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    PEP
    Earnings call· Dec 2024(Q4 FY24)

    PEPSICO INC PEP

    Feb 4, 2025 Source

    Executive summary

    PepsiCo Q4 FY24 — Strategic Investments and International Growth Drive Future Outlook

    PepsiCo concluded Q4 FY24 with strategic investments in its Frito-Lay North America business, aiming to revitalize volume growth through targeted pricing, innovation, and away-from-home expansion, while its international segments continued to deliver robust performance. The company's FY25 outlook reflects a prudent approach amidst global volatility, balancing sustained productivity with increased investment in key growth platforms and portfolio evolution towards health and wellness trends.

    Highlights

    5

    • International business continues to be a major growth opportunity, already a nearly $40 billion business accretive to PepsiCo.

    • Frito-Lay North America grew 8% over the last four years, gaining almost 200 basis points of market share.

    • Salty snack category showing signs of volume growth in the last three months of the year, with some pricing.

    • PepsiCo Beverages North America continues to improve margins, with a line of sight to mid-teens margin.

    • Baja Blast is an almost $1 billion franchise, driving incremental penetration for Mountain Dew, especially with Gen Z.

    Concerns

    3

    • Frito-Lay North America volumes decelerated sequentially in Q4 FY24 despite significant reinvestment.

    • FY25 EPS guidance assumes some leverage, but less than prior years, due to higher net interest expense and pension costs, and a 3.4x FX headwind.

    • North America top-line growth was muted in Q4 FY24, reflecting a challenging CPG industry environment.

    Guidance & targets

    5
    CategoryTargetConfidence
    Organic sales growth
    low single-digit
    high materiality
    Medium
    Adjusted EPS growth
    some leverage, but not nearly as much as you've reported in prior years
    high materiality
    Medium
    Organic sales growth
    4% to 6%
    high materiality
    High
    Adjusted EPS growth
    high single-digit
    high materiality
    High
    PepsiCo Beverages North America operating margin
    mid-teens margin
    medium materiality
    Medium

    Operational metrics

    7
    International business revenue
    $40B
    current

    To give you a sense today, our international business is already almost a $40 billion business accretive to PepsiCo.

    PepsiCo Beverages North America operating margin
    mid-teens
    long-term

    We see our line of sight to a mid-teens margin in our beverage business. That continues to be an aspiration.

    Frito-Lay North America revenue growth
    8%compound rate
    last 4 years

    Frito-Lay grew 8% in the last 4 years. That's a pretty good compound rate for a company of that scale and that development.

    Frito-Lay North America market share gain
    200 bps
    last 4 years

    Frito-Lay has, I think, gained almost 200 bps of share of market.

    FX impact on EPS
    3.4x hit
    FY25

    Yes, I'd add, we have about 3.4x hit. Obviously, the dollars strengthened recently. Peso is the biggest piece of that ForEx guide.

    Advertising & Marketing as % of sales
    pretty consistentvs. prior year
    FY25

    I'd expect our A&M to be pretty consistent as a percent of sales in 2025.

    Baja Blast franchise revenue
    $1B
    current

    It's a large franchise. It's almost $1 billion already between our away-from-home and our retail business in the neighborhood of $1 billion.

    Industry KPIs

    9
    MetricValueDetails
    Category brand share200 bpsbps
    EPS organic EPS growthhigh single-digit%
    Gross operating marginmid-teens%
    Organic revenue growthlow single-digit%
    Geographic regional mix$40BUSD
    Unit case volume growthgrowing again
    Energy functional category health—
    Pack architecture pricing actions—
    Bottler franchise system economics—

    Deals & partnerships

    2
    Siete Family FoodsAcquisition of a better-for-you snack brand.

    Part of strategy to participate in meals and mini meals, offering better-for-you snacks.

    SabraAcquired the remaining 50% of Sabra not previously owned.

    Part of strategy to participate in meals and mini meals, offering better-for-you snacks.

    Risks & headwinds

    4
    Global volatilityFY25, especially H1

    null

    Mitigation: Prudent guidance, flexibility to react to circumstances, continued long-term investment.

    Foreign exchange headwindFY25

    3.4x hit on EPS

    Increased net interest expenseFY25

    higher

    Increased pension expenseFY25

    up a bit

    What to watch in Q1 FY25

    4

    Frito-Lay North America volume growth

    Next quarter (Q1 FY25)
    CurrentDecelerated sequentially in Q4 FY24, but category starting to grow in volume in last 3 months.
    TargetSustained volume growth for FLNA and the salty/savory category.

    Why it matters

    Indicates effectiveness of reinvestment, pricing strategies, and innovation in revitalizing the core snacks business.

    volumes decelerated sequentially. So just curious if you can talk a little bit more about spending and reinvestment in the fourth quarter... the ROI on reinvestment doesn't feel great with volumes kind of taking a step in the wrong direction.

    Q&A highlights

    5

    Lauren questioned the ROI on Frito's Q4 reinvestment given sequential volume deceleration, asking if it was tactical or strategic.

    Jamie stated the investment aims to regain momentum in Frito and the salty/savory category, funded by productivity and Q4 non-operating gains, with a focus on improving 2025 performance. Ramon added that the category is returning to volume growth, and investments target innovation, unmet spaces, and the Away-From-Home opportunity.

    “the ROI on reinvestment doesn't feel great with volumes kind of taking a step in the wrong direction. So just curious if you can talk a little bit more about spending and reinvestment in the fourth quarter, in particular, how much you would describe as kind of tactical versus laying strategic groundwork for next year?”

    asked by Lauren Lieberman · answered by Jamie Caulfield

    2 min read6 chapters

    Detailed Narrative

    01

    Frito-Lay North America Reinvestment Strategy

    PepsiCo is strategically reinvesting in its Frito-Lay North America business, particularly in Q4 FY24, utilizing one-time📎 gains to fund initiatives aimed at revitalizing volume growth and category momentum. Key areas of focus include optimizing price partitions (e.g., sub-$1, sub-$2 offerings), refining price pack architecture for single-serve and multipacks, and expanding into the Away-From-Home channel. The goal is to attract consumers across various disposable income levels and occasions, with a strong program planned for FY25.

    02

    Portfolio Evolution and Health & Wellness

    The company is accelerating its portfolio evolution to meet increasing consumer awareness around health and wellness. This involves shifting A&M dollars towards 'positive choices' and 'permissible offerings,' such as a new line of 'no artificials' under Simply, more baked and lightly salted products, and an emphasis on portion control. Acquisitions like Siete and Sabra are integral to this strategy, providing better-for-you snacks and enabling participation in mini-meal solutions, reflecting a multi-year consumer trend.

    03

    International Business as Growth Engine

    PepsiCo's international business remains its largest growth opportunity, consistently delivering strong performance and margin expansion. Now a nearly $40 billion business, it is accretive to the company's overall results and is expected to be a resilient and major contributor in FY25. The company is restructuring its international operations to enhance focus between franchise beverage opportunities and food operating units, aiming to capture significant per capita growth potential.

    04

    North America Beverages Strategy

    In North America Beverages, PepsiCo is focused on continuous margin improvement, with a clear aspiration for mid-teens margins. The strategy for FY25 includes driving top-line acceleration through better price pack execution and targeted innovation in areas like Zero sugar beverages, functional hydration, teas, and coffees. Operational excellence and productivity initiatives are central to this segment's journey, aiming to enhance efficiency across buying, making, and moving processes.

    05

    FY25 Outlook and Investment Philosophy

    PepsiCo's FY25 guidance reflects a prudent approach amid global uncertainties, with expectations for low single-digit organic sales growth and EPS growth that will see some leverage but less than prior years due to FX headwinds🌐, higher net interest expense, and increased pension costs. The company plans to ramp up investments, leveraging systematic productivity savings to fund long-term growth platforms and maintain flexibility to adapt to market conditions, particularly in the first half of the year.

    06

    Restructuring and Operational Harmonization

    The company is undertaking a restructuring to optimize its international and U.S. operations. Internationally, this involves separating beverage and food units for enhanced category focus. In the U.S., the restructuring aims to leverage prior investments in systems, data, and infrastructure to achieve short-term cost efficiencies and harmonize future technology and infrastructure decisions, while maintaining focused category teams for innovation and consumer understanding.

    AI-generated summary of the company’s earnings call. Not investment advice.