Why did PepsiCo lower its organic revenue growth outlook for 2024?

PepsiCo now expects approximately 4% organic revenue growth, versus at least 4% previously. Management cited difficult year-over-year comparisons, subdued North American convenient foods category performance, and the impacts of the Quaker Foods recall. The company plans to reinvest in value propositions, advertising and go-to-market execution in North America to stimulate growth in the balance of the year.

Is the 8% core EPS growth target still on track?

Yes. PepsiCo reaffirmed at least 8% core constant-currency EPS growth for 2024, which implies core EPS of at least $8.15 versus $7.62 in 2023. Management stated it has a high degree of confidence in delivering this, supported by margin expansion and productivity initiatives, although the planned commercial investments could pressure margins in the second half.

What caused the decline at Quaker Foods North America?

Quaker's net revenue fell 18% in Q2 and 21% year to date, and operating profit dropped sharply. The decline was driven by a previously announced voluntary recall of certain bars and cereals, which triggered product write-offs, returns and related costs, along with weak category trends and reduced volume (down 17% in the quarter).

Why did operating cash flow decline in the first half of 2024?

Net cash from operating activities fell to $1.3 billion from $2.0 billion. The main drivers were larger working capital outflows, including a $3.0 billion reduction in accounts payable and other current liabilities, higher receivables and inventory build, recall-related cash payments, and higher pension contributions and tax payments. Capital spending of $1.7 billion and dividends of $3.5 billion were funded partly with short-term borrowings.

Are the reported GAAP results and the core results materially different?

Yes, somewhat. Year-to-date GAAP EPS was $3.71 versus core EPS of $3.89, with the gap driven mainly by the product recall-related impact, restructuring and impairment charges, and mark-to-market effects on commodity derivatives. Investors should review the non-GAAP reconciliations, since PepsiCo's core measures exclude these items and may not be comparable to other companies' metrics.

PEP 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed July 11, 2024. Cited figures are marked; the original filing is the authoritative source.

PepsiCo's Q2 2024 results (12 weeks ended June 15, 2024) show modest top-line growth with strong profitability.

Reported net revenue rose 0.8% to $22.5 billion^a, and organic revenue growth was 1.9%. GAAP EPS was $2.23, up 13%, while core constant-currency EPS grew 10%. Gross and operating margins expanded sharply: reported operating profit rose 11% to $4.05 billion, and core operating margin expanded about 103 basis points.

The quarter was helped by a sharp recovery in Europe and PepsiCo Beverages North America, offset by a steep decline at Quaker Foods North America, where a voluntary product recall and weak category trends cut revenue by 18%^b. Frito-Lay North America was roughly flat in revenue but down 4% in volume. Management lowered its full-year 2024 organic revenue growth outlook to approximately 4% from at least 4%, a subtle but notable trim.

It reaffirmed at least 8% core constant-currency EPS growth, implying core EPS of at least $8.15^c, and kept cash returns to shareholders at about $8.2 billion. Management said it will step up productivity initiatives and make disciplined commercial investments in North American convenient foods, including value propositions, advertising and go-to-market execution, to stimulate growth in the second half. Investors will likely focus on whether these investments can restore volume growth in North America without eroding the margin gains seen so far.

Cash flow was weaker in the first half. Operating cash flow fell to $1.3 billion^d from $2.0 billion a year earlier, driven by working capital outflows including a large reduction in accounts payable and other current liabilities. Capital spending of $1.7 billion and dividends of $3.5 billion exceeded operating cash flow, and net debt rose.

Short-term debt increased to $8.3 billion. The company also absorbed product-recall costs and related cash payments, and the 2024 outlook assumes an approximate 1-point foreign exchange headwind to reported revenue and core EPS.

02—Key points

Key Highlights

Q2 2024 reported net revenue rose 0.8% to $22.5 billion; organic revenue grew 1.9%, with volume down 2% on a total basis.
GAAP EPS of $2.23 rose 13% year over year; core constant-currency EPS grew 10% to $2.28 (core EPS basis).
Operating margin expanded strongly: reported operating profit rose 11% to $4.05 billion, and core operating margin grew about 103 basis points.
Quaker Foods North America was the main drag, with net revenue down 18% in Q2 and operating profit down 34%, due to the voluntary product recall and weak convenient foods category trends.
Europe (operating profit up 30%) and PepsiCo Beverages North America (operating profit up 37%) were the strongest contributors to profit growth in the quarter.
Full-year 2024 organic revenue growth guidance was trimmed to approximately 4% from at least 4%; core constant-currency EPS growth of at least 8% was reaffirmed, implying core EPS of at least $8.15.
First-half operating cash flow fell to $1.3 billion from $2.0 billion, and capital spending plus dividends exceeded operating cash flow, pressuring liquidity and increasing short-term borrowings.

03—Questions

Frequently Asked Questions

Why did PepsiCo lower its organic revenue growth outlook for 2024?
PepsiCo now expects approximately 4% organic revenue growth, versus at least 4% previously. Management cited difficult year-over-year comparisons, subdued North American convenient foods category performance, and the impacts of the Quaker Foods recall. The company plans to reinvest in value propositions, advertising and go-to-market execution in North America to stimulate growth in the balance of the year.
Is the 8% core EPS growth target still on track?
Yes. PepsiCo reaffirmed at least 8% core constant-currency EPS growth for 2024, which implies core EPS of at least $8.15 versus $7.62 in 2023. Management stated it has a high degree of confidence in delivering this, supported by margin expansion and productivity initiatives, although the planned commercial investments could pressure margins in the second half.
What caused the decline at Quaker Foods North America?
Quaker's net revenue fell 18% in Q2 and 21% year to date, and operating profit dropped sharply. The decline was driven by a previously announced voluntary recall of certain bars and cereals, which triggered product write-offs, returns and related costs, along with weak category trends and reduced volume (down 17% in the quarter).
Why did operating cash flow decline in the first half of 2024?
Net cash from operating activities fell to $1.3 billion from $2.0 billion. The main drivers were larger working capital outflows, including a $3.0 billion reduction in accounts payable and other current liabilities, higher receivables and inventory build, recall-related cash payments, and higher pension contributions and tax payments. Capital spending of $1.7 billion and dividends of $3.5 billion were funded partly with short-term borrowings.
Are the reported GAAP results and the core results materially different?
Yes, somewhat. Year-to-date GAAP EPS was $3.71 versus core EPS of $3.89, with the gap driven mainly by the product recall-related impact, restructuring and impairment charges, and mark-to-market effects on commodity derivatives. Investors should review the non-GAAP reconciliations, since PepsiCo's core measures exclude these items and may not be comparable to other companies' metrics.

04—Continue

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