PepsiCo Q4 2021 Earnings Call Transcript

There are 12 speakers on the call.

Operator

And welcome to PepsiCo's 2021 4th Quarter Earnings Question and Answer 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. Pamnon, you may begin.

Speaker 1

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 and long term financial targets And the potential impact of the COVID-nineteen pandemic on our business. Forward looking statements inherently involve risks and uncertainties and only reflect our view as of today, February 10, 2022, and we are under no obligation to update.

Speaker 1

When discussing our results, we refer to non GAAP measures, which exclude certain items from reported results. Please refer to our Q4 and full year 2021 earnings release and 2021 Form 10 ks available on pepsico.com for definitions and reconciliations of non GAAP measures and additional information regarding our results,

Operator

Our first question comes from Dara Mohsenian with Morgan Stanley.

Speaker 2

Question. Hey, good morning guys.

Speaker 3

Good morning, Darren.

Speaker 2

So I wanted to focus on the 20 22 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?

Speaker 2

Thanks.

Speaker 4

Yes. Derek, let me start and maybe Hugh can We see our categories very healthy moving into 2022 and long term. Both are convenient foods and beverages. So that makes us feel very comfortable. The investments that we have made over the last few 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.

Speaker 4

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 stay growing faster than food overall. So That's how we see our long term. And yes, we obviously, if you think about next year, yes, we're at the top end of our Long term guidance, this year, obviously, we I mean, last year, we obviously crossed that long term guidance. So you see compounded, yes, we We're at the high end of our 4% to 6%.

Speaker 4

And obviously, we that's the objective of the whole organization to stay within question. That guidance and beat it in good years.

Speaker 3

Yes. The only thing I'll add there in terms of some of the financial pieces of it, You saw in Q4, we had about 5 points of volume and about 7 points of price mix. Obviously, we're 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 7 pricing We'll probably be around there, maybe even a little bit stronger for the year. We'll see how it plays out question. 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.

Speaker 2

Question. 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, seem like there clearly wasn't a lot in Q4, but What are you assuming for 2022? Thanks.

Speaker 3

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.

Speaker 2

Thanks.

Speaker 4

Yes. I think if you think about all the investments we've made in the last few years, both in the brand strength or some of our net revenue Capabilities, even our execution capabilities, the granularity that we can execute in the stores, that's Clearly giving us a lot of, I would say, 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 22 scenarios.

Speaker 2

Great. That's helpful. Thanks.

Speaker 4

Our Our

Operator

next question comes from Bonnie Herzog with Goldman Sachs.

Speaker 5

All right. Thank you. Good morning. Actually had a question on your A and M Then 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 you think that did contribute to your Robust top line growth in Q4.

Speaker 5

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 top line guidance at the high end of your long term growth go?

Speaker 3

Yes. Hi, Bonnie, it's Hugh. A couple of things on that. 1, A and M for the year was up 11%. For the quarter, it was up 15%.

Speaker 3

But remember, when you're dealing with the quarter, that's not necessarily what's in the marketplace. That's sort of the A and M curve and we book A and M On the revenue curve, in terms of spend, spend was up in the quarter for sure. I don't know that it was Proportionately up relative to the rest of the year. And in terms of go forward, I Expect our A and 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.

Speaker 3

We think it's having the right impact. But we clearly were the beneficiaries of, in North America, some reduction, and we think that's also played well. Question. We generally are spending at a competitive level and we're trying to compete on quality of BANM, not necessarily the quantity of BANM.

Speaker 4

Yes, Bonnie. One of the things we're I think we're getting better at is measuring our return on investment on our marketing. And we're 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 gives 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.

Speaker 4

It's statistically We want to continue with this kind of investments being very rational in the way we invest A and M, but understanding that A company like ours, the current competence is building brands and that's what give us in situations like we're having This year, what we have to price, we have consumers following us in spite of higher prices. So I think, statistically, it's a very important LMM in our overall growth strategy.

Speaker 5

Okay, helpful. It seems to be working. Thank you.

Operator

Our next question comes from Lauren Lieberman with Barclays.

Speaker 6

Great. Thanks. Good morning. I wanted to just talk about PB and A volumes Because accelerated sequentially and on a 2 year basis are 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.

Speaker 6

But zeros have been in the market, I think arguably all year. Question. I thought maybe there's something to be said for the reorganization of the markets and that may be starting to click in, in a different way. So just curious on any perspective on the Accelerating trends in PB and A, that will be great. Thanks.

Speaker 4

Yes. This is Lauren. I I would say if you take the 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 seeing we're capturing pretty good debt consumption at home. And obviously, during the quarter, there's been more mobility across the multiple markets in the U.

Speaker 4

S, obviously, question. 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.

Speaker 4

And the truth is that in Q4, Before, we've seen an improvement sequentially of our supply chain and some of our large brands, and I would name Gatorade, for example, Clearly, it has improved substantially in its 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. Matt, we're very pleased in general with The way the North America business is performing in beverages and in snacks as well and 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. We're very pleased. We're feeling comfortable as well for 2022.

Speaker 4

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 more empowered organization that makes more local decisions. And that's obviously reflected in the performance of the business.

Operator

Thank you. Our next question comes from Andrew Teixeira with JPMorgan.

Speaker 7

Question. 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.

Speaker 7

And as you go into 'twenty two, So 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 seeing the visibility of the gross margin curve Actually recovered by the end of the year and potentially being up year over year for the full year. Thank you.

Speaker 4

Yes, Jay, let me talk to you about the Gatorade and then Hugh can talk more about the enterprise. We We're very optimistic with this 4th drinks category, but we think a bit broadly than just hydration. We think about overall nutrition. And the way Gatorade is playing that space along with some other brands like Propel, Muscle Milk, Evolv and Some other assets that we have in that space. It is growing very fast.

Speaker 4

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. And the innovation that we've done this year and you will see more next year, Be it 0, be it ghetto light, be it some of the more science related with a sweat patch and how we can be much more customized For the consumer based on their hydration profile. So there's a lot of positive value that I think we can create in In higher parts of the category with Gatorade and some of the other brands. So we feel good about the demand momentum.

Speaker 4

On the supply, obviously, We have reacted to the situation and we've expanded capacity, both ourselves and some of our co packers and we're ready For what we think will be another year of successful growth for Gatorade and continue to build the brand in spaces that will be hard to match by competitors. So that's That's how we are approaching Gatorade and the full category next year.

Speaker 3

Yes. Andrea, how are you? I'll expand on the your question on the other side. Yes. Our assumptions on the guidance are based on the pricing that we have in the marketplace right now, and that Pricing is based on the visibility that we have into both the productivity and the cost structure and commodities, Which we have pretty good visibility into on the commodities about 8, 9 months of the year as you would expect based on some of the things I've communicated in the past.

Speaker 3

Q4 is still a bit open, but there are obviously pricing windows as we get into the Q4 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.

Operator

Thank you. Our next question comes from Brian Sling with Bank of America.

Speaker 8

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

Speaker 3

Both actually.

Speaker 8

Okay. Okay. Question. 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?

Speaker 8

I think part of the motivation to maybe pull back on repurchases At the beginning of 2021 was your CapEx is going to be elevated for a while and I know you're watching the leverage 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 CapEx outlook? Just trying to understand if we can how you're thinking about that.

Speaker 3

Yes. I mean, obviously, we made the decision not just based on what We see this year, but we see over the next couple of years. Number 1, we really have 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 bought us some room as well, and 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.

Speaker 3

As I mentioned last year, CapEx will be elevated for another year or 2. But frankly, I think that's well within The sort of overall envelope that we're working on and we got comfortable with going back to share repurchase and Obviously, it's one of the levers we use to help drive company performance and question.

Operator

Thank you. Our next question comes from Laurent Grandet with Guggenheim.

Speaker 9

Hey, good morning, Ramon and Hugh. Well, I do I'd like to focus this morning on the energy platform. So So it has been almost 2 years since the acquisition of Rockstar that unlocked the energy platform, an advantage PepsiCo has over your competitor That is committed because of its contract with Monster. So could you please update us on where you are seeing your where you're heading? Because the beginning has not been a bit more challenged than expected with the difficulty with bank management, question.

Speaker 9

Mutando Rice, name change and Rockstar taking a bit more time to stabilize. So at least a high growth, high profitability Segment of the business, it doesn't impact on PP and N the rest of the business. So could you please update us on what you're seeing and where you're heading? Thanks.

Speaker 4

Thank you, Laura. Good to talk to you. Listen, we're executing the playbook as we told you. We've been Quite consistent on the last few calls. And we're quite pleased with what we're seeing.

Speaker 4

Obviously, Rockstar, we always said it was the most complex transformation where we positioned the brand, we changed packaging. We're seeing growth in Rockstar, both in the areas where it's more developed, areas of the country where it's more developed and new areas obviously where The distribution system is making a difference. We're seeing especially very good performance in new innovation segments like now sugar And some more Hispanic focused innovation. So we're hopeful on Rockstar, and we're seeing Yes. The metrics that we set for ourselves are becoming reality.

Speaker 4

Then on Mountain Dew Energy, question. We have this legal situation, which we move very quickly, super agile actually. The teams did a great job turning that in 6 weeks. And 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 is we're ready to now invest, obviously, this year in building that platform under the Renew energy branding.

Speaker 4

And that's a pretty good position even though we had that legal situation. With bank, Which was the other part of the strategy. We after that initial hiccup, I think we're Actually, we're doing a pretty good job as a distributor of the brand, and the brand is more points of sale than it used to be, And we continue to focus on driving that performance during the length of the contract. And then but the other one that we're very pleased It's the Starbucks relationship. That is that JV relationship is better than ever, I would say.

Speaker 4

And both Double shot, triple shot is growing at a very high levels. And I don't know if you're aware, we just launched Bahia Energy, which is a Full natural energy brand, new brand to the system. It's the first time we launch it both in retail and in Starbucks outlets. Great product, good levels of caffeine coming from natural source. We're very optimistic on that platform.

Speaker 4

It's very incremental if you see the full portfolio of brands that we have on energy. So Via will be A positive addition incremental. So I think the machine is firing in a lot of cylinders. Question. As always, it is an area of focus.

Speaker 4

You need to test and learn question. And adjust and tweak your execution. I'm pleased with what I'm seeing. The other element that we don't talk so much about Rockstar is that this year is going to be in 70 international markets. And it was in 10 Market, we expanded in 'twenty one to I think it was 'twenty two, 'twenty three markets.

Speaker 4

Now next year this year 'twenty two, we'll be in 'seventy markets. So Clearly, another part of the growth story of Rockstar as we acquired the business. So we'll keep updating you question. In our regular calls, we're positive on how the full energy strategy is working.

Operator

Thank you. Our next question comes from Vivien Azer with Cowen.

Speaker 5

Hi, good morning. Thank you. I wanted to follow-up please on Jared's question on price elasticities. Hugh, I appreciated your comment that you guys are Multiple scenarios and clearly do have a lot of levers at your disposal. But I was hoping you could dive a little bit more please on Pepsi Beverages North America And specifically, how you think about cross category elasticities across your U.

Speaker 5

S. Beverage business? And as a quick follow-up to that, to the But the consumer's ability to absorb pricing were to diminish at all, like are there certain categories you'd be watching more closely as a leading indicator of that? Thank you.

Speaker 3

Yes, happy to go there a bit. And as I said, elasticities to mirror are Basically, a portfolio of risks that we try to manage rather than kind of zeroing in on a single number, right, in a portfolio as complex as this, it's It's hard to have that conversation. What I would tell you, Vivien, that we've seen over the last couple of years is 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, right, whether you're looking at 2 liters or 12 packs. And if you compare those prices to elsewhere in the world, The prices in this market are actually quite low.

Speaker 3

It's a tremendous value for consumers. So as we sort of move into A world of higher inflation, I do expect the category prices probably will go up. And at least to date, we haven't seen Much in the way of elasticity. As you might imagine, I can't point to any one. I think we sort of watch elasticities on everything, Both the value packages and the premium packages.

Speaker 3

And the good news is that our system is agile enough to react to it. But right now, the elasticities are in line with our expectations, and frankly, that's what gives us confidence in the guide for the year.

Operator

Thank you. Our next question comes from Kevin Grundy with Jefferies.

Speaker 8

Great. Thanks. Good morning, everyone. Thanks for the question. First, just a clarification on Lorentz line of questioning around energy.

Speaker 8

Ramon, can you just comment, you mentioned firing on all Cylinders and you're pleased with energy, would you rule out M and A? So if you could just comment on that, that'd be helpful. My broader strategic question is really on the business venture With Boston Beer, regarding Heart Mountain Dew. Can you just update us on how that partnership has progressed? And 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.

Speaker 8

So thanks for that.

Speaker 4

Yes, Kevin. Listen, on M and A, I think we have Sufficient brands, right, to play in that space. So we're not thinking about any M and A in the energy space at this point. Now with regards to alcohol, great question. And I think it's a very interesting development question.

Speaker 4

For the LRB category and for the alcohol category, so clearly consumers are choosing to converge in a way. And so we see that space as a Strategically, very incremental. It's sizable and it's profitable. So obviously, we would like to participate In a consistent and structural way for us. Obviously, we will play From the brand point of view and innovation, licensing our brands to be manufacturers That can help us with the manufacturing.

Speaker 4

We don't have the technologies to make some of these products, but we're creating strong partnerships. Question. You mentioned 1. And I think we have brands that can extend into those spaces. So that will be one way how we do it.

Speaker 4

On the other hand, I think there is a very interesting play for us to leverage some of our distribution assets To provide capital distribution and consistent execution across the country, and We're working on that solution. We have obviously some market tests undergoing and we will continue to Roll out those that potential distribution opportunity, I think it could be an advantage for us, if we do it well, and that's what we're Planning to do so. We see us participating from the consumer point of view and also from the infrastructure and execution and granularity of execution point of view as Those two areas could create value for PepsiCo long term.

Operator

Thank you. Our next question comes from Rob Ottenstein with Evercore.

Speaker 10

Question. Great. Thank you very much. We focus mostly on the U. S.

Speaker 10

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 And the offerings in Russia and South Africa, any thoughts along those lines in other geographies? Any things that is going on in the international side that we should be aware of in terms of strategic direction or Changes of how you're looking at the business. And then just a quick follow-up on the hedging and the commodities.

Speaker 10

I think it'd be helpful If to the extent you can, kind of talk about some of the key commodities and what percentage of your cost structure they represent. Thank you.

Speaker 4

Great. Robert, I'll talk about international a bit and then Hugh can talk about the commodities and we're quite limited on what we say about our Detail, P and L. On international, I've always said and continue to say, this is By the largest growth opportunity we have in PepsiCo, I think we're we have a strong market positions in snacks And pretty good in beverages in many markets, some others a bit more challenging positions, but we're working to strengthen those. I think we have the portfolio of brands and we have the portfolio of assets and the teams in place to continue to work on that opportunity. Last year, we grew double digit internationally pretty much across the board from Asia to Middle East, Africa, Europe Was very close to double digit full year, if I recall.

Speaker 4

And then Latin America beat double digits. So pretty good performance. And 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 question. Progress in the system, obviously, as we scale up those markets, profitability gets much better, and that's the model we're applying to we're trying to play. For next year, we see good signs.

Speaker 4

Obviously, the geopolitics in some parts of the world are complex. We hope that that will not materialize in anything that will impact our system. And we see inflation Going up everywhere, we have the brands and we have, again, the capabilities to price. That's what we're doing in majority of the market. We feel good about the elasticities as we discussed earlier, both developing market and emerging.

Speaker 4

I'm a bit more cautious on emerging markets. Question. I want to see a few more months to understand how the consumer is kind of Soaring all these high costs in multiple parts of their budget, household budgets, but we're feeling good about how consumers are Staying loyal to our brands in spite of some of our pricing decisions. So yes, that should cover international. Maybe the

Speaker 3

Yes. So in terms of commodities, just a couple of facts. Number 1, the overall commodity basket is about $16,000,000,000 $17,000,000,000 it's a super broad basket. There's not a single commodity that even accounts for 10% of the overall spend, so fairly diverse basket. But that said, clearly, Commodities are inflationary pretty well across the board and that's what we're dealing with.

Operator

Thank you. Our last question comes from Chris Carey with Wells Fargo.

Speaker 11

Question. Hey, good morning. Thanks so much. Just on that last line of questioning there on commodities, do you expect pricing to offset commodities just in context of your comments on full year margins. And then on North America, there was a comment in the prepared remarks just around Your expectations for PB and A margins to expand next year.

Speaker 11

I think the margin drivers of this business have obviously evolved with product Thanks. And pricing, and I wonder if you could just comment on how you see the drivers of that business go forward in the context of some evolution of the business. Thanks so much.

Speaker 3

Sure. In terms of commodities and the way we approach it from a pricing Perspective, obviously, we always try to do what we can in terms of productivity to manage an inflationary environment. But obviously, 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, we have the variable to consider of affordability and consumer reaction to it.

Speaker 3

And our history has been We'll initially price through 2 thirds to 3 quarters and then go back and get the rest of it later. That said, overall, as I I mentioned early 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. So that's kind of where I think we land on that. And In terms of PB and A, we do expect margins to continue to improve as we've talked about in the past. Drivers are generally the same ones that we've talked about.

Speaker 3

It's a combination of some pricing, some product mix as the energy Category is more successful for us. Some level of productivity is we get returns on the investments we've made in Capacity and digitalization and the like, and we continue to use global business services as a mechanism to drive G and A productivity as well. So It's a broad bucket of actions that over the course of several years, will get PB and A margins closer and closer to the company average.

Speaker 4

Question. Great. I think this is the last question. So, I just would like to say thank you for everyone that joined us today and For the confidence you've played in PepsiCo and in all of us with your investment, and we hope that you guys stay safe and healthy. So thank you very much.

Earnings Conference Call
PepsiCo Q4 2021
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