PepsiCo Q3 2023 Earnings Call Transcript

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October 10, 2023

Key Takeaways

  • PepsiCo saw sequential global volume improvement while expanding margins by prioritizing consumer interactions (units) and pruning unprofitable promotions—most notably a 2.5-point volume cut in take-home water.
  • The company provided preliminary 2024 guidance earlier than usual, citing strong visibility into nine months of commodity buys and deepened productivity and digitalization initiatives.
  • Price mix in 2024 is expected to stay elevated versus pre-pandemic levels, with pricing roughly in line with inflation to help offset ongoing cost pressures.
  • Long-term category tailwinds—urbanization, snacking trends and portfolio health—remain intact, and early impact from GLP-1 obesity drugs on beverage and snack demand is still negligible.
  • Some volume trade-offs in Latin America snacks and Gatorade—through smaller pack sizes and competitive pressure from Prime—were necessary to maintain affordability and protect margins amid consumer cost constraints.
AI Generated. May Contain Errors.
Earnings Conference Call
PepsiCo Q3 2023
00:00 / 00:00

There are 15 speakers on the call.

Operator

Morning, and welcome to PepsiCo's 2023 Third Quarter Earnings Question and Answer Session. Your lines have been placed on listen only until it's your turn to ask a 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.

Operator

Mr. Pamnani, you may begin.

Speaker 1

Thank you, operator. Good morning, everyone. I hope everyone has had a chance this morning to review our press release and prepared remarks,

Speaker 2

both of

Speaker 1

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 10, 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.

Speaker 1

Please refer to our Q3 2023 earnings release and Q3 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

Operator

Thank you. Our first question comes from Brian Spillane with Bank of America. Your line is open.

Speaker 2

Thanks, operator. Good morning, everyone.

Speaker 3

Hi, Brian.

Speaker 2

So my question is just around volume. There's been a lot of focus on that topic, not just for Pepsi, but just I think more broadly. So I know in the prepared remarks, there's a little bit there's some commentary about a shift to small packs, but maybe Ramon, if you could touch on What was happening specifically volumetrically for PB and A in the quarter? And then kind of relative to what your outlook was For volumes coming out of 2Q, just how that might have evolved as the quarter progressed?

Speaker 3

Yes. Good morning, Brian. Let me step back beyond PB and A to the broader company. We're seeing sequential volume improvement, if you Take the last few quarters. So globally, we're improving our volume.

Speaker 3

But more philosophically, I would thinking about How we're managing the company? There's 2 big variables that we're trying to optimize. 1 is Consumer interaction with our brands and the proxy we're using for that is units or specific purchasing act. And then the other one is obviously margin for the overall business and those are the 2 variables that we're maximizing. In both cases, units are growing much faster than volume and we're seeing that.

Speaker 3

You mentioned Consumers move into a smaller packs. We're also in a way facilitating that through our pricing and mix strategy. And then we're obviously optimizing margin that as you saw, it was a good improvement in our margin across the company and the particular businesses that you referred to. So that's how we're thinking about That you referred to. So that's how we're thinking about volume and margin.

Speaker 3

When it comes to PB and A, We've been a bit more aggressive than in the other businesses with regards to volume optimization and we've made some decisions Especially around take home water that we were able to prune some promotions that We're not profitable for the business and that has almost a 2.5 points of volume impact. So that's how we're managing volume. It's clearly an important variable for us, but for efficiency in the plants and some others that Unit transaction and consumer interaction with the brands are the metric that we're trying to maximize As we're making these trade offs between volume, net revenue and margin expansion.

Operator

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

Speaker 4

Great, thanks. Good morning. Carrying on Brian's question, but taking it a little bit further out into 2024 and it was great to get Some preliminary perspective on next year so early. But I was also curious how you're thinking about that balance in 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.

Speaker 3

Yes, Lauren, we'll give you more details obviously in February when it comes to the actual composition of some of our key metrics. What I would tell you at this point as 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 businesses 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 2024 will have a bit more elevated price mix in the equation That in the previous years.

Speaker 5

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%, 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 up.

Operator

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

Speaker 6

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

Speaker 3

Yes, Andrea. So with regards to PB and A, we'll continue to optimize The portfolio, so we should be probably thinking about a few a couple more quarters where we will continue to see Volume decisions that again, we're trying to maximize units and transactions And we're trying to continue to optimize the margin of the business. And you saw that this quarter and balance of the year, we feel very good about the margin Expansion in PB and A. Now when it comes to LatAm, there is mostly our snack business that what you see there In our numbers and we've been making again decisions around affordability, making sure that our brands continue To be within affordable price points to consumers that we know that this possible income is limited and they make decisions a lot based on price points. So we've been reducing size portion size of our products and making sure that we're still very affordable And that has a repercussion on has an impact on the actual volume.

Speaker 3

But again, the transactions are much healthier And that's the metric that we use to assess the health of the business with regards to consumer along with brand equity and some other metrics that we use obviously to understand Full consumer picture. So, we'll continue to make optimizations, Andre, as we need to absorb inflation and Make sure that our brands remain a choice for consumers that are clearly more limited in their disposable income.

Operator

Thank you. One moment for our next question. Our next question comes from Dara Mohseni with Morgan Stanley. Your line is open.

Speaker 7

Hey, guys. Good morning. Could you just discuss the motivation behind the decision to provide guidance 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?

Speaker 7

Thanks.

Speaker 5

Yes. Hi, Darryl. I can answer that one. I think in general as we build the plans, we're focused on a couple of things. Number 1 is obviously that the level of commodity inflation and you know we buy forward about 9 months.

Speaker 5

So that's roughly in line with the Pass. Number 2 is that 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 And 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 3, we're in a good spot in many of the developed markets, in terms of our commercial plans. We do joint planning with our customers.

Speaker 5

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 was undoubtedly questions in the investment community on what 24 looked 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 2024. So that's what drove the decision.

Operator

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

Speaker 8

Thanks, operator, and good morning, everyone. So I actually wanted to follow-up Darren'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 'twenty four 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.

Speaker 5

Sure. Happy to address that. We obviously have a long history here of meeting or Seating 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 beat 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.

Speaker 5

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.

Operator

Thank you. One moment for our next question. Our next question comes from Nik Modi with RBC Capital Markets. Your line is open.

Speaker 9

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, the economy, kind of how you guys are Thinking that will shape up as you go through 2024? Thanks.

Speaker 5

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 1, 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 and You see some orientation toward value. At the same time, the things that I usually look at with the consumer to detect whether There is high stress.

Speaker 5

We see good results in, Nick. Number 1 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 2 is foodservice.

Speaker 5

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.

Speaker 3

Yes. And the other thing, I would say is all the Long term or structural tailwinds of our categories will continue. If you think about Urbanization, demographic shifts, lifestyles, etcetera, That have been driving our snacking categories or beverage category, the move from package to package, all those things will continue. And they drive a lot of our confidence in our categories. Then obviously, we have almost completed by now our Innovation plans, our commercial plans, our I think we got better at affordability and premiumization of our portfolio.

Speaker 3

So we think Our share of market will be good next year as well. So that's what's driving our kind of confidence for next year.

Operator

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

Speaker 3

is open.

Operator

And if you have a question, go ahead and ask it. It looks like they didn't have a question. Do you want me to go and move on to the next person?

Speaker 1

Yes, please.

Operator

Okay. Sure thing. One moment. Our next question comes from Chris Carey with Wells Fargo. Your line is open.

Speaker 10

Hi, good morning. Thanks, Chris. The inflation got a bit worse quarter over quarter in the PB and A 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 Commodity inflation standpoint in this segment particularly and how the beverage side is driving the inflation expectations going into Here, 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.

Speaker 5

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 than foods is just by virtue of the nature of the products.

Speaker 5

But I'd rather not go any further than that to get into the specifics of individual commodities for competitive reasons.

Operator

Our next question comes from Robert Ottenstein with Evercore ISI. Your line is open.

Speaker 11

Great. Thank you very much. So I want to shift a little bit more kind of to the long term. And I was just wondering if you can kind of give us A sense of the vision, your vision for the business, the beverage business And the food business in the U. S, in light of your large investment in Instacart, What you're trying to accomplish there and other kind of strategic moves you're doing on the digital side And the all the underlying work that you're doing in terms of automation And productivity, just kind of what do you see the business looking like in the future?

Speaker 11

And how does Instacart play into it? Thank you.

Speaker 3

Yes, good question. Obviously, as you were saying, we continue to drive The transformation of the business with automation at the center of it and digitalization as well. With digitalization, we're trying to obviously give much more precision to our decision making across Everything we do from how we talk to consumers, how we invest in our pricing with our customers, And how we run our end to end operations from agro to the consumers, how we run our routing and everything, all these activities that we to generate value for our consumers. That is an investment we've been making over time and we continue that Still, it's the priority of the company to make the company more precise and intelligent and empower our frontline to make better decisions All the time with the best information possible real time and ideally forward information. So that is a continuous investment.

Speaker 3

Now when it comes to Instacart, There is a commercial relationship trying to enhance the capabilities of our DSD system With the shoppers that they have in store and that is a continuous focus. I think DSD continues to be a competitive advantage And I think we can enhance that capability with supporting activities from the Instacart shoppers And that commercial relation led to a very minor investment in Instacart and just To reinforce the commitment to the commercial relationship, it's there's nothing more than that in terms of a strategic long term Intentionality with that investment.

Operator

Thank you. One moment for our next question. Our next question comes from Steven Powes with Deutsche Bank. Your line is open.

Speaker 8

Hey, thanks.

Speaker 12

On two questions, if I could. 1, just following up on the 'twenty four outlook. Given the visibility you have on costs 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 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, just didn't occur at quite the level of improvement that we were expecting from a shipment perspective.

Speaker 12

I think we went from Down high single digits in the 2nd quarter to down mid in the 3rd. So just would love some perspective on how you view that business performing. Thank you.

Speaker 3

Good. Listen, we will not go into more details on 24. We'll cover that in February in due time. 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, etcetera, inventory on display and number of Condary location, etcetera. So that move is working.

Speaker 3

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 GFEAT, GatorLite, GZERO, our fathers and tablets that are being very well received by consumers That we have a very good we're going to have a very good 24 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.

Operator

Thank you. One moment for our next question. Our next question comes from Filippo Falerni with Citi. Your line is open.

Speaker 13

Hey, good morning, everyone. So clearly, there's been a lot of concern in the market around the adoption of GLP-one drugs In the U. S. And the potential impact on your business. So maybe can you comment a bit of what you've Seeing 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, Changing consumer behaviors.

Speaker 13

And then from a Pepsi specific standpoint, what changes can you make to adapt your portfolio To this news, to this new consumer preferences that could emerge if the adoption is greater than Thank you.

Speaker 3

Thank you, Filippo. Good question. Listen, obviously, we're looking at this along with many other Positive and negative potential risk for our business, our category. So far, the impact is negligible in our business. Overall, if you take global consumption, there's obviously a lot of question marks with regards To these obesity drugs, when it comes to medical testing or scalability Of the usage of this or what is the impact really on consumer choices.

Speaker 3

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.

Speaker 3

We're seeing lifestyle And people snacking to eat, so 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 sound when it comes to Portfolio transformation and everything we've been doing for the last 5, 6 years when it comes to reducing sodium, reducing fat, reducing sugar, Reducing the portion control 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 where 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.

Speaker 3

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.

Operator

Thank you. Our last question comes from Brett Cooper with Consumer Edge. One moment.

Speaker 14

Good morning. 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 Celsius as an organic business, I

Speaker 9

would just

Speaker 14

love to hear how you assess the beverage performance You want me to hold share with the own portfolio or just 2 distributed brands and a component to hold share? Thanks.

Speaker 3

Yes. So we missed a little bit of the question, but hopefully we got what you're trying to ask. Celsius obviously is part of our energy drink strategy. We said we had multiple pillars And our ability to distribute in our system some third party Brands is part of that strategy. Obviously, Celsius continues to grow.

Speaker 3

We've doubled the distribution and the presence in store of the brand in the last year or so, Especially in the convenience channel, which is a key channel for energy consumption. That participation of sales in our truck makes our full system more efficient. It makes our salesman more relevant in the store. It makes Our cooler more a go to cooler in the store and that those are all positive that eventually have a halo effect as well in the rest of our portfolio. So I don't know if I'm answering the question because really I couldn't we couldn't hear it very well.

Speaker 3

But I guess you get a sense of The importance of Celsius in our energy strategy and the value we get from both the actual monetization of that distribution, but also the Halo it has Okay. So thank you very much for your questions and for joining us today and Especially thank you for the confidence that you've placed in us with your investment. We hope you all stay safe and healthy. Thank you very much.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

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