Q4 2023 Earnings Summary
- PepsiCo's international business, now almost $40 billion in revenue, is expected to grow faster than the U.S. business in 2024, becoming more profitable through scale, reinvestment, and margin expansion.
- The company is strengthening its beverage portfolio with product innovations and brand investments, including a relaunch of the Pepsi brand focusing on Zero Sugar, expansion in energy drinks through successful collaborations like CELSIUS, and introducing new offerings like Mountain Dew Baja Blast as a permanent SKU.
- PepsiCo Beverages North America (PBNA) has expanded core operating margin by over 150 basis points in the last three years, with plans for continued margin improvement through portfolio optimization, supply chain efficiencies, and higher returns on advertising investments.
- PepsiCo lowered its organic sales growth guidance to at least 4% for 2024, citing the Quaker recall affecting the first half of the year, geopolitical events impacting some markets, and a slowdown in the U.S. food and beverage categories due to pricing and disposable income pressures.
- Frito-Lay reported significant volume declines, with recent results showing a bigger volume decline than seen in some time, influenced by shifts from in-home to away-from-home consumption and competitive challenges in certain channels.
- Market share struggles in PepsiCo Beverages North America (PBNA), particularly in sports drinks and carbonated soft drinks (CSDs), raising concerns about their competitive position and ability to drive top-line growth in key categories.
-
Organic Sales Guidance
Q: Why did you lower your organic sales growth guidance?
A: We lowered our guidance due to several factors: a Quaker recall that will impact us for at least the first half of the year , geopolitical events affecting some markets , and a slowdown in the U.S. food and beverage category in Q4 due to pricing and disposable income pressures. Despite these challenges, we expect the categories to normalize and are maintaining our long-term growth algorithm. -
PBNA Profitability
Q: How will you improve PBNA operating margins?
A: We have made progress over the last three years, with PBNA net revenue growing over $5 billion and operating profit increasing by $1 billion, expanding core operating margin by more than 150 basis points. We’re optimizing our portfolio by eliminating less profitable products like bottled water , improving supply chain efficiency through digitalization , reducing G&A via global business services , and optimizing advertising and marketing spend for higher ROI. We plan to continue expanding margins without structural changes to our business. -
Frito-Lay Performance
Q: What are your expectations for Frito-Lay in 2024?
A: We expect Frito-Lay to return to profitable volume growth in 2024. The recent volume decline was partly due to a shift from in-home to away-from-home consumption, impacting volume because of differing portion sizes. We have a strong commercial plan, increasing advertising and marketing investments in core brands like Lay's and Doritos , and focusing on our permissible portfolio, which is growing almost three times the Frito-Lay average. We anticipate continued market share gains and a rebound in the category. -
Energy Drinks Strategy
Q: How are you addressing competition in energy drinks?
A: The energy category continues to grow above the liquid refreshment beverage category. We participate with multiple brands, including Starbucks coffee energy, Rockstar, and our collaboration with CELSIUS. Rockstar is growing with the category, focusing on Zero and Recover products that offer functionality where our R&D can create an advantage. We're also expanding Rockstar internationally in markets across Asia, Europe, and Latin America. Our collaboration with CELSIUS has been successful, and we're exploring opportunities for international expansion. -
Commodity Inflation Impact
Q: What is the outlook on commodity costs, especially for Frito-Lay?
A: We expect commodity inflation to moderate from what we experienced in 2023. While we don't comment on specific commodities, we acknowledge that some agricultural inputs might be higher. Less commodity inflation should benefit Frito-Lay, but we remain cautious due to potential increases in certain inputs. -
Cash Flow and CapEx
Q: How will you improve cash flow and free cash flow conversion?
A: Cash flow continues to be a priority. We have been intentional about our capital investments, including catching up on capacity and investing in IT and digitalization. Over time, we expect our level of capital expenditure as a percentage of sales to trend down, which will help improve cash flow conversion. -
SG&A and Distribution Costs
Q: What's driving the increase in SG&A, particularly distribution costs?
A: Selling and distribution costs are the largest part of SG&A. The increase reflects sector mix components and investments to drive distribution and growth. With our large direct-store-delivery business, we have experienced inflation in areas like labor. We have also increased advertising and marketing spend and made numerous capability investments. -
Advertising and Marketing Spend
Q: Are you investing enough in advertising and marketing?
A: We have increased advertising and marketing spend by over $500 million last year and over $1 billion over a longer timeframe. In absolute terms, our A&M has grown significantly. The percentage of sales may appear lower due to factors like stopping advertising in Russia. We will continue to invest in building our brands, innovating, and creating value through consumer investment. -
Consumer Confidence Assumptions
Q: How does consumer confidence affect your guidance?
A: Our current assumption is that the consumer will continue to improve in confidence and disposable income throughout the year. We feel good about the U.S. consumer in 2024 due to very low unemployment and expected wage growth outpacing inflation. If this doesn't materialize, we have a strong productivity program that gives us flexibility to manage different consumer realities.