Good morning, and welcome to PepsiCo's 2022 First Quarter Earnings Question-and-Answer Session. Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Ravi Pamnani, Senior Vice President of Investor Relations. Mr. Pamnani, you may begin.

Thank you, operator. I hope everyone has had a chance this morning to review our press release and prepared remarks, both of which are available on our website. Before we begin, please take note of our cautionary statement. We may make forward-looking statements on today's call, including about our business plans and 2022 guidance. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, April 26, 2022, and we are under no obligation to update. When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results. Please refer to our first quarter 2022 earnings release and first quarter 2022 Form 10-Q available on pepsico.com for definitions and reconciliations of non-GAAP measures and additional information regarding our results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements. Joining me today are PepsiCo's Chairman and CEO, Ramon Laguarta; and PepsiCo's Vice Chairman and CFO, Hugh Johnston. And with that, I will turn it over to the operator for the first question.

Our first question comes from Bryan Spillane with Bank of America.

I wanted to ask about margins. And I guess on the last earnings call, I think the expectation was that margins would be intact. And I guess now with today's guidance, it implies maybe a step back in margins. So maybe, Hugh, could you talk a little bit about maybe how that's changed, where we stand now in terms of net inflation as we exit the first quarter? And then what are some of the actions that you're taking, maybe besides pricing, to try to protect margins?

Yes, Bryan. A couple of things. One, inflation has clearly gotten a bit more challenging for the year. No question about that. We had previously indicated it was low teens. It's several points higher than that now. Number two, and we've always talked about this in the past, when we have inflation, the first thing we do is look internally to try to find opportunities to drive productivity. And we've been pretty good at driving productivity, but we're really stepping it up even a bit further this year, whether it's identifying areas of waste or whether it's looking to leverage digital in a faster and more effective way or whether it's looking to leverage shared services more and more. We're obviously doing all of those things. After that, then we obviously look for revenue management opportunities, whether it's the way that we're merchandising product in-store or packaging mix or shallowing our promotions. And then obviously, price ultimately becomes a factor as well. So in terms of the overall impact, I mentioned that I thought margins would be pretty level on the last call. I think, by and large, that's going to be about the same as we go forward. So clearly, we'll decide what we need to do in the balance of the year in terms of further revenue management actions. Typically, we do that in Q4. But by and large, I think the margins will be relatively level year-over-year.

Our next question comes from Dara Mohsenian with Morgan Stanley.

So on that topic, maybe we can touch specifically a bit more on pricing. Obviously, very strong delivery in the quarter. Can you talk about consumer demand elasticity so far and what you're seeing? But more importantly, with the cost pressures we're seeing out there, can you talk about strategically how you think about pricing going forward? Is there room to take additional increases, if needed? And how you think about that in light of potential consumer sensitivity with inflation being at unprecedented levels?

Dara, I'll start, and then Hugh can contribute. Looking at Q4 and Q1, the elasticities we're seeing are better than our historical figures and our expectations, which is why we're increasing our guidance for the year. This applies to both developed and developing markets. We had concerns about developing markets, but the data from Latin America, Africa, the Middle East, and Asia-Pacific indicates positive elasticities. Nonetheless, we believe the consumer is still in the early stages of adapting to the new inflationary environment. We anticipate changes in consumer behavior as they adjust to these new realities, including shifts in channel and packaging choices, and potential reductions in certain activities such as going out and traveling. We think we are just beginning this process. Our categories typically perform well under inflationary conditions, and our confidence stems from our significant recent investments in our brands and new capabilities in revenue management and waste reduction. Additionally, we have enhanced our in-store execution through better information and tools. We feel it’s early in the journey, but we are confident in our ability to navigate this with a strong focus on balancing revenue management and comprehensive cost management. Our primary goal is to maintain consumer loyalty to our brands, and ideally, attract new consumers during this period. Regarding the long term, we have seasoned leaders in the market, and we recognize that this is a market-by-market challenge. This puts us in a good position compared to competitors dealing with similar inflationary pressures.

Yes. The only thing I'd add to that, Dara, is if you look over time, our categories have always performed pretty well during inflationary times. As a result of that, I think as a company, our performance has been pretty inflation-resistant as well as recession-resistant, which obviously makes us a pretty good defensive stock.

Our next question comes from Lauren Lieberman with Barclays.

Was curious if you could talk a little bit about impacts from Russia-Ukraine that are embedded in the outlook. Of course, we saw the impairment charges on brands that you talked about before the conflict began and then also the charges on PP&E and so on. But I was curious about how Russia-Ukraine is impacting the revenue outlook and also the EPS outlook for the year in terms of operational elements.

Yes, Lauren. Russia, as I think we've shared in the past, is low single digits in terms of its overall size to us. Obviously, it's a bit of a drag in terms of our overall outlook. But elsewhere in the company, we're doing quite well. So I think we have a pretty conservative Russia outlook embedded in our guidance, which I think will put us in good stead for most of the outcomes that could occur as we go forward.

Yes. Regarding Ukraine, we had to halt our manufacturing operations there. We are still making some sales, which is also affecting our performance. This situation is integrated into our guidance for the year. We have now reopened our factory in Kyiv, and we hope to resume operations in Ukraine as the safety situation permits. This is also reflected in our guidance.

Our next question comes from Bonnie Herzog with Goldman Sachs.

I just wanted to get a quick clarification on your top line guide based on your comments. So are you now expecting a greater impact from volume growth this year? As you mentioned, you're maybe feeling better about elasticities going forward. And then I'd be curious to hear specifically how your immediate consumption business is performing in key regions for both your beverage and snack business. I'm asking in light of rising fuel prices. For instance, I'm curious to hear if you guys are seeing any signs of pressure in this channel despite broad reopening in so many markets. And then looking forward, what strategy do you have in place to mitigate some of these pressures if they continue to intensify?

Sure. So Bonnie, why don't I start? Number one, obviously, the revenue guidance is up. That's a combination of a bit more volume and a bit more price, so balanced between the two in terms of the change from prior. Previously, we had indicated we don't expect much volume growth. So I think, obviously, that takes us to we expect a little bit of volume growth as the year progresses. In terms of immediate consumption channels, relatively small impact thus far. Obviously, we'll see how it plays out. Historically, it has impacted the beverage business a bit more than it's impacted the snack food business. I think that's because beverage incidence is just higher than snack food incidence. But so far, relatively muted impact on that, and the other channels are doing quite well. Take-home is still up big gross and foodservices are growing at a nice healthy clip at this point.

Yes. If you think about immediate consumption, the away-from-home channel is growing very fast across the world. And also, in the U.S., it's recovering. So that is a positive to immediate consumption. There's a little bit of traffic decline in convenience stores but not meaningful at this point. And obviously, there, the strategy will be to gain space and gain share in that channel to compensate for whatever traffic dilution might be, also trying to be conscious of price points and entry points to the category in those channels. Internationally, we're not seeing mobility being impacted. And we're seeing immediate consumption very strong internationally as well. As I was saying earlier, we're seeing elasticity quite positive in emerging markets. So overall, I don't think that this is going to impact us in the coming period.

Our next question comes from Andrea Teixeira with JPMorgan.

I was just trying to check something in between the lines marketing, and I know you had SG&A was up last year, or actually, you're lapping $180 million in equity investment gain from the same period last 2 years. But just thinking, as you're mentioning, elasticities come in better. Obviously, that may change. But what are you embedding through the end of the year in terms of marketing from a dollar and rate perspective? And then for the places where you count on bottlers, was there any impact of stocking this quarter or ahead of price increases?

Yes, Andrea. Aiming and hoping we're up roughly in line with revenue for the year. So that's where that will likely land. Yes.

Yes. And then your question, Andrea, on the bottlers, no, there hasn't been any loading of bottlers for price increase. We don't follow these practices, neither with our retail partners. So whatever you see as sales is basically sell-in and sell-out that we've had for the business.

Our next question comes from Laurent Grandet with Guggenheim.

Ramon and Hugh, question on PBNA margin. I mean been progressing about 100 basis points in the quarter, almost back to the level of pre-COVID for the first quarter despite higher inflation. Could you please help share the impact of the high-cost inflation for PBNA specifically in the quarter? And also, could you give us maybe more color as to where the gains are coming from maybe dissecting between Tropicana divestiture, product mix? And where do we go from here?

Yes. Thanks, Laurent. A couple of things, obviously, on that front. Number one, we continue to make progress in terms of cost management inside the business. And I've laid out for you all in the past sort of our pathway to mid-teens margins for the PBNA business. That thesis is still very much intact, and that's the plan we're executing against. Obviously, inflation has put a bit more pressure on that. But the combination of the additional cost management actions that we've taken, as well as, obviously, shallowing our promotions, and price increases and revenue management have allowed us to continue on that journey. We still very much expect to do exactly what we've said in the past, which is we'll progress along towards getting that business back to the margin levels that I mentioned earlier, something in the mid-teens over the course of the next several years. So I think we're making good progress, and it's going as we expected. Inflation, obviously, is higher than we expected, but we're taking actions to manage that.

Yes. The key levers, Laurent, of that margin improvement stay intact, right? If you think about the portfolio pivots that we're trying to do, those are really good work in progress. If you see the Gatorade performance, that's a high-margin business for us, clearly growing at a very fast pace. We're making good progress in energy. So that part of the transformation is good. We're also making good progress on efficiency and operating excellence. So the critical levers of that transformation continue intact. Clearly, inflation is a factor. But as Hugh was saying, we're doubling down on productivity and trying to sharpen the pencil a bit more on revenue management as well.

Our next question comes from Vivien Azer with Cowen.

I was hoping to dive into your European EBIT margins. While I recognize that 1Q is a seasonally low quarter, Hugh, I was wondering if you could offer any incremental color on the margin compression that you saw in that segment this quarter.

Sure, happy to. A couple of things. Number one, and you hit on the key point. It's a very small quarter for Europe. It's a very short quarter, and it's seasonally low in terms of the revenue as well. In terms of some of the factors in there, obviously, Eastern Europe sort of plays something of a role in terms of that number. Second one, we made a U.K. pension contribution, I think, of about $25 million. That's a relatively small number in the overall year. But in a 2-month quarter, it obviously has a disproportionate impact. And then in addition to that, the SodaStream business was a little bit soft. That was a bit of a factor. Recall we report SodaStream through Europe because that's the biggest market for the SodaStream business.

Our next question comes from Kaumil Gajrawala with Crédit Suisse.

If I could dig into the guidance increase a little bit, better volume and price this quarter, of course. Are your expectations of volume price dynamic as we go through the rest of the year? Or is it you just kind of push just including the volume upside for this quarter as part of your full year?

Kaumil, there was a lot of echo there. And if I understand, your question was around our volume pricing guidance. We've raised the guidance on top line because we've seen better elasticities in the first part of the year. Our assumptions for the balance of the year are a bit more conservative on elasticities because, as I said earlier, within the context for the consumer might change, might not change. We're going to obviously try to do our best with our commercial plans and our people on the ground, with execution and better insights to minimize elasticities. Obviously, that's our role here. But our assumptions going forward are a little bit more conservative because we think that the consumer will be feeling the overall inflation in their disposable income, and that might have an impact on the elasticities of our categories as well, although we think that our categories normally fare quite well in inflationary and recessionary moments. And that's why we feel optimistic about raising the guidance to 8% on top of a very high, fast growth 9.5% last year. So clearly, we're growing very fast as a company.

Our next question comes from Kevin Grundy with Jefferies.

Great. I had a question on pricing as well, but from a different angle, really from a retailer's perspective. So the context, of course, your portfolio is in very large, essential and high-velocity categories that drive foot traffic for retailers. But looking at results in the syndicated data, your price/mix is up anywhere from low double digits to mid-teens in your larger categories. I know that's not all frontline pricing. Some of it's mix, but nevertheless, certainly not inconsequential for the consumer to cope with. So my question is, have the pricing discussions started to become more difficult with retailers, particularly your large customers to a point where maybe we're closer to a tipping point where it's going to be more difficult to put the pricing through? Or is the pricing window still very much open in your view? So your thoughts there would be helpful.

Yes. Listen, we always make full commercial plan discussions with our customers, and we try to create value for both. Those joint business planning discussions are the essence of our growth strategy. So we do that in full coordination with our partners, trying to ensure that we keep the consumer with us, we keep the shopper coming to the store, and it's a win-win proposition. So we'll do it. We've been doing it the same this year, of course, even with more intensity than in the past and more insights and more value discussions. And we plan to continue to do that as we go into the second half of the year and into the coming years. Obviously, we're all concerned about elasticities and consumer reaction. So it is in both of our interests to take this into consideration as we build the commercial plan. There are some geographies in the world where these discussions are a bit more tactical. I would say in some of the European markets, there is a bit more friction when it comes to pricing. And actually, some of our net revenue in Q1 reflects some of these conversations and difficult realities. I would say, in the majority of the markets, these are done in collaboration with our customers and with very good value creation and win-win discussions.

Our next question comes from Bob Ottenstein with Evercore.

Great. I was wondering if you could please remind us what your exposure is to China, what you're seeing there now and your long-term plans.

Sure. Robert, it's Hugh. We're seeing low single-digit growth in revenue and very low single-digit growth in volume. Regarding our plans, we continue to execute effectively in the marketplace. In the snack business, we have a successful relationship with a bottler in China. Despite a challenging environment, we will keep working to operate well. So, it's low single digits and very low singles on the figures.

Yes. I would say, obviously, we're seeing the impact of the lockdowns in Shanghai and some other cities impacting consumer behavior. In general, I would say the in-home consumption is going up. There's been some stocking of our food business in the last few weeks. A little bit of lower mobility in the away-from-home channel, which impacted mostly the beverage business. Overall, this is performing as planned. And obviously, we're doing business contingency planning to ensure that we're ready in case some of the lockdowns impact our operating plans. But in general, I would say, the team is responding very well. And so far, we haven't seen an impact in our business, which, as Hugh said, is relatively small compared to the full size of the company.

And just to build on Ramon's point, I should have mentioned as well, our guide doesn't include a level of conservatism and an expectation that performance will be somewhat challenged based on the situation there.

Our next question comes from Steve Powers with Deutsche Bank.

Ramon and Hugh, just a quick follow-up for me, actually, going back to Laurent's question on Russia-Ukraine. Hugh, you mentioned the contribution there at low single digits, which I think is a profit perspective. On revenue, I thought it was more like mid-single digits, I think, around 4.5% last year. So I guess in that context, just can you talk about how Russia-Ukraine factors into that 8% organic outlook because intuition would say that the business reductions there create a drag on organic growth that you're absorbing in that 8%? But then again, there's just likely so much nominal inflation in those markets. I'm not exactly sure how or whether Russia-Ukraine net out as a positive or a negative driver of organic growth as you've calculated it into what magnitude. So just some clarity there would be helpful.

Sure, I'm happy to. You're correct. Last year, Russia accounted for about 4%. Given the current situation, we anticipate it to be lower than that. That's my comment about low single digits. It's also reflected in our guidance. We do not expect significant growth this year due to various challenges and our strategic decisions. This is factored into our overall 8% outlook. To reiterate, we are not delving into excessive detail, but it's clear that the business will be substantially lower than in 2021.

Our next question comes from Nik Modi with RBC Capital Markets.

This is Filippo Falorni on for Nick. A question on your beverage alcohol strategy. Maybe if you can comment on how the HARD MTN DEW launch is performing in the States, where you've launched a product. And then more longer-term and bigger picture, like give us an update on kind of your expectations for the beverage alcohol category and any potential new launches or initiatives there?

Yes. This is Ramon. Yes, listen, I think we're testing and learning at a fast speed, right, both Boston Beer Company is learning how to market and improve the products in their responsibility in the partnership. And we're also learning about how to distribute and sell low-alcohol beverages, which obviously have a lot of restrictions at the state and even municipal level. We're having to train our people in the right way and so on. So there's a lot of test and learning, very encouraging learnings actually as we see in the consumers. Obviously, Mountain Dew is a big brand, and it's generating a lot of excitement. There's a lot of initial trial. As always, in these circumstances, we have to wait and see repeats and see really where the business stabilizes. But I would say, good learnings for the organization. It's still very early in the process of building the infrastructure and the talent base and pretty good response from the consumer. Yes, we're going to continue to try to create new exciting products that will go through this platform in the future. And as we learn more about the consumer, together with our partners, we'll be able to, I think, innovate meaningfully in this category. But as I said, too early yet to call it a huge success.

Our next question comes from Brett Cooper with Consumer Edge Research.

I was just hoping you could update us on where you are on digitizing your relationship with customers and consumers, aspirations on both levels? And then I guess if I can nest underneath the consumer, if there's any challenges you guys have in going direct, given the independent bottling contracts?

Yes, Brett, this journey began several years ago, focusing on both consumers and customers. We have made varying levels of progress in different regions, with the U.S. and Western Europe being more advanced in terms of consumer interaction. We are improving how we target our messaging in a more detailed manner and have made significant strides in enhancing the efficiency of our media through better targeting. This progress is also evident with retailers, where we have fully digitalized platforms that enable them to purchase directly from us. For smaller, fragmented customers worldwide, this platform enhances both service and productivity by allowing us to target retailers more effectively. Overall, we are making good progress, as this initiative is strategically crucial to our goal of generating additional growth through personalization and consumer targeting. This journey involves innovation, the introduction of new digital tools, and better training for our marketers and leaders in the marketplace. While we are somewhat behind in emerging markets, we are making investments as part of our broader digitalization efforts that we have been discussing for several years.

Our last question comes from Chris Carey with Wells Fargo Securities.

So just two connected questions on cost and productivity, if I could. So you noted the prior outlook was for commodities to be low teens. I believe that's impacted COGS, and the company is now tracking higher by a couple of points. I guess that would imply things get worse from here. Can you just maybe help us with perspective on the ability you have in commodity expectations? I understand you're locked specifically for the next few quarters. But spot exposure increases in Q4, and how you're thinking about incremental pricing in Q4? And then just connected, Ramon, I think you noted a couple of times on the call that you're doubling down on productivity. Would you expect to be in a position to exceed the $1 billion in productivity savings target for the year? Or is this just more conceptual?

Yes, Chris. Yes, your math is right. We said low teens before, and it will be several points higher than that. In terms of what that means for Q4, when we typically see pricing in the business, we're still in the process of figuring out how much that will be. That's sort of our normal pricing window in the U.S., in particular. Obviously, other markets have different windows. So we'll see what that looks like when we get a little bit closer to the time. In terms of your second question around productivity, yes, we've historically said $1 billion. And yes, we'll be several hundred million dollars higher than that this year based on the actions that we've needed to take to try to help manage a challenging inflationary environment but one that we have pretty well under control.

Okay. So thank you, everybody, for joining us today and for the confidence you've placed in us with your investments, and we hope that you all stay safe and healthy. Thank you very much for your time. Thanks.

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