Good morning, and welcome to PepsiCo’s First Quarter Earnings Question-and-Answer Session. Your lines have been placed on listen-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. I hope everyone has had the chance this morning to read our press release and listen to our 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 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, 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 and 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. Our first question comes from the line of Dara Mohsenian of Morgan Stanley.

Hi, gentlemen, hope you're well in this environment. So Ramon, I just wanted to touch on the market share opportunity in snacks and beverages going forward. It sounded like the momentum was pretty strong through February pre-COVID and in the COVID environment. But I was hoping you could discuss if there's opportunity for improved share structurally longer term as you look coming out of the COVID crisis. Theoretically in snacks, there's a shift to larger trusted brands, which is in your wheelhouse, and you've got the DSD distribution advantage. So from a retailer and consumer standpoint there could potentially be a shift there. And then in beverages, theoretically less exposure to the away-from-home channel than some of your competitors should enable you to invest behind the business. So just, sort of, curious if you could run through how you're positioning yourselves for market share advantages coming out of this COVID crisis and if you think there could be some structural improvement longer term beyond what you've already seen over the last year or so.

Yeah, good morning, Dara. It's a good question. Obviously in a moment when it's hard to predict where the category will go in the coming months, share of market becomes clearly the number one priority for the organization. The investments we made in the business last year, both in our structural capabilities and the strength of our brands in particular markets, gave us a lot of momentum. As you saw in Q1, it was our fastest growing quarter in a long time even if you deduct the last couple of weeks where we had a positive impact from stockpiling in the U.S. Even though if you were to ask our people on the ground, share of market is the key variable. As you were saying, it's a moment where large brands that people trust, strong supply chains and go-to-market strategies like we have, along with the talented people in the marketplace, should give us an edge in terms of competing in the upcoming months filled with volatility. I think it presents a very positive opportunity for ourselves.

Your next question comes from the line of Bryan Spillane of Bank of America Merrill Lynch.

Hey, good morning, everyone. And maybe just a follow-up on Dara's question. As I was listening to the recorded message, I guess what I took away from it was there is going to be still some investment in SG&A this year, some of it in response to the environment, some of it maybe be opportunistic in terms of market share gains. So I guess is that a correct characterization of it as we're thinking about as the year unfolds and the pressure points or the stresses in the P&L? You're looking to spend in SG&A this year because you want the business to exit stronger and also there's going to be some investments to adapt to the environment?

Hi, Bryan. Good morning. Yes. Of course, I mean, we were in an investment position, and we were very selective on where we're putting the investments and trying to look for the highest ROI investments everywhere around the world in the different categories. We're not planning to change that position even if we might have opportunities ahead of us that suggest doubling down on some of those market opportunities for short-term advantages that could lead to structural gains for the long term. We're looking at all our discretionary costs with a lot of scrutiny. As we said in the note, we're looking holistically and very intentionally at unnecessary costs in our P&L at this point. We're going to stop unnecessary expenses and also have flexibility to reallocate into areas of the business where we see acceleration. For example, we see e-commerce being a high-growth channel at this point. So we're reallocating resources from other parts of the P&L into e-commerce to capture consumers in that particular channel. Some brands are benefiting from increased consumption at home like Quaker. We want to invest in those brands that are gaining consumer attention now to retain those consumers as we exit the crisis situation. So, yes, our mentality going into the crisis was an attack mode, and we continue with that same mentality, ensuring strong criteria of ROI for those investments and being strict with every single line of our P&L to ensure that unnecessary expenses are eliminated.

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

Thank you. Good morning. I have a few questions for you guys on energy drinks. You're certainly stepping up your game here with the announcement you made this morning to distribute Bang. So hoping you could give us a little more color on how you're going to manage the energy category with the different brands. Now you've got Rockstar and now distributing Bang and eventually Mountain Dew. So curious to hear how you're going to prioritize these different brands and how you see the different positioning of them. And then could you guys give us a sense as to how you're going to hit the ground running now that the Rockstar deal is closed? I'm just curious if your plans have changed given everything going on with COVID also as it relates to Mountain Dew. Thank you.

Good morning. Yes, let me provide some thoughts. This is consistent with what we've been saying in the past: we see the energy need state as a very large need state that will remain for many years. Consumers need energy during the day in both developing and developed markets, and we're targeting that consumer occasion with multiple vectors. We're actively engaging in the coffee category and believe it's a great opportunity. Our partnership with Starbucks, along with some innovations we've had there, has proven successful in addressing the energy need state. We also have our own innovations with GameFuel and others. The Rockstar deal provides additional opportunity to leverage these spaces that energy demands. We intend to invest in Rockstar, recognizing it has been underinvested in the past. Bang has been a great addition to our portfolio as a differentiated brand with positive momentum in the U.S. that still has many distribution opportunities. I believe that our distribution capabilities will provide Bang an additional boost, and we can benefit from the positive consumer reception. Moreover, Mountain Dew, which is already part of our portfolio, has significant potential in the energy boost category, and we plan to encourage more innovation with the Mountain Dew brand in that space. Overall, we aim to utilize various tools as we tap into this substantial need state, especially as populations move to mega cities and lifestyles get busier.

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

Hi, good morning, everyone. Ramon, I was hoping you can talk about go-to-market and I'm thinking more on the Gatorade side. I mean clearly having availability in a time like this has been critical. And so when you think about warehouse versus DSD of Gatorade between the channels small format, large format and some of the tests that you're running in the Midwest, then I was hoping you could just kind of opine on how you think this should evolve in the future, given that this could potentially happen again at some point in the future?

Yes, that's a great question. The logistic challenges we've seen in the marketplace in the last few weeks, both in the U.S. and globally, have emphasized the need for better methods to deliver our Gatorade products into stores. We have worked closely with our customers and partners to find solutions to get that brand into stores quickly due to high demand, even though we've encountered some bottlenecks. We're considering various options. The final decision will always reflect a mix of top-line growth against additional costs and complexities in the organization. As Gatorade is a seasonal brand, with significant volume between May and September, it's a strategic decision we are testing right now. We're giving it a lot of thought and will make decisions along with our retail partners while considering all these variables. It's a potentially big opportunity for Gatorade, alongside the complexity involved.

Your next question comes from the line of Andrea Teixeira of JPMorgan.

Hi, good morning and thank you for taking my question. I hope all is well with all of you. So I was hoping if you can talk about the strength in at-home consumption. I'm assuming your shipping is still below your demand and you are not worried about any stock destocking in the second quarter. So I was just thinking in your outlook of the low single-digit decline for the second quarter. Are you just assuming as we cycle through the immediate consumption channels, they're still going to be very much impaired through most of the second quarter? And if you can give us an idea of what happened in some of the places where the restrictions were lifted. Thank you.

Andrea, good morning. We're seeing a lot of uncertainties on how economies will return to normal. As you can imagine, we have multiple scenarios in mind regarding various potential outcomes. Many of these scenarios suggest that the recovery will not be linear, as economies may not open right away. There could be scenarios with ups and downs surrounding the virus spread, leading to local restrictions being enforced again. Our cautious stance stems from this uncertainty regarding geographies, channels, and categories. You're right that most of the impact on our categories, especially beverages, is related to reduced mobility of people. Some channels are significantly tied to mobility and transportation, particularly out-of-home food and beverage services. If consumers are moving around, there will be increased consumption, particularly in convenience and gas stations where we have a substantial business. This should recover as mobility increases. However, we are cautious because we do not anticipate a smooth return to mobility levels once the economy begins to reopen. It might be a restricted mobility scenario for some time, impacted by possible second waves in some markets. This flexibility in our guidance reflects our cautious approach.

Your next question comes from the line of Kaumil Gajrawala of Credit Suisse.

Good morning, everybody. Can you talk a bit more about the Bang deal? It obviously makes sense and congratulations on becoming a lot more meaningful in the energy space in what seems like a fairly short period of time. But maybe just some more specifics. It looks like it's a distribution deal and historically distribution deals have favored the founder or supplier a bit more than they favored the distributor. Is there a path to ownership? I think there have been some deals in the past where a lack of a path to ownership has been detrimental. And maybe just some other basics, such as the time horizon for this deal. Is it perpetual? Things like that. Thanks.

Hugh, would you like to respond?

Yes. Happy to do that, Ramon. Good morning, Kaumil. A couple of things: we aren't going to disclose all of the details of the deal. The way I'd characterize it is, it presents substantial upside for the Bang team, giving them broader and deeper distribution than they have had to date. It also represents a good win for us, helping to fill out our energy portfolio as we adopt a more assertive posture in this category. Regarding any forward deals or sort of M&A considerations, that’s not part of this agreement. We expect it to remain in effect for quite some time. Lastly, unlike the Rockstar deal, we have less meaningful restrictions on how we manage our portfolio. We feel confident that we have the freedom to operate effectively in the energy space.

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

Great. Thanks. Good morning.

Good morning.

In the prepared remarks, you guys have talked about developing in emerging markets, feeling pressure and that was sort of the thing you were thinking about, discretionary coming under pressure and how the macroeconomic could hurt categories. I wanted to get a bit more detail on that because I think category development of packaged snacks is a big part of the long-term plan in international markets and the investments that you've been making, particularly to promote and support some of your bigger brands, expanding their global footprint. So I know it's still pretty early days in all of this, but if you could just talk about D&E market development for snacks as you think about how this crisis unfolds.

Yes, yes. Hi, Lauren. It's still very early to assess, especially in markets like Latin America or the Middle East and Africa, where Eastern Europe has endured the crisis for a bit longer. In the short term, we're facing two challenges. Many outlets we serve are shut down or partially operational during the lockdown, impacting our distribution and initial sell-ins, thereby affecting our sales. Additionally, consumer occasions in these markets primarily involve on-the-go consumption, particularly among the younger demographic that buys our snack products. Many of these occasions are limited right now. Nonetheless, we see strong supply chains in these markets, and our brands remain well established. We can adapt price points flexibly in our snack business to handle currency impacts and price adjustments. This situation might offer us an opportunity to enhance our distribution and increase our market share in those markets. Thus, we see some short-term impact due to distribution challenges but once retailers are back in operation, we expect life to normalize. We believe this situation could actually accelerate our market share in many international markets. Given the size of our business globally and against competitors, we view this as a promising opportunity.

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

Great. Thank you very much. Guys, at a time when a lot of companies are suspending or cutting their dividend, you have essentially committed to your initial guidance on those $2 billion of share buybacks, which signifies tremendous financial strength. My question is, given how the world has changed, how are you thinking about capital allocation now and priorities? Does opportunistic M&A make more sense? How are you weighing all these elements in terms of priority, also considering perhaps even stepping up marketing which was significantly increased last year? And in Q4 you mentioned that it may or may not be increased ahead of sales this year. That was something you were considering. So just big picture how you're reevaluating capital allocation. Thank you.

Hugh, do you want to share your thoughts?

Yes, happy to. Rob, in many ways there is not much change in how we approach capital allocation relative to what we have discussed previously. You’re absolutely correct in observing our significant financial strength. We've actively participated in both short-term and long-term debt markets, securing funds at favorable rates. As such, we enjoy financial flexibility to maintain share repurchases as well as distribute dividends. Concerning capital allocation priorities, our approach remains consistent: first, we invest in the business as opportunities arise; secondly, we pay dividends; thirdly, we evaluate M&A, being highly selective as in the past; and finally, we follow through with share repurchases. Our outlook hasn't changed significantly in this regard. Thankfully, due to the strength of our balance sheet and cash flow generation, we can execute effective returns to shareholders.

Your next question comes from the line of Vivien Azer of Cowen.

Hi. Good morning. Thank you for the question. I was hoping to dive a little deeper on your commentary around increased at-home per capita consumption during your prepared remarks regarding consumers eating more breakfast and snacking more at home. That seems to be evident in the Nielsen data that's come out today, where salty snacks continue to grow, although it did decelerate. I think it raises a bigger question: it appears that some categories are seeing pantry loading and de-loading, like sports drinks down in the current four-week period and others still performing strong. As you consider the second quarter, which categories do you think can sustain higher levels of per capita consumption in the at-home occasion, and where do you expect to see some pantry destocking? Thank you.

Good. Yes, let me address that. We’ve indeed noticed substantial increases in our Quaker range. The number of households purchasing Quaker has risen significantly in the last six weeks, driven by increased cooking at home, resulting in higher repurchase cycles. We're emphasizing not only the breakfast opportunity but also cooking scenarios where our oats can be utilized. This applies not just in the U.S., but also in Latin America, where we've shifted our marketing completely to highlight recipes using oats and other Quaker products. We have made numerous improvements to Quaker products, such as reducing sugar and artificial ingredients and enhancing formulas. I believe this is a prime chance for consumers to re-evaluate the brand and provide it a structural boost. We are directing our marketing investments toward promoting trials and repurchase of the Quaker range, which I believe offers excellent taste. Additionally, in the snacks sector, there are many more consumption occasions within families now, as children are home, and we find ourselves taking breaks amidst busy days, or spending time together as a family, leading to increased consumption. We see significant growth in multipacks and variety packs, especially in our Tostitos brand and dips. All these factors contribute to rising sales across our brands. Importantly, our snack products have expiry dates, meaning consumers won’t stockpile them indefinitely—they'll inevitably be consumed. So we see clear cycles of repurchase evident in our snack business.

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

Hey, good morning guys. Hope you're well. Ramon, looking out over the horizon and building on some comments you made in response to Andrea's question, I was hoping you could elaborate a bit further on your early thoughts around an exit strategy from current lockdown conditions specifically in North America and Western Europe. Could you comment on any lessons learned from China and whether the strategy and its timing are likely to vary between snacks versus beverages? I’d also appreciate any insights regarding your approach and timing across markets in relation to consumer/customer mentalities, competitive positioning, and government policy. What does the exit strategy look like?

Yes. My earlier point pertained to the expectation that it will not be linear in nature. We're actively analyzing various scenarios and ensuring that our company remains agile. This period involves scenario planning and exploring options. The possibility of every country and every state reopening without experiencing second waves seems low. The ongoing presence of the virus, absence of effective treatments or vaccines encourages caution. The consumer behavior regarding acquiring the virus will play an integral role. Our approach is one of aggressive commercial action—we plan to be the first to engage with any stores that reopen, organizing our equipment and replenishing the supply under our leadership to ensure our products capture consumer interest. Regarding employee safety, however, our top priority is ensuring their protection exceeds typical standards. We need to balance both commercial aggressiveness and employee safety as we move forward—aiming for a strong return once retail stores open. We recognize that having experienced, capable people on the ground provides me confidence in our ability to navigate these challenges effectively.

Your next question comes from the line of Laurent Grandet of Guggenheim.

Hey, good morning Ramon and Hugh, innovative format to read your results this morning. I like that. I have a follow-up question on energy actually. Regarding Bang, how much will you be able to distribute immediately? And how fast are you planning to exit from existing distribution agreements? Clearly, the upside in energy is primarily affecting the U.S., could you help us understand how internationally, the international market could benefit from the Rockstar acquisition? In some countries, like the U.K., the current distributor has stated that there was no change to its distribution agreement. Moreover, why is Bang distribution limited to just the U.S.? What are the plans for international play in energy?

Hey, Laurent, good morning. I won't share extensive details regarding transitions from the existing Bang distribution network to ours, but the transition will be gradual. Initial distributions will begin in select channels as early as early May, with plans for full integration within our operations by the beginning of Q4. Internationally, we maintain strong energy product lines in various regions with our brands, such as Sting or Ad Rush in Russia and several Eastern European markets. The Rockstar brand and its formulations offer us extra leverage targeting international markets and will strongly feature in our beverage sector operations. We are applying the framework we've implemented for other beverage ventures with Rockstar as well, categorizing markets into stronghold, battleground, or challenger and tailoring our commercial priorities accordingly. Choose markets will see the Rockstar brand gaining traction internationally, thereby enhancing our involvement in the energy category.

Your next question comes from the line of Sean King of UBS.

Thanks for the question. Mountain Dew, I guess, returned to growth. Is this the sustainable inflection we were looking for, or is there an aspect of the pre-COVID pantry loading that helped drive that?

Listen, we've been investing a lot in Mountain Dew. There’s definitely a return on that investment—growth in Q1 was enhanced by a successful innovation, Zero Mountain Dew, which is well-received by consumers. We recognized that we were losing some consumers to non-sugar brands. The introduction of the zero-sugar option seems to be bringing some of those customers back to the franchise. Our marketing efforts are also enhancing frequent customer interactions. The freedom to innovate further for Mountain Dew, including a more energetic focus, presents new opportunities. We’re not fully out of the woods with Mountain Dew yet, particularly as it tends to perform better in convenience stores where, given current transportation limitations and reduced foot traffic, it's impacting the brand harder than others. However, as consumers begin moving more freely and traffic increases, we'll be prepared with our marketing strategies to support the brand's rebound.

Our final question today will come from the line of Bill Chappell of SunTrust.

Thanks for taking my question. Just a quick question on commodity outlook and any changes you're considering regarding near- or long-term hedges and how we should perceive this in terms of potentially offsetting currency considerations. I realize you're not providing guidance, but any insights you can offer would be great. Or is there more that remains to be seen as it flows through the supply chain over the next 2-3 quarters? So any color there would be great.

Hugh, do you want to respond please?

Yes, I’ve got it. Hey Bill. As you know, we’ve been systematically buying ahead for a number of years now. It tends to be six to 18 months out. Currently, we forecast low single-digit commodity inflation for both Q2 and for the balance of the year, which includes transaction FX. Presently, we’re about 80% covered on market-traded commodities and approximately two-thirds across the entire basket. We haven’t enacted any significant changes. We did extend our purchases for oil when it dropped significantly below production costs. Otherwise, I expect us to continue with our systematic forward-buying program as it gives us predictability in both costs and marketplace pricing. This strategy has served us well.

Very good. Thank you all for joining us today and for the confidence you’ve placed in us with your investments. We hope that you all stay safe and healthy, and we look forward to updating you as the year progresses on our performance. Thank you very much. Stay safe, please.

Thank you for participating in PepsiCo's first quarter 2020 earnings Q&A session. You may now disconnect your lines and have a wonderful day.