PepsiCo, Inc.
Q2 2020 Earnings Call Transcript

Published: 14 Jul 2020

[Ravi Pamnani:]

Good morning, everyone and welcome to this pre‐recorded management discussion of PepsiCo’s Second Quarter Earnings Results. My name is Ravi Pamnani and I am the Senior Vice President of Investor Relations at PepsiCo. Joining me today are PepsiCo’s Chairman and CEO Ramon Laguarta; and PepsiCo’s Vice Chairman and CFO, Hugh Johnston. Before we begin, please take note of our cautionary statement. We will make forward‐looking statements on today’s call, including about our business plans and outlook and the potential impact of the COVID‐19 pandemic on our business. Forward‐ looking statements inherently involve risks and uncertainties and only reflect our view as of today, July 13th, and we are under no obligation to update. When discussing our results, we refer to non‐GAAP measures, which exclude certain items from reported results. Please refer to today’s earnings release and 10-Q, available on pepsico.com, for definitions and reconciliations of non-GAAP measures and additional information regarding our results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements. As a reminder, our financial results in the United States and Canada, or North America, are reported on a 12‐week basis, while substantially all of our international operations report on a monthly calendar basis for which the months of March, April and May are reflected in our results for the 12 weeks ended June 13, 2020. And now, it’s my pleasure to introduce our Chairman and CEO, Ramon Laguarta.

[Ramon Laguarta:]

Thank you, Ravi, and good morning, everyone. I will spend some time today discussing the current environment, our business performance and then provide thoughts on our expectations going forward given the unprecedented level of volatility that we currently face. I will then turn it over to Hugh for additional color on the financial details. Our second quarter began during the early stages of the COVID19 pandemic for most of our markets. As we started the quarter, we set clear, simple priorities to manage the business successfully through the enormous challenges that were happening with the consumer, customer, economy and operating environment. These priorities included

[Hugh Johnston:]

Thank you, Ramon, and good morning, everyone. As Ramon mentioned earlier, our second quarter results were impacted by disruptions due to retail closures and other restrictions put in place as a result of COVID‐19. In addition, our business experienced higher labor, personal protective equipment, logistics and service costs associated with COVID-19. These costs coupled with an adverse channel mix shift in key markets impacted our operating margin in the second quarter. We expect some of these costs to persist and remain committed to making the necessary, long‐term investments to support our employees and customers, while also investing in capabilities that drive competitive advantages for our business. To mitigate some of these challenges, we have accelerated our efforts to control what we can. This includes tightly managing our discretionary expenses, reducing non‐essential advertising and marketing spend to reflect the realities of the current environment and optimizing our pricing wherever possible. We have also reduced the complexity of our product offerings by prioritizing high‐velocity SKUs to maximize production capacity. However, it remains difficult to predict exactly how consumer habits and macroeconomic conditions will evolve for the balance of this year. Based on what we can currently project for the full‐ year 2020, we continue to expect our annual core effective tax rate to be approximately 21%; total cash returns to shareholders of approximately $7.5 billion, comprised of dividends of $5.5 billion and share repurchases of $2 billion; and we now expect foreign exchange translation to negatively impact our reported revenue and core EPS by 3 percentage points based on current market consensus rates. Our expected cash returns reflect a 7% increase in the annualized dividend per share that began in June. This represented the company’s 48th consecutive annual dividend per share increase. With respect to our liquidity and balance sheet, we believe that we have ample flexibility to meet the investment needs of our business and return cash to shareholders. Now, as we look ahead to our third quarter, we expect our organic revenue to increase within a low single-digit range, which incorporates the geographic perspectives and channel dynamics that Ramon referenced earlier. We expect our core operating margin to contract, albeit at a less severe rate than what we experienced during the second quarter, as greater costs associated with keeping our employees safe persist; and we expect foreign exchange translation headwinds to negatively impact our net revenue and core earnings per share performance by 3 percentage points. With that, we conclude our prepared remarks for today. We thank you for your time and the confidence you’ve placed in us with your investment. I invite you to listen to our live question-and-answer webcast, which will begin today at 8