PepsiCo to Streamline Operations Amid Higher Supply Chain Costs

PepsiCo is doubling down on productivity initiatives and brand innovation to offset rising supply chain costs due in part of tariffs amid flat sales in its North American business, executives said during the company’s second-quarter earnings call on Thursday (July 17).

To mitigate higher fixed costs, the company has shuttered two plants and several manufacturing lines, which it can bring back online as volumes recover. The initiatives, which also included layoffs, is part of the company’s plan to integrate production in North America to cut costs.

“With the investment we’ve made in technology, with the new data that we have and systems, we can start looking at those businesses in a more integrated way,” said Chairman and CEO Ramon Laguarta, in a call with analysts. “With that, we create both efficiency and cost reduction, but also growth opportunities for the business in a combined way.”

PepsiCo expects second-half productivity to be about 70% higher than in the first half, driven by procurement savings, improved third-party contract management, a leaner management structure and reduced travel expenses.

“We’re pushing every cost lever that is available,” said CFO Jamie Caulfield during the earnings call.

The North America integration of its nearly $30 billion foods and beverages units is expected to promote efficiency. Laguarta called it a “new layer of opportunity” to improve the company’s cost structure over the next three to four years.

Along with the cost reduction, PepsiCo is making targeted investments to boost sales. These include refreshing legacy brands like Lays, expanding into health-conscious categories such as ‘no artificial ingredients,’ and tapping into the growing away-from-home market – those brands sold outside of grocery stores such as cafes, schools and restaurants.

“Our number one priority has been trying to stabilize the category,” Laguarta said of the company’s food business. He highlighted early signs of success in the relaunch of the Simply and Tostitos brands and said the company is working to “elevate the ‘real food’ perception of Lays” through a brand relaunch focusing on the simplicity of its ingredients: potato, oil and salt.

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Shares Soar on Core Earnings News

Meanwhile, no-sugar colas and functional beverages like Propel and Gatorade helped the beverage unit gain market share in the U.S., with Propel surpassing $1 billion in annual sales last year. (Functional beverages are those that provide health benefits beyond basic nutrition.) Pepsi Zero Sugar also delivered “strong double-digit volume and net revenue growth,” the company said in its prepared remarks.

PepsiCo’s away-from-home sales rose at a high single-digit rate in the quarter. Laguarta called it a “very incremental, a focus area, and margin accretive” business that is larger in beverages than in foods.

For the quarter ended June 14, PepsiCo reported net income of $1.26 billion, or 92 cents per share, down from $3.08 billion, or $2.23 per share, a year earlier. The earnings were hit by a $1.86 billion impairment charge related to its Rockstar and Be & Cheery brands.

Excluding one-time items, core earnings were $2.12 per share, topping Wall Street estimates of $2.03, according to consensus figures.

Revenue for the quarter was $22.73 billion, up 1% from $22.5 billion a year earlier and slightly ahead of expectations. Organic revenue rose 2.1%, led by 6% growth in its international business, while North America remained flat.

Looking ahead, the company reaffirmed its full-year outlook for low-single-digit organic revenue growth and flat core constant currency earnings per share. It also decreased its forecast for foreign exchange headwinds from 3 percentage points to 1.5 points.

“As we look ahead, we will continue to build upon the successful expansion and growth of our International business and accelerate initiatives to improve our North America business performance,” Laguarta said in the earnings release. “These initiatives include more portfolio innovation and cost optimization activities that aim to stimulate growth and profitability.”

Shares of PepsiCo are up 6.4% to $144.04 in late morning trading.

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