PepsiCo, Inc. (NASDAQ:PEP) Q1 2023 Earnings Call Transcript

PepsiCo, Inc. (NASDAQ:PEP) Q1 2023 Earnings Call Transcript April 25, 2023

PepsiCo, Inc. beats earnings expectations. Reported EPS is $1.5, expectations were $1.39.

Operator: Good morning, and welcome to PepsiCo’s 2023 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. Pamnani, you may begin.

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Ravi Pamnani: 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 exclude 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.

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Q&A Session

Operator: . Our first question comes from Dara Mohsenian with Morgan Stanley.

Dara Mohsenian: So very impressive price mix result 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 of that back to more normalized levels going forward the next few quarters and the ability of volume to recover as that pricing dissipates on a year-over-year basis?

Ramon Laguarta: Yes. Thank you, Dara. Let me 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, investing in our brands, investing obviously in value in different ways, pricing, sizing in mostly. So we’re seeing a good positive competitive environment in the U.S., 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 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 we might have to take additional pricing. If you think about Argentina, Turkey, Egypt though those kind of markets where the currencies are suffering, but the majority of our pricing is already done.

Hugh Johnston: Yes. And the only thing I’d add to that, Dara, as a reminder, you know we tend to buy commodities 9 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: Our next question comes from Andrea Teixeira with JPMorgan.

Andrea Teixeira: I wanted to go back to a little bit of what you spoke in the prepared remarks that you were — and you also on an earlier interview Hugh that you gave, that you’re not seeing the fact that inflation is still high throughout the 6 to 9 months that you’re seeing here. And it doesn’t look like you’re seeing the need for promotional environment, but more in the context of what has happened in LatAm, I think it’s the only region that you haven’t seen a reacceleration and every other region, you’ve seen an acceleration. And I’m seeing — I’m talking — I’m asking this question more of the 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 parse it out or it’s more about the comparison getting tougher?

Hugh Johnston: Yes, Andrea. 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 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 be automation in the supply chain or digitalization across the company, we’re 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: Our next question comes from Kevin Grundy with Jefferies.

Kevin Grundy: Great. 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 I — just some context here. Was it that the first quarter was that good relative to your expectations, just came in that much better? Because 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.

Ramon Laguarta: Yes, Kevin. 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 the — in general, the flow of materials, the availability of labor, transportation, all those elements that were making us a suboptimal company if you just to call it somehow in terms of operating metrics, that’s 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 an improvement in productivity on the cost side and better elasticity. I think the commercial programs were strong. You saw that we’ve increased A&M again in the first quarter.

And I think the commercial plan, the innovation plans are very strong. So we feel comfortable that even — and we always play out a lot of scenarios before we give a — give you guys a guidance. We feel comfortable that even at this early point in the year, we can raise our top line and bottom line estimates.

Operator: Our next question comes from Bonnie Herzog with Goldman Sachs.

Bonnie Herzog: 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 pressure. And then maybe what you’re seeing from the consumer. Also, it seems that incremental pricing may be a bit harder to come by and promotional 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 Pepsi rebranding or the new logo and visual identity for the brand, one of those key initiatives, for instance?

Ramon Laguarta: 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’s some one-off in the first quarter because we’re — as you know, we’re moving Gatorade from a warehouse system to a DSD system and in that transition, there is some inventory reduction overall in the system that is impacting Q1. But we don’t think that the competitive environment in beverages in the U.S. 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’re planning to continue to compete vigorously in the market.

Operator: Our next question comes from Lauren Lieberman with Barclays.

Lauren Lieberman: Great. So you’ve 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?

Ramon Laguarta: Yes, Lauren, it’s mostly related to the fact that we’re already 1/3 of the year is passed, and we have better information on our costs and everything else that complex operating. There are a few things we’re still concerned about. One is where is the consumer going to be in second half of the year. We continue to be — have multiple scenarios. And some of the scenarios are more optimistic, some best, 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 are 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’re seeing better labor availability, better flow of materials, suppliers are obviously getting better as well. Transportation is getting better. So operationally, the business is in a better place than it was in 2022.

Operator: Next question comes from Bryan Spillane with Bank of America.

Bryan Spillane: 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 don’t know, if there is something else going on with accounts payables that just is driving such a meaningful change?

Hugh Johnston: Yes. Bryan, it’s really two things. One is a 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 change in trend by any stretch of the imagination. It’s just a one-off when the quarter ended.

Operator: Our next question comes from Chris Carey with Wells Fargo.