles, partially offset by a double-digit decline in Santitas.
• Operating margins increased marginally in Q1 2019 due to net revenue growth and productivity savings, partially offset by certain operating cost increases.

Quaker Foods North America

• Net revenue declined by 1.2% (y-o-y) in Q1 2019, mainly driven by volume decline of 1% and unfavorable mix, partially offset by favorable net pricing.
• Volume decline was driven by a double-digit decline in ready-to-eat cereals, partially offset by modest growth in Aunt Jemima syrup and mix.
• Operating margin continued its declining trend reflecting certain operating cost increases, impact of higher commodity costs, and the net revenue performance

North America Beverages

• Net revenue increased 2.2% in Q1 2019, driven by effective net pricing, partially offset by a 2% decline in volume.
• Lower volume was driven by a 4% decline in carbonated soft drink volume, partially offset by 1% volume increase in non-carbonated beverage.
• Operating margin was marginally lower in Q1 2019 compared to Q1 2018 due to higher commodity costs and increased advertising and marketing expenditure.

Latin America

• Net revenue increased by 1.4% reflecting effective net pricing, partially offset by impact of unfavorable foreign exchange.
• Operating margin increased sharply in Q1 2019 reflecting the net revenue growth, productivity savings, and impact of an insurance settlement recovery related to the 2017 earthquake in Mexico.

Europe Sub-Saharan Africa

• Net revenue increased 1.5%, reflecting a 7-percentage-point impact of the SodaStream acquisition, as well as effective net pricing, partially offset by the impact of unfavorable foreign exchange.
• The y-o-y increase in operating margin in Q1 2019 is due to the net revenue growth, productivity savings, and impact of an insurance settlement recovery in Russia.

Asia, Middle East and North Africa

• In spite of volume growth and effective net pricing, segment revenue declined by 0.6% in Q1 2019 reflecting unfavorable foreign exchange and refranchising of a portion of the beverage business in Thailand.
• Operating margins increased, primarily reflecting the volume growth, productivity savings, and the effective net pricing, partially offset by certain operating cost increases, higher advertising and marketing expenses, and the impact of higher commodity costs.

Profitability

• On a sequential basis, net income margin saw a sharp drop from 35.1% in Q4 2018 to 11% in Q1 2019. This was primarily due to a significant rise in the effective tax rate from -254.9% to 23.9%.
• PEP received significant tax benefits in Q4 2018 following the implementation of the TCJ Act, which translated into a negative effective tax rate. However, in Q1 2019, with a tax expense of $446 million, margins saw a sharp drop.
• On a y-o-y basis, in spite of a higher effective tax rate, margin was slightly higher due to productivity savings and lower interest burden in Q1 2019.

Full Year Outlook

• For the full year, we expect the company’s revenues to grow by 3.1% to $66.7 billion in 2019, driven by growth in the company’s healthy snacks, sports drinks, and non-carbonated beverage portfolio.
• An effective tax rate of 21% in 2019 (compared to tax benefits received in 2018), incremental investments by the company to strengthen its business, and absence of gains from sale of assets (unlike in 2018), is expected to lead to a sharp drop in net income margin to 8.5% in 2019 from 19.4% in 2018. However, gains from the company’s recently announced new productivity plan are expected to support margin growth going forward.

Trefis has a price estimate of $120 per share for PepsiCo’s stock. Though the stock rallied after the announcement of Q1 results, we believe that the stock price could come down, closer to our estimate, as the company has reaffirmed its 2019 guidance that it shared earlier this year, which might be indicative of the possibility of performance in the coming quarters being subdued.

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