PepsiCo, Inc.

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. In order to ask a question and make a comment, please press star followed by one on your touchtone telephone. 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, and good morning, everyone. I hope everyone has had a chance this morning to review our press release and prepared remarks, 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, 2022 guidance, and long-term financial targets, 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. February 10, 2022, 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 our fourth quarter and full year 2021 earnings release and 2021 Form 10-K 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.

Thank you. Once again, in order to ask a question and make a comment, please press star followed by one on your touchtone phone at any time. Our first question comes from Dara Mosadian with Morgan Stanley.

Hey, good morning, guys.

Morning, Dara.

So I wanted to focus on the 2022 top-line guidance. Obviously, very strong Q4 results. But, look, you're guiding towards the higher end of the long-term range in terms of 6% organic sales growth in 2022, despite a really tough comparison if we look at 2021. I just wanted to understand the key drivers for 2022 top line, particularly price mix versus volume, and any thoughts on demand elasticity. And then also just from a broader long-term perspective as you look out beyond 2022, are you more confident your strategies are sustainably paying off? Could top line growth be more at the higher end of that mid-single-digit long-term top line range? How do you think about the long-term beyond 2022, given what's expected to be pretty robust growth despite the tough comp? Thanks.

Yeah, let me start and maybe Hugh can add. We see our categories very healthy moving into 22 and long-term. Both are 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 across multiple developing markets, snacks and beverages. We feel good about our ability to continue to grow ahead of our categories in 22 and beyond. Obviously, we are big players in those categories, so we carry the responsibility to make this category stay healthy and growing faster than food overall. That's how we see our long term. Obviously, if you think about next year, we're at the top end of our long term guidance. This year, obviously, we crossed. I mean, last year, we obviously crossed that long-term guidance. So if you see compounded, yes, we're at the high end of our 4% to 6%. And obviously, that's the objective of the whole organization, to stay within that guidance and beat it in good years.

Yeah, and the only thing I'll add there in terms of some of the financial pieces of it, you saw in Q4 we had about five points of volume and about seven points of – of price mix. Obviously, as our hedges roll off and we move into a new round of commodities, we're going to price in a way that allows us, at least for the full year, to try to keep our margins pretty well intact, which means that that seven pricing will probably be around there, maybe even a little bit stronger for the year. We'll see how it plays out. and react to what happens with the facts in the marketplace. But it's going to be a pretty healthy pricing year to accommodate the cost increases.

And if I can follow up, 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? It seemed like there clearly wasn't a lot in Q4, but what are you assuming for 2022? Thanks.

Yeah. So, I mean, for 22, you're right. Obviously, there wasn't a lot in Q4, but that's a relatively short period of time. Right now, we've built multiple scenarios around elasticity, and we have plans to react to any of them. So, frankly, we're going to have to be very agile this year in the way that we we plan, but you know that our history on guidance is we tend to have multiple ways to get there, and we'll react to what the marketplace gives us.

Thanks.

I think if you think about all the investments we've made in the last few years, both in the brand strength or some of our net revenue capabilities, even our execution capabilities, the granularity that we can execute in the stores, that's clearly giving us a a lot of, I would say, tools to play the marketplace and to manage the price increases in better ways than we used to do it in the past. So we're also contemplating that as a factor as we're building our 22 scenarios.

Great. That's helpful. Thanks.

Our next question comes from Bonnie Herzog with Goldman Sachs.

All right. Thank you. Good morning. I 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 you think that did contribute to your robust top line growth in Q4? And then, you know, in 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 top line guidance at the high end of your long-term growth algo.

Yeah. Hi, Bonnie. It's you. Um, a couple things on that. One, A&M for the year was up 11%. For the quarter, it was up 15%. But remember, when you're dealing with the quarter, that's not necessarily what's in the marketplace. That's sort of the A&M curve, and we book A&M on the revenue curve. In terms of spend, spend was up in the quarter for sure. I don't know that it was disproportionately up relative to the rest of the year. And In terms of go forward, I expect our A&M, as it generally has, will probably be in or around the same level of growth as the sales growth number is. Obviously, we feel terrific about the advertising we're doing. We think it's having the right impact. But we clearly were the beneficiaries of, in North America, some reduction, and we think that's also played well. We generally are spending at a competitive level, and we're trying to compete on quality of the A&M, not necessarily the quantity of the A&M.

Yeah, Bonnie, one of the things I think we're getting better at is measuring our return on investment on our marketing. And 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. That's playing very well. It's obviously one of the reasons why we're getting 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 A&M, but understanding that a company like ours, you know, the core competence is building brands, and that's what gives us in situations like we're having this year where we have two prides, we have consumers following us in spite of higher prices. So I think statistically it's a very important element in our overall growth strategy.

Okay. Helpful. It seems to be working. Thank you.

Our next question comes from Lauren Lieberman with Barclays.

Great, thanks. Good morning. I wanted to just talk about PB&A volumes because, you know, accelerated sequentially and on a two-year basis, so now putting up growth on growth. And I was just curious, you know, how you might kind of bucket the drivers of that. And I'm going to guess part of it you're going to say, oh, it's a little bit of everything. But, you know, zeros have been in the market, I think, arguably all year. You know, I thought maybe there's something to be said for the reorganization of the markets, and that may be starting to click in in a different way. So I was just curious on any perspective on the accelerating trends in PB&A. That would be great. Thanks.

Yeah. Lauren, I would say if you take the bigger picture, I think there is an 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 debt consumption at home. And obviously, during the quarter, you know, there's been more mobility across the, you know, the multiple markets in the U.S., obviously, but, you know, globally, I would say. And then some of the away-from-home business has, you know, has accelerated as well. So what you see there is a combination of all these channels, I think, playing at a very high level. You know, 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. We're very pleased. We're feeling comfortable as well for 22. 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.

Thank you. Our next question comes from Andrew Teixeira with JP Morgan.

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 huge 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.

Yeah, let me talk to you about Gatorade and then Hugh can talk more about the enterprise. We're very optimistic with this sports drinks category, but we think of it broadly than just hydration. We think about overall nutrition and the way Gatorade is playing that space along with some other brands like Propel, Muscle Milk, Evolves, and some other some other assets that we have in that space. It is growing very fast. We see continued consumer adoption of this category. Consumers are exercising more, and we think that's a very positive trend for the segment. When it comes to Gatorade, the brand equity is stronger than ever. And the innovation that we've done this year, and you will see more next year, be it zero, be it a ghetto light, be it some of the more science related with the sweat pads and how we can be much more customized for the consumer based on their hydration profile. So there's a lot of positive value that I think we can create in higher parts of the category with Gatorade and some of the other brands. So we feel good about the demand momentum. On the supply, obviously, you know, we have reacted to the situation and we've expanded capacity, both ourselves and some of our co-packers, and we're ready for what we think will be another year of successful growth for Gatorade and continue to build the brand in spaces that will be hard to match by a competitor. So that's how we are approaching Gatorade and the full category next year.

Andrea, how are you? I'll expand on 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 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.

Thank you. Our next question comes from Brian Splane with Bank of America. Hey, good morning.

Maybe just two follow-ups. One is just, Hugh, your answer, response to Andrea's question. When you're saying margins, are you talking about EBIT margins or gross margins? Both, actually. 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 21 was, you know, your CapEx is going to be elevated for a while, and I know you're watching the credit rating. So, you know, is this just a now there's more comfort with being able to return more cash to shareholders, or is it a change in CapEx outlook? Just try to understand if we can, you know, how you're thinking about that.

Yeah. I mean, obviously, we made the decision not just based on what we see this year, but what we see over the next couple of years. Number one, we really had a pretty good year on cash generation last year, which gave us a little bit of extra room. In addition to that, obviously, we had the Tropicana transaction, which bought us some room as well. And And we just really closed that over the course of the last week or so. So the combination of those two factors led us to the decision. As I mentioned last year, CapEx will be elevated for another year or two. But frankly, I think that's well within the sort of overall envelope that we're working on and we got comfortable with going back to share or purchase. And obviously, it's a... one of the levers we use to help drive company performance and shareholder returns.

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

Hey, good morning, Ramon. Well, I'd like to focus this morning on the energy platform. So it has been almost two years since the acquisition of Rockstar that unlocked the energy platform. an advantage PepsiCo has over your competitor that is limited because of its contract with Monster. So could you please update us on where you are seeing, where you're heading? Because the beginning has been a bit more challenged than expected with the difficulty with bank management. Mountain Dew rise, name change, and Rockstar taking a bit more time to stabilize. So that is a high growth, high profitability segment of the business. It doesn't impact on PB&A and the rest of the business. So Could you please update us on what you are seeing and where you are heading? Thanks.

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 where it's 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 moved very quickly. It's 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 is, you know, we're ready to now invest, obviously, this year in building that platform, you know, under the Mountain Dew Energy branding. And that's a pretty good position, even though we had that legal situation. With banks... which was the other part of the strategy. After that initial hiccup, I think we're actually 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. 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 level. And I don't know if you're aware, we just launched Bayer 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, you know, 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 Bayer will be a positive addition incremental. So I think the machine is firing in a lot of cylinders. It is, as always, you know, 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 is going to be in 17 international markets. It was in 10 markets. We expanded in 21 to I think it was 22, 23 markets. Now this year, 2022, 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.

Thank you. Our next question comes from Vivian Azar with Cowen.

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 lovers 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 U.S. 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.

Yeah, happy to go there a bit. And as I said, you know, elasticities to me are basically a portfolio of risks that we try to manage rather than kind of zeroing in on a single number. In a portfolio as complex as this, it's hard to have that conversation. What I would tell you, Vivian, that we've seen over the last couple of years is in the North America beverage business, category elasticities are relatively low. I think the reason for that is particularly in the multi-serve area, prices are pretty remarkably low, whether you're looking at 2 liters or 12 packs. And if you compare those prices to elsewhere in the world, The prices in this market are actually quite low. It's a tremendous value for consumers. So as we sort of move into a world of higher inflation, I do expect that the category prices probably will go up. And at least to date, we haven't seen much in the way of elasticity. As you might imagine, I can't point to any one. I think we sort of watch elasticities on everything, both the value packages and the premium packages. And the good news is our system is agile enough to react to it. But right now the elasticities are in line with our expectations, and frankly that's what gives us confidence in the guide for the year.

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

Great. Thanks. Morning, everyone. Thanks for the question. First, just a clarification on Loren's line of questioning around energy. Ramon, can you just comment? You mentioned firing on all cylinders, and you're pleased with energy. Would you rule out M&A? So if you could just comment on that, that would be helpful. My broader strategic question is really on the business venture with Boston Beer regarding Hard Mountain Dew. Can you just update us on how that partnership has progressed? And importantly, as you spend more time studying the alcohol space. Can you provide some updated thoughts on broader ambitions to play, not only as it pertains to new product innovation, but also the potential to distribute non-Pepsico alcohol products through your distribution? So thanks for that.

Yeah, Kevin. On M&A, I think we have sufficient brands to play in that space. So 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. Clearly, consumers are choosing to converge in a way, and so we see that space as a statistically very incremental. It's sizable and it's profitable, so obviously we would like to participate. in a consistent and structural way for us. Obviously, we will play from the brand point of view and innovation, licensing our brands to be 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 we'll continue to roll out that potential distribution opportunity. I think it could be an advantage for us if we do it well, and that's what 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 Pepsi-Cola on term.

Thank you. Our next question comes from Rob Ottenstein with Evercore.

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. 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.

Great. Robert, I'll talk about international a bit, and then Hugh can talk about the commodities, and we're quite limited on what we'd say about our detailed P&L. On international, I've always said and continue to say, this is by the largest growth opportunity we have in PepsiCo. I think we're We have strong market positions in snacks and pretty good in beverages in many markets, some others a bit more challenging positions, but we're working to strengthen those. I think we have a portfolio of brands and we have a portfolio of assets and the teams in place to continue to work on that opportunity. Last year we grew a double digit internationally pretty much across the board from Asia, to Middle East, Africa, Europe, was very close to double-digit full year, if I recall. And then Latin America beat double-digit. So, you know, pretty good performance. And if I look at the top 15 markets for the company, we are gaining share in most of those markets, which is, to me, the key indicator of you know, progress in the system. Obviously, as we scale up those markets, profitability gets much better, and that's the model we're trying to play. For next year, you know, we see good signs. Obviously, you know, the geopolitics in some parts of the world are complex. We hope that that will not materialize in anything that will impact our system, and we see inflation going up everywhere, We have the brands and we have, again, the capabilities to price. That's what we're doing in majority of the markets. We feel good about the elasticities, as we discussed earlier, both developing markets and emerging. I'm a bit more cautious on emerging markets. I want to see a few more months to understand how the consumer is kind of absorbing all these high costs in multiple parts of their budget, household budgets. but we're feeling good about how consumers are staying loyal to our brands in spite of, you know, some of our pricing decisions. So, yeah, that's what we cover internationally.

Yeah, so in terms of commodities, just a couple of facts for you. Number one, the overall commodity basket is a, Oh, about $16, $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 and inflation are pretty well across the board, and that's what we're dealing with.

Thank you. Our last question comes from Chris Carey with Wells Fargo.

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, you know, full year margins? And then, you know, on North America, there was a comment in the prepared remarks just around, you know, expectations for PB&A margins to expand next year. I think the margin drivers of this business have obviously evolved with product mix and 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.

Sure. In terms of commodities and the way we approach it from a pricing perspective, obviously we always try to do what we can in terms of productivity. to manage an inflationary environment, but obviously when inflation is this high, we need to take some pricing. In general, in developed markets, we do price through the commodity increases. In developing and emerging, we have the variable to consider of affordability and consumer reaction to it, and our history has been it will initially price through two-thirds to three-quarters and then go back and get the rest of it later. That said, overall, as I mentioned early in the call, I think the combination of our productivity and our pricing should put us in a position where we ought to be able to keep margins pretty well intact for the year. So that's kind of where I think we land on that. In terms of PB&A, we do expect margins to continue to improve as as we've talked about in the past. Drivers are generally the same ones that we've talked about. It's a combination of some pricing, some product mixes, as the energy category is more successful for us, some level of productivity as we get returns on the investments we've made in capacity and digitalization and the like. And we continue to use global business services as a mechanism to drive G&A productivity as well. So it's a broad bucket of actions that over the course of several years will get PB&A margins closer and closer to the company average.

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 played in PepsiCo and in all of us with your investment. And we hope that you guys stay safe and healthy. So thank you very much.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day. Speakers, please stand by.