5 Things PepsiCo Management Wants You to Know

By Markets Fool.com


PepsiCo owns more than a dozen internationally recognized food and beverage brands.

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PepsiCo

Excluding the currency issue, PepsiCo's organic growth was solid. The company is seeing strong underlying demand for its products, particularly in new markets. Here are five items from PepsiCo's quarterly conference call with analysts that investors should know about.

PepsiCo is on a roll

Our focus on innovation, brand building, and marketplace execution funded, in part, by productivity initiatives continued to drive fundamental business performance. -- CEO Indra Nooyi

Last quarter, PepsiCo's organic revenue grew 4.4%. To me, this is a better measure to focus on than the headline revenue figure because organic revenue strips away non-core factors like currency that don't really demonstrate the true health of a business. Currency fluctuations significantly affected growth, but foreign exchange movements are often transitory.

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PepsiCo's core food and beverage businesses remain strong. Global Snacks grew revenue by 7% year over year, and Global Beverages grew 1.5%. Core constant currency operating profit grew 11%, and core constant currency EPS grew 16%.

Measures in place to combat currency

We have and will continue to take actions to manage through the current volatile macroeconomic environment by taking responsible pricing actions, tightly controlling costs, and optimizing our global sourcing to minimize and mitigate the impacts of the current foreign exchange challenges. -- Nooyi

Nevertheless, the currency situation is an issue that companies are forced to deal with. In response, PepsiCo aggressively cut costs to keep profitability intact.

PepsiCo realized three percentage points of price increases in its Global Beverages business. Separately, PepsiCo plans to reap $1 billion in annual cost savings per year by 2019.

In all, the company's core gross margins improved by 150 basis points last quarter. This helped offset the brutal currency headwind.

Snacks are critical to PepsiCo's success

Just over half of our global revenue is derived from snacks, with the remainder from beverages. -- Nooyi

PepsiCo might be naturally associated with Pepsi, but the company is steadily becoming less reliant on soda. This is a wise strategy, because soft-drink sales in the U.S. are declining.

PepsiCo holds a very large snacks business through the Frito-Lay brand, which is seeing strong growth. In fact, carbonated soft drinks comprised less than 25% of PepsiCo's 2014 total global revenue. Compare this to PepsiCo's fiercest competitor, The Coca-Cola Company, which still derives the majority of its revenue from soda.

New markets are the future

Our business has delivered 10% organic revenue growth in the quarter despite all of the ongoing volatility in many regions of the world. -- Nooyi

PepsiCo's growth going forward will depend largely on its success in new markets. More mature economies like North America are highly saturated, but under-developed nations across the world are still ripe for the picking. This includes the BRIC nations, Brazil, Russia, India, and China. For example, PepsiCo delivered double-digit organic revenue growth in China and Turkey last quarter, as well as mid-single digit organic revenue growth in Mexico, Egypt, and India.

2015 should be another good year

For the full year 2015 we expect mid-single-digit organic revenue growth, core operating margin expansion, and organic top-line growth. -- CFO Hugh Johnston

There's nothing PepsiCo can do about the strong U.S. dollar, which will have a significant impact on the full-year results. Management expects the strong dollar to negatively impact revenue and core EPS growth by approximately 10 and 11 percentage points, respectively.

Despite the currency headwind, PepsiCo isn't deterred from its main priority, which is to keep growing organically. PepsiCo expects 7% core constant currency earnings-per-share growth in 2015.

Foolish takeaway
It doesn't seem like PepsiCo is thriving right now. The headline numbers don't look impressive, as the strong dollar is weighing significantly on revenue and profit. But management is still excited about what the future holds, and for good reason. PepsiCo's brands remain very popular with consumers across the world.

Organic growth is still strong, which is an indicator that the company will thrive once again, as soon as the U.S. dollar relaxes a bit. As a result, PepsiCo investors shouldn't worry too much about currency. The company still generates a lot of cash, and with it, rewards shareholders handsomely. The stock pays a hefty 2.75% dividend, and that dividend will remain secure.

The article 5 Things PepsiCo Management Wants You to Know originally appeared on Fool.com.

Bob Ciura owns shares of Apple and PepsiCo. The Motley Fool recommends Apple, Coca-Cola, and PepsiCo. The Motley Fool owns shares of Apple and PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.