Q3 2024 Earnings Summary
- PepsiCo is strategically improving margins in its beverage business in the U.S., aiming for mid-teens margins in PBNA (PepsiCo Beverages North America) in a couple of years, and is also enhancing international margins through scale and efficiency. ,
- The company is evolving its food portfolio to align with consumer trends towards more permissible snacks and mini meals, particularly among Gen Z, with its permissible snacks portfolio already a significant and growing $2 billion business. , ,
- PepsiCo's systemic productivity and cost transformation programs, including automation of the supply chain and digitalization, are generating growth and efficiency, enabling high EPS performance even in challenging times and providing flexibility to invest in business growth. ,
- Margins under pressure in Frito-Lay North America due to required reinvestments: PepsiCo's Frito-Lay North America division experienced a significant 200 basis point decline in operating margin, and margins are expected to remain pressured into next year due to continued investments to stimulate consumer demand.
- Deceleration in international convenience foods amid geopolitical tensions and weaker consumer spending: PepsiCo is facing a slowdown in key international markets, including China and Mexico, with the convenience foods segment decelerating more than beverages. Geopolitical tensions in the Middle East are also impacting performance, which may continue in the coming months.
- Potential structural shifts in consumer habits affecting snacks business growth: There are concerns that the slowdown in the snacks business may be due not only to cyclical factors but also to structural or secular changes in consumption habits, with consumers moving towards more permissible snacks and unstructured meals. This requires significant strategic investments and could impact growth and profitability.
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Organic Sales Growth | Q3 2024 | Mid-single-digit organic sales growth | Total revenue declined from 23,453MIn Q3 2023 to 23,319MIn Q3 2024 (≈ -0.57% YoY), indicating no mid-single-digit growth | Missed |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
International expansion as a growth driver | Previously emphasized as a significant growth driver, with revenues near US$40B internationally and heavy investments in regions like India, China, Europe, and Latin America. | Discussed challenges and growth in various international markets (Southeast Asia, India, Eastern Europe, Brazil) without explicitly calling it a key growth driver. China and Mexico decelerated, and the Middle East was impacted by geopolitical tensions. | Consistent but with less explicit emphasis this quarter |
Productivity initiatives to enhance margins | Multiyear productivity pipeline involving automation, digitalization, and strategic cost controls to sustain efficiency across PBNA, FLNA, and international segments. | Focus on portfolio optimization, automating supply chain, digitalization, and global capability centers. PBNA margin goals and scale efficiencies internationally were highlighted. | Ongoing across all calls; expanded detail in Q3 |
Continued brand building and innovation | Key pillar for growth in Q2, Q1, and Q4, with examples like Gatorade, Mountain Dew, zero-sugar products, and "permissible" snacks, alongside consistent investments in A&M and innovation to drive category expansion. | CEO emphasized investing in brand health and innovation for long-term growth in both snacks and beverages. | Consistent theme with steady investments |
Shifts in consumer behavior and value-conscious spend | Multi-year discussion of price-conscious consumers across income levels, value-seeking behaviors, and a shift from in-home to away-from-home consumption. Emphasis on adapting promotions and product offerings accordingly. | Slower-than-anticipated U.S. consumer recovery, 0.5 point growth drag from geopolitics, and consumer focus on smaller multipacks and bonus packs for affordability. | Consistent awareness of cautious consumers |
Away-from-home consumption emphasis | Previously highlighted as a faster-growing channel, with shifts from in-home to away-from-home consumption impacting portion sizes and volume. | Brief mention of expanding into away-from-home channels but not a focal point. | No longer a major focus in Q3 |
Potential addition of Siete to permissible portfolio | No prior mentions in Q2, Q1, or Q4 documents. | Newly discussed acquisition pending approval to expand "permissible" snacking and mini-meal opportunities. | Newly emerged |
Quaker product recall impacting supply chain | Mentioned in Q2 (recovering supply and positive impact expected) and Q4 2023 (recall in Nov-Dec affecting first half of year). | No mention of Quaker recall or supply chain impact this quarter. | Newly emerged in prior calls but not in Q3 |
Expanded focus on automation, digitalization, and global capability centers | Referenced in Q2 as a strategic, multiyear pipeline with automation and standardization. Fewer details in Q1 and Q4. | CEO highlighted systemic productivity platforms, from automated warehousing to digitalized value chain management, plus global business services at scale. | Newly emphasized with more detail in Q3 |
Progressive lowering of organic revenue growth guidance | Adjusted from ~5% to 4% in Q2 due to soft U.S. environment; reaffirmations in Q1, and lowered guidance in Q4 due to Quaker recall and geopolitical events. | Lowered from 4% to low single digits, citing slower U.S. consumer recovery and geopolitical drag. | Changed sentiment with repeated downward revisions |
Increasing margin pressure in Frito-Lay North America | Noted margin compression in Q2 (managing total margins) and some softness in Q1 (lapping high growth). Little direct mention in Q4. | Experienced ~200 bps decline in operating margin; management focuses on total PepsiCo margins while investing to drive demand. | Changed sentiment – margins under pressure but balanced by total firm |
Trillion-dollar snack and beverage market opportunities | No explicit mention in Q2, Q1, or Q4, though the scale of international business has been highlighted. | CEO referred to snacks and beverages as large global categories with significant long-term growth potential. | Potential major future impact first stated in Q3 |
Geopolitical tensions affecting international performance | Cited in Q2 as a potential risk if conditions worsen and in Q4 as a factor lowering guidance. Not explicitly noted in Q1. | Middle East conflicts and other geopolitical factors contributed a 0.5 point drag on total revenue growth. | Likely to continue impacting global outlook |
Retailer pressure for promotional rollbacks influencing profitability | No direct references in Q2, Q1, or Q4. Some discussion on "win-win plans" with retailers in Q4 but no explicit rollback pressure. | No specific mentions in Q3. | Not mentioned across periods |
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Balancing Cost Cuts and Investment
Q: How are you balancing cost cuts with investment to stimulate demand?
A: Management is focusing on productivity and cost transformation through automation and digitalization across the value chain, generating both growth and productivity. This approach provides flexibility to invest responsibly in the business while delivering the financial returns expected by investors, even in a challenging consumer backdrop. They continue to invest in marketing, long-term transformation, and sustainability without compromising short-term results, thanks to best-in-class productivity programs deployed over the coming years. -
EPS Growth Amid Low Revenue
Q: Can you still deliver 8% EPS growth with low revenue growth?
A: Management believes their multi-pronged productivity efforts will allow them to deliver their EPS targets even if organic revenue growth remains low. They expect their categories to grow more than 1% long term and are not considering a low-growth scenario in their planning. They will focus on what they can control, such as productivity and keeping consumers in their brands, to continue delivering financial returns. -
Lowered Organic Sales Guidance
Q: What drove the reduction in organic sales guidance to low single digits?
A: The reduction from 4% to low single-digit organic sales growth is due to a slower recovery of the consumer in the U.S. and, to a lesser extent, geopolitical impacts on international markets. Geopolitical issues resulted in about a 0.5-point drag on total revenue growth in the quarter. Management does not expect a significant change in conditions for Q4. -
Margin Outlook and Investments
Q: Should we expect margins to remain pressured due to investments?
A: Management is focused on stimulating consumer demand responsibly, prioritizing investment in the business over short-term margin expansion in segments like Frito-Lay. They are managing margins at the total portfolio level and expect to expand margins meaningfully at the PepsiCo level while investing in the long-term health of the business. -
International Business Challenges
Q: Which international markets are negatively impacting results?
A: Certain markets are seeing deceleration, including China due to a weaker consumer and Mexico ahead of elections. Geopolitical tensions in the Middle East have impacted results, causing about a 0.5-point drag on total revenue growth in the quarter. -
Cyclical vs. Structural Slowdown
Q: Is the slowdown cyclical or due to structural changes in consumption?
A: Management believes long-term trends favor growth, with consumers snacking more and eating mini meals. While acknowledging current affordability concerns, they are confident in the long-term prospects and are evolving their portfolio accordingly, including the planned acquisition of Siete Foods to capture permissible and meal occasions. -
Gatorade Transition and DSD System
Q: How is the Gatorade transition and DSD system affecting margins?
A: The Gatorade transition is performing well, with improved service levels and market share gains. Propel is growing double digits, enhancing DSD system economics in some states. Management is optimizing warehousing, transportation, and delivery models to improve efficiency and is on track to reach mid-teens operating margins for PBNA in a few years. -
Frito-Lay Volume Growth Drivers
Q: What are the drivers for returning to volume growth in Frito-Lay?
A: Management is focusing on providing more value in core brands like Lay's, investing in brand events and bonus packs for Tostitos and Doritos, and expanding their permissible portfolio with brands like SunChips and Simply. They are also entering new channels and leaning more on value offerings in the near term. -
Energy Drinks and CELSIUS
Q: What is the outlook for energy drinks and CELSIUS slowdown?
A: Management believes the energy need remains strong long term, despite recent impacts due to reduced convenience store traffic. They remain optimistic about the CELSIUS partnership, executing their part with increased distribution points and service levels. -
Investments in Tostitos and Positive Choices
Q: Have you invested behind Tostitos like Lay's? Progress on Positive Choices?
A: They are increasing investments in Tostitos during the fall season with brand events and bonus packs offering 20% more product. The permissible portfolio is growing, with brands like SunChips, Simply, PopCorners, and they continue to invest in distribution and trial generation. -
Actions Taken in Frito-Lay
Q: Are you tweaking actions in Frito-Lay for greater payoff?
A: Management is applying a multi-pronged strategy, providing more value on core brands, investing in brand events, and working on long-term portfolio evolution. They are introducing bonus packs, investing in permissible and multicultural offerings, and entering new channels to create new occasions. -
Q4 Expectations within Guidance
Q: Where do you expect to fall within Q4 organic revenue guidance range?
A: Management does not anticipate a significant change in conditions and does not expect a huge inflection up or down from the conditions that existed in Q3.