PepsiCo, Inc.

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

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 and 2024 guidance. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, April 23, 2024, 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 first quarter 2024 earnings release and first quarter 2024 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 Executive Vice President and CFO, Jamie Caulfield. 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. In order to ask a question or make a comment, please press star followed by one on your touch-tone phone. One moment for our first question. Our first question comes from Derek Moschini with Morgan Stanley. Your line is open.

Hey, guys. Good morning. Good morning there. So really strong international profit results for the third quarter in a row here. Can you just take a step back, Ramon, and maybe give us some perspective on that international performance over the last few quarters? And, A, just looking forward short-term, how confident are you in the sustainability of that and the balance of the year? But, B, also just long-term as you think about international development, over the last few quarters, give us some perspective looking out over the next few years, both from a top line perspective and then the margin flow through. Thanks.

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

Thank you. One moment for our next question. Our next question comes from Bonnie Herzog with Goldman Sachs. Your line is open.

All right. Thank you. Good morning, everyone. I had a question on Frito-Lay op margins, which were a little soft in the quarter. So hoping you could talk through some of the key puts and takes on your margins in the quarter and then moving forward. And then is it realistic to assume free-to-lays, you know, op margins will expand in 24? And I'm thinking about that in the context of, you know, the commodity cost pressures easing a bit or, you know, how do we think about, you know, your level of reinvestment as, you know, these cost savings, you know, maybe, you know, are in an effort to drive faster top-line growth. And then ultimately, curious to hear if free-to-lay margins can ultimately, you know, return to the low 30%.

range and if so you know by when how do we think about that thank you hey bonnie it's jamie how are you um yeah on frida when you look at the q1 profit the thing to keep in mind is last year we're lapping 24 growth in the first quarter of last year i think we had 180 basis points of margin improvement last year and uh you know we don't want to push the the p l that hard uh you know the the Growth last year, growth this year, part of that has to do with investment timing, the flow of productivity. But, you know, I think you'll see margin improvement over time at Credo. But, you know, this is a business that has very healthy margins already, and we want to make sure that we're investing back in the business to sustain growth.

Yeah, Bonnie, I think on top of what Jamie said, for the long term, you know, the key – key goal for Frito in the US is to continue to grow the salty savory category at a very high rate and continue to get occasions from other parts of macro snacks into into the savory and from meals into savory and and continue to gain share of that category as it has been doing and you know including including q1 so that's the ultimate goal because if you think about the high margin that we have in that business and the impact it would have in the overall PepsiCo margins, that's the role that Free LA has in the portfolio.

Thank you. One moment for our next question. Our next question comes from Brian Splane with B of A. Your line is open.

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

That's good, Brian. Actually, we feel good about those two brands. Those two brands actually gain share in Q1, so Mountain Dew and Gatorade in their own category. So that's a meaningful, good performance, I would say. now Gatorade as you mentioned a little bit of weather impact so you know we're not concerned about Gatorade this year as the weather improves I think we have the right investments the right commercial programs our G2DSD was impactful to us last year operationally I think we've learned a lot on how to deal with a very high seasonality product and category and give the better service to our customers and maintain the product in stock and available. So we feel good about we have the platform to take Gatorade to higher market share in a faster growing category. Now with regards to due, the launch of Baja Blast has been very good to the brand. We launched it as a permanent additional flavor to the portfolio early in the year. It's been, you know, it's been obviously successful. We knew it was a successful LTO and therefore it's a successful permanent product. And it's been bringing incremental consumers to the brand and help us gain share now. Obviously, we will keep investing in the portfolio and the brand and we have strong programs for the summer. Hopefully that will deliver as we expect and we'll continue to build Mountain Dew in the category. So feeling good about those two brands.

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

Great. Thanks. Good morning. In the prepared remarks, I noticed in the discussion of PB&A and plans to improve profitability there, there were two new bullets. The first two talking about de-emphasizing certain product and package combinations, and the second around revenue management and increasingly precise consumer value proposition. So I was curious if you could just, I know there's new management for that business as well. So would love to get a little bit more color maybe around those two points I thought would be helpful. Thanks.

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

Thank you. One moment for our next question. Our next question comes from Andrew Teixeira with JP Morgan. Your line is open.

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

Yeah. So listen, Andrea, hi. I would say that the consumer globally, we think it's very resilient. And we see it, as you saw, from our international business performance. And it's basically... supported by two facts very low unemployment or quite low unemployment globally and wages growing at a good good pace in majority of the other countries where we participate so those two things make us feel quite good about the consumer now when you double click there is probably two areas that were you know that probably surface one is Chinese consumers I think Chinese consumers are being very cautious and we're seeing the savings rate really going very high in China. Our category is still resilient in China, but especially we're delivering growth through share of market gains in China, so that's a good performance by the team, but an area of watch out for us. The other double click is in the, I would say the lower income consumer in the US. The lower income consumer in the US is stretched, is making a lot of strategizing a lot to to make their budgets get to the end of the month and that's a consumer that is you know choosing what to buy where to buy and and you know making a lot of choices that's a consumer that we're emphasizing in our commercial programs I think we're learning how best to keep that consumer in our categories at the frequency that we want that consumer, and we're pivoting our commercial plans, our innovation, giving that consumer the right innovation, the right value in different parts of the month through different channels, digital and physical, making sure that the ROIs on the investments are the best ROIs. So those two are the consumers that I would say we're paying more attention in terms of specific commercial programs but I would say the consumer is very resilient everywhere else and our teams I think are pivoting to maintain our brands top of mind in their baskets at the frequency that we want and continue to gain market share so it applies to beverages and to snacks your question was more on snacks but I think it applies to both categories

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

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

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

Yeah, thank you, Peter. I will not talk too much about the agreement other than saying that it's a good alignment of the long-term interests of both companies, and it's great for PepsiCo shareholders. The partnership with Celsius is strong, and it's helping us to gain scale in our in our go-to market, specifically in some channels where we need volume to justify some of the economics of the call. So that role continues. We're pleased with the partnership. Energy is a fast-growing category, profitable. That is great for our portfolio. So that's what I would say. We remain pleased with the partnership, and we'll continue to to build the partnership going forward.

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

Hey, good morning, everyone. So I wanted to go back to Frito, but on the top-line trends. Clearly, you guys were cycling the toughest comp of the year in Frito-Lay. You mentioned you expect some sequential improvement. So maybe you could talk about the volume trajectory, particularly for the business. And Ramon, you spoke in the past about the cycling of this shift towards smaller pack sizes, so maybe you can give us an update on that, and also any potential impact from cycling the reduction in SNAP benefits from last year. Thank you.

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

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

Thanks. Good morning, everyone. You mentioned multiple times on gaining share within the category. In multiple regions, can you just give us some context on

What the categories are growing or at least what maybe what they're expected to grow as you think about the next next year or so We Yeah, I mean like what I said is that our goal is always for our Categories to grow faster than overall food and beverages. I think that makes us a very attractive partner with our retail partners and we deliver growth for them and our categories are profitable. So it's a good combination of growth and profitability for our customers. So that's what we're trying to do. I think our categories will continue to grow faster than food and beverages in the majority of the countries around the world, given the trends on urbanization and the secular trends that we've been talking about. both for, uh, you know, convenient foods and beverages. So we, we feel good about that. And our commercial programs, innovation and, uh, investments are, are in, in to, to deliver that for, for our partners. Um, obviously there's countries around the world where we do better. Others were do, you know, where we do less, less well. And, uh, our goal is to keep emphasizing the ones we do do better and improve the ones that we don't do so well. And that's how we're managing the company.

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

Hi. Thanks for the question. The 4% price mix benefit in Frito-Lay North America is pretty impressive in a food industry where there's just not a lot of pricing left. And I imagine a lot of it is from price pack architecture or maybe even consumers shifting to different pack sizes. Can you help delineate a little bit more, like which of those is driving it more than the other or if it's about the same? And how do you expect it to evolve for the rest of the year? Do you expect it to be pretty constant?

Robert, it's Jamie, and its majority is price, but there's an element of mix in there. I'd put it at probably two-thirds price and one-third mix. And, yeah, if you comment earlier on our inflationary trends, we expect them to be fairly moderate for the balance of the year, fairly smooth for the balance of the year, so I wouldn't expect a lot of volatility in that volume and revenue relationship.

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

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

Yeah. Listen, I'll step back a little bit. I would say our customer negotiations have been good and completed all over the world, and especially Europe took a bit longer, but a very positive impact to our overall, I would say, European business, and other parts of the world are less impacted by this type of negotiations. We feel good, including the U.S., To your specific question on space gains, I think it's going to be a good reset time for us across snacks and beverages. It's not completed yet. It's in its way. Normally, I would say probably another six weeks or so. We're feeling good about where we've seen already resets, the performance improvement in the business. That's good. Well done by the commercial teams. We feel good overall and that's why we are reaffirming our guidance to grow at least over 4% in our net revenue for this year.

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

Hi, everyone. So one question on APAC division Ramon, I think you were a bit more cautious or balanced on the Chinese consumer and yet double digit growth in the quarter in China. I just wonder how APAC came in relative to your own expectations and whether there's any timing dynamic here or whether you see these results as perhaps a bit more durable going forward. And if I could just sneak in from the at-home versus away-from-home consumption globally, As you see some of the weaker trends from the lower income consumer, are you seeing any acceleration in that shift, which might be helping your business on a global basis as well? Thanks.

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

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

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

That's great. Now, this is a great question, and I think we need to step back and look at the bigger numbers. Obviously, there was huge inflation in our categories driven by input inflation over the last couple of years and operating cost inflation. Now, what makes us feel optimistic is a couple of data. Number one, I think wages are growing above inflation, and we see that not only in the U.S., but across the world and we see our consumer packaged food inflation below I would say total CPI. So those two numbers make us feel comfortable that consumers will start coming back to our categories at the frequency and with the same level of or higher frequency than in the past. So those are two big numbers. Obviously, each one of us with our commercial programs, our innovation, our challenge strategies is trying to accelerate that pivot back, but we feel good about the price-volume mix that we see in our business and that how we think that we will continue to sequentially improve over the balance of the year into further years. Our North Star remains the same, is make sure that As I said earlier, we have innovation and consumer programs and channel programs that continue to drive savory snacks ahead of micro snacks, ahead of food. And the same with LRB, ahead of overall liquid consumption and ahead of food and beverages. So that drives value for our business and that drives value for our customers. And that's how we think about driving the company long term.

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

Thank you. Good morning. Question on the international business. On these calls over the years, PepsiCo has spoken about managing international profit delivery to provide affordability to consumers and support recruitment. And if we look at margins in the international business, they're up versus pre-COVID levels. So can you help us understand beyond the headline financial results that we can see, I guess, evidence of what you look at to ensure you're providing proper levels of affordability for category development to support the very long term for that business? Thanks.

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

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

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

Thanks. Thank you and good observation. I think our team in Europe is doing a fantastic work. It started with strong productivity, simplifying the business and driving cost control, eliminating duplication and then reinvesting that money back into our brands and becoming more competitive and also driving our availability and driving our brand preference and that is a flywheel that is working for us across both developing and developed markets in Europe. Obviously developing markets a bit more, so if you think about kind of Eastern Europe markets are growing a little bit faster than Western Europe markets. Western euro markets have been impacted a little bit in this first quarter by some of the negotiations, and that's not atypical in Europe. But I think we have a good flywheel in Europe, and Europe will be expanding its portfolio along the lines of what the U.S. has been doing, which will give us additional consumers and additional penetration in households across developing markets. So we feel good about the flywheel in Europe. But at the center of that is a very strong productivity cost discipline and reinvestment strategy that is, in a way, what we're trying to do across the full company, elevating our productivity and driving the reinvestments both into affordability, availability, better brand equity, and then reinvesting back into our future digitalization and sustainability at the center of that reinvestment. So it's a flywheel that we're trying to do for all the world. Clearly, Europe is doing a good job at implementing it.

Thank you, ladies and gentlemen. That's concluded the question and answer session. I would like to turn the call back to Ramon Laguarta for any closing remarks.

Yeah, thank you, everyone, for joining us this morning and for the confidence that you've placed in us and in our stock. And we hope that you all stay healthy and safe. Thank you.

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