Pepsi earnings buoyed by cost cuts

PepsiCo reported increased profit in the first quarter as its cost savings programme kicked in and it expanded in the US, but the maker of Doritos was hit by the strong dollar and warned its impact would be bigger than originally expected this year.

Net income was $1.22bn in the first three months, or 81 cents a share, which represented a 3 per cent increase, it said in a statement on Thursday. However, net revenue dropped 3 per cent to $12.2bn.

Pepsi did better when earnings were adjusted for one-off costs, with EPS of 83 cents a share beating consensus analysts' estimates of 79 cents, while revenues adjusted for currency swings and other costs, rose 4.4 per cent. PepsiCo's gross margin widened 150 basis points.

Like many US multinationals Pepsi has been battling macroeconomic headwinds, not least the strength of the dollar, which wiped 8 percentage points off net revenue.

The company said that although the strength of the dollar had started to ease, the rates it uses for forecasting its profit meant that it expected the negative impact of foreign exchange to wipe 10 percentage points off net revenue and 11 points off its core EPS this year. That was worse than the 7 points it had previously forecast for both.

Pepsi's international presence, it earns half its revenues in the US but just a fifth of its pre-tax profit from its domestic market, has made it vulnerable to the slowdown in emerging markets.

PepsiCo chairman and chief executive Indra Nooyi insisted that the underlying businesses in key markets such as Brazil, Russia and Venezuela were doing well to cope with the volatile economic environment. Indeed Pepsi would have increased operating profit in all its regions had it not been for the strong dollar.

But she added: "Our business is still holding, but ... probably in the last quarter Brazil is where we saw some on-the-ground action that we are watching very carefully at this point."

Hugh Johnson, Pepsi chief financial officer, said Pepsi was continuing to localise its costs "more aggressively" in a bid to mitigate the impact of foreign exchange while managing its capital spending "tightly".

Pepsi and Coca-Cola have been working to match shifting consumer tastes, prompting them to expand their range of beverages and introduce more healthy options.

Pepsi's snacks divisions have helped buoy profit, particularly in North America, where the macroeconomic environment has been improving. Its exposure in the soda segment - which is where consumers tastes have been rapidly changing - is also limited to less than 25 per cent of net revenue, the company said.

Pepsi's Frito-Lays regional division increased net revenue by 3 per cent, while operating profit rose 7 per cent. Its American beverage division increased operating profit 9 per cent.

"What you're seeing is as people move to still drinks from sparkling, PepsiCo is stronger in non-carbonated than carbonated," said Mr Johnson. He added that the company is introducing drinks that "sit somewhere in the middle", aiming to meet consumer demands for lower calorie, or healthier drinks, that still have some sweetness.

Pepsi maintained its forecast for the full year of 7 per cent adjusted constant currency EPS growth. It added that it is on track to meet its target of $1bn in productivity savings and return between $8.5bn and $9bn to shareholders.

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