PepsiCo Q1 2023 Earnings Call Transcript

Participants

Corporate Executives

• Ravi Pamnani, Investors Relations
• Ramon Laguarta, Chairman & CEO
• Hugh Johnston, Vice Chairman & CFO

Analysts

• Dara Mohsenian, Morgan Stanley
• Andrea Teixeira, JP Morgan Cazenove
• Kevin Grundy, Jefferies Financial Group Inc.
• Bonnie Herzog, The Goldman Sachs Group, Inc.
• Lauren Lieberman, Barclays PLC
• Bryan Spillane, Bank of America Co.
• Chris Carey, Wells Fargo & Company
• Peter Grom, UBS Group AG
• Robert Ottenstein, Evercore ISI
• Gerald Pascarelli, Wedbush
• Brett Cooper, Consumer Edge Research
• Unidentified Participant
• Charlie Higgs, Redburn Partners

Presentation

[Operator]

Good morning, and welcome to PepsiCo's 2023 First Quarter Earnings Question-and-Answer Session. Your lines have been placed on listen-only until it's your turn to ask the question. Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Ravi Pamnani, Senior Vice-President of Investor Relations. Mr. Pamnani, you may begin.

[Ravi Pamnani, Investors Relations at PepsiCo]

Thank you, operator. 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 and updated 2023 guidance. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, April 25, 2023, and we are under no obligation to update. When discussing our results we refer to non-GAAP measures, which excludes certain items from reported results. Please refer to our first-quarter 2023 earnings release and 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.

Questions and Answers

[Operator]

[Operator Instructions] Our first question comes from Dara Mohsenian of Morgan Stanley. Your line is open.

[Dara Mohsenian, Analyst at Morgan Stanley]

Hi, good morning guys.

[Ramon Laguarta, Chairman & CEO at PepsiCo]

Good morning Dara.

[Dara Mohsenian, Analyst at Morgan Stanley]

So very impressive price-mix results in the quarter at 16%. Can you just give us an update on the competitive environment you're seeing in your key business segments and geographies both in terms of just price increases, but also promotion and if that's picking back up to more normalized levels. And if that favorable environment is continuing and just as you look going-forward obviously very strong levels of pricing, how do you think about the moderation of that back to more normalized levels going forward in the next few quarters and the ability of volume to recover as that pricing dissipates on a year-over-year basis. Thanks.

[Ramon Laguarta, Chairman & CEO at PepsiCo]

Yeah, thank you Dara. [Technical issue] for me to cover that, and then Hugh can add some comments. We're seeing a competitive environment we're all trying to protect the health of the categories and then make sure that our brands are participating in those categories in a competitive way. We are investing in our innovation and investing in our brands, investing obviously in value in different ways. Pricing sites[phonetic] in mostly. So we're seeing a good positive competitive environment in the US, in Europe and also in our developing markets, consistently across the world. When it comes to pricing as we said earlier in February we have mostly taken the pricing already this year that we needed to cover for our cost increases and that's -- it is where we stand at this point. We're seeing a deceleration of inflation, not a reduction of cost, but a deceleration of inflation and we think that with the pricing that we've taken already most of our business around the world that should be sufficient.

Obviously, there are some markets, highly inflationary markets around the world where you might have to take additional pricing. If you think about Argentina, Turkey, Egypt so those kind of markets where the currencies are suffering, but majority of our pricing is already done.

[Hugh Johnston, Vice Chairman & CFO at PepsiCo]

The only thing I'd add to that Dara as a reminder you know, we tend to buy commodities nine to 12 months out. So to the degree that the rate of inflation decreases, and it will be a decrease in the rate of inflation, not deflation by any stretch of imagination, that's going to happen very slowly over the course of '23 I think that's more of a '24 thing. To the degree it happens even then.

[Operator]

Thank you. One moment for our next question. Our next question comes from Andrea Teixeira with JP Morgan. Your line is open.

[Andrea Teixeira, Analyst at JP Morgan Cazenove]

Good morning. I wanted to go back to a little bit of what you spoke in the prepared remarks that you are -- and you also are you going to [indecipherable] that you gave that you're not seeing the fact that inflation is still -- is still high throughout these six to nine months that you're seeing here and it doesn't look like you were seeing the need for promotional environment, but more in the context of what has happened in LATAM. I think it is the only region that you haven't seen a reacceleration, and every other region you've seen an acceleration and I'm saying -- I'm talking -- I'm asking this question, more of a point of strength rather than a point of weakness. Of course, it's really hard not to like the numbers here. Just thinking of how to think of the volume decline you saw in snacks and to think about how to -- how to parse it out or it's more about the comparison getting tougher. Thank you.

[Hugh Johnston, Vice Chairman & CFO at PepsiCo]

Yeah, good morning, Andrea. It is Hugh. A couple of things, just for clarity in terms of the snack food or the community food volume Pioneer was a big driver of that. There are challenges with the power grid down in South Africa and obviously Pioneer makes a lot of heavy products. Ex-Pioneer snacks volume was basically flat for the quarter and beverages obviously, was up a small amount for the quarter. In terms more broadly of sort of the rate of -- the rate of growth of all of the businesses from a revenue standpoint I think generally speaking, you see the consumer continuing to buy our products elasticities are still holding up quite well across most of the globe and then despite the fact that we're taking pricing-driven by the inflation that we're facing into, in terms of operating performance I think what you're seeing more than anything is a reflection of the productivity initiatives that we've put into place.

Whether they'd be automation in the supply-chain or digitalization across the company or leveraging global business services. So when we talk about sort of an acceleration in the operating income performance I think it's a consumer that's responding to the brand advertising we're doing. And in addition to that, the productivity that we're driving.

[Operator]

Thank you. One moment for our next question. Our next question comes from Kevin Grundy with Jefferies, your line is open.

[Kevin Grundy, Analyst at Jefferies Financial Group]

Great, thanks, good morning, everyone. Just picking-up on some of your prior commentary there and just the decision to raise the EPS guidance at this juncture of the year, which I think is noteworthy because the Company's delivery against guidance has historically been quite good as you're well aware, but historically, the tax has been to maintain it and then as the year moves on to edge it higher. So, just some context here, was the first-quarter was that good relative to your expectations, just came in that much better. It's noteworthy, within the context of all the prognostication around potential recession and market volatility for the raise at this juncture of the year. So maybe just some historical context around it, and relative to the first-quarter results I think would be helpful. So, thank you.

[Hugh Johnston, Vice Chairman & CFO at PepsiCo]

Yeah, Kevin, good morning. I think you're right, your assessment is right. We're seeing both better elasticities than some of the worst-case scenarios we were planning for and also, we're seeing the teams delivering better productivity. So we're seeing that in general, the flow of materials and the availability of labor, transportation, all those elements that we're making as a sub-optimal company if you just to call it somehow in terms of operating metrics that is getting better which is giving us the opportunity to improve some of the metrics in our operations, faster than what we thought. So it's both improvement in productivity on the cost side and better elasticity. But in the commercial programs, we're strong. You saw that we've increased A&M again in the first-quarter and I think the commercial plans, innovation plans are very strong. So we feel comfortable that even -- and we always play-out a lot of scenarios before we give you guys any guidance. We feel comfortable that even at this early point in the year we can raise our topline and bottom-line estimates.

[Operator]

Thank you. One moment for our next question. Our next question comes from Bonnie Herzog with Goldman Sachs. Your line is open.

[Bonnie Herzog, Analyst at The Goldman Sachs Group]

All right. Thank you. Good morning, everyone. I had a question on organic revenue growth at PBNA, your price-mix in the quarter was incredibly impressive, but your volumes were down slightly again. So could you touch on where you're primarily [technical issue] and then maybe what you're seeing from the consumer, also it seems that incremental pricing maybe a bit harder to come by and promotion levels may need to increase in beverages this year, so could you touch on that as well as maybe your key initiatives to stabilize or turn your volume trends around that PBNA. Is your happy rebranding or the new logo and visual identity for the brand? One of those key initiatives for instance. Thanks.

[Hugh Johnston, Vice Chairman & CFO at PepsiCo]

Thank you, Bonnie. We don't see actually, we see the momentum in the beverage category, very strong in terms of demand. We're seeing away-from-home, very strong. We're seeing the convenience channel, very strong and we're seeing most of the in-home channels also quite strong. So we don't feel that there is a competitive environment that is getting worse in beverages. There are some one-off in the first-quarter because as you know, we're moving Gatorade from a warehouse system to a DSD system. And in that -- in that transition, there are some inventory reduction overall in this system that is impacting Q1 but we don't -- we don't think that the competitive environment in beverages in the US is getting worse and that we need to do anything special.

We have a very strong commercial program both innovation, brands, commercial execution, and customer programs. So that will be the way we were planning to continue to compete vigorously in the market.

[Operator]

Thank you. One moment for our next question. Our next question comes from Lauren Lieberman with Barclays. Your line is open.

[Lauren Lieberman, Analyst at Barclays]

Great, thanks, good morning. So you have already been asked about raising the guidance early in the year and it would sort of be mechanically hard not to given how strong the quarter was. But your prior outlook you had baked-in what we thought was one of the more conservative set of assumptions around the macro-environment at least for the second-half of the year across our coverage anyway and so I was just curious if you're seeing anything more recently that has you more optimistic on the macro trajectory anything in terms of that broader market outlook or consumer outlook that's informing your ability to raise the guidance or is it really more tied to just the momentum in your own business. Thanks.

[Hugh Johnston, Vice Chairman & CFO at PepsiCo]

Yeah, Lauren it's mostly related to the fact that we are already 1/3 of the year is fast and we have better information on our costs and everything else that is complex operating. There are few things we're still concern about one is, what is the consumer is going to be in second-half of the year. We continue to be have multiple scenarios and some scenarios are more optimistic and we continue to have various scenarios. The second one, geopolitics and that might impact the business and therefore we want to be cautious there as well. And the third one, as I mentioned earlier, there is some currencies in some emerging and developing markets that we don't know where some of those markets will go in the second-half of the year and we also want to make sure that we have the right financial scenarios around those options. So those are the three variables that could define where the business goes.

As I said earlier, operationally, the business is better, we are seeing better labor availability, better flow of material, suppliers are obviously getting better as well. Transportation is getting better, so operationally the business in a better place than it was in 2022.

[Operator]

Thank you. One moment for our next question. The next question comes from Bryan Spillane with Bank of America. Your line is open.

[Bryan Spillane, Analyst at Bank of America]

Hey, thanks, operator, and good morning everyone. You know, Hugh I wanted to ask about accounts payable just -- it was a pretty meaningful shift year-over-year I understand there's a sequential or a seasonal piece to it, but I think it's up more than $1 billion versus the first-quarter last year. So, is that tied to the Gatorade DSD distribution change or I know if there was something else going on with accounts payables, that is driving such a meaningful change?

[Hugh Johnston, Vice Chairman & CFO at PepsiCo]

Yeah, hey Bryan, it's really two things, one is seasonal inventory build-on the Gatorade thing, as you mentioned. The second is, we've got a number of significant capital projects that are in flight right now and the timing of the payables on the capital equipment is what drove that number, so I would take it as a one-off, not a -- not a change in trend by any stretch of the imagination. It's just a one-off when the quarter ended.

[Operator]

Thank you. One moment for our next question. Our next question comes from Chris Carey with Wells Fargo. Your line is open.

[Chris Carey, Analyst at Wells Fargo & Company]

Hi, good morning. Can you maybe just touch on how investment priorities will evolve in 2023. I think one of the key takeaways from 2022 distribution cost between shipping, handling, and merchandising activity was a key driver of SG&A inflation but I'm conscious of double-digit increases and added marketing spending out-of-the gates into Q1. So can you maybe just frame how overall investment will be evolving over the course of this year in the context maybe some easing on inflation in certain SG&A buckets and an ability to put more spending in others. Thanks so much.

[Ramon Laguarta, Chairman & CEO at PepsiCo]

Yeah, Chris, listen I think the framework of investment is similar to what we spread in the past. I mean, number-one priority for us is to make sure that our categories remain highly visible in consumers' minds in the complex -- in consumer choices environment and our brands are very well in that -- in those categories. So that's priority number-one, make sure that, that we will continue to be the preferred brand with our consumers. Second, we continue to invest in transformation of the business the utilization and productivity. The center of this strategy. Systems we've been investing on that for quite a while. That continues to be an enabler of all the data strategy that we have in the business and those are the two big projects. We continue to invest in capacity. There is good volume growth across many of our markets around the world and that continues to be a priority and enabling the brands to continue to grow. So those are the principles. I don't know, Hugh, if there is anything else.

[Hugh Johnston, Vice Chairman & CFO at PepsiCo]

No, I think that's -- the only thing I think to where Chris has gone with the question from his perspective as well. Chris, I think you'll see more of the financial impact of those investments in SG&A significantly less so in cost of goods. So, as you're modeling it out SG&A in-place where you'll see all the items Ramon referenced, we'll be hitting.

[Operator]

Thank you. One moment for our next question. Our next question comes from Peter Grom with UBS. Your line is open.

[Peter Grom, Analyst at UBS Group]

Thanks, operator, and good morning everyone. So I was hoping to get more color on the international performance in the quarter but maybe specifically in China I know it was called out in the prepared remarks as a market where you gained share and maybe I missed this, but I don't think it was mentioned when discussing growth in the quarter. So can you maybe share a view on the current environment in China, how that evolves through the quarter and kind of how you see that progressing from here. Thanks.

[Ramon Laguarta, Chairman & CEO at PepsiCo]

Yeah, we're seeing obviously in China optimism in consumers and optimism in the customers and that's driving volume for us across the -- across both our food and beverage business. We're gaining share especially in snacks, snacks has been performing very well through the pandemic and continues to outgrow the category and in beverages as well we've seen competing quite well in Colas, and in sports and hydration. So, yeah, obviously this is going to be a tailwind for us as the year progresses both in away-from-home and in-home consumption.

[Operator]

Thank you. One moment for our next question. Our next question comes from Robert Ottenstein with Evercore ISI. Your line is open.

[Robert Ottenstein, Analyst at Evercore ISI]

Great, thank you very much. Given the strong start to the year and your confidence in the year. I thought I'd ask a longer-term question and that is as you look at the categories that you are in over-time, in the past you've expanded in certain countries a little bit outside of beverages and snacks either for reasons of scale or growth opportunities or maybe that's just what was available as part of an acquisition. Over the next, call it next five years or so, do you believe that you're in the right categories to drive your algorithm or do you see potentially the need or desirability to expand and do some adjacent areas and given the advances that you've made in IT and logistics perhaps that's even a greater opportunity than in the past. Thank you.

[Ramon Laguarta, Chairman & CEO at PepsiCo]

Thank you. It is a great, great question. This is, we believe our categories are large and growing at a very fast pace around 5% globally. I think our main response is to maintain the innovation and make sure that the portfolio evolves with consumers, that brands continue to be super relevant and that is where we want to focus our efforts. We're making some small moves as you saw, for example, and we're going into low alcohol here in the US, expanding the brands, we're making small moves like Cheetos going into Mac and Cheese, so we're expanding in some of our brands organically into some new spaces that makes sense from the consumer point-of-view that we believe our categories are large, global, healthy, and we are responsible[phonetic] to give them a healthy and growing very fast.

[Operator]

Thank you. One moment for our next question. Our next question comes from Vivien Azer with Cowen. Your line is open.

[Robert Ottenstein, Analyst at Evercore ISI]

Good morning, thank you. I wanted to ask about Pepsi zero Sugar given the reformulation and the broad-based international distribution. Can you offer some perspective on how that's performing relative to expectations and as well, could you possibly update us on how the organization is tracking towards your 2025 ESG target to drive 60%, 70% of volumes from lower added sugar beverages. Thank you.

[Ramon Laguarta, Chairman & CEO at PepsiCo]

Thank you. Great question and it's central to our strategy, continue to drive low sugar and non-sugar products as kind of the portfolio transformation. In the case of Pepsi obviously, that is very relevant for us given the size and scale of Pepsi brand for us. In the re-launch in the US within your formula is very, has been very well-received by consumers based on our early -- early data of repeats and preferences. The vast -- the brand is growing 60%, if I -- if I remember correctly in the first-quarter and that's driven a little bit by distribution, but it's mostly velocity. So clearly, the consumers are -- they like the product and they're coming back to the products. Globally we also see the growth of the non-sugar segment in the category, two to three times the average of the category in most of the markets and we are driving that growth along with some of our key competitors. I think in Australia that is working and is keeping the category very relevant so consumers will continue to invest in non-sugar as a driver of growth for our brands.

[Operator]

Thank you. One moment for our next question. Our next question comes from Gerald Pascarelli with Wedbush. Your line is open.

[Gerald Pascarelli, Analyst at Wedbush]

Hi, good morning, thanks for the question. In US measured channels for salty snacks we've seen private-label products gain share of the overall category for the past few months now, this is obviously happening in tandem with very strong performance and market-share gains for Frito as well, which is great, but I was just curious if you've seen any near-term changes to broad consumer purchase patterns in this category relative to maybe a few months ago. Any thoughts there would be helpful. Thank you.

[Ramon Laguarta, Chairman & CEO at PepsiCo]

Yeah, in general, we're seeing private-label growth in some of the categories where we participate especially waters, juices that we used to participate in some categories in salty snacks, as well as you mentioned. As you will say Frito-Lays is, I think it's growing share of market at the fastest pace that we've seen in the last maybe 10 years, if I recall. The consequence of the great work the team is doing in terms of execution, but mostly innovation and brand-building, so I think we see both private-label increasing, although from a very low-base in salty snacks that most importantly for us, we see in our brands continue to gain loyalty, expand the consumer base, and be preferred in that segment. But yes, private-label is slowly increasing and from a very-very low-base as I said in some sub-segments of the -- of the salty snacks business.

[Operator]

Thank you. One moment for our next question. Our next question comes from Brett Cooper with Consumer Edge. Your line is open.

[Brett Cooper, Analyst at Consumer Edge Research]

Good morning. It was about a year in of Blue Cloud and part of Mountain Dew, just hoping if you could provide some color on your view of the performance of the brand and the operation to date any learnings and then -- and then how you think about proceeding from here. Thanks.

[Ramon Laguarta, Chairman & CEO at PepsiCo]

Yeah, listen we're happy with the -- with the learning that we're taking, both in the operation of this category which is new to us, and also in how we create consumer demand and consumer loyalty and we continue to find partners to create new solutions for consumers with our brands. We just launched a tea version, a hard tea version with Lipton and FIFCO company. They develop a great product, which we're going to start distributing through our system in the next few weeks. So we're going to go into the summer with two main products, Mountain Dew -- hard Mountain Dew and hard Lipton.

As I said, our intention is not to build a large portfolio of products and complex portfolio but is to focus on a few good brands, develop with strategic partners and then leverage our distribution capabilities to give it to consumers all across the country. That's our -- that's our journey. We're not rushing, we're going at a speed that we learn and we -- and we make this business solid and with the right margins and the right -- the right consumer propositions.

[Operator]

Thank you. One moment for our next question. Our next question comes from [indecipherable] with Citi. Your line is open.

[Unidentified Participant, at PepsiCo]

Hey, good morning, everyone. Question on the Pepsi Beverage North-America business, it seems clearly this year you're making a lot of investments. The Pepsi logo change, the Star[Phonetic] re-launch. A lot of other launches, expansion of Pepsi zero Sugar, and Hard Mountain Dew, just bigger-picture, what are your expectations from kind of a market-share standpoint in the business, what would you consider a success for this year. And then secondly, how do you balance these investments that you're making with your target of getting back to mid-teens margin for the business. Thank you.

[Ramon Laguarta, Chairman & CEO at PepsiCo]

Yeah. I mean, we've expressed this in the past[phonetic] as we want to have a business that grows at the category pace or above and expands its margins to the mid-teens levels that we have mentioned as well in the next two to three years. That is the strategic intent for this business. I think the team is executing very well. The way we measure our share is full LRB so it is full set of brands that we have in our portfolio and not just small segments within the category and obviously I think we're progressing well against that growth target for the year, whilst also expanding the margins for the business. We feel good about the margin expansion this year.

[Operator]

Thank you. One moment for our next question. Our last question comes from Charlie Higgs with Redburn. Your line is open.

[Charlie Higgs, Analyst at Redburn Partners]

Thanks for the question. Good morning, everyone. I was just wondering if you could talk a little bit more about the Frito-Lay North-America division and the volume growth there, how did Lay's, Doritos, Cheetos perform, is there any color you can give on the single-serve packs versus multi-packs. And then just how you see the very strong margin growth in Q1, progressing throughout the year will be useful. Thank you.

[Ramon Laguarta, Chairman & CEO at PepsiCo]

Yeah, great. As I said earlier Frito-Lays I think in the US and -- but also on the whole snack business globally is doing extremely well. But if we focus on the US I think the team is doing a fantastic job, growing the large brands, as you mentioned Lay's, Doritos, Ruffles, [indecipherable], Cheetos, and at the same time building peripheral brands that cover some spaces, though, that we were not covering with big brands, let's[phonetic] call it PopCorners or [technical issue] we're really building a portfolio of brands that covers different cohorts and different need stays[phonetic] in a unique way. We're also innovating in new formats, you mentioned multi bags, which has been a great hit for us in terms of variety and empowering consumers for personalization, but this year, few months ago, we launched minis, which is also an incredible innovation. If you think about the convenience -- additional convenience it gives to consumers and putting our best brands in that -- in that format opens a whole set of new locations for the business. So we feel very good about the innovation strategy and how we keep capturing new locations into our brands.

As I said earlier the business has become better operationally as the supply of materials is getting better, labor availability is getting better. So we should see operational metrics improving and that's where you're seeing in the margins although the Q1 margin was a little bit elevated. The strategic intent with Frito-Lay is growing it very-very fast and keeping the margins at those high levels. That's super accretive for the PepsiCo overall business.

Yeah, I think this is the last question. So really appreciate the conversation this morning, and thank you everyone for joining today and especially for the confidence that you've all placed in our -- in our -- in our company and the investments you're making in our company. Thank you very much and have a great day.

[Operator]

[Operator Closing Remarks]