PepsiCo Q1 2024 Earnings Call Transcript

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April 23, 2024

There are 17 speakers on the call.

Operator

Good morning, and welcome to PepsiCo's 20 24 First Quarter Earnings Question and Answer Session. 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.

Operator

Pamnani, 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 and 2024 guidance. Forward looking statements inherently involve risks and uncertainties and only reflect our view as of today, April 23, 2024, 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 Q1 2024 earnings release and Q1 2024 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 Executive Vice President and CFO, Jamie Caulfield. 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.

Operator

Thank you. Our first question comes from Darrin Moshini with Morgan Stanley. Your line is open.

Speaker 2

Hey, guys. Good morning. Good morning.

Speaker 3

Good morning, there.

Speaker 2

So really strong international profit results for the Q3 in a row here. Can you just take a step back, Ramon, and maybe give us some perspective on that international performance over the last few quarters? And A, just looking forward short term, how confident are you in the sustainability of that in the balance of the year? But B, also just long term as you think about international development over the last few quarters, give us some perspective looking out over the next few years, both from a top line perspective and then the margin flow through? Thanks.

Speaker 3

Great. Thank you, Darren. And

Speaker 4

yes, we're very pleased

Speaker 3

with the performance of international businesses in Q1 as but also in the last few quarters, as you mentioned. And this has been an area of investment for us now for a few years, both in snacks and in beverages and trying to build scale businesses in most of the markets where the scale in terms of population and profitable growth. So I feel very good about our ability to continue to outperform our categories in international and to keep our categories growing, both food and beverages in the future. Our innovation is strong. Our ability to understand local rituals and local food and beverage occasions is better than ever.

Speaker 3

We are adapting our portfolio to that. Our ability to attract the best talent in the markets where we participate and build really capable teams is better than ever. We've been investing in capacity. We're right now, we're in the process of opening factories in Vietnam and in China and in India and in Mexico and in we just opened one in Poland. So we keep expanding our manufacturing and our go to market capabilities in those markets.

Speaker 3

So we feel good, and I think that it was going to continue to be a big source of growth for us. As we mentioned in CAGNY, I think our international business is already $36,000,000,000 and it's growing at a very high single digit level and with very good profitability. So it is part of the future growth story for PepsiCo for sure.

Operator

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

Speaker 5

All right. Thank you. Good morning, everyone. Good morning. I had a question on Frito Lay op margins, which were a little soft in the quarter.

Speaker 5

So hoping you could talk through some of the key puts and takes on your margins in the quarter and then moving forward. And then is it realistic to assume Frito Lay's op margins will expand in 2024? And I'm thinking about that in the context of the commodity cost pressures easing a bit or how do we think about your level of reinvestment as these cost savings maybe or in an effort to drive faster top line growth? And then ultimately curious to hear if Frito Lay margins can ultimately return to the low 30% range? And if so, by when?

Speaker 5

How do we think about that? Thank you.

Speaker 6

Hey, Bonnie, it's Jamie. How are you? Yes, on Frito, when you look at the Q1 profit, the thing to keep in mind is last year, we're lapping 24% growth in the Q1 of last year. I think we had 180 basis points of margin improvement last year. And we don't want to push the P and L that hard.

Speaker 6

The growth last year, growth this year, part of that has to do with investment timing, the flow of productivity. But I think you'll see margin improvement over time at Frito, but this is a business that has very healthy margins already and we want to make sure that we're investing back in the business to sustain growth.

Speaker 3

Yes, Bonnie, I think the on top of what Jamie said for the long term, the key goal for Frito in the U. S. Is to continue to grow the salty savory category at very high rate and continue to get occasions from other parts of micro snacks into the savory and from meals into savory and continue to gain share of that category as it has been doing and including Q1. So that's the ultimate goal because that if you think about the high margin that we have in that business and the impact it would have in the overall PepsiCo margins, that's the role that Frito Lay has in the portfolio.

Operator

Thank you. One moment for our next question. Our next question comes from Brian Spillane with BofA. Your line is open.

Speaker 6

Thanks, operator. Good morning, everybody. Ramon, I guess, a question on PB and A and specifically on Gatorade and Mountain Dew. The volumes are still weak, Gatorade noticeably weak in the quarter. And so can you just talk about, 1, how much in the quarter might have been affected by the weather?

Speaker 6

And then second, I guess, as we're thinking about volume recovery for the whole for the enterprise at PB and A, just what's on tap for both Mountain Dew and Gatorade to stabilize the volume trend?

Speaker 3

That's good, Brian. Listen, actually, we feel good about those two brands. Those two brands actually gained share in Q1. So Mountain Dew and Gatorade in their own category. So that's a meaningful performance good performance, I would say.

Speaker 3

Now Gatorade, as you mentioned, a little bit of weather impact. So we're not concerned about Gatorade this year as the weather improves. I think we have the right investments, the right commercial programs. Our G2DSD was impactful to us last year operationally. I think we've learned a lot on how to deal with a very high seasonality product and category and give the better service to our customers and maintain the product in stock and available.

Speaker 3

So we feel good about we have the platform to take, Gatorade to higher market share in a faster growing category. Now with regards to Dew, the launch of Baja Blast has been very good to the brand. We launched it as a permanent additional flavor to the portfolio early in the year. It's been obviously successful. We knew it was a successful LTO and therefore it's a successful permanent product.

Speaker 3

And it's been bringing incremental consumers to the brand and help us gain share now. Obviously, we will keep investing in the portfolio and the brand, and we have strong programs for the summer. Hopefully, that will deliver as we expect, and we'll continue to build Mountain Dew in the category. So feeling good about those 2 brands.

Operator

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

Speaker 7

Great. Thanks. Good morning. In the prepared remarks, I noticed in the discussion of PB and A and plans to improve profitability there, there were 2 new bullets. The first two talking about deemphasizing certain product and package combinations and the second around revenue management and increasingly precise consumer value proposition.

Speaker 7

So I was curious if you could just I know there's new management for that business as well. So would love to get a little bit more color maybe around those two points, if that would be helpful. Thanks.

Speaker 3

Yes. Lauren, I think the I don't know, maybe we have put a bit more detail, but the intentionality was always there. And I mentioned last time on the last couple of calls that we're making choices in PB and A in terms of making sure that we deliver profitable growth and we'll continue to make those choices, emphasizing the parts of the portfolio where there is a better return on the investments for us and eliminating those parts of the portfolio where the margins are not that attractive and they're going to get probably not that better over time. So we've been referring to categories like backwater or some of the less profitable take home formats where we will be making choices. We feel good about both the productivity at PB and A and the margin expansion of PB and A.

Speaker 3

And we feel that, that will continue based on the ideas that we have and the organizational focus that the team has been putting under the new management, but also the old management in PB and A. There's much more focus on becoming a better operating machine in the supply chain and sales and expanding the margin. So we feel good about PB and A margin expansion and profitable growth delivery this year.

Operator

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

Speaker 8

Hi, good morning. Thank you. So Ramon, if you can please comment on the overall consumption and in particular for snacks and how consumer behavior evolved in the context of your comments about normalization? And then a clarification for Jamie on the margin outlook. On the prepared remarks, you mentioned environment, but that has recently changed, in particular for oil and looking at your DSD, hoping to get some clarification on the diesel impact or this is going to be more further down and perhaps not even impacting 2020 4?

Speaker 8

Thank you.

Speaker 3

Yes. So listen, Andrea, hi. I would say that the consumer globally, we think it's very resilient and we see it in as you saw from our international business performance and it's basically supported by 2 facts, very low unemployment or quite low unemployment globally and wages growing at a good pace in majority of the countries where we participate. So those two things make us feel quite good about the consumer. Now when you double click, there is probably 2 areas that were that probably surface.

Speaker 3

1 is Chinese consumers. I think Chinese consumers are being very cautious and we're seeing the savings rate really going very high in China. Our category is still resilient in China, but especially we're delivering growth through share of market gains in China. So that's a good performance by the team, but an area of watch out for us. The other DoubleClick is in the, I would say, the lower income consumer in the U.

Speaker 3

S. The lower income consumer in the U. S. Is stretched, is making a lot of is strategizing a lot to make their budgets get to the end of the month. And that's a consumer that is choosing what to buy, where to buy and making a lot of choices.

Speaker 3

That's a consumer that we're emphasizing in our commercial programs. I think we're learning how best to keep that consumer in our categories and the frequency that we want that consumer. And we are pivoting our commercial plans, our innovation, giving that consumer the right innovation, the right value in different parts of the month through different channels, digital and physical, making sure that ROIs on the investments are the best ROIs. So those 2 are the consumers that I would say we're paying more attention in terms of specific commercial programs. But I would say the consumer is very resilient everywhere else.

Speaker 3

And our teams, I think, are pivoting to maintain our brands top of mind, in their baskets, at the frequency that we want and continue to gain market share. So it just applies to beverages and to snacks. Your question was more on snacks, but I think it applies to both categories. So now Jamie Yes.

Speaker 6

Andre, on commodities, really no change in the outlook. A couple of points I just want to emphasize. One is the diversity of the inputs in the basket. So no single commodity accounts for more than 10% of the total. So that diversification kind of smooths things out.

Speaker 6

And the other point I'd make is we do tend to forward buy and hedge so that we've got good visibility for the year that helps us with planning the business overall. And so outlook Q2 through Q4 still relatively benign inflation and not a lot of volatility in the rate of inflation quarter to quarter.

Operator

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

Speaker 9

Thanks, operator, and good morning, everyone. So I was hoping to get an update on the Celsius agreement and kind of just your broader energy drink strategy at this point. In the release, you spoke positively about the partnership, but I think there were some changes to the incentive structure a few weeks back. So maybe first, just any thoughts on how the brand is performing as part of your Energy Drink portfolio? And then just like anything you can share in terms of what changed with the agreement, but maybe specifically, how does it really help Pepsi?

Speaker 9

And maybe what benefit does it provide for Celsius if anything? Thanks.

Speaker 4

Yes. Thank you, Peter.

Speaker 3

I will not talk too much about the agreement other than saying that it's a good alignment of the long term interest of both companies and it's great for PepsiCo shareholders. The partnership with Celsius is strong and it's helping us to gain scale in our go to market, specifically in some channels where we need volume to justify some of the economics of the coal. So that role continues. We're pleased with the partnership. Energy is a fast growing category, profitable that is great for our portfolio.

Speaker 3

So that's what I would say. We remain pleased with the partnership and we'll continue to build the partnership going forward.

Operator

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

Speaker 10

Hey, good morning, everyone. So I wanted to go back to Frito, but on the top line trends. Clearly, you guys were circling the toughest comp of the year in Frito Lay. You mentioned you expect some sequential improvement. So maybe you could talk about the volume trajectory, particularly for the business.

Speaker 10

And Ramon, you spoke in the past about the cycling of this shift towards smaller pack sizes. So maybe you can give us an update on that. And also any potential impact from cycling reduction in SNAP benefits from last year? Thank you.

Speaker 3

Yes, I would say the Frito Lay continues to outperform the category. And as I said earlier, the big opportunity for Frito Lay is continue to create occasions for our savory category, bringing them from broader micro snacks or as snacks and meals overlap, how do we bring more category stores, more occasion stores snacking. So those are the 2 big strategic objectives of Frito Lay. And all our innovation and pricing and channel mix and everything else is against that large objective and do it faster than others so that we continue to gain shares. So as we look at the business performance, as you said, this is the toughest lap.

Speaker 3

I think last year we grew 16% in Q1 and that lap is still high in Q2, but then it gets much better in half too. So we should expect a gradual sequential improvement of our volume for Frito Lay, especially in the second half of the year. And we'll continue to be the guardians of the savory category, make sure it's valued appropriately and it generates growth for our customers ahead of what food generates for our customers. And we continue to capture a disproportionate share of that very fast growing and profitable business.

Operator

Thank you. One moment for our next question. Our next question comes from Camilo Gajawala with Jefferies. Your line is open.

Speaker 11

Thanks. Good morning, everyone. Just you mentioned multiple times on gaining share within the category. Could you just give us some in multiple regions, can you just give us some context on what the categories are growing or at least what maybe what they're expected to grow as you think about the next year or

Speaker 3

so? Yes, I mean, like what I said is that our goal is always for our categories to grow faster than overall food and beverages. I think that makes us a very attractive partner with our retail partners and we deliver growth for them and our categories are profitable. So it's a good combination of growth and profitability for our customers. So that's what we're trying to do.

Speaker 3

I think our categories will continue to grow faster than food and beverages in the majority of the countries around the world, given the trends on urbanization and the secular trends that we've been talking about both for convenient foods and beverages. So we feel good about that in our commercial programs, innovation and investments are in to deliver that for our partners. Obviously, there's countries around the world where we do better, others where we do less well. And our goal is to keep emphasizing the ones we do better and improve the ones that we don't do so well. And that's how we're managing the company.

Operator

Thank you. One moment for our next question. Our next question comes from Robert Muska with TD Cowen. Your line is open.

Speaker 12

Hi. Thanks for the question. The 4% pricemix benefit in Frito Lay North America is pretty impressive in a food industry where there's just not a lot of pricing left. And I imagine a lot of it is from price pack architecture or maybe even consumers shifting to different pack sizes. Can you help delineate a little bit more like what's which of those is driving it more than the other or if it's about the same?

Speaker 12

And how do you expect it to evolve for the rest of the year? Do you expect it to be pretty constant?

Speaker 6

Robert, it's Jamie. And it's a majority is price, but there's an element of mix in there. I'd put it at probably 2 thirds price and 1 third mix. And yes, if comment earlier on our inflationary trends, we expect them to be fairly moderate for the balance of the year, fairly smooth through the balance of the year. So I wouldn't expect a lot of volatility in that volume revenue relationship.

Operator

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

Speaker 13

Great. Thank you very much. 2 kind of follow ups, if I may. Can you please talk about, the spring shelf sets? Is it pretty much done?

Speaker 13

And your how do you feel good about what you're seeing both on the Frito Lay side and on the beverage side? And I understand on the beverage side, you're discontinuing some SKUs. So are you gaining shelf space where you want to? And then just a follow-up to an earlier question on Celsius. Maybe, if you give us an idea of how your energy drink strategy overall is evolving and what's going on with Rockstar, Starbucks, Mountain Dew in terms of the overall energy drink strategy?

Speaker 13

Thank you.

Speaker 3

Yes. Listen, I'll step back a little bit. I would say our customer negotiation have been good and completed all over the world and especially Europe took a bit longer, but very positive impact to our overall, I would say, European business and other parts of the world are less impacted by these type of negotiations are good. We feel good, including the U. S.

Speaker 3

To your specific question on space gains, I think it's going to be a good reset time for us across snacks and beverages. It's not completed yet. It's in its way normally, I would say, probably another 6 weeks or so. We're feeling good about where we've seen already resets the performance improvement in the business. So that's good, well done by the commercial teams.

Speaker 3

So yes, we feel good overall, and that's why we are reaffirming our guidance to grow at least over 4% in our net revenue for this year.

Operator

Thank you. One moment for our next question. Our next question comes from Chris Carey with Wells Fargo Securities.

Speaker 4

Hi, everyone. So one question on APAC division. Ramon, I think you were a bit more cautious or balanced on the Chinese consumer and yet double digit growth in the quarter in China. I just wonder how APAC came in relative to your own expectations and whether there's any timing dynamic here or whether you see these results as perhaps a bit more durable going forward? And if I could just sneak in from the at home versus away from home consumption globally, as you see some of the weaker trends from the lower income consumer?

Speaker 4

Are you seeing any acceleration in that shift, which might be helping your business on a global basis as well? Thanks.

Speaker 3

Two things. Thanks. Good questions. I think the APAC performance is a little bit impacted by the timing of Chinese New Year. So there is a bit of benefit in our Q1 numbers versus Q2.

Speaker 3

It was a bit earlier this year. But the reality is that the APAC region is improving, I would say, outside of China. China still, as I mentioned earlier, I think the consumer is cautious and the consumer is saving a lot and it might not impact so much the low price, let's say, products as ours. It might probably impact some other categories a bit harder than ours. The truth is that in China, as I said earlier, our team is not only this year, but already consistently for the last 4 or 5 years been gaining share and creating a very capable and profitable business in China we're very proud of.

Speaker 3

Now to your other question on away from home, in home, we're seeing mobility obviously going back pre pandemic times and I think we all forgot COVID anymore. And we're seeing obviously that impacting the consumption of food between home and away from home, especially in the U. S, I would say it's probably the country that is having more impact. So yes, away from home is growing faster than in home for us and or pivoting resources to away from home, both in our food business and our beverage business, and we're trying to capture as much as possible that consumption that is moving to away from home. Internationally as well, I would say that is a huge wide space for growth for our business, both in trying to improve the availability of our current products and also creating new solutions that are more targeting meals and meal replacement as consumers buy more food away from home.

Speaker 3

And I think our brands belong in some of those occasions. And as I mentioned at CAGNY, we're building both innovation and business models that can help us capture this meal location away from home with some of our large brands like Lay's, Doritos, Tostitos, some of our well known global brands.

Operator

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

Speaker 9

Hey, thanks and good morning.

Speaker 14

Ramon, maybe it ties to the pressures you mentioned earlier on the lower income consumers in the U. S. Or maybe even your comments just now on at home versus away from home. But if I think back over the last 6 plus months, we've seen arguably unexpected slowing across many categories, but really many immediate consumption categories where I think it was most unexpected across savory snacks, sweet snacks, arguably a number of beverage categories as well. Do you agree with that kind of unexpected slowing comment?

Speaker 14

And if so, how do you see the drivers? How do you stack up the drivers? Where do you think we are in that cycle? And how does that factor into your expectations on momentum recovery across your North American Beverages sorry, North American businesses? I think the easing comps are obvious.

Speaker 14

I'm just I'm curious about sort of the your expectations on demand itself sequentially improving.

Speaker 3

That's great. Now listen, it's a great question and I think we need to step back and look at the bigger numbers. Obviously, there was huge inflation in our categories driven by input inflation over the last couple of years and operating cost inflation. Now what makes us feel optimistic is a couple of data. Number 1, I think wages are growing above inflation and we see that not only in the U.

Speaker 3

S. But across the world. And we see our consumer packaged food inflation below, I would say, total CPI. So those two numbers make us feel comfortable that consumers will start coming back to our categories at the frequency and with the same level of or higher frequency than in the past. So those are 2 big numbers.

Speaker 3

Obviously, each one of us with our commercial programs, our innovation, our channel strategies is trying to accelerate that pivot bag. But we feel good about the price volume mix that we see in our business and that how we think that we will continue to sequentially improve over the balance of the year and to further years. Our North Star remains the same is to make sure that as I said earlier, we have innovation and consumer products and channel programs that continue to drive savory snacks ahead of micro snacks, ahead of food and the same with LRB ahead of overall liquid consumption and ahead of food and beverages. So that drives value for our business and that drives value for our customers in the and that's how we think about driving the company long term.

Operator

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

Speaker 3

Thank you. Good morning.

Speaker 15

A question on the international business. On these calls over the years, PepsiCo has spoken about managing international profit delivery to provide affordability to consumers and support recruitment. And if we look at margins in the international business, they're up versus pre COVID levels. So can you help us understand beyond the headline financial results that we can see, I guess, evidence of what you look at to ensure you're providing proper levels of affordability for category development to support the very long term for that business? Thanks.

Speaker 3

Yes. And we're always very conscious of the relative value of our products versus other potential substitute products in the categories that we participate. So if you think about Snacks, the big opportunities to transform and packaged snacks into packaged snacks or other micro snacks into savory snacks. And we always look at that value ratio in every market, in every geography for different types of consumers. Now the same with beverages, right?

Speaker 3

Moving from noncommercial beverages to commercial beverages, that is always the opportunity for us as an industry. We look at that very carefully. Now why are our margins expanding internationally? Because as we gain scale and obviously that we our fixed cost leverage is much better. And that's how we're getting to more profitable businesses in international markets, especially the large markets, whilst we keep affordability at the center of our strategy because that's long term, including other things that we do obviously with availability and with innovation, we make our categories continue to grow at a very fast pace.

Speaker 3

But as you mentioned, affordability and relative value of our category is a key KPI that we measure all the time in every market because it's the key source of continuous growth for our categories.

Operator

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

Speaker 16

Great. Thanks very much. Question on Europe. Another really strong quarter here like the 7th consecutive quarter at double digit. Revenue growth looks like it accelerated on an underlying 2 year basis.

Speaker 16

So maybe if you could provide some color on the driver markets, ones that maybe came in better than your expectations? And then how you would compare how developed markets in Europe are performing relative to what we're seeing in the U. S? Thanks.

Speaker 3

Yes. Thank you and good observation. I think our team in Europe is doing a fantastic work. It started with strong productivity, simplifying the business and driving cost control, eliminating duplication and then reinvesting that money back into our brands and becoming more competitive and also driving our availability and driving our brand preference. And that is a flywheel that is working for us across both developing and developed markets in Europe.

Speaker 3

Obviously, developing markets a bit more. So if you think about kind of Eastern Europe markets are growing a little bit faster than Western Europe markets. Western Europe markets have been impacted a little bit in this Q1 by some of the negotiations and that's not a typical in Europe. But I think we have a good flywheel in Europe. And Europe will be expanding its portfolio along the lines of what the U.

Speaker 3

S. Has been doing, which will give us additional consumers and additional penetration in households across developed and developing markets. So we feel good about the flywheel in Europe. But at the center of that is a very strong productivity, cost discipline and reinvestment strategy that is in a way what we're trying to do across the full company, elevating our productivity and driving their investments both into affordability, availability, better brand equity and then reinvesting back into our future digitalization and sustainability at the center of that reinvestment. So it's a flywheel that we're trying to do for all the world.

Speaker 3

Clearly, Europe is doing a good job at implementing it.

Operator

Thank you. Ladies and gentlemen, this does conclude the question and answer session. I would like to turn the call back to Ramon Laguarta for any closing remarks.

Speaker 3

Yes. Thank you, everyone, for joining us this morning and for the confidence that you've placed in us and in our stock. And we hope that you all stay healthy and safe. Thank you.

Operator

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

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Earnings Conference Call
PepsiCo Q1 2024
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