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.”

PepsiCo’s (PEP) Q2 2017

CEO Indra Nooyi

Business in Latin America performing well in spite of the challenges

“in Latin America we continue to see very challenging macroeconomic conditions, geopolitical instability, and high levels of inflation in key markets, including Brazil and Argentina, which are dampening consumer spending. Within this context, our businesses are performing well.”

Strategies to counter increased global challenges

“We are pricing to cover the increased cost of doing business, we are going more aggressively after productivity to reduce our overall costs, and we continue to transform our beverage portfolio to offer more non-carbonated options and reducing sugar levels across the portfolio.”

They are paying attention to e-commerce

“The good news is, our e-commerce business is growing brilliantly. We are doing very, very well. We are not yet ready to talk about it in any significant way….it’s growing with our traditional products and our traditional packaging, if you want to call it that….we are looking at meaningful innovation, both in snacks and beverages, in order to address the exploding growth of e-commerce”

Retail is changing and we must change with it

“Perhaps more pronounced are the changes we are witnessing in retail where the lines are blurring between channels…the channels are beginning to blur between food service, retail, home delivery, restaurants, everything, the channels are beginning to blur….you now have a shopping occasion being replaced by home delivery or replaced by a meal delivery of kits. So what we have to do is rethink what is the real growth of the marketplace, the food and beverage marketplace, in a much more holistic way…we all as manufacturers have to start to rethink how we serve this multiplicity of channels and how we should retool our business models to serve every one of these fragmenting channels.”

 

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.”

Pepsi 3Q16 Earnings Call Notes

PepsiCo’s CEO (PEP) Indra Nooyi on Q3 2016 Results

3% volume growth in snacks

“we had more than 3% organic volume growth in global snacks and more than 2% organic volume growth in global beverages. While foreign-exchange translation continued to pressure our reported revenue results, we delivered more than 4% organic revenue growth, which represents an acceleration from the first half.”

Generated 37% of all food and beverage sales growth in the US

“For example, the third quarter in the US, which is our largest market, we were once again the largest contributor to retail food and beverage sales growth. We generated approximately 37% of all food and beverage retail sales growth, significantly higher than our food and beverage dollar share position of less than 10%. And we generated more retail sales growth than all other $5 billion class food and beverage manufacturers combined.”

SG&A leverage all starts with topline growth

” On the SG&A leverage, it all starts first with topline growth. The minute you get good top line growth, you get leverage on all of the other SG&A costs that we have in the P&L. And so, this quarter was a very, very good top line growth at 4.2%. That’s pretty significant.”

Hugh Johnston

Deflationary environment in commodities, but do have a negative water mix

“We are continuing to get good pricing in carbonated soft drinks. The couple of factors I would remind you of is we do have deflationary commodities right now. So you’re seeing a little bit less of that pricing flow through into retailers as we have deflationary commodities. The other is, we do have a negative water mix going on. So on the one hand, non-carbs were quite positive. But a portion of that was water which is, obviously, from a price mix perspective, negative”

Pepsi at Barclays Conference Notes

Vivek Sankaran

If you want to know where consumer taste is headed look at college campuses

“We have a great deal of consumer research that tells us where the [indiscernible] consumer is going and the millennial moms those are two we watch real carefully. But at the end of the day, it’s simpler than that. Just go in a college campus and see what are the highest selling products on campus water, Gatorade, third, which is a surprise Lipton Pure Leaf Tea, then we’ve got Starbucks, then we got Mountain Dew. Those are the five selling. So, if we’re not heading where that consumer is going in the next five years is, we would have a tough time. But I think we are making some progress in that area.”

Pepsi 2Q16 Earnings Call Notes

PepsiCo CEO (PEP) Indra Nooyi on Q2 2016 Results – Earnings Call Transcript

2% volume growth

I’m pleased to report that our businesses continued to perform well in the second quarter. We had more than 2% organic volume growth in both global snacks and global beverages. While foreign exchange translations continue to pressure our reported revenue results, we delivered more than 3% organic revenue growth led by Frito-Lay North America, AMENA and Latin America.

Focused on five things

there are five things we focused on to deliver in what continues to be a challenging macro-environment. First, consumer-centric relentless innovation; second, connecting with digital age consumers in new ways; third, being a true growth partner to our customers; fourth, flawless end-to-end execution; and fifth, a maniacal focus on productivity.

Strategy has been to expand in the snack category

Look, the macro snack category is a big category. And we’re only playing in the salty snack category, expanding into savory snacks. And our goal, if you go back maybe 15 years ago, and we’ve been consistent in this strategy, we’ve always said, grow the core, add more inch out of the core. We’ve used these words. And that’s what Frito-Lay has been doing, solidify our position in salty snacks and start to step out of the core into other savory snacks and then start to take on other occasions from the overall macro snack category.

Mexico is actually doing well

Mexico is actually doing well. The strength of the dollar, the increased remittances into Mexico doing well, the country actually is one of the brighter stars in the whole Latin American economy. So we feel good about our business in Mexico

The marketplace for soft drinks has fragmented, making distribution even more important

Now, let me just say, the marketplace is fragmenting. Forget Pepsi or Diet Pepsi or the cola category, any new category that’s expanding is becoming niche, more fragmented. And that’s why it was important for us to own the distribution system because once you have control over the distribution system, you can pump a lot of niche products through it, all our craft products, all of those are low-volume products. So we have to learn how to handle complexity, not walk away from it.

The beverage market is larger than just Carbonated Soft Drinks

think, Caroline, and we talked about it in the Q1 earnings call, it is critically important that all of you change your frame of reference in the beverage market from cola to CSDs to LRBs. 30 years ago, it was colas. 25 years ago, it was CSDs. 15 years ago, it was CSDs. It’s been LRB for the last decade or so. And I think the sooner we can shift our frame of reference, the better it is because just beating a category that is in secular decline, just beating that all the time is not a game to play, that’s not a game that is going to guarantee good results. If we play this rich LRB game, multi-category, placing the bets where the growth is and where the consumer is going, I think we’re better off. So my request to you and all of you who are tracking the company in this category, expand your aperture. LRB is the game to play. That’s the game we’re playing and we watch LRB share very, very carefully.

Hugh Johnston CFO

The macro has been more stable than the guidance that we gave

When we give guidance, our intention is always to hit it and perhaps beat it. Now that we’re halfway through the year, I think we’ve seen two things. One, the macros are operating in a consistent steady way, so there has not been a deterioration, which, obviously, is to our benefit relative to our expectations.

Snack foods are recession resistant

frankly, that’s what you’ve seen, is this portfolio now, regardless of economic cycle, regardless of consumer sentiment, regardless of consumer trends in chips, seems to be capable and has been capable delivering good, strong performance throughout all of those shifts.

Miscellaneous Earnings Call Notes

PepsiCo (PEP) Indra K. Nooyi on Q1 2016 Results

It’s a difficult environment indeed

“Most of the developed world outside the United States is grappling with slow growth. GDP growth in developing and emerging markets is also challenged with many D&E markets experiencing significant political unrest and high unemployment. Key energy-producing countries are dealing with significant budgetary gaps; and high levels of local inflation in many of these markets are eroding disposable income and dampening consumer spending. It’s a difficult environment indeed.”

Hugh F. Johnston – Vice Chairman, Chief Financial Officer & EVP

Incrementally less optimistic in South America and Eastern Europe

“I think the two places where we’re probably incrementally less optimistic, number one is South America, not Mexico. Mexico, I think, we’re quite positive on, but the balance of South America obviously is a challenge. And then number two is Eastern Europe. Eastern Europe is obviously continuing to be challenged from a GDP perspective and that flows through to disposable income and therefore to consumer spending on our products. The balance I think were probably roughly in line with where we’ve been.””


Hasbro’s (HAS) CEO Brian Goldner on Q1 2016 Results

Seeing impact from ongoing economic challenges

“While consumer demand remains robust, we are beginning to see an impact on some retailers from the ongoing economic challenges.”

Retailers are excited about toy category

“I would say this is the second year of strong growth year-to-date; we are seeing high single digit growth rates, both in developed economies like U.S. and also throughout Europe. Retailers are very excited about the category, as we continue to have more story driven brands, more integrated play brands and more innovation in the category. Overall, POS was very strong, as I said, but as we’ve noted before, online POS was even stronger, and many additional retailers that have been historically brick retailers are doing a very good job in omni-channel.”


Morgan Stanley (MS) James Patrick Gorman on Q1 2016 Results

Seeing a better turn in markets now

“where are we now? Though it’s impossible to predict the future, we’re seeing a slightly better turn in markets, certainly, in comparison to what was evident at the start of the first quarter, leading into the early days of February. The M&A pipeline is strong and some green shoots suggest the equity underwriting calendar may open up. The S&P level at the end of the first quarter will help with asset pricing in our Wealth Management business, where we continue to grow our lending book and see flows into managed accounts. ”


Brinker International’s (EAT) CEO Wyman Roberts on Q3 2016 Results

QSR is taking share with promotions

“I mean there’s just such a strong value proposition being played out there. And we don’t think that that’s sustainable or it’s a long term issue, I think it’s more of those are limited time offers, but they also are interesting that the QSR category is kind of showing us that they’re rethinking how they deliver value and their value propositions ”


The Coca-Cola (KO) Ahmet Muhtar Kent on Q1 2016 Results

James Quincey – President & Chief Operating Officer

The degree to which our industry was affected by the slowdown in China was worse than expected

“In China, we are adjusting our plans to reflect these realities. China’s macro environment was challenging in 2015, and that continued to be so in the first quarter. While the economic slowdown is not new, the degree to which the NARTD industry was impacted this past quarter was worse than expected.”


Chicago Bridge & Iron NV (CBI) Philip K. Asherman on Q1 2016

Customers aren’t canceling work, just delaying

“I would have to say if there’s customer impact in today’s environment, it has to do with just again a delay in making financial commitments and we’ve seen that. However, we haven’t seen any cancellations in current backlog or in prospective work. So, that’s good. It just seems to be pushing out a little further.”


Knight Transportation (KNX) CEO Dave Jackson on Q1 2016 Results

April has been better y/y

“if I were to look into April thus far, we would say what we have seen so far in April has been more of the same where we’re seen our trucks run a little bit better in terms of miles’ year-over-year and we’re seeing — so therefore we’re seeing decent volumes on a year-over-year basis.”


PulteGroup (PHM) Richard J. Dugas, Jr. on Q1 2016 Results

No V-shaped rebound

“We have believed since the outset of this housing recovery that it would be more gradual than the V-shaped rebound, typical of most housing cycles. Our thesis is unchanged as we expect an extended recovery will continue to unfold for the next several years supported by improving economy, favorable demographics, years of relative under-building and a supportive mortgage rate environment.”

Inventory of available homes remains tight

“The inventory of homes available for sale remains tight in most of our markets; and at least on the new home side it will likely remain that way for a while given the limited supply of finished lots available. ”


Fifth Third Bancorp (FITB) Gregory D. Carmichael

Would grow investment portfolio at slightly higher rates

“So, frankly, if rates were to stay at these pretty low levels, you could expect from us just to reinvest cash flows because the entry points don’t look real good. But if rates were to have a little bit of a sell-up here and present more opportunity, then you would expect our investment portfolio to grow in line with earning assets. But I don’t think you’ll see a lot of movement in the book one way or the other throughout 2016.”


Cohen & Steers’ (CNS) CEO Bob Steers on Q1 2016 Results

The asset management industry is no longer a growth industry

“The simplest takeaway from the letter is that the asset management industry in its current form is no longer a growth industry for a majority of traditional active asset managers. Overcapacity, chronically poor investment performance, high fees, competition from passive strategies, growing barriers to entry for access to distribution and the rapidly growing cost of regulatory compliance, taken together will challenge future growth and profitability for most legacy investment managers. However, we’re convinced that asset managers who are focused on a limited number of historically inefficient markets, with strong brands and track records of consistent outperformance, will be among the relatively small number of big winners.”

Real estate is under-allocated in retirement plans but not among institutional investors

“I would say that large institutions are not under-allocated to real assets. The largest endowments in sovereign wealth funds have had a 10% to 30% allocation to real-assets for some time. However, most of those allocations have been executed to private equity strategies. Where the under-allocation is more pronounced is both in the wealth and what I would call the retirement channel, the fine contribution channel which as you know we’ve been adding to our DCIO team because there’s virtually no representation in the 401(k) market in real assets.”


Reliance Steel & Aluminum (RS) Gregg Mollins on Q1 2016

Rising steel prices for the first time in over a year thanks to positive trade case filings

“for the first time in well over a year, we’ve begun to experience rising metal pricing for carbon steel products as well as stainless steel flat-rolled products. This pricing improvement, which accelerated towards the end of first quarter, was mainly result of the recent trade case filings by U.S. steel producers. We continued to support these trade actions which seem to be having a positive impact on reducing the overall level of imports in the United States marketplace and on metal prices.”

Not seeing anyone build inventory in anticipation of higher prices

“You have to realize that our average order size is about $1,600, so we are dealing with a lot of small to mid-size job shops. That’s probably the vast majority of our businesses is not with large OEMs, and so therefore they are really not buying in advance. We have not seen or heard from our guys in the field that anybody is building inventory in anticipation of higher prices. So I’d have to say basically its business as usual with our customer base and we don’t see anybody really trying to build inventories ahead of price increases.”


Pepsi 3Q15 Earnings Call Notes

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.”

Pepsico FY 2Q15 Earnings Call Notes

Increasing growth outlook

“Based on the strength of the quarter, our overall first half results and our outlook for the remainder of the year, we are increasing our full year of core constant currency 2015 EPS growth outlook to 8%.”

Eight years ago we were a decentralized organization in innovation

“eight years ago. At that time, we were in an extremely decentralized organization, operating as a loose confederation of geographic business units, with each largely driving its own development agenda and establishing their own processes”

Adopted a “demand moments framework” for innovation

“we globally adopted the proprietary Demand Moments framework, originally developed at Frito-Lay North America. The framework focuses on the triggers of consumption by examining consumer needs based on the context of the occasion. This created much stronger linkage between consumer and shopper insights in the R&D functions, and has led to our innovation being more incremental to top line growth.”

Clearly there are macro challenges but we will navigate them

“Clearly, there are a number of macro challenges around the world, but we believe we have the right strategies and programs in place, to enable us to continue to navigate successfully through the current environment. The construction of our product and geographic portfolios enable us to continue to deliver strong results. In part, because our balanced portfolio creates a natural hedge against the global macro and political volatility that has become the new normal. And all of this bolsters our confidence in our ability to continue to achieve our financial target.”

Foreign exchange negatively impact revenue and earnings by nine and 11 percentage points

“We expect foreign exchange translation to negatively impact net revenue and core earnings per share growth by approximately nine and 11 percentage points respectively, based on current market consensus rates.”

43 years of dividend increases

“Our annualized dividend is now $2.81, an approximate 60% payout ratio based on 2014 core EPS. This represents the 43rd consecutive year of annual dividend increases and our annualized dividends per share have grown at 10% compound annual rate over the past 10 years.”

Second half comps will be a little tougher than the first half

“we are certainly facing more of an uphill for growth in the back half of the growth. Number two, you are correct, commodities are more of a headwind in the back half of the year than they were in the first half of the year.”

There is some bifurcation of center of store vs. perimeter

“there is some bifurcation between what’s happening in the center of the store, and what’s happening on the perimeter. But from the perspective of the categories we participate in, with the exception of center of the store, where we saw Quaker category slow down a little bit; most of our categories are robust and saw pretty good growth across the quarter”

In conversations with governments to make sure no discriminatory taxes on our products

“we are also in constructive conversations with governments, to make sure there aren’t any discriminatory taxes or discriminatory action on any of our categories.”

The board focuses on talent management for the top couple hundred roles

“talent management is something that the board and I are focused on a lot. I mean, our phenomenal board, spends a lot of time thinking through succession for the top couple of hundred jobs. And one of the things we always looked at is, where is that bright talent across the company that should be lifted up, so that they can be part of a succession process in the company. And every time we get an opportunity, we figure out ways to lift them up, in order to stretch people, in order to really build exciting talent for the future, and that’s what the most recent changes enabled us to do.”

Our base is savory snacks

“our base is savory snacks, and we are a very-very strong player in savory snacks. First of all globally, we still have a lot of growth within savory snacks. We came from a salty crisp snack background, and we are expanding more and more into other savory snacks, be it crackers, be it nuts and seeds, we are expanding into those areas, there is lot of opportunity there.”

We have the opportunity to take away eating occasions from other macro snack categories

“The other area is taking away eating occasions from other macro-snacks category. Its interesting, unlike beverages, in the case of snacks, we can go off and take eating occasions from other macro-snacks, be it cookies, or confectionery or chocolate. And our goal is to focus on what we are doing, but looking at our signs of demand spaces, which I talked about briefly, look at each eating occasion by cohort group, and figure out, how we can leverage our salty snack platform, to go after other macro snacks, be it — replace it with a salty occasion, or do some sort of a salty-sweet combination, for example Stacy’s with cinnamon sugar. It’s based on a pita chip, but it’s certainly sweet when you taste it, and has a much better mouth feel and experience, than if you eat something totally sweet by itself. At least, that’s my perspective.”

Nobody likes cost cutting, everybody likes growth

“look nobody likes cost cutting, everybody likes growth. I think we are one of those companies that are doing a wonderful balance of growing the top line and delivering productivity, and that’s what we want to focus on. Swinging the pendulum too much to cost cutting, I don’t think is a good idea at all, because it just jeopardizes the future of the company.”

Pepsi 4Q14 Earnings Call Notes

Each week I read dozens of transcripts from earnings calls and presentations as part of my investment process. Below are some of the most important quotes about the economy and industry trends from the transcripts that I read this week. Full notes can be found here.

Social and digital marketing

“We expanded our engagement in social and digital marketing. For example, Doritos CrashTheSuperBowl received nearly 5,000 consumer submissions from 29 countries around the world. And our Lays Do Us A Flavor campaign garnered more than 14 million submissions. Programs like these drive phenomenal consumer engagement, are highly complementary to our broader marketing efforts and are extremely financially efficient. Our investments are translating to tangible results with solid improvement in brand equity scores and market share performance in our priority markets for our global brands.”

Higher inflation in non-market traded commodities

“In terms of headwinds, we anticipate commodity cost inflation in the low single digits. Keep in mind that because of our forward buying strategies, our commodity cost changes will lag what you see in the spot market. I believe our expected inflation rate is a bit higher than what a number of you have modeled and this is because we are seeing more pronounced inflation in our non-market traded commodities, including certain packaging and agricultural raw materials. In addition, we will see an inflation impact from transaction ForEx in many of the markets whose currencies have weakened against the dollar. And foreign exchange translation will be a significant drag on our U.S. dollar earnings.”

Pepsi and Frito-Lay merged in 1965

“this year marks the 50th anniversary of the coming together of PepsiCo and Frito-Lay in 1965. We set the foundation for what is today one of the world’s most iconic and successful companies. ‘”

Only 79 of the Fortune 500 in 1965 still remain

“It was a phenomenal vision of Don Kendall and Herman Lay, the architects of this combination, which set the stage to grow from $510 million in revenue in 1965 to almost $67 billion today. Of the companies in the Fortune 500 in 1965 just 79 remain today, and over this time frame, we’ve generated extraordinary shareholder returns.”

Juice business is very different in Europe than it is in the states

“the Tropicana line-up we sell in France and the UK is a very different line-up than we sell here in the U.S. because the juice business evolved very, very differently there.”

It takes time for lower gas prices to make their way back

“In terms of the impact of gas prices, I think what we see happening is consistent with what we’ve seen in the past which is — it takes a number of months before the consumer fully spends back the so called benefit from lower gas prices. I think you’re going to see that over the course of six months to eight months rather than an immediate change in consumer behavior. It just sort of assimilates over time.”