PepsiCo (PEP) Q4 2018 earnings summary

Executive summary

• FY 2018 organic revenue grew 3.7%, accelerating from 2.5% in H1 to 4.7% in H2; Q4 organic revenue growth was 4.6%.

• FY core constant-currency EPS grew 9%; all stated financial targets were met or exceeded.

• Strategic priorities include faster organic growth, stronger capabilities and productivity, and purpose-led sustainability.

• Ramon Laguarta became CEO in early October; management completed a four-month strategy review and set new growth priorities.

Financial highlights

• FY reported net revenue was $64.661B, up 2%; Q4 revenue was $19.524B, flat year over year.

• FY reported operating profit declined 2% to $10.110B; core constant-currency operating profit increased 2%.

• FY core EPS was $5.66, up 8%, with core constant-currency EPS growth of 9%; Q4 core EPS was $1.49 and core constant-currency EPS grew 17%.

• FY net income attributable to PepsiCo was $12.515B versus $4.857B; reported diluted EPS was $8.78 versus $3.38, with tax benefits affecting comparability.

• Over six years, average organic revenue growth was 3.8%, core constant-currency EPS growth averaged 9%, core operating margin expanded 1.6 points, and core ROIC rose 9.5 points to 24.8%.

Outlook and guidance

• 2019 targets: 4% organic revenue growth and core EPS of ~$5.50; core constant-currency EPS is expected to decline ~1%, with high-single-digit growth expected to return in 2020.

• 2019 cash from operating activities is expected at ~$9B, free cash flow at ~$5B, and net capital spending at ~$4.5B.

• Long-term targets: 4%-6% organic revenue growth, 20-30 bps average annual core operating margin expansion, high-single-digit core constant-currency EPS growth, and increasing core net ROIC.

• Productivity savings target extended to at least $1B annually through 2023; related pre-tax charges are expected at ~$2.5B, including ~$1.6B cash.

• 2019 core tax rate is expected at ~21%, versus 18.8% in 2018; FX translation is expected to be a 2-point headwind to reported revenue and EPS.