Q3 Accelerating price increases (PEP)
PepsiCo reported Q3 EPS of $1.97 vs. consensus expectations of $1.84. The upside was driven by better sales and margins. Organic revenue growth of 16% accelerated from 13% sequentially. Pricing was up nearly 17% and volume declines were nearly 1%, accelerating sequentially from the pricing of +12% and volumes of +1% in Q2.
In North America, Frito-Lay organic revenue growth was 20%, Quaker Foods grew 16%, and Beverages grew 13%. Pricing was up 20% for Frito Lay and Quaker Foods while Beverages was up 12%. Volumes were flat in Frito Lay, down 4% for Quaker Foods, and up 1% for beverages.
The International Business had organic growth of 16% with convenient foods growing by 20% and beverages growing by 20%. Pricing was up 24% in Europe while volumes were down 10%. In Latin America pricing increased by 17% while volumes increased by 5%. Africa, the Middle East, and South Asia pricing of 19% was slightly offset by a 1% decrease in volumes. Asia Pacific, Australia, New Zealand, and China pricing increased by 5% while volumes increased by 3%.
Gross margins contracted 20bps, improving 30bps sequentially. Commodity costs are up high teens for the year. EBIT margins expanded 30bps, down slightly from 40bps of expansion in Q2.
Management raised EPS guidance by $.10 to $6.63. Organic revenue guidance was raised by 2% to 12%. The revenue outlook implies 7% organic growth in Q4 with pricing up HSD% and volume declines between 2-3%. Due to PepsiCo’s commodity hedges the company trailed smaller competitors in raising price, but now the company is passing through its higher costs. PepsiCo’s ability to take a price increase of 17% and see minimal volume loss is why the shares are on our Best Idea Long List.
September PPI (LANC)
The headline PPI for September was up more than expected at +0.4% month over month and 8.5% year over year. Food manufacturing PPI increased 10.2% YOY in September, decelerating sequentially from 12.1%. September’s increase was the lowest rate of growth since May 2021.
As cost increases continue to decelerate and price increases continue to accelerate many CPG companies are seeing an inflection in gross margins.
The PPI for fats and oils increased 12.3% YOY in September, decelerating from 13.9% in August. The peak YOY growth was 42.1% in March and since then the growth rate has decelerated every month. Fats & oils have been the input with the greatest cost increase for manufacturers of products ranging from dressings to chips. For Lancaster Colony the basis cost for soybean oil is up, offsetting some of the commodity price declines. The company also contracted some of its usages in F2022, so F2023 contracts will be higher. The higher costs in F2023 are reflected in the company’s pricing plans.
October WASDE (PPC)
The October WASDE report was mostly as expected, but supportive of higher soybean prices.
- The USDA lowered its projection for corn yields to 171.9 bushels per acre from 172.5. Production is estimated to be 8% lower this year. The projection for ending stocks was lowered by 4%.
- The USDA lowered its projection for soybean yields to 49.8 bushels per acre from 50.5. Production is estimated to be 3% lower this year. The projection for ending stocks was unchanged.
- The USDA lowered its projection for wheat yields by 1 bushel per acre to 46.5. Ending stocks are now seen 5.6% lower at the lowest level in 15 years but above consensus expectations.
The USDA’s soybean yield revision was the biggest surprise with the new projection at the low end of expectations. Soybean ending stocks are projected to be at a 4.5% stocks-to-use ratio. Corn ending stocks are projected to be at an 8.3% stocks-to-use ratio, the lowest since 2011-2012. The tightness of the supplies gives the underlying prices a floor. Which is also a headwind for protein suppliers.
