PepsiCo, Inc.

Good morning, everyone, and welcome to this prerecorded management discussion of PepsiCo's third quarter earnings results. My name is Ravi Pumnani, and I am the Senior Vice President of Investor Relations at PepsiCo. Joining me today are PepsiCo's Chairman and CEO, Ramon Laguarta, and PepsiCo's Vice Chairman and CFO, Hugh Johnston. Before we begin, please take note of our cautionary statement. We will make forward-looking statements on today's call including about our business plans and 2020 guidance and the potential impact of the COVID-19 pandemic on our business. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, October 1st, and we are under no obligation to update. When discussing our results, we refer to non-GAAP measures which exclude certain items from reported results. Please refer to today's earnings release in 10Q available on pepsico.com for definitions and reconciliations of non-GAAP measures and additional information regarding our results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements.

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As a reminder, our financial results in the United States and Canada or North America are reported on a 12-week basis, while substantially all of our international operations report on a monthly calendar basis for which the months of June, July, and August are reflected in our results for the 12 weeks ended September 5th, 2020. And now, it's my pleasure to introduce our Chairman and CEO, Ramon Laguarta.

Thank you, Ravi. Good morning, everyone. My agenda today will include a detailed discussion of our business performance and a reiteration of the guiding principles and priorities on becoming a faster, stronger, and better company. I will then turn it over to Hugh for additional perspectives on our financial results and 2020 outlook. But before I start the business review, I'd like to note that I am very pleased with how our people and businesses have performed in what continues to be a complex and volatile environment. As this environment continues to evolve, we remain very focused on controlling what we can with an unwavering commitment to keeping our employees safe, servicing our customers to the very best of our abilities, and supporting our communities in both good and difficult times. The dedication and resilience of our employees have been nothing short of exemplary during these times, and I want to thank them for everything they do. Now, with respect to our business performance, our organic revenue growth accelerated in the third quarter. Our global snacks and food business remained resilient, while our global beverage business returned to growth, specifically Our Q3 organic revenue growth accelerated to 4.2%, with both our North American and international businesses delivering mid-single-digit growth. Our global snacks and food businesses delivered 6% organic revenue growth, while our global beverage business delivered 3% organic revenue growth. The global beverage business meaningfully improved versus the previous quarter, with specially encouraging results in our PepsiCo beverages North America division. Core constant currency operating profit increased 5% and reflected an increase in our advertising and marketing spend, and core constant currency EPS increased 9%. Now, starting with North America snacks and food, both Frito-Lay and Quaker fruits continue to deliver robust growth as at-home consumption trends have remained strong despite the measured reopening of economies and activities in certain areas since May. Frito-Lay sustained its strength with 6% organic revenue growth and gained market share in the macro snack category in the quarter. These results were powered by strong net revenue growth across each of our billion-dollar brands including double-digit growth for Tostitos, high single-digit growth for Cheetos, and mid-single-digit growth for Doritos and Raffles. We also saw continued strength in the e-commerce and large format channels, while trends in the convenience and gas channel meaningfully improved versus the previous quarter. And finally, Credo's core constant currency operating profit increased 4% in the quarter. which included a strong double-digit increase in advertising and marketing spend and additional COVID-19-related costs. Quaker Foods delivered 6% organic revenue growth, along with an improvement in household penetration rates in the quarter. Quaker's revenue growth was in line with what we had expected and consistent with where the business was trending after economies in certain areas began to reopen during the second quarter. Quaker's third-quarter performance included strong double-digit net revenue growth in light snacks and side dishes, such as pasta and macaroni and cheese. Pancake mixtures and syrup sales increased at a high single-digit rate, while both hot and ready-to-eat cereal also delivered good growth. Quaker's strong net revenue growth and cost management initiatives resulted in a 170 basis point increase in core operating margin and 14% increase in core constant currency operating profit. Now, I will turn to our North America beverages business, where we delivered a strong improvement in results with 3% organic revenue growth and 12% core constant currency operating growth. Many of our large brands perform well with double-digit net revenue growth for bubbly, Lipton, and Starbucks, high single-digit growth for Gatorade, mid-single-digit growth for Mountain Dew and Tropicana, and low single-digit growth for Pepsi. Innovation has continued to play an important role in the portfolio. For example, Gatorade Zero, bubbly, and Mountain Dew Zero Sugar in aggregate has delivered more than a billion dollars in retail sales on a year-to-date basis. We also continue to invest in our successful Pepsi pseudo-sugar product, which has grown in its retail sales by more than 30% year-to-date. From a channel performance perspective, both the large format and convenient and gas channels delivered strong growth, while the decline in food service channel moderated. Our market share trend within the liquid refreshment beverage category improved versus the previous quarter, and we gained market share in the coffee, tea, and juice categories. We also executed well on our net revenue management initiatives in larger categories such as carbonated soft drinks and sports drinks. In addition, our expanded presence in the energy category contributed to our net reported growth and reported operating profit in the quarter. We are very excited about our expanded presence in this highly profitable category with our recent acquisition of Robster and distribution agreement with Bank. Our focus will remain on improving the performance and marketplace execution of these terrific brands while also effectively competing in the category with existing brands such as Mountain Dew. Overall, I'm very pleased with PB&A's performance during the third quarter. I'm encouraged by our North America energy integration process as it nears its completion. Moving forward, I remain optimistic about the long-term potential of the North America beverage business and believe we have the right plans and portfolio in place to deliver sustainable growth and margin expansion over time. In summary, our North America businesses perform well in the quarter, and we expect our snacks and food business to remain resilient, while our beverage business should sustain its momentum for the balance of this year. Now, I will turn to our international businesses, which improved meaningfully versus the previous quarter and delivered 4% organic revenue growth in the third quarter. Our international snacks business remained very resilient and delivered 5% organic revenue growth, while our international beverage organic revenue increased nearly 2%. as pandemic-related closures and restrictions eased to a certain extent in some markets. Within our international markets, developed market organic revenue growth increased 8%, and outpaced developing and emerging markets, which increased 2%. Some notable highlights include double-digit organic revenue growth in France, Australia, and Brazil, high single-digit growth in India, amidst single-digit growth in the UK, China, and Russia. We gained savory share in many of our key snack markets, including Mexico, Brazil, China, and Russia. Purple beverages we gained share in the UK, Russia, Turkey, France, Germany, and Thailand. And finally, we again delivered strong double-digit net revenue growth in our Southern Stream business, as consumers continue to adopt this environmentally friendly, convenient, at-home beverage system. Now, to touch on the outlook for our international businesses, we expect our snack business to remain resilient, while the recovery for our beverage business may take more time due to ongoing and rain-steady pandemic-related restrictions and closures as it relates to certain channels. From a geographical perspective, we continue to expect our performance to vary between developed and developing and emerging markets due to differences in pandemic-related impacts and responses, disposable income and affordability metrics, foreign exchange dynamics, and fiscal and monetary policy support. To conclude, I believe our overall business is performing well and is benefiting from the diversity and breadth of our portfolio and the strategic actions we have taken to complement our growth agenda. We're content with the composition of our portfolio and are more focused now on maximizing the full potential of our existing and recently acquired assets to drive improved growth and returns over time as we aim to become an even faster, stronger and better organization. And I'd like to spend a few minutes on reinforcing this strategic framework that prioritizes our actions and behaviors within the company. When we say faster, we mean that we must win in the marketplace and improve market share by being more consumer-centric and investing in both large, established brands and smaller, emerging brands to accelerate our growth. Our key priorities to become faster include sustaining or improving growth and market share in our high-return snacks and food businesses in North America, improving the profitability of our North American beverage business and capturing our fair share of category growth, accelerating our growth and presence in international snacks and food, while investing wisely in beverages to balance between growth and returns. and making the necessary investments in our manufacturing capacity, go-to-market systems, and digital initiatives such as improving our presence and scale in our e-commerce business, which nearly doubled during the third quarter. When we say stronger, we mean that we must continue to transform our cost structure, capabilities, and culture. Our priorities here include a renewed focus on driving holistic cost management throughout all our organizations to support our investments in advantage capabilities, such as a highly agile and flexible end-to-end value chain, more precision around revenue management, investing in data analytics that can provide more granularity around consumer insights. And we continue to invest to further expand global business services into new capabilities, which will enable better insight and support for our businesses at a much lower cost. With respect to transforming our culture, we're committed to diversifying our workforce, balancing internal views with more outside-in thinking, and reinforcing the PepsiCo way, where we emphasize that employees act like owners to get things done quickly. And when we say better, we're focused on further integrating purpose into our business strategy and brands by becoming planet positive strengthening our roots in our community, and advancing social justice. For example, we're committed to becoming planet positive by supporting practices and technologies that improve farmer livelihoods and agricultural resiliency. We're also focused on using precious resources such as water more efficiently, accelerating our efforts to reduce greenhouse gas emissions throughout our value chain, and driving progress towards a world where plastics needs never become waste by focusing on reducing, recycling, and reinventing packaging. And when it comes to our people across the value chain, PepsiCo remains committed to advancing respect for human rights, building diverse and inclusive workplaces, and investing to promote shared prosperity in local communities where we live and work.

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In summary, I believe we're executing well against our strategic framework and remain well positioned for future success with our portfolio of large companies trusted brands that participate in attractive and growing categories, a team of trusted and highly seasoned business leaders, a very powerful go-to-market distribution system, and an agile end-to-end supply chain network. Before I conclude my portion of this discussion today and turn it over to Hugh, I want to reiterate that I'm incredibly proud of the way our organization has executed and performed to what has been an incredibly complex and dynamic environment. And I want to thank everyone again for the dedication and effort. With that, I'll turn it over to Hugh.

Thank you, Ramon, and good morning, everyone. As Ramon covered in detail, our business performance improved in the third quarter, and we delivered 4.2% organic revenue growth. I'll focus my commentary on our profit performance and financial outlook for 2020. From a margin perspective, our core gross margin declined 60 basis points in the quarter. The year-over-year decline is driven by our recently completed acquisitions of Pioneer Foods and B and Cherry and certain COVID-19 related costs included in our cost of goods sold. Our core operating margin decline moderated and was down 40 basis points in the quarter as we increased our advertising and marketing spend and experienced $147 million of higher labor, personal protective equipment, and logistics and service costs associated with COVID-19. When excluding the incremental COVID-19 related costs, our core operating margin increased 40 basis points. We expect some of the COVID-19 related costs to persist and remain committed to making the necessary long-term investments to support our employees and customers while also investing in capabilities that drive competitive advantages for our business. To mitigate some of these challenges, we have continued our efforts to control what we can. This includes tightly managing our discretionary expenses, reducing nonessential advertising and marketing spend to reflect the realities of the current environment, and sharpening our revenue management capabilities across brands and packages. Now, as we look forward and consistent with Ramon's earlier comments, we do expect our North America businesses to remain resilient for the balance of year, while the recoveries across international markets will likely remain uneven across both developed and developing and emerging markets. So based on what we can reasonably predict for the balance of this year, we are updating our full year guidance and now expect organic revenue growth of approximately 4%, and core earnings per share of approximately $5.50. And we continue to expect a core annual effective tax rate of approximately 21%. Based on current market consensus rates, we now expect foreign exchange translation headwinds to negatively impact our net revenue and core earnings per share performance by negative two percentage points, and this expectation as reflected in our core EPS guidance. With respect to cash flow, we now expect full-year cash flow of approximately $6 billion, which reflects net capital spending of approximately $4 billion, and continue to expect total cash returns to shareholders of approximately $7.5 billion, comprised of dividends of $5.5 billion and share repurchases of $2 billion. Our expected cash returns reflect a 7% increase in the annualized dividend per share that began in June. This represented the company's 48th consecutive annual dividend per share increase. With respect to our liquidity and balance sheet, we continue to believe that we have ample flexibility to meet the reinvestment needs of the business and return cash to shareholders. With that, we conclude our prepared remarks for today. We thank you for your time and the confidence you've placed in us with your investment. We invite you to listen to our live question and answer webcast, which will begin today at 815 a.m. Eastern Time and will be available on pepsico.com.

Good morning and welcome to PepsiCo's third quarter earnings question and answer session. Your lines have been placed on listen only until it is your turn to ask a question. In order to ask a question or make a comment, please press star followed by one on your touchtone phone at any time. You may remove yourself from the queue by pressing the pound key. 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.

Thank you, operator. I hope everyone has had a chance this morning to review our press release and prepared comments, both of which are available on our website. Before we begin, please take note of our cautionary statement. We may make forward-looking statements on today's call, including about our business plans, 2020 outlook, and the potential impact of the COVID-19 pandemic on our business. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today. and we are under no obligation to update. When discussing our results, we may refer to non-GAAP measures, which exclude certain items from reported results. Please refer to today's earnings release in 10-Q, available on pepsico.com, for definitions and reconciliations of non-GAAP measures and additional information regarding our results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements. Joining me today are PepsiCo's chairman and CEO, Ramon Laguarta, and PepsiCo's vice chairman and CFO, Hugh Johnston. We ask that you please limit yourself to one question. And with that, I will turn it over to the operator for the first question.

Once again, if you'd like to ask a question, please press star, then the number one on your telephone keypad. Our first question comes from the line of Dara Mastinian of Morgan Stanley.

Hi, can you hear me? We can. Okay, great. So good morning. With the better than expected results here in Q3 and for full year earnings guidance, you know, we're likely to end up with a pretty solid 2020 earnings result, all things considered post COVID. So I know you won't guide explicitly for next year, but just try to understand at a high level, do you view 2020 as a depressed earnings result and sort of a depressed earnings base that we should see outsized growth off of as we look out to 2021, you know, particularly as COVID costs drop off or is your bias more to reinvest than he assumed drop off in COVID costs? And perhaps you can just discuss some of the key puts and takes potentially looking out to 2021 relative to what's obviously an abnormal 2020.

Okay, good morning there. Yeah, we're very happy with the quarter and how our investments are starting to deliver in terms of I would say a global market share improvement and sustained top line acceleration, and also how some of that is flowing down to the bottom of the P&L, as you saw in our EPS numbers. In terms of your question of are we going to keep investing or not, I think you know our philosophy. We've been trying to have sustainable growth for the business, top line, bottom line, very balanced in that respect. I think there are continuous reinvestments required in terms of brands pivoting into new spaces or New capabilities required because of the new ways consumers are shopping, especially around the omnichannel transformation. There are sustainability reinvestments required. So we're going to continue to run the business in a very balanced way, right, where we're going to flow to the bottom line along the lines of what we said a couple of years ago when we defined our, you know, high single-digit ambition for EPS. long-term, but make sure that we don't sacrifice the reinvestments that are required for a company of our scale to remain competitive long-term, given what's going on externally. So that's how we're thinking about the business. Obviously, we'll give you more information in February. We'll know more about how the pandemic evolves, the costs that will still be required to run the business. I would not be Assuming at this point that the pandemic costs will go away by next year, I think we'll continue to put some costs back into the business to run the business safely. More in February, but I just wanted you to get the philosophy, how we're thinking about the long-term reinvestment in the business and the delivery of our EPS on a yearly basis.

Our next question comes from the line of Andrea Teixeira of J.P. Morgan.

Hi, good morning, and I hope all is well. So you spoke on the resilience of the business in developed markets and the recovery in beverage, in particular in North America and also in Europe. So I was hoping if you can elaborate more, Ramon, on the trends for the on-premises with the reopening and how are you planning your price points in places in emerging markets where recession may be be beheading more the consumer.

Yeah. Hi, Andrea. Good. Yes, listen. Yeah, I can give you a bit more color on the away from home business. It has rebounded from the very lows of April, May, right? It's better. There's more mobility. There's more traffic in some channels. I would say there's a lot of innovation in a lot of the customers, so they're adapting to the new reality, especially restaurants and some entrepreneurs are finding ways to adjust. But it still is a very big drag in our business. I would say in the levels of 30% to 40% versus YAG or negative still in most of the developed markets. So it's still a very negative. It's better than the minus 60, 70s that we had in the April, May. But I'm sure it's going to be improving, right? We see some channels still hurting a lot, like hospitality or entertainment or transportation. Those are still very low. We see some other channels improving, and we're obviously going to lean into those channels to capture most of the growth. So that's the first part. On the second part, Andrea, yeah, we see developing markets, especially I would say Latin America, parts of Africa, Middle East, you know, starting to feel the economic challenges for a lot of the households. So people are starting to, you know, there's a bit more unemployment, and there's obviously these possible income challenges for many families. We tend to do well in those circumstances. We can adjust our price points quite fast, and we have good playbooks on how to play in recessions, how to adjust entry points to the category, how to deliver good value on some of the family sizes that are now preferred as well. So I think we're going to do well. Okay, we tend to do okay in these situations, but yes, there is, I would say, Latin America and Africa, Middle East, signs of economic challenges for many households.

Our next question comes from the line of Bonnie Herzog of Goldman Sachs.

Thank you. Good morning, everyone. I had a question on your FY20 guidance, which implies that organic sales growth should, I guess, modestly accelerate to, I think, around 5% in Q4 versus the 4.2% you reported in Q3. But then when I think about your full-year EPS guidance, that implies EPS growth in the fourth quarter will moderate a fair amount from the 9% that you reported in Q3 to around 3%. I just really wanted to understand how conservative your guidance might be, especially as I think about you facing maybe even fewer COVID-related headwinds as you round out the year. And then maybe you guys could touch on what that assumes for A&M spending in Q4. I guess it could assume a pretty big step up and maybe put pressure on your margins, but drive an acceleration on your top line. So any color there would be helpful. Thank you.

Q, you want to cover this one? Yeah, happy to. Good morning, Bonnie. A couple things. Maybe you and Ravi can talk a little bit. My math's a little different on the top line for Q4. I think it lands somewhere in the mid-fours based on the implied full year backing into Q4. In terms of the margin implications, probably the biggest factor in all of it will continue to be the COVID costs. We mentioned that we had about $150 million worth of COVID costs in Q3, and that will continue to some degree in Q4 as well. And it's a bit of a longer quarter in that regard. In addition to that, you know that our A&M spend is booked on a curve. As we get into the fourth quarter, the curve will be affected by the full year A&M spend. So I think it's a bit more of a drag in Q4 than it was in Q3. So nothing beyond those things, nothing in terms of other big notable costs other than higher A&M and COVID costs that will continue based on what you've seen so far.

Our next question comes from the line of Brian Spillane of Bank of America.

Hey, good morning, everyone. I wanted to ask a question about PB&A and, you know, good sequential improvement in the third quarter. And I guess, Ramon, what I'd like to understand now is now that you've got an energy drink, a more comprehensive energy drink portfolio, you know, can you elaborate a little bit more on some of the things you're going to do to potentially, I guess, take advantage of this situation? You know, you've got a largely company owned bottling system, you know, you've got the resources to spend. So are there opportunities to begin to accelerate market share from here? And then maybe if you could just touch on in this in the third quarter, specifically, were there any market share issues or any issues with that stocks relative to maybe, you know, can shortages or packaging?

Yeah. Hey, Brian, how are you? Good. Yes, good question. Listen, when we talked about PB&A about a year ago, we said we're going to try to go one step at a time trying to fix all the different opportunities we had with the different brands, right? And the truth is that Q3 is a good reflection of that effort that the team has done over the last year, year and a half. If you look at every one of our large brands, it's accelerating. So Pepsi is growing. Mountain Dew, good, good growth. Gatorade, very good growth, I would say. Our coffees, our teas, our juices are growing double-digit. So very good performance across. With regards to the energy integration, as you can imagine, there's a lot of – Small details, right, in operational details, in integrating a business like bank, which is quite sizable, and trying to move it from a very dispersed distribution setup to a more consolidated one. So in every state, we had different anecdotes. and also the Rockstar integration. So I think the team has done a very good job in terms of both the integration, now we're starting to run it as a full business. So to your question on the future, I think we're going to continue to double down on what I think has driven the success, which is very good innovation. So if you think about We're in their corner and on it because their local agent is a small business owner too. All our Xero innovation is doing very well. Gatorade Xero, massive innovation. Mountain Dew Xero is doing very well and starting to bring new consumers into the franchise, younger consumers that we had not been very... successful with, so we feel good about that. Pepsi Zero, growing very nicely. Then, obviously, Bubbly continues to do very well. So we'll continue to double down on innovation as a lever. We'll continue to double down on execution and becoming a better operating company. So I think the changes we made to our organization to more of a division structure, it's giving us more granularity and more local excellence, if you wish, in terms of execution. We're going to double down on that. The energy portfolio gives us a much more scale in the convenience channel, which was some sort of a weakness for us. And so we're improving in that channel. If you see the market share in convenience stores, in the summer, great progress. So we're happy with how we're doing in that respect. So we'll continue with the playbook. It's working for us. Now we have one more set of tools in our arsenal with this energy portfolio. We're happy with the way Gatorade is working. We're seeing a lot of More people exercising is a good trend. We like it. People are exercising at home. People are embracing daily routines of exercising. That helps the sports drink category and obviously Gatorade as a leader in that category. So we see a lot of positives for growth in the portfolio. And then we're happy with Mountain Dew. Mountain Dew Zero, has been a great addition to the team. And it's, I mean, it's getting scale and it's getting very good trial, very good repeats, and it's very incremental to the brand. So I think you will see, I think, that sustained performance in PB&A, and hopefully we can, yeah, improve our market competitiveness as we go along.

Your next question comes from the line of Nick Modi of RBC Capital Markets.

Hi, good morning, everyone. I just had a quick clarification question and then my real question. Ramon, I was hoping you could just clarify your comments around the COVID-related costs and saying that, you know, you expect them to stick around in 2021 or, you know, beyond this year. I just wanted to see if you can just clarify, like, how much of it actually out of the total pool of COVID costs do you actually think will stick around? And then my actual question is just on Pepsi Beverages North America and its margin profile. you know, margins today are 400, 500 basis points below the peak. So I'm just trying to understand how you're philosophically thinking about the migration of that margin back up to kind of where they used to be. I mean, is this something that you want to really see happen quickly or you think it'll be much more of a measured pace? Any thoughts around that would be helpful.

Yeah. Yeah. On the, on the COVID cause, my, my point is, um, I don't know how the pandemic would evolve, but I think it's going to be very likely that we still have to be very careful and keep our people safe for a large part of the year, next year. It's not going to be as much as what we had this year, especially at the beginning. I think we're getting better at this. We're finding more effective ways to run the business under these difficult circumstances But there's going to be still some inefficiency and some additional cost because of COVID. So that was my point. With regards to the PB&A business and the shape of its, you know, the portfolio and the profitability, obviously, you know, we want to get back to, you know, much higher levels. The speed of the of the transition to the higher levels will depend on our success to drive market share and to drive efficiency on our, especially S&D and supply chain, which is where I think we have more of the opportunity. So we have a sense of urgency in all this, in becoming a better performing top-line company and in improving the efficiency of the business. As you can see from the QT results, it's a good performance. but we're not going to sacrifice the long-term for the short-term. So we're going to continue to invest in our brands, make sure that they're well-funded, that we continue to keep our consumers in our brands, keep them engaged. We innovate, you know, with well-funded innovation and that we invest in data, especially data and infrastructure investments are required to pivot to the multi, you know, the omni-channel world that we're living in. And we're not going to sacrifice those investments for an accelerated profit improvement. But you should see profit improvement in PB&A going forward.

Hey, Ramon, if I can just add to Nick's question a bit on the COVID cost. Nick, to build on Ramon's answer a bit, obviously up front there were sort of two implications. One was around taking reserves around potential losses due to customer losses. customers exiting their businesses, particularly in the food service area. And then the second piece of the cost is personal protective equipment and sanitation and things like that, which is more ongoing. In Q3 and Q4, those numbers are sort of landing at about $150 or so million. Depending on the course of the pandemic for next year, obviously, we're going to need to continue to protect our people. So those costs obviously will continue until we get to a point where we have a different outcome from the perspective of the virus.

Our next question comes from the line of Lauren Lieberman of Barclays.

Great. Thanks. Good morning. You touched a little bit on your ability to move quickly in emerging markets to adjust pricing in a challenging macroeconomic environment. I was curious, number one, the degree to which you've already started to make those moves, because in some of those markets the price mix was a little bit below what I'd modeled, but volume was a bit better. So I was curious kind of to what degree you've already started to put that playbook into place. And then from a longer-term perspective, Ramon, I think a year and a half ago when you first started communicating with the street about your longer-term plans, You talked about the need to broaden out the portfolio in international stacking into the value tiers, and that's where kind of your share performance wasn't quite what it could be. So I was curious if you've made any progress on that front, of course, knowing COVID kind of interrupted business as usual, but I was curious about any progress there as well.

Yeah, yeah, that's good. No, listen, I think international is probably the biggest opportunity we have long term, right? I mean, the per caps in both our beverages and our snacks is still very low. We see that as our number one driver of future value for the company. So that's a big focus for us. We've seen the levers to drive per capita consumption. Affordability clearly is a big one for us. And we continue to make progress on adjusting our cost structures to the different market realities. And that allows us to have much more flexibility on the price points than what we decide to do with the different levels of tiering of the market. So the big enabler, if you want, for being a really affordable product, and that would drive for caps, is our cost structures. And I think we're making great progress on adjusting a lot of the levers that at the end are the cost, be it in the supply chain, be it in the GNA, be it in the selling and distribution. So I think we're making great progress on adjusting the decisions we make on supply, delivery, and management for the different realities in the different developing markets. affordability that's driving, as you were saying, volume increase, even in a situation where, you know, a lot of those markets are suffering, obviously. You know, a lot of small stores are still closed. And, you know, there's a lot of adjustment to the COVID reality in many of those markets from the consumer and customer point of view. But our strategic intent continues to be that one, you know, reduction of costs, you know, adjustment of the price points and continue to invest in the brands and the innovation that will drive the per caps development in international.

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Your next question comes from Alaina Kamal Gajrawala of Credit Suisse.

Hey, good morning guys. Can we talk a little bit about Quaker and if we should be thinking about Quaker differently long-term and that right now, obviously it's benefiting from the environment that we're in, but is there anything happening there that might suggest trends could look different on a run rate basis for that part of your business?

Yeah, a couple of things there. Number one, we're gaining penetration in a good way with Quaker, most of the segments in the Quaker business in these last six months. So we've gained penetration. We're investing to retain those new families and obviously to increase frequency in the, it was a pretty large penetrated brand. It's not a small penetrated. So make sure that consumers kind of reconnect with the brand and with the transformation we've made to the portfolio in the last few years, eliminating artificials and making their products, I would say, more forward-looking products. So I think that work is in motion. And I think consumers are voting that they like our products and we're getting share in many of the sub-segments of the Quaker family. Now, going forward, Our assumptions, but still to be validated with future, you know, we need to see where the consumer really ends up. I think there's going to be more cooking and eating occasions at home going forward. And especially we think that breakfast, there will be at least one or two more occasions at home every week because, you know, I don't think we're going to go back to work. in the same way that we used to. And that's our assumption at this point. Obviously, we can be right or we can be wrong. But if you judge by how in developed markets everybody's thinking about their return to the offices, I think it's going to be a much more flexible environment and much more tech-enabled, remote kind of work where consumers will be at home a few days of the week And that will drive, I think, a different behavior in terms of breakfast consumption and potentially some of the other meals during the day, especially lunch. So that's how we're thinking about the long-term category growth, and we're trying to position ourselves to compete well in that new environment where there should be more locations for our products.

Our next question comes from the line of Rob Ottenstein of Evercore.

Great. Thank you very much. First, just a clarification of your prerecorded tape in which you said you expect the U.S. to be fairly steady, but international being somewhat choppy. I'm wondering if you could tell us kind of what you actually saw in September in international markets to drive that. And then my main question is, you put out now some very interesting direct-to-consumer data. businesses in the U.S., realizing that they're very small today. But can you talk about what you're learning from those in terms of the consumer behavior, habits, and innovation, and how you expect to use those direct-to-consumer channels in the future? Thank you.

Yeah. The direct-to-consumer models, as you're saying, is more of a – an attempt for us to stay closer to the consumer, read them, understand reaction to early innovation, and then obviously take it mainstream into the balance of the channels. It is still, as you're saying, very embryonary, smaller percentage, but we're getting good insights, and we plan to obviously scale them up a little bit and get better at reading consumers early, test and learning with our innovation, and also improving the way we segment consumers. We have prototypes of consumers that we can innovate and talk to in our communication. So that's the journey going forward. In terms of the COVID in international, As you read around, there is an increase in COVID cases in especially Europe, I would say. They had managed to control the pandemic pretty well. Now, September, they've seen a number of cases going up. The way we're seeing governments managing the situation so far is with local restrictions. When that happens, the business gets a little bit impacted, but not as much, obviously, as it was during the April-May more dramatic restrictions on people mobility. So we're not seeing the business being impacted much at this point. That doesn't mean that as the winter comes and if the governments have to take more restrictions that the business may be a little bit more impacted, especially on the away from home and some of the you know, the more capital channels. So far, we haven't seen that, and we're seeing the governments making very, a bit more balanced decisions between keeping the economy going and trying to protect everybody against the spread of the pandemic. So that's the situation, especially in Europe, as we're seeing, you know, the situation evolving there.

Our next question comes from the line of Steve Powers of Deutsche Bank.

Yes, thanks very much. You know, Ramon, when you think back to the original faster, better, stronger framework that you laid out early last year and the investment priorities that you laid out alongside that, I guess I'm curious just to hear whether the experiences of 2020 have altered those priorities at all. I'm interested whether there are key things that have been.

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Permanently accelerated or added new to the mix versus other things that maybe have been deprioritized, even if only temporarily. And I guess related to that, maybe this is for Hugh, I just note that CapEx for the year is now coming in about a billion dollars lower versus the original outlook when 2020 started. And should we consider that simply a deferral, or have you found efficiencies to more structurally reduce those investments? Thanks.

That's a good question. Listen, I think we're happy that we had that framework going into this pandemic, right? Both the PepsiCo ways with very clear behaviors for our people, and he has helped us a lot in managing through the pandemic. especially when we have now a more kind of empowered organization making more decisions in the front line. And they have, you know, a very, I think, good framework, clarity on what's expected, and I think that's helping us perform. In terms of the three vectors you were referring to, the fastest, stronger, better, we're happy with the faster. Clearly, we're becoming more competitive in the marketplace. As we look into the future, I think we're going to have to probably go more after drivers of share because categories might slow down a little bit. So I think innovation, brands, execution will play a very high role in trying to capture that market share. When you look at the stronger, we had some... obviously, it was part of the agenda to invest in becoming a much better omnichannel company, right? So e-commerce was big, supply chain flexibility was big to enable that omnichannel. Obviously, I mean, what's happened, you saw the numbers, the penetration of e-commerce or e-grocery is just, you know, accelerated by three years now. So what we had forecasted to To be three, four years from now, it's happening now. So that is a big focus of the organization. How do we accelerate the pivoting to the omni-channel much faster, which means that, you know, we're going to have to up some of the capabilities that we have. I think we've made great progress in how we deal with consumer data and how we – We have much more performance marketing. We're improving a lot of those capabilities, creating internal content. So all that is happening on the flexibility of the supply chain as well. I think we were lucky that we made a lot of investments in additional capacity last year, and that's helping us this year big time and helping us to have more flexibility. So good progress there. I think we need to pivot with more of a sense of urgency. The other area where we're doubling down is what we call holistic cost management. Holistic cost management was a capability we had, but clearly we need more of that in terms of being able to repurpose money from one part of the P&L to another part of the P&L, and where we have inefficiencies, get rid of those inefficiencies to reinvest back where we're going to get the best ROI in terms of growth and flow through. So that capability, I think we've made good progress. That's another area where we put in a lot of emphasis. On the better side, I would say the social consciousness. I mean, the need for becoming much more of a social company, not social company, but social aware company, both in terms of the environment and the inequalities. I think has also increased given the pandemic. So you saw we increased the foundation funding. We're also quite focused on improving, you know, all our environmental footprint. So those are areas that more than changing the trajectory is more a sense of urgency to get them done earlier as the consumer and society is expecting us to, I think, go faster in those areas.

Yeah, and Steve, to finish off on your question around CapEx, clearly there's some element of timing as COVID's made it more difficult to execute capital projects, but I would also tell you we spent a lot of time and energy around identifying new low-cost sources of capital and doing things in a much more efficient way that clearly is going to benefit the level of spending going forward. So in terms of specifics, more to come in the in February, but I would tell you we are getting more efficient with capital spending.

Your next question comes from the line of Kevin Grundy of Jefferies.

Great. Thanks. Congratulations, guys. Great results so far year to date. Ramon, question for you. We've covered a lot of ground. I did want to ask you about your openness to moving into the alcohol space, specifically hard seltzers. As you know, the category has been growing rapidly. You've seen Coca-Cola's launch here with Topo Chico in Latin America. Recently, they plan to launch in the U.S. next year with Molson Coors. There's also discussion that Monster and perhaps some others, non-alcohol players, may be moving into the space. So I was hoping you could comment on your openness to moving into hard seltzers. Is this an area that PepsiCo is looking at? How much time are you spending internally? and then maybe some of the governors that may be in place around that possible decision. Thank you very much.

Yeah, welcome. Now, listen, our focus today, 100% focus, is getting the energy strategy right, right, in terms of executing that. I think, as I said earlier, is a multi-vector strategy that requires, you know, both Rockstar doing very well. It requires to do a great job with banks. It requires, you know, innovation in Mountain Dew to move into that space and then do a great job with Starbucks. So those four big pillars, that's taking a lot of our focus, and that's going to be our priority, right, especially 2021. And I think you will see great progress in all those four fronts. Now, obviously, we look at every opportunity, right? There is in the industry. And, you know, a couple of years ago was CBD. Now it's more alcohol. So we get a lot of, you know, a lot of opportunities in front of us. Of course, we're looking at all of them. And, of course, we have people that are thinking more long-term versus the very immediate 2021 situation. So, you know, we're reflecting, we're thinking what are the best options. And, you know, we will make decisions in the coming, you know, quarters, whether this is an area where PepsiCo wants to play. And then more importantly, how do we capture a lot of value of this opportunity? You know, given the three-tier system, it's not obvious how you capture a lot of value. So there is a first, I would say, do we play or not? Second, very important is who do we play with and who do we partner to maximize the value for PepsiCo?

Your next question comes from Laurent Grandet of Guggenheim.

Hey, good morning, Roman and you. And despite the current environment, it's a strong quarter, so Congrats to the entire team. A lot has been covered. So just a clarification maybe on PD&A results. Strong results in the quarter, especially as the on-premise continues to suffer. So maybe you could help us reconcile the difference between what we are seeing in Nielsen from your reporting numbers. So could you tell us how big now is e-commerce and on-premise channels for PD&A and the growth you are seeing in those two channels? Thank you.

Yeah, Loran. I mean, there's been, you know, quite a discrepancy always between the Nielsen numbers and the full performance of PB&A. So I would not go into the details of what is each channel. Obviously, e-commerce is booming and e-commerce is large, but there's much more than e-commerce. between the final, I would say, results of the company and what Nielsen covers in its reduced samples. So, you know, that's as much as I can say. There's obviously away from home. There's many channels that are not well covered, including some, I would say, organized channels that are not well covered by Nielsen.

Our final question will come from the line of Bill Chappelle of Truist Securities.

Hey, this is actually grant on for bill. Thanks for taking the question. Um, just quick one on. And the competitive dynamics in that space, you had a fairly large regional competitor that is now public and talked about some geographic expansion opportunities across the U S. So wondering if you guys have seen anything different so far in the competitive dynamics, we're pricing in that space, or if you would expect to maybe over the next couple of years, I know there's been a focus on share. and holding share, gaining share in this call. So wondering if that changed your strategy or their strategy going forward. Thank you.

Yeah, great question. We like obviously our category, savory, and there's other people that like it as well. So it's obviously driving new entrants from people that were not playing in Savory and people that were playing Savory and have extended their ambitions to play beyond their original geographical limitations. So I think we welcome competition in that sense. To me, the more competitors and more investments in the brands, the higher, the larger the category becomes. That's my experience globally and I think it's everywhere in the world. So we welcome players. To the arena players that, you know, they play with the levers that I think develop the category, which is advertising, innovation, better products. Those are the levers that develop a category and will welcome anyone in the business. It's hard to compete with freedom, right? Given the advantages that the company has, you know, the scale of the brands, the, you know, the distribution systems. the cost advantage, everything else. So, you know, it's not easy to compete with Frito, but I think it's good that we have multiple competitors and that that develops a category.

That was our final question. Are there any closing remarks?

Yeah, thank you very much, everybody, for your time this morning and your questions, insightful questions, and Thank you for the confidence you've put in the company and your investments in PepsiCo. And please stay safe and look forward to talking to you soon. Thank you.

Thank you. That does conclude today's PepsiCo third quarter earnings conference call. You may now disconnect.