PepsiCo : Q2 2024 PepsiCo Earnings Transcript – Investors Q&A

Published: 2024-07-11 14:19:08 ET PEP

Corrected Transcript

11-Jul-2024

PepsiCo, Inc. (PEP)

Q2 2024 Earnings Call

Total Pages: 15

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PepsiCo, Inc. (PEP)

Corrected Transcript

Q2 2024 Earnings Call

11-Jul-2024

CORPORATE PARTICIPANTS

Ravi Pamnani

Jamie Caulfield

Senior Vice President, Investor Relations, PepsiCo, Inc.

Executive Vice President & Chief Financial Officer, PepsiCo, Inc.

Ramon L. Laguarta

Chairman & Chief Executive Officer, PepsiCo, Inc.

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OTHER PARTICIPANTS

Dara Mohsenian

Robert Moskow

Analyst, Morgan Stanley & Co. LLC

Analyst, TD Cowen

Bonnie Herzog

Andrea Teixeira

Analyst, Goldman Sachs & Co. LLC

Analyst, JPMorgan Securities LLC

Lauren R. Lieberman

Chris Carey

Analyst, Barclays Capital, Inc.

Analyst, Wells Fargo Securities LLC

Bryan D. Spillane

Robert Ottenstein

Analyst, BofA Securities, Inc.

Analyst, Evercore ISI

Kaumil Gajrawala

Carlos Laboy

Analyst, Jefferies LLC

Analyst, HSBC Securities (USA), Inc.

Peter Grom

Nik Modi

Analyst, UBS Securities LLC

Analyst, RBC Capital Markets LLC

Filippo Falorni

Kevin Grundy

Analyst, Citigroup Global Markets, Inc.

Analyst, Jefferies LLC

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PepsiCo, Inc. (PEP)

Corrected Transcript

Q2 2024 Earnings Call

11-Jul-2024

MANAGEMENT DISCUSSION SECTION

Operator: Good morning and welcome to PepsiCo's 2024 Second Quarter Earnings Question-and-Answer Session. Your lines have been placed on listen-only until it's your turn to ask the 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, Investor Relations. Mr. Pamnani, you may begin.

Ravi Pamnani

Senior Vice President, Investor Relations, PepsiCo, Inc.

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 and updated 2024 guidance.

Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, July 11, 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 second quarter 2024 earnings release and second quarter 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.

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PepsiCo, Inc. (PEP)

Corrected Transcript

Q2 2024 Earnings Call

11-Jul-2024

QUESTION AND ANSWER SECTION

Operator: [Operator Instructions] Our first question comes from Dara Mohsenian with Morgan Stanley. Your line is open.

Dara Mohsenian

Analyst, Morgan Stanley & Co. LLC

Hey, good morning, guys.

Ramon L. Laguarta

Chairman & Chief Executive Officer, PepsiCo, Inc.

Hey, Dara.

Dara Mohsenian

Analyst, Morgan Stanley & Co. LLC

So I just wanted to focus on the implied organic sales growth guidance in the back half of the year of mid-single digits to get to the approximate 4% guidance. You've obviously had a great longer-term track record, Ramon, under your tenure. But in this softer US consumer environment, we've seen low single-digit growth in the last couple of quarters.

So what gives you confidence at the corporate level you can get back there and specifically, I wanted to dial down into Frito-Lay North America, which is presumably a piece of that. Obviously, a pretty soft volume result in Q2. You had taken some initial actions.

So help us understand the incremental actions from here. What gives you confidence you get a volume payback and a top line payback from that and how sort of Frito-Lay North America fits into that implied top line recovery also?

Ramon L. Laguarta

Chairman & Chief Executive Officer, PepsiCo, Inc.

That's great, Dara. So I think it's an important area to focus. When we're saying at least 4%, we were talking more about around 5% in our minds. Now we're talking around 4%. So that's the pivot [ph] pivot (00:03:08) we're making. There is an adjustment and it's related to specifically the consumer in the US and we can talk a little bit more.

Now why do we feel good about our guidance? And it cannot be disconnected from our earnings performance because I think the work we've been doing on our productivity and our cost reduction gives us the optionality to reinvest back in Half 2 in a way that we feel much more comfortable about the performance. So a couple of, I would say, elements that give us confidence.

Now one is Quaker, Quaker, you're all familiar with the situation. We're recovering the supply chain by Q4. We'll be in almost 100% supply. And obviously, the business at that point will be growing materially because we're just refilling the shelves in the pipeline. So that should be out of the picture and it will be a positive impact for us.

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PepsiCo, Inc. (PEP)

Corrected Transcript

Q2 2024 Earnings Call

11-Jul-2024

The second is mathematical, but it's lapping. And we think, obviously, the laps are much better in second half and that has a - gives us confidence that we can get back to a mid-single-digit type of growth in the second half.

The third element is international. International is an area we've been investing for the last few years materially and is delivering for us. So first half of the year, 7%, within that - we will continue that same level of growth in the second half of the year. Pluses and minuses around the world, but the portfolio is diverse enough, scaled enough, profitable enough around multiple parts of the world that we believe that we can deliver.

And then now in the US, there is clearly a consumer that is more challenged and is a consumer that is telling us that in particular parts of our portfolio, they want more value to stay with our brands. That is not for all the consumers. It's some consumers, that is not for all the portfolio, it's some parts of the portfolio, and we have been working different tactics to give the consumer what they want and we see that is working and that's why we feel comfortable about, given the oxygen that we have in the P&L, that we'll be able to deploy in a very targeted way, thinking long-term about the category, making sure that it has good ROI, that we'll be able to turn around the - especially what you were referring, the food business to positive volume, and with that, a higher level of net revenue.

So that's how we're thinking about the second half. Again, we have [ph] green shots (00:05:51) with some of the activities we've been executing and July 4th has been very strong for us and we feel good about the business.

Now, the North America beverage business is also to be highlighted. It's a business that we said over time we want to stay with - deliver profitable growth, make sure we compete well in the category, but at the same time, improve our margins. We think we're executing the playbook well.

Actually, we've been accelerating the profitable growth delivery of the business and it should continue in the second half. We're investing in advertising and marketing even more in the platforms that are growing and that's what overall you put it all together, we feel good about the second half of the year and the momentum that we'll start 2025 with that.

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

Bonnie Herzog

Analyst, Goldman Sachs & Co. LLC

All right. Thank you. Good morning, everyone. I actually had a question on PBNA, Ramon. I know you just touched on it a bit, but I'd be curious to hear if you're satisfied with some of the progress you might be making to reinvigorate the business and maybe what green shoots you are seeing within PBNA.

And then, I guess I'm hoping for some color on the initiatives you highlighted in terms of the disciplined commercial investments. Should we assume this will also mean a potential step-up in promos for PBNA and do you maybe see a need for some brand repositioning? Are there structural opportunities? Essentially what will be the drivers to reaccelerate growth at PBNA? Thanks.

Ramon L. Laguarta

Chairman & Chief Executive Officer, PepsiCo, Inc.

Yeah, it's good. Bonnie, I'll give you a couple of data points that I think are relevant. Gatorade, for example, has been gaining share this year, year-to-date meaningfully, it's accelerating. That's a core part of our portfolio and a

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PepsiCo, Inc. (PEP)

Corrected Transcript

Q2 2024 Earnings Call

11-Jul-2024

very profitable part of our portfolio. So that's one data point. We've been investing in Gatorade, not so much on, as you were saying, promos and discount, but more on innovation, execution and branding and that's paying back. The same with Propel. So all that functional hydration space, I think it's a focus for us. It's always been a focus, but now I think that part of the portfolio is working well. I think some of the G2DSD challenges that we had last year are behind us. I don't think we're all the way to perfection there, but much better service levels in this early part of the summer, which obviously that's when the category peaks and where we have to be ready for perfection.

So that part is clear. If you think about the other brand we've been talking for some time, Mountain Dew, Mountain Dew is on growth now. It's back to growth. I think we made the strategic decision to have multiple flavors driving the brand and made Baja a structural part of the portfolio versus just an LTO. That's driving consumers into the brand, incremental consumers, and again, better levels of execution. So just some examples. All the Zero part of the portfolio is booming.

If you think about consumer trends, clearly we know where they're going. We know that internationally we know that it's going to eventually happen here in the US. So Zero, not only on colas, not only on soft drinks, but also on Gatorade, on teas, on coffees, we're seeing that consumers are going.

And then the last part is our foodservice business is becoming stronger and we are being better at where the profitability is, which is on the fragmented restaurant, local restaurant where consumers have a lot of interaction every day. And that part of the portfolio we've been investing. We are getting additional distribution. We know we're becoming a better execution company in that particular channel and we're feeling good about that.

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

Lauren R. Lieberman

Analyst, Barclays Capital, Inc.

Great. Thanks so much. Ramon, I wanted to go back to Frito, if I may, because you commented on some consumers and being more value to stay with our brands. But one thing we've been doing a lot in trying to parse through the data that's available to us, and it looks like it's the category, the salty snack category as a whole is really pressured. It's not just your brands. I know given your share, they're sort of one and the same, but it looks like there's a broader category issue.

Again, some of the data we've looked at, it feels like the category is not proving terribly responsive to promotion. So I just was hoping you could comment on that, if that is or isn't consistent with what you're seeing and how what you're going to be doing will be different. Because again, what we've seen so far, it doesn't look like there's a lot of response and it feels like the category is proving more discretionary. So just love your thoughts on that. Thanks.

Ramon L. Laguarta

Chairman & Chief Executive Officer, PepsiCo, Inc.

Yeah. I think - we feel that the issue is an issue of value, it's not an issue of anything else. And we have a lot of data, obviously. Now, how do you address that value gap versus what consumers want to do I think is where the knowhow will come and the sweet spot for us is not to promote, but it's to promote to who needs it in their products that need it versus a blanket approach to promotion. So that's where we're investing a lot of time. I think

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PepsiCo, Inc. (PEP)

Corrected Transcript

Q2 2024 Earnings Call

11-Jul-2024

we're much more capable from the insights and diagnostic point of view, and also from our ability to execute more granularly all these interventions, be it digital, be it with particular channels or customers.

To give you an example, we feel that the unsalted part of our portfolio, right, if you think about potato chips or tortilla chips, that needs some value reset and value intervention for some consumers. When we think about flavor potato chips or other parts of our portfolio, no, consumers are staying in the category, are staying in our brands and they're buying with pretty high frequency, as in the past.

There are other parts of the portfolio that are growing, growing very fast, especially the permissible part of, what we call, permissible portfolio, positive choices. This is a - when you think about brands like SunChips, PopCorners, Smartfood or the Simply range, Off The Eaten Path, those brands are growing. And there it's not about value. There, I think it's more about and the way we're going to approach it is more marketing, investment, awareness, execution, availability. So there's different tools that we'll be using to drive the category growth.

To your point on is it the category, is it PepsiCo brands? I think given even our massive participation in the category through many multiple brands, I think it's our responsibility to manage this category for the long term, providing value to consumers in different ways and continue to have the savory snacks category, growing above food structurally, as we have done in the past.

Now there is nothing in terms of consumer long-term trends that tells us that that's not possible. I think it's a small adjustment in value and in execution and in investment in new - innovation areas that will drive it and we'll feel very strong about our ability to do that, not in the long term, but actually in the short term, in Q3 and Q4 and that's why our guidance reflects a little bit that inflection, because we're already testing and executing some of these levers and we see the returns it has in volume and net revenue.

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

Bryan D. Spillane

Analyst, BofA Securities, Inc.

Hey, thanks, Operator. Good morning. Ramon. Good morning, Jamie.

Ramon L. Laguarta

Chairman & Chief Executive Officer, PepsiCo, Inc.

Hi Bryan.

Bryan D. Spillane

Analyst, BofA Securities, Inc.

Just wanted to circle back on Frito. And I guess stepping back, you were able to sort of reset the margins and fund it with just deep - drilling deeper into some of the reservoirs of productivity, other places in the organization. So I guess just if you can comment on two things related to that.

One, given that you're tapping more productivity this year, does it - how does that affect next year? Does that affect maybe not having as much productivity to flow through? Or is that reservoir very deep?

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PepsiCo, Inc. (PEP)

Corrected Transcript

Q2 2024 Earnings Call

11-Jul-2024

And then the second is, as we're thinking about Frito margins stepping back in the back half of the year, should we be thinking about that now as the new base to maybe grow off of gradually? Or is that a major stepdown and then you'd expect Frito have another maybe step change up in the future?

Ramon L. Laguarta

Chairman & Chief Executive Officer, PepsiCo, Inc.

Yeah. So Bryan, let me tell you - I mean, I think we've talked about this in the past. We're managing total PepsiCo operating margin. And as you've seen, we keep improving the margin. This quarter was almost 100bps of operating margin improvement and it's been consistent for the last few years.

We feel good about our productivity pipeline, it's not tactical. It's super strategic and it's multiyear and it's based on automation, it's based on digitalization, simplification of the company, standardization, different service models to the business. So there is a whole portfolio of productivity ideas that are multiyear in nature and we don't think that we will slow down our productivity in the coming years.

Now as you think about our overall margin, International has continued to grow its margin. PBNA has been very vocal from our side that we want to have that business going - moving into mid-teens and we've delivered on that. And we've always said that the big value of Frito for us is not so much whether it's a 26% or 26.5% or 27.5%, that is very relevant, I would say. It's always tremendously accretive for us long-term. And the biggest value creation for Frito is to make sure that it grows at a 4% or 5% levels. And that is going to be our - continues to be our strategic focus.

How do we get Frito to continue to grow above the category, make the category very healthy in terms of growth, keep bringing consumers occasions and channel - new opportunities for channel expansion to Frito and that will continue to be our focus. We'll keep investing until we get it right - we feel good about getting it right rather soon. And that's the way we'll keep managing the overall profitability of the company. And Frito, PBNA and International, in particular, with different sub-strategies and obviously, that triggers down to every market around the world when you talk about International, but we have a very good playbook for every country and every line of business in every country, expectations on profitability and roadmaps to deliver that kind of growth.

Operator: Thank you. One moment for our next question. Our next question comes from Kaumil Gajrawala with Jefferies. Your line is open.

Kaumil Gajrawala

Analyst, Jefferies LLC

Hi. Good morning, everybody. Do you believe that the prices at Frito are too high, given the increases over recent years?

Ramon L. Laguarta

Chairman & Chief Executive Officer, PepsiCo, Inc.

Listen, Kaumil, I think I kind of touched on the point earlier, but some parts of the portfolio need value adjustments, some parts of the portfolio don't. Some parts of the portfolio needs to be - for particular consumers, we need some new entry price points and probably some new promotional kind of mechanics that don't spec for the consumer to invest so much cash in a purchase of salty. So there's adjustments that we have to make for certain consumers, some parts of the portfolio. I don't think the overall portfolio needs a reset. I think this is going to be about granularity. It's going to be about good execution of that granularity. And that's what's - I think we're well prepared to do throughout the full value chain. So yes, there is some value to be given back to consumers

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Corrected Transcript

Q2 2024 Earnings Call

11-Jul-2024

after three or four years of a lot of inflation. Our cost allows us to do that, whatever we choose to do and that will be one of the interventions that we'll be making in the second half, but not the only one.

I mean, there's going to be investments in marketing. There's going to be investments in better execution that overall will drive the business growth to where we think it will be structured in the coming years.

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

Peter Grom

Analyst, UBS Securities LLC

Thanks operator. Good morning, everyone. So, I was hoping to get some color on Latin America. Organic revenue was the weakest we've seen in some time here. And I think in the prepared remarks, Brazil and Mexico seemed solid, so just curious kind of what drove the weakness in the quarter.

And then Ramon, just as we look ahead, you mentioned you still expect strong growth from International in the back half of the year. How does Latin America fit into that equation and would you anticipate improvement or should we expect more muted performance to continue? Thanks.

Ramon L. Laguarta

Chairman & Chief Executive Officer, PepsiCo, Inc.

No. I think the - again, I would look at LATAM and all the International business in like six months, rather than a three months. In three months, there's a lot of moving pieces between first quarter, second quarter, Chinese New Year. In particular, the LATAM situation, in our case, is related to Mexico.

And Mexico, because of the elections, there have been some changes in disposable income given to the families by the government that created some, I would say, some abnormalities in the way those funds were distributed and that's impacted demand in Mexico in the last - what we've seen in the last three weeks in Mexico that as those funds have been given back to consumers again, that the demand has come back to our category.

So we don't foresee any issue in LATAM. LATAM, again, I mean, value continues to be a factor, as it's always been in LATAM, we'll see pluses and minuses between the different countries. But as a region, LATAM continues to be a high-performing region for us, where we keep developing the categories and we keep expanding our margins and building scale businesses, not only in Mexico and Brazil, but across multiple markets.

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

Filippo Falorni

Analyst, Citigroup Global Markets, Inc.

Hey, good morning, everyone. So just staying on International business, Ramon, you sounded pretty confident on the growth in International. Maybe you can talk more about, like what regions do you see the greater growth potential in that business?

And going back to the question on guidance, on top line for the second half, is the improvement in organic sales mainly driven by an improvement in North America or an acceleration in International? If you can give some color there will be helpful.

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Corrected Transcript

Q2 2024 Earnings Call

11-Jul-2024

Ramon L. Laguarta

Chairman & Chief Executive Officer, PepsiCo, Inc.

Yeah, Filippo, hi. You should assume that most of the incremental acceleration of the business comes from mostly North America, right? And the two factors I mentioned, Quaker will get back to growth, [ph] the labs (00:22:53) get better for North America and then some of the interventions we're making, both in value and in additional A&M should drive additional volume. Those are the three factors.

Internationally, we're assuming that the rate of growth for the first half will continue in the second half. And again, we're seeing parts of the portfolio accelerating, parts of the portfolio stabilizing, some of them being a little bit softer. But overall, the portfolio at this point is broad enough, we have enough scale across multiple markets that we're kind of hedged geographically.

So that's what we're assuming and what we're seeing that the per caps growth of the category will continue. We continue to invest meaningfully incremental funds to both execution and brand development and we don't see any reason why not, of course, it could be big geopolitical reasons why we change our mind later in the year, but with information we have today about geopolitics and the stability of countries, that's our best, best guess today.

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

Robert Moskow

Analyst, TD Cowen

Hi, thanks. A couple questions. One is, I was hoping you'd give a little more color on the energy drinks category. Growth has slowed dramatically in the US. And just wanted to get your perspective and ask like, do you think that consumers there are making a value decision as well? There's a lot of premium price drinks there. Do you see any evidence of trading down to maybe higher caffeine carbonated drinks? Thanks.

Ramon L. Laguarta

Chairman & Chief Executive Officer, PepsiCo, Inc.

Listen, I think fundamentally, the energy category continues to provide long-term good prospects for our industry. And I think it's a consumer need that will continue to be there and whether we're able to satisfy that through multiple options, that will continue to grow. There's always small, ups and downs of subcategories within LRB that you could argue, is it because of channel dynamics? Is it because it's very hot and people are moving to other parts of the portfolio?

Like we're seeing, for example, in our case, in that recent six weeks, a massive growth in our hydration portfolio because obviously it's been very hot in the US. So I guess there is some cannibalization between energy and hydration for some consumers and they prefer to do that. So I wouldn't over-read into the short term of the category. I would try to think about this as a - the consumer needs energy, if we're able to provide energy in a consumer-friendly way, including price, probably, as you mentioned. But I would say functionality, clean labels. I mean, like a lot of the things that I think the category has been working on, this should be a good runway for that segment of the category and it's been value-creating for a lot of us that are participating it, including the retailer partners and the brand owners.

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

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PepsiCo Inc. published this content on 11 July 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 11 July 2024 18:18:07 UTC.