Good morning and welcome to PepsiCo's 2021 Third 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 on our website. 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 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, October 5, 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 Q3 2021 earnings release and Q3 2021 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 comes from Dara Mohsenian with Morgan Stanley.

Hey. Good morning, guys.

Good morning there.

Obviously very strong top-line results again here in Q3, and for the full year you now expect 8% organic sales growth, may be the best results we've seen in recent history. Can you just discuss some of the key drivers behind the recent acceleration in top-line growth, how sustainable they are as you look out longer term? And then also just near-term, are you confident you can sustain the mid-single digit organic sales growth in line with the long-term algorithm, particularly as maybe you catch up on supply or as we look specifically at 2022, could there be some risk as you cycle these difficult comparisons from 2021? How you guys think about that conceptually would be helpful.

Hi, Dara. Good morning. Yeah, listen, I think we're very pleased with the performance of the business overall. Categories are healthy, both our beverage and food categories. Snacks categories are growing faster than food and beverage overall in the U.S. but globally. I think we're playing in categories that are doing very well, I would say, during the pandemic and now as we are exiting the pandemic in many markets around the world. So that's one thing. The other component of our success is I think we're becoming much more competitive across both our categories in most of the markets where we operate. And that's been a consequence of the investments we've been making in the brands, pretty good innovation. Obviously, investments we've made in go-to-market capacity, new capabilities, talent, everything else we've been talking to you for the last couple of years. So, we’re seeing the momentum across the business and we're seeing that momentum continuing into the balance of the year. That's why we are elevating our guidance for the top-line and we think that that momentum will continue well into the year 2022.

Yeah, I'm happy to jump in as well.

Some parts of the question were not clear.

Yeah. Dara, specifically on '22. And I know obviously there's always going to be lots of questions on that. And historically, you've been with us for a long time, you know we typically don't talk about the following year until we get to February. But given the level of question and given the level of volatility, I think we thought it was prudent at least to give some indication of where we are on '22. In short, we expect our organic revenue growth and our core constant currency EPS growth to be in line with our long-term objectives in 2022. Now, I know that's going to create a lot of additional questions, and candidly we're not ready to get into all of the details of that because, frankly, we're still early in our planning process. But I think we can say with confidence that we expect both revenue and core constant currency EPS to be in line with the long-term objectives for '22. Hopefully, that gives everyone some level of comfort that as we emerge from Q4, we emerge with a lot of momentum in the top-line as well as a business that has its supply chain well-managed and on good footing to deliver another good year next year.

Thanks very helpful.

And we will take our next question from Bonnie Herzog with Goldman Sachs.

All right. Thank you. Good morning, everyone.

Hi, Bonnie.

I guess I have a bit of a follow-on question as it relates to the top-line and maybe specifically on innovation where we're hearing from some of our industry contacts that your innovation pipeline for next year, from what we've seen and what we've heard, looks very robust. Just love to hear some color from you in terms of if you are, in fact, stepping up your innovation significantly versus prior years. And if so, do you think you're going to need to also step up your A&M spend to really support that pipeline and ensure that these innovations really get the support they need in the bottom market? Thanks.

Thank you, Bonnie. Well, it's good that you're hearing from our customers that innovation is good. It's always a good feedback. Listen now, more seriously, I think we've always seen innovation as a key driver of our competitive advantage in the marketplace. And we've been investing a lot in R&D, we're investing a lot in insights, and we're connecting better at the insights with R&D and the whole commercial execution to get the maximum return on those innovations. So, I think the machine is ready and it keeps getting better year after year. So yes, our pipeline is strong. I would say our pipeline in 2021 was very strong as well, and we're seeing the return from that innovation across the world. We're trying to be much more local, much more mid-term and long-term, much more incremental in the way we think about our innovation. When it comes to the investment behind the innovation, I think we have the right level of A&M, Bonnie, in our business to support innovation in a big way. And it's not only A&M, but as you know, we have a very strong push system that allows us to give innovation a lot of visibility and separate it from the rest of the category and make sure that the trial levels are higher and the repeat levels are good. I would say, yes, there will be a strong innovation across beverages and snacks. We think it's going to be quite incremental, and I would think we have the right level of resources to support that innovation within our current algorithm, so I would not expect a higher A&M next year.

Thank you.

Our next question comes from Andrea Teixeira with JPMorgan.

Thank you, and good morning to all. I just wanted to go back to the balance of cost supply chain and labor. In the prepared remarks, Hugh did talk about those. Obviously, it's no surprise to anyone. But it was a 14 percentage point impact on EBIT. And I understand that your cost inflation had been running around mid-single-digits. And as such, I think like the EPS and you're having pricing coming through also in the fourth quarter strongly. So should we read the EPS floor of a $1.47 as a reflection of increased A&M you said, and not necessarily for 2022, but perhaps you are not going to flow all of the upside that we saw so far in the year into the EPS for the year just because of these investments, is it just that you're up for a strong 2022. Is that the way we should read?

Yeah, Andrea, good question. I think I would think about it this way; obviously, we've given you some pretty specific guidance in terms of where we would expect EPS to land for Q4. You know that we advise by 6 months to 9 months, those hedges that we had in the beginning of the year are starting to roll off, the new ones that are in place are higher costs. We had shared on the last call, as well as in the prepared remarks today that we expect to be able to price through the inflation that we're facing whether it be commodities inflation or other types of operating expense inflation. Some of that pricing occurred in the summer, much more of it is occurring in the fall in the beverage business and substantially all of it for 2021 in the snack food business is occurring really as we speak during these weeks right now. You also know that we forward by 6 months to 9 months out, so we will have a better handle on where exactly 2022 costs are going to land as we get into the first quarter of 2022. And I would expect this to price a bit more to be reflective of some of that sort finalization of costs during the course of 2022. So Q4, some of the pricing coming through, the balance of it coming in Q1 of 2022, and the EPS guidance is reflective of all of that.

Great. Thank you. I’ll pass it on.

We will take our next question from Lauren Lieberman with Barclays.

Great. Thanks. Just to follow up on that. I mean, Hugh, your comments on you forward by 6 months to 9 months, and so you have more visibility to get into the first quarter onto the cost base. That suggests a lot of pricing, and so I was hoping you could just comment on elasticity. Whether what you're seeing in terms of your models, if you're seeing less elasticity than traditionally because the innovation has been so strong, if it's tough to really get a read because of all of the COVID comparisons that are flowing through consumer behavior right now. But curious on the elasticity piece because it does imply a lot of pricing. Thanks.

Yeah. Lauren, I'll take a first go at this and then maybe Hugh can add some more comments. What we're seeing across the world is much lower elasticity on the pricing that we've seen historically, and that applies to developing markets, Western Europe, and the U.S. Across the world consumer seems to be looking at pricing a little bit differently than before. It could be several hypotheses. I think in our case, our brands are stronger and I think our innovation is stronger as you were saying, so that could be a factor. There could be also some behaviors as consumers are shopping faster in-store and they might be paying less attention to pricing as a decision factor, and they might be giving more relevance to the brands or brands that they feel more emotionally attached to us as our brand. We're seeing less elasticity and we're adjusting our models as we go. And that's obviously informing our decisions as we price the balance of the year and into 2022.

And we will take our next question from Bryan Spillane with Bank of America.

Hey, good morning everyone. My question is around AMESA and APAC. And if we look at the year-to-date profit contribution from those two segments, it's contributing about a quarter of the operating profit, just incremental dollars. If you look at it on a currency-neutral basis, you've got a pretty healthy gap on currency-neutral operating profit growth versus what the currency-neutral organic sales growth is. So, I guess my question is just, are we at a point in those two segments where there's enough scale where you could really start to see a sustained margin improvement and profit contribution to the total going forward or is there something just unusual in the near-term that's just driving those margins?

I believe both of your hypotheses are correct. There was a lapping effect, particularly as AMESA faced significant challenges last year due to its geography, including India, Pakistan, the Middle East, and Africa. Those regions are recovering, as our business there is heavily focused on beverages, which were more affected by COVID mobility restrictions. We're starting to see those businesses rebound, and we hold substantial scale and market share in many of these areas, along with strong performance in our advertising and marketing efforts. Regarding your second question about scale, yes, we are witnessing growth on the top-line every year, and we are achieving good scale levels in many key markets, which enhances our competitiveness. Looking ahead, these markets are strategically important for us, and we continue to invest in technology for portfolio expansion as well as talent development. We recognize there is intense competition for talent in that region, but we are effective in nurturing talent. Our go-to-market strategy is solid, supported by reliable bottlers. Furthermore, in locations where we operate, particularly in the food sector, we are investing in digitalization to become more precise and agile. I hope this addresses both the short-term outlook and especially the long-term perspective for that part of the world.

And we will take our next question from Laurent Grandet with Guggenheim.

Hey, good morning everyone, and congrats on this strong quarter and that very good client environment.

Thank you, Laurent.

Talking about innovation, it's great to see you leading the Company, pushing the usual boundaries. So during the quarter you announced a partnership with the Boston Beer Company to introduce Hard Mtn Dew in the U.S.. The question is not so much about the potential of that initiative, but more on the route-to-market you decided to choose. So we'd like to understand why you decided to create your own distribution rather than rely on the Boston Beer wholesaler network. What is the end game here and by extension, your strategy in alcohol here in the U.S. and internationally? Thank you.

Thank you Laurent. Well, listen, we have a good partnership with The Boston Beer Company and they have the R&D, and the knowledge in this space that we don't. We have the brand, so Mountain Dew, I think it will play very well in that space. It will be quite differentiated in terms of the flavor profile and the emotional connection. That's how we're thinking about it in terms of the first step into this market. From the distribution point of view, we think we have an opportunity to create a distribution system in the U.S. that is quite unique in the sense that would be an integrated distribution system that can make coordinated decisions across multiple states from one decision point. And that could be, I think, competitively advantaged. We're starting with a number of states where we have the license to operate, and we will take it from there. We feel optimistic, we think it will be very incremental. It would help us with the drop size. It will help us with the economics of their routes eventually. And we think the same as we're doing with a chill distribution system, that goes very popular and it's unique and it covers the whole country. We think we could eventually vision distribution system that can be quite integrated on the low alcohol part of our portfolio as well.

And we will take our next question from Vivien Azer, from Cowen.

Hi. Yeah. I was just hoping actually to follow up on the hard seltzer questions, please. Just curious your impressions of the overall category, it's obviously been incredibly contentious, the decelerating trends, and whether you at all discussed perhaps introducing Mountain Dew as a canned cocktail as opposed to a hard seltzer because it does seem the best where the consumer is moving. Thank you.

Yeah. Listen, our view on the category is it's very sizable, I think it's almost $9 billion retail value now, and growing 20%, and with good margins above the average of the categories. Clearly a space where we should be playing, and that's how we're thinking about this. We see consumer trends that favor this category will continue to grow in its current form or with new innovation. That's why we decided to participate in our first entries with Mountain Dew, and Mountain Dew is going to be a flavor malt beverage, not a hard seltzer. I think it will be a differentiated flavor and with a very unique brand. So I think we can carve out our own space in what is a relatively crowded market. And we'll take it from there. Obviously, we have a pipeline of ideas that we will be disclosing as we go.

We will take our next question from Kevin Grundy with Jefferies.

Hey. Good morning, everyone and congratulations on the strong result. Ramon, I want to ask you about the decision to sell the juice businesses and the sort of overall satisfaction with the portfolio. So the Trop business, of course, has been with the Company for, if I'm not mistaken, over two decades. You go back over the years, the Quaker business has had a nice balance, I think there has been some discussion in the marketplace about a potential divestiture there from time to time. Maybe you could just sort of walk us through the decision to sell the juice business, what went into it. Can you maybe comment on preliminary thoughts on uses of the proceeds when the deal closes? And then, Ramon, just broadly overall satisfaction in potential other areas of divestiture. Thank you.

Kevin, good morning. Since I joined Hugh on the team, we have been reviewing our portfolio and making additions in high-growth areas for the long term. We have expanded our assets in Africa, China, and here in the U.S., which enables us to venture into new markets such as value-added dairy, energy, and healthier snacks. Over the past three years, we have made strategic decisions to acquire assets that will drive accelerated growth. At the same time, we have evaluated other segments of our portfolio where long-term growth and margin potential appear less promising. In that light, we view the juice business as a solid operation, but it doesn't align with our goals for growth speed and margins for PepsiCo overall. Therefore, we made the choice to move forward with this decision. We have partnered with PAI, who has considerable experience with similar partnerships with large food companies. We believe this joint venture will allow us to generate operational synergies for the juice business, continue innovating, and ensure our brands thrive. Being a 40% stakeholder in this joint venture, we expect to enhance competition in ways that would be challenging within our broader portfolio. That’s the reasoning behind this decision. Now Hugh can provide more insights into the financial aspects, which I would describe as very attractive.

Yeah, Kevin, there is no change to what we previously communicated regarding the use of proceeds. First, we will use it to reduce debt. With some decline in EBITDA, we will adjust our debt levels accordingly. Second, we will allocate funds to invest in organic CapEx for the business. This raises the question about share repurchase in 2022. We will discuss share repurchase in February, as it relates to broader guidance. I know this question is on people's minds, so I wanted to mention that we will address it when we get to 2022.

We'll take our next question from Wendy Nicholson with Citi.

Hi. And my question is a follow-up, but not specifically on share repurchases. But this year, sensibly, you said you wouldn't be buying back as much stock because you wanted to invest in some of the acquired businesses, and I have two questions on that. Number one, we haven't, as of the 9 months, seen Capex actually tick up meaningfully, so I'm wondering what sort of investments you are making. Is it still Capex to come in some of those acquired businesses? But also, you cited those acquired businesses as being a primary reason for your gross margin erosion in the quarter, and I'm wondering how long that will persist. Are those businesses just structurally lower gross margin? Do you think that's going to be something in perpetuity? Or are there things you can do either pricing or restructuring-wise to get the gross margins in those acquired businesses up?

Sure, Wendy, I'll respond to both of your questions. Regarding our investments, we plan to invest broadly in the business, not just specifically in the acquired companies when it comes to capital expenditures. While those companies are certainly a part of the overall investment mix, my comment was meant to reflect our wider approach to capital expenditures. Our capital spending is at a higher, more sustained level than it was a few years back as we pursue a quicker growth rate for the company and work to enhance our supply chain's resilience as well. So from that perspective, the figures align well with the strategic goals we previously discussed. Now, what was the other part of your question?

International M&A.

Oh yeah, in terms of the international M&A piece, we're through the overlap period, the biggest driver on that obviously was Pioneer to some degree, as well as some lower gross margin businesses. We really are through that as of the end of the second quarter, so that's not an impact in mixing our margins down any further, but we're past that as of the Q3 results.

We will take our next question from Nik Modi with RBC Capital Markets.

Yeah, thanks. Good morning, everyone. Ramon, I was hoping you can comment on just general strength in packaged beverage. I mean, I think all of us have been pretty surprised by the strength, especially with all the pricing in the marketplace. I was wondering, just from a consumer insight standpoint, what do you think is driving that despite the mobility improvements we're seeing?

The category isn't very healthy globally, including in the U.S., Western Europe, and developing markets. However, our away-from-home business is improving and is currently at 90% of 2019 levels in Q3, showing month-to-month growth, which is a positive sign. Our convenience store business is also performing well due to increased consumer mobility. Interestingly, at-home consumption remains high as consumers continue to use their homes as a hub for entertaining and other activities, resulting in higher consumption compared to 2019. We are in a favorable position with increased at-home consumption and a rise in on-the-go consumption while most channels in our food service business are gaining momentum. We expect these trends to persist, and it appears consumers have shifted some of their habits, which bodes well for the beverage category in the future. Snacks are also performing strongly globally, growing rapidly as consumer mobility increases. Overall, our two categories are expanding significantly faster than the broader food and beverage market, providing us with an advantage as we cater to consumer preferences.

Our next question comes from Robert Ottenstein with Evercore.

Thank you very much, and I apologize if this question has already been asked since my phone dropped for a few minutes. I'm wondering if you can provide any update regarding your shelf space in North America for beverages. Resets were delayed in 2020, and we've seen some this year, especially in the convenience store sector where you seemed to be focused on enhancing your position with energy drink offerings. Thank you.

Thank you for your question. I won't delve into too many specifics since that information is widely available, but I can say that we are gaining shelf space in convenience stores as it was a key focus for us. We have invested to increase our presence not only for our energy products but also to ensure that our innovations contribute positively to our overall company output. Regarding other variables like secondary displays and inventory levels, we have made the decision to reduce some inventory along the perimeter during the summer due to supply chain constraints on certain products. This was a temporary measure to ensure we could meet our customers' needs effectively. However, as our supply chain reliability improves, we will start to replenish that inventory. Overall, we see positive growth in our top line driven by the additional shelf space we are securing for both beverages and snacks across all channels. Our push model and direct store delivery systems are proving effective not just in execution but also in strategically utilizing our resources. We are working closely with our associates on the ground to create a positive feedback loop, making our approach a distinct advantage for our company.

We will take our next question from Steve Powers with Deutsche Bank.

Hey, thanks. Going back to the top-line, Ramon, as you look across the strength across your emerging market businesses, I wonder if there's anything you could speak to in terms of where that strength is coming from a channel perspective. Whether it's balanced, to whether you're seeing outside strength, perhaps some places where you may have not expected it when the year began. And I guess if that answer varies at all by key market, those insights would be helpful as well. Thanks.

Yeah. Steve, a couple of things, I would say, specifically to developing markets. We're seeing a higher mobility than we were expecting earlier in the year, so we've seen maybe we were a bit conservative as we were planning the year in terms of how COVID would impact some of the developing markets. Clearly, the consumers have found ways to increase their mobility and going back to their routines of work or of school or whatever, so that's helped us. The other thing we've seen positive, as I mentioned earlier, is that the elasticity to pricing has been better than we had initially in our models as well. We're seeing consumers staying with our brands better. I think that's a consequence of investments we've been putting in our brands. And the way we're executing our pricing decisions is much more informed by data and granularity and we're able to execute different strategies by channel, by brand in a very nuanced way. I think those two elements are reducing the elasticity impact on our business and making our international business I think more competitive and thriving in the majority of the market. Those two would be the elements, Steve, if I had to single out what's been differential versus our original estimations.

And Steve, just to add to Ramon’s answer with a few numbers. Overall, D&E markets were up 19%, so we saw good strong growth across D&E. And then some of the biggest markets for us, Brazil, Russia, India, China, and Mexico were all up either in the teens or 20%. Very broad-based growth across all of the big key D&E markets for us.

And we will take our next question from Kumar Katari with Credit Suisse. Your line is open.

Good morning, everyone. Could you please provide us with an update on SodaStream? You have held it for a significant amount of time, and you've been mentioning it more lately. It seems like the pandemic may have fundamentally changed the future of this business. Could you start by sharing how large it is currently, what the household penetration looks like, and any plans you might have for it? I think that would be helpful. Thank you.

Yes, we can discuss the specifics. The business continues to thrive as we invest in it, making it a vital strategic driver for our company's future growth. In terms of performance, we are gaining traction in our core markets, which include Central Europe, Northern Europe, Canada, and the U.S. In certain areas of the U.S., household penetration is on the rise, and we are seeing improved retention rates among these households. We are implementing several structural initiatives that we believe will further accelerate this growth. One significant initiative is the development of a direct-to-consumer model with SodaStream, which provides us valuable first-party data and facilitates a direct connection with consumers, allowing us to better understand their behaviors. This insight enables us to create new products and enhances the lifetime value of our customers. Additionally, we are integrating our brands into the SodaStream model, giving consumers the ability to enjoy sparkling water infused with their favorite flavors and brands, such as Bubly, Pepsi, Mountain Dew, and 7Up in our international markets. This approach is crucial for increasing the lifetime value of households and generating additional value. Furthermore, our strong commitments to altering the environmental footprint of our categories position SodaStream as a key element of our future consumption model.

We will take our next question from Sean King with UBS.

Great, thanks for the question. It's a question about energy drinks. I guess you mentioned in the 10-Q seeing double-digit volume growth. It's not necessarily what we're seeing in the Nielsen data. Is that how you're defining the category, or just channels that we're not capturing in the track channel data?

Yeah. Sean, I think it's the latter. It's more channels that you're not capturing in the Nielsen data. Obviously, energy is big in the unmeasured CNG channel. And given the DSD strength that we have, we're probably over-indexing those channels. So you're just not seeing the data relative to what we have.

All right. Thank you very much.

And our final question comes from Chris Carey with Wells Fargo.

Hi, thank you very much. I have a broader question that relates to a previous answer. Could you discuss how Pep Positive will influence this portfolio in the long term? While it's clear that Tropicana had its financial factors, there are other concepts like health and wellness that are quite important. There’s definitely a push to grow businesses that avoid single-use packaging, which contrasts with a significant part of your current operations. I assume this will drive innovation further towards health and wellness. My question is how Pep Positive will ultimately shape this portfolio in the long run, beyond just the clear financial aspects of some of your recent deals. Thank you.

There are a few layers to this. One aspect is focused on our portfolio of positive choices, which can be visualized in several ways. First, we want to enhance our existing products. For instance, think of Lay's continuing to deliver its great taste while having the lowest sodium levels and being cooked with high-quality oils. That reflects our commitment to providing the best-tasting products with improved nutritional quality. Additionally, we are exploring new consumption models. Offering Gatorade in powder or tablet forms is a more sustainable option for the environment and convenient for consumers. Consider SodaStream as an example of a sustainable consumption model, particularly in office settings, where we promote the use of refillable and reusable formats. We are also focused on innovation that benefits both consumers and the planet, such as integrating more legumes into our snacks. Legumes can be beneficial for agriculture while also enhancing nutrition, including varieties like chickpeas. Furthermore, our partnership with Beyond Meat aims to provide protein solutions that aren’t derived from animals, resulting in improved outcomes for consumers and the environment. We are adopting multiple strategies to evolve our portfolio, with strong emphasis on enhancing our current high-quality products, innovating consumption methods, and developing platforms that are better for consumers and the planet. That’s the direction we envision for our portfolio in the coming years. Thank you for your insightful questions, your engagement, and the trust you have placed in us through your investments. We hope you all stay safe and healthy and look forward to connecting again soon. Thank you.

This does conclude today's PepsiCo Quarter 3, 2021 Earnings Conference Call. You may disconnect at any time and have a wonderful day.