Operator:

Good morning, and welcome to PepsiCo’s 2024 Second Quarter Earnings question-and answer-session. Your lines have been placed on listen-only until it’s your turn to ask a question. Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Ravi Pamnani, Senior Vice President, Investor Relations. Mr. Pamnani, you may begin.

Operator:

Thank you. [Operator Instructions] Our first question comes from Dara Mohsenian with Morgan Stanley. Your line is open.

Ramon Laguarta:

Good morning, Dara.

Ramon Laguarta:

That's great, Dara. So I think it's an important area to focus. When we're saying at least four, we were talking more about around five in our minds. Now we're talking around four, so that's the pivot we're making. There is an adjustment and it is related to specifically the consumer in the U.S., and we can talk a little more. Now, why do we feel good about our guidance? And it cannot be disconnected from our earnings performance, because I think the work we've been doing on our productivity and our cost reduction gives us the optionality to reinvest back in half two in a way that we feel much more comfortable about the performance. So, a couple of, I would say, elements that give us confidence. Now, one is Quaker. Quaker, you're all familiar with the situation. We're recovering the supply chain by Q4, will be in almost 100% supply and obviously the business at that point will be growing materially, because we're just refilling the shelves and pipeline. So that should be out of the picture and it will be a positive impact for us. The second is mathematical, but it's lapping, and we think it -- obviously, the laps are much better in second half, and that has a -- gives us confidence that we can get back to a mid-single digit type of growth in the second half. The third element is international. International is an area we've been investing for the last few years materially, and is delivering for us. So first half of the year 7%, within that -- we will continue that same level of growth in the second half of the year, pluses on minuses around the world. But the portfolio is diverse enough, scale enough, profitable enough around multiple parts of the world that we believe that we can deliver. And then now in the U.S. there is clearly a consumer that is more challenged, and is a consumer that is telling us that in particular parts of the portfolio -- of our portfolio, they want more value to stay with our brands. That is not for all the consumers, it is some consumers, that is not for not all portfolio, it is some parts of the portfolio, and we have been working different tactics to give the consumer what they want, and we see that is working, and that's why we feel comfortable about -- given the oxygen that we have in the P&L that we'll be able to deploy in a very targeted way, thinking long-term about the category, making sure that has -- it has good ROI, that we'll be able to turn around the -- especially, what you were referring, the food business to positive volume, and with that, a higher level of net revenue. So that's how we're thinking about the second half. Again, we have green charts with some of the activities we've been executing. And July 4th has been very strong for us, and we feel good about the business. Now, the North America beverage business is also to be highlighted. It's a business that we said over time we want to stay with -- deliver profitable growth, make sure we compete well in the category, but at the same time improve our margins. We think we're executing the playbook well. Actually, we've been accelerating the profitable growth delivery of the business, and that it should continue in the second half. We're investing in advertising and marketing even more, in the platforms that are growing, and that's what, overall, if we put it all together, we feel good about the second half of the year and the momentum that we will start 2025 with that.

Bonnie Herzog:

All right. Thank you. Good morning, everyone. I actually had a question on PBNA. Ramon, I know you just touched on a bit, but I'd be curious to hear. If you're satisfied with some of the progress you might be making to reinvigorate the business, and maybe what green shoots you are seeing within PBNA? And then, I guess, I'm hoping for some color on the initiatives you highlighted in terms of the disciplined commercial investments, should we assume this will also mean a potential step up in promos for PBNA? And do you maybe see a need for some brand repositioning? Are there structural opportunities? Essentially, what will be the drivers to reaccelerate growth at PBNA? Thanks.

Operator:

Thank you. One moment for our next question. Our next question comes from Lauren Lieberman with Barclays. Your line is open.

Ramon Laguarta:

Yes. I think -- we feel that the issue is an issue of value, is not an issue of anything else. And we have a lot of data, obviously now how do you address that value gap versus what consumers want to do. I think it's the -- it's where the know-how will come. And the sweet spot for us is not to promote, but is to promote to who needs it, in the products that need it versus a blanket approach to promotion. So that's where we're investing a lot of time. I think we're much more capable from the insights and diagnostic point of view and also from our ability to execute more granularly all these interventions, be it digital, be it with particular channels or customers. To give you an example. We feel that the unsalted part of our portfolio, right? If you think about potato chips or tortilla chips, that needs some value reset and value intervention for some consumers. When we think about flavor potato chips or other parts of our portfolio. No, I mean consumers are staying in the category, are staying in our brands, and they're buying with pretty high frequency as in the past. There are other parts of the portfolio that are growing, growing very fast, especially the permissible part of what we call permissible portfolio positive choices, this is a -- when you think about brands like SunChips, PopCorners, Smartfood, or the Simply range of the Eaten Path, those brands are growing. And there it’s not about value, there I think it's more about and the way we're going to approach it’s more marketing, investment, awareness, execution, availability. So there's different tools that we'll be using to drive the category growth. To your point on, is it the category? Is it PepsiCo brands? I think given our massive participation in the category through many multiple brands, I think it's our responsibility to manage this category for the long-term, providing value to consumers in different ways and continue to have the savory snacks category growing above food structurally as we have done in the past. Now, there is nothing in terms of consumer -- long-term trends that tells us that that's not possible. I think it's a small adjustments in value and in execution and in investment in new innovation areas that will drive it, and we feel very strong about our ability to do that, not in the long-term, but actually in the short-term, in Q3 and Q4. And that's why our guidance reflects a little bit that inflection because we're already testing and executing some of these levers and we see the returns it has in volume and net revenue.

Bryan Spillane:

Hey. Thanks, operator. Good morning, Ramon. Good morning, Jamie.

Bryan Spillane:

Just wanted to circle back on Frito. And I guess stepping back, you're able to sort of reset the margins and fund it with just drilling deeper into some of the reservoirs of productivity other places in the organization. So I guess just if you can comment on two things related to that. One, given that you're tapping more productivity this year, does it -- how does that affect next year? Does that affect maybe not having as much productivity to flow through, or is that reservoir very deep. And then the second is, as we are thinking about Frito margins stepping back in the back half of the year, should we be thinking about that now as the new base to maybe grow off of gradually, or is that a major step down, and then you'd expect Frito to have another maybe step change up in the future?

Operator:

Thank you. One moment for our next question. Our next question comes from Kaumil Gajrawala with Jefferies. Your line is open.

Ramon Laguarta:

Do you think Kaumil? I think I kind of touched on the point earlier, but some parts of the portfolio need value adjustments, some parts of the portfolio don't. Some parts of the portfolio need to be -- for particular consumers we need some new entry price points and probably some new promotional kind of mechanics that don't spec for the consumer to invest so much cash in a purchase of salty, so there's adjustments that we have to make to -- for certain consumers some parts of the portfolio. I don't think the overall portfolio is -- needs a reset. I think this is going to be about granularity, it's going to be about good execution of that granularity, and that's what I think we're well prepared to do throughout the full value chain. So, yes, there is some value to be given back to consumers after three or four years of a lot of inflation. Our cost allows us to do that wherever we choose to do. And that will be one of the interventions that we'll be making in the second half, but not the only one. I mean, there's going to be investments in marketing. There's going to be investments in better execution. That overall will drive the business -- the business growth to where we think it will be structurally in the coming years.

Peter Grom:

Thanks, operator. Good morning, everyone. So I was hoping to get some color on Latin America. Organic revenue was the weakest we've seen in some time here, and I think in the prepared remarks Brazil and Mexico seems solid. So just curious, kind of what drove the weakness in the quarter? And then, Ramon, just as we look ahead, you mentioned you still expect strong growth from international in the back half of the year. How does Latin America fit into that equation? Would you anticipate improvement, or should we expect more muted performance to continue? Thanks.

Operator:

Thank you. One moment for our next question. Our next question comes from Filippo Falorni with Citi. Your line is open.

Ramon Laguarta:

Yes, Filippo. Hi. You should assume that most of the incremental acceleration of the business comes from mostly North America, right? And the two factors I mentioned, Quaker will get back to growth, the laps get better for North America, and then some of the interventions we're making both in value and in additional A&M should drive additional volume. Those are the three factors. Internationally, we're assuming that the rate of growth for the first half will continue in the second half. And again, we're seeing parts of the portfolio -- accelerating parts of the portfolio kind of stabilizing, some of them being a little bit softer. But overall the portfolio at this point is broad enough. We have enough scale across multiple markets that we're kind of hedged geographically. So that's what we're assuming and what we're seeing that per caps growth of the category will continue. We continue to invest meaningfully incremental funds to both execution and brand development, and we don't see any reason why not. Of course, it could be big geopolitical reasons why we change our mind later in the year. But with the information we have today about geopolitics and stability of countries, that's our best guess today.

Robert Moskow:

Hi, thanks. A couple of questions. One is, I was hoping you'd give a little more color on the energy drinks category, growth has slowed dramatically in the U.S. And just wanted to get your perspective and ask like, do you think that the consumer there are making a value decision as well? There's a lot of premium price drinks there. Do you see any evidence of trading down to maybe higher caffeine carbonated drinks? Thanks.

Operator:

Thank you. One moment for our next question. Our next question comes from Andrea Teixeira with J.P. Morgan. Your line is open.

Jamie Caulfield:

Andrea, it's Jamie. On the acceleration in the back half, as Ramon mentioned, that's going to come mostly from North America for the reasons we cited and we're making the investment, primarily focused North America, we've got the easier lapse. And Quaker, so that gives us a lot of confidence. On channels, look, away from home has been a focus area for us. We put investment behind that and it's outgrowing the balance of our portfolio, so we'd expect that to continue.

Chris Carey:

Hi. Good morning, everyone. Ramon, I know you mentioned international to be looked at on six-month cadence. I was wondering, however, if you could comment on some specific regions just in Europe. Why to your mind have trends been so resilient? I don't think it's just your portfolio, I think the region in general has been more resilient for longer than many expected. And then in Asia, I think you were clear last quarter that there were some timing benefit. Clearly we saw that normalize this quarter. What's the right run rate for this division? And do you have any comments on the progress in China? Thank you.

Operator:

Thank you. One moment for our next question. Our next question comes from Robert Ottenstein with Evercore ISI. Your line is open.

Ramon Laguarta:

Yes. I wouldn't extrapolate too much. This is a decision by Carlsberg to make an investment in the UK business. It makes a lot of sense for Carlsberg for multiple reasons. And we partner with Carlsberg in other geographies. We are very happy with the partnership. We trust them as a partner to grow our business. And, of course, we supported the transaction. So I wouldn't over extrapolate it. Let's make it a UK decision by Carlsberg, and we decided to endorse the transaction because we have a great relationship with Carlsberg, and we trust them.

Carlos Laboy:

Yes. Good morning, everyone. Ramon, in keeping with the last two comments you've made in the Britvic deal, can you discuss the international franchise doctrine of PepsiCo? In other words, how are you thinking in terms of clarity of what each side is supposed to do and allowed to keep, right? I'm trying to get a sense of how you're compelling independent bottlers in these great growth territories that you see to step up investments for the purpose of accelerated system revenue growth and bottling returns?

Operator:

Thank you. One moment for our next question. Our next question comes from Nik Modi with RBC. Your line is open.

Ramon Laguarta:

Yes, listen. Nik, I don't know about all the categories. I know that for many categories the multiple year inflation that we had to take because our input cost went up, has created some perception and some reality in a lot of households that food is expensive and consumers are making choices. And they can make choices to cook versus buy finished goods or finished products, or they can make a lot of decisions around how they spend their money and how do they feed themselves every day with the lowest budget. And I think that's the fundamental question to address for the food companies. Now that our cost are kind of normalizing, our input cost, and we've all been going at productivity in our case, this has been a very, very strategic focus for us. Now, how do we deploy those resources against what are the best levers to reignite growth? And again, it will not be a blanket approach, it will be a segmented approach. In our case, it will be very rational, it will based on data. I think we have a lot of data, and we have great segmentation. And I think we can execute with again, with precision so that we don't destroy value where we create value for the category as we increase the net revenue of the category. So that's how we're thinking about it. I don't think GLP at this point, Nik, as material impact in our category for sure, and we have a lot of panels and we have a lot of conversation with consumers, it's not impacting us. At this point is an economic value relationship for our categories, and we will address them in the second half of the year.

Kevin Grundy:

Great, thanks. Good morning, everyone. Covered a lot of ground, and not to beat a dead horse, but just to drill down a couple of areas, Ramon, if we could on the demand weakness in snack. So you mentioned some parts of the portfolio, but not all consumers. I apologize if I missed this. What are you seeing beyond the low income consumer? It's a lot of focus on where's the consumer and depends on which management call you're listening to or what industry frankly. What are you seeing specifically with the middle and high-end consumer? Is the weakness also being seen among that cohort as well? And then I think an important question as well, is there anything you're seeing in your market research? I know you're staying close to the consumer that gives you any pause with the longer term outlook for the Frito business, which has been so strong for so long. Is there anything there that kind of gives you pause or you do this to be entirely transitory? So thanks for that.

Jamie Caulfield:

Thank you.

Operator:

Good morning and welcome to PepsiCo's 2024 First Quarter Earnings question-and-answer session. Your lines are being placed on listen-only until it's your turn to ask the question. Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Ravi Pamnani, Senior Vice President of Investor Relations. Mr. Pamnani, you may begin.

Operator:

Thank you. [Operator Instructions] Our first question comes from Dara Mohsenian with Morgan Stanley. Your line is open.

Ravi Pamnani:

Goof morning Dara.

Ramon Laguarta:

Great. Thank you, Dara. And yes we're very pleased with the performance of international businesses in Q1, but also in the last few quarters, as you mentioned. And this has been an area of investment for us now for a few years, both in snacks and in beverages and trying to build scaled businesses in most of the markets where the scale in terms of population and profitable growth. So, I feel very good about our ability to continue to outperform our categories in international and to keep our categories growing both food and beverages in the future. Our innovation is strong. Our ability to understand local rituals and local food and beverage occasions is better than ever. We are adapting our portfolio to that. Our ability to attract the best talent in the markets where we participate and build really capable teams is better than ever. We've been investing in capacity. We're -- right now, we're in the process of opening factories in Vietnam and in China and in India and in Mexico, and we just opened one in Poland. So we keep expanding our manufacturing and our go-to-market capabilities in those markets. So we feel good, and I think that it's going to continue to be a big source of growth for us. As we mentioned in CAGNY, I think our international business is already $36 billion and it's growing at a very high single-digit level and with very good profitability. So it is part of the future growth story for PepsiCo for sure.

BonnieHerzog:

Hi. Thank you. Good morning, everyone. I had a question on Frito-Lay op margins, which were a little soft in the quarter. So hoping you could talk through some of the key puts and takes on your margins in the quarter and then moving forward? And then is it realistic to assume Frito-Lay's op margins will expand in 2024? And I'm thinking about that in the context of commodity cost pressures easing a bit, or how do we think about your level of reinvestment as these cost savings maybe in an effort to drive faster top line growth? And then ultimately, curious to hear if Frito-Lay margins can ultimately return to the low 30% range? And if so, by when, how do we think about that? Thank you.

Ramon Laguarta:

Yeah, Bonnie. I think on top of what Jamie said, for the long term, the key goal for Frito in the US is to continue to grow the salty, savory category at a very high rate and continue to get occasions from other parts of macro snacks into the savory and from meals into savory, and continue to gain share of that category as it has been doing and including Q1. So that's the ultimate goal. Because that, if you think about the high margin that we have in that business and the impact it would have in the overall PepsiCo margins, that's the role that Frito-Lay has in the portfolio.

Bryan Spillane:

Thanks, operator. Good morning, everybody. Ramon, I guess, a question on PBNA and specifically on Gatorade and Mountain Dew. The volumes are still -- with Gatorade noticeably weak in the quarter. And so can you just talk about, one, how much in the quarter might have been affected by the weather? And then second, I guess, as we're thinking about volume recovery for the whole for the enterprise at PBNA, just what's on tap for both Mountain Dew and Gatorade to stabilize the volume trend?

Operator:

Thank you. One moment for our next question. Our next question comes from Lauren Lieberman with Barclays. Your line is open.

Ramon Laguarta:

Yes. Lauren, I think the -- I don't know, maybe we have put a bit more detail, but the intentionality was always there. And I mentioned last time on the last couple of calls that we're making choices in PBNA in terms of making sure that we deliver profitable growth, and we'll continue to make those choices emphasizing the parts of the portfolio where there is a better return on the investments for us and eliminating those parts of the portfolio where the margins are not that attractive and they're going to get probably not that better over time. So we've been referring to categories like packed water or some of the less profitable take-home formats, where we will be making choices. We feel good about both the productivity at PBNA under margin expansion of PBNA. And we feel that, that will continue based on the ideas that we have and the organizational focus that the team has been putting under the new management, but also the old management in PBNA. There's much more focus on becoming a better operating machine in the supply chain and sales and expanding the margin. So, we feel good about PBNA margin expansion and profitable growth delivery this year.

Andrea Teixeira:

Hi, good morning. Thank you. So, Ramon, if you can please comment on the overall consumption and in particular for snacks and how consumer behavior evolved in the context of your comments about normalization? And then a clarification for Jamie, on the margin outlook. On the prepared remarks, you mentioned a more benign commodities environment, but that has recently changed in particular, for oil and looking at DSD. Hoping to get some clarification on the diesel impact or this is going to be more further down and perhaps not even impacting 2024? Thank you.

Jamie Caulfield:

Yes. Andrea, on commodities, really no change in the outlook. A couple of points I just want to emphasize. One is the diversity of the inputs in the basket, so no single commodity accounts for more than 10% of the total. So that diversification kind of smooth things out. And the other point I'd make is we do tend to forward buy and hedge, so that we've got good visibility for the year that helps us with planning the business overall. And so outlook Q2 through Q4, so relatively benign inflation and not a lot of volatility in the rate of inflation quarter-to-quarter.

Peter Grom:

Thanks operator and good morning, everyone. So I was hoping to get an update on the CELSIUS agreement and kind of just your broader energy drink strategy at this point. In the release, you spoke positively about the partnership, but I think there were some changes to the incentive structure a few weeks back. So maybe first, just any thoughts on how the brand is performing as part of your energy portfolio? And then just like anything you can share in terms of what changed with the agreement? But maybe specifically, how does it really help Pepsi? And maybe what benefit does it provide for CELSIUS, if anything? Thanks.

Operator:

Thank you. One moment for our next question. Our next question comes from Filippo Falorni with Citi. Your line is open.

Ravi Pamnani:

Yeah. I would say the Frito-Lay continues to outperform the category. And as I said earlier, the big opportunity for Frito-Lay is continue to create occasions for our savory category, bringing them from broader macro snacks or snacks and meals overlap, how do we bring more category stores, more occasion store snacking. So those are the two big strategic objectives of Frito-Lay. And all our innovation and pricing and channel mix and everything else is against that large objective and do it faster than others, so that we continue to gain shares. So as we -- as we look at the business performance, as you said, this is the toughest lap. I think last year, we grew 16% in Q1, and that lap is still high in Q2, but then it gets much better than half two. So we should expect a gradual sequential improvement of our volume for Frito-Lay, especially in the second half of the year, and we'll continue to be the guardians of the savory category and make sure it's valued properly, and it generates growth for our customers ahead of what food generates for our customers, and we continue to capture a disproportionate share of that very fast-growing and profitable business.

Kaumil Gajrawala:

Thanks. Good morning, everyone. Just you mentioned multiple times on gaining share within the category. Could you just give us some -- in multiple regions, can you just give us some context on what the categories are growing or at least what -- maybe what they're expected to grow as you think about the next – next year or so?

Operator:

Thank you. One moment for our next question. Our next question comes from Robert Moskow with TD Cowen. Your line is open.

Jamie Caulfield:

Hey, Robert. It’s Jamie. And its majority is price but there’s an element of mix in there. I’d put it that probably two-thirds price and one-third mix. And yes, it comment earlier on our inflationary trends would expect them to be fairly moderate for the balance of the year, fairly smooth through the balance of the year. So I wouldn't expect a lot of volatility in that buying revenue relationship.

RobertOttenstein:

Great. Thank you very much. Two kind of follow-ups, if I may. Can you please talk about the spring shelf sets? Is it pretty much done? And how do you feel good about what you're seeing both on the Frito-Lay side and on the beverage side? And I understand on the beverage side, you're discontinuing some SKUs. So are you gaining shelf space where you want to? And then just a follow-up to an earlier question on CELSIUS. Maybe if you can give us an idea of how your energy drink strategy overall is evolving and what's going on with Rockstar, Starbucks, Mountain Dew in terms of the overall energy drink strategy? Thank you.

Operator:

Thank you. One moment for our next question. Our next question comes from Chris Carey with Wells Fargo Securities.

Ramon Laguarta:

Two things, thanks. Good questions. I think the APAC performance is a little bit impacted by the timing of Chinese New Year. So there is a bit of benefit in our Q1 numbers versus Q2. It was a bit earlier this year. But the reality is that the APAC region is improving, I would say, outside of China. China still, as I mentioned earlier, I think the consumer is cautious and the consumer is saving a lot. And it might not impact so much the low price, let's say, products as ours. It might probably impact some other categories a bit harder than ours. The truth is that in China, as I said earlier, our team is not only this year, but already consistently for the last four, five years, been gaining share and creating a very capable and profitable business in China, we're very proud of. Now, to your other question on away-from-home, in-home, we're seeing mobility obviously, going back to pre-pandemic times anything we all forgot COVID anymore. And we're seeing, obviously, that impact in the consumption of food between home and away-from-home, especially in the U.S., I would say, it's probably the country that is having more impact. So, yes, away-from-home is growing faster than in-home for us and we're pivoting resources to away-from-home both in our food business and our beverage business, and we're trying to capture as much as possible that consumption that is moving to away-from-home. Internationally as well, I would say that is a huge wide space for growth for our business, both in trying to improve the availability of our current products and also creating new solutions that are more targeting meals and meal replacement as consumers buy more food away-from-home. And I think our brands belong in some of those occasions and as I mentioned at CAGNY, we're building both innovation and business models that can help us capture this meal location away-from-home with some of our large brands like Lays, Doritos, Tostidos, some of our well-known global brands.

Steve Powers:

Hey thanks and good morning. Ramon, maybe it ties to the pressures you mentioned earlier on the lower-income consumers in the U.S. or maybe even your comments just now on at home versus away-from-home. But if I think back over the last six-plus months, we've seen arguably unexpected slowing across many categories, but really in many immediate consumption categories where I think it was most unexpected across savory snacks, sweet snacks, arguably a number of beverage categories as well. Do you agree with that kind of unexpected slowing comments? And if so, how do you see the drivers? How do you stack up the drivers? Where do you think we are in that cycle? And how does that factor into your expectations on momentum recovery across your North American beverages -- sorry, North American businesses? I think the easing comps are obvious. I'm just -- I'm curious about sort of the -- your expectations on demand itself sequentially improving?

Operator:

Thank you. One moment for our next question. Our next question comes from Brett Cooper with Consumer Edge Research. Your line is open.

Ramon Laguarta:

Yes. And the -- we're always very conscious of the relative value of our product versus other potential substitute products in the categories that we participate. So if you think about snacks, the big opportunities to transform and packaged snacks into packet snacks or other macro snacks into savory snacks. And we always look at that value ratio in every market, in every geography for different types of consumers. Now the same with beverages, right, moving from non-commercial beverages to commercial beverages, that is always the opportunity for us as an industry. We look at that very carefully. Now why are our margins expanding internationally because as we gain scale and obviously, that our fixed cost leverage is much better, and that's how we're getting to more profitable businesses in international markets, especially the large markets, whilst we keep affordability at the center of our strategy because that's long-term, including other things that we do, obviously, with availability and with innovation. We make our categories continue to grow at a very fast pace. But as you mentioned, affordability and relative value of our category is a key KPI that we measure all the time in every market because it's the key source of continuous growth for our categories.

Gerald Pascarelli:

Great. Thanks very much. Question on Europe. Another really strong quarter here, like the seventh consecutive quarter of double-digit revenue growth. It looks like it accelerated on an underlying two-year basis. So maybe if you could provide some color on the driver markets, ones that maybe came in better than your expectations? And then how you would compare how developed markets in Europe are performing relative to what we're seeing in the US? Thanks.

Operator:

Thank you. Ladies and gentlemen, this does conclude the question-and-answer session. I would like to turn the call back to Ramon Laguarta for any closing remarks.

Operator:

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.

Operator:

You're welcome.

Operator:

Good morning and welcome to PepsiCo's 2023 Fourth Quarter Earnings question-and-answer session. Your lines have been placed on listen-only until it's your turn to ask a question. Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Ravi Pamnani, Senior Vice President of Investor Relations. Mr. Pamnani, you may begin.

Operator:

Thank you. [Operator Instructions] Our first question comes from Bryan Spillane with Bank of America. Your line is open.

Jamie Caulfield:

It's great to talk to you again, Brian.

Ramon Laguarta:

Great. Good morning, Bryan. This is Ramon. Listen, let me step back for a minute and talk about the last few years and then how next year fits into that. So the last few years we've seen a double-digit growth, top line in the business consistently. So I think it's at 11 CAGR and a 14% or double-digit EPS growth consistently as well. So three very good years. Now we see a -- in ‘24 we see a normalization of the categories, a normalization of the cost, normalization of inflation. So we see everything trending back to our long-term algorithm. Now, we guide it to upper end of the -- both top line and bottom line at the previous earnings call. We maintain the top line at the upper end for the EPS and we move back to at least four for the top line and there's a few factors that I think are material. One, is the Quaker recall. We had a food safety incident in our Quaker supply chain in the U.S., which has impacted us in November, December, and it will continue to impact us, I think for the -- at least for the first-half of the year until we recover our supply chain to normality. We're also seeing some geopolitical events around the world that are impacting some of our markets, which might potentially continue in the first-half of next year. And then the third element is we're seeing a bit of a slowdown in the U.S. both the food category and the beverage category in the Q4. Part of that is slowdown due to pricing and disposable income situation. Part of that is also pivoting between in-home consumption and away-from-home consumption that we're seeing in our business in the U.S. We think that, that might continue in next year, so that's why we're lowering our guidance. We feel good about the consumer in ‘24 in the U.S. We feel good in the sense of very low unemployment, we feel good about the fact that we think wages will go higher than inflation next year. And we hope that by the summer interest rates will go down and that will create another source of oxygen for this possible incoming household. So we feel good about the consumer in the U.S., but if you think about those three elements, we decided to have at least four as the guidance for the top line.

Lauren Lieberman:

Great, thanks. Good morning. Just kind of continuing on that thread perhaps a little bit focusing more on Frito. So, track channel data hasn't looked great, you know, the reported volume decline, you know, sort of bigger than what we've seen in some times of this business. But when I look at a multi-year stack, you know, things look kind of steadier sequentially when I look at the second-half. So just curious how much it may be these near-term results on Frito and looking into the beginning of the year is multi-year comps? Is it the consumer backdrop, the impact of pricing? But just thinking a little bit about your expectations for and plans, I guess, for driving greater units -- unit versus volume growth in ‘24. We're thinking about those two pieces.

Operator:

Thank you. [Operator Instructions] The next question comes from Bonnie Herzog with Goldman Sachs. Your line is open.

Ramon Laguarta:

Yes. So, yes, listen, I would say we don't contemplate at this point any of the structural changes to our business. We continue to think that operating the business has advantages for us in terms of speed of execution and some other elements that as we see where the business is growing in e-commerce, away-from-home and some other channels of the future including direct-to-consumer. Within that, that's going to create an advantage for us. Now we've been making progress at a good pace in our margin improvement. If you think about the last three years, the net revenue for PBNA has grown over $5 billion, and the operating profit has grown a billion dollars. Core operating margin has expanded more than 150 bps. So we see the last few years a good improvement in the PBNA business. We think this will continue in the coming years, actually ‘24, that's the first step. We are optimizing the portfolio. We're eliminating parts of the portfolio that were less profitable. We've referred to bottled water. We've referred to some multi-serve parts of the portfolio that were not that profitable. We continue to optimize our efficiency of our supply chain. We're digitalizing our supply chain. We continue to extract, you know, eliminate waste from that. We continue to work on global business services that reduces the G&A. We're also optimizing A&M, trying to get to higher ROI on A&M and our trade investments. So we continue to think that optimizing all those elements in the different parts of the P&L will continue to drive a sustainable margin improvement, whilst we remain very competitive in the marketplace. And that's the balance that we're trying to strike with this business. So far we feel good. The business grew with the rest of the category. If you take everything that is in our system, grew in line with the category and we increased the operating margin. So that's how we're thinking at this point about the PBNA business and with a long-term perspective obviously in how we will achieve those two elements of growing with the category and increasing the margins.

Unidentified Analyst:

Hey, everybody. Good morning. Welcome back, Jamie. Well, I suppose you've gone nowhere, but welcome back to dealing with us, I guess. Can you maybe talk a bit more about international, particularly margins are picking up above the average now, it's scaling quite nicely, but also if there's anything we need to be aware of as it relates to hyperinflation, Argentina, anything like that?

Operator:

Thank you. [Operator Instructions] Our next question comes from Dara Mohsenian with Morgan Stanley. Your line is open.

Jamie Caulfield:

Hey, Dara.

Ramon Laguarta:

Hi there. Good, listen, we feel good about the overall portfolio of PBNA. You know, we manage the business as a full LRB business, not as a CSD or any particular subcategory. We're looking at, you know, the full portfolio and how it's always everywhere for consumers from the morning to the night in all the multiple locations. We continue to believe that we have an advantage portfolio. If you think about our positions in sports and hydration, our positions in coffee, tea, now the portfolio we have in energy, and our CSD position as well. So we continue to manage as a full LRB. Now, if you think about our priorities for the year, relaunch of Pepsi brand with a new image with focus on Zero. Zero has been growing very fast and continues to be an advantage proposition for us. We are putting a lot of additional investment in Mountain Dew, and we're launching Baja Blast as a permanent SKU. Baja Blast has been a success as an LTO, a limited time offer. For many years now, we're launching it. We're using the Super Bowl as a platform this weekend to launch Baja Blast. We continue to build a position in Lemon Lime with Starry. Starry, it's been a good first year. I think we had -- we're over indexing with Gen Z. We see the brand getting some good repeat. You will see also an investment around Super Bowl and continue during the year. So that's our CSD portfolio. We feel very good about Gatorade. Gatorade is, we're moving from historically a liquid for high performing athletes to an ecosystem of solutions in hydration and fuel for every type of active person. And we've seen a lot of traction. It's not only Gatorade per se, but it's Gatorlyte, it's GFit, it's Propel, it's Muscle Milk, all under one umbrella. And it's not only liquid solutions, it's powders, it's tablets, it's equipment, personalized equipment, bottles, and others. And now we're launching around the Super Bowl Gatorade ID, which is also an ecosystem of loyalty and I would say personalization for our consumers that will bring even more attention to the brand and more loyalty with younger consumers. On energy, we're very happy with our portfolio. Obviously the Starbucks coffee energy on one side, Rockstar, and obviously our collaboration with CELSIUS, which has been a great success, and it provides scale to our go-to-market and kind of a point of entry as well with some of our customers. And then our tea business continues to very well with Pure Leaf and our Starbucks collaboration now moving more into beyond coffee, I would say more refreshers and some other innovation that Starbucks is developing for their cafes and we bring it to ready to drink. So I think we have a beautiful portfolio. We continue to grow in retail and we're putting a lot of focus in away-from-home as we're seeing that the away-from-home channel is getting much more traffic as people go back to normal mobility and that will be a focus for us going forward. This year we think we'll continue to grow above the market and continue to gain share in what is a very profitable and high growth channel. So this is how we're thinking about the business there. Hopefully it gives you a good sense of the intentionality, how we're thinking about the broad portfolio and our willingness to compete with innovation, with brand investment and with great execution.

Peter Grom:

Thanks, operator, and good morning, everyone. Ramon, I just wanted to ask a follow-up based on your response to both Bryan and Lauren’s question on the organic growth. And I may have misheard or could be misinterpreting this, but you touched on some of the things that you are doing internally that will drive the improved performance. But I think you also mentioned some sort of assumption around maybe the U.S. consumer would feel better. I mean, if that doesn't happen, would that put the organic revenue guidance at risk or would an improved backdrop be more of a source of upside versus the greater than 4%? Thanks.

Jamie Caulfield:

Yes, and I'd add just to remind you, 40% of our business is now international. So, you know, the U.S. is significant, but we've got a big business outside the U.S.

Gerald Pascarelli:

Great. Thanks very much. Ramon, I have a question on energy drinks. Can you just speak about your plans to maybe drive performance in Rockstar this year? It's kind of been a relative underperformer in energy drinks for some time and now you have bang coming back into the market, which could potentially result in some incremental disruption. So maybe just some color on how you're thinking about driving an improvement in Apron and then maybe broader thoughts on the competitive dynamics within energy drinks this year? Thank you.

Operator:

Thank you. [Operator Instructions]

Operator:

Our next question comes from Robert Moskow with TD Cowen. Your line is open.

Jamie Caulfield:

Hey, Rob, it's Jamie. Yes, that is a practice we comment on the basket of inputs. We don't comment on specific commodity movement, but you're absolutely correct that we do expect commodity inflation to moderate from what we had in ‘23.

Andrea Teixeira:

Thank you, operator. Good morning to you all and great having you back, Jamie, on the investor facing mode. I have one question and then a clarification. First for Ramon, I was hoping to see if you can elaborate a little bit more on how you're going to be lapping and if you have a red lap, the mixed drags and the shift from away-from-home and where your market share is not probably as strong as in snacks as you have in at-home channels? And given your strong gross margin delivery in your experience negotiating with large box retailers, especially in Europe. Are retailers asking you to invest back in promo rollbacks given your gross margin delivery and productivity gains, in particular North American and Europe. And my clarification for Jamie is in terms of like your organic sales growth and EPS cadence for the year, anything we should be considering on your guide as far as cadence. Thank you.

Ramon Laguarta:

Yes, and listen, with regards to the customer, I think we're all trying to build win-win plans in the sense that we grow the business and we create profit growth for both our customers and ourselves. We normally -- we have always the consumer at the center, so it will be a combination of we generate growth through, as I said, innovation, and we have a few big innovations and brand relaunches this year. We'll put a lot of investment there together with our customers. We'll continue to try to expand our SKUs with the customers and there will be investments there. And there will be some investments in trying to give more value to consumers in a very holistic way, right? Through back priced, through promotions, through consumer events that eventually will drive preference for our brands. But that's the way we're thinking about creating this joint business planning with our large customers that create growth for the category, growth for our customers, and growth for us. With regards to away-from-home, sorry I forgot Andrea. The away-from-home we see it as an and, not as an or, we see it as an opportunity for us to continue to be in consumers’ lives always everywhere. And as consumers pivot away-from-home, we'll try to be there for them. It's been an area of investment for us, both in distribution and specific solutions for away-from-home for quite some time. And we're seeing our businesses in the large markets growing above the market in away-from-home. So clearly, this will be an opportunity for us for many years to come. And I think we're getting better at mixology. We're getting better at more food experiences, walking tacos, Doritos loaded. We're testing food trucks. We're testing many things that will make our brands available to consumers in the beyond what is a package bag or a can or a bottle. Now I think consumers are expecting from us away-from-home a much more holistic experience and that's what we're working on and I think we're making good progress.

Robert Ottenstein:

Great, thank you very much. A little bit more of a detailed question on PBNA and just want to talk about Gatorade and CELSIUS. So in terms of Gatorade, could you just remind us in terms of the timing of the move to DSD? And how that impacted your income statement? And then in terms of CELSIUS, obviously the brand has done phenomenally well. It's getting pretty big now. Can you talk about how CELSIUS impacts the income statement in the U.S.? And then how your relationship with the company has evolved? You talked about taking Rockstar internationally. CELSIUS is going international now. Are you part of that plan as well? Thank you.

Ramon Laguarta:

Yes, listen, we're happy with the collaboration with CELSIUS and that continues to be a part of our growth strategy. You know, there is an opportunity for us to collaborate in the international expansion as well. At this point it's not, I would say, a scaled opportunity. It's a market-by-market opportunity and very particular market. So yes, we are contemplating that as an option and we are having conversations with CELSIUS how we can leverage the PepsiCo system for a bigger expansion. Nothing short-term I would say at this point.

Chris Carey:

Hi. Good morning, everyone. So I just wanted to ask about SG&A over the past four years. We've talked about this before in this forum, but with the annual disclosure is now out. I thought it would be a good time to revisit the topic. Specifically, Ramon, can you help contextualize the increase that we've seen in SG&A over the past four years, specifically in distribution costs? I'm really curious about maybe how much of this is underlying inflation as opposed to discretionary investments that PepsiCo is making and not really looking for a specific number per se, I realize that's probably difficult, but distributions up 40% over the past four years, and I'm just wondering how much of this is within your control, maybe some of the capabilities that you've been able to build over this timeframe and maybe get a sense of how this line item should be trending going forward? So thanks.

Jamie Caulfield:

One other thing, Chris, that you should be mindful of is, you know, we do have a big direct store delivery business, so we've had inflation in various things like labor and so forth, and that's what's gone up. A&M has gone up as well, which is also kind of all part of that SG&A bucket. We've made numerous capability investments in there as well. So it's all of the above. I wouldn't hone in just on the distribution costs, which I know you focus on from the 10-K. There's a lot of buckets that go in that are far deeper that we can't get into for competitive reasons.

Filippo Falorni:

Hey, good morning everyone. So Ramon and Jamie, you both mentioned the organic sales growth guidance is going to be more second-half weighted? And I know you don't provide breakdown and guidance on volumes, but given the importance of volume trends, can you give us a sense of how you see volumes evolving? Is there a possibility in your guidance where you see positive volumes in the second-half of the year? And then on the pricing front, maybe you can give us a sense of what are you assuming in terms of pricing? I assume in the U.S. or developed markets its limited and there's more pricing in emerging market, but any color on pricing will be also helpful. Thank you.

Operator:

Thank you. [Operator Instructions] Our next question comes from Callum Elliott with Bernstein. Your line is open.

Ramon Laguarta:

That's great, good point. Obviously in absolute terms, we have much more A&M. So I think we have increased, last year was $500 million. And if you think about a longer timeframe, a meaningful over $1 billion increase in absolute A&M. So that's absolute dollars that go against our business. We're thinking about continuing that trend, continuing to support both our large brands across multiple markets and then smaller brands where we take the portfolio into the future. So that should be a composition of our A&M. Now, when you look at the last few years, you should bear in mind we stopped advertising in Russia, which was a meaningful market for us. So that is reflected in our absolute numbers or relative numbers. So that you should contemplate that. But as a, you know, if you think about where and how we're going to create demand in the future, you should be thinking about A&M continue to increase. Obviously, we'll look at ways to optimize A&M, and we have very strong measures on ROI and best ways to invest in our brands, but you should be thinking about as a company that continues to build brands, continues to innovate, continues to create value through investment in consumer. And obviously we also create a lot of demand through our push model to some of the questions that were asked before. You should be thinking about our selling and distribution costs not only as a cost, but also as a way for us to execute very granularly across millions and millions of point of sale around the world where we reach the final point of sale and we create, I would say visibility for our brands and impulse for our brands, which are relevant if you think about the categories where we compete.

Steve Powers:

Oh, great. Good morning. Thanks, everybody. Jamie, add me to the list of people excited to work with you again. Hey, actually, this question may be for you. It probably is for you. On these calls for the last several years, we've been talking about on and off, just sort of the cashflow profile of the business and the capital investments that have been made in the business in the past, eventually back towards a higher level of pre-cashflow conversion. I guess acknowledging that you've been there in the room the whole time. Now as you assume the role of CFO, do you see any opportunities to speed that process of cash flow generation and a return to higher levels of pre-cash flow conversion from where we've been trending or is it more steady state? And if you could just give us a little perspective on how you're seeing those, that cashflow profile of the business evolving from here, that'd be great. Thank you.

Ramon Laguarta:

Great. So thank you, everybody. I'm glad everybody's happy that Jamie is back and I see a lot of bonding. Great, but obviously thank you for the confidence that you've placed in our investment and we look forward to seeing many of you at Cagny in a couple of weeks and having a longer conversation there. Thank you very much.

Operator:

Good morning and welcome to PepsiCo's 2023 Third Quarter Earnings Question-and-Answer Session. Your lines have been placed on listen-only until it's your turn to ask a question. Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Ravi Pamnani, Senior Vice President of Investor Relations. Mr. Pamnani, you may begin.

Operator:

Thank you. [Operator Instructions] Our first question comes from Bryan Spillane with Bank of America. Your line is open.

Ramon Laguarta:

Good morning, Bryan.

Ramon Laguarta:

Yeah, good morning, Bryan. Let me step back beyond PBNA to the broader company. We're seeing sequential volume improvement, if you take the last few quarters. So globally, we're improving our volume. But more philosophically how we're thinking about how we're managing the company. There's two big variables that we're trying to optimize. One is consumer interaction with our brands. And the proxy we're using for that is units or specific purchasing act. And then the other one is obviously margin for the overall business. And those are the two variables that we're maximizing. In both cases, units are growing much faster than volume. And we're seeing that -- you mentioned consumers moving to smaller packs. We're also in a way, facilitating that through our pricing and mix strategy. And then we're obviously optimizing margin that, as you saw it was a good improvement in our margin across the company and the particular businesses that you referred to. So that's how we're thinking about volume and margin. When it comes to PBNA, we've been a bit more aggressive than in the other businesses with regards to volume optimization. And we've made some decisions, especially around take home water that we're able to prune some promotions that were not profitable for the business, and that has almost 2.5 points of volume impact. So that's how we're managing volume. It's clearly an important variable for us, but for efficiency in the plants and some others that unit transaction and consumer interaction with the brands are the metrics that we're trying to maximize as we're making these trade-offs between volume you know net revenue and margin expansion.

Lauren Lieberman:

Great. Thanks. Good morning. Carrying on Bryan's question, but taking it a little bit further out into 2024, and it was great to get kind of some preliminary perspective on next year, so early. But I was also curious how you're thinking about that balancing volume and price mix as we go into next year because price mix has continued to outperform? And so just kind of thinking about that more forward look as well. Thanks.

Hugh Johnston:

Yes. So right, to add a finer point to Ramon's comments, Lauren, if you think of pre-pandemic inflation being kind of in that 2%, 3% range, inflation is going to be a little elevated relative to that. And our pricing will be roughly in line with inflation. So that should at least give you a rough sense as to how things might shake out.

Andrea Teixeira:

Thank you. Good morning. So going back to your comments about volumes in PBNA. Was that specific to the quarter or should we still see about this 2.5% headwind to volumes you quoted and potentially into the first half of 2024? And if you can also comment on the volumes in Latin America, so how we should be thinking towards the end of the year and potentially into 2024? Thank you.

Operator:

Thank you. One moment for our next question. Our next question comes from Dara Mohsenian with Morgan Stanley. Your line is open.

Hugh Johnston :

Hi, Dara. I can answer that one. I think in general, as we build the plans, we're focused on a couple of things. Number one is obviously the level of commodity inflation, and you know we buy forward about nine months. So that's roughly in line with the past. Number two is the balance of the PepsiCo cost structure. And as we've talked about the last couple of quarters, we've put even higher focus than we've had in the past on driving productivity and driving out unnecessary costs using the tools that we've discussed, the investments in digitalization, the investments in global business services, the investments in driving out overlaps within the organization. Because that work has been going on for a longer period of time, I think that gave us earlier line of sight into what we would expect our cost outcome to be for next year. And then number three, we're in a good spot in many of the developed markets in terms of our commercial plans. We do joint business planning with our customers. And we're probably in line to maybe even a little ahead of where we've been historically with all of that. So given the information was available to us a little bit earlier and given there was undoubtedly questions in the investment community on what '24 look like given the evolving pricing and inflationary environment, we thought it was prudent to at least give some indication of what guidance would look like in '24. So that's what drove the decision.

Peter Grom:

Thanks, operator, and good morning, everyone. I actually wanted to follow up on Dara's question there. But just more in the context of your actual performance versus your initial expectations historically because it's really been a while since organic revenue growth has actually fallen short of your initial outlook. So can you maybe just characterize your confidence in the '24 outlook at this stage and really whether or not you've embedded enough conservatism just given what remains a pretty choppy backdrop for the consumer? Thanks.

Operator:

Thank you. One moment for our next question. Our next question comes from Nik Modi with RBC Capital Markets. Your line is open.

Hugh Johnston:

Sure. Why don't I start and then Ramon, obviously, you're super deep on the consumer as well, but I'm happy to start on this one. Number one, I do think that we see the consumer right now being more selective, and you see it in a variety of ways, right? You see some trade down in terms of channels of trade that they're purchasing products in. You see some orientation toward value. At the same time, the things that I usually look at with the consumer to detect whether there's high stress, we see good results, Nik. Number one is the convenience store channel. Typically, when gas prices are up and consumer incomes are stressed, you see revenue in those channels under stress as well. For Q3, we saw revenue up 5% in beverages and 8% in foods in the convenience channel. Number two is food service, that's also typically a leading indicator, that's still growing double-digits. So I think we've gone into the year with an approach that says, given all that I laid out during Dara's question, we expect the consumer to continue to be cautious. And to the degree that they are worse than that, we've got cost plans in place that we would use to mitigate whatever challenges we face. But we think our revenue outlook accommodates an increasingly cautious consumer next year.

Operator:

Thank you. One moment for our next question. Our next question comes from Bonnie Herzog with Goldman Sachs. Your line is open. Again, Bonnie Herzog, your line is open, and if you have a question, go ahead and ask it. It looks like they didn't have a question, do you want me to go and move on to the next person?

Operator:

Okay. Sure thing. One moment. Our next question comes from Chris Carey with Wells Fargo. Your line is open.

Ramon Laguarta:

Good morning, Chris.

Hugh Johnston:

Yes. Good morning, Chris. Chris, we don't get into by commodity levels of dissecting the numbers and guidance. That's something that historically we haven't done. As you know, the beverage segment is a little more packaging exposed in foods is just by virtue of the nature of the products. But I'd rather not go any further than that to get into the specifics of individual commodities for competitive reasons.

Robert Ottenstein:

Great. Thank you very much. I just want to shift a little bit more kind of to the long-term. And I was just wondering if you can kind of give us a sense of the vision, your vision for the business, the beverage business and the food business in the US in light of your large investment in Instacart what you're trying to accomplish there? And other kind of strategic moves you're doing on the digital side and the -- all the underlying work that you're doing in terms of automation and productivity. Just kind of what do you see the business looking like in the future? And how does Instacart play into it? Thank you.

Operator:

Thank you. One moment for our next question. Our next question comes from Stephen Powers with Deutsche Bank. Your line is open.

Ramon Laguarta:

Listen, we will not go into more details on '24. We'll cover that in February in due June time. When it comes to Gatorade, we're very pleased with the G2DSD or the movement of Gatorade to the DSD platform over the summer. We're seeing sequential improvement in the performance of the brand. Better performance in August that we saw early in the summer, et cetera, inventory on display and a number of secondary location, et cetera. So that move is working. On the velocity of the brand, we also saw that the brand is improving its velocity. It is true that the emergence of Prime in the category took some share from Gatorade less than other brands in the category or less proportionally to the size of the brand. But I would say Prime impacted Gatorade in a way some transactions during the peak of the season. We're seeing that the size of Prime in the category getting smaller as we go into the fall, which gives us very good optimism that with the new infrastructure we have with our DSD business, some of the innovation with GFit, Gatorlyte, G Zero, our powders and tablets that are being very well received by consumers that we have a very good you know we're going to have a very good '24 for Gatorade. So we have a stronger foundation to go into next year with potentially weaker competition. But obviously, I don't know what their plans are.

Filippo Falorni:

Hey, good morning, everyone. So, clearly, there's been a lot of concern in the market around adoption of GLP-1 drugs in the US and the potential impact on your business. So maybe can you comment a bit of what you've seen so far based on your consumer studies, both on the beverage and food side? And how you're thinking that can evolve over the next couple of years, change in consumer behaviors? And then from a Pepsi-specific standpoint, what changes can you make to adopt your portfolio to these new consumer preferences that could emerge if the adoption is greater than that? Thank you.

Operator:

Thank you. Our last question comes from Brett Cooper with Consumer Edge. One moment.

Ramon Laguarta:

Yes. Sorry, we missed a little bit of the question, but hopefully, we got what you're trying to ask. CELSIUS obviously is part of our energy drink strategy. We said we had multiple pillars and our ability to distribute in our system, some third-party brands is part of that strategy. Obviously, CELSIUS continues to grow. We've doubled the distribution and the presence in store of the brand in the last year or so especially in the convenience channel, which is a key channel for energy consumption. That participation of CELSIUS in our track makes our full system more efficient. It makes our salesmen more relevant in the store. It makes our cooler more a go-to cooler in the store and those are all positive that eventually have a halo effect as well in the rest of our portfolio. So I don't know if I'm answering the question because really I couldn't -- we couldn't hear it very well. But I guess you get a sense of the importance of CELSIUS in our energy strategy and the value we get from both the actual monetization of that distribution, but also the halo it has in the rest of the portfolio.

Operator:

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Operator:

Good morning, and welcome to PepsiCo's 2023 Second Quarter Earnings Question-and-Answer session. Your lines have been placed on listen-only until it’s your turn to ask a question. [Operator Instructions] Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Ravi Pamnani, Senior Vice President of Investor Relations. Mr. Pamnani, you may begin.

Operator:

Thank you. [Operator Instructions] Our first question comes from Bryan Spillane with Bank of America. Your line is open.

Hugh Johnston:

Good morning, Brian.

Bryan Spillane:

So I guess, Ramon, my question is more kind of related just how you're looking at the bigger kind of macro picture in the consumer specifically. I think as we went into this year, there was an expectation that elasticity would increase and there'd be more of a consumer response, I guess, to all the inflation we're seeing really globally. So I guess it seems like in the first half volumes effectively have been better than expected. So I guess as we're kind of looking forward in the back half of the year and even into next year. Can you just kind of give us a little bit of a some insight into how what you're seeing with the consumer? What your expectations are and just how that may have differed from what we were seeing or what you were thinking maybe going into the start of the year?

Operator:

Thank you. One moment for our next question. Our next question comes from Dara Mohsenian with Morgan Stanley. Your line is open.

Ramon Laguarta:

Yeah. Thank you. Thank you, Dara There are obviously some markets around the world that are suffering from currency situations and there we have to adjust to the reality. And I'm talking about Turkey, Pakistan, Egypt, Argentina. So there are subsegment of markets where I would not apply the global rule and we're acting very specifically in those markets. But beyond those markets overall, we're seeing and I think it's because what I was saying earlier, unemployment levels being very low. We're seeing consumers continue to behave in a positive way. Our category penetrations in most of those markets is still relatively low, and we continue to be an affordable treat in those markets. So our products continue to be part of the repertoire that they can afford and they make trade-offs to stay within our category. So we're seeing that in a very positive way. Now competitive wise, I think there's very rational competition across the world from what I -- from what we can observe, in the first half of the year, both in our snacks and our beverage business. And that's what we're assuming in the balance of the year.

Lauren Lieberman:

Hey. Thanks. Good morning. I'm trying to get a little bit more specific around the [Technical Difficulty]

Lauren Lieberman:

Is it better a little?

Lauren Lieberman:

I will hang up, and call back.

Lauren Lieberman:

Bye. No.

Bonnie Herzog:

All right. Thank you. Good morning, Ramon and Hugh. I wanted to circle back on your guidance. I just had a question on it. Your new guidance implies, I guess, above algo growth in the second half, but I guess doesn't really imply much bottom line leverage. So I wanted to understand if there might be some level of conservatism baked in or if you're planning on stepping up your reinvestments in the second half or if there are any incremental headwinds we should be aware of? Thanks.

Operator:

Thank you. One moment for our next question. Our next question comes from Vivien Azer with TD Cowen. Your line is open.

Hugh Johnston:

Hi, Vivien.

Hugh Johnston:

Yeah. Hi, Vivien. It's Hugh. The margins in PBNA was down in the second quarter. We had a big gain on an asset transaction in 2022. We're cycling over that transaction in '23. And for the full year on PBNA, you'll see the margins up in a healthy way, and north of 100 basis points.

Lauren Lieberman:

Hi. Is this better, hopefully.

Lauren Lieberman:

Okay. Cool. I’m still sitting in the same place. Okay. I was going to ask -- sorry about that, I was going to ask about Gatorade. So tons of innovation activity, you guys have talked about it. We're seeing it very much in the marketplace. And in the release, you talked about Gatorade being up double-digits in the quarter. But when we look at Nielsen, it shows something that significantly trails that. And so I was just curious, I guess, about mix of on track, how much of maybe some of the performance you're seeing has to do with incremental shelf space and distribution given the breadth of innovation and new product activity there has been?

Operator:

Thank you. One moment for our next question. Our next question comes from Andrea Teixeira with JPMorgan. Your line is open.

Hugh Johnston:

Hi. Ramon, go ahead.

Hugh Johnston:

Hi, Andrea. So balance sheet (ph) revenue, the squeeze is 7.5%. What I think we're going to see is volumes will be sort of in the flattish range for the balance of the year. Obviously, there's still carryover pricing. And I don't think we'll do anything different than our normal cycles on pricing in the balance of the year. You tend to see pricing in the beverage business in the fourth quarter. Frito tends not to go in the balance of the year, but that's TBD. We'll see how the year plays out. But the implication that we have in the forecast right now is kind of back to our relatively more normal pricing. And obviously, that sets us up for '24. And then a lot of ways to think about it as the back half of the year is a little bit ahead of our long-term guidance, which I think is the momentum that we'll carry forward.

Christopher Carey:

Hi. Good morning.

Christopher Carey:

Hey, Hugh. Just one quick follow-up on the gross margin. You said that the pricing tailwinds year-to-date are basically in line or offsetting inflation. I couldn't tell if you said commodity inflation. I guess what I see is about 600 basis point benefit from pricing and a 400 basis point headwind from commodity inflation. So it seems like you're actually tracking ahead. But when you made that comment? Was that a total inflation comment or is there a mix tailwind as well? So maybe price is actually below what we can see in price mix. So I just wanted to clarify that. And I guess connected is just in the context of full year gross margin, unless there's some offsets, it seems like you could see some notable expansion for the full year. Am I reading that wrong that's going to allow you to invest or are there some offsets I'm not thinking about? So thanks, so much.

Operator:

Thank you. One moment for our next question. Our next question comes from Peter Grom with UBS. Your line is open.

Ramon Laguarta:

Yeah. Good morning. I think there's a couple of realizations on this. The number one is that the power of our distribution system our DSD machine in the U.S. is very powerful. And obviously, you can see by the increase in the numerical distribution and the quality of execution. So that's one element that makes us feel very strong about our capabilities in the U.S. Beverages. Second, I think Celsius is a brand that is capturing new consumers to the energy category, consumers that were not consuming energy drinks for many reasons in the past, flavor or image or some other elements. That is a positive. The category keeps expanding and we're glad that that's in our portfolio. And we're working together with Celsius to see additional international opportunities, whether we can expand the brand in some other markets, especially more developed markets where the category is a bit more developed. Those are the three conclusions that we're taking from our relationship so far.

Operator:

Thank you. One moment for our next question. Our next question comes from Robert Ottenstein with Evercore ISI. Your line is open.

Ramon Laguarta:

Yeah. Thank you. Yes, good -- good diagnostic. The fact that our European business clearly has had a terrific first half of the year and we're expecting that to continue in the second half. A couple of elements, I think we have a portfolio that is quite robust on the snack side. We have very good market positions in snacks. And we have good challenging positions in beverages and our zero propositions in Europe are growing very fast and they're taking market share in some of the more affluent markets in Europe. So good portfolio mix and good focus by the team on growing that portfolio. As you said, we were a little bit late to pricing last year in '22. And the team has been courageous and has been able to find win-win solutions with our customers in '23. So as you see from the numbers, good pricing levels, but what is also very remarkable in Europe is the levels of productivity that the team has been executing through simplification of the business and everything else that Hugh was saying about digitalization and automation and also moving some service to essential points that we can service the businesses more effectively, more efficiently. So good work by the European team, both on portfolio managed simplification and then in driving productivity. So we feel good about Europe. We have a very strong business in both Central Europe, Eastern Europe and parts of the economy that are growing faster. So we feel good about the portfolio composition and the business going forward.

Stephen Powers:

Great. Thanks and good morning. Maybe putting a final bow around Bryan's original top line question. I guess, Hugh, the volume cadence that you implied a little earlier, down 2% or so in the first half based on results reported to date, and if I heard you correctly flattish in the second half. How does that compare with your outlook coming into the year? Because I guess, just stepping back, I'm trying to get a better sense of whether the 4 points of upside you now see in organic growth versus that February forecast is more driven by better volumes or whether the upside is really driven by greater-than-expected price mix realization or whether it's some kind of combination? Thanks.

Ramon Laguarta:

Yeah. And I would say the commercial teams have done a great job in minimizing elasticity. So going into the year, of course, we were assuming a level of elasticity that was more based on historical levels. I think we've been positively surprised on the strength of the brands in some markets. And obviously, as I said earlier, the consequence of the investment we've been making. But the way the teams have executed innovation, have executed range expansion, multiple displays around the store and some of the tactics we normally use to drive volume and minimize elasticities have been really well executed. I think we link it as well to as being a more intelligent company in a broader sense, having better data, having better digitalization and execution capabilities. So it is all connected. And yeah, we feel good about how the business performed in that respect versus what we had initially planned.

Filippo Falorni:

Hey. Good morning, everyone. A quick question on Frito-Lay North America. Clearly, very strong results in the quarter. But over the last couple of weeks, we have seen a bit of a slowdown in track channels. So the first question is, what do you think is driving the recent slowdown, partly is obviously cycling high price realization, but also just general sense on what you're seeing from a volume standpoint. And then, also why are you seeing untracked channels in that business? Thank you.

Operator:

Thank you. One moment for our next question. Our last question comes from Gerald Pascarelli with Wedbush Securities. Your line is open.

Ramon Laguarta:

Yeah. Listen, we take our energy products along with the rest of the portfolio where it makes sense, right? So some of the channels you're mentioning like college universities, they are very large channels for our energy execution, right? So when you go to a normal campus, you will see a Rockstar, you would see Celsius, you will see our coffee business. You will see the new Gatorade energy Fast Twitch. So you will see all these execution. Wherever there are consumers that are looking for energy, we tend to be there. So we're not holding on any opportunities at this point to maximize the reach of our brands. So no, don't wait for '24. We're executing as we speak.

Operator:

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Operator:

Good morning, and welcome to PepsiCo's 2023 First Quarter Earnings Question-and-Answer session. [Operator Instructions]. Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Ravi Pamnani, Senior Vice President of Investor Relations. Mr. Pamnani, you may begin.

Operator:

[Operator Instructions]. Our first question comes from Dara Mohsenian with Morgan Stanley.

Ramon Laguarta:

Yes. Thank you, Dara. Let me cover that and then Hugh can add some comments. We're seeing a competitive environment. We're all trying to protect the health of the categories and then make sure that our brands are participating in those categories in a competitive way. We are investing in our innovation, investing in our brands, investing obviously in value in different ways, pricing, sizing in mostly. So we're seeing a good positive competitive environment in the U.S., in Europe, and also in our developing markets consistently across the world. When it comes to pricing, as we said earlier in February, we have mostly taken the pricing already this year that we needed to cover for our cost increases. And that is where we stand at this point. We're seeing a deceleration of inflation, not a reduction of cost, but a deceleration of inflation. And we think that with the pricing that we've taken already most of our business around the world, that should be sufficient. Obviously, there are some markets, highly inflationary markets around the world where we might have to take additional pricing. If you think about Argentina, Turkey, Egypt though those kind of markets where the currencies are suffering, but the majority of our pricing is already done.

Operator:

Our next question comes from Andrea Teixeira with JPMorgan.

Hugh Johnston:

Yes, Andrea. A couple of things. Just for clarity, in terms of the snack food or the community food volume, Pioneer was a big driver of that. There are challenges with the power grid down in South Africa. And obviously, Pioneer makes a lot of heavy products. Ex-Pioneer Snacks volume was basically flat for the quarter and beverages obviously was up a small amount for the quarter. In terms more broadly of sort of the rate of growth of all of the businesses. From a revenue standpoint, I think generally speaking, you see the consumer continuing to buy our products. Elasticities are still holding up quite well across most of the globe. And then despite the fact that we're taking pricing driven by the inflation that we're facing into. In terms of operating performance, I think what you're seeing more than anything is a reflection of the productivity initiatives that we've put into place, whether they be automation in the supply chain or digitalization across the company, we're leveraging global business services. So when we talk about sort of an acceleration in the operating income performance, I think it's a consumer that's responding to the brand advertising we're doing. And in addition to that, the productivity that we're driving.

Kevin Grundy:

Great. Just picking up on some of your prior commentary there. And just the decision to raise the EPS guidance at this juncture of the year, which I think is noteworthy because the company's delivery against guidance has historically been quite good, as you're well aware, but historically, the tax has been to maintain it and then as the year moves on to edge it higher. So I -- just some context here. Was it that the first quarter was that good relative to your expectations, just came in that much better? Because it's noteworthy within the context of all the prognostication around potential recession and market volatility for the raise at this juncture of the year, so maybe just some historical context around it and relative to the first quarter results, I think, would be helpful.

Operator:

Our next question comes from Bonnie Herzog with Goldman Sachs.

Ramon Laguarta:

Thank you, Bonnie. We don't see -- actually, we see the momentum in the beverage category, very strong in terms of demand. We're seeing away from home, very strong. We're seeing the convenience channel, very strong, and we're seeing most of the in-home channels also quite strong. So we don't feel that there is a competitive environment that is getting worse in beverages. There's some one-off in the first quarter because we're -- as you know, we're moving Gatorade from a warehouse system to a DSD system and in that transition, there is some inventory reduction overall in the system that is impacting Q1. But we don't think that the competitive environment in beverages in the U.S. is getting worse and that we need to do anything special. We have a very strong commercial program, both innovation, brands, commercial execution and customer programs. So that will be the way we're planning to continue to compete vigorously in the market.

Lauren Lieberman:

Great. So you've already been asked about raising the guidance early in the year, and it would sort of be mechanically hard not to, given how strong the quarter was. But your prior outlook you had baked in what we thought was one of the more conservative set of assumptions around the macro environment at least for the second half of the year across our coverage anyway. And so I was just curious if you're seeing anything more recently that has you more optimistic on the macro trajectory. Anything in terms of that broader market outlook or consumer outlook that's informing your ability to raise the guidance? Or is it really more tied to just the momentum in your own business?

Operator:

Next question comes from Bryan Spillane with Bank of America.

Hugh Johnston:

Yes. Bryan, it's really two things. One is a seasonal inventory build on the Gatorade thing, as you mentioned. The second is, we've got a number of significant capital projects that are in flight right now and the timing of the payables on the capital equipment is what drove that number. So I would take it as a one-off, not a change in trend by any stretch of the imagination. It's just a one-off when the quarter ended.

Christopher Carey:

Can you maybe just touch on how investment and priorities will evolve in 2023. I think one of the key takeaways from 2022 was distribution costs between shipping, handling and merchandising activity was a key driver of SG&A inflation, but I'm conscious of double-digit increases with added marketing spending out of the gates into Q1. So can you maybe just frame how overall investment will be evolving over the course of this year in the context, maybe some easing on inflation and certain SG&A buckets and an ability to put more spending in others.

Hugh Johnston:

No, I think that's the only thing -- and I think where Chris is going with the question from his perspective as well. Chris, I think you'll see more of the financial impact of those investments in SG&A significantly less selling cost of goods. So as you're modeling it out, SG&A is a place where you'll see all the items that Ramon referenced will be hitting.

Peter Grom:

So I was hoping to get more color on the international performance in the quarter. But maybe specifically in China. I know it was called out in the prepared remarks is a market where you gained share, and maybe I missed this, but I don't think it was mentioned when discussing growth in the quarter. So can you maybe share a view on the current environment in China how that evolved through the quarter and kind of how you see that progressing from here?

Operator:

Our next question comes from Robert Ottenstein with Evercore ISI.

Ramon Laguarta:

It's a great question. Listen, we believe our categories are large and growing at a very fast pace, around 5% globally. I think our main responsibility is to maintain the innovation and make sure that the portfolio evolves with consumers, the brands continue to be super relevant. And that is where we want to focus our efforts. We're making some small moves, as you saw, for example, when we're going into low alcohol here in the U.S., expanding the brands. We're making small moves like Cheetos going into Mac and Cheese. So we're expanding some of our brands organically into some new spaces that make sense from the consumer point of view that we believe our categories are large, global, healthy, and we -- our responsibility is to give them healthy and growing very fast.

Vivien Azer:

I wanted to ask about Pepsi Zero Sugar given the reformulation and the broad-based international distribution. Can you offer some perspective on how that's performing relative to expectations? And as well, could you possibly update us on how the organization is tracking towards your 2025 ESG target to drive 60, 70% of volumes from lower added sugar beverages?

Operator:

Our next question comes from Gerald Pascarelli with Wedbush.

Ramon Laguarta:

Yes. In general, we're seeing private label growth in some of the categories where we participate, especially waters, juices that we used to participate in some categories in salty snacks as well as you mentioned. As you will say, Frito-Lay is -- I think it's growing share of market at the fastest pace that we've seen in the last, maybe 10 years, if I recall, as a consequence of the great work the team is doing in terms of execution, but mostly innovation and brand building. So I think we see both private label increasing, although from a very low base in salty snacks. But most importantly for us, we're seeing our brands continue to gain loyalty, expand their consumer base and be preferred in that segment. But yes, private label is slowly increasing and in -- from a very, very low base as I said, in some subsegments of the salty snacks business.

Brett Cooper:

With about a year in of and Hard Mountain dew, I was hoping you could provide some color on your view of the performance of the brand and the operation to date, any learnings? And then how you think about proceeding from here?

Operator:

Our next question comes from Filippo Falorni with Citi.

Ramon Laguarta:

Yes. I mean we've expressed this in the past. We want to have a business that grows and the category pace or above and expand its margins to the mid-teens levels that we have mentioned as well in the next 2 to 3 years. So that is the strategic intent for this business. I think the team is executing very well. The way we measure our share is full LRB. So it's the full set of brands that we have in our portfolio, not just small segments within the category. And obviously, I think we're progressing well against that growth target for the year, whilst also expanding the margins for the business. We feel good about the margin expansion this year.

Charlie Higgs:

I was just wondering if you could talk a little bit more about the Frito-Lay North America division and the volume growth there. How did Lays, Doritos, Cheetos perform? Is there any color you can give on a single-serve pack versus multi-packs? And then just how you see the very strong margin growth in Q1 progressing throughout the year would be useful.

Operator:

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.

Operator:

Good morning, and welcome to PepsiCo's 2022 Fourth Quarter Earnings Question-and-Answer session. [Operator Instructions] Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Ravi Pamnani, Senior Vice President of Investor Relations. Mr. Pamnani, you may begin.

Operator:

[Operator Instructions] Our first question comes from Dara Mohsenian with Morgan Stanley. Your line is open.

Ramon Laguarta:

Good morning, Dara.

Ramon Laguarta:

Good morning, Dara, this is Ramon. Listen, the way, the way we feel about the consumer is based on employment data and wage growth around the world is positive. In our assumption for the year, we're thinking elasticities might get worse going into the second half of the year based on multiple scenarios that we have. Obviously, they are very changing. We just had some recent changes in some other in multiple parts of the world. But we’re feeling that that might happen that there are worse elasticities in the second half of the year. And that's why we're guiding to a 6%. We feel comfortable with the way the business is going as you could see from Q4 a good momentum in our brands and good share momentum in many geographies around the world. But the key, the most important thing for you to think about is we're going to keep investing in the quality of our products. We're going to keep investing in the strength of our brands. We'll keep making our go-to-market systems stronger. So no matter what happens with the consumer, we're going to be I think preferred choice for a lot of the consumers and our customers. And that's how we are planning for next year.

Lauren Lieberman:

Great, thanks. Good morning. I was curious in the release there were a couple mentions of two things. One brand exits and portfolio management, and the other was there were a number of impairments. And I know, anyone who acquired a business pre pandemic is pretty much taking an impairment, so that's kind of due course. But I thought it might be a good opportunity to get an idea on how some of these businesses have been faring in the sense of what they've added capability or portfolio wise or maybe where they've fallen short. Again, notwithstanding the pandemic dynamics. And then just color on what some of those brand exits and portfolio management mentions were in reference to? Thanks.

Ramon Laguarta:

Yes, Lauren, strategically SodaStream continues to be a very central to the transformation of the beverage category. We've seen that there is a huge opportunity to enable consumers to personalize their drinks and have a type of consumption where there's no plastics and where there's a lot of convenience for consumers at home or in offices or even on the go. So it continues to be very central. Hugh was saying there was obviously a situation, especially in Europe, with inventories and the discretionary consumption that we took this opportunity to reassess the value of the asset.

AndreaTeixeira:

Thank you. Thank you, operator. Good morning, everyone. If you can talk about how to think about operating leverage, you have historically been able to use about 1 billion per year in productivity, to offset inflation. And now coming in to these year on top of like a very strong inflation, but also really healthy carryover from pricing. How should we be thinking in terms of like the ability to flex your P&L? Any particular you invested- I think we all appreciate that you invested a lot more in A&P, strong double-digit growth in the last quarter. How to think about A&P investments into 2023? Thank you.

Operator:

Thank you. One moment for our next question. Our next question comes from Bryan Spillane with Bank of America. Your line is open.

Hugh Johnston:

Yes, happy to, Bryan. Let me start broad and then I'll sort of narrow it in. Very broadly, the capital allocation principles we have are no different than what we've had in the past, the four basics of make sure we invest in the business, pay the dividend, tuck in acquisitions and share repurchase. If I zero within a little bit more for the environment that we're in right now, with some of the changes, I think our biggest priorities right now we're going to be continuing to invest in the business and growing the dividend. And that's not a just a today's statement, although obviously 10% dividend growth is a pretty, pretty healthy growth in our current environment. But I think those are our bigger priorities, relative to perhaps tucking in there and relative to perhaps share repurchase. If the 10% dividend growth is bigger than what we've done in a number of years, and I think you'll see us prioritize that a bit more over time. So I'm sorry, and then the last piece is about working capital. Yes, the time -- we basically had a timing issue one that we're doing some IT implementations. And in terms of the IT implementations, essentially we paid for it about two weeks’ worth of payables, just to take some pressure off the IT systems because we had some freezes at the beginning of the year. So that's what pulled that number down. That was probably worth about 500 or so million dollars right at the end of the year. It's not a material change in cash flow. It's a two week timing issue. So I think you'll see that bounce back as we get to the end of 2023.

Bonnie Herzog:

Hi, thank you. Good morning. So you’ve worked out a new and improved Pepsi Zero Sugar. So just hoping for some more color behind this initiative? And really how incremental you think this can be? I mean, maybe you guys could give us a sense of how big your Zero platform is currently? And what percentage of your portfolio this could be in the next few years? And then finally, just maybe some insight in terms of how big of a push you plan to be making behind the rollout in terms of marketing spend, activation etcetera? Any color on some of these initiatives would be helpful? Thank you.

Hugh Johnston:

And Bonnie just to give you a data point Pepsi Zero Sugar grew 26% volume in the fourth quarter so that business is really growing.

Peter Grom:

Thanks, operator. And good morning, everyone. So I wanted to ask about the long-term organic revenue algorithm, 4% to 6%. And recognizing that a lot of the upside the past few years has been driven by pricing. But this is now the third straight year, you're excited to be at the high end or above the high end of the range. And I guess, as you take a step back and look at your performance and think about the path ahead, has anything changed in how you think about that target? You mentioned increased spending and driving the top line, do you have a higher degree of confidence that Pepsi can consistently be at the higher end of that range longer-term? So just like any perspective on whether you feel differently today about the building blocks of that algorithm versus maybe 2019, will be really helpful? Thanks.

Hugh Johnston:

And Peter, just as a reminder, both Ramon and I have said in the past that our goal is to be at the high end of that guidance. And also as a reminder, recall 5 years or so ago, our long-term guidance was 4% to 6%, but we were struggling to get to 4%. We were averaging somewhere in the low to mid-3s. So it's obviously a material acceleration where we've been as recently as 5 years ago.

Kevin Grundy:

Great. Thanks, good morning everyone. And congratulations on the strong results this year. I would like an update on PBNA, please, on 2 fronts, Mountain Dew and then segment margins more broadly. So market share, nice to see Gatorade performing well, though the company's market share continues to slide here a bit in CSDs, most notably with one of your power brands in Mountain Dew. So Ramon, perhaps an update there on your investment plans behind Mountain Dew to try to turn around some of the share loss. And then just relatedly, how does the scope of your investment, not just in Dew, but broadly in PBNA, how does that impact your other key priority within that segment of restoring margins towards mid-teens? So thank you for that.

Hugh Johnston:

And Kevin, just to add a few numbers to that. For the year, PBNA grew revenue 11%, which is obviously quite strong, and operating profit grew strongly as well. As Ramon mentioned, the mid-teens margin thesis is still very much intact and the drivers are still very much intact. For the year, we improved operating margins 43 basis points in the business. And in the fourth quarter, margins were up 110 basis points. So we're making good progress and good momentum on both fronts. Top line has obviously been terrific, and we're making good progress on the cost side as well, and I expect we'll continue to see improvement into 2023.

Vivien Azer:

Hi, thank you. Good morning. I was hoping that we could dive into the Frito-Lay margin expectations, please. Obviously, the top line has seriously benefited from very effective advertising, but we have seen a couple of years of margin compression there. So how should we think about that going forward, please? Thank you.

Hugh Johnston:

Yes. And again, just to put a few numbers to the points Ramon was making. We have a Frito business with a 27% operating margin for the full year, which is a really wonderful operating margin, obviously. And when you have a margin that high, your goal should be grow that business as fast as you possibly can. We grew at 18% in the fourth quarter and 17% for the full year. This is Frito-Lay, 17% full year revenue growth. So look, obviously, you can't continue to see margins go down. But at the same time, with 11% dollar operating profit growth for Frito-Lay, that's terrific operating profit growth. That's an equation we're certainly happy with for the year. We feel like Frito had just an outstanding year. We'd love to have a couple more like this one here.

Operator:

Thank you. One moment for our next question. Our next question comes from Robert Ottenstein with Evercore ISI. Your line is open.

Hugh Johnston:

Yes, Robert, it's Hugh. Let me try to take a shot at that. Look, obviously, 6% revenue growth in Consumer Products is still a very healthy growth rate, and we certainly feel good about that as the guide. Would we expect volumes to be down? Perhaps they'll be down a little bit. Let's see how the year plays out. Right now, the consumer is still quite good. But we also have to plan for multiple scenarios. And in the back half of the year, given interest rates are as high as they are, it wouldn't be shocking if there were a mild recession in the U.S. and in some of our developed markets. We've taken actions in terms of productivity to make sure in a recessionary environment, we're still well insulated to hit our numbers. But we've got to plan the business such that with interest rates as high as they are, you could certainly see some impact over time on the top line. So that's kind of the way that we're thinking about this one. And then let's see how the year plays out. If the year plays out better, then that's great. We'll invest back. And I think we'll -- everybody will be happy with that outcome.

Operator:

Thank you. One moment for our next question. Our next question comes from Nik Modi with RBC. Your line is open.

Ramon Laguarta:

Yes. I mean you mistake that. I'll cover the China consumer business well. I think, listen, China, obviously, we're seeing the consumer happy to be free kind of. And the consumer will obviously spend more. I think that's obvious. So there is an opportunity in reassessing the China demand and what it means for all the businesses in that country. So obviously, we have two meaningful businesses, snacks and beverages. And we'll -- I think we'll benefit from that increased demand. Will it change the PepsiCo growth? No, I think that it's an important market, but not to that extent. Now with regards to the Frito-Lay innovation portfolio beyond our potatoes, our corn or wheat, we have already large businesses in rice snacks, for example, you think about the Quaker snacks. We have a pretty sizable business that is in rice snacks and it's growing very fast. Within the Frito portfolio, there are also different substrates that we're playing. Off the Eaten Path is a great example. You have multigrains, then you have smaller substrates. One substrate that we like a lot is Chickpea. Chickpea has a high nutritional values, and it's I think it's a substrate that we are starting to work on agro, and we're starting to work on different layers to create advantage in that substrate. So yes, we see that strategically as an incremental opportunity to broaden our portfolio beyond the more traditional substrates where we build a lot of supply chain advantage and innovation advantage and brand advantage. But I think our brands can expand into other spaces, especially some of those smaller brands, but also we're thinking about some of our bigger brands as well.

Operator:

Thank you. One moment for our next question. Our next question comes from Kaumil Gajrawala with Credit Suisse. Your line is open

Ramon Laguarta:

Yes. Listen, we see an opportunity in expanding our distribution capabilities to other spaces in the U.S. and maybe eventually in other parts of the world in beverages and also in snacks. So the alcohol distribution strategy that we have is one that is, I would say, embryonary in the way that both geographically and from the amount of brands that we carry in our portfolio. We are very focused in getting it right, in getting the learnings, getting the execution right, is different, right, and selling our soft drinks, our sport drinks or other brands. There are more nuances, regulatory-wise and execution-wise. So we're in that process of learning. I think strategically, you should see this becoming an important part of our business in the U.S. But we're going to learn before we scale up. And I wouldn't think about this as we're going to be an alcohol distributor. I think we're going to choose a few partners that will create brands with us and products, and we will be distributors of a small portfolio of high-potential brands rather than just a lot of brands in our distribution system, which will be too complex and probably little value for us.

Christopher Carey:

Hi, good morning. Hugh, I wanted to actually ask about just SG&A. Certainly, investment has been a key topic for the company as ever, but including this year and especially in Q4 with how the year ended. But I'm also looking at your filings this morning, which show that distribution costs have probably been the one line item where the SG&A increases have been most significant. Clearly, marketing is growing, but not as big of a contributor. And so I'm just trying to understand what's going on here specifically. Is this your being offensive with investments into your shipping and handling network? Is this natural inflation? Should this level of inflation on that line item specifically continue? Or as freight rates are starting to ease, should we start thinking about inflation here easing and perhaps you can start investing in other areas? So I'm really just trying to understand the complexion of spending here just being a little bit different than where I would have thought it'd come in. So any context would be very helpful? Thanks.

Ramon Laguarta:

Yes. And to your question on Q4, yes, we decided to invest both in consumer, as you saw from our A&M growth in the quarter, and also as Hugh was saying, in making sure our installed equipment base in the market, and this is very relevant in the U.S. But also internationally, we continue to gain space, space being a key lever of for categories like ours that are input-based categories, space and it's a critical lever of performance in the marketplace, and it is a driver of share of market. So those two were there. We also invested in systems and some of the capabilities, especially digitalization capabilities that we thought we had a window of investment in Q4.

Gerald Pascarelli:

Hi, good morning. Thanks very much for the question. Mine is actually on energy drinks. So now that the Celsius transition has been completed, I was just looking for some color around your market strategy for driving distribution for both Rockstar and Celsius in tandem. Are there any specific strategies or considerations around channel mix to be mindful of, in particular given how under-penetrated the Celsius products are at convenience? Any color you could provide on your strategy would be helpful? Thank you.

Ramon Laguarta:

Great. I think this is the end of our conversation. So thank you very much for joining us in the conversation today. And especially thank you for the confidence that you've placed in PepsiCo with your investments. We wish you the best and hope you all stay safe and healthy. Thank you.

Operator:

Good morning, and welcome to PepsiCo's 2022 Third Quarter Earnings Question-and-Answer session. [Operator Instructions] Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Ravi Pamnani, Senior Vice President of Investor Relations. Mr. Pamnani, you may begin.

Operator:

[Operator Instructions] Our first question comes from Andrew Teixeira with JPMorgan. Your lines is open.

Hugh Johnston:

Yes. Andrea, it's Hugh. Obviously, we've seen elasticity continue to be strong and stronger than expected through three quarters of the year. So in terms of the math that you've done, the math is certainly accurate. And obviously, we are carefully watching what happens with the consumer. We obviously exited the third quarter with the consumer still very healthy in terms of our particular categories. I'm not sure that's true broadly with housing and other big ticket purchases. So, we'll see what elasticities look like in the fourth quarter, but I don't disagree with your math, what you said is accurate.

Ramon Laguarta:

Yes, this is Ramon. With regards to investments, the philosophy, we've been using in the last few years to continue to balance the short term and long term. I think it's realizing in good performance. We continue to invest in our brands. We're investing a lot in digitalizing the Company and some of the long-term sustainability bets that we're making as well. So, we continue with that, and next quarter will not be different than any of the other quarters that in the year. So, you should assume that we're looking at reinvesting in the next quarter and entering '23 with strength on the commercial side and on the investment side.

Lauren Lieberman:

I was just struck again by the strength in the pricing particularly - everywhere, but particularly in Europe and how even though volumes are off holding on really well. So just curious knowing how much of that business is skewed towards Western Europe and if you could talk a little bit about revenue management versus straight list pricing. What you can tell us just to put a little bit more context and color around how that magnitude of pricing is being realized? Thanks.

Operator:

Our next question comes from Dara Mohsenian with Morgan Stanley. Your line is open.

Hugh Johnston:

Yes. Dara, it's Hugh. A couple of things, number one, you know our long-term guidance on revenue is four to six. And as Ramon and I have talked about in the past, we've always been pushing ourselves to how do we get to the upper end of the range on that on a more consistent basis. Given the combination of high pricing right now as well as relatively low elasticity, it's difficult to figure out exactly how that might project going forward. And that's sort of a long-term comment. I'm not going to give it to '23 on today's call as is our practice. We'll talk about that in February. But our aspiration remains the same, which is, we want to go and push hard on top line. We think it's great for the organization. We think it ultimately creates more value than any other strategy, but no change in terms of long-term guidance at this point. It's just been -- the times are just so interesting. It's hard to figure out what that projects forward into.

Operator:

Our next question is Bonnie Herzog with Goldman Sachs. Your line is open.

Ramon Laguarta:

Yes. Bonnie, let me start with a share and then Hugh will top it out with the margin philosophy on PBNA. On share, we're seeing -- consistent with the trends that we saw last year and earlier this year, we've seen gains in, I would say, 70%, 75% of our markets in what we call, foods, convenient foods, salty snacks, and we're seeing about 70% gains in about -- in the beverage markets internationally. So that's -- basically, we're competing well across most of our geographies, emerging markets, developing markets and developed markets across both categories. In particular, to the U.S., as you mentioned, Frito-Lay is accelerating its share gains. Q3 was very strong. It was almost a couple of points of share gains in what we measure as savory market, both in value and also there was a share gains in volume, so both volume and value. When we look at the beverage business in the U.S., we held share in total LRB in the quarter. That's a good performance with very good performance in sports. So sports has been a priority category for us, the recovery of the Gatorade brand. We have invested a lot for the last couple of years. Our innovation is working. Our brand building is working. Our commercial execution is working and we gained meaningful share in the quarter, which makes us very happy, obviously, given the efforts the team has put in that brand. We're gaining share in teas. We're getting share in coffees. So, multiple categories where the business is performing very well, and we are losing share in CSDs. I would say Pepsi is doing quite well. Mountain Dew is a brand that we're working on to continue to gain share. But overall, we measure our performance as total LRB and total LRB share in the quarter was flat to the category as you saw double-digit growth, which is a pretty good performance for PBNA.

Operator:

Our next question comes from Kevin Grundy with Jefferies. Your line is open.

Hugh Johnston:

Yes. Happy to try, Kevin, although I think it might have been four parts, not two, but we'll go with it anyway. Anyway, a couple of things, number one, commodity for this year, high teens is where we're going to land. That's not a change relative to what we've talked about in the past. In terms of hedge positions and forward buy, as we've discussed before, we tend to be out about six to nine months, and that's consistent with past practice. That's the way we're operating the commodity cycle. That clearly puts us somewhat into next year, but not anywhere near all the way through next year. As you've no doubt observed, some of the commodity inputs for us, although I'll remind you, our basket is pretty dispersed. There's not a single commodity that even accounts for 10% of the basket. But you've seen some softening in commodity prices that will play its way into our commodities going forward. And then regarding specific numbers for next year, I'm sure I won't surprise you by telling you, we'll talk about that in February for a couple of reasons. The biggest of which is we'll have more line of sight to be able to give you a better number and frankly, to give you something that you really can model and rely on. At this point, I think it's just a little bit too early for that. And in addition, it just takes us to a place where, frankly, we just wind up doing a lot of partial analysis, which I don't think is productive for you or for the Company. Regarding pricing, we increased prices at the beginning of the fourth quarter based on what we knew at that point. And going forward, with the investments that we've made in brands, I still think we're capable of taking whatever pricing we need.

Stephen Powers:

Ramon, I wanted to ask on Gatorade and Fast Twitch. First, I'd love some -- just more detail around your expectations for that particular innovation in the role you see it playing in the Gatorade portfolio generally. But I guess, more broadly, I'm wondering, how you're thinking about the intersection of sports nutrition and the energy drink categories on a broad basis? How far you think Gatorade may be able to expand into what we've traditionally thought of as the energy drink end market? And where that ranks in terms of the priorities for future Gatorade investment?

Operator:

Our next question comes from Robert Ottenstein with Evercore ISI. Please go ahead.

Ramon Laguarta:

Yes, listen, as with any one of our businesses, we're looking at multiple ways to increase our revenue per kilo in this case with continuing to maintain the consumer in our brands and obviously gain share as we do that. So that's the strategy. We'll use multiple levers. So visual pricing, lower promotions, pushing for the formats where we have higher revenue per liter or per kilo, moving into channels, obviously, where we can price more because the consumer has different price expectations. All those tools are well integrated into our full commercial program. And that's the way Frito's doing it, but the same is being done in beverages North America or any of our international markets emerging or developing or developed. So that's a consistent capability we've been investing. We're becoming much more digital, becoming much more insightful and precise as a company. And that applies -- linking to your second question, that applies also to our supply chain. I think we're becoming much more integrated in our forecasting to demand forecast into supply and we're able to execute a certain level of higher complexity in our business. We're automating -- we're becoming better at execution in that respect. I would say we're not running a perfect company at this point, given all the challenges there is still in supply chain of ingredients and some of the transportation bottlenecks, but I would say we're able to cope with higher levels of complexity throughout the Frito-Lay given your question or any of the other organizations that we have around the world. However, I will say that we have very strict processes of portfolio optimization that are being run quarterly in each one of our businesses, so each one of the business goes through a pretty strict process of rationalization and elimination of unnecessary complexity regularly. So on the one side, we want to have more complexity because we know that consumers appreciate personalization and a lot of varieties is a key, I think, advantage for us in our categories. But at the same time, we go through rigid processes that eliminate unnecessary complexity and keep our cost down given supply chain but in any respect, given what it is to run a good business.

Kaumil Gajrawala:

Can we talk just a bit more about cash flow? And with the year coming in better than expected, is there excess cash on the balance sheet or any thoughts around that? And then maybe in the same context, just maybe an update on what the M&A environment looks like at the moment, given we're going through a kind of a difficult period? I wonder if assets are more perhaps more interesting than they would have been before.

Operator:

Our next question comes from Chris Carey with Wells Fargo. Please go ahead.

Ramon Laguarta:

Yes, listen, I think this is a difficult question to answer. The environment clearly is still very inflationary with a lot of supply chain challenges across the industry and everybody trying to have responsible behaviors to maximize the value of its brands. So our philosophy is the same. We continue to invest in advertising and marketing, make sure that we have very strong innovation, very strong commercial plans. That's where we put the focus of our organization. We're trying to be growth drivers to our customers. I mean if you look at the majority of our conversation with our customers, center around growth and how do we develop our categories, continue to bring consumers into the category, continue to bring new occasions into the category, and that's the role I think we play to our customers and to the -- how we create value for the Company long term. So we'll continue with that focus, trying to create brands that can stand for higher value to consumers and consumers are willing to pay more for our brands. We'll continue with that philosophy. And we'll see where the cost environment goes in the coming years. Obviously, we're -- if anything that these last two years have taught us is that we want to become more agile and more nimble and more flexible, and that's what we're doing across the Company.

Peter Grom:

I hope you're doing well. So I wanted to ask about the Celsius distribution agreement. Maybe just to start, why was the structure of this partnership the right one for PepsiCo? And then I guess maybe any initial views on kind of how the transition to your distribution network is going? And maybe just last, if I can squeeze it in here, just bigger picture, I guess, like what have you learned from either your own brands? What happened with Bang that really gives you greater confidence in the success of this partnership looking ahead? Thanks.

Ramon Laguarta:

Yes. I would -- Peter, I would endorse what he was saying. I think from the portfolio point of view, Celsius probably brings -- it's a better complement to the rest of brands or vectors of growth that we had in this category earlier. We feel good. I think it appeals to consumers that are different than what Rockstar would appeal to or what some of the Starbucks or obviously, some of the Gatorade consumers would appeal to. So I think we're in a better place to play in the broader category to continue to bring consumers to our franchise. And as Hugh said, the partnership is strong. We've learned also on the -- how to build stronger and more statistically aligned partnerships. And hopefully, this one, I'm sure it is going to be a much more durable and much more value creative for both companies. So, it's still too early, obviously. We only started October 1st, and it's 80% of the territories, but early signs are very positive, and the alignment and the commercial collaboration between the two companies is very strong. Okay. So I think the Q&A is over. So I'd like to thank everyone for joining us today and for, obviously, the confidence that you've placed in us with your investments. We hope that you guys all stay safe and healthy. Thank you very much.

Operator:

Good morning, and welcome to PepsiCo's 2022 Second Quarter Earnings Question-and-Answer Session. [Operator Instructions] Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Ravi Pamnani, Senior Vice President of Investor Relations. Mr. Pamnani, you may begin.

Operator:

[Operator Instructions] Our first question comes from Lauren Lieberman with Barclays.

Ramon Laguarta:

Lauren, yes, listen, these are important channels you're saying, and we've been investing in the U.S. and other parts of the world in this impulse channel. The trends are quite stable from what we've seen since Q4. And as the gasoline price went up, the consumption on beverages and snacks in that particular channel has been pretty stable. A bit less volume, a bit more price as we -- second quarter versus first quarter. But overall, sales has remained stable, high single digit, a bit of a difference between beverages and snacks. Snacks a bit higher than beverages, but stable. And that has continued into the last few weeks. So we don't see any meaningful consumer behavioral change as gas prices go up. Obviously, we're watching this channel very carefully as an indicator of potential consumer behavioral change. But so far, high incidents in our categories, yes.

Dara Mohsenian :

I just want to talk a bit about pricing relative to costs. Obviously, another quarter of very exceptionally strong pricing in Q2. Ramon, are you hearing any pushback from the retailer trade that's different than normal? It's been a topic of discussion more in CPG in general. So just curious for your views on retailer pushback and ability to continue to take pricing going forward, including what that might mean for the fall. And then Hugh, can you just give us an update on the cost outlook for 2022? And given hedging, how much hedging do you have in place? Does that sort of create a hangover for '23? I know you won't guide for '23, but just how you think about the pricing versus cost gap for '23 based on where we stand today might be helpful at least conceptually.

Hugh Johnston :

Right. Dara, in terms of cost, as you know, our first focus whenever we're faced with inflation is to try to drive incremental productivity on our internal costs. And I think we've been doing a pretty good job of that. I mean we've seen this year some of the strongest productivity we've seen in a number of years. That puts us in a relatively better position when we're faced with commodity inflation because we're not necessarily forced to price it all through. We can take a more consumer-centric approach to dealing with the inflation and the subsequent pricing. Balance of the year inflation is higher than it is for the first half of the year. I think we've mentioned in the past, we're in the teens in terms of commodity inflation. That will continue, but a little bit higher in the back half. But we do expect stronger productivity in the back half as well. So I think from an overall cost outlook, our guidance certainly captures all of that, and I think it puts us in a position where we've got high confidence in delivering the year.

Andrea Teixeira:

So the market share gains you alluded to in PBNA and -- not PBNA, sorry, in snacks, and in general, we've been pretty positive. And I know it has been a narrative that there's some service level issues in both cases and especially in North America. I'm wondering if you can comment on that. And then separately on LatAm, and I think you mentioned Ramon and Hugh, in terms of like balancing what you just said, inflation getting worse. And of course, Latin America has been extremely resilient for a region that has obviously a lot of pressure on gas prices as well. So I wonder if you can comment on where the strength is coming from, if you're getting more space in the big box? Is it also Bodega Aurrerá or Atacadão or anything like that, that gives you comfort that you continue to gain share from a very organic basis and despite the pricing? And if you can comment again on the service levels in the U.S.

Operator:

Our next question comes from Bryan Spillane with Bank of America.

Hugh Johnston :

Yes. Bryan, obviously, the first thing that we're thinking about these days is just the level of volatility in the world. And we do what we can to insulate ourselves against that volatility. We have zero-floating rate debt. So we've insulated ourselves against that. We forward buy on commodities. We insulate ourselves against that. We try to do as much as we can to create a predictable work environment so that we have -- we can manage our labor costs well. But there's obviously macros that are out there that are more volatile than they were a few years ago. So as we sort of look at things, clearly, as I mentioned before, commodities is a bit higher in the back half than they are in the first half. That's incorporated into all of this. We're still watching elasticities closely as Ramon just mentioned. Elasticities are good right now. We don't plan for them to be as strong in the back half, and we'll see what happens with that. It's certainly hard to gauge because inflation is having so much impact on the consumer in so many ways. But as we looked at all of it, and we're making choices around -- okay, as you know, we have -- we like to give you numbers that are highly deliverable. The choice that we made was based on the things I just mentioned, that we would raise the revenue guidance because we felt highly confident in that. And for EPS guidance, we made a choice to hold right now based on some of the volatility and some of the variables that I had mentioned.

Bonnie Herzog :

All right. Just a quick follow-up on, Hugh, just what you were discussing. Could you talk about if you are also planning to sort of reinvest or step up reinvestments into your business despite the cost inflation that you just called out in the second half? And I'm thinking about in the context of your very strong top line. And then I did want to ask about your revenue growth management in this environment. And how strong you think your capabilities are to ensure you have the right packages in both your beverage and salty-snack business to ensure you have affordable offerings, especially as we could see increasing pressures on the consumer? And then could you touch on your beverage business and how your ownership of your bottling operations might actually be a competitive advantage or not as it relates to this.

Ravi Pamnani:

Consumer value proposition.

Ramon Laguarta :

Yes. Especially Bonnie, I think on the second question, and the truth is that we've been investing on revenue management now for 4 or 5 years and has been in the developed markets but also in the developing markets to try to add to the to the old capabilities we had, which were more related to the ability to change product size or understand better the channels, to much more individual almost understanding of the consumer and what we can do to keep that consumer in our brand and different levels of pricing depending on obviously what that consumer prefers. That link to our precision execution, as Hugh referred to, both in developed markets, but also in developing markets as well, where we reach normally very capital distribution. That gives us, I think, a unique advantage end-to-end from consumer insights to point-of-sale execution that is quite -- it's hard to match in the industry. And we're seeing that. We're seeing that in -- across the world. So it's good investments that we're getting the return. And we're going to need more of it, obviously, as inflation keeps going up. And we're going to have to be super agile and very precise on the choices we make with the consumer.

Nik Modi :

Ramon, I was wondering now with the decision on the bank distribution rights out, can you just update us on the energy drink strategy here? And what kind of financial implications should we expect as we think about, I guess, questions for you in terms of the beverage business over the course of the year now that I'm not sure if the distribution stops right away. Or do you still have some time left on the contract if it expires at the end of 2022.

Hugh Johnston :

Right. And Nik, as Ramon mentioned, financial impact, not material.

Kevin Grundy :

Great. Ramon, I wanted to pivot to your business venture with Boston Beer and Hard Mountain Dew. Maybe just provide an update there, how that relationship has progressed since the partnership was announced, your early learnings to date. And importantly, as you spend more time studying the alcohol space, maybe you can offer some updated thoughts on your broader ambitions to play a bigger role there, not only new product innovation, but also the potential to distribute non-PepsiCo products through your distribution.

Operator:

Our next question comes from Vivien Azer with Cowen.

Ramon Laguarta :

Yes. Vivien, I'll give you a few data so that helps you with the diagnostic. In beverages, non-sugar is growing 3 times the speed of full sugar. So that gives you a sense of how consumers are, in the U.S., are choosing with the choices. If you go more developed markets around the world like Western Europe, the categories are pivoting very quickly to non-sugar. In the UK, for example, the non-sugar segment in beverages is already almost above 80% of the market. So clearly, in beverages, non-sugar is king. You see some of our innovations in the last couple of years with, for example, Gatorade Zero. That was -- it's a huge innovation. I think it's $1.5 billion in only 3 years and expansive to the category and recruiting new consumers into the brand. So non-sugar, I think, is unstoppable trend in the beverage category, something we're leaning in with our R&D, something we're leading in with our commercial strategy with the customers. Every brand has a non-sugar leg that is going to be the focus leg for the brand in the foreseeable future. So that is in beverages. Obviously, you see other trends like functionality, consumers looking for additional functionality and willing to pay for that. But your question was more about health, sugar clearly being a dimension. Now in snacks, I think consumers are also voting with their money. So permissible snacks, what we call permissible snacks, which are the kind of baked or popped or kind of not fried snacks, they're growing much faster than fried snacks, so that we see that as well in that category. We're seeing kind of more nutritious substrates growing faster than some of the more cereal-based substrates. But 1 trend we're seeing across is portion control. So a portion control is a huge consumer idea how we're eliminating some of the brakes, if you want, in consumers' mind to have higher frequency in our categories is portion control. We're seeing in snacks a huge growth on small format, multipacks or not only it's portion control but variety. And we're seeing that also in beverages where full sugar products are going to smaller portions, right, like mini cans or some other formats that give the consumer little pleasure for -- without a lot of calories. So I would continue to bet long term on health being one of the vectors that consumers are choosing. There's also indulgent. Obviously, there's also functionality. There's also a social moment. There's a lot of vectors in our categories, And that's the beauty of our categories. They attract a lot of consumers because of the multiple occasions. But I will continue to bet on health being one of the vectors of choice for the consumer. And that's part of our innovation strategy and how we're trying to move the categories long term. And it's part of the success, if you think about the sodium reduction, the fat transformation, the sugar reduction in our products, a lot of the R&D investments we've been putting in the company in the last many years are starting to pay back in we're giving the consumer the option to make choices with no trade-offs in taste or any of the other key category choices here.

Stephen Powers :

Maybe going back to the higher top line that you're now seeing for the year. Could you maybe expand a bit more on that and talk about the incremental changes that have taken shape in your own expectations since last quarter? I guess would you frame the 2 points of organic growth upside more as volume or price/mix driven versus prior expectations? And maybe would you call any particular segments as more or less responsible, that would be helpful. And I know I'm only allowed 1 question. But Hugh, if I could, just going back to Brian's question on second half cost. I wasn't fully clear on the answer, whether the maintained EPS in light of the better top line was really more conservatism in the face of volatility or if there were known pockets of higher costs you're now facing? And if it's the latter, if you could just be a little bit more specific there.

Operator:

Our next question comes from Kaumil Gajrawala with Credit Suisse.

Ramon Laguarta :

Yes. Kaumil, this is Ramon. No, listen, inflation will come and go. And the reason why we're keeping the bottling business integrated with the brand business is much more longer term than the, I don't know, the economic cycle that will leave for the next couple of years. It's a huge strategic decision that is more based on -- if you think about the consumer evolution and the shopper evolution and the way channels will evolve in the future, I think having an integrated brand to consumer value chain will give us flexibility and faster decision-making that we believe creates a lot of value for the company, right? In the short term, yes, we'll have inflation in S&D and we'll have inflation in some of the manufacturing. But if you have a bottling system, that inflation happens anyhow. So your system still has that inflation. It's not like nobody is isolated from inflationary pressures. I mean your system consumer to kind of manufacturing to consumers still has that inflation. So we think, again, this is a very strategic decision we've made, thinking about the long term where consumer is going, where the shopper is going, where the retailers are going. We're going to fulfill demand in the future and where demand will be in the future, much more complex, much more long tail. There's a lot of things that we feel that we're going to be best positioned in the future. And we're talking about 5, 10 years from now to fulfill that demand in a much more integrated way from the brand to the consumer with all the value chain under one decision-making point. Again, the economic cycles will differ. Now we'll have inflation. Maybe 3 years from now, we'll have deflation and we'll be -- so we're not thinking that short term for what is a huge business model decision.

Brett Cooper :

From the data that we can see, your top line is benefiting by about 100 basis points from reductions in promotional depth and breadth. And that's not just short term. We've seen it over the last several years. And we can obviously see part of your business. So I was hoping that you could speak to the benefits from promotional optimization across your business. What's enabling that realization? And then given the enormous size of promotional spend in your business, what the potential is for promotional optimization over the medium term?

Operator:

Our next question comes from Chris Carey with Wells Fargo.

Ramon Laguarta :

Yes. Good. Listen, Europe, obviously, has been impacted by -- more than other parts of the world by, I would say, the war, so our business has been impacted both in Ukraine and Russia. Ukraine, because obviously, we had to stop a lot of our manufacturing and commercial activities as reflected in our performance in Europe. And also in Russia, given the commitments we made to stop our beverage, some of our beverage, large brands and also stop advertising and promotion of our more essential food brands. So clearly, that's part of the reason why the European business has been impacted. With regards to China, clearly, the lockdowns are impacting the operation of the business. So our team has been incredibly agile to make the right pivots in how we are continuing to produce our snacks or our beverages. And we've been able to more or less manage that in what is an incredibly challenged situation to get raw materials and to get products out to consumers. We're doing that probably better than other companies, and that's why we're gaining share dramatically. That's the reason why our business is growing very fast. Now if you think about the beverage business, there has been an impact to the consumption of the beverage business in away from home. So as consumers have obviously stayed more at home, there has been an impact in the last few months in that particular channel, not so much in the foods business. We're seeing both our Quaker business and our snack business continue to grow very fast. A bit less on the beverage side of the business, basically because of the away-from-home impact. In-home consumption of beverages continues to be quite strong.

Peter Grom:

So I was hoping to follow up on Nik's question around the energy portfolio. So Ramon, you mentioned the willingness to leverage your distribution assets. But I would be curious if there are any major takeaways from the relationship with them that kind of informed your view on how you think about these agreements moving forward. And then just any thoughts around timing, I guess. Is it a near-term focus to kind of find a new brand to fill that void? Or is this something you think about opportunistically over time?

Ramon Laguarta :

Last question, right? So thank you, everyone, for joining us today. And I know it's summer and everybody has a lot of things to do. And then obviously, for the confidence that you're all placing with your investment in PepsiCo. We hope that you guys are safe and healthy and enjoy the summer.

Operator:

Good morning, and welcome to PepsiCo's 2022 First Quarter Earnings Question-and-Answer Session. [Operator Instructions]. Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Ravi Pamnani, Senior Vice President of Investor Relations. Mr. Pamnani, you may begin.

Operator:

[Operator Instructions]. Our first question comes from Bryan Spillane with Bank of America.

Hugh Johnston:

Yes, Bryan. A couple of things. One, inflation has clearly gotten a bit more challenging for the year. No question about that. We had previously indicated it was low teens. It's several points higher than that now. Number two, and we've always talked about this in the past, when we have inflation, the first thing we do is look internally to try to find opportunities to drive productivity. And we've been pretty good at driving productivity, but we're really stepping it up even a bit further this year, whether it's identifying areas of waste or whether it's looking for -- to leverage digital in a faster and more effective way or whether it's looking to leverage shared services more and more. We're obviously doing all of those things. After that, then we obviously look for revenue management opportunities, whether it's the way that we're merchandising product in-store or packaging mix or shallowing our promotions. And then obviously, price ultimately becomes a factor as well. So in terms of the overall impact, I mentioned that I thought margins would be pretty level on the last call. I think, by and large, that's going to be about the same as we go forward. So clearly, we'll decide what we need to do in the balance of the year in terms of further revenue management actions. Typically, we do that in Q4. But by and large, I think the margins will be relatively level year-over-year.

Dara Mohsenian:

So on that topic, maybe we can touch specifically a bit more on pricing. Obviously, very strong delivery in the quarter. Can you talk about consumer demand elasticity so far and what you're seeing? But more importantly, with the cost pressures we're seeing out there, can you talk about strategically how you think about pricing going forward? Is there room to take additional increases, if needed? And how you think about that in light of potential consumer sensitivity with inflation being at unprecedented type of levels?

Hugh Johnston:

Yes. The only thing I'd add to that, Dara, is if you look over time, our categories have always performed pretty well during inflationary times. And as a result of that, I think as a company, our performance has been pretty inflation-resistant as well as recession-resistant, which obviously makes us a pretty good defensive stock.

Lauren Lieberman:

Was curious if you could talk a little bit about impacts from Russia-Ukraine that are embedded in the outlook. Of course, saw the impairment charges on brands that you talked about before the conflict began and then also the charges on PP&E and so on. But I was curious about how Russia-Ukraine is impacting the revenue outlook and also the EPS outlook for the year in terms of operational elements.

Ramon Laguarta:

Yes. And then with regards to Ukraine, obviously, we had to stop our operations there -- our manufacturing operations. We're still doing some sales. That's also impacting. It's also embedded in the -- in our guidance for the year where we reopened now our factory in Kyiv. Hopefully, we'll try to get back to operations in Ukraine as a safety situation allows us, but that's also embedded into our guidance.

Bonnie Herzog:

I just wanted to get a quick clarification on your top line guide based on your comments. So are you now expecting a greater impact from volume growth this year? As you mentioned, you're maybe feeling better about elasticities going forward. And then I'd be curious to hear specifically how your immediate consumption business is performing in key regions for both your beverage and snack business. I'm asking in light of rising fuel prices. For instance, curious to hear if you guys are seeing any signs of pressure in this channel despite broad reopening in so many markets. And then looking forward, what strategy do you have in place to mitigate some of these pressures if they continue to intensify?

Ramon Laguarta:

Yes. If you think about immediate consumption, the away-from-home channel is growing very fast across the world. And also, in the U.S., it's recovering. So that is a positive to immediate consumption. There's a little bit of traffic decline in convenience stores but not meaningful at this point. And obviously, there, the strategy will be to gain space and gain share in that channel to compensate for whatever traffic dilution might be, also trying to be conscious of price points and entry points to the category in those channels. Internationally, we're not seeing mobility being impacted. And we're seeing immediate consumption very strong internationally as well. As I was saying earlier, we're seeing elasticity quite positive in emerging markets. So overall, I don't think that this is going to impact us in the coming period.

Andrea Teixeira:

I was just trying to check something in between the lines marketing, and I know you had SG&A was up last year, or actually, you're lapping $180 million in equity investment gain from the same period last 2 years. But just thinking, as you're mentioning, elasticities come in better. Obviously, that may change. But what are you embedding through the end of the year in terms of marketing from a dollar and rate perspective? And then for the places where you count on bottlers, was there any impact of stocking this quarter or ahead of price increases?

Ramon Laguarta:

Yes. And then your question, Andrea, on the bottlers, no, there is -- there hasn't been any loading of bottlers for price increase. We don't follow these practices, neither with our retail partners. So whatever you see as sales is basically sell-in and sellout that we've had for the business.

Laurent Grandet:

Ramon and Hugh, question on PBNA margin. I mean been progressing about 100 basis points in the quarter, almost back to the level of pre-COVID for the first quarter despite higher inflation. Could you please help share the impact of the high-cost inflation for PBNA specifically in the quarter? And also, could you give us maybe more color as to where the gains are coming from maybe dissecting between Tropicana divestiture, product mix? And where do we go from here?

Ramon Laguarta:

Yes. The key levers, Laurent, of that margin improvement stay intact, right? If you think about the portfolio, pivots that we're trying to do, those are really good work in progress. If you see the Gatorade performance, that's a high-margin business for us, clearly growing, again, at very fast pace. We're making good progress in energy. So that part of the transformation is good. We're also making good progress on efficiency and operating excellence. So there's -- the critical levers of that transformation continue intact. Clearly, inflation is a factor. But as Hugh was saying, we're doubling down on productivity and trying to sharpen the pencil a bit more on revenue management as well.

Vivien Azer:

I was hoping to dive into your European EBIT margins. While I recognize that 1Q is a seasonally low quarter, Hugh, I was wondering if you could offer any incremental color on the margin compression that you saw in that segment this quarter.

Operator:

Our next question comes from Kaumil Gajrawala with Crédit Suisse.

Ramon Laguarta:

Kaumil, there was a lot of echo there. And if I understand, your question was around our volume pricing guidance. We've raised the guidance on top line because we've seen better elasticities in the first part of the year. We -- our assumptions for the balance of the year are a bit more conservative on elasticities because, as I said earlier, within the context for the consumer might change, might not change. We're going to obviously try to do our best with our commercial plans and our people on the ground, with execution and better insights to minimize elasticities. Obviously, that's our role here. But our assumptions going forward are a little bit more conservative because we think that the consumer will be feeling the overall inflation in their disposable income, and that might have an impact on the elasticities of our categories as well, although we think that our categories are -- normally fare quite well in inflationary and recessionary moments. And that's why we feel optimistic about raising the guidance to 8% on top of a very high, fast growth 9.5% last year. So clearly, we're growing very fast as a company.

Kevin Grundy:

Great. I had a question on pricing as well, but from a different angle, really from a retailer's perspective. So the context, of course, your portfolio is in very large, essential and high-velocity categories that drive foot traffic for retailers. But looking at results in the syndicated data, your price/mix is up anywhere from low double digits to mid-teens in your larger categories. I know that's not all frontline pricing. Some of it's mix, but nevertheless, certainly not inconsequential for the consumer to cope with. So my question is, have the pricing discussions started to become more difficult with retailers, particularly your large customers to a point where maybe we're closer to a tipping point where it's going to be more difficult to put the pricing through? Or is the pricing window still very much open in your view? So your thoughts there would be helpful.

Operator:

Our next question comes from Bob Ottenstein with Evercore.

Hugh Johnston:

Sure. Robert, it's Hugh. Low single digits on revenue and very low single digits on [indiscernible] is the number. In terms of our plans, I think we continue to execute in the marketplace. We -- on the snack business, we have a bottler in China who we've had a very successful relationship with. And obviously, in what's a challenging environment, we'll continue to do what we can to continue to operate well. So -- but low single digits and very low singles on the number.

Hugh Johnston:

And just to build on Ramon's point, I should have mentioned as well, our guide doesn't include a level of conservatism and an expectation that performance will be somewhat challenged based on the situation there.

Steve Powers:

Ramon and Hugh, just a quick follow-up for me, actually, going back to Laurent's question on Russia-Ukraine. Hugh, you mentioned the contribution there at low single digits, which I think is a profit perspective. On revenue, I thought it was more like mid-single digits, I think, around 4.5% last year. So I guess in that context, just can you talk about how Russia-Ukraine factors into that 8% organic outlook because intuition would say that the business reductions there create a drag on organic growth that you're absorbing in that 8%? But then again, there's just likely so much nominal inflation in those markets. I'm not exactly sure how or whether Russia-Ukraine net out as a positive or a negative driver of organic growth as you calculated into what magnitude. So just some clarity there would be helpful.

Operator:

Our next question comes from Nik Modi with RBC Capital Markets.

Ramon Laguarta:

Yes. This is Ramon. Yes, listen, I think we're testing and learning at a fast speed, right, both Boston Beer Company is learning how to market and improve the products in their responsibility in the partnership. And we're also learning about how to distribute and sell low-alcohol beverages, which obviously have a lot of restrictions at the state and even municipality level. We're having to train our people in the right way and so on. So there's a lot of test and learning, very encouraging learnings actually as we see in the consumers. Obviously, Mountain Dew is a big brand, and it's generating a lot of excitement. There's a lot of initial trial. As always, in these circumstances, we have to wait and see repeats and see really where the business stabilizes. But I would say, good learnings for the organization. It's still very early in the process of building the infrastructure and the talent base and pretty good response from the consumer. Yes, we're going to continue to try to create new exciting products that will go through this platform in the future. And as we learn more about the consumer, together with our partners, we'll be able to, I think, innovate meaningfully in this category. But as I said, too early, too early yet to call it a huge success.

Brett Cooper:

I was just hoping you could update us on where you are on digitizing your relationship with customers and consumers, aspirations on both levels? And then I guess if I can nest underneath the consumer, if there's any challenges you guys have in going direct, given the independent bottling contracts?

Operator:

Our last question comes from Chris Carey with Wells Fargo Securities.

Hugh Johnston:

Yes, Chris. Yes, your math is right. We said low teens before, and it's -- it will be several points higher than that. In terms of what that means for Q4, when we typically see pricing in the business, we're still in the process of figuring out how much that will be. That's sort of our normal pricing window in the U.S., in particular. Obviously, other markets have different windows. So we'll see what that looks like when we get a little bit closer to the time. In terms of your second question around productivity, yes, we've historically said $1 billion. And yes, we'll be several hundred million dollars higher than that this year based on the actions that we've needed to take to try to help manage a challenging inflationary environment but one that we have pretty well under control.

Operator:

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.

Operator:

Good morning and welcome to PepsiCo's 2021 Fourth Quarter Earnings Question-and-Answer Session. Your lines have been placed on listen-only until it is your turn to ask a question. [Operator Instructions] Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Ravi Pamnani, Senior Vice President of Investor Relations. Mr. Pamnani you may begin.

Operator:

Thank you. [Operator Instructions] Our first question comes from Dara Mohsenian with Morgan Stanley.

Ramon Laguarta:

Good morning Dara.

Ramon Laguarta:

Yeah. Dara let me start and maybe Hugh can add. We see our categories very healthy moving into 2022 and long-term, both our convenient foods and beverages. So that makes us feel very comfortable. The investments that we have made over the last three years in brands, in more capable go-to-market systems, in more insights, better execution that's clearly paying off in the form of share of market gains in across multiple developing markets snacks and beverages. So we feel good about our ability to continue to grow ahead of our categories in 2022 and beyond. And, obviously, we are big players in those categories. So, we carry the responsibility to make this category stay healthy and stay growing faster than food overall. So, that's how we see our long-term. And yes we -- obviously, if you think about next year, yes, we're at the top end of our long-term guidance. This year, obviously, we -- I mean last year we obviously crossed that long-term guidance. So, you see compounded, yes, we're at the high end of our 4% to 6%. And obviously we -- that's the objective of the whole organization to stay within the - that guidance and beat in good years.

Dara Mohsenian:

And if I can follow-up or -- what are you assuming in terms of demand elasticity? And what's been the experience so far you've seen in terms of consumer demand elasticity to pricing? Seem like there clearly wasn't a lot in Q4, but what are you assuming for 2022? Thanks.

Dara Mohsenian:

Thanks.

Dara Mohsenian:

Great. That’s helpful. Thanks.

Bonnie Herzog:

All right. Thank you. good morning. Actually had a question on your A&M spend in the quarter. I guess on a dollar basis, it seemed to have almost doubled in the quarter versus Q3 and then came in at maybe a record as a percentage of sales at almost 8% in the quarter versus your typical, call it I don't know 6.5%. So, I just was hoping you guys could give us a little more color on where you stepped up the spending in the quarter. And then how much do you think that did contribute to your robust topline growth in Q4? And then thinking about it typically there is a lag with spending. So, I'm also wondering if this is partly what you expect to drive your topline guidance at the high end of your long-term growth how it go.

Ramon Laguarta:

Yeah. Bonnie one of the things we're – I think we're getting better at is measuring our return on investment on our marketing. And we're – the more data we have and obviously we're becoming a better data company, we're able to put better numbers to those investments and have the marketing teams, and the commercial teams overall choosing different levers that give us the best return overall. And that's playing very well. It's obviously, one of the reasons why we're gaining market share across many categories. It's strategically – we want to continue with this kind of investments being very rational in the way we invest in A&M, but understanding that a company like ours the core competence is building brands. And that's what give us in situations like we're having this year where we have to price, we have consumers following us in spite of higher prices. So I think strategically, it's a very important element in our overall growth strategy.

Operator:

Our next question comes from Lauren Lieberman with Barclays.

Ramon Laguarta:

Yes. Lauren, the – I would say, if you take a bigger picture I think there is a elevated in-home consumption that has stayed like that. I think Home-as-a-hub is a clear trend, and we're seeing – we're capturing pretty good that consumption at home. And obviously, during the quarter, there's been more mobility across the multiple markets in the US obviously, but globally, I would say. And then some of the Away from Home business has accelerated as well. So what you see there is a combination of all these channels, I think playing at a very high level. Then, if you go into our own business, I would say, it's a combination of branding, better execution. And the truth is that in Q4 we've seen an improvement sequentially of our supply chain. And some of our large brands, and I would name Gatorade for example, clearly has improved substantially in its running rates and fill rates in the last part of the quarter. So that's reflected as well in a better overall performance for the business. But we're very pleased in general with the way the North America business is performing in beverages and snacks as well. And both the margin expansion, the top line, the fact that it grew with the market a bit faster than the market in a very challenging year with a lot of supply chain complexities and bottlenecks for several reasons. So we're very pleased. We're feeling comfortable as well for 2022. It's very strong commercial programs, very strong brand programs. And as you were saying, probably a better execution machine for many reasons, data and intelligence, but also more empowered organization that makes more local decisions and that's obviously reflected in the performance of the business.

Andrea Teixeira:

Thank you. Good morning. I have a question on sports drinks and then a clarification on the pricing. First on Gatorade. It was a brand that obviously was pressured in 2021 from supply chain challenges and competition. And as you go into 2022, can you talk about the supply dynamics there and inventory for the brand? And then on the pricing, I think, embedded in your guidance I understand that it's assuming only the pricing that is already in the market. And therefore I wanted to see if we can bridge from Hugh's comments and seeing the visibility of the gross margin curve potentially recovered by the end of the year and potentially being up year-over-year for the full year. Thank you.

Hugh Johnston:

Yes. Andrea, how are you? I'll expand on the -- your question on the other side. Our assumptions on the guidance are based on the pricing that we have in the marketplace right now. And that pricing is based on the visibility that we have into, both the productivity and the cost structure and commodities, which we have pretty good visibility into on the commodities about, eight, nine months of the year, as you would expect based on some of the things I've communicated in the past. Q4 is a bit -- still a bit open, but there are obviously pricing windows as we get into the fourth quarter as well. So as those facts become more known, we'll make decisions on that front. Regarding your question on margins, obviously, we don't give guidance on margins. But I think given the combination of what we know about costs and what we know about pricing, we ought to be able to get through the year pretty well intact on margins, acknowledging the fact that earlier in the year the cost pressure is a little bit higher than it is later in the year.

Bryan Spillane:

Hey, good morning. Just – maybe just two follow-ups. One is just Hugh, your answer in response to Andrea's question, when you're saying margins, are you talking about EBIT margins or gross margins?

Bryan Spillane:

Okay. Okay. And then my question is about just the share repurchases coming back in this year. Hugh, can you talk a little bit about where we stand now in terms of cash return to shareholders? I think part of the motivation to maybe pull back on repurchases at the beginning of 2021 was your CapEx is going to be elevated for a while. And I know you're watching the leverage or – the credit rating. So is this just a – now you're – there's more comfort with being able to return more cash to shareholders, or is it a change in CapEx outlook? Just trying to understand if we can – how you're thinking about that.

Operator:

Thank you. Our next question comes from Laurent Grandet with Guggenheim.

Ramon Laguarta:

Thank you, Laurent. Good to talk to you. Listen, we're executing the playbook as we told you we've been quite consistent on the last few calls. And we're quite pleased with what we're seeing. Obviously, Rockstar, we always said it was the most complex transformation. We repositioned the brand. We changed packaging. We're seeing growth in Rockstar both in the areas, where it's more developed, areas of the country was more developed and new areas obviously, where the distribution system is making a difference. We're seeing especially very good performance in new innovation segments like no sugar and some more Hispanic-focused innovation. So we're hopeful on Rockstar and we're seeing the metrics that we set for ourselves are becoming reality. Then on Mountain Dew Energy, we had this legal situation which we move very quickly. Super agile actually. The teams did a great job turning that in six weeks. And it's in the market. And it's gone back to the platform exactly where it was. So clearly there is a consumer that likes the product. And it's -- we're ready to now invest obviously this year in building that platform under the Mountain Dew Energy branding. And that's a pretty good position even though we had that legal situation. With bank which was the other part of the strategy we -- after that initial hiccup, I think we're -- actually we're doing a pretty good job as a distributor of the brand and the brand is more points of sale than it used to be. And we continue to focus on driving that performance during the length of the contract. And then -- but the other one that we're very pleased is the Starbucks relationship. That is -- that JV relationship is better than ever I would say. And both Double Shot Triple Shot is growing at a very high levels. And I don't know if you're aware we just launched Baja Energy which is a full natural energy brand new brand to the system. It's the first time we launched it both in retail and in Starbucks outlets. Great product good levels of caffeine coming from natural source. We're very optimistic on that platform. It's very incremental, if you see the full portfolio of brands that we have on energy. So Baja will be a positive addition incremental. So I think the machine is firing in a lot of cylinders. It is -- as always it is an area of focus. You need to test and learn and adjust and tweak your execution. I'm pleased with what I'm seeing. The other element that we don't talk so much about Rockstar is that, this year it's going to be in 17 international markets. It was in 10 markets. We expanded in 2021 to -- I think it was 22, 23 markets. Now next year -- this year '22 we'll be in 70 markets. So clearly another part of the growth story of Rockstar as we acquire the business. So we'll keep updating you in our regular calls, but we're positive on how the full energy strategy is working.

Vivien Azer:

Hi good morning. Thank you. I wanted to follow up please on Dara's question on price elasticities. Hugh, I appreciated your comment that you guys are looking at multiple scenarios and clearly do have a lot of levers at your disposal. But I was hoping you could dive a little bit more please on Pepsi Beverages North America. And specifically, how you think about cross-category elasticities across your US beverage business? And as a quick follow-up to that to the extent that consumers' ability to absorb pricing were to diminish at all like are there certain categories you'd be watching more closely as a leading indicator of that? Thank you.

Operator:

Thank you. Our next question comes from Kevin Grundy with Jefferies.

Ramon Laguarta:

Yeah Kevin. Listen on M&A I think we have sufficient brands right to play in that space. So I -- we're not thinking about any M&A in the energy space at this point. Now with regards to alcohol, great question. And I think it's a very interesting development for the LRB category and for the alcohol category. So clearly consumers are choosing to converge in a way. And so we see that space as a strategically very incremental. It's sizable and it's profitable. So, obviously, we'd like to participate in a consistent and structural way for us. Obviously we will play from the brand point of view on innovation licensing our brands to beer manufacturers that can help us with the manufacturing. We don't have the technologies to make some of these products. But we're creating strong partnerships. You mentioned one. And I think we have brands that can extend into those spaces. So that will be one way how we do it. On the other hand, I think there is a very interesting play for us to leverage some of our distribution assets to provide capital distribution and consistent execution across the country. And we're working on that solution. We have, obviously, some market tests undergoing. And we will continue to roll out those -- that potential distribution opportunity. I think it could be an advantage for us if we do it well and that's where we're planning to do. So we see us participating from the consumer point of view and also from the infrastructure and execution and granularity of execution point of view as well. Those two areas could create value for PepsiCo long-term.

Rob Ottenstein:

Great. Thank you very much. We focused mostly on the U.S. today. I was wondering if you could talk a little bit about how you're viewing your global footprint. In the past, for instance, the company has made acquisitions to expand the offerings in Russia and South Africa. Any thoughts along those lines in other geographies? Any things that are going on, on the international side that we should be aware of in terms of strategic direction, or changes of how you're looking at the business? And then just a quick follow-up on the hedging and the commodities, it’d be -- I think it would be helpful if, to the extent you can, kind of, talk about some of the key commodities and what percentage of your cost structure they represent. Thank you.

Hugh Johnston:

Yes. So in terms of commodities just a couple of facts. Number one, the overall commodity basket is about $16 billion $17 billion. It's a super broad basket. There's not a single commodity that even accounts for 10% of the overall spend. So a fairly diverse basket. But that said, clearly, commodities are inflationary pretty well across the board. And that's what we're dealing with so.

Chris Carey:

Hey. Good morning. Thanks so much. Just on that last line of questioning there on commodities. Do you expect pricing to offset commodities just in the context of your comments on full year margins? And then, on North America, there was a comment in the prepared remarks just around expectations for PBNA margins to expand next year. I think the margin drivers of this business have obviously evolved with product mix and pricing, and I wonder if you could just comment on how you see the drivers of that business go forward in the context of some evolution of the business? Thanks so much.

Ramon Laguarta:

Great. I think, this is the last question. So I just would like to say, thank you for everyone that joined us today, and for the confidence you've placed in PepsiCo and in all of us your investment. And we hope that, you guys stay safe and healthy. So thank you very much.

Operator:

Good morning and welcome to PepsiCo's 2021 Third Quarter earnings question and answer session. Your lines have been placed on listen-only until it is your turn to ask a question. [Operator Instructions]. Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Ravi Pamnani, Senior Vice President of Investor Relations. Mr. Pamnani, you may begin.

Operator:

Thank you. [Operator Instructions]. Our first question comes from Dara Mohsenian with Morgan Stanley.

Ramon Laguarta:

Good Morning there.

Ramon Laguarta:

Hi, Dara. Good morning. Yeah, listen, I think we're very pleased with the performance of the business overall. Categories are healthy, both our beverage and food categories. Snacks categories are growing faster than food and beverage overall in the U.S. but globally. I think we're playing in categories that are doing very well, I would say, during the pandemic and now as we are exiting the pandemic in many markets around the world. So that's one thing. The other component of our success is I think we're becoming much more competitive across both our categories in most of the markets where we operate. And that's been a consequence of the investments we've been making in the brands, I think pretty good innovation. Obviously, investments we've made in go-to-market capacity, new capabilities, talent, everything else we've been talking to you for the last couple of years. So, we’re seeing the momentum across the business and we're seeing that momentum continuing into the balance of the year. That's why we are kind of elevating our guidance for top-line and we think that that momentum will continue well into the year 2022. I think Hugh, if you can --

Dara Mohsenian:

[Indiscernible] some parts of the question.

Dara Mohsenian:

Thanks very helpful.

Bonnie Herzog:

All right. Thank you. Good morning, everyone.

Bonnie Herzog:

I guess I have a bit of a follow-on question as it relates to top-line and maybe specifically on innovation where we're hearing from some of our industry contacts that your innovation pipeline for next year, from what we've seen and what we've heard, it looks very robust. Just love to hear some color from you in terms of if you are, in fact, stepping up your innovation significantly versus prior years. And if so, do you think you're going to need to also step up your A&M spend to really support that pipeline and ensure that these innovations really get the support they need in the bottom market? Thanks.

Bonnie Herzog:

Thank you.

Andrea Teixeira:

Thank you, and good morning to all. I just wanted to go back to the balance of cost supply chain and labor. In the prepared remarks, Hugh did talk about those. Obviously, it's no surprise to anyone. But it was a 14 percentage point impact on EBIT. And I understand that your cost inflation had been running around mid-single-digits. And as such, I think like the EPS and you're having the pricing coming through also in the fourth quarter strongly. So should we read the EPS floor of a $1.47 a reflection of increased A&M you said, and not necessarily for 2022, but perhaps you are not going to flow all of the upside that we saw so far in the year into the EPS for the year just because of these investments, is it just that you're up for a strong 2022. Is that the way we should read?

Andrea Teixeira:

Great. Thank you. I’ll pass it on.

Lauren Lieberman:

Great. Thanks. Just to follow up on that. I mean, Hugh, your comments on you forward by 6 months to 9 months, and so you have more visibility to get into the first quarter onto the cost base. That suggests a lot of pricing, and so I was hoping you could just comment on elasticity. Whether what you're seeing in terms of your models, if you're seeing less elasticity than traditionally because the innovation has been so strong, if it's tough to really get a read because of all of the COVID comparisons that are flowing through consumer behavior right now. But curious on the elasticity piece because it does imply a lot of pricing. Thanks.

Operator:

And we will take our next question from Bryan Spillane with Bank of America.

Ramon Laguarta:

I think, Bryan, your two hypotheses are valid. I think there is a lapping effect especially AMESA last year suffered a lot given its geography, so India, Pakistan, Middle East, and Africa clearly were challenged last year. They are coming back, is a very beverage-focused business so clearly it was more impacted by the COVID mobility restrictions, so we're seeing those businesses coming back, and we have high scale and we have high share in many of those markets, and our advertising and marketing is doing very well. So part of that is lapping. Your second question on scale, yes, scale is getting -- obviously, every year, you see the growth level on the top-line. We're getting to scale levels that are pretty good in many of the critical markets in that region, and that's giving us obviously the opportunity to do better in the marketplace and the flow-through is also stronger. I think the two are relevant. If you think about the business going forward, those are very strategic markets for us going forward. And we continue to invest in everything from technologies so we can expand the portfolio, talent. Obviously, there is a war for talent in that part of the world. I think we're a scale Company that does a good job with developing talent in that part of the world. And then obviously our go-to-market being very strong, we have very good bottlers. And wherever we have our own operations, especially in the food business, we're also investing in digitalization and everything that goes with being more precise and more agile. Hopefully, I'm answering both the short-term, but also more especially for me, the long-term of how we see that part of the world, yeah.

Laurent Grandet:

Hey, good morning everyone, and congrats on this strong quarter and that very good client environment.

Laurent Grandet:

Talking about innovation, it's great to see you leading the Company, pushing the usual boundaries. So during the quarter you announced a partnership with the Boston Beer Company to introduce Hard Mtn Dew in the U.S.. The question is not so much about the potential of that initiative, but more on the route-to-market you decided to choose. So we'd like to understand why you decided to create your own distribution rather than rely on the Boston Beer wholesaler network. What is the end game here and by extension, your strategy in alcohol here in the U.S. and internationally? Thank you.

Operator:

And we will take our next question from Vivien Azer, from Cowen.

Ramon Laguarta:

Yeah. Listen, our view on the category is it's very sizable, I think it's almost $9 billion retail value now, and growing 20%, and with high -- good margins above the average of the categories. Clearly a space where we should be playing, and that's how we're thinking about this. We see consumer trends that favor that this category will continue to grow in its current form or with new innovation. That's why we decided to participate our first entries with Mountain Dew, and Mountain Dew is going to be a flavor malt beverage, not a hard seltzer. I think it will be a differentiated flavor and with a very unique brand. So I think we can carve out our own space in that what is in relatively crowded market. And we'll take it from there. Obviously, we have a pipeline of ideas that we will be disclosing as we go.

Kevin Grundy:

Hey. Good morning, everyone and congratulations on the strong result. Ramon, I want to ask you about the decision to sell the juice businesses and the sort of overall satisfaction with the portfolio. So the Trop business, of course, has been with the Company for, if I'm not mistaken, over two decades. You go back over the years, the Quaker business has had a nice balance, I think there has been some discussion in the marketplace about a potential divestiture there from time to time. Maybe you could just sort of walk us through the decision to sell the juice business, what went into it. Can you maybe comment on preliminary thoughts on uses of the proceeds when the deal closes? And then, Ramon, just broadly overall satisfaction in potential other areas of divestiture. Thank you.

Hugh Johnston:

Yeah, Kevin, no change to what we have previously communicated on use of proceeds. Number one, we'll use it to reduce that. Obviously, we're losing some EBITDA, so we'll adjust our debt levels to reflect that. Number two, is we have been -- we'll use the funds to invest in organic CapEx back into the business. Obviously, it begs the question, and I can see where people might go to, what does it mean for share repurchase in 2022? And the answer is we'll talk about share repurchase in February on all of that. That's a broader question on guidance, but I know that question is out there, so wanted to at least say we'll deal with that when we get to '22.

Wendy Nicholson:

Hi. And my question is a follow-up, but not specifically on share repurchases. But this year, sensibly, you said you wouldn't be buying back as much stock because you wanted to invest in some of the acquired businesses, and I have two questions on that. Number one, we haven't, as of the 9 months, seen Capex actually tick up meaningfully, so I'm wondering what sort of investments you are making. Is it still Capex to come in some of those acquired businesses? But also, you cited those acquired businesses as being a primary reason for your gross margin erosion in the quarter, and I'm wondering how long that will persist. Are those businesses just structurally lower gross margin? Do you think that's going to be something in perpetuity? Or are there things you can do either pricing or restructuring-wise to get the gross margins in those acquired businesses up?

Ramon Laguarta:

International M&A.

Operator:

We will take our next question from Nik Modi with RBC Capital Markets.

Ramon Laguarta:

Yeah, Nik, listen clearly the category isn't very healthy across the world. Obviously, the U.S., Western Europe, and also developing markets. We're seeing, obviously, the away - from -home business picking up. We think in Q3 our away from home business is a 90% index to '19. It keeps going up with every month that goes by. Clearly that's a very positive sign. Now, our convenience store business continues to do very well as consumers are having higher mobility. But the remarkable thing is that they in-home consumption continues to be quite high. Consumers are not -- are still using the home as a hub and continue to entertain at home, and continue to do more things at home. And that's driving additional consumption at home versus the previous '19 level. I think, we're in a very good place where consumption at home is higher, consumption on-the-go is increasing and most of the channels in our food service business are picking up. Pretty good momentum. We expect those strengths to continue for a while, and we think that consumers have changed some of their habits from what we're reading in our insights. And we think that the beverage category is in a very positive situation for the upcoming future. We see the same with snacks, by the way. The snack business which is obviously a big part of our growth and sales and profit s, we see that category very consistent across the world. And it was during the pandemic, it is now growing in a very fast pace as consumers are gaining mobility as well. So I think, as I said at the beginning, our 2 categories where we operate are growing significantly higher than the food and beverage categories overall. And that is an advantage that we have as a Company as we play into categories that are from the consumer point of view are very preferred.