PepsiCo, Inc. (NASDAQ:PEP) Q3 2023 Earnings Call Transcript

PepsiCo, Inc. (NASDAQ:PEP) Q3 2023 Earnings Call Transcript October 10, 2023

PepsiCo, Inc. beats earnings expectations. Reported EPS is $2.25, expectations were $2.17.

Operator: Good 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. 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, October 10th, 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 third quarter 2023 earnings release and third quarter 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 question.

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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, everyone.

Ramon Laguarta: Good morning, Bryan.

Bryan Spillane: 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 PBNA 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?

Ramon Laguarta: Yeah, good morning, Bryan. Let me step back beyond PBNA to the broader company. We’re seeing sequential volume improvement, if you take the last few quarters. So globally, we’re improving our volume. But more philosophically how we’re thinking about how we’re managing the company. There’s two big variables that we’re trying to optimize. One 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 two variables that we’re maximizing. In both cases, units are growing much faster than volume. And we’re seeing that — you mentioned consumers moving to 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 volume and margin. When it comes to PBNA, 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’re able to prune some promotions that were not profitable for the business, and that has almost 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 metrics that we’re trying to maximize as we’re making these trade-offs between volume you know 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.

Lauren Lieberman: Great. Thanks. Good morning. Carrying on Bryan’s question, but taking it a little bit further out into 2024, and it was great to get kind of some preliminary perspective on next year, so early. But I was also curious how you’re thinking about that balancing 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.

Ramon Laguarta: Yes, Lauren, we’ll give you more details, obviously, in February when it comes to the actual composition of some of our key metrics. But 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 business. 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 ’24 will have a bit more elevated price mix in the equation than in the previous years.

Hugh Johnston: 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 out.

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

Andrea Teixeira: Thank you. Good morning. So going back to your comments about volumes in PBNA. Was that specific to the quarter or should we still see about this 2.5% headwind to volumes you quoted and potentially into the first half of 2024? And if you can also comment on the volumes in Latin America, so how we should be thinking towards the end of the year and potentially into 2024? Thank you.

Ramon Laguarta: Yes, Andrea. So with regards to PBNA, we 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 the balance of the year, we feel very good about the margin expansion in PBNA. Now when it comes to LatAm, there is mostly our snack business, 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, making sure that we’re still very affordable. And that has a repercussion on — has an impact on the actual volume. But again, the transactions are much healthier. And that’s a metric that we used 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, Andrea, 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 Mohsenian with Morgan Stanley. Your line is open.

Dara Mohsenian: Hey, guys. Good morning. Could you just discuss the motivation behind the decision to provide guidance for 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? Thanks.

Hugh Johnston : Hi, Dara. I can answer that one. I think in general, as we build the plans, we’re focused on a couple of things. Number one is obviously the level of commodity inflation, and you know we buy forward about nine months. So that’s roughly in line with the past. Number two is 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 in 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.