PepsiCo, Inc. (PEP) Earnings Call Transcript & Summary

Okay. So up next, we have another session look on the topic of circularity. It's in partnership with our partner, Hi-Cone, one of the event partners, and you can find out more information about them in the virtual exhibition area. But without farther ado, for the attentive viewers of you, you know we're running a few minutes late. So I wanted to introduce the next panel and get them underway. And on your screens, you now can see Shawn Welch, Vice President and General Manager, Hi-Cone Worldwide; Yolanda Malone, Vice President, Global R&D, Snacks and Packaging, PepsiCo; and David Greenfield, European External Affairs Spokesperson, Circular Economy Club. They're here for the next roughly 30 minutes and want to answer as many of the questions as they can, both from -- set by David but also from you guys. So do keep using the Q&A box to the side of the stream. But now, David, it's all yours.

Thank you very much, Liam, and good afternoon to those of you in Europe, and good morning to those of you that have dialed in from the States, and that includes Shawn and Yolanda. It's lovely to be here and lovely to be talking about such an important aspect of circular economy, redesigning products through a circular lens. And we've got 2 panelists who are very well versed in this, and we're going to have a very exciting conversation. It's going to go across a number of different factors. But just to remind those of you that are not entirely up-to-date with circular economy, circular economy is very much about looking at how we can move away from a linear society of taking stuff out of the ground, making it and then throwing it away. So one way to respect the materials and keep them going for as long as possible, and part of that is about design. How can we design products so that they can be reused, remanufactured, repaired, restarted and ensure that we have those materials going through the system for as long as possible. So without further ado, we have got quite a short time. So I'm going to ask Yolanda to just introduce herself very briefly and then ask Shawn, and then we're going to go into our first question. So Yolanda, over to you, please.

Hi, everyone. I'm responsible for Global Foods Packaging at PepsiCo, and I'm really excited to be here. And thank you, Liam and team, and David, for being invited to the Reuters Responsible Business event. I'm looking forward to our chat today. Along with our packaging team here, we're really excited about working along our business partners and our customers to actually bring products to delight our consumers with every sip and every smile. So one of the responsibilities that we have as a corporation is also making our products and packaging more sustainable holistically so that we can all have a better planet. And so I know we're short on time today, but I'm really excited to be here and represent PepsiCo.

Thank you very much, Yolanda. A really brilliant introduction to what you're trying to do. Shawn, over to you.

Yes, good morning, good afternoon. I'm Shawn Welch, Vice President and General Manager of Hi-Cone Worldwide. It's certainly an honor, pleasure to be here with you. As David, you, and Yolanda introduced, we were just passionate about change and sustainability across the entire supply chain, which includes changing packaging from the inside out. It's just not for sustainability offices only, but the circular economy requires a holistic approach. We see circular economy approach to design as the way forward for products from conception to recovery, to end of life. It requires a different level of thinking or a different point of view. And so we're happy to be here to share that with the panel and the audience today.

Thank you very much, Shawn. So let's go straight into the first question. And coming off the back of what you've just said, Shawn, I think one of the key things that from my experience of working with a number of different companies to get circular economy embedded within a company, you need really good leadership. Can you tell us a little bit about how circular economy is being led in each of your individual companies? And who's providing that leadership? Yolanda, I'll start with you.

Yes. Thank you. Yes, you're spot on. The leaders really have to drive the behaviors within our organization, and it also sets the tone for the culture. And one of the first actions our CEO, Ramon, did was took and introduce our sustainable plastics vision, which is truly our intent to build a world where plastic never becomes waste. And as you can understand, given the complexity of the challenges, there are several things that we're working across the pillars. And many of the other companies are looking at it. But it truly are how do we reduce the amount of packaging that we use. Recycling is really key, important, and we'll talk about that today, I believe, in a lot more detail. But many of us have to really rethink and reinvent how we bring our products to market to the consumer. Because if we don't reinvent, we'll be falling back into old practices and our behaviors. And so that's really a key pillar that Ramon has embedded within our organization, and it is the foundation. And I'll get back to the point. Leaders top-down and then it needs to be embedded in the culture, and we've seen it at the CEO level.

And that is so important. And it's refreshing to hear that a multinational like yourselves is being led by somebody that is really passionate about circular economy and sustainability because that's what we need to meet many of the climate challenges and other challenges we have across the globe at the moment. And Shawn, from your perspective, I know that you've got that same leadership internally. But how do you -- what's the best strategy for getting Board level and company ownership for this sort of circular economy?

Yes, David, I think a real, lasting change requires a fact-based, research-driven approach. That gets everyone on board. And so we certainly look at the data and the pain points in the marketplace to determine our action going forward. We invest in changing the organization cost, along with research and development to drive minimal packaging for a minimal environmental footprint. This is, for us, has meant changing the business model totally and makes transforming the product portfolio our focus. A holistic approach, our product now has 50% PCR, which means that the demand for recycled content is increasing. And then an incentive for recycling within the organization and making recycling easier for consumers in the long term is how we're trying to focus. And in fact, to your point, it seems that the sustainability is top of mind for the Board. As a matter of fact, next Friday, they're inviting me to talk about sustainability and give an update on what we're doing in the marketplace. So it's very much top of mind.

You've just talked there, Shawn, about some of the challenges as well. And I'd like to explore that because it's not an easy journey to just assume that the CEO or the Board are going to accept circular economy. There's a lot of underlying changes required, a lot of underlying behaviors, but there's also some very practical challenges. And I wonder if you want to pick up on some of those. And you mentioned the recycled content. Actually, getting some of that recycled, getting that material back to make it recycled, I think is one of the major challenges. Shawn?

Yes. Well, to your point, some of the obstacles are just the -- we have to collaborate across the supply chain, right? So -- and have consumer education along the way to make it easier for people to recycle and recover the material that's very, very valuable now in our process of remanufacturing, given that is post-consumer recycled content. And I say, it's a -- overall, it's a cultural change. Some of -- particularly in Europe, we found some challenges around countries and the fragmentation relative to how recycling and sustainability is administered in those countries. So that's something that we're challenged with. But the value of the product, when it returns to the manufacturer, needs to change and actually be more valuable. And it is for us. From a linear system where you extract, use and discard, to now a circular type of loop, close-the-loop scenario, where you're actually recirculating the content through the redevelopment of products.

Yes. And I think that there were so many challenges embedded in what you just said. And Yolanda, I'm going to ask you to react to that slightly, but also just to ask very simplistic question, too. Many people that might not understand the complexities of creating a food-ready drinks bottle. It's not as simple as just picking up an old bottle, shredding it up and creating it into 100% recycled plastic. What are some of the challenges that you found that are stopping us going truly circular really quickly?

Yes. I think Shawn hit on some really good points. And so first, I'll react to some of his feedback because he's spot on. One of the things that we know, this challenge is so huge, we can't do it alone. And from a consumer education standpoint, from a collection system, where they -- is it accessible to the consumer, getting that material back is really critical as the first step so we can then actually begin to transform it back into our products or if necessary, other products that continue to keep that material in circulation. Some of the challenges and opportunities that we have when we're thinking of food is around safety and food contact. So ensuring the science actually confirms and validates that this material, once it's recollected and processed and we're able to use it again, that it's also safe and efficacious for the products that we use it with. As you touched on rPET, some of the things, our recycled PET, are some of a big use for us because of our beverage business as you can imagine. And so for us, getting that material back is critical and essential for us to really promote the circular economy. One of the things that what's important to us here, and I'll touch on this again, is the collaborations. This is something that PepsiCo alone can't do by themselves. It will take governments, NGOs, consortias, supply chain to really work through and make this truly effective so that we can have really long-lasting impacts, so we don't fall back into bad habits and low recycling rates because we've seen it go up and down over the decade. I think it started back in the '70s, and we haven't been consistent around the globe. And so we've seen it even proliferate. So that's really critical for us. But the material itself, as Shawn said, the value of that material in coming back is also critically important.

Yes. And you're entirely right, both of you, in terms of the -- it has to be a collaborative supply chain. And the supply chain is the manufacturer of the plastic, it's the company that is actually using that packaging to fill its products, but it's then also the local government or the private sector company that's going to every residence and business and collecting that. And I know from my 25 years working in waste management that one of the biggest challenges is getting packaging back from households and businesses in a clean-enough form. And I think looking at that collaboration across the supply chain is absolutely critical. So I call out to everybody that's listening to this. We want more collaboration. We want lots of ideas coming through. And whilst I'm doing a call out to you, please do put some questions in because we've got a bit of time. And I've got a couple more questions that I want to raise with Yolanda and Shawn. So just taking us on to products. And this might be one of your products, it might be somebody else's products. But in terms of a product that's been designed for circularity, what do you think will influence consumer behavior the most? Is it actually the product or is it the storyline that sits behind the product, or is it something else? Yolanda, do you want to take that one first?

Sure, sure. That's a very complex question when it comes to consumers. And we're trialing various models to talk to consumers to understand their behaviors. And some of them may be unique in certain sectors around the world in certain countries, where when you have a behavior in Europe, where people are used to recycling and collecting, that behavior is probably a lot easier for consumers to actually then take -- to understand the content, what to do with it, as long as we have the receptacles and where to put it. When you get to other countries where the recycling infrastructure or the collection infrastructure is not as advanced, there's a lot more learning we need to do with consumers in those regions because that's not a behavior that's embedded. One of the products that we launched was Doritos Stax in a 95% paper canister in Europe. And so right there, we have a package that's been developed for recycling. And because it's paper, it has an opportunity to go either in the paper disposal. And ultimately, paper does break down as well, should it find its way in places that it shouldn't. So I'm not even going to say that. But what consumers -- what -- we need to make it also easier for consumers. So when you look at that package, the canister lid still attaches. So you're not worried about a 2-piece package, and consumers are now confused about what to do with the top versus the body. So it's really incumbent upon us to work with innovations with our suppliers, with our partners to make it easier for consumers. And as we learn what does it take to educate the consumer, our packages will evolve to make sure that it is simpler for them. But it's not one solution that we're finding depending on where you are.

No, that's really, really interesting. And Shawn, same question to you, what products? And of course, you picked up on some of Yolanda's points?

Yes. So Yolanda, she made some great points, and I agree with her 100%. For us, I'm a little biased here. I would say packaging is the biggest impact on consumers from our perspective. I think consumers are being -- becoming more and increasingly conscious of packaging due to us seeing one-use nature, that packaging you see in the marketplace. So circular packaging options will influence consumer choices, of course. But to be truly circular, solutions need to take into life -- the entire life cycle into account, right? And so this is a very, to Yolanda's point, very complex, depending on the marketplace you're in. But it's a fundamental shift in how we, as manufacturers and consumers, see and use products. And so that is a mindset change that needs to continue to happen. Although we've had these bouts with back in the '60s and '70s with deforestation and such sustainability. To Yolanda's point, we need to stay consistent. Consumers need to understand and be clear about what their choices are. And everyone has a responsibility to make sure that, that happens.

Yes. And we're all in agreement here. I think there are some major challenges, and we've just got a couple of questions through from the audience, which I'd like to go to now. And one of them is about research and development. And as somebody, I worked with a lot of start-ups in the U.K. and across Europe. And I'm working with a number that are looking at bio-based materials, so moving away from virgin plastics or even recycled plastics. And this isn't about bio-based materials, but you can talk about as bio-based materials, if you want. The question is there's a lot of circular issues around research and development. Are you both working internally with R&D? Or are you looking at how you can bring in externals to support your R&D? Shawn, I'll go over to you first.

Yes. So we do have an R&D group that is dedicated, frankly, to sustainability. And so we have internal resources that are actually separate from the business day-to-day. And so that doesn't have the pressures of the day-to-day deliveries of the business. To go out and ensure that we are canvassing, making sure that our research and development around material development is consistent with our sustainable strategic intent, right? So we do have that internally. We've been blessed to have an investment that's kind of segregated from the day-to-day operations of the business. But of course, it has to come in and make sense over time. And so we also are open to partnerships as well, right? So we recognize, to Yolanda's point, that we can't do this by ourselves. And it's not one of those situations where it's only born here. And so we're open to the collaboration across the board because, again, this is a really complex issue. And when it comes to material development, there's a lot of research, development, testing, validating to make sure that the solutions that we're bringing forward really do deliver against the expectations and are not causing unintended consequences with making that action.

Yes. I think the unintended consequences or one of the biggest challenges -- and we're seeing this in the U.K. at the moment, that we're all getting bio-based materials as a replacement for plastic. But when you put them in the recycling system designed for composting, and they go through the materials recycling facility and get thrown out as rejects. So you've got a couple of challenges there, but Yolanda talk to me a little bit about what research PepsiCo is looking at on this area.

Yes, I'm actually really close to it as part of our global R&D program. So our teams are really working with partnerships. We're working with partners like Carbios just looking at using enzymes to help recycle. We've partnered with NaturALL. They're a company that's also working on a bio-based bottle. So for us, it isn't one -- just one solution. Some of these key partnerships as well as our own internal research and development teams are doing both because we do need to understand what the impacts are to our products and how do you manufacture them. But the science, the partnerships that we're seeing, the start-ups, there's a lot of new innovations out there that both in recycling technologies as well as new materials that we're exploring within PepsiCo and our R&D teams are working through many various different types, both either recycling and also biomaterials. We recently signed a partnership with Pulpex. And so that's a consortia that we're looking at using sustainably sourced fibers for our beverage bottles. So for us, it's a holistic look at how do we take a look at bringing different materials and different science into changing where we've been in the past. Because I think you sound -- but it is not one answer. So we need to look at it more holistically.

No. And there are so many answers out there. And I'm so excited by what you've just said, Yolanda. It's brilliant. It's really heartwarming to see somebody from PepsiCo talking about materials that could completely change the way that we consume and how we actually have behavior change with the materials that you're using to consume things. I'm lucky enough. I'm mentoring a young lady who got the James Dyson innovation international award last year, where she's combined red algae and fish scale waste into a biomaterial that could be a thick cling film, plastic film for food packaging. And so many people out there trying to explore these things.

That's a big creative thinking.

Yes, and it is. And I think that collaboration -- coming through, there's a couple of questions on collaboration. For me, I'm working with 7 or 8 different companies at the moment as an adviser/initiator. Collaboration is so key to everything that you already said. How do people, how do start-ups, how do individuals get involved in organizations like yourselves and become part of collaboration? Is it literally just as simple as getting your messages out there and having -- getting involved in sessions like this and trying to pass over information? Yolanda, I'll ask you first.

I think some of the easier, faster ways that some of the involvement happens are through some of the partnerships that already exist. So there are many partnerships that PepsiCo is involved in around the globe. When we think of the Global Plastic Action Partnership, which is led by the World Economic Forum, those are really big partnerships that we're engaged in. We have the Alliance to End Plastic Waste. And if you take that organization as an example, start-ups and innovators are coming there, and they're providing funding to help bring innovations to life and to market. And many companies and supply chains, we get to see those innovations and then help to shepherd it along. We're involved in Circulate Capital. We have many, many places where these collaborations exist that people should join. But additionally, there are start-ups, there are accelerator funds, there are contests that are out there that are actually either local or national in many places where the visibility for someone with a great idea and some great science get an opportunity, and I'll call it the fast pitch, to be able to go in and actually get funding from companies like ourselves and shepherd their development and their designs. So I would say, forums like this are fantastic as well. So these are places where we talk a little bit about what we're interested in, and it may spark some creative ideas. And David, they'll probably go to you and send over to Shawn. But these are those spaces where we do want to hear the new innovations and how people are thinking because, as we said before, this is way bigger than one company. This is holistic. And we need partners and we need creativity and we need innovation.

Yes. And representing the Circular Economy Club as I do, one of the things that I've been really excited about over the last 2 or 3 years is back in 2018, we did a mapping event across 70 cities. And we mapped all of the circular economy activities that were going on in those cities. And that's now on our website as an open source downloadable Excel spreadsheet, which has got examples of start-ups, innovations, projects of circular economy. It's about 4,500 initiatives.

Wow.

So I know that there's loads out there. And what we're trying to do is see how we can get as many of those embedded within organizations like yours and others. I'm going to go back to the question, Shawn. You can answer that one if you want, but we've just had a rush of questions come in.

Okay. All right. Yes.

Right. So I'm going to ask you this one, Shawn, because I think this probably fits a little bit more in your area. There seems to be a shift where suppliers are being involved in the design stage. Is that the case?

Oh, absolutely. And like I said, it's a holistic approach. I think my history is in consumer packaged goods, worked for a couple of large consumer practices companies like Kellogg's in the past. And one of the things that was an opportunity is, particularly as it relates to packaging, which landed me in the packaging space, was to move packaging forward in the life cycle of the product or the development in terms of innovation. A lot of times, the -- a company like Pepsi or Kellogg's too, for that matter, will spend 36 months developing the specific taste and profile of a product, whether it be the beverage or a cereal product. But ultimately, at the end, end up putting it in a bag or in a box or whatever supply chain has been developed for that particular product. And so as you can move the design for around, one, the packaging that's appropriate for the use, and then as you think about the design of the product through the entire life cycle, not only is that the use, but what do you do with it to get it recycled and to put it back into the circular system. And we think that's important going forward. It also is a -- could be a brand differentiator for consumers if a product or a brand shows the consciousness to consider the impact on the environment. We believe that's a strategic differentiator and a value-add for consumers.

Brilliant. And you've, by coincidence, answered another 2 questions that were in there around consumer engagement and consumer choice, which is great. I'm going to just finally ask, we've got a couple of minutes left. So I just want to ask you both a single question. Firstly, thank you to all of the people that have put in the questions. We had 9 questions for this session. So I've tried to consolidate them into a couple of questions there. But I want to ask Shawn and Yolanda one final question, and then I'm going to close and hand back to Liam. So we were discussing when we prepared this about if you can ask governments in Europe one thing to embed circularity, what would it be? Shawn, I'm going to start with you.

Okay. That's a simple one for me. It's not simple in the execution, but better recycling infrastructure and consumer education. I would think turning particular materials such as plastic into a default unsustainable option and banning it, it's not a holistic approach, and it doesn't address the underlying issues around how people recycle. And so as I mentioned before, when you ban a product, it takes it out of the system. And so we want to keep it in a circular system and reuse it and recover, reuse and recycle. Earlier this year, I would tell you, Hi-Cone published a study conducted by YouGov, consumer beliefs and attitudes around recycling. And a couple of statistics around that just to dictate the situation. And the majority of adults in all territories, particularly in Europe, agreed that -- 91% believe that recycling plastic is beneficial to the environment, and more than 2/3 of them did not currently recycle their plastic waste. They felt that they were not recycling enough or as much as they should. And then 80% of those people reported that if they had the facilities or the guidance that they would recycle plastic more frequently. So there's an intent and desire to do so, particularly in a market like Europe, where it's high consciousness around sustainability. But again, the infrastructure and the consumer education is critically important.

Okay. 2 really clear things there, better infrastructure, better education. Yolanda, can you add to that?

Yes. I think one of the things that I would add to is a harmonized approach with member states. I think the conditions exist for circularity in Europe, but I think the labeling and the consumer communication around the European member states needs to be consistent. I think that's one ask that I would ask, so that we don't have varying different waste management systems. So that the solutions that we make, we can do it in partnership across our supply chain, but it's not confusing from one country to the next when I think about different states that are may be in Europe. So that's actually what I would ask, to build upon what Shawn was saying.

Consistency. All right.

Yes.

I know the term very well. And no, well, thank you both very much. Your last point, Yolanda, I'm going to do a blatant plug here. Next week is the Circular Economy Club World Circular Cities Week. And we've got about 100 cities across the world hosting events that are going to be talking about how we can embed circularity into each of those cities. And one of those, we'll be talking about collections and consistency. So go over and look on the website, and we'll send you some more information, of course.

Will do.

So I'd just like to say thank you both to Shawn and Yolanda for, firstly, getting up early and getting -- making sure and looking very bright-eyed and bushy-tailed for -- never, it's now 7 a.m. and for brilliant insights into 2 companies, which I think are really leading the way in moving towards circularity. So thank you both very much, and I'm going to hand over to Liam now and say thank you very much. And I look forward to speaking to you all very soon. Liam, over to you.

Thank you. Thank you, David, and thank you again, Yolanda and Shawn, for joining us. And it was an excellent discussion. Take care, guys.

Thank you.

Thank you.

Bye-bye.