Good morning, and welcome to PepsiCo's 2023 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 updated 2023 guidance. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, April 25, 2023, 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 2023 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.

Our first question comes from Dara Mohsenian with Morgan Stanley.

So very impressive price mix result in the quarter at 16%. Can you just give us an update on the competitive environment you're seeing in your key business segments and geographies, both in terms of just price increases but also promotion and if that's picking back up to more normalized levels? And if that favorable environment is continuing. And just as you look going forward, obviously, very strong levels of pricing, how do you think about that back to more normalized levels going forward in the next few quarters and the ability of volume to recover as that pricing dissipates on a year-over-year basis?

Yes. Thank you, Dara. Let me cover that and then Hugh can add some comments. We're seeing a competitive environment. We're all trying to protect the health of the categories and ensure that our brands are participating in those categories in a competitive way. We are investing in our innovation, investing in our brands, and investing obviously in value in different ways, including pricing and sizing. So we're seeing a positive competitive environment in the U.S., Europe, and also consistently across our developing markets around the world. When it comes to pricing, as we said earlier in February, we have taken most of the pricing that we needed this year to cover our cost increases. That is where we stand at this point. We're seeing a deceleration of inflation, not a reduction of cost, but a deceleration of inflation. We believe that with the pricing we've taken already in most of our business globally, that should be sufficient. Obviously, there are some highly inflationary markets where we might need to take additional pricing, such as Argentina, Turkey, and Egypt, where the currencies are suffering, but the majority of our pricing is already done.

Yes. And the only thing I'd add to that, Dara, as a reminder, we tend to buy commodities 9 to 12 months out. So to the degree that the rate of inflation decreases – and it will be a decrease in the rate of inflation, not deflation by any stretch of the imagination – that's going to happen very slowly over the course of 2023. I think that's more of a 2024 issue if it happens at all.

Our next question comes from Andrea Teixeira with JPMorgan.

I wanted to go back to a little bit of what you spoke in the prepared remarks and also something you mentioned in an earlier interview, Hugh, that you're not seeing the fact that inflation is still high over the next 6 to 9 months. Additionally, it doesn't appear that you're seeing the need for a promotional environment, but more in the context of what has happened in LatAm. I think it's the only region where you haven't seen a reacceleration, while in other regions, you've seen an acceleration. I see this question more as a point of strength rather than a point of weakness. Of course, it's hard not to like the numbers here, but I'm thinking about how to interpret the volume decline you saw in snacks and how to parse it out in relation to tougher comparisons.

Yes, Andrea. A couple of things. Just for clarity, in terms of snack food or community food volume, Pioneer was a big driver of that. There are challenges with the power grid down in South Africa. Obviously, Pioneer produces a lot of heavy products. Excluding Pioneer, snacks volume was basically flat for the quarter and beverages saw a small increase for the quarter. Regarding the rate of growth of all businesses from a revenue standpoint, consumers continue to buy our products, and elasticities are holding up quite well across most of the globe. Despite taking pricing due to the inflation we face, the operating performance reflects the productivity initiatives we've implemented, such as automation in the supply chain and digitalization across the company. We're leveraging global business services. So when we talk about an acceleration in operating income performance, it’s more about the consumer responding to the brand advertising we're doing, along with the productivity we're driving.

Our next question comes from Kevin Grundy with Jefferies.

Great. Just picking up on some of your prior commentary regarding the decision to raise the EPS guidance at this juncture of the year, which I think is noteworthy. Historically, the company's delivery against guidance has been strong, but typically the approach has been to maintain it before edging higher as the year progresses. Was Q1 that good relative to your expectations? It seems particularly noteworthy given the discussions around potential recession and market volatility. Could you provide some historical context around it relative to the first quarter results?

Yes, Kevin. I believe your assessment is accurate. We're seeing better elasticities than some of the worst-case scenarios we were planning for and seeing the teams deliver better productivity. We're observing improvement in the flow of materials, labor availability, and transportation – all of which are improving operationally faster than we anticipated. This leads us to enhance some of our operational metrics sooner than we initially thought. So it's a combination of improved productivity and better elasticity. The commercial programs are performing well. We've increased advertising and marketing again in the first quarter, and our commercial and innovation plans are robust. We feel confident that, even at this early point in the year, we can raise both our top line and bottom line estimates.

Our next question comes from Bonnie Herzog with Goldman Sachs.

I had a question on organic revenue growth at PBNA. Your price mix in the quarter was incredibly impressive, but your volumes were down slightly again. Could you elaborate on where you're primarily seeing pressure? Additionally, what are you observing from the consumer? It seems that incremental pricing may be a bit harder to achieve and promotional levels may need to increase in beverages this year. Can you address that as well as your key initiatives to stabilize or reverse your volume trends at PBNA? Is your Pepsi rebranding or the new logo and visual identity one of those key initiatives?

Thank you, Bonnie. We see momentum in the beverage category, very strong in terms of demand. We're experiencing strong performance in away-from-home and convenience channels, while most in-home channels are performing well. We do not perceive a worsening competitive environment in beverages. There were some one-off issues in the first quarter because, as you know, we are transitioning Gatorade from a warehouse system to a DSD system, resulting in some inventory reductions impacting Q1. Nevertheless, we do not believe that the competitive environment in U.S. beverages is worsening, and we do not see the need for any special actions. We have a strong commercial program, encompassing innovation, brands, execution, and customer programs, which will be our strategy to continue competing vigorously in the market.

Our next question comes from Lauren Lieberman with Barclays.

You've already been asked about raising the guidance early in the year, and it would be mechanically hard not to, given how strong the quarter was. Your prior outlook included what seemed like one of the more conservative assumptions regarding the macro environment for at least the second half of the year across our coverage. Are you seeing anything more recently that has made you more optimistic about the macro trajectory? Anything regarding the broader market outlook or consumer outlook that is influencing your ability to raise guidance? Or is it mostly tied to the momentum in your own business?

Yes, Lauren, it's mostly related to the fact that as one third of the year has passed, we have better information regarding our costs and the overall operational complexity. That said, there are still a few concerns. One is where the consumer will be in the second half of the year. We continue to have multiple scenarios – some more optimistic than others. Another concern is geopolitical factors that might impact the business, and we want to be cautious about that as well. Lastly, some currencies in emerging and developing markets pose uncertainties for the second half of the year. We also want to ensure we have appropriate financial scenarios surrounding these options. So, those are the three variables that could define the future of the business. Operationally, however, the business is significantly better off. We're experiencing improved labor availability and better flows of materials, and transportation is getting better too. Overall, operationally, the business is in a better state than it was in 2022.

Next question comes from Bryan Spillane with Bank of America.

Hugh, I wanted to ask about the accounts payable. It appears there was a significant year-over-year shift. I understand there's a sequential or seasonal component to it, but I believe it’s up more than $1 billion versus the first quarter last year. Is this tied to the Gatorade DSD distribution change, or is there something else impacting accounts payable that is driving such a meaningful change?

Yes, Bryan, it's really two factors. One is the seasonal inventory build due to the Gatorade adjustment you mentioned. The second factor is that we have numerous significant capital projects underway, and the timing of the payables related to capital equipment contributed to that number. Thus, I would consider it a one-off situation, not an indication of a trend.

Our next question comes from Chris Carey with Wells Fargo.

Could you touch on how investment and priorities will evolve in 2023? I think a key takeaway from 2022 was the impact of distribution costs between shipping, handling, and merchandising activity as a key contributor to SG&A inflation. Given the double-digit increases alongside added marketing spending to kick off Q1, can you frame how overall investment will evolve throughout the year, especially in the context of easing inflation and certain SG&A areas while increasing spending in others?

Yes, Chris. The framework of our investment priorities remains consistent with what we've communicated before. Our #1 priority is to ensure that our categories maintain high visibility in consumers' minds, especially in a complex consumer choices landscape. Our brands must perform well in those categories. Second, we will continue to invest in the transformation of the business, including digitalization and productivity, which are integral to our strategies. We've been investing in this area for quite some time, and it continues to facilitate our data strategy. These are the main projects, while we also aim to invest in capacity. There is good volume growth across many markets and this will remain a priority for enabling brand growth.

No, I think that's the only thing – and I believe your perspective aligns with Chris's question. Chris, more of the financial impact of those investments will be evident in SG&A versus a significant increase in the selling cost of goods. So, when modeling this out, SG&A is where you will see the impact of all the items that Ramon referenced.

Our next question comes from Peter Grom with UBS.

I hope to gain more insight on the international performance in the quarter, specifically in China. I know it was mentioned in the prepared remarks as a market where you gained share, but I don't believe it was discussed during the growth analysis. Can you share your perspective on the current environment in China, how it evolved through the quarter, and how you foresee its progression from here?

Yes, we're observing optimism among consumers and customers in China, which is driving volume for us across both our food and beverage sectors. We are gaining organic share, especially in snacks, which has performed well throughout the pandemic and continues to outpace category growth. In beverages, we're also competing strongly in Colas and sports hydration, providing a tailwind for us as the year proceeds for both away from home and in-home consumption.

Our next question comes from Robert Ottenstein with Evercore ISI.

Given the strong start to the year and your confidence in the outlook, I'd like to ask a longer-term question. As you examine the categories you are in, historically, you've broadened your reach in certain countries beyond beverages and snacks for reasons of scale, growth opportunities, or sometimes as part of acquisitions. Over the next 5 years, do you believe you are in the right categories to drive your performance, or do you see a desire to expand into adjacent areas? Given your advancements in IT and logistics, perhaps this presents a greater opportunity than in the past?

That's a great question. We believe our categories are large and experiencing swift growth, roughly 5% globally. Our primary responsibility is to drive innovation and keep our portfolio relevant to consumers, ensuring our brands remain prominent in their minds. We are making small expansions into adjacent areas, such as venturing into low-alcohol beverages in the U.S. and extending the Cheetos brand into Mac and Cheese. We believe our core categories are robust, global, healthy, and they represent our responsibility to provide consumers with healthy and rapidly growing options.

Our next question comes from Vivien Azer with Cowen.

I wanted to inquire about Pepsi Zero Sugar in light of the reformulation and its broad international distribution. Can you provide perspective on its performance relative to expectations? Additionally, could you update us on how the organization is tracking towards your 2025 ESG target to drive 60-70% of volumes from lower added sugar beverages?

Great question, and it’s essential to our strategy to continue driving low-sugar and non-sugar products for portfolio transformation. The relaunch of Pepsi with the new formula has received positive feedback from consumers, based on early data regarding repeat purchases and preferences. The brand experienced around 60% growth, driven mostly by volume velocity, even with some distribution impacts. On a global level, we are also witnessing significant growth in the non-sugar segment, 2 to 3 times the average rates in most markets. We find that this strategy is resonating well and keeping the category relevant for consumers, and we'll continue to invest in non-sugar offerings to spur growth.

Our next question comes from Gerald Pascarelli with Wedbush.

In U.S. measured channels for salty snacks, we've recently seen private label products gaining share in the overall category for the past few months. This trend has coincided with strong performance and market share gains for Frito as well, which is great. However, I was curious if you've seen any recent changes regarding broad consumer purchase patterns in this category compared to a few months ago. Any insights you can provide would be helpful.

In general, we observe private label growth in specific categories where we compete, particularly waters and juices, as well as in salty snacks. However, Frito-Lay is growing at one of the fastest paces we've seen in the last decade, largely due to the exceptional work the team is doing in execution, innovation, and brand building. While private label is gradually increasing from a low base in salty snacks, we are also seeing our brands maintain loyalty, grow their consumer base, and remain preferred within that segment.

Our next question comes from Brett Cooper with Consumer Edge.

With about a year of Hard Mountain Dew behind us, I was hoping you could provide some insights into the brand's performance and operations to date. Any key learnings? Also, how are you planning to proceed from here?

Yes. We're pleased with the insights gained both in the operations of this new category and in how we create consumer demand and loyalty. We just launched a hard tea variant with Lipton and FIFCO Company, and we’re set to distribute it through our system in the coming weeks. As we head into the summer, we will offer two main products: Hard Mountain Dew and Hard Lipton. Our goal is not to build a large and complex portfolio but to concentrate on a few strong brands developed with strategic partners, utilizing our distribution capabilities to serve consumers nationwide. We're approaching this methodically, ensuring solid foundations and appropriate margins.

Our next question comes from Filippo Falorni with Citi.

I have a question regarding the Pepsi Beverage North America business. This year, you appear to be making significant investments, from the Pepsi logo change to launching Starry, along with other rollouts, including expanding Pepsi Zero Sugar and Hard Mountain Dew. Given this, what expectations do you have from a market share standpoint? What would you consider a success this year? Additionally, how do you balance these investments with your target of returning to a mid-teens margin for the business?

As we've stated previously, our aim is to achieve business growth at or above category pace while also expanding margins to the mid-teens over the next 2 to 3 years. This is our strategic intent. The team has been executing well. Our measure of share encompasses the full portfolio of brands, not just specific segments within the category. We believe we are making good progress towards this year’s growth target while also improving business margins. We feel positive about margin expansion this year.

Our last question comes from Charlie Higgs with Redburn.

Could you talk more about the Frito-Lay North America division and its volume growth? How did Lays, Doritos, and Cheetos perform? Can you provide any insights regarding single-serve packs versus multi-packs? Additionally, how do you see the strong margin growth in Q1 progressing throughout the year?

Yes, great. As I mentioned, Frito-Lay is performing exceedingly well in the U.S. and globally. The team is doing an outstanding job in growing the larger brands, such as Lays, Doritos, Ruffles, Tostitos, and Cheetos, while also developing peripheral brands that cater to market segments not addressed by the big brands, like PopCorners or SunChips. We are also innovating with new formats, recently launching multipacks that have been very well received in terms of variety and personalization opportunities for consumers. We launched Minis a few months ago as another innovation, enhancing convenience for consumers and allowing us to introduce our top brands in that format, creating new occasions for the business. We're optimistic about our innovation strategy and the way we're capturing new opportunities for our brands. The operational metrics are improving as the supply chain becomes more efficient, and we are witnessing improvements in labor availability. While Q1 margins were somewhat elevated, the strategic aim is to grow Frito-Lay rapidly while maintaining high margins, which is beneficial for the overall PepsiCo business.

I really appreciate the conversation this morning, and thank you, everyone, for joining today, especially for the confidence that you're all placing in our company and the investments you're making. Thank you very much, and have a great day.

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