Pepsicos latest results exceeded expectations

Pepsico's latest results exceeded expectations

As PepsiCo's leadership team presented the group's results yesterday (7 July) they could have summed up their core message to investors with a blast from the past: "You've got a lot to live, and Pepsi's got a lot to give". That slogan from the early 1970s would be too tame for today's app hungry consumers and investors who demand infinite fizz in terms of products, ideas and healthy dollar returns. But the slogan did sum up the mood as PepsiCo reported second-quarter profit that beat analysts' estimates and the firm boosted its full-year forecast, helped by rising sales of snacks and soft drinks in North America.

Chairman and CEO Ingra Nooyi and vice-chairman and CFO Hugh Johnston walked analysts through the group's results, which exceeded expectations, during a conference call.

Nooyi set PepsiCo's results against the backdrop of "what continues to be an incredibly volatile global macro environment". Fiscal 2016 EPS guidance was revised upwards to 7% growth (9% excluding the impact of deconsolidating in Venezuela), meanwhile  emerging and developing grew organic revenue of nearly 7%, which was led by double-digit growth in China, Mexico, Turkey, and Egypt.

She also noted that 45% of PepsiCo's total net revenue now comes from "guilt-free" products, a level that is set to climb still further as the firm steps up innovation on healthier products. 

In terms of innovation, Nooyi said PepsiCo's global operations group is identifying, then lifting and shifting best practices developed by its manufacturing teams around the world. This leads to benefits in terms of both product and process innovation, the executive noted. "For example, our manufacturing team in Romania developed a refinement to our potato cutting process that can reduce raw potato waste by up to 2%. We're now implementing this process improvement in other plants around the globe," Nooyi revealed. 

Analyst Bonnie Herzog, MD for beverage, tobacco and convenience at Wells Fargo, applauded PepsiCo's "impressive" performance in the first six months of the year. She was also upbeat on the full year outlook, suggesting the guidance for fiscal 2016 "remains conservative in our view".

Herzog said: "Solid currency-neutral organic revenue growth of 3.3% was driven by 2% volume growth and 2% net pricing growth. PepsiCo's impressive results reflect 75 bps of core gross margin expansion and 80 bps of core operating margin expansion. We believe management has done an impressive job of expanding the diameter of PepsiCo's innovation pipeline while harvesting productivity savings to drive increased advertising and marketing support to drive both top-line growth and margin expansion."

PepsiCo management appeared confident that these positive trends will continue to play out in the remainder of the year, with productivity savings still to be found. As PepsiCo moves into the next quarter, Nooyi said the firm is "capturing significant savings by using advanced logistics planning processes and tools, which enable us to optimise both the mode and routing of material transport".

She continued: "These tools initially developed and deployed in North America have been expanded to nine more countries and are generating 3% to 4% savings in transportation costs."

PepsiCo also believes that it drive to remain relevant to consumers through innovation will support a "sustainable" top line performance. Nooyi said the firm continues to invest in capabilities "and to transform our portfolio to succeed in the dynamic customer and consumer landscapes, with a singular goal of generating sustainable shareholder value for the long term".

However, as PepsiCo moves into the second half of the fiscal, management did conceed that the group will be lapping some tough comparables. 

Susquehanna International Group analyst Pablo Zuanic sees this - coupled with soft trends in PepsiCo's "jewel in the crown" Frito Lay North America, where sales grew "only" 3% - as cause for caution in an otherwise bullish outlook. At Frito Lay North America, PepsiCo said that its second half performance will be impacted by rising input cost inflation and higher advertising and promotion spend to support sales.