PepsiCo (PEP) Q1 2016 earnings summary

Executive summary

• Organic revenue grew 3.5%; total servings increased 2%; core constant-currency operating profit rose 12% and core EPS rose 11%.

• Net revenue fell 3% to $11.862B; reported operating profit declined 10% to $1.619B and diluted EPS fell 21% to $0.64.

• Core gross margin expanded 130 bps and core operating margin 165 bps, supported by net pricing, commercial initiatives and productivity gains.

Financial highlights

• Gross profit was $6.711B versus $6.714B; reported operating margin contracted 105 bps to 13.7%.

• Adjusted diluted EPS was $0.89, up 7%; core constant-currency EPS growth was 11%.

• Net income attributable to PepsiCo was $931M versus $1.221B; the reported tax rate rose to 31.9%, reflecting the Tingyi impairment, which had no tax benefit.

• Operating cash flow was $131M; free cash flow was negative $233M after $389M of capital spending and $25M of property, plant and equipment sales.

• FX translation reduced reported revenue growth by 4.5 points; Venezuela deconsolidation reduced it by 2 points.

Outlook and guidance

• FY 2016 organic revenue growth expected at ~4%, excluding the 53rd week; core EPS guidance remained $4.66.

• Core constant-currency EPS growth expected at 8%, with a 2% impact from Venezuela deconsolidation and a 4% FX impact; growth weighted toward Q4.

• FY 2016 operating cash flow expected above $10B and free cash flow above $7B, excluding certain items; net capital spending expected at ~$3B.

• Shareholder returns expected at ~$7B: ~$4B in dividends and ~$3B in repurchases; annualized dividend increased 7.1% to $3.01 per share.

• Raw materials expected to show low-single-digit deflation excluding transaction-related FX, or low-single-digit inflation including it; productivity savings targeted at ~$1B.