PepsiCo, Inc.

Good morning and welcome to PepsiCo's 2022 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 11 on your touchtone phone at any time. 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 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 and our updated 2022 guidance. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, October 12, 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 third quarter 2022 earnings release and our third quarter 2022 Form 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.

Thank you. Once again, in order to ask a question or make a comment, please press star 1-1 on your touchtone phone at any time.

One moment for our first question. Our first question comes from Andrew Teixeira with J.P.

Morgan. Your line is open.

Thank you. Good morning and congrats on the results. I was hoping to get more clarity on both the price elasticity and the reinvestment you called out. We all appreciate that you're conservative, but it seems that you're embedding a 7% organic growth for the fourth quarter. And given the high single digit pricing, are you expecting volumes to be negative in the range of 2% or 3%? against the 1% negative that you got in the Q3? And then, if I may, I want to ask a casual question.

Yeah. Hey, Andrea. It's Hugh. You know, 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've said is accurate.

Thank you. If I can squeeze the, sorry,

With regards to reinvestments, the philosophy we've been using 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. We continue with that, and next quarter will not be different than any of the other quarters that, you know, in the year. So you should assume that we're looking at, you know, reinvesting in the next quarter and entering 23 with strength on the commercial side and on the investment side.

Thank you, Ramon and Hugh. Pass it on.

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

Great. Thanks. Good morning. I was just struck again by the strength in the pricing everywhere, but particularly in Europe and how even the volumes are off, holding on really well. So just curious, knowing how much that business is skewed towards Western Europe, 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.

Yeah, good morning, Lauren. Europe, as you well said, has been impacted more than other parts of the world on the cost, and therefore we've had to lean into revenue management probably stronger than other regions in the business. The team has been investing in those capabilities for some time already, and it's been a combination of mixed management and pure pricing across most of the geographies, east and west. We've had a good summer, which tends to drive more impulse sales and those channels have higher price per liter or price per kilo. So that is reflected in the pricing in Q3. And then also the teams have been courageous in some of the large bags and in home format as well across what you call Western Europe. So yeah, a combination of visual pricing and some channel management. The truth is that our brands The investment we've made in the brands in the last few years are paying off in the sense that our brands are being stretched to higher price points and consumers are following us in Europe and in other parts of the world, as you saw with the volume to price and realization in the U.S. or even other emerging markets.

Thank you. One moment for our next question. Our next question comes from Darryl Machine with Morgan.

Hey, good morning, guys. So I was just hoping to get a bit of perspective on the sustainability of the organic sales growth we're seeing as you look out longer term. Obviously, the second straight year of double-digit organic sales growth, so very robust levels. But there is some COVID recovery in beverages. There's excess pricing with limited demand elasticity. just looking for some long-term perspective on if you're incrementally positive to the mid-single-digit long-term trajectory after the last couple of years, and as you look at some of those key drivers of growth, you know, which ones are more sustainable longer-term. And then if I can slip the second part in, just to follow up Andrea's question, have you seen anything in the business in September or October so far in Q4 that's different than generally the underlying momentum you saw in Q3, just given some worries about macros here, et cetera, and some short-term volatility. Thanks.

Yeah, hey, Derek, too. 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, And 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 get into 23 on today's call, as is our practice. We'll talk about that in February. But our aspiration remains the same, which is, you know, 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 there. The times are just so interesting. It's hard to figure out what that projects forward into.

Yeah. There, I mean, what I would say on top of what he was saying is that our categories seem to be growing faster than food, and food is growing faster than non-food. I don't think that's going to change. We've seen, I think, affordable treats and small moments of pleasure continue to be a key, you know, need state, I think, in consumers today. and our categories play in that space. So I think we should assume that that will continue in spite of all the ups and downs potentially economically around the world. The second element I think it's fair to assume as well is that we are gaining share in many, many markets across our geographies, both in snacks and beverages. We should assume that given the The investments we're making, the quality of brands and people that we have in a lot of the markets, we should assume that in the future we will continue to gain share. At least that's our aspiration. And we try to continue to invest and get better every quarter in that respect. So, you know, when you compare to the average of food, you should assume we'll do better and hopefully we'll do better than our categories. Those are the variables that we look at every month. as we assess our performance. And as you were saying, our long-term 4% to 6% I think remains valid. Clearly, a 16% quarter is an outstanding quarter with a lot of pricing. I don't think that's a sustainable performance for the business. But obviously, we're aspiring to beat our long-term as many quarters as possible.

Thank you. One moment for our next question. Our next question is from Company Herzog with Goldman Sachs.

Your line is open.

Thank you. Good morning. Your top-line growth in the quarter, as we've all been discussing, was very impressive, but it was fully driven by strong price realizations. So I guess my question is on your market share. Could you give us a sense of how your share has been trending in both maybe your beverage and Frito-Lay businesses? And then I know a priority of yours is to improve your op margins in PB&A especially, so maybe give us a sense of how you're going to balance market share growth with profitability growth going forward. Thanks.

Yeah. Bonnie, let me start with a share, and then probably Hugh will top it up with a margin philosophy on PB&A. On share, we're seeing – Consistent with the trends that we saw last year and earlier this year, we're seeing 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 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, free-to-lays is accelerating its share gains. The Q3 was very strong. It was almost a couple of points of share gains in what we measure as a savory market, both in value and also there was 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 gain meaningful share in the quarter, which makes us very happy, obviously, given the efforts the team have put in that brand. We're getting 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. Montenew 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 PB&A.

Right, and I'll build on that, Bonnie. One of our goals clearly is to both gain share and to grow margins, and frankly, that's something that I think we can do. I don't view it as an either-or. I view it as an and. We ought to be able to do both. Obviously, we try to price through inflation, and we always set that out as a goal. We were a little bit short of that in the quarter. Gross margins were down by about 20 basis points, as I'm sure you've noted. But then we also focus on the balance of the cost structure, making sure that we're as efficient as we can possibly be. trying to eliminate waste wherever we can find it. We were successful on that in the third quarter as well. So operating margins were up about 30 basis points. So our plan is to be able to do exactly that, gain share, ideally price through inflation. If we're a little bit short of that, we're going to continue to focus on driving the balance of the cost structure so that if the revenue growth does start to soften up a little bit, we'll still be in position to deliver superior financial results. Regarding PB&A specifically and the margin goal that we've set out there of getting to mid-teens, that is still very, very much intact. That is absolutely the plan. So that's where we stand.

Thank you. One moment for our next question. Our next question comes from Kevin Grundy with Jefferies. Your line is open. Great.

Thanks. Good morning, everyone, and congratulations on the strong results. Question for Q on commodity inflation from here, and you may be a little bit constrained. I know you don't want to give forward guidance, but, you know, we're starting to see key inputs soften here, oil, resin, aluminum, among others, as you're well aware. Hoping to get your updated thoughts on your inflation outlook, anything you'd be willing to share with respect to hedge positions, preliminary outlook looking out to next year. and then your ability to continue to offset with pricing and cost and RGM tools. Is it fair to assume that, you know, kind of going forward, it'll be a little bit more reliant on cost management, revenue growth management, as opposed to pricing? Do you feel like you'd be maybe a little bit more constrained, given the extent of the pricing that's been taken so far? It's a two-part question. Any thoughts there would be helpful. Thank you.

Yeah, happy to try, Kevin. I think it might have been four parts, not two, but we'll go with it anyway. Anyway, a couple 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 where 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'll 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 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 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.

Thank you. One moment for our next question. Our next question comes from Steven Powers with Deutsche Bank.

Great. Thank you very much, and good morning. 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 and 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 categories on a broad basis. you know, 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.

Thank you, Steve. This is a very good question, and, you know, one that we're obviously spending a lot of time thinking about, how far can we take a Gatorade, which is obviously a very strong franchise, along with, you know, I would say high-performance athletes, but much broader than that. What we're seeing is a lot of the innovation that we put under the brand in the last year and a half or so, two years, is working very well, starting with Xero. Xero has been a great success for Gatorade. It's brought into the franchise a lot of lapsed consumers that have left the brand because of the sugar content, especially, I would say... you know, people that just exercise, you know, regularly, but not at high performance level. That's one. Then the two recent innovations, GatorLite and G-Fit, also are working well for the brand, bringing incremental consumers or incremental occasions to the category. So we're happy with the, obviously, core Gatorade, but the two other, the three other new innovations. With regards to fast twitch, What we're seeing is that more and more athletes are drinking caffeine and then also hydration during the game or before the game or at the end of the game, so different parts of their exercise. So we think there is a role for Gatorade to play in that space, providing some additional stimulant to the performance, but also providing the hydration in one single consumption. We've been told by trainers and by other people that work with the athletes to go and help them. So this drink has been developed with the athletes, developed with the trainers, with that occasion in mind. And we think that Gatorade plays very well. It has a lot of, I think, credibility to play in that space of hydration and caffeine for better performance. We're launching it, as you know, with the NFL. And we'll go full blast itself early next year.

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

Great. First question, just a follow-up on the pricing on Frito-Lay North America, if you could kind of give us a breakout. between headline pricing, product mix, and channel. And then, you know, my real question is, you're introducing a lot of additional complexity into the portfolio with different flavors and package sizes. Can you just talk a little bit about how you're looking at that from a supply chain side? Thank you.

Yeah, 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 is doing it, but the same is being done in beverages in North America or any of our international markets emerging or developing or developed. That's a consistent capability we've been investing. We're becoming much more digital. We're 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, you know, demand forecasting to supply. And we're able to execute, you know, 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 businesses goes through a pretty strict process of rationalization and elimination of unnecessary complexity, you know, regularly. So on the one side, we want to have more complexity because we know that consumers appreciate personalization and a lot of the, you know, variety is a key factor. is a key advantage for us in our categories. But at the same time, we go through rigid processes that eliminate unnecessary complexity and keep our costs down, given supply chain, but in any respect, given what it is to run a good business.

Thank you. One moment for our next question. I'm from Camilo Gargiuala with Credit Suisse. Your line is open.

Hi, guys. Good morning. 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? 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 kind of a difficult period. I wonder if assets are perhaps more interesting than they would have been before.

Yeah, I'm happy to jump in on that one, Carmel. In terms of cash flow, you're right. We are performing well this year on cash flow and obviously feel terrific about that. I wouldn't necessarily characterize it as excess cash, but certainly we're coming from a relatively strong cash position. In addition to that, and you know our philosophy on how we manage the balance sheet well, we actually are very much fixed in terms of our debt rates. And our average maturity now, I think, is about 12 years at this point. So the refinancing elements of what we need to do are – relatively small. Our towers going forward are about $2.5 to $3 billion a year going forward. So we've got a lot of flexibility in terms of managing rising interest rates. In terms of where that might take us in the future, again, we'll talk about that in 23. Regarding M&A, no real change in our capital allocation policies broadly. M&A has obviously played something of a role in our past. We're still largely focused on tuck-ins where, frankly, we can realize a lot of value. But, you know, beyond that, it's really difficult to speculate on what might or might not happen, certainly not sending any indications at all that we've got anything on the horizon whatsoever. But, you know, we'll always be looking at things. We don't really pass in terms of taking a look at anything. But, as you know, we rarely transact, so I don't expect any change at all in that regard.

Thank you. One moment for questions. Our next question comes from Chris Carey with Wells Fargo. Your line is open.

Hi, good morning. Good morning. Can you just comment on the stickiness of pricing? You know, across the CPG, there's been a growing debate about whether some of these price increases would need to be dealt back with either list price reversal or accelerated promotion. I suppose the logic goes that it's such an atypical commodity environment. And if the environment changes, they typically the other way during a recession or perhaps demand slows that, you know, price rollbacks are not entirely out of the question, even if they're not historically, you know, a consistent practice. What are your thoughts on how the business might confront pricing versus promotion, especially in an environment of commodity deflation, you know, especially if demand starts to slow?

Yeah, I think this is a difficult question to answer at this point. 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. If you look at the majority of our conversation with our customers centered around growth and how do we develop our categories, continue to bring consumers into the category, continue to bring new occasions into the category. That's the role I think we play to our customers and to how we create value for the company long term. So we'll continue with that focus, trying to create brands that can stand for a higher value to consumers, and consumers are willing to pay more for our brand. So we'll continue with that philosophy, and we'll see where the cost environment goes in the coming years. Obviously, 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 what we're doing across the company.

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

Hey, good morning, everyone. Hope you're doing well. So I wanted to ask about the Celsius distribution agreement. You know, maybe just to start, you know, why was the structure of this partnership the right one for PepsiCo? And then I guess maybe, you know, 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.

Sure. Happy to talk about that, Peter. First, the transition is going very well. We're at this point over 80% integrated Celsius into the PepsiCo system, and we think it's off to a terrific start. And I think you'd probably hear the same thing from the folks down at Celsius. We're excited about the business. We think it's got a nicely differentiated proposition, and we're proud and happy to have it on our trucks and think it's going to be a great business for us. In terms of the structure, frankly, we looked at it and said, look, we'd like to do a distribution agreement, but we knew we were going to create some additional value for the company and felt like we should participate in that value. And we set up a structure that enabled us to do that. It doesn't take us any further than what you see right now, and it puts us in a position where – It's a preferred, so we'll either get paid based on the preferred or down the road, you know, the relatively small position we have could convert at some point. So we felt like it was a good value grading structure for PepsiCo. I wouldn't read anything more into it than that. And then more broadly on the energy portfolio, our approach has been one of having a portfolio of brands. We like that approach because we think as the energy category starts to segment into different types of consumers and different types of need states, having a portfolio approach will ultimately position us best to take advantage of that. Obviously, we're in a building position here, whether it's Rockstar or Mountain Dew Energy or what we're doing with Celsius. or for that matter, even the Starbucks coffee energy business. But we now think we have three or four different ways to compete to capture that consumer's business. So we like where we sit in that regard.

Yeah, Peter, I would endorse what he was saying. I think from the portfolio point of view, Celsius probably is 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 to our franchise, and as Hugh said, the partnership is strong. We've learned also on the how to build stronger and more strategically aligned partnerships, you know, and hopefully this one, I'm sure it is going to be a much more durable and much more value-creating 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.

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