Pepsi 3Q17 Earnings Call Notes

Indra Nooyi

Significant investments in e-commerce business unit

“Our success is underpinned by the significant investments we’ve made in attracting talents to and building capabilities in our dedicated global e-commerce business unit. So today, we have a team of roughly 200 e-commerce professionals supporting our businesses to capture growth in the rapidly emerging e-commerce channels.

It’s made up of seasoned e-commerce and tech professionals, combined with our best entrepreneurial talent from within PepsiCo and we’re managing this unit more like a tech company than a traditional CPG from how and where they work, the risks they can take, to how they are compensated. And we continue to fortify and enhance the full suite of capabilities that we believe will enable us to win in these channels from data analytics to specialized e-commerce supply chain knowhow.

Importantly, we’re increasingly collaborating with our retail customers to make our e-commerce capabilities yet another point of differentiation in our value-added relationships with them.

For example, using big data and predictive analytics to shape real-time marketing messages, dynamic merchandising, and tailored offers, our team is enabling us to drive greater purchase instrumentality and higher basket size for our customers online.”

Coca Cola at Barclays Conference Notes

Sandy Douglas – Executive Vice President and President, Coca-Cola North America

Bifurcated consumer environment

“What we’re seeing broadly is kind of a bifurcated consumer environment. The upper part of the economy is healthy and vibrant, positive expectations for investor performance, tax relief. And then the bottom half is really struggling, which is impacting purchasing habits, trips to retail, et cetera.”

don’t count out the brick retailers

“don’t count out the brick retailers. They’re moving fast. They have significant assets and they’re working to serve the shopper. And don’t think of e-commerce as a channel. It’s a way for consumers to research, to buy, to experience brands and then, ultimately, to have them have fulfilled.”

Digitization good for add ons

“But also, more broadly, think about like restaurant operators. Restaurant operators – think of pizza, for example. Pizza orders that have moved on to apps. Our incidence of beverage attachment, if we’re well merchandised on a digital app, is 50% higher than on telephone.”

Entrepreneurs face common issues around distribution

“And then the other thing we’ve done is we’ve found that – and it gets to this very fragmented innovative category that we’re in, is that the innovators are launching hundreds of new products every year. But once they’re successful, they all have the same kind of issues, issues like buying, procurement, like selling, distributing, manufacturing and capital. And so, we have a venturing group that we started about ten years ago and, basically, it goes out to all the entrepreneurs and says, instead of going to private equity to get money, why don’t we work with you, we’ll invest in you and we’ll help you. And we’ll help you take your idea, solve some of the issues you might have, and we can see how you can be a part of what we’re doing and we can help you achieve your dreams as an entrepreneur…All of that allowing us to kind of source external innovation, so that when you take a healthy core, build strong, new businesses, and then bring all the next businesses in, it gives you a sustainable top line.

The thing that had the highest correlation with success was the number of tries

“Because we’ve analyzed innovation and we did a pretty exhaustive study to try to figure out how we could become more innovative. And the net is that there are a lot of things going on in innovation, but the one thing that had the highest correlation with success was the number of at-bests.

It wasn’t the super brainy process. It wasn’t the eight-page request for authorization form that was better than another. It was, you had the general idea of what you’re trying to do and where the consumer is going and you create the opportunity for lots of tries.

And the only way we could figure how to do that was to get other people to try and then to give us the chance to help them make the more likely winners succeed. But even then, the more likely winners don’t all win.

Starbucks FY 3Q17 Earnings Call Notes

Kevin R. Johnson – Starbucks Corp.

physical + digital

‘The evidence is clear that the pace of retail transformation is accelerating with a common theme: extending the in-store experiences to include relevant digital scenarios. It is the driving force behind combinations including Walmart’s acquisition of, the combination of PetSmart and, and last month’s announcement of Amazon’s intent to acquire Whole Foods. Each of these combinations demonstrate that pursuit of enhancing the physical retail experience with a relevant and complementary digital experience.”

Matthew Ryan

Deceleration in restaurant spend but we’re outpacing the industry

“in the U.S. and just about any other market we’ve studied, there’s been a decades-long trend for growth away from home, food and beverage consumption, driven by demographics and people just want more convenience. And we’re strongly bullish on the long-term continuation of that trend.

However, in the past year, we’ve seen some pullback from that trendline, as we have from time to time, with consumers in the U.S. shifting some discretionary spend to other categories. We look at all sorts of sources of data here, including corroborating credit and debit card spend data. But we think the best source of industry comp intelligence comes from the APT index, which is a metric developed by Applied Predictive Technologies, that’s the name of the company, that aggregates and tracks actual comp data from a broad set of more than 100,000 retail restaurant and QSR competitor locations on a weekly basis, allowing us to understand just how well we’re doing versus important benchmarks.

And for Q3 overall, the APT index showed decelerating and negative comp for QSR and restaurant industries, while Starbucks’ own metrics accelerated comp to 5%. In fact, the differential between Starbucks and the industry increased significantly in Q3 compared to the past several quarters, and that’s just on the comp stores. It excludes the effect of any further market share gains we have as a result of our strong pace of new store openings.

Within the quarter, we did see some deceleration in month-to-month comp performance for both industry benchmarks and Starbucks, but Starbucks steadily outpaced the competition.”

Howard Schultz

New relationships will elevate brick and mortar

“I would just add, as Kevin had in his prepared remarks, what we’ve seen over the last few months with Walmart and and PetSmart and Chewy and most recently Amazon and Whole Foods, I think this is just, we’re in the nascent stage of these kinds of commercial relationships that are going to elevate the experience of a brick-and-mortar retail company. And having said that, Starbucks is probably best positioned, given our national footprint, the demography of our customers, and where we’re located to have those kinds of conversations. I think it would be premature to kind of get into who they are, but clearly, we are a very viable partner, given the change in the industry.”

Pepsi 4Q16 Earnings Call Notes

Indra K. Nooyi

Demonetization had a significant impact

“And on demonetization, across the board for pretty much all of industry and CPG in particular, because it hit the individual retailers significantly, demonetization had a significant impact on our India business in Q4. And there’s still some lingering effects. I’m not sure we are totally out of the woods. It’s a big country, a massive change because it’s currency that was about 80% of the circulation out in the country that was taken out of circulation, and the implementation had its share of challenges. So our hope was that by the time Q2 rolls by, we would be through the bulk of the demonetization challenges. And the new currency and the digital currency will be back in circulation and we’ll be back to retail activity coming back to norma”

I don’t believe that political actions impact consumption of our products

“We are basic food and beverage. I don’t believe political actions impact consumption of our products. And we’re not seeing any deterioration in activity versus our products, and the market growth continues.”

Hugh Johnston

Do expect to see higher inflation

“As we look forward into 2017, in the first half in particular, before we lap the inflation that we saw in 2016, we do expect to see a higher level of low single-digit inflation in commodities. And that combined with our annual pricing outlook will probably result in a bit of pressure on gross margins.”

Constellation Brands FY 3Q17 Earnings Call Notes

Constellation Brands’ (STZ) CEO Robert Sands on Q3 2017

Border adjustability could potentially disallow a deduction for foreign COGS

“One specific aspect of a proposed Republican tax reform plan called border adjustability could potentially disallow a deduction for foreign sourced COGS or cost of goods sold. As you know, our imported Mexican brands can only be authentically produced in Mexico and sold in the U.S. In order to understand how different tax reform proposals could impact our business, we have modeled several different potential scenarios that include border adjustability as well as some of the positive facets of a corporate tax reform plan based on what we know today. Overall, there are many unknowns related to future legislation and it’s still too early to make a definitive call on final outcomes and timing because the legislation has not been written. As more details develop on these policies and legislation materialized, you can be assured we are prepared to respond accordingly. As you would expect, we are closely monitoring the situation and we have significant resources dedicated to this effort.”

Consumer takeaway for products is accelerating

“The simple fact is that consumer takeaway for our products is accelerating, okay, sequentially as we look at our results. So I don’t think that we believe or see any softness whatsoever in the business and in fact I would say, it’s the opposite, okay, at the consumer level to the extent that it can be measured. We are actually seeing acceleration and I am sure that that will shake out from a depletion point of view over the medium term meaning throughout the year and into next year. So very, very, very strong results.”

Big craft brands are down a lot, everything else is rising

“And as far as craft goes, look, I mean craft is a tale of two cities, right. You can’t look at the craft number as a total number. I mean what continues to go on in craft is the major brands, Sam, Sierra Nevada, Blue Moon, which are all on the craft numbers, those continued to be down big time, right, like in the, I don’t know, about 8% range. And then you have sort of everything else which continues to be up significantly and is not being dragged by those numbers. And you have also got the, what I will call, the local effect which is a lot of the smaller local craft players eating up many of those larger older brands, which are now 25 years old.”

60% of our COGS is from Mexico

“Our understanding is that U.S. based COGS will be deductible. And right now our U.S. based component of our beer COGS, inclusive of freight, is about 40%. I mean 60% of the COGS is from Mexico. Now we have things that we can do within our supply chain over time, but we are talking about long-term supply agreements. We would have to take into account changes in freight and of course, any changes or fluctuations in currency between the countries before you make final plans like that.”

We’re at the forefront of thinking about these tax issues. The Senate side isn’t as clear right now

“Well, I think that Hatch made some comments yesterday saying that he doesn’t know yet what their view or opinion is on any of this. I have talked to Schumer myself personally and I would say that on the Senate side everybody is pretty reserved as to where this whole thing is going. So I would say that there is a lot less clarity on the Senate side than there is on the House side. And I would say we know a lot more about it than anybody else and that we are told that other companies that should be concerned about this are just waking up to the whole matter whereas we have been focused on it from the very beginning, having met ourselves with Ryan several months ago, really over the last summer. So we have been quite aware of this and thinking about it.”

Tax reform is probably a year off at best. First thing that’s going to happen is Obamacare

“I mean it’s probably a year off at best…We can only tell you what our legislators have been telling us, right. But the first thing that’s going to happen in Congress, which you are seeing right now is Obamacare…So Congress has a lot on its plate right now. And to work through all of the details and get legislation like that passed, well, Congress is telling us it’s going to be a while in any event. And it is clear cut and again this is literally what we have been told by the leaders that Obamacare is the first thing on their plate…And that’s going to take a while.”

The Mexicans are being measured

“And I guess my comment on the Mexicans and of course we do talk to the Mexican politicians as well as Peña Nieto, et cetera, et cetera. I think they are taking a measured view of the whole thing. Not necessarily being overly aggressive in their comments about what they will do other than they are prepared to engage in reasonable negotiations. And they do not believe that the U.S., in the end, will enter into or will take actions that would violate WTO principles and other principles of that nature.”

David Klein

Thoughts on how to address potential tax changes

So Dara, when we look at the tax changes and I just really want to caution everybody because we are talking to people in Congress on this topic and the border adjustability provision haven’t even been written, right. So it’s hypothetical and of course, we are trying to understand the effects that could take place, but it’s hard to get into a lot of specifics when answering. But I would say that we still would suspect that our pricing algorithm would remain consistent where it’s been in the past in the range of 1% to 2% a year and in order to mitigate any sort of a border tax, we would be more inclined to address elements of the supply chain that we would put into the deductible category. So for example, if you look at elements of our cost inputs that currently come from the U.S. that we could make deductible, I would put, say, the energy cost of producing glass in Mexico. That’s just one example of things we can do in our supply chain. So we turn that into a U.S. cost instead of a Mexican cost and we then have a deductible expense for U.S. tax purposes. We think that combined with a lower U.S. tax rate and a reasonable phase-in period for any border adjustment tax would be a more appropriate and value creating approach than to really just jump on the price lever.

Mexican COGS decline with peso. Not seeing any issues within Mexico

“Yes. So about 25% of our costs are peso denominated which disconnects a little bit from the percentage that I said earlier, so 60% of our COGS being Mexican. And the difference is dollar denominated contracts for goods that we purchase in Mexico, those contracts themselves really have an underlying FX component to them. They are denominated in dollars and it may take longer for any benefit from that to flow through. And as it relates to the Mexican economy, we are not seeing any issues from a hiring or a labor standpoint or costs within Mexico. So we are seeing no problem. We are also not seeing any significant benefits.”

This would be massive tax reform

” in terms of phase-in, the last time there was tax reform, I think the phase-in period was four years. But this sort of tax reform really isn’t about just setting up back office accounting departments to manage the new tax code. This kind of tax reform would require a time horizon that would allow companies to change their entire supply chain. So our expectation is that it would at least be four years and our objective would be to advocate to make that as long as possible so that we could actually get through up in supply agreements and so forth”

Coca Cola 3Q16 Earnings Call Notes

The Coca-Cola (KO) Q3 2016 Results
Muhtar Kent

It is a little unusual that developed markets outperformed developing markets

” that it is unusual. What you’ve just said is definitely – the fact that developed markets are growing at a higher pace than the developing and emerging markets, but it’s not a surprise given the volatility that we all know that is taking place. But it is a mixed bag. It’s not just a uniform, all emerging markets. Africa, for example, continues to be a very strong performer, both West Africa, led by Nigeria, but also other markets in Africa. Mexico, to name another one, so it is a mixed bag”

James Quincey

China changes rapidly

“To give you one example, a very small example, but it’s symptomatic of how fast China can change. If you go to the cafe channel in China, there are all the noodle shops up and down the streets. People go there at lunchtime. Last year, they were packed with people. This year, you go, they’re a third empty. You go, okay, maybe the economy has slowed down. No, that’s not what’s happening. The explosion of online to offline ordering and the availability of lots of people on motorbikes to deliver stuff, and the apps and the aggregator apps to buy food has seen an explosion of ordering of online and delivery food, such that there is just as many people buying from these cafes, but sometimes in some parts of China, a third of it’s being delivered to people, whether they be at work or as students. And so we’ve had to adapt our packaging. Having a returnable glass bottle in that cafe doesn’t help you with off-line delivery. So we’ve had to revamp the packaging offer so that we’re there with the right package to go where the consumer is going. And that’s a micro example of the sorts of things we have to do China to adapt to how the market is changing and is contributing to stabilization. But it is, again, as I said, a country undergoing change in its economic model and that’ll throw up new and different consumer behaviors to which we’ll have to adapt.”

Constellation Brands 2Q17 Earnings Call Notes

Constellation Brands’ (STZ) CEO Robert Sands on Fiscal Q2 2017 Results

Could get into the food and beverage category

“there’s definitely whitespace that we think is very good whitespace that we don’t participate in. You mentioned, for instance, the F&B category. That’s a very good category in terms of its premium positioning margins and growth, so that’s clearly a subcategory that we’ll be looking at in terms of developing our portfolio for the future.”

Scale allows for a virtuous cycle

“. Look, the virtuous cycle. Our performance enables us to invest more in our businesses, in particular our wine and spirits business, which is now driving significant growth in that business and enabling us to both leverage the P&L and achieve market share growth as our focus brands are now growing at a rate that more than offsets the decline in our tail brands, which are in categories which are fundamentally not growing. So we’re over-investing. And when I say over-investing, I mean we’re investing more than we have traditionally, specifically in marketing of our wine and spirits brands”

Greater premiumization happening in the wine category

“Well, I think the category is performing very well. I think that we’ll continue to see sort of mid-single digit volume type growth in the category, right? And I think that we’ll see the spread between volume and sales and, therefore, premiumization in trade, I think we’ll continue to see that grow. I think we’re a real shift, whereas five years ago we were sort of talking, what they used to call, the super-premium category, which was the $8 to $12 range, is really being the hot and premium segment of the industry. We’re seeing a definitive shift up in that regard. And, now, you’re sort of seeing this $15-$25 segment really coming on strong, as well as segments above that. So this is what is driving the wrong of brands like Meiomi, which are about $20 a bottle, or even Prisoner, closer to $40 a bottle, is this premiumization trend, which we think is going to continue unabated in certainly the mid-term”

No interest in distribution agreements

“Distribution agreements, we have no interest in whatsoever, okay? Number one, you don’t own the brand. Number two, distribution agreements are short term. Nobody is going to sign up and give you distribution rights for a life. Number three, distribution margins are small relative to the kind of margins that we at Constellation generate through our owned brand portfolio and certainly the type of margins that we’re talking about on luxury spirits. So we don’t have really any interest at all in distribution, low margin, short-term distribution agreements that would utilize probably one of our most valuable assets, which is our sales and marketing organization. So we don’t see distribution arrangements as an add-on for the future. As I said, way, way, way too low margin and no brand equity related there too.”

Craft is over SKU-ed

” I would say that, as a general proposition, we probably think craft is over SKU-ed and over-spaced. And imports – given the importance in the growth, high-end imports are under-SKU-ed and under-spaced. And premium domestics are way over-SKU-ed and over-spaced. That’s something that we spend a lot of time sort of thinking about, which is assortment in the high end especially, and I think we’re in a very strong position to advise our retail customer through our category management initiatives as to ways that they can improve their velocity as well as their profit per-unit space that they’re devoting to beer. So that’s a big part of what we’re doing. And I think the trend that you’re alluding to is definitely occurring. And I think that that bodes really well for us in a couple of areas.”

You are going to see some shake out in Craft

“Craft, even though you are going to see some shake out there, I think that what will also occur there simultaneously is that the bigger, stronger, faster growing brands like Ballast Point will and should be given more space, more SKUs sort of for the obvious reason because it’s moving and it’s highly, highly profitable. And I think that you can say the same about imports because it’s going to become obvious to the retailer that that’s the best way to maximize, as I say, their velocity and profitability for the unit space that they’re devoting to the category”

We’re in line with inflation when it comes to price increases

“Yeah. I’m not sure that our price is really going up more than others. It’s going up to the extent that we’re taking pricing. We’re right in line with sort of the typical, I’d say, inflationary increase that occurs every year and we continue to look at it on a market by market basis. We’re probably under the 2% when we combine everything, sort of between 1% and 2%. I would say that that’s normal just to keep up with the pace of – with cost of goods and inflation and so on and so forth. So nothing different, I would say, is occurring on the pricing front – period – industrywide from what we can see.”

Coca Cola 2Q16 Earnings Call Notes

The Coca-Cola (KO) Ahmet Muhtar Kent on Q2 2016 Results

Volume and top line fell short of expectations due to weakening of demand

” While we are pleased we accelerated our price/mix from 1% last quarter to 3% this quarter, our volume and top-line results still fell short of our expectations. This was largely due to a weakening demand in certain large emerging and developing markets, which also impacted our company-owned bottling operations’ revenue growth.”

James Quincey – President & Chief Operating Officer

Slowdown driven by challenges faced in China

“. Our volume deceleration from the first quarter was concentrated in a few number of markets facing specific macroeconomic challenges; firstly, China, but also Argentina and Venezuela.’…slowdown was principally driven by the challenges the industry, the broad industry, is facing in China.”

No question the overall consumer environment is weakening in China

“There are three factors impacting our performance in China. First, no question, the overall consumer environment is weakening due to the economy’s economic transition. Secondly, as this is occurring, wholesalers are adjusting to lower expected sales growth and bringing down inventory levels, which has a whiplash effect on our bottler sales. Third, there are some category mix shifts occurring as different consumer segments respond to these new circumstances.”

There are strong affordability needs across rural and blue collar areas in China

“there’s an opportunity here to both innovate with more premium products positioned for the higher income new mainstream consumer segment, as well as opportunities to address strong affordability needs across the rural and blue-collar areas.”

We remain committed to China, we always knew that transitioning to a consumer led economy was going to have challenges

“despite these actions to improve our business, we still expect our China operation to be under pressure for the remainder of the year. This is a key factor driving the organic revenue outlook, particularly the difference between consolidated and core, but I think it is worth finally making a note that we are keeping a long-term perspective with regard to China. We always knew that for a country as large as China, transitioning to a consumer-led economy was going to have its challenges. Those may have turned out to be more than we expected in the short-term; however, we absolutely believe in the long-term opportunity of this market of 1.4 billion consumers with relatively low beverage per capitas compared to the global average.”

Argentina, Venezuela and Brazil are facing difficulties

“Argentina, we believe that the Argentinian government is taking the right steps to secure its economic recovery, but this is resulting in a contraction in the near-term that accelerated in the second quarter, therefore impacting our business. In Venezuela, severe shortages in certain raw materials resulted in us temporarily suspending production at the bottling partners’ plants during the quarter, clearly impacting the results. Additionally, Brazil, the challenges there are well-understood and we think will continue for the remainder of the year; however, we are focusing on key affordability packages and activating a strong Olympic marketing campaign in the coming weeks and months.”

Not every market is under pressure. NA is strong

“not every market is under pressure. In markets with relatively stable economies, we are executing our strategies and seeing strong results. For example, in North America, we grew organic revenues 4% in the quarter, reflecting continued pricing initiatives for our sparkling business as well as the ongoing strength of our stills portfolio.”

There is no sugar in Venezuela

” the most extreme example perhaps is Venezuela, where there was no sugar. And we’ve actually doubled-down on really driving Coke with zero sugar in Venezuela with kind of a full red One Brand look. So there are places where we are adjusting to the need that just because you advertise, doesn’t mean people are going to buy if it’s an affordability problem. And I think China is a good example of where affordability is in there as well, and I think I’ve talked a bit about China.”

Constellation Brands FY 3Q16 Earnings Call Notes

Highlighting fourth consecutive year of strong stock performance

“This is the fourth consecutive year that Constellation was one of the best performing stocks in the S&P 500 Consumer Staples Index. I believe this excellent stock price performance is being driven by our strong financial results led by our beer business, which has incredible momentum and strong prospects for future growth.”

Ballast Point provides a high growth premium platform

“Ballast Point provides a high growth premium platform that will enable Constellation to compete in the fast growing Craft Beer segment, further strengthening our position in the high end of the U.S. beer market. Now Ballast Point is currently growing at more than 125% in IRI channels and remains on track to sell nearly four million cases and generate approximately $115 million in net sales for calendar 2015, representing growth of more than 100% versus the prior calendar year.”

Purchase price not crazy relative to the growth rate of Ballast Point

“so purchase price and size of the brand, first of all the purchase price is not related to the size of the brand. It’s related to the growth percentage and the size of the brand okay. So obviously the multiple that we paid for it in relationship to the growth is actually a pretty reasonable purchase price right. As you recall from my initial comments the brand grew over a 100% this year and 125% in IRI. So, when you look at purchase price at multiple as a function of growth rate, it’s pretty reasonable and we don’t see that growth rate changing much in the short term. So, we expect another pretty robust year with Ballast Point.”

Beer is becoming like wine

“Beer, okay — yes beer is becoming like wine. The high end of the beer business is a very exciting part of the business because there is huge trading up going on in beer. Okay the consumer is definitely premiumizing, it’s premiumizing into our import. They’re premiumzing into our import brand. And craft you see the high end of the beer business being very robust. You can see it coming right out of the premium part of the beer. We definitely think that that’s going to continue and although the price differential seems big in beer, okay that’s really in percentage terms okay, is still talking about like a super affordable luxury, way, way even more affordable than wine right.”

Constellation Brands 2Q16 Earnings Call Notes

California grape harvest is expected to be down this year, but good quality

“The current California industry estimate is for total harvest yield of 3.6 million to 3.8 million ton versus approximately 4 million tons last year. While the crop is down this year versus last, quality looks to be very good with excellent color and flavors and our winemakers are smiling.”

Grape pricing flat to down though

“From a pricing perspective, we continue to expect grape pricing to be flat-to-down slightly versus last year depending on the variety, locations and demand with the exception of Cabernet, which continues to be in high demand.”

Cans provide incremental consumption occasions

“In terms of where we think the mix can get to, our Modelo brand is more of a can centric brand. We don’t really see Corona becoming a can centric brand. The purpose of the can is to just provide incremental consumption occasions for our consumers.”

Corona is by far our most important brand

“Corona is our by far most important brand. And we are going to be very thoughtful about how we proceed basically with anything new with that brand. So good news is the brand is performing better than ever right now or at least as it relates to shorter-term history. So again, Beer business is extremely strong.”

The year of the can

“I do want to come back on the year of the can, however. We’ve seen a lot of growth in Corona Extra from our year of the can program. We’ve also seen a lot of growth on the Corona Light, which was a bit of ancillary benefit that came from our focus on cans and Corona. So yes, I think there are a lot of opportunities for a future growth in our brands.”

Volume remains sort of flat so the industry is pushing more premium

“the industry is definitively premiumizing, while volume remains sort of flat so that there is a shift internally towards more premium products.”