Q2 2023 PepsiCo Inc Earnings Call

July 13, 2023

turn to ask a question. In order to ask a question or make a comment, please press star followed by one one on your touchtone phone at any time. You may remove yourself from the queue by pressing star one one again. Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Rob Pianani, Senior Vice President of Investor Relations.

Mr. Pam Nani may begin. 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 updated 2023.

refer to our second quarter 2023 earnings release and second quarter 2023 form 10Q available on pepsico.com for definitions and reconciliations of non-GAF 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 LaGuardia 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.

Thank you. Once again, in order to ask a question or make a comment, please press star followed by one one at any time when you're touched on phone. One moment for our first question.

Our first question comes from Brian Splane with Bank of America. Your line is open. Your line is open.

Thanks, operator. Hey, good morning, Hugh. Good morning, Ramon.

Good morning, Brian . Good morning, Brian . Good morning, Brian .

So, so I guess Ramon, my question is more kind of related just how you're looking at the bigger kind of macro picture in the consumer specifically. I think as we went into this year, you know, there was an expectation that elasticity would increase and, you know, there'd be more, you know, of a consumer response, I guess, to all the inflation we're seeing really globally.

The G to DSD has a meaningful impact on timing on that when we reflect our sales and when the consumer actually buys compared to previous years. So were much the cycle has reduced substantially given our R&D azeem on that might have some implications on on the on their readings.

We feel good about the sports category.

Even though it has been cold in some parts of the country for the month of June and so on but in general within the categories continue to have healthy metrics in terms of penetration and usage and everything else our innovation <unk> feed gateway.

Gator lied and most importantly for us long term, our fathers and tablets is going very very well. So we believe in those those sub segments continue to develop along with <unk> zero, which continues to attract new consumers to the category. So we feel good we're seeing all the execution metrics for it.

Gatorade, improving so inventory on display.

Service levels to our customers, which were a little bit.

Handicap in the past due to the supply chain issues. So we're seeing the health of the brand.

The category at a political level. It is true that there are some new entrants in the category like prime.

That have been taken some space, especially with younger audience says.

They've been affecting Gatorade, but they've been affecting more some other brands in the category that had that kind of profile. So we feel good about about the execution, we feel good about how the brand is performing.

Increased advertising substantially against Gatorade, and we'll continue to do so in the back end of the.

The summer end of the year.

We feel good about Gatorade I think digi to DSD is going to be a structural move that will give us better execution and capacity to respond to weather changes and an opportunity in the marketplace.

And going forward.

Thank you one moment for our next question.

Our next question comes from Andrew <unk> with Jpmorgan. Your line is open.

Hi, Good morning, everyone. So my question is more on the balance of pricing and volumes. Obviously you were lapping some of the most strong price increases from last year and Youre expecting I would say are you expecting.

High single digits in the second half.

With volumes more flattish I assume negative.

Because to get to the math with 10%, perhaps youre lapping Russia.

But it seems that the UK and France, and Spain have lagged a bit for the top line. So I'm trying to reconcile the implied organic seven five.

Yes.

With better volumes. So in other words you are seeing.

Some.

Some improvement there as pricing pricing kind of ethos for the consumer and how we should be thinking.

To <unk> comment on some of the discounters and that happening or Youre still seeing room for continued pricing, but to a lesser extent does mesh.

<unk> at CIBC.

Thank you.

Okay got it.

We can have he will continue the.

CNBC interview.

Yeah.

Hi, Andrea so balance of your revenue.

The squeeze of seven 5%.

What I think we're going to see is volumes there'll be sort of in the flattish range for the balance of the year.

Obviously, there is still carryover pricing and I don't think we will do anything different than our normal cycles on pricing in the balance of year, you tend to see pricing in the beverage business in the fourth quarter Frito tends not to go into the balance of the year, but that's TBD, we'll see how the year plays out but.

But the implication that we have in the forecast right now is kind of back to our relatively more normal pricing and.

Obviously that sets us up for 'twenty four I mean, there are a lot of ways to think about it is the back half of the year is a little bit ahead of our long term guidance, which I think is the momentum that will carry forward.

Thank you <unk> next question.

Our next question comes from Chris Carey with Wells Fargo Securities.

Hi, good morning.

Hey, Hugh.

Just just one one quick follow up on the gross margin.

You said that.

Reising Teo.

<unk> year to date are basically in line or offsetting inflation I Couldnt tell if you said commodity inflation.

I guess, what I see is about.

600 basis point benefit from pricing and a 400 basis point headwind from commodity inflation. So it seems like you're actually tracking ahead.

When you made that comment was that a was that a total inflation comp.

Comment or.

Or is there a mixed tailwind as well so maybe price is actually below what we can see in price mix. So I just wanted to clarify that and I guess connected.

<unk>.

Full year gross margin.

Unless there is some offset it seems like you could see some notable expansion for the full year.

Am I reading that wrong that allow you to invest or are there some offsets I'm not thinking about so thanks so much.

Yes, Hey, Chris.

So what I had said was pricing was up exactly in line with with our commodity inflation. So both both are in the teens and the numbers are basically identical.

So that obviously is not driving margin improvement because those two are essentially offsetting each other.

In terms of the balance of the year margins. We've previously communicated we'd be at least equal with where we were last year.

We're now clearly going to be ahead of where we were last year. So margins will improve this year as opposed to the at least equal that we had previously communicated.

And the driver of course behind that is productivity and the things that I've been talking about and Ramon has been talking about for a while.

We've made these investments in digitalization, we have made these investments in automation, we've been investing in building out a global business services operation and I think thats. The pivots that you see happening inside of our numbers right. Now is that the margins will improve I think on a sustained basis and it'll be driven by productivity and that.

Productivity will come out of those three three buckets. So I don't think this is a one or two quarter thing I think youre going to see margins continue to steadily improve this year and into the into the coming years.

Thank you <unk> next question.

Our next question comes from Peter Grom with UBS. Your line is open.

Thanks, operator, and good morning, everyone. So I was hoping to get some updated thoughts on the <unk> agreement and kind of what you've learned over the past several months. Obviously the growth has been tremendous but how's that outsized growth or better than expected share performance shifted your view as to whether this is the right structure for pepsico longer term.

And then just having previously distributed bang and kind of given the bearing and Monster News do you have any updated thoughts as to whether this could impact the growth trajectory for Celsius looking ahead. Thanks.

Yes.

Good morning.

I think there is a couple of.

<unk>.

Realization on that number one is that.

The power of our distribution system.

Our DSD machine in the U S is very powerful and obviously you can see by the increase in the numerical distribution and the quality of execution. So thats one.

And that makes us feel very strong about our capabilities in the U S. Beverages second I think <unk> is a brand that.

Is capturing new consumers to the energy category consumers that we're not.

Consuming energy drinks.

The reasons in the past flavor or.

Some other element that is that as a positive that category keeps expanding and we're glad that's in our portfolio.

And we are working together with Celsius to see additional international opportunities, whether we can expand the brand in some other some other markets, especially.

More developed markets, where the category is a bit more.

More developed those are the three.

Inclusions that were taken from from our relationship so far.

And the only thing I'd add is we're very happy with the investment we've made and we feel very comfortable where we are with the with the company right. Now I think we are both benefiting from each other's capabilities.

Thank you one moment for our next question.

Our next question comes from Robert <unk> with Evercore ISI. Your line is open.

Great. Thank you very much and congratulations on another terrific quarter.

I was wondering if we could focus on air we haven't spent that much time talking about in the past, but is really doing well on that and that's Europe , and maybe perhaps parse out for us.

Remind us the business mix in Europe between between snacks and beverages.

And then talk a little bit about how the business is doing so well.

Very significant pricing I know you had relatively easy comps and whether you think that there are structural long term changes.

The pricing dynamics in Europe , I mean for many years Europe was very deflationary.

And extremely tough retail I'm sure a lot of that persists, but there.

Are there clues here that maybe there are structural changes in that environment that can go forward. Thank you.

Yes. Thank you.

Yes, good good.

<unk>.

Good diagnostic the fact that our European business clearly has had a terrific first half of the year and we're expecting that to continue in the second half.

A couple of elements I think we have a portfolio that is quite robust on the on the snack side, we have very good market positions in snacks, and we have good challenging positions.

Beverages, and our zero propositions in Europe are growing very fast and they are taking market share in some of them are.

More affluent markets in Europe , so good portfolio mix and good focus by the team on growing that portfolio. As you said, we were a little bit late to pricing last year and 22.

And the team has been encourages and as being able to find win win solutions with our customers in 2003. So.

As you see from the numbers.

Good pricing levels, but what is also very remarkable in Europe is the levels of productivity that the team has been executing through simplification of the business and everything else that he was saying about digitalization and <unk>.

Automation and.

Moving moving some service to two essential points that we can serve as the businesses more effectively more efficiently. So.

Good work by the European team both on portfolio managed simplification and then in driving productivity. So we feel we feel good about Europe , we have very strong.

Business in.

Both central Europe .

Eastern Europe and parts of the economy that are growing faster. So we feel good about the portfolio composition and the business going forward.

Thank you one moment for our next question.

Our next question comes from Stephen Powers with Deutsche Bank. Your line is open.

Great Thanks, and good morning.

Maybe putting a final bow around Brian's original topline question I guess.

The volume cadence that you implied a little earlier.

The 2% or so in the first half based on results.

And if I heard you correctly flattish in the second half.

How does that compare with your outlook coming into the year.

I guess, just stepping back I'm trying to get a better sense of whether the four points of upside you now see inorganic growth versus that February forecast is.

Driven by better volumes or whether the upside is really driven by greater than the greater than expected price mix realization or whether it's some kind of a combination.

Yeah, Hey, Steve Good morning, it's a combination of volumes are certainly a bit better than we expected and price realization is a little better than we expected as well so it's a combo.

It's not dominant one or the other.

Yeah, and I would say.

The commercial teams have done a great job in minimizing elasticity, so going into the year.

We're assuming a level of elasticity there was more based on historical levels I think we've been positively surprised on the strength of the brands in some markets and obviously as I said earlier, the consequence of the investment we've been making.

But the way the teams have executed innovation I've executed range expansion.

Multiple displays around the store and some of the tactics, we normally use to drive volume and minimize elasticities have been really were well executed I think Lincoln as well too.

In a more intelligent company in a broader sense, having better data, having better digitalization and execution capabilities.

It is all connected and yes.

Feel good about about how the business performed in that in that in that respect versus when we had initially planned.

Thank you one moment for our next question.

Our next question comes from Philip <unk> with Citi. Your line is open.

Hey, good morning, everyone.

Quick question on Frito lay North America, clearly very strong results in the quarter.

But over the last couple of weeks, we have seen a bit of a slowdown in tracked channels. So the first question is why do you think is driving the recent slowdown probably is obviously cycling high price realization, but also.

Just general sense on what you're seeing from a volume standpoint, and then also why you seen untracked channels in that business. Thank you.

Yes.

<unk> is having a tremendous year again on top of a very good 22.

It's been driven by our large brands performing very well linked into what I said earlier about very strong brand programs and commercial programs.

The away from home business in the small store independent.

Business, where there is a lot of impulse consumption is not really reflected normally buy a lot of their reports that you've probably seen so that might be a gap there and obviously in the summer. This is very relevant as people move around more so we're seeing the only thing we're seeing in Frito lay in the last few weeks is that lapping versus the <unk>.

This increase with it last year. So that's the only element everything else, we're seeing a much better.

Supply chain, so our service levels to our key customers is improving a lot.

That's good news, because we were little bit Handicap, India last year and first half of this year, we're seeing that much.

Much broader portfolio. So the smaller skus that drive we know they drive frequency and they drive.

Penetration in some some some sub consumers. So we're seeing a lot of positive trends in some of our innovation. If you think about <unk> or if you think about some of the <unk>.

New launches like the Cherokee product or.

Our relaunch of the nuts and seeds are permissible portfolio. There are really doing very well along with RV brands. So we feel good about the portfolio composition and the continued execution capabilities off of Frito to drive availability of universally all myself I'm feeling good about.

The business.

Thank you one moment for our next question.

Okay.

Our last question comes from Gerald Pascarelli with Wedbush Securities. Your line is open.

Hi, Thanks, very much for the question.

Mine is also on energy drinks, specifically regarding near term distribution opportunities, you've obviously been a great partner for Celsius. Since you took over distribution of their products, which has been readily apparent in measured channels, but looking forward. How do you think about the opportunity to penetrate some of the non measured channels that have yet to scratch the surface specifically related to foodservice.

<unk> campuses as an example.

And as a comprehensive rollout of these products something we should expect in the back half of this year or is that more of a 2020 for opportunity I guess any incremental color you could provide on timing and then the potential halo effect that Celsius could have on your legacy portfolio of energy products would be helpful. Thank you.

Yes.

We take our energy products, along with the rest of the portfolio, where it makes sense right.

Some of the channels you are mentioning.

Universities, they are very large channels for our energy execution right.

When you go to a normal campus that you will see a rock star you will see <unk> you will see our coffee business you will see.

Then you then.

Gatorade energy fast to HR.

You will see all these execution wherever there are consumers that are looking for energy we tend to be there. So.

We're not holding.

<unk>.

On any opportunities at this point to maximize the reach of our brands.

No.

Don't wait for 24, we're executing as we speak.

Great. Thanks, So I think this is.

At the end of the year.

The conversation. Thank you very much. Thank you all of you for joining us today, and especially for the confidence you've placed in us with your with your investments. We hope that you all have a great summer and stay safe and healthy. Thank you.

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

Yes.

Thank you Kevin Thank you everyone.

Youre welcome.

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Q2 2023 PepsiCo Inc Earnings Call

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