Pepsi 3Q15 Earnings Call Notes

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Indra Nooyi – Chairman and CEO

Constant currency op profit +12%

“In the third quarter, organic revenue grew 7.4%, with Global Snacks up 10% and Global Beverages up 5%. Core gross margin improved by 120 basis points. Core constant currency operating profit increased 12% and core constant currency EPS increased 14%.”

Managing what we can control in developing markets

“Now turning to our international market. In our developing and emerging markets, although we continue to face volatile and challenging macros in a number of these markets, we’re managing what we can control”

Digital technologies disrupting our business

“With volatile macros globally, and increasingly competitive landscape with digital technologies disrupting many aspects of our business, productivity has never been more important”

Increased automation

“increased automation. We have installed packaging automation across approximately a third of our snacks plant worldwide enabling us to reduce packaging label costs in these facilities by at least 50%.”

We are optimizing our manufacturing footprint

“we are optimizing our global manufacturing footprint. Since 2010, we have reduced the number of company-owned beverage plants in North America by 23%. At the same time, we’ve increased our capacity utilization by 20%.”

Implementing our own version of zero based budgeting

“we have also embarked on our version of zero-based budgeting, something we call smart spending. You know, we studied ZBB in great detail and we realized that implementing it as currently designed, ran the risk of starting resources to drive topline growth initiatives. Our version of ZBB or smart spending as we call it focuses on rightsizing our operating expenses, now that we are beginning to see benefits from our technology investments and global coordination, while ring-fencing top line driving resources to focus more on deriving additional effectiveness from them.”

The Macro volatility is here to stay

“somehow we balance the portfolio to deliver the results but the macro volatility is here to stay.”

Soft drink market is under pressure from volume standpoint but not value thanks to “good pricing”

“The US beverage environment is pretty good actually. There is good portfolio management happening in the industry and I would say that the CSD market continues to be under pressure from a volume perspective. From a value perspective, because of good revenue management and good pricing in the industry, the value numbers are way better than the volume numbers”

Having control of manufacturing and distribution becomes critical

“Innovation is becoming more fragmented and the life cycle of innovation is being shorter and the trade becoming more and more complex. Having control of the manufacturing and distribution systems becomes critical.”

Everyone should start focusing on the LRB (Liquid Refreshment Beverage) not just CSD market

“I think focusing just on CSDs is actually a thing of the past and I would strongly suggest everybody looks at total LRB, because that’s the right way to look at the market going forward.”

Hugh Johnston – CFO

Expect a 10-11 point impact from Forex

“We now expect foreign exchange translation to negatively impact net revenue and core earnings per share growth by approximately 10 and 11 percentage points respectively based on current market consensus rates. Taking our 2014 core EPS of $4.63 and applying our guidance and current market consensus of foreign exchange impact implies 2015 core EPS of approximately $4.54.”