PepsiCo Inc (PEP) — Q4 2021 Earnings Call Transcript

Thank you, operator, and good morning, everyone. I hope everyone has had a chance this morning to review our press release and prepared remarks, both of which are available on our website. Before we begin, please take note of our cautionary statement. We may make forward-looking statements on today's call, including about our business plans, 2022 guidance, long-term financial targets, and the potential impact of the COVID-19 pandemic on our business. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today. We are under no obligation to update. When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results. Please refer to our fourth quarter and full year 2021 earnings release and 2021 Form 10-K available on our website for definitions and reconciliations of non-GAAP measures and additional information regarding our results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements. Joining me today are PepsiCo's Chairman and CEO, Ramon Laguarta, and PepsiCo's Vice Chairman and CFO, Hugh Johnston. We ask that you please limit yourself to one question. And with that, I will turn it over to the operator for the first question.

Good morning, guys.

Good morning, Dara.

So I wanted to focus on the 2022 top line guidance. Obviously, very strong Q4 results. But look, you're guiding towards the higher end of the long-term range in terms of 6% organic sales growth in 2022 despite a really tough comparison if we look at 2021. So I just wanted to understand the key drivers for 2022 top line, particularly price mix versus volume, and any thoughts on demand elasticity? And then also just from a broader long-term perspective as you look out beyond 2022, are you more confident your strategies are sustainably paying off? Could top line growth be more at the higher end of that mid-single-digit long-term top line range? How do you think about the long-term beyond 2022 given what's expected to be pretty robust growth despite the tough comp? Thanks.

Yeah. Dara, let me start and maybe Hugh can add. We see our categories very healthy moving into 2022 and long-term, both our convenient foods and beverages. So that makes us feel very comfortable. The investments that we have made over the last three years in brands, in more capable go-to-market systems, in more insights, better execution — that's clearly paying off in the form of share of market gains across multiple developing markets, snacks, and beverages. So we feel good about our ability to continue to grow ahead of our categories in 2022 and beyond. And, obviously, we are big players in those categories. So, we carry the responsibility to make this category stay healthy and growing faster than food overall. So, that's how we see our long-term. And yes, we're at the top end of our long-term guidance. This year, we obviously crossed that long-term guidance. So, you see compounded, yes, we're at the high end of our 4% to 6%. And obviously, that's the objective of the whole organization to stay within that guidance and beat in good years.

Yes. And the only thing I'll add there in terms of some of the financial pieces of it: you saw in Q4, we had about five points of volume and about seven points of price/mix. Obviously, as our hedges roll off and we move into a new round of commodities, we're going to price in a way that allows us at least for the full year to try to keep our margins pretty well intact, which means that that seven pricing will probably be around there. Maybe even a little bit stronger for the year. We'll see how it plays out and react to what happens with the facts in the marketplace. But it's going to be a pretty healthy pricing year to accommodate the cost increases.

And if I can follow-up, what are you assuming in terms of demand elasticity? And what's been the experience so far you've seen in terms of consumer demand elasticity to pricing? It seems like there clearly wasn't a lot in Q4, but what are you assuming for 2022? Thanks.

Yes. So, I mean for 2022, Dara, you're right. Obviously, there wasn't a lot in Q4, but that's a relatively short period of time. Right now, we've built multiple scenarios around elasticity and we have plans to react to any of them. So, frankly, we're going to have to be very agile this year in the way that we plan. But you know that our history on guidance is we tend to have multiple ways to get there and we'll react to what the marketplace gives us.

Thanks.

I think, Dara, if you think about all the investments we've made in the last few years both in the brand strength, our net revenue capabilities, and our execution capabilities, the granularity that we can execute in the stores is giving us a lot of tools to play the marketplace and to manage the price increases in better ways than we used to do in the past. So, we're also contemplating that as a factor as we're building our 2022 scenarios.

Great. That’s helpful. Thanks.

All right. Thank you. Good morning. Actually had a question on your A&M spend in the quarter. I guess on a dollar basis, it seemed to have almost doubled in the quarter versus Q3 and then came in at maybe a record as a percentage of sales at almost 8% in the quarter versus your typical, call it, I don't know, 6.5%. So, I just was hoping you guys could give us a little more color on where you stepped up the spending in the quarter. And then how much do you think that did contribute to your robust topline growth in Q4? And then thinking about it, typically, there is a lag with spending. So, I'm also wondering if this is partly what you expect to drive your topline guidance at the high end of your long-term growth.

Yes. Hi Bonnie, it's Hugh. A couple of things on that. One A&M for the year was up 11%. For the quarter, it was up 15%. But remember, when you're dealing with the quarter, that's not necessarily what's in the marketplace. That's sort of the A&M curve, and we book A&M on the revenue curve. In terms of spend, the spend was up in the quarter for sure. I don't know that it was disproportionately up relative to the rest of the year. And in terms of go-forward, I expect our A&M, as it generally has, will probably be in or around the same level of growth as the sales growth number is. Obviously, we feel terrific about the advertising we're doing. We think it's having the right impact. But we clearly were benefits of reductions in North America, and we think that's also played well. We generally are spending at a competitive level and we're trying to compete on quality of the A&M, not necessarily the quantity.

Yeah. Bonnie, one of the things we're getting better at is measuring our return on investment on our marketing. The more data we have, and obviously we're becoming a better data company, we're able to put better numbers to those investments and have the marketing teams, and the commercial teams overall choosing different levers that give us the best return overall. And that's playing very well. It's obviously one of the reasons why we're gaining market share across many categories. It's strategically, we want to continue with this kind of investments, being very rational in the way we invest in A&M, but understanding that a company like ours has as its core competence building brands. And that's what gives us the situation like we're having this year where we have to price, and we have consumers following us in spite of higher prices. So, I think strategically, it's a very important element in our overall growth strategy.

Okay. Helpful. Seems to be working. Thank you.

Great. Thanks. Good morning. I wanted to just talk about PBNA volumes, because they accelerated sequentially and on a two-year basis and now putting up growth on growth. And I was just curious how you might kind of bucket the drivers of that. And I'm going to guess part of it you're going to say, oh, it's a little bit of everything. But zeros have been in the market, I think arguably all year. And I thought maybe there's something to be said for the reorganization of the market, and that may be starting to click in a different way. So just curious on any perspective on the accelerating trends in PBNA that would be great.

Yes. Lauren, I would say, if you take a bigger picture, I think there is an elevated in-home consumption that has stayed like that. I think Home-as-a-hub is a clear trend, and we're capturing pretty good that consumption at home. And obviously, during the quarter, there's been more mobility across multiple markets in the US, but globally, I would say. And then some of the Away from Home business has accelerated as well. So what you see there is a combination of all these channels, I think playing at a very high level. Then, if you go into our own business, I would say, it's a combination of branding, better execution. And the truth is that in Q4 we've seen an improvement sequentially in our supply chain. Some of our large brands, and I would name Gatorade for example, clearly have improved substantially in their running rates and fill rates in the last part of the quarter. So that's reflected as well in a better overall performance for the business. But we're very pleased in general with the way the North America business is performing in beverages and snacks as well. Both the margin expansion, the top line, the fact that it grew with the market a bit faster than the market in a very challenging year with a lot of supply chain complexities and bottlenecks for several reasons. So, we're very pleased. We're feeling comfortable as well for 2022. It's very strong commercial programs, very strong brand programs. And as you were saying, probably a better execution machine for many reasons, data and intelligence, but also a more empowered organization that makes more local decisions, and that's obviously reflected in the performance of the business.

Thank you. Good morning. I have a question on sports drinks and then a clarification on the pricing. First on Gatorade. It was a brand that obviously was pressured in 2021 from supply chain challenges and competition. And as you go into 2022, can you talk about the supply dynamics there and inventory for the brand? And then on the pricing, I think, embedded in your guidance, I understand that it's assuming only the pricing that is already in the market, and therefore I wanted to see if we can bridge from Hugh's comments and see the visibility of the gross margin curve potentially recovering by the end of the year and potentially being up year-over-year for the full year. Thank you.

Yes, Andrea. Let me talk to you about Gatorade, and then Hugh can talk more about the pricing. We're very optimistic about this sports drink category. But we think of it more broadly than just hydration; we think about overall nutrition. And the way Gatorade plays in that space along with some other brands like Propel, Muscle Milk, Evolve, and some other assets in that space is growing very fast. We see continued consumer adoption of this category. Consumers are exercising more, and we think that's a very positive trend for the segment. When it comes to Gatorade, the brand equity is stronger than ever. The innovation that we've done this year, and you'll see more next year, be it Zero, Gatorade, or some of the more science-related products with the sweat patch, we can customize based on consumers' hydration profiles. So there's a lot of positive value that I think we can create in higher parts of the category with Gatorade and some of the other brands. So we feel good about the demand momentum. On the supply, obviously, we have reacted to the situation, and we've expanded capacity both ourselves and through some of our co-packers. And we're ready for what we think will be another year of successful growth for Gatorade and continuing to build the brand in spaces that will be hard to match by a competitor. So that's how we're approaching Gatorade and the full category next year.

Yes. Andrea, how are you? I'll expand on your question. Our assumptions on the guidance are based on the pricing we have in the marketplace right now. And that pricing is based on the visibility we have into both the productivity and the cost structure and commodities, which we have pretty good visibility into the commodities for about eight or nine months of the year, as you would expect based on some of the things I've communicated in the past. Q4 is still a bit open, but there are obviously pricing windows as we get into the fourth quarter as well. So as those facts become more known, we'll make decisions on that front. Regarding your question on margins, obviously, we don't give guidance on margins. But I think given the combination of what we know about costs and what we know about pricing, we ought to be able to get through the year pretty well intact on margins, acknowledging the fact that earlier in the year the cost pressure is a little bit higher than it is later in the year.

Hey, good morning. Just – maybe just two follow-ups. One is just Hugh, your answer in response to Andrea's question, when you're saying margins, are you talking about EBIT margins or gross margins?

Both, actually.

Okay. Okay. And then my question is about just the share repurchases coming back in this year. Hugh, can you talk a little bit about where we stand now in terms of cash return to shareholders? I think part of the motivation to maybe pull back on repurchases at the beginning of 2021 was that your CapEx was going to be elevated for a while. And I know you're watching the leverage or the credit rating. So is this just a – now there's more comfort with being able to return more cash to shareholders, or is it a change in the CapEx outlook? Just trying to understand your thoughts.

Yes. I mean we made the decision not just based on what we see this year but what we see over the next couple of years. Number one, we really had a pretty good year on cash generation last year, which gave us a little bit of extra room. In addition to that, obviously, we had the Tropicana transaction, which brought us some additional room as well. And we just really closed that over the course of the last week or so. So the combination of those two factors led us to the decision. As I mentioned last year, CapEx will be elevated for another year or two. But frankly, I think that's well within the overall envelope that we're working on, and we got comfortable with going back to share repurchase. Obviously, it's one of the levers we use to help drive company performance and shareholder returns.

Hey, good morning, Ramon and Hugh. Well, I'd like to focus this morning on the energy platform. So it has been about two years since the acquisition of Rockstar that unlocked the energy platform, an advantage PepsiCo has over your competitors that are limited because of its contract with Monster. Could you please update us on where you're seeing your strategy heading? Because the beginning has been a bit more challenged than expected with the difficulty with brand management and the recent rebranding of Rockstar taking more time to materialize. So that is a high growth, high profitability segment of the business. It doesn't impact on PP&M and the rest of the business. So could you please update us on what you're seeing and where you're heading? Thanks.

Thank you, Laurent. Good to talk to you. Listen, we're executing the playbook as we've discussed previously, and we're quite pleased with what we're seeing. Obviously, Rockstar, we always said it was the most complex transformation. We repositioned the brand and changed packaging. We're seeing growth in Rockstar both in the areas where it is more developed in the country and new areas where the distribution system is making a difference. We're seeing especially very good performance in new innovation segments like no sugar and some Hispanic-focused innovation. So we're hopeful on Rockstar, and we're seeing the metrics that we set for ourselves becoming reality. Then on Mountain Dew Energy, we had this legal situation that we moved very quickly on. Super agile actually. The teams did a great job turning that around in six weeks. It's in the market, and it's gone back to the platform exactly where it was. So clearly, there is a consumer that likes the product, and we're ready to now invest this year in building that platform under the Mountain Dew Energy branding. And that's a pretty good position even though we faced that legal situation. As for bank management, which was the other part of the strategy, we after that initial hiccup, I think we're doing a pretty good job as a distributor of the brand and the brand now has more points of sale than it used to. We're focusing on driving that performance during the length of the contract. And then, we're also very pleased with the Starbucks relationship, which is better than ever. Both Double Shot and Triple Shot are growing at very high levels. We just launched Baja Energy, a completely new brand in both retail and Starbucks outlets. Great product, good levels of caffeine coming from natural sources. We're very optimistic about that platform. It's very incremental when you see the full portfolio of brands that we have in energy. So Baja will be a positive addition. We feel that the strategy is working effectively on multiple fronts, and as always it is an area of focus. You need to test, learn, and adjust and tweak your execution. I'm pleased with what I'm seeing. The other element we don't discuss much about Rockstar is that this year it's going to be available in 17 international markets. It was in 10 markets previously, and we expanded in 2021 to 22 or 23 markets. Now in 2022, we plan to enter 70 markets. So clearly this is another part of the growth story of Rockstar as we integrate the business. We will keep updating you in our regular calls, but we're positive on how the full energy strategy is progressing.

Hi, good morning. Thank you. I wanted to follow up please on Dara's question on price elasticities. Hugh, I appreciated your comment that you guys are looking at multiple scenarios and clearly do have a lot of levers at your disposal. But I was hoping you could dive a little bit more into Pepsi Beverages North America. Specifically, how you think about cross-category elasticities across your US beverage business? And as a quick follow-up to that, to the extent that consumers' ability to absorb pricing were to diminish at all, are there certain categories you'd be watching closely as leading indicators of that? Thank you.

Yes. Happy to go there. As I said, elasticities to me are basically a portfolio of risks that we try to manage rather than zeroing in on a single number, right? And in a portfolio as complex as this, it’s hard to have that conversation. What I would tell you, Vivien, is that over the last couple of years in the North America beverage business, category elasticities are relatively low. I think the reason for that is particularly in the multi-bag, multi-serve area, prices are pretty remarkably low. Whether you're looking at two liters or 12 packs, if you compare those prices to elsewhere in the world, the prices in this market are actually quite low. It’s a tremendous value for consumers. So as we move into a world of higher inflation, I do expect that category prices will probably go up. And to date, we haven't seen much in the way of elasticity. As you might imagine, I can't point to any one specific category. I think we watch elasticities on everything, both the value packages and the premium packages. The good news is our system is agile enough to react to it. But right now, the elasticities are in line with our expectations, which frankly gives us confidence in the guidance for the year.

Great. Thanks. Good morning, everyone. Thanks for the question. First, just a clarification on Laurent's line of questioning around energy. Ramon, can you just comment — you mentioned firing on all cylinders and you're pleased with energy. Would you rule out M&A? So if you could just comment on that, that would be helpful. My broader strategic question is really on the business venture with Boston Beer regarding Hard Mountain Dew. Can you just update us on how that partnership has progressed? Importantly, as you spend more time studying the alcohol space, can you provide some updated thoughts on broader ambitions to play, not only as it pertains to new product innovation but also the potential to distribute non-PepsiCo alcohol products through your distribution? So thanks for that.

Yeah, Kevin. Listen, on M&A, I think we have sufficient brands right to play in that space. So, we're not thinking about any M&A in the energy space at this point. Now with regards to alcohol, great question. And I think it's a very interesting development for the LRB category and for the alcohol category. Consumers are consciously choosing to converge in this way, and we see that space as strategically very incremental. It's sizable and profitable, and we would like to participate consistently in that category. Obviously, we will play from the brand point of view on innovation, licensing our brands to beer manufacturers that can help us with the manufacturing; we don't have the technologies to do that. But we're creating strong partnerships as you mentioned. I also think there is an interesting play for us to leverage some of our distribution assets to provide capital distribution and consistent execution across the country that we are working on. We have some market tests underway and will continue to roll out those distribution opportunities. I think it could be a significant advantage for us if we execute well, and that's our plan.

Great. Thank you very much. We've focused mostly on the U.S. today. I was wondering if you could talk a little bit about how you're viewing your global footprint. In the past, for instance, the company has made acquisitions to expand the offerings in Russia and South Africa. Any thoughts along those lines in other geographies? Any things that are going on in terms of the international side that we should be aware of in terms of strategic direction, or changes in how you're looking at the business? And then just a quick follow-up on the hedging and the commodities; it would be helpful if, to the extent you can, talk about some of the key commodities and what percentage of your cost structure they represent. Thank you.

Great. Robert, I'll talk about international a bit, and then Hugh can discuss the commodities. And you know we're quite limited on what we can say about our detailed P&L. On international, I've always said and continue to say this is the largest growth opportunity we have in PepsiCo. We have strong market positions in snacks and pretty good positions in beverages in many markets. Some others are a bit more challenging, but we're working to strengthen those. I think we have the portfolio of brands and capabilities to continue to work on that opportunity. Last year, we grew double-digit internationally across the board from Asia to the Middle East, Africa. Europe was very close to double-digit for the full year, if I recall. Latin America also achieved double digits. So, pretty good performance. If I look at the top 15 markets for the company, we are gaining share in most of those markets, which is to me the key indicator of progress in the system. Obviously, as we scale up those markets, profitability improves significantly. That is the model we are trying to pursue. For next year, we see good signs. Obviously, the geopolitics in some parts of the world are complex. We hope that won't materialize into anything that negatively impacts our system. We see inflation going up everywhere. We have the brands, and we have the capabilities to price as we're doing in the majority of the market. We feel good about how consumers are staying loyal to our brands in spite of some of our pricing decisions. This should cover international. Now, Hugh, maybe you can take the commodities.

Yes. In terms of commodities, just a couple of facts; number one, the overall commodity basket is about $16 billion to $17 billion, it's a super broad basket. There's not a single commodity that accounts for even 10% of the overall spend, so it is a fairly diverse basket. That said, clearly, commodities are inflationary across the board, and that’s the landscape we're navigating.

Hey. Good morning. Thanks so much. Just on that last line of questioning regarding commodities. Do you expect pricing to offset commodities just in the context of your comments on full year margins? And then, on North America, there was a comment in the prepared remarks just around expectations for PBNA margins to expand next year. I think the margin drivers of this business have obviously evolved with product mix and pricing, and I wonder if you could just comment on how you see the drivers of that business going forward in the context of some evolution of the business. Thanks so much.

Sure. In terms of commodities and the way we approach them from a pricing perspective, obviously, we always try to do what we can in terms of productivity to manage an inflationary environment. But when inflation is this high, we need to take some pricing. In general, in developed markets, we do price through the commodity increases. In developing and emerging markets, we have variable factors to consider regarding affordability and consumer reaction. Our history has been that we'll initially price through two-thirds to three-quarters, and then go back later for the rest. Overall, as I mentioned earlier in the call, I think the combination of our productivity and our pricing should put us in a position where we ought to be able to keep margins pretty well intact for the year. In terms of PBNA, we do expect margins to continue to improve as we’ve talked about in the past. Drivers are similar to those we’ve discussed: a combination of pricing, product mix, productivity returns on investments we've made in capacity, and digitalization. We will continue to leverage global business services as a mechanism to drive G&A productivity. So it’s a broad range of actions that over several years will bring PBNA margins closer to the company average.

Great. I think this is the last question. So I just would like to say thank you to everyone that joined us today, and for the confidence you’ve placed in PepsiCo and in all of us. We hope that you stay safe and healthy. Thank you very much.