PepsiCo, Inc. (NASDAQ:PEP) Q4 2023 Earnings Call Transcript

PepsiCo, Inc. (NASDAQ:PEP) Q4 2023 Earnings Call Transcript February 9, 2024

PepsiCo, Inc. beats earnings expectations. Reported EPS is $1.78, expectations were $1.72. PepsiCo, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Ravi Pamnani: Thank you, operator. 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, guidance, and outlook. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, February 9, 2024, 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 fourth quarter 2023 earnings release and 2023 Form 10-K 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.

As a reminder, our reported fourth quarter and fiscal year 2022 financial results included one extra reporting week for our North America businesses. Our reported fourth quarter and fiscal year 2023 financial results in North America reflect the impacts associated with one less reporting week versus when compared to the prior year. 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. With that, operator, I’ll turn it over for the first question.

See also Top 12 Oil and Gas Stocks To Invest In According To Hedge Funds and 15 Countries with the Most Reserve Military Manpower in the World.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Bryan Spillane with Bank of America. Your line is open.

Bryan Spillane: Thanks, operator. Good morning, everybody. Jamie, I’m not sure who’s more surprised we’re seeing each other again, me or you, but welcome back.

Jamie Caulfield: It’s great to talk to you again, Brian.

Bryan Spillane: So I have a question, I guess, just in, we fielded a few questions today about the organic sales growth guidance for the year, and maybe if you can help dimensionalize, you know, not just the reduction, but how much is recall things that are sort of external, how much are things that are under your control? And maybe you can think about, as we think the balance of that, just how much of improvement are you expecting maybe in North America versus international? Just trying to understand the moving parts of how we get the organic sales guide from here?

Ramon Laguarta: Great. Good morning, Bryan. This is Ramon. Listen, let me step back for a minute and talk about the last few years and then how next year fits into that. So the last few years we’ve seen a double-digit growth, top line in the business consistently. So I think it’s at 11 CAGR and a 14% or double-digit EPS growth consistently as well. So three very good years. Now we see a — in ‘24 we see a normalization of the categories, a normalization of the cost, normalization of inflation. So we see everything trending back to our long-term algorithm. Now, we guide it to upper end of the — both top line and bottom line at the previous earnings call. We maintain the top line at the upper end for the EPS and we move back to at least four for the top line and there’s a few factors that I think are material.

One, is the Quaker recall. We had a food safety incident in our Quaker supply chain in the U.S., which has impacted us in November, December, and it will continue to impact us, I think for the — at least for the first-half of the year until we recover our supply chain to normality. We’re also seeing some geopolitical events around the world that are impacting some of our markets, which might potentially continue in the first-half of next year. And then the third element is we’re seeing a bit of a slowdown in the U.S. both the food category and the beverage category in the Q4. Part of that is slowdown due to pricing and disposable income situation. Part of that is also pivoting between in-home consumption and away-from-home consumption that we’re seeing in our business in the U.S. We think that, that might continue in next year, so that’s why we’re lowering our guidance.

We feel good about the consumer in ‘24 in the U.S. We feel good in the sense of very low unemployment, we feel good about the fact that we think wages will go higher than inflation next year. And we hope that by the summer interest rates will go down and that will create another source of oxygen for this possible incoming household. So we feel good about the consumer in the U.S., but if you think about those three elements, we decided to have at least four as the guidance for the top line.

Operator: Thank you. [Operator Instructions] Our next question comes from Lauren Lieberman with Barclays. Your line is open.

Lauren Lieberman: Great, thanks. Good morning. Just kind of continuing on that thread perhaps a little bit focusing more on Frito. So, track channel data hasn’t looked great, you know, the reported volume decline, you know, sort of bigger than what we’ve seen in some times of this business. But when I look at a multi-year stack, you know, things look kind of steadier sequentially when I look at the second-half. So just curious how much it may be these near-term results on Frito and looking into the beginning of the year is multi-year comps? Is it the consumer backdrop, the impact of pricing? But just thinking a little bit about your expectations for and plans, I guess, for driving greater units — unit versus volume growth in ‘24. We’re thinking about those two pieces.

Ramon Laguarta: Great, Lauren. I think it’s a great question. Just to summarize, we’re seeing the Frito business going back to profitable volume growth in ‘24. So that’s how we’re thinking about the business. If you think about the slowdown in Q4 and you link it to the elements that I was referring to, there is a units versus volume dynamic in the Frito business that is quite relevant. As you see consumption moving from in-home to away-from-home, the portion size is meaningfully different. So we’re seeing growth in convenience stores, we’re seeing growth in away-from-home in, you know, like 2 times to 3 times the retail growth, but obviously has an implication on volume. As we look at the ‘24, we have a very strong commercial plan for Frito.

We have our core brands very well invested. You saw that in ‘23 we increased our A&M meaningfully. We’re planning to do that as well in ‘24. So Lays has a big increase in A&M. Doritos has a big increase in A&M. All our permissible portfolio which — if you think about a combination of SunChips, PopCorners, the whole Simply Line, Smart Foods, that part of the portfolio is growing almost 3 times the average of Frito. So we’re putting a lot of emphasis on that particular part of the portfolio to make sure that it has — is well executed in the store and now the supply chain is back to 100%, we’re going to push that part of the portfolio even more aggressively. So we think that Frito will have a continuation of the share of market gains that it’s been having for the last couple of years and we expect the category will rebound as well.

Part of that because of what we’ll do with our brands, which obviously have a lot of weight in the overall category, but also the fact that we think consumers will continue to feel better throughout the year, and that will recover the fleet of a topline with a more balanced, profitable volume growth and pricing versus what we’ve seen this year.

Operator: Thank you. [Operator Instructions] The next question comes from Bonnie Herzog with Goldman Sachs. Your line is open.

Bonnie Herzog: All right, thanks, [Technical Difficulty]. I guess I had a question on PBNA profitability. I believe you still have a goal to reach the mid-teen operating margin levels, but so far we really haven’t seen much progress. So Ramon, I guess hoping you could touch on your plans to achieve this? And then maybe whether you’re considering making bigger structural changes to your business as possible refranchising of your bottoming network. I know you’ve mentioned in the past that you do see some advantages with broadly owning your network, but just curious to hear if your thoughts on this have changed and I guess if not, what other initiatives do you plan to implement to improve profitability at PBNA? Thanks.

Ramon Laguarta: Yes. So, yes, listen, I would say we don’t contemplate at this point any of the structural changes to our business. We continue to think that operating the business has advantages for us in terms of speed of execution and some other elements that as we see where the business is growing in e-commerce, away-from-home and some other channels of the future including direct-to-consumer. Within that, that’s going to create an advantage for us. Now we’ve been making progress at a good pace in our margin improvement. If you think about the last three years, the net revenue for PBNA has grown over $5 billion, and the operating profit has grown a billion dollars. Core operating margin has expanded more than 150 bps. So we see the last few years a good improvement in the PBNA business.

We think this will continue in the coming years, actually ‘24, that’s the first step. We are optimizing the portfolio. We’re eliminating parts of the portfolio that were less profitable. We’ve referred to bottled water. We’ve referred to some multi-serve parts of the portfolio that were not that profitable. We continue to optimize our efficiency of our supply chain. We’re digitalizing our supply chain. We continue to extract, you know, eliminate waste from that. We continue to work on global business services that reduces the G&A. We’re also optimizing A&M, trying to get to higher ROI on A&M and our trade investments. So we continue to think that optimizing all those elements in the different parts of the P&L will continue to drive a sustainable margin improvement, whilst we remain very competitive in the marketplace.

And that’s the balance that we’re trying to strike with this business. So far we feel good. The business grew with the rest of the category. If you take everything that is in our system, grew in line with the category and we increased the operating margin. So that’s how we’re thinking at this point about the PBNA business and with a long-term perspective obviously in how we will achieve those two elements of growing with the category and increasing the margins.

Operator: Thank you. [Operator Instructions] Our next question comes from [Indiscernible] with Jefferies. Your line is open.

Unidentified Analyst: Hey, everybody. Good morning. Welcome back, Jamie. Well, I suppose you’ve gone nowhere, but welcome back to dealing with us, I guess. Can you maybe talk a bit more about international, particularly margins are picking up above the average now, it’s scaling quite nicely, but also if there’s anything we need to be aware of as it relates to hyperinflation, Argentina, anything like that?