PepsiCo Inc. is trimming costs and pumping more money back into its business in 2019, which should lead to earnings boosts in 2020 and beyond, executives said Feb. 15.
The Purchase, N.Y.-based PepsiCo is targeting $1 billion in annual productivity savings through restructuring aimed at making the soda- and snack-maker "more capable, leaner, more agile and less bureaucratic," PepsiCo. Chairman, President and CEO Ramon Laguarta told analysts on a call after the company posted fourth-quarter earnings that came in slightly below expectations.
"In doing so, we will drive down costs and that enables us to plow the savings back into the business to develop scale and sharpen core capabilities that drive even greater efficiency and effectiveness creating a virtuous cycle," Laguarta said during the call.
The snack and soda company forecast a 1% drop in "core," or adjusted, constant currency EPS for fiscal 2019, driven by investments, a tax rate increase from 18.8% in 2018 to 21% in 2019, and lapping gains from refranchising, asset sales and insurance recoveries during 2018, PepsiCo. Vice Chairman, Executive Vice President and CFO Hugh Johnston said during the call.
The investments from the cost-cutting plan will help drive a return to high-single digit, currency neutral adjusted EPS in growth in 2020, in line with the company's long-term earnings targets, executives said.
Executives did not call out specific areas where they intend to cut costs, offering instead a general productivity plan to simplify the organization, standardize processes, adopt new technology and automate some functions.
"Just as importantly, we're also adopting a philosophy that recognizes that not all the capabilities or costs are equal, so we'll be very discriminating in where we need to pay for best-in-class or we should pay for just good enough. These principles will be applied across the entire cost structure, from labor to discretionary costs, and advertising and marketing, to fixed assets," Laguarta said.
The company plans to extend the cost-saving program through 2023 and target about $1 billion in savings each year, executives said. The company expects to record $2.5 billion pretax charges through 2023 from restructuring.
PepsiCo plans to pump about 40% to 50% of the savings from cost cutting in 2019 back into the company, Johnston said during the call.
The investments will focus on manufacturing and supply chains for PepsiCo's snack-focused Frito-Lay North America businesses and other international segments, Johnston said.
For the North American soda business, PepsiCo wants to focus more on supporting core brands including Pepsi and Mountain Dew, ramp up innovation and redirect some resources to enhance sales execution in local markets, Johnston said.
Shares in PepsiCo were up about 3% at $116.11 in early afternoon trade on Feb. 15. The company's reinvestment plan, coupled with better-than-expected organic revenue growth of 4.6% during the fourth quarter drove the positive stock reaction, Guggenheim analyst Laurent Grandet said in Feb. 15 research note.
Soda giants see similar 2019 ahead
PepsiCo executives expect similar earnings for 2019 as soda rival Coca-Cola Co., which guided its own possible adjusted EPS decline during the fiscal year.
Coca-Cola executives on Feb. 14 predicted its adjusted EPS for 2019 will come in between a range of 1% down and 1% up versus 2018. A strong U.S. dollar and higher rates for both tax and interest will hit Coca-Cola's comparable EPS growth during the year, executives said Feb. 14.
Coca-Cola's 2019 guidance is largely due to nonoperating items while PepsiCo forecast the adjusted EPS drop because of investments, Grandet said in a Feb. 15 research note.
Both companies also expect long-term organic revenue growth of 4% to 6%.
Coca-Cola's adjusted EPS guidance, though, generally fell below the expectations of analysts, who pointed to the forecast as a reason for the company's stock drop of 8.4% on Feb. 14 to $45.59 per share. On Feb. 15 in early afternoon trade, its shares were trading nearly flat at $45.57.
However, the Feb. 14 drop was the company's "largest single-day sell-off in more than 10 years," UBS analyst Sean King said in a Feb. 15 research note.