Good morning, and welcome to PepsiCo's 2022 Third 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 our updated 2022 guidance. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, October 12, 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 third quarter 2022 earnings release and our third 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. 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.

Our first question comes from Andrew Teixeira with JPMorgan. Your line is open.

Good morning and congrats on the results. I was hoping to get more clarity on both the price elasticity and the reinvestments you called out. We all appreciate that you're conservative, but it seems that you're embedding a 7% organic growth for the fourth quarter. And given the high single-digit pricing, are you expecting volumes to be negative in the range of 2% or 3% against the 1% negative that you got in the Q3? And then if I may, I can, I want to ask a cash flow question.

Yes. Andrea, it's Hugh. Obviously, we've seen elasticity continue to be strong and stronger than expected through three quarters of the year. So in terms of the math that you've done, the math is certainly accurate. And obviously, we are carefully watching what happens with the consumer. We obviously exited the third quarter with the consumer still very healthy in terms of our particular categories. I'm not sure that's true broadly with housing and other big ticket purchases. So, we'll see what elasticities look like in the fourth quarter, but I don't disagree with your math; what you said is accurate.

If I can squeeze the answer in, I apologize.

Yes, this is Ramon. With regards to investments, the philosophy we've been using in the last few years is to continue to balance the short term and long term. I think it's resulting in good performance. We continue to invest in our brands. We're investing a lot in digitalizing the company and some of the long-term sustainability bets that we're making as well. So, we continue with that, and next quarter will not be different than any of the other quarters in the year. So, you should assume that we're looking at reinvesting in the next quarter and entering '23 with strength on the commercial side and on the investment side.

Our next question comes from Lauren Lieberman with Barclays. Your line is open.

I was just struck again by the strength in the pricing, particularly everywhere, but particularly in Europe and how even though volumes are off, it's holding on really well. So just curious knowing how much of that business is skewed towards Western Europe and if you could talk a little bit about revenue management versus straight list pricing. What you can tell us just to put a little bit more context and color around how that magnitude of pricing is being realized? Thanks.

Yes. Europe, as you well say, has been impacted more than other parts of the world on the cost. And therefore, we've had to lean into revenue management, probably stronger than other regions in the business. The team has been investing in those capabilities for some time already. And it's been a combination of mix management and pure pricing across most of the geographies, East and West. We've had a good summer, which tends to drive more impulse sales and those channels have higher price per liter or price per kilo. So that is reflected in the pricing in Q3. And then also the teams have been courageous in some of the large banks and in home formats as well across what you call Western Europe. So a combination of visual pricing and some channel management. The truth is that our brands have the investment we've made in the brands in the last few years that are paying off in the sense that our brands are being stretched to higher price points and consumers are following us in Europe and in other parts of the world, as you saw with the volume to pricing realization in the U.S. or even other emerging markets.

Our next question comes from Dara Mohsenian with Morgan Stanley. Your line is open.

So I was just hoping to get a bit of perspective on the sustainability of the organic sales growth we're seeing as you look out longer term, obviously, the second straight year of double-digit organic sales growth, so very robust levels, but there is some COVID recovery in beverages. There's excess pricing with limited demand elasticity. So just looking for some long-term perspective on if you're incrementally positive to the mid-single-digit long-term trajectory after the last couple of years, and as you look at some of those key drivers of growth, which ones are more sustainable longer term? And then if I can slip the second part in, just a follow-up on Andrea's question. Have you seen anything in the business in September or October so far in Q4 that's different than generally the underlying momentum you saw in Q3, just given some worries about macros here, etc., and some short-term volatility? Thanks.

Yes, it's Hugh. Regarding our long-term revenue guidance, we aim for a growth rate of four to six. As Ramon and I have mentioned before, we are always striving to reach the upper end of that range more consistently. Currently, high pricing and low elasticity make it challenging to project future outcomes accurately. This is a long-term observation, and I won't provide specifics for 2023 on today's call, as is our usual approach. We'll discuss this in February. However, our goal remains to aggressively push for top-line growth. We believe this strategy is beneficial for the organization and creates more value than any other approach, but there is no change in our long-term guidance at this time. The current circumstances are quite unique, making it difficult to determine future projections.

Yes. I mean what I would say on top of what he was saying is that our categories seem to be growing faster than food and food is growing faster than non-food. I don't think that's going to change. We've seen that affordable treats and small moments of pleasure continue to be a key need state, I think, consumers today, and our categories play in that space. So that I think we should assume that, that will continue in spite of all the ups and downs, potentially economically around the world. The second element, I think it's fair to assume as well is that we are gaining share in many, many markets across our geographies, both in snacks and beverages. We should assume that given the investments we're making, the quality of brands and people that we have in a lot of the markets, we should assume that in the future, we will continue to gain share, at least that's our aspiration, and we try to continue to invest and get better every quarter in that respect. So when you compare to the average of food, you should assume we'll do better, and hopefully will do better than our categories. Those are the variables that we look at every month as we assess our performance. And as you are saying, our long-term 4% to 6%, I think it remains valid. Clearly, a 16% quarter is an outstanding quarter, with a lot of pricing, and we don't think that's a sustainable performance for the business. But obviously, we're aspiring to beat our long-term as many quarters as possible.

Our next question is Bonnie Herzog with Goldman Sachs. Your line is open.

Your top line growth in the quarter, as we've all been discussing, was very impressive, but it was fully driven by strong price realization. So I guess my question is on your market share. Could you give us a sense of how your share has been trending in both maybe your beverage and Frito-Lay businesses? And then I know a priority of yours is to improve your operating margins in PBNA, especially. So maybe give us a sense of how you're going to balance market share growth with profitability growth going forward?

Yes. Bonnie, I'll begin with a discussion on market share and then Hugh will elaborate on the margin strategy for PBNA. Regarding market share, we are maintaining consistent trends similar to last year and the beginning of this year, with gains in approximately 70% to 75% of our markets across food categories, including convenient foods and salty snacks. We're also experiencing about 70% growth in international beverage markets. Overall, we’re performing well in various regions, including emerging, developing, and developed markets across both categories. In the U.S., Frito-Lay is gaining market share, with Q3 showing significant strength that equates to nearly two points of share growth in the savory market, both in value and volume. Looking at the U.S. beverage sector, we maintained our share in the total ready-to-drink beverage category this quarter, with particularly strong performance in sports drinks. Our investments in the Gatorade brand over the past few years are generating positive results, and we’re pleased with the share gains achieved due to effective innovation and brand building. We are also increasing our share in teas and coffees, indicating robust performance across multiple categories, although we are experiencing a loss in share in carbonated soft drinks. Pepsi is performing well, and we're focusing on Mountain Dew to enhance its market share. Overall, our total ready-to-drink beverage share remained flat in the quarter, even while the category saw double-digit growth, which is a solid result for PBNA.

Right. And I'll build on that, Bonnie. One of our goals clearly is to both gain share and to grow margins. And frankly, that's something that I think we can do. I don't view it as an either/or; I view it as an and. We ought to be able to do both. Obviously, we try to price through inflation, and we always set that out as a goal. We were a little bit short of that in the quarter. Gross margins were down by about 20 basis points, as I'm sure you've noted. But then we also focus on the balance of the cost structure, making sure that we're as efficient as we can possibly be, and trying to eliminate waste wherever we can find it. We were successful on that in the third quarter as well. So, operating margins were up about 30 basis points. So our plan is to be able to do exactly that: gain share, ideally price through inflation. If we're a little bit short of that, we're going to continue to focus on driving the balance of the cost structure so that if the revenue growth does start to soften up a little bit, we'll still be in a position to deliver superior financial results. Regarding PBNA specifically and the margin goal that we've set out there of getting to mid-teens, that is still very much intact. That is absolutely the plan. So that's where we stand.

Our next question comes from Kevin Grundy with Jefferies. Your line is open.

Congratulations on the strong results. A question for Hugh on commodity inflation from here, and you may be a little bit concerned. I know you don't want to give forward guidance, but we're starting to see key inputs soften here: oil, resin, aluminum, among others, as you're well aware. Hoping to get your updated thoughts on your inflation outlook, anything you'd be willing to share with respect to hedge positions, preliminary outlook looking out to next year? And then your ability to continue to offset with pricing and cost and RGM tools. Is it fair to assume that kind of going forward, it will be a little bit more reliant on cost management, revenue growth management as opposed to pricing? Do you feel like you'd be maybe a little bit more constrained given the extent of the pricing that's been taken so far? So two-part question; any thoughts there would be helpful.

Yes. Happy to try, Kevin, although I think it might have been four parts, not two, but we'll go with it anyway. A couple of things: number one, commodity for this year, high teens is where we're going to land. That's not a change relative to what we've talked about in the past. In terms of hedge positions and forward buy, as we've discussed before, we tend to be out about six to nine months, and that's consistent with past practice. That's the way we're operating the commodity cycle. That clearly puts us somewhat into next year, but not anywhere near all the way through next year. As you've no doubt observed, some of the commodity inputs for us, although I'll remind you, our basket is pretty dispersed. There's not a single commodity that even accounts for 10% of the basket. But you've seen some softening in commodity prices that will play its way into our commodities going forward. And then regarding specific numbers for next year, I'm sure I won't surprise you by telling you we'll talk about that in February for a couple of reasons. The biggest of which is we'll have more line of sight to be able to give you a better number and frankly, to give you something that you really can model and rely on. At this point, I think it's just a little bit too early for that. And in addition, it just takes us to a place where, frankly, we just wind up doing a lot of partial analysis, which I don't think is productive for you or for the company. Regarding pricing, we increased prices at the beginning of the fourth quarter based on what we knew at that point. And going forward, with the investments that we've made in brands, I still think we're capable of taking whatever pricing we need.

Our next question comes from Stephen Powers with Deutsche Bank. Your line is open.

Ramon, I wanted to ask on Gatorade and Fast Twitch. First, I'd love some, just more detail around your expectations for that particular innovation in the role you see it playing in the Gatorade portfolio generally. But I guess, more broadly, I'm wondering how you're thinking about the intersection of sports nutrition and the energy drink categories on a broad basis? How far you think Gatorade may be able to expand into what we've traditionally thought of as the energy drink end market? And where that ranks in terms of the priorities for future Gatorade investment?

Thank you, Steve. That's an excellent question. We're investing considerable effort into exploring how far we can take Gatorade, a strong brand that resonates well with high-performance athletes and beyond. Over the past year and a half to two years, the innovations we've introduced under the Gatorade brand have been performing exceptionally well, particularly Zero, which has successfully attracted consumers who previously left the brand due to its sugar content, especially those who exercise regularly but not at elite levels. Additionally, our recent launches, Gatorlyte and GFit, are also performing well, adding more consumers and occasions for the brand. We're pleased with our core Gatorade offerings and these three new products. Regarding Fast Twitch, we are noticing a growing trend among athletes who are using caffeine and hydration during different stages of their activities, including before, during, and after their games. We believe Gatorade has a valuable role here by offering both hydration and an energy boost in a single product. Feedback from trainers and others working with athletes has been instrumental in developing this product. Fast Twitch has been designed with both athletes and trainers in mind, and we feel confident that Gatorade is well-positioned in the hydration and caffeine market for improved performance. As you know, we are launching it in partnership with the NFL and will fully roll it out early next year.

Our next question comes from Robert Ottenstein with Evercore ISI. Please go ahead.

Great. First question, just a follow-up on the pricing on Frito-Lay North America. If you could kind of give us a breakout between headline pricing, product mix, and channel. And then my real question is, you're introducing a lot of additional complexity into the portfolio with different flavors and package sizes. Can you just talk a little bit about how you're looking at that from a supply chain side? Thank you.

We are exploring various strategies to enhance our revenue per kilo while maintaining consumer engagement with our brands and increasing our market share. To achieve this, we plan to utilize several tactics, such as adjusting visual pricing, reducing promotions, promoting formats that yield higher revenue per liter or kilo, and focusing on channels where we can implement higher pricing due to differing consumer expectations. These strategies are integrated into our overall commercial program, which Frito-Lay employs, along with our beverage divisions in North America and international markets, whether emerging, developing, or developed. We are making significant investments in becoming more digital and insightful as a company, which is also relevant to our supply chain. We are improving our demand forecasting and its integration with supply, enabling us to manage greater complexity within our operations. While we are not perfect and still face challenges related to ingredient supply and transportation bottlenecks, we are effectively handling increased complexity across Frito-Lay and other global organizations. Additionally, we conduct quarterly portfolio optimization processes for each of our businesses to rationalize and eliminate unnecessary complexity regularly. While we aim to embrace complexity due to consumer demand for personalization and variety, we also implement strict measures to reduce unnecessary complexity and maintain cost efficiency in our operations.

Our next question comes from Kaumil Gajrawala with Credit Suisse. Your line is open.

Can we talk just a bit more about cash flow? And with the year coming in better than expected, is there excess cash on the balance sheet or any thoughts around that? And then maybe in the same context, just maybe an update on what the M&A environment looks like at the moment, given we're going through a kind of a difficult period? I wonder if assets are perhaps more interesting than they would have been before.

Yes, I'm happy to jump in on that well, Kaumil. In terms of cash flow, you're right. We are performing well this year on cash flow and obviously feel terrific about that. I wouldn't necessarily characterize it as excess cash. But certainly, we're coming from a relatively strong cash position. In addition to that, and you know our philosophy on how we manage the balance sheet well, we actually are very much fixed in terms of our debt rates, and our average maturity now, I think, is about 12 years at this point. So the refinancing elements of what we need to do are relatively small. Our towers going forward are about $2.5 billion to $3 billion a year going forward. So we've got a lot of flexibility in terms of managing rising interest rates. In terms of where that might take us in the future, again, we'll talk about that in '23. Regarding M&A, no real change in our capital allocation policies broadly. M&A has obviously played something of a role in our past. We're still largely focused on tuck-ins where, frankly, we can add value. But beyond that, it's really difficult to speculate on what might or might not happen, certainly not setting any indications at all, but we won't have anything on the horizon whatsoever. But we'll always be looking at things. We don't really pass in terms of taking a look at anything. But as you know, we rarely transact. So I don't expect any change at all in that regard.

Our next question comes from Chris Carey with Wells Fargo. Please go ahead.

Can you just comment on the stickiness of pricing across CPG? There's been a growing debate about whether some of these price increases would need to be dealt back with either list price reversal or accelerated promotion? I suppose a lot goes that it's such a typical commodity environment. And if the environment changes, they typically the other way during a recession or perhaps demand flows that price rollbacks are not entirely out of the question, even if they're not historically consistent practice. What are your thoughts on how the business might confront pricing versus promotion, especially in an environment of commodity deflation, especially if demand starts to slow?

Yes, listen, I think this is a difficult question to answer. The environment clearly is still very inflationary with a lot of supply chain challenges across the industry and everybody trying to have responsible behaviors to maximize the value of its brands. So our philosophy is the same. We continue to invest in advertising and marketing, make sure that we have very strong innovation and very strong commercial plans. That's where we put the focus of our organization. We're trying to be growth drivers to our customers. I mean if you look at the majority of our conversations with our customers, center around growth and how do we develop our categories, continue to bring consumers into the category, continue to bring new occasions into the category, and that's the role I think we play to our customers and how we create value for the company long term. So, we'll continue with that focus, trying to create brands that can stand for higher value to consumers, and consumers are willing to pay more for our brands. We'll continue with that philosophy. And we'll see where the cost environment goes in the coming years. Obviously, if anything that these last two years have taught us is that we want to become more agile and more nimble and more flexible, and that's what we're doing across the company.

Our last question comes from Peter Grom with UBS. Your line is open.

I hope you're doing well. So I wanted to ask about the Celsius distribution agreement. Maybe just to start, why was the structure of this partnership the right one for PepsiCo? And then I guess maybe any initial views on kind of how the transition to your distribution network is going? And maybe just last, if I can squeeze it in here, just bigger picture, I guess, like what have you learned from either your own brands? What happened with Bang that really gives you greater confidence in the success of this partnership looking ahead? Thanks.

Sure. Happy to talk past that, Peter. First, the transition is going very well. We're, at this point, over 80% integrated Celsius into the PepsiCo system, and we think it's off to a terrific start, and I think you'd probably hear the same thing from the folks down at Celsius. We're excited about the business. We think it got a nicely differentiated proposition, and we're proud and happy to have it on our trucks and think it's going to be a great business for us. In terms of the structure, frankly, we looked at it and said, look, we'd like to do a distribution agreement, but we knew we were going to create some additional value for the company, and we felt like we should participate in that value. And we set up a structure that enabled us to do that. It doesn't take us any further than what you see right now, and it puts us in a position where it's preferred. So, we'll either get paid based on the preferred or down the road at the relatively small position we have could convert at some point. So we felt like it was a good value-creating structure for PepsiCo. I wouldn't read anything more into it than that. And then more broadly, on the energy portfolio, our approach has been one of having a portfolio of brands. We like that approach because we think as the energy category starts to segment into different types of consumers and different types of need states. Having a portfolio approach will ultimately position us best to take advantage of that. Obviously, we're in a building position here, whether it's Rockstar or Mountain Dew Energy or what we're doing with Celsius or for that matter, even the Starbucks Coffee Energy business. But we now think we have three or four different ways to compete, to capture that consumer's business. So we like where we sit in that growth.

Yes, I agree with what was said. From a portfolio perspective, Celsius likely enhances our range of brands and growth strategies in this category. We are optimistic about this, as it targets a different consumer base compared to what Rockstar or Starbucks and Gatorade attract. This positions us well to engage a broader audience and draw more consumers into our brand. As mentioned, the collaboration is robust. We have also gained insights into building more effective partnerships, and I am confident that this collaboration will prove to be sustainable and beneficial for both companies. It is still early, as we just began on October 1st and currently cover 80% of the territories, but initial indications are very promising, and the partnership between our companies is solid. I believe the Q&A has concluded, so I want to thank everyone for joining us today and for the trust you have shown in us through your investments. We hope you all remain safe and healthy. Thank you very much.

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