Pepsico, Inc. (PEP)

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PepsiCo, Inc. (PEP)

Q4 2018 Earnings Conference Call

February 15, 2019, 07:45 ET

Company Participants

Jamie Caulfield - SVP, IR

Ramon Laguarta - Chairman, President & CEO

Hugh Johnston - Vice Chairman, EVP & CFO

Conference Call Participants

Dara Mohsenian - Morgan Stanley

Bryan Spillane - Bank of America Merrill Lynch

Lauren Lieberman - Barclays Bank

Ali Dibadj - Sanford C. Bernstein & Co.

Judy Hong - Goldman Sachs Group

Andrea Teixeira - JPMorgan Chase & Co.

Stephen Powers - Deutsche Bank

Bonnie Herzog - Wells Fargo Securities

Caroline Levy - Macquarie Research

Kevin Grundy - Jefferies

Laurent Grandet - Guggenheim Securities



Good morning, and welcome to PepsiCo's Fourth Quarter 2018 Earnings Conference Call. [Operator Instructions]. Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Jamie Caulfield, Senior Vice President of Investor Relations. Mr. Caulfield, you may begin.

Jamie Caulfield

Thank you, operator, and good morning, everyone. I'm joined this morning by PepsiCo's Chairman and CEO, Ramon Laguarta; and PepsiCo's Vice Chairman and CFO, Hugh Johnston. We'll begin with approximately 25 minutes of prepared comments from Ramon and Hugh, and then open the call up to your questions.

Before we begin, please take note of our cautionary statement. This conference call includes forward-looking statements, including statements regarding 2019 guidance and long-term targets, based on currently available information. Forward-looking statements inherently involve risks and uncertainties that could cause our actual results to differ materially from those predicted. Statements made on this conference call should be considered together with cautionary statements and other information contained in today's earnings release and in our most recent periodic reports filed with the SEC.

When discussing our financial results on today's call, we will refer to certain non-GAAP measures, which exclude certain items from our reported results. Such items include the impacts of certain tax-related matters, foreign exchange translations, acquisitions, divestitures, structural and other changes, and restructuring charges. You should refer to the glossary and other attachments to this morning's earnings release and to the Investor section of PepsiCo's website under the Events and Presentations tab to find full explanations and reconciliations of these non-GAAP measures.

And now it's my pleasure to introduce Ramon Laguarta.

Ramon Laguarta

Thank you, Jamie, and good morning, everyone. We'll begin this morning's call with a brief recap of 2018 performance, and then move on to a discussion at -- of go-forward priorities, long-term targets and the financial outlook for 2019. So let's begin with 2018, which was a very successful year.

We met or exceeded each of the financial targets we outlined at the beginning of the year. Organic revenue grew 3.7%, which was a meaningful sequential acceleration from 2017. And within the year, we saw the rate of growth accelerate from 2.5% in the first half to 4.7% in the second half. Purely North America and each one of the international divisions performed very well, and NAV made progress throughout the year with a return to organic revenue growth and improved pricing. At the same time, we continued to make investments in the business, and the solid momentum we have as we enter 2019 is a good indication that those investments are working.

Now on to priorities. As most of you know, I assumed the role of CEO in early October, and I'm pleased to report that the transition has gone very well. And I'm fortunate step into the role at such a well positioned company. PepsiCo competes in attractive, large and growing categories. We've been leading -- we have leading brands and a broad portfolio capable of evolving into new growth spaces. We have a very well-developed geographic footprint, with a stronghold positions in our largest markets and very competitive positions in a number of other rapidly growing markets. We have a suite of strong and very relevant capabilities across the value chain that we've been -- that have been built and strengthened over the years.

We have scale that allows us to run our operations very efficiently and to leverage our capability investments across a large and global business. We have highly engaged associates, a strong cohesive management team and deep talent bench. And we have a distinct winning culture that has its -- at its foundation, well embodied values and a strong sense of purpose.

These traits have enabled us to perform well in an environment characterized by highly-dynamic retail and competitive landscapes, shifting consumer habits and preferences, and volatile currencies, commodities and geopolitics. Over the past six years, organic revenue growth has averaged 3.8%. Core operating margin has expanded by 1.6 percentage points. Core constant currency earnings per share growth has averaged 9%. Core ROIC has expanded by 9.5 percentage points to 24.8%. Dividends per share have grown 9% on a compound basis. And we're returning $45 billion to shareholders through a combination of dividends and share repurchases.

I've spended the past four months deeply engaged in the business, connecting with our consumers, our customers and associates, as well as spending considerable time together as a senior leadership team, having no holds barred debates with a goal of focusing on what the opportunities are to make our company even faster, stronger and better. We looked for opportunities to improve our strategies, our portfolio of businesses, the strength and breadth of our capabilities, how we organize and get work done, how we can take our execution to new heights and how we can elevate our sense of purpose.

And from this review and assessment, we emerged with a set of what I'll call observation and a very clear set of go-forward priorities. Let me begin with the observations. Fundamentally, we're a highly-focused convenient food and beverage company. We compete in very attractive, large, growing and highly complementary categories that share many common characteristics, including consumers, customers, shoppers and occasions. Our ability to leverage the scale of our business to invest in and deploy new capabilities and technologies is a competitive advantage. Furthermore, we have tremendous potential to expand consumption across multiple dimensions. We believe we can capture a greater share of consumption occasions by considering to broaden our portfolio to provide greater choice to satisfy consumers evolving taste, whether they are seeking for an indulgent treat or a more nutritious snack, hydration or a functional drink, on-the-go convenience or take-home value. And we also see the opportunity to continue to increase consumers perceived visibility of our products as an additional growth avenue.

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