Good morning, and welcome to PepsiCo’s 2021 Second 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. 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, updated 2021 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, July 13, 2021, 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 Q2 2021 earnings release and 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. Our first question is coming from Bonnie Herzog of Goldman Sachs.

Good morning, everyone. I guess I wanted to ask about PBNA, hoping you could provide a little bit more color on that business and the drivers of the robust top line growth that you saw in the quarter. I guess I'm wondering if the growth accelerated each month in the quarter, and if you're seeing this double-digit growth continue so far in July? Also, how big of a driver was the stepped-up marketing and advertising spend, which you mentioned was up double digits in the quarter? How much did that help drive the top line? And then maybe finally, on this business, you mentioned revenue in your on-premise business doubled in the quarter. Clearly, that's off of a very easy comp, but just curious when you expect revenues from that business to be back to normal levels? Thank you.

Yes, Bonnie, let me try to answer a few of those elements. I think the results of the PBNA business are a consequence of the work we've been doing for the last, I would say, three years or so, trying to improve the equity of the brands, improve the execution, improve the organizational focus, etc. We're very pleased with the performance of all our brands. If you think about Mountain Dew, Pepsi, Gatorade, all our large brands are growing very nicely. And then on top of that, our smaller, medium-sized brands like Starbucks or Pure Leaf or Bubly, others are also growing at a very nice pace. So I think the portfolio is working very well for us, the consequence of the great work the team has done on innovation and brand, and the field teams are doing on execution. So that is the area we feel more proud about. Obviously, as you mentioned, there is a channel shift as consumers are moving more in the U.S. There's more mobility of the foodservice away-from-home channel is growing faster in Q2, obviously, as you compare it to last year, and that's a tailwind to the business that I think will continue over the next quarters. But the most important thing I think for us to assess is that the business has been investing, and it's delivering as a consequence of that. We're gaining share. If you look at the share numbers for the business in the last few months, the business keeps gaining share and keeps getting more competitive. So that's a good sign of the return on those investments.

The only thing I wanted to add to that, Bonnie, is A&M was up about 30% in the quarter to that specific question in PBNA, I’m sorry, total.

Our next question comes from the line of Dara Mohsenian of Morgan Stanley.

Hey, everyone. To expand on that question, there was clearly a strong organic sales performance this quarter and your average trends also improved sequentially. It seems the top line exceeded your expectations, which led to the increase in your sales guidance. Could you provide more details on how much of the positive performance or acceleration was due to increased category growth? You mentioned the strength in on-premise beverages compared to the expanding corporate market share. Could you share more specifics and figures about the market share performance? Additionally, moving forward, considering the strong market share trends and the gross margin pressures we experienced in Q2, could you discuss your pricing strategies for Frito and beverages? How might the near-term promotional landscape influence that, especially in light of the robust market share gains and some gross margin challenges? Thank you.

Yes, Dara, let me try to cover and then Hugh will also add on to it. I think when you look at the overall PepsiCo business, obviously, the biggest highlight for me is the resilience of our snack business. If you think about last year, it grew high single-digit. This year, it’s growing high single-digit. That is extraordinary if you think about the shift in consumer behavior, how our portfolio is able to adapt to a more of an in-home consumption pattern or more of an away-from-home consumption pattern. So that part of the business is solid. It continues to grow at a very high level in the U.S. and also internationally. Obviously, the beverage category is benefiting from the change of patterns and behaviors of consumers, and it was very negatively affected in the away-from-home consumption last year. We're benefiting now from that, and you see that in the acceleration of our North America business, but globally, our beverage business is growing much faster in the away-from-home business as the stores are open and people are moving around. So that’s from the category dynamics. Across the board, we're seeing a share of market momentum in the business as a consequence of the investments we've been making for the last few years. This is not only in the U.S., but across most of our large markets internationally, developing and emerging markets. As I said, we're having better innovation, better focus on our brand messaging, better execution in-store, better demand-to-supply connectivity. So all that is working very well to our advantage. So that's in terms of growth and the key levers that are driving the acceleration of the business. When you come to our pricing and how we are going to deal with pricing in the coming months, I would say, obviously, same as everybody else, we're seeing inflation in our business across many of our raw ingredients and some of our inputs in labor and freight and everything else that we operate in the same context. We feel quite comfortable or confident that through a combination of net revenue management initiatives and increased productivity, we can navigate this. We’re looking at staying within our long-term guidance for the coming year. So it’s a combination of tools that we're using. We're working with our partners in the retail space and in the away-from-home space to make the right pricing decisions to keep consumers with us once we improve our margins.

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

Great, thanks. Good morning. I'd love to hear a little bit about PBNA’s margins this quarter. Obviously, very strong top line, so there's going to be some operating leverage. But I was curious if you could talk a little bit about building blocks on the margin this quarter, what you're thinking of as we've reached a new sustainable level in that build to that aspiration to build PBNA margins back into the mid-teens-type level. So if you can share any kind of building blocks, channel mix, absence of COVID costs, straight lower promotion, that would be really helpful context? Thanks.

Yes. Hi, Lauren. It’s Hugh. Actually, you just mentioned a couple of the important factors for sure. Channel mix, obviously, is a benefit as small foodservice as well as the convenience store channel continues to do well. Convenience grew double digits. The foodservice channel, as you saw, doubled. That’s a good profitable channel for us. So that clearly was a tailwind. But keep in mind, that's really getting us back to normal in a lot of ways as well. I don't view this as extraordinary; I just view it as we're getting back to sort of a more normal world, although clearly not all the way back. In addition to that, the energy category, in which we participate, obviously has higher margins. Mountain Dew Rise is off to a terrific start. Rockstar, we're slowly but steadily making progress on that. As we said, we believe that would take some time, and we continue to believe that will take some time, but we're seeing some of the right indications there. And then, as you noted, the combination of operating leverage in the business and a reduction in COVID costs, as we expected, also contributed. So some of the things that we've talked about in past quarters in terms of getting PBNA on the road to much stronger margins, we are certainly very acutely aware of it and we are focused as a team on continuing to drive that improved performance.

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

Great, thanks. Good morning, everyone, and congratulations on the strong results. Question on the extension of the restructuring initiative and how this may translate to profitability. So you now expect $1 billion in incremental annual savings through 2026. I think this was generally expected by the market and translates to over 100 basis points per annum of margins, pre any sort of reinvestment. So the question is, do you see a greater likelihood that shareholders could see a greater degree of earnings flow through in this phase of the restructuring program? And I ask that in the context of a clearly healthier top line coming out of the pandemic and multiyear investments that the company has made, some of which we've discussed on this call that have already been put into the P&L? So if the answer is no, what do you see as the most attractive areas of investment within the portfolio, whether this is by product line or geography? So thanks for that.

Yes, it's Hugh. First, we've consistently delivered over $1 billion in productivity annually for several years, and we continue to seek out opportunities to enhance that. Second, we are shaping the company for the future, which means reducing costs in certain areas while investing in others, such as digitalizing our supply chain and improving efficiency in our interactions with customers and consumers. I believe these efforts will balance out to some extent. We have previously mentioned a margin improvement target of around 20 to 30 basis points, which we anticipate will continue moving forward. Of course, there may be some fluctuations from quarter to quarter, but we are committed to this trajectory alongside accelerated revenue growth. The combination of this accelerating revenue growth and margin improvement should lead to strong earnings per share. The specific amount we achieve each quarter will depend on the unique circumstances of that quarter.

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

Hey, good morning, guys.

Good morning, Bryan.

Hey, Hugh, I wanted to discuss the factors affecting gross margin both this quarter and moving forward. We have raw material and commodity costs fluctuating, and labor expenses are increasing as well. Additionally, there appears to be some supply constraints with certain packaging materials. Given that raw material inflation may persist, I’m curious about how much of the current situation you expect to continue and how much might diminish as we approach the end of 2021.

Yes, happy to answer that, Bryan, and maybe shape a couple of summary comments to sort of help frame the numbers a bit. Obviously, gross margin was down in the quarter. That was no surprise to anyone. The biggest driver of that by far were the big international acquisitions that we had that are just inherently lower gross margin businesses, still good businesses to be sure, but lower gross margin. So the math of that obviously dragged them down to some degree. In addition to that, obviously, there's ongoing inflationary pressure. We insulate ourselves to some degree based on our forward buying program, and that has actually helped us clearly this year. There will be a bit more pressure in the back half. But at the same time, as you know, we tend to take pricing after Labor Day in both of our businesses, and I think you would expect to see that pattern continue. So is there somewhat more inflation out there? There is. Are we going to be pricing to deal with it? We certainly are. The investments in our brands and the investments that we've made in supplying our customers, I think is what enables us to take that pricing as we have every year.

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

Good morning and congratulations on the strong results. My question relates to the sales recovery you mentioned, Hugh. The guidance suggests around 4% to 5% growth in the second half, indicating an acceleration when looking at a two-year stack. What factors are contributing to this more cautious outlook? Is it due to challenges outside the U.S., the uncertainty from the reopening, the return of single servings post-Labor Day, the pricing strategy, or the growing significance of energy for you? Can you clarify why we expect the second half to show acceleration in a two-year stack?

Yes, Andrea, a couple of things that went into our guidance. First, and I always start with this, when we deliver guidance to you all, it is a number that we intend to hit, and we have high assurance of hitting it. As we sort of evaluate scenarios for the balance of the year, we obviously contemplate both the opportunity factors that you've mentioned, all of which are quite real, as well as the risk factors of we're not fully out of the pandemic at this point yet. There's lots of volatility to some degree in the U.S. and developed countries, but to an even greater degree in developing and emerging countries. So as we sort of think about our guidance, we package all of that up, and we adopt the posture that gives us the ability to deliver under pretty well almost all scenarios. And that's why we've been as consistent as we have been in delivering our guidance. So I think, as you think about our posture, I'll just remind you that that's the way we tend to approach this.

Yes, I think, Andrea, just to build on what Hugh is saying, we've seen obviously positive trends in many markets, but we also see the reality of the pandemic. I was just in Europe last week working with the European team, and when we thought it was going to be out of the COVID lockdowns, they're back into lockdowns in many markets. As Hugh said, we're confident in our marketplace performance. I think that will continue. We're counting on the resilience of our categories, but we’re also aware of the ups and downs that might come in the coming months, especially as we move into the colder months in the Northern Hemisphere. So that is all included in the forecast for the balance of the year.

And the one thing I will remind you of is we're delivering 6% on a full year basis. That's on top of a 4% to 2% last year and on top of a 4% to 5% the previous year. So, it's pretty strong overall top line performance for the year.

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

Hi. Good morning, everyone. And I'd like to come back to some of the comments you made on the energy category. You did say your premium market was pretty strong and you mentioned that you still have some work to do on Rockstar. Clearly, we are seeing that Starbucks and Rise to some extent and Bang are doing very well, but Rockstar is a bit behind. So could you maybe give us a bit more granularity about the relaunch and when you’re thinking numbers come in, in the U.S. but also internationally, specifically in Europe for Rockstar? And also wanted some indication about Mountain Dew Rise so that we understand what's going on in the energy category for you guys? Thank you.

Hi, Laurent. Yes, you mentioned the four pillars of our strategy, so let me go through them one by one. We're very pleased with the performance of our Starbucks portfolio, and our partnership with Starbucks is stronger than ever as we continue to innovate. The new products are performing excellently, and the execution is top-notch. That business is thriving both in take-home and away-from-home markets. Regarding Mountain Dew Rise, we're satisfied with the initial execution and consumer reaction. The teams have done a great job, our distribution system is functioning well, and we're seeing promising initial trials and repeat purchases from consumers. Feedback on social media has been extremely positive regarding taste and effectiveness, which is encouraging. While we only have 1% market share in energy drinks and aim for much more, it's just been available for three months, so it's a strong start. I believe we have a solid foundation for future growth. As you mentioned, we continue to support the Bang business as promised, and that's progressing well. For Rockstar, we’ve been clear that this is a multiyear effort, and we're focused on building strong foundations in our product line. We're reformulating some products, and our non-sugar portfolio is performing excellently in the fastest-growing segment of the category. Our execution is significantly improving, with increased distribution and better brand visibility. We've established a good brand position, finding a niche that differentiates us from Red Bull and Monster. We plan to emphasize what is receiving positive feedback regarding that positioning. This will be a long-term commitment, with a strong focus on our domestic U.S. business, as well as our international teams concentrating on these priorities. We will carry out our plans over multiple quarters and years. We're optimistic about the progress we're making and will provide updates every quarter on our evolution, but so far, things look positive.

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

Hi. Good morning. Thank you. I was hoping you could please comment on trends for SodaStream in the quarter, and in particular how that business has responded to the recovery in waste and home consumption in the U.S.? Thank you.

Yes, good. Vivien, the SodaStream business is a global business, right? So it has a very solid penetration in Europe. That business continues to thrive, I would say, in Europe and also in the U.S. We're gaining a lot of household penetration in the U.S. The latest thing we're doing and it's working quite well is putting some of our large beverage brands into the SodaStream consumption model, which started in Europe. In the U.S., we started with Bubly. Bubly drops are working very, very well as an enhancer of the SodaStream experience, and we continue to push that combination of the Bubly flavors on the SodaStream sparkling water experience. So I would say we're still far from its potential. The household penetration is good in some Central European markets but low everywhere else. We continue to build that and continue to build the direct-to-consumer model, trying to get many more insights on consumption behaviors. That is helping us not only to develop the SodaStream business, but to develop the rest of our innovation and categories. We feel good about the momentum of the business and we’ll continue to prioritize it going forward.

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

Yes. Hi. Good morning. Ramon, you commented on this just there a bit in the context of SodaStream, but as you step back, I was hoping you could expand on how you're viewing the performance of your recently acquired businesses in aggregate and where you're at in terms of integrating them into the broader portfolio relative to your plans coming into the year? And then, Hugh, in that context, I guess just to validate whether it's fair to assume that with the financial performance expected this year, that you feel you'll be on track to remove some of the financial constraints that you imposed upon yourself this year in terms of being able to resume elective buybacks and/or reenter the M&A market looking out beyond the end of this fiscal year? Just a health check there would be great. Thank you.

Yes, that's great, Steve. Let me provide an update on our various mergers and acquisitions. We started with SodaStream, which represents a future consumption model we are investing in. It's a strong product for consumer personalization and is environmentally friendly. The progress is exceeding our initial expectations, and we will keep investing in it. In the U.S., we've made several acquisitions, including the CytoSport business, known for the Muscle Milk and Evolve brands, which are performing exceptionally well. There is a clear trend of consumers shifting towards protein and sports products, which will continue to expand. The momentum is very positive for both brands, and we're focused on maximizing the potential of successful products like Evolve. The acquisition of Rockstar has provided us with a strong business foundation and supports a broader strategic approach, and we are executing those plans effectively. We are also pleased with our acquisition in the snack sector, which includes the Better-For-You company and the PopCorners brands. That segment is performing wonderfully, as we recognized the demand for popping technology and healthier snack options. The Frito team is doing an outstanding job in expanding distribution and developing the brand, so we feel positive about this investment. Internationally, we focused on two key acquisitions, one being the Pioneer business in Africa, where we are currently integrating the operations. Integration has faced challenges due to COVID, but we are making progress. We view this as a long-term investment, as Africa is poised to drive growth for our companies globally in the coming decades. The other acquisition is Be & Cheery in China, a direct-to-consumer snack business that complements our existing chips and corn products in the region with a variety of local snacks. This initiative is also going well; we are integrating Be & Cheery products into our brick-and-mortar distribution channels in China and introducing some of our brands into their direct-to-consumer model. Overall, the execution is solid, and the strategic intent behind these acquisitions is proving effective. We are seeing good progress across all these different investments.

And then, Steve, to follow up on your questions on capital allocation, no change at all to what I previously said regarding M&A and no change regarding buybacks.

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

Yes, thanks. Good morning, everyone. The question is really about international performance. You had some strong results, but the COVID situation varies significantly between the U.S. and other regions. I would like to get some insight into the differences between away-from-home and at-home consumption. Additionally, some of the channel work we've done suggests that PepsiCo has been quite active in the retail space with promotions. Can you provide context around this? Did you identify specific opportunities to encourage away-from-home consumption due to COVID?

Yes, Nik, let me tell you a bit about how we see the situation, the different markets around the world. Obviously starting with China, China is clearly out of COVID already for some time and the trends are the away-from-home business grew last year, continues to grow. Our snacks business continues to do very strongly, the same with beverages. So good macros in China. The rest of Asia is a bit more challenged. We're seeing, when you think about Vietnam, Thailand, Japan, even Australia, more challenges and consumers going back to normal behavior, so that might take a bit of time. Obviously, Africa, Middle East, India, there are a lot of ongoing challenges there with running normal operations in all those markets. It will be a while before those markets go back to normality. Eastern Europe is very strong, actually, in spite of some of the COVID challenges in Russia specifically. Consumers are moving around, and Eastern Europe is very strong, Turkey included, where they had some recent lockdowns. We see those markets performing very well. Western Europe, obviously away-from-home is improving compared to last year but still you don't see the normal traffic North-South in Europe this time of year; consumers are staying in their countries. There won't be the usual movement of people in Europe, North-South. We plan for that and we execute our summer programs around that. In Latin America, I happened to be in Mexico a few weeks ago; still the pandemic is very visible but consumers are increasing their mobility and that obviously has a positive impact on our small shops performance and the restaurant business, the same with Brazil. So that hopefully gives you a bit of a picture of how the different parts of the world are behaving and the trends in our channels.

Yes, the only thing I'd add is broadly the environment seems quite rational. We're managing through this successfully, and it obviously shows up in the results. The growth numbers were quite strong pretty well around the world.

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

Great. Thank you very much. Still early days and maybe premature, but love to get your thoughts on what the new normal is going to look like for the consumer channels. Any long-lasting behaviors that you're starting to pick up on that we'll see post-COVID? And to the extent there are, how you're changing or adapting the company to meet them? Thank you.

Yes, good question. Listen, we are still obviously looking at consumer behaviors. Consumers are also trying to figure it out at this point. We see some trends that I think are going to stay. The most important one probably is the shopping behavior is changing. I think e-commerce, or let’s call it e-commerce in a broader sense, is going to continue to be a preferred way of shopping. It's something that a lot of families tried during the pandemic and we're seeing those families stick to that behavior. That is going to be a permanent trend, and we've been investing in e-commerce for quite some time; capabilities, supply chain, advertising models, etc., and we're working very closely with all our customers to pivot to that. I think that's something that is going to stay. The home as a hub is also a trend that we're seeing more. I think consumers are venturing out, but they are still doing a lot of their activities at home. We foresee a flexible working model where consumers are going to spend more time at home and they're not going to go back to the office kind of every day of the week; obviously, certain types of people, not everybody. We see that as an opportunity for our snacks and our breakfast and our food business in general, and also for our beverages business. We see consumers in general being more concerned about what we call holistic health; mental health, physical health. Consumers are exercising more, consumers are making more balanced food choices, which generates a couple of important trends for us. Portion control, we're seeing that as a strategy consumers are following, and that's giving us a huge growth in our variety packs and multi-packs. That trend we’re capturing, and I think it will continue. The other one is consumers moving into healthier spaces in our categories. Clearly, non-sugar is growing very fast. I think we're very well positioned from the R&D and innovation points of view in non-sugar. The same goes for more permissible snacks, where we’ve been between acquisitions and development. We have a very good portfolio that is gaining share in that particular space. So those are some of the trends that we're seeing. Consumers will continue to evolve, but we're closely following what's happening across different parts of the world and we're adapting our brands, our innovation, and our channel resources to those new trends.

And we have time for one more question. Our final question will come from the line of Chris Carey of Wells Fargo Securities.

Hi. Thank you for the question. So you just noted on the trend to consume healthier products and in your prepared remarks, you also talked about continuing to invest behind Zero Sugar, both on the carbonated and non-carbonated sides. I wonder if you could maybe just help lay the land here on how the portfolio is performing and how you see it positioned and where you think the investments will go both on a product and geographic basis? Obviously, in the U.S., if diet Mountain Dew isn't losing some share, maybe Diet Pepsi got flat; snacks gaining, but still relatively small Bubly doing quite well. Any perspective on how important or the go-forward trends you see in this business? Where do you really expect to focus in the near, medium and longer term? Thank you.

Yes, happy to discuss. Listen, consumers are moving, I think, and this is going to be a long-term trend into healthier choices in beverages and in snacks. We've been working on this for a long time in our R&D, and I think we're getting very good at providing consumers with very good taste experiences and functional experiences with Zero Sugar, and that is a great capability we have in the system. We have great examples of that. If you think about Gatorade Zero, this is a massive innovation. It’s over a $1 billion innovation that has been on the market for only about 20 months. We can provide functionality, good taste, and a Zero Sugar option even in spaces like Gatorade. Clearly, for more refreshing experiences or more indulgent experiences, I think the Pepsi Zero solution or the Mountain Dew Zero solutions are extremely great tasting products that are getting a lot of consumer favor. If you think about our European business, for instance, the equivalent of Pepsi Zero, which is Pepsi Max in Europe, is a leader in many of the European markets. We have a much higher share in the non-sugar category than in the sugar category. We've been investing for a long time. We'll continue to invest. We see that trend not stopping for the foreseeable future, and it’s where we are putting our R&D investments, our brand investments, and our innovation investments.

Okay, I think we run out of time. So thank you very much, everybody, for joining us today and for the confidence you've placed in PepsiCo and in us with your investments. We hope that you all stay healthy and safe. Thank you very much, and talk to you again.

Thank you. Ladies and gentlemen, this does conclude today’s call. You may now disconnect.