PepsiCo Inc (PEP) — Q3 2023 Earnings Call Transcript

Thank you, operator. 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, guidance and outlook. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, October 10th, and 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 third quarter 2023 earnings release and third quarter 2023 Form 10-Q available on pepsico.com 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.

Thanks, operator. Good morning, everyone.

Good morning, Bryan. My question is about volume, as it has been a significant topic not only for Pepsi but also more generally. In the prepared remarks, there was some mention of a shift to smaller packs. Can you, Ramon, provide insights into the volume trends for PBNA this quarter? Additionally, how does that compare to your expectations for volume growth coming out of the second quarter? I'm interested in how those projections may have changed as the quarter went on. Good morning, Bryan. I want to take a moment to discuss the broader company beyond PBNA. We're observing an improvement in sequential volume over the past few quarters, indicating global volume growth. From a management perspective, we are focusing on two primary factors: consumer interaction with our brands, measured by unit purchases, and overall business margin. We're optimizing both, and notably, units are increasing at a quicker pace than volume. As you pointed out, consumers are shifting toward smaller packs, and our pricing and mix strategy is supporting this change. Additionally, we're enhancing our margin, which has shown positive improvement across the company and the specific businesses you mentioned. Regarding PBNA, we've taken a more aggressive approach to volume optimization compared to other sectors. We made some strategic decisions, particularly regarding take-home water, where we've eliminated unprofitable promotions, resulting in an almost 2.5 point impact on volume. While managing volume is crucial for us, we're also focused on efficiency in our plants and ensuring strong consumer interaction with our brands, as we balance volume, net revenue, and margin expansion.

Great. Thanks. Good morning. Carrying on Bryan's question, but taking it a little bit further out into 2024, and it was great to get kind of some preliminary perspective on next year, so early. But I was also curious how you're thinking about that balancing volume and price mix as we go into next year because price mix has continued to outperform? And so just kind of thinking about that more forward look as well. Thanks.

Yes, Lauren, we'll give you more details, obviously, in February when it comes to the actual composition of some of our key metrics. But what I would tell you at this point, we've obviously seen all the commercial plans from the different markets and our innovation plans and our productivity plans and our cost trends that there will be still a higher inflation in our business. And therefore, there will be higher price mix versus not the last couple of years, but if you think about the historical price mix that we had in the past, I think '24 will have a bit more elevated price mix in the equation than in the previous years.

Yes. So right, to add a finer point to Ramon's comments, Lauren, if you think of pre-pandemic inflation being kind of in that 2% to 3% range, inflation is going to be a little elevated relative to that. And our pricing will be roughly in line with inflation. So that should at least give you a rough sense as to how things might shake out.

Thank you. Good morning. So going back to your comments about volumes in PBNA. Was that specific to the quarter or should we still see about this 2.5% headwind to volumes you quoted and potentially into the first half of 2024? And if you can also comment on the volumes in Latin America, so how we should be thinking towards the end of the year and potentially into 2024? Thank you.

Yes, Andrea. Regarding PBNA, we are continuing to optimize our portfolio. We should expect a few more quarters where we will keep making volume decisions aimed at maximizing units and transactions, while also working to enhance our business margins. You observed our margin expansion this quarter and we are optimistic about its continuation in PBNA. As for Latin America, our snack business primarily drives our numbers in that region. We've focused on affordability, ensuring our brands remain at price points accessible to consumers with limited income, who often base their choices on pricing. Thus, we've been reducing the portion sizes of our products to maintain affordability, which does impact actual volume. However, the transactions are healthier, which is a key metric we track to evaluate our business's health along with brand equity and other indicators for a comprehensive understanding of consumer behavior. We will keep making adjustments as needed to address inflation and ensure our brands are a choice for consumers with restricted disposable income.

Hey, guys. Good morning. Could you just discuss the motivation behind the decision to provide guidance for 2024 a bit earlier than is typical? What do you think your level of visibility is at this point versus a typical year? And as you look out maybe what are some of the areas that give you confidence and what might be some of the areas where there's more uncertainty, particularly given the volatile consumer environment here? Thanks.

Hi, Dara. I can answer that one. I think in general, as we build the plans, we're focused on a couple of things. Number one is obviously the level of commodity inflation, and you know we buy forward about nine months. So that's roughly in line with the past. Number two is the balance of the PepsiCo cost structure. And as we've talked about the last couple of quarters, we've put even higher focus than we've had in the past on driving productivity and driving out unnecessary costs using the tools that we've discussed, the investments in digitalization, the investments in global business services, the investments in driving out overlaps within the organization. Because that work has been going on for a longer period of time, I think that gave us earlier line of sight into what we would expect our cost outcome to be for next year. And then number three, we're in a good spot in many of the developed markets in terms of our commercial plans. We do joint business planning with our customers. And we're probably in line to maybe even a little ahead of where we've been historically with all of that. So given the information was available to us a little bit earlier and given there were undoubtedly questions in the investment community on what '24 looks like given the evolving pricing and inflationary environment, we thought it was prudent to at least give some indication of what guidance would look like in '24. So that's what drove the decision.

Thanks, operator, and good morning, everyone. I actually wanted to follow up on Dara's question there. But just more in the context of your actual performance versus your initial expectations historically because it's really been a while since organic revenue growth has actually fallen short of your initial outlook. So can you maybe just characterize your confidence in the '24 outlook at this stage and really whether or not you've embedded enough conservatism just given what remains a pretty choppy backdrop for the consumer? Thanks.

Sure. Happy to address that. We obviously have a long history here of meeting or exceeding expectations, both our internal expectations as well as the guidance, including this quarter, where we beat revenue and we beat EPS. In fact, we've now met or beat consensus for 55 straight quarters. So we tend to be, I think, appropriately conservative in the way that we communicate to you all. So from that perspective I think you can go into 2024 with a similar expectation that we should at least achieve the numbers that we've laid out for you.

Thank you. Good morning, everyone. Hugh, I was hoping maybe you can just provide some of the macro underpinnings that kind of go into your 2024 viewpoints at this point? Just would love to kind of get your state of the union on the consumer or the economy and kind of how you guys are thinking that will shape up as you go through 2024? Thanks.

Sure. Why don't I start and then Ramon, obviously, you're super deep on the consumer as well, but I'm happy to start on this one. Number one, I do think that we see the consumer right now being more selective, and you see it in a variety of ways, right? You see some trade down in terms of channels of trade that they're purchasing products in. You see some orientation toward value. At the same time, the things that I usually look at with the consumer to detect whether there's high stress, we see good results, Nik. Number one is the convenience store channel. Typically, when gas prices are up and consumer incomes are stressed, you see revenue in those channels under stress as well. For Q3, we saw revenue up 5% in beverages and 8% in foods in the convenience channel. Number two is food service, that's also typically a leading indicator, that's still growing double-digits. So I think we've gone into the year with an approach that says, given all that I laid out during Dara's question, we expect the consumer to continue to be cautious. And to the degree that they are worse than that, we've got cost plans in place that we would use to mitigate whatever challenges we face. But we think our revenue outlook accommodates an increasingly cautious consumer next year.

Yes. I would also emphasize that the long-term structural advantages in our categories will persist. Factors such as urbanization, demographic changes, and evolving lifestyles that have been supporting our snacking and beverage categories will continue to shift within various segments. These elements enhance our confidence in our categories. Additionally, we are nearing completion of our innovation and commercial plans, and we have improved in terms of affordability and premiumization of our portfolio. Therefore, we believe our market share will remain strong next year, which underpins our confidence for the coming year.

Yes, please.

Hi. Good morning.

Good morning, Chris.

The inflation got a bit worse quarter-over-quarter in the PBNA segment, specifically, whereas in the rest of the segments, the trend is for continued easing. Can you just comment on some of the puts and takes that you're seeing from a commodity inflation standpoint in this segment, particularly and how the beverage side is driving the inflation expectations going into next year relative to food? I'm really speaking to Hugh's comments on above average inflation next year. And just given what we see from commodities in general, I'm trying to parse out where exactly that outlook is coming from? So thanks so much.

Yes. Good morning, Chris. Chris, we don't get into by commodity levels of dissecting the numbers and guidance. That's something that historically we haven't done. As you know, the beverage segment is a little more packaging exposed in foods is just by virtue of the nature of the products. But I'd rather not go any further than that to get into the specifics of individual commodities for competitive reasons.

Thank you very much. I want to focus on the long-term vision for your beverage and food businesses in the US, particularly in light of your significant investment in Instacart. What are you aiming to achieve with that investment? Additionally, could you share insights on your strategic initiatives in the digital space and the ongoing efforts in automation and productivity? What do you envision for the future of the business, and how does Instacart fit into that vision? Thank you.

We are focused on transforming the business with automation and digitalization at the core. Through digitalization, we aim to enhance our decision-making processes in all areas, from consumer interactions to pricing strategies and our end-to-end operations. This ongoing investment is critical for making our company more precise in its intelligence and empowering our teams to make informed decisions with real-time and forward-looking data. Regarding Instacart, we are working to strengthen our DSD system by leveraging the capabilities of their in-store shoppers, which we see as a competitive advantage. Our relationship with Instacart has required only a minor investment, and it reflects our commitment to this commercial partnership without any broader strategic intentions behind it.

Hey, thanks. Two questions, if I could. One, just following up on the '24 outlook given the visibility you have on cost and the commercial planning at this point. Should we be expecting a relatively even performance and cadence of growth, both top and bottom line throughout the year? Or is there a reason to see that growth weighted first half versus second half? And then I did want to ask on Gatorade because the improvement we saw this quarter sequentially volumetrically did occur. It just didn't occur at quite the level of improvement that we were expecting from a shipment perspective. I think we went from down high single digits in the second quarter to down mid in the third. So I just would love some perspective on how you view that business performing? Thank you.

Listen, we will not go into more details on '24. We'll cover that in February in due course. When it comes to Gatorade, we're very pleased with the G2DSD or the movement of Gatorade to the DSD platform over the summer. We're seeing sequential improvement in the performance of the brand. Better performance in August that we saw early in the summer, et cetera, inventory on display and a number of secondary locations, et cetera. So that move is working. On the velocity of the brand, we also saw that the brand is improving its velocity. It is true that the emergence of Prime in the category took some share from Gatorade less than other brands in the category or less proportionally to the size of the brand. But I would say Prime impacted Gatorade in a way some transactions during the peak of the season. We're seeing that the size of Prime in the category getting smaller as we go into the fall, which gives us very good optimism that with the new infrastructure we have with our DSD business, some of the innovation with GFit, Gatorlyte, G Zero, our powders and tablets that are being very well received by consumers that we have a very good outlook for Gatorade. So we have a stronger foundation to go into next year with potentially weaker competition. But obviously, I don't know what their plans are.

Hey, good morning, everyone. So, clearly, there's been a lot of concern in the market around adoption of GLP-1 drugs in the US and the potential impact on your business. So maybe can you comment a bit of what you've seen so far based on your consumer studies, both on the beverage and food side? And how you're thinking that can evolve over the next couple of years, change in consumer behaviors? And then from a Pepsi-specific standpoint, what changes can you make to adopt your portfolio to these new consumer preferences that could emerge if the adoption is greater than that? Thank you.

Thank you, Filippo. Good question. Listen, obviously, we're looking at this along with many other positive and negative potential risks for our business and our category. So far, the impact is negligible in our business. Overall, if you take global consumption, there are obviously a lot of question marks with regards to the obesity drugs when it comes to medical testing or scalability of the usage of this or what is the impact really on consumer choices. So a lot of question marks. We continue to believe that all the structural positive trends that we had to our categories remain, and I mentioned, I referred to that earlier in the conversation. So we're seeing urbanization as a big driver of adoption of our categories. We're seeing middle-class development. We're seeing lifestyle and people snacking to eat, some meals becoming more mini-meals and much more unstructured during the day, being a big driver of our categories, both beverages and snacks. So we're seeing a lot of tailwinds that will continue to drive our categories. Of course, we're observing the growth of these new drugs and its potential impact. The other thing we're looking at is our strategy is sound when it comes to portfolio transformation. And everything we've been doing for the last five, six years when it comes to reducing sodium, reducing fat, reducing sugar, reducing the portions of our products, adding some new cooking methods to our snacks, those are all very positive trends that will help us pivot the portfolio if needed in the future. We'll continue to do it. Obviously, it's one of our key strategic pillars. So again, negligible impact today, a lot of these structural trends that are in our category, I think, remain very solid and even we see them accelerating. And our portfolio strategy, we think, is very solid when it comes to a potential protection against some of these future developments 5, 10 years from now.

Good morning. A question for you on the North American Beverage business. You've said in the past your goal is to hold share in that business. When you begin to add things like CELSIUS as an organic business, I'd love to hear how you assess the beverage performance and you're looking to hold share with the own portfolio or you distributed brand as a component to hold share? Thanks.

Yes, we may have missed part of your question, but I hope we understood what you were asking. CELSIUS is indeed a key element of our energy drink strategy. We have established multiple pillars in our approach, and our distribution capabilities for third-party brands play a significant role in that strategy. CELSIUS continues to experience growth, and we have doubled its distribution and in-store presence over the past year, particularly within the convenience channel, which is crucial for energy drink consumption. The involvement of CELSIUS enhances the efficiency of our overall system, boosts our sales team’s relevance in stores, and makes our coolers a preferred choice. All these factors contribute positively, creating a halo effect on our entire portfolio. While I may not have fully addressed your question due to communication issues, I hope you understand the significance of CELSIUS in our energy strategy and the benefits we gain from both the revenue generated and its positive impact on the rest of our product lineup. Okay. So thank you very much for your questions and for joining us today. And especially thank you for the confidence you've placed in us with your investment. We hope you all stay safe and healthy. Thank you very much.