Pepsi (NYSE:PEP) recently closed the books on a surprisingly strong fiscal 2018 that had investors feeling more optimistic about the business. The beverage and snack giant achieved faster growth in its core soda portfolio while continuing to squeeze value from the Frito-Lay segment.
Following his first full quarter as CEO, Ramon Laguarta told investors in a conference call why the management team believes they can accelerate sales growth even more in future years. Pepsi's new leader also had some comments about his broader capital allocation plans that should produce significant cash returns for shareholders. Below are a few highlights from the presentation by Laguarta and his team.
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Organic revenue grew 3.7%, which was a meaningful sequential acceleration from 2017. And within the year, we saw the rate of growth accelerate from 2.5% in the first half to 4.7% in the second half.
Pepsi modestly outpaced executives' growth rebound expectations for the second half of 2018 thanks to a 5% spike in organic sales in the third and fourth quarters. Nearly all of its product and geographic segments contributed to that strong result, but the most encouraging rebound came in the U.S. beverage unit. Demand for Pepsi Zero Sugar is helping stabilize the wider soda portfolio, according to management.
Organic sales sped up to a 2% rate in the final six months of 2018 compared to about 5% for rival Coca-Cola (NYSE:KO). "While there is more work to do," Laguarta said, "we're very encouraged by the steady sequential improvement we've seen in this business."
The core of [the Frito-Lay] business remains very strong and growing.
The Frito-Lay snack segment is Pepsi's biggest profit contributor, and it showed off its pricing power in the most recent quarter, with higher prices leading to an 8% earnings increase despite a 1% downtick in sales volumes.
Executives said there's room for improvement on both the top and bottom lines. On the manufacturing side, they help to boost capacity to fix bottlenecks that have cropped up recently. As for market share gains, Laguarta and his team think they can broaden the snacking portfolio to more tastes and more eating occasions so that the segment improves upon the 3% organic sales boost it achieved in 2018.
Spending that cash
We do not currently see the need to shed or acquire businesses in any significant way. Those businesses are not squarely on strategy, are relatively small and generate very healthy cash flows. And there is no apparent value-creating path to divest them because of tax consequences and/or transaction complexity.
Pepsi's 2019 outlook had a few numbers that stood out as encouraging for investors. On the operations side, executives predicted sales gains would hold steady at a 4% pace overall, which compares favorably to the modest deceleration that Coke predicted.
Laguarta also outlined a capital investment strategy that targets incremental sales growth, mainly through investing in the existing snack and beverage businesses. Management didn't rule out major acquisitions on the level of last year's $4 billion purchase of SodaStream, but Pepsi seems content to focus on supporting the 22 franchises it already owns that each generates over $1 billion in annual sales.
The 2019 spending plan envisions earnings dropping about 1% as the company invests in growth initiatives. The good news for investors is that executives see this approach driving a quick return to high single-digit profit gains in 2020. It should also leave lots of cash from Pepsi's annual $5 billion of free cash flow open for direct returns to shareholders. Pepsi plans to scale up stock repurchase spending to around $3 billion in 2019, in fact, while Coke is predicting almost zero spending on buybacks.