Good morning and welcome to PepsiCo's 2024 First Quarter Earnings question-and-answer session. Your lines are being placed on listen-only until it's your turn to ask the question. Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Ravi Pamnani, Senior Vice President of Investor Relations. Mr. Pamnani, you may begin.

Thank you, operator and good morning everyone. I hope everyone has had a chance this morning to review our press release and prepared remarks, both of which are available on our website. Before we begin, please take note of our cautionary statement. We may make forward-looking statements on today's call, including about our business plans and 2024 guidance. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, April 23rd, 2024, and we are under no obligation to update them. When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results. Please refer to our first quarter 2024 earnings release and first quarter 2024 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 Executive Vice President and CFO, Jamie Caulfield. 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. Your line is open.

Hey guys, good morning.

Good morning, Dara.

So, really strong international profit results for the third quarter in a row here. Can you just take a step back, Ramon, and maybe give us some perspective on that international performance over the last few quarters? And, A, just looking forward, short-term, how confident are you in the sustainability of that in the balance of the year? But, B, also just long-term as you think about international development over the last few quarters give us some perspective looking out over the next few years, both from a top line perspective and then the margin flow through? Thanks.

Great. Thank you, Dara. And yes, we're very pleased with the performance of international businesses in Q1, but also in the last few quarters, as you mentioned. And this has been an area of investment for us now for a few years, both in snacks and in beverages and trying to build scaled businesses in most of the markets where the scale in terms of population and profitable growth. So, I feel very good about our ability to continue to outperform our categories in international and to keep our categories growing both food and beverages in the future. Our innovation is strong. Our ability to understand local rituals and local food and beverage occasions is better than ever. We are adapting our portfolio to that. Our ability to attract the best talent in the markets where we participate and build really capable teams is better than ever. We've been investing in capacity. We're right now, we're in the process of opening factories in Vietnam and in China and in India and in Mexico, and we just opened one in Poland. So we keep expanding our manufacturing and our go-to-market capabilities in those markets. So we feel good, and I think that it's going to continue to be a big source of growth for us. As we mentioned in CAGNY, our international business is already $36 billion and it's growing at a very high single-digit level and with very good profitability. So it is part of the future growth story for PepsiCo for sure.

Thank you. One moment for our next question. Our next question comes from Bonnie Herzog with Goldman Sachs. Your line is open.

Hi. Thank you. Good morning, everyone. I had a question on Frito-Lay operating margins, which were a little soft in the quarter. So hoping you could talk through some of the key puts and takes on your margins in the quarter and then moving forward? And then is it realistic to assume Frito-Lay's operating margins will expand in 2024? And I'm thinking about that in the context of commodity cost pressures easing a bit, or how do we think about your level of reinvestment as these cost savings maybe in an effort to drive faster top line growth? And then ultimately, curious to hear if Frito-Lay margins can ultimately return to the low 30% range? And if so, by when, how do we think about that? Thank you.

Hey, Bonnie, it's Jamie here. How are you? Yeah on Frito, when you look at the Q1 profit, the thing to keep in mind is last year, we're lapping 24% growth in the first quarter of last year. I think we had 180 basis points of margin improvement last year. And we don't want to push the P&L that hard. The growth last year, growth this year, part of that has to do with investment timing, the flow of productivity. But I think you'll see margin improvement over time at Frito, but this is a business that has very healthy margins already, and we want to make sure that we're investing back in the business to sustain growth.

Yeah, Bonnie. I think on top of what Jamie said, for the long term, the key goal for Frito in the U.S. is to continue to grow the salty, savory category at a very high rate and continue to get occasions from other parts of macro snacks into the savory and from meals into savory, and continue to gain share of that category as it has been doing and including Q1. So that's the ultimate goal. Because that, if you think about the high margin that we have in that business and the impact it would have on the overall PepsiCo margins, that's the role that Frito-Lay has in the portfolio.

Thank you. One moment for our next question. Our next question comes from Bryan Spillane with BofA. Your line is open.

Thanks, operator. Good morning, everyone. Ramon, I have a question regarding PBNA, particularly concerning Gatorade and Mountain Dew. The volumes remain low, especially with Gatorade showing noticeable weakness this quarter. Can you discuss how much the weather may have impacted the quarter? Additionally, as we consider volume recovery for PBNA overall, what are the plans for both Mountain Dew and Gatorade to stabilize the volume trends?

That's good, Bryan. Just actually we feel good about those two brands. Those two brands actually gained share in Q1, so Mountain Dew and Gatorade, in their own category. So that's a meaningful good performance, I would say. Now Gatorade, as you mentioned, had a little bit of weather impact. So we're not concerned about Gatorade this year as the weather improves, I think we have the right investments, the right commercial programs. Our G2DSD was impactful to us last year operationally. I think we've learned a lot on how to deal with a very high seasonality product and category and give better service to our customers and maintain the product in stock and available. So we feel good about having the platform to take Gatorade to higher market share in a faster growing category. Now with regards to Dew, the launch of Bubly Burst has been very, very good for the brand. We launched it as a permanent additional flavor to the portfolio early in the year. It's been obviously successful. We knew it was a successful LTR and therefore, it's a successful permanent product. And it's been bringing incremental consumers to the brand and helping us gain share now. Obviously, we will keep investing in the portfolio and the brand, and we have strong programs for the summer. Hopefully, that will deliver as we expect, and we'll continue to build Mountain Dew in the category. So feeling good about those two brands.

Thank you. One moment for our next question. Our next question comes from Lauren Lieberman with Barclays. Your line is open.

Great. Thanks, good morning. In the prepared remarks, I noticed the discussion about PBNA and the plans to enhance profitability. There were two new points mentioned. The first discussed the deemphasis on certain product and package combinations, and the second focused on revenue management and a more precise consumer value proposition. I was curious if you could provide more details on those two points, especially with the new management in place for that business. I think it would be helpful. Thanks.

Yes, Lauren, I believe we may have provided a bit more detail, but our intention has always been clear. I've mentioned in previous calls that we are making strategic choices within PBNA to ensure we achieve profitable growth. We will continue to prioritize areas of our portfolio that offer better returns on investment while reducing focus on segments where margins are not attractive and are unlikely to improve. This includes categories like packaged water and certain less profitable take-home formats. We are confident in the productivity and margin expansion at PBNA. We believe this will continue due to the innovative ideas and organizational focus being implemented under both the new and previous management. There is a heightened emphasis on improving our operational efficiency in both the supply chain and sales, leading to expanded margins. Therefore, we are optimistic about PBNA's margin expansion and our ability to deliver profitable growth this year.

Thank you. Our next question comes from Andrea Teixeira with JPMorgan. Your line is open.

Hi, good morning. Thank you. So, Ramon, if you can please comment on the overall consumption and in particular for snacks and how consumer behavior evolved in the context of your comments about normalization? And then a clarification for Jamie, on the margin outlook. On the prepared remarks, you mentioned a more benign commodities environment, but that has recently changed in particular, for oil and looking at DSD. Hoping to get some clarification on the diesel impact or this is going to be further down and perhaps not even impacting 2024? Thank you.

Yes. So, Andrea, I would say that the global consumer appears to be quite resilient, which is evident from our international business performance. This is largely supported by two factors: low unemployment rates and rising wages in most countries where we operate. These factors give us confidence in consumer spending. However, there are two specific areas of concern. First, Chinese consumers are becoming very cautious, leading to a significant increase in their savings rate. While our category remains strong in China, we are achieving growth mainly through gaining market share. It's important for us to closely monitor this situation. Secondly, in the U.S., lower-income consumers are feeling the squeeze and are making careful choices about their purchases. This demographic is a focus for our commercial strategies as we aim to keep them engaged with our products. We are adapting our commercial plans and innovation to provide them with suitable options and value at various points in the month, utilizing both digital and physical channels while ensuring a good return on investment. These two consumer segments are where we're focusing our specific commercial programs, but overall, the consumer remains resilient in other areas. Our teams are working hard to keep our brands prominent in consumers' shopping habits and to continue gaining market share in both beverages and snacks.

Yes. Andrea, on commodities, really no change in the outlook. A couple of points I just want to emphasize. One is the diversity of the inputs in the basket, so no single commodity accounts for more than 10% of the total. So that diversification kind of smooths things out. And the other point I'd make is we do tend to forward buy and hedge, so that we've got good visibility for the year that helps us with planning the business overall. And so outlook Q2 through Q4, so relatively benign inflation and not a lot of volatility in the rate of inflation quarter-to-quarter.

Thank you. One moment for our next question. Our next question comes from Peter Grom with UBS. Your line is open.

Thanks operator and good morning, everyone. So I was hoping to get an update on the CELSIUS agreement and kind of just your broader energy drink strategy at this point. In the release, you spoke positively about the partnership, but I think there were some changes to the incentive structure a few weeks back. So maybe first, just any thoughts on how the brand is performing as part of your energy portfolio? And then just like anything you can share in terms of what changed with the agreement? But maybe specifically, how does it really help Pepsi? And maybe what benefit does it provide for CELSIUS, if anything? Thanks.

Yeah. Thank you, Peter. I will not talk too much about the agreement other than saying that it's a good alignment of the long-term interest of both companies, and it's great for PepsiCo shareholders. The partnership with CELSIUS is strong, and it's helping us to gain scale in our go-to-market, specifically in some channels where we need volume to justify some of the economics of the call. So that role continues. We're pleased with the partnership. Energy is a fast-growing category, profitable, that is great for our portfolio. So that's what I would say. We remain pleased with the partnership and we'll continue to build the partnership going forward.

Thank you. One moment for our next question. Our next question comes from Filippo Falorni with Citi. Your line is open.

Hey, good morning, everyone. So I wanted to go back to Frito but on the top line trends. Clearly, you guys were setting the toughest comp of the year in Frito-Lay. You mentioned you expect some sequential improvement. So maybe you could talk about volume trajectory, particularly for the business? And Ramon, you spoke in the past about the cycling of this shift towards smaller pack sizes. So maybe you can give us an update on that, and also any potential impact from cycling the reduction in SNAP benefits from last year? Thank you.

Yeah. I would say the Frito-Lay continues to outperform the category. And as I said earlier, the big opportunity for Frito-Lay is to continue to create occasions for our savory category, bringing them from broader macro snacks or snacks and meals overlap, how do we bring more category stores, more occasion store snacking. So those are the two big strategic objectives of Frito-Lay. And all our innovation and pricing and channel mix and everything else is against that large objective and do it faster than others, so that we continue to gain shares. So as we look at the business performance, as you said, this is the toughest lap. I think last year, we grew 16% in Q1, and that lap is still high in Q2, but then it gets much better than half two. So we should expect a gradual sequential improvement of our volume for Frito-Lay, especially in the second half of the year, and we'll continue to be the guardians of the savory category and make sure it's valued properly, and it generates growth for our customers ahead of what food generates for our customers, and we continue to capture a disproportionate share of that very fast-growing and profitable business.

Thank you. One moment for our next question. Our next question comes from Kaumil Gajrawala with Jefferies. Your line is open.

Thank you. Good morning, everyone. You have mentioned several times about gaining market share within the category. Could you provide some context on which categories are growing in different regions or what you expect their growth to be over the next year or so?

Our goal is always for our categories to grow faster than the overall food and beverage market. I believe this positions us as an attractive partner for our retail associates, as we drive growth for them. Additionally, our categories are profitable, creating a beneficial combination of growth and profitability for our customers. We aim for our categories to continue outpacing food and beverages in most countries, influenced by trends in urbanization and the ongoing changes we've previously discussed regarding convenient foods and beverages. We are optimistic about this, and our commercial initiatives, innovations, and investments are aligned to achieve these goals for our partners. Naturally, performance varies by country; we will focus on strengthening our strengths and improving in areas where we are underperforming. This is how we are steering the company.

Thank you. One moment for our next question. Our next question comes from Robert Moskow with TD Cowen. Your line is open.

Hi. Thanks for the question. The 4% price mix benefit in Frito-Lay North America is quite notable given the limited pricing options in the food industry. I suspect a significant portion of this could be attributed to changes in price pack architecture or possibly consumers opting for different pack sizes. Could you clarify which factor is contributing more to this benefit or if they have similar impacts? Additionally, how do you foresee this trend developing for the remainder of the year? Should we expect it to remain relatively stable?

Hey, Robert. It’s Jamie. And its majority is price but there’s an element of mix in there. I’d put it that probably two-thirds price and one-third mix. And yes, it comment earlier on our inflationary trends would expect them to be fairly moderate for the balance of the year, fairly smooth through the balance of the year. So I wouldn't expect a lot of volatility in that buying revenue relationship.

Thank you. One moment for our next question. Our next question comes from Robert Ottenstein with Evercore ISI. Your line is open.

Great. Thank you very much. Two kind of follow-ups, if I may. Can you please talk about the spring shelf sets? Is it pretty much done? And how do you feel good about what you're seeing both on the Frito-Lay side and on the beverage side? And I understand on the beverage side, you're discontinuing some SKUs. So are you gaining shelf space where you want to? And then just a follow-up to an earlier question on CELSIUS. Maybe if you can give us an idea of how your energy drink strategy overall is evolving and what's going on with Rockstar, Starbucks, Mountain Dew in terms of the overall energy drink strategy? Thank you.

I would say our customer negotiations have been successful globally, and while they took a bit longer in Europe, the overall effect on our European business is very positive. Other regions, including the U.S., have been less affected by these negotiations. As for space gains, I anticipate that it will be a beneficial reset period for us in both snacks and beverages, although it's not finished yet. I would estimate it will likely take another six weeks or so. We're optimistic about the performance improvements we have already seen, thanks to our commercial teams. Overall, we feel confident, which is why we are reaffirming our guidance for at least 4% growth in net revenue for this year.

Thank you. One moment for our next question. Our next question comes from Chris Carey with Wells Fargo Securities.

Hi, everyone. So one question on the APAC division. Ramon, I think you were a bit more cautious or balanced on the Chinese consumer and yet double-digit growth in the quarter in China. I just wonder how APAC came in relative to your own expectations that whether there's any timing dynamic here or whether you see these results as perhaps a bit more durable going forward? And if I could just sneak in from the at-home versus away-from-home consumption globally, as you see some of the weaker trends from the lower income consumer, are you seeing any acceleration in that shift, which might be helping your business on a global basis as well? Thanks.

Two things, thanks. Good questions. I think the APAC performance is a little bit impacted by the timing of Chinese New Year. So there is a bit of benefit in our Q1 numbers versus Q2. It was a bit earlier this year. But the reality is that the APAC region is improving, I would say, outside of China. China still, as I mentioned earlier, I think the consumer is cautious and the consumer is saving a lot. And it might not impact so much the low price, let's say, products as ours. It might probably impact some other categories a bit harder than ours. The truth is that in China, as I said earlier, our team is not only this year but already consistently for the last four, five years, been gaining share and creating a very capable and profitable business in China, we're very proud of. Now, to your other question on away-from-home, in-home, we're seeing mobility obviously going back to pre-pandemic times anything we all forgot COVID anymore. And we're seeing, obviously, that impact in the consumption of food between home and away-from-home, especially in the U.S., I would say, it's probably the country that is having more impact. So, yes, away-from-home is growing faster than in-home for us and we're pivoting resources to away-from-home both in our food business and our beverage business, and we're trying to capture as much as possible that consumption that is moving to away-from-home. Internationally as well, I would say that is a huge wide space for growth for our business, both in trying to improve the availability of our current products and also creating new solutions that are more targeting meals and meal replacement as consumers buy more food away-from-home. And I think our brands belong in some of those occasions and as I mentioned at CAGNY, we're building both innovation and business models that can help us capture this meal location away-from-home with some of our large brands like Lays, Doritos, and Tostitos, some of our well-known global brands.

Thank you. One moment for our next question. Our next question comes from Steve Powers with Deutsche Bank. Your line is open.

Thank you and good morning. Ramon, this may relate to the pressures you mentioned earlier regarding lower-income consumers in the U.S. or perhaps your recent comments about at-home versus away-from-home consumption. Reflecting on the past six months, I've observed what seems to be an unexpected slowdown across many categories, particularly in immediate consumption categories such as savory snacks and sweet snacks, as well as several beverage categories. Do you agree with these observations of unexpected slowing? If so, how do you assess the underlying drivers? Where do you think we currently stand in that cycle? How does this influence your expectations for recovery momentum in your North American businesses? I believe the easing comparisons are clear, but I'm interested in your thoughts on the potential sequential improvement in demand itself.

That's a great question. We need to take a step back and consider the larger trends. We've experienced significant inflation in our categories due to rising input and operating costs over the past couple of years. However, we're feeling optimistic based on a couple of data points. Firstly, wages are increasing at a rate that exceeds inflation, which we observe not only in the U.S. but globally. Additionally, our consumer packaged food inflation is lower than the overall Consumer Price Index. These two factors give us confidence that consumers will return to our categories at a frequency that meets or exceeds past levels. Each of us is working on our commercial strategies, innovations, and channel approaches to facilitate this shift. We're pleased with the price volume mix in our business, which suggests that we will continue to improve sequentially throughout the year and into the following years. Our main goal remains consistent: to ensure that our innovations and consumer programs in savory snacks lead the market, alongside liquid refreshments and food. This ultimately creates value for both our business and our customers, guiding our long-term strategy.

Thank you. One moment for our next question. Our next question comes from Brett Cooper with Consumer Edge Research. Your line is open.

Good morning. A question on the international business. On these calls over the years, PepsiCo has spoken about managing international profit delivery to provide affordability to consumers and support recruitment. And if we look at margins in the international business, they're up versus COVID or versus pre-COVID levels. So can you help us understand beyond the headline financial results that we can see, I guess, evidence of what you look at to ensure you're providing proper levels of affordability for category development to support the very long-term for that business? Thanks.

Yes. We are always mindful of how our product's value compares to other potential substitutes in the categories we operate in. For snacks, we see significant opportunities in transforming and packaging snacks into convenient options or savory varieties. We evaluate this value comparison in every market and for different consumer segments. The same applies to beverages, where transitioning from non-commercial to commercial products represents an ongoing opportunity for our industry. We analyze this closely. Our margins are expanding internationally because we achieve better fixed cost leverage as we grow in scale, allowing us to develop more profitable operations in international markets, especially in larger markets. We maintain affordability at the core of our strategy as it is crucial for the long-term, along with our efforts in availability and innovation. These factors help our categories grow rapidly. As you noted, affordability and the relative value of our offerings are key performance indicators that we continuously assess in every market, as they are essential for sustained growth in our categories.

Thank you. One moment for our next question. Our next question comes from Gerald Pascarelli with Wedbush Securities. Your line is open.

Great. Thanks very much. Question on Europe. Another really strong quarter here, like the seventh consecutive quarter of double-digit revenue growth. It looks like it accelerated on an underlying two-year basis. So maybe if you could provide some color on the driver markets, ones that maybe came in better than your expectations? And then how you would compare how developed markets in Europe are performing relative to what we're seeing in the US? Thanks.

Yeah. Thank you and a good observation. I think our team in Europe is doing a fantastic job. It started with strong productivity, simplifying the business and driving cost control, eliminating duplication and then reinvesting that money back into our brands and becoming more competitive and also driving our availability and driving our brand preference. And that is a flywheel that is working for us across both developing and developed markets in Europe. Obviously, developing markets a bit more. So if you think about Eastern European markets are growing a little bit faster than Western European markets. Western European markets have been impacted a little bit in this first quarter by some of the negotiations, and that's not atypical in Europe. But I think we have a good flywheel in Europe, and Europe will be expanding its portfolio along the lines of what the US has been doing, which will give us additional consumers and additional penetration in households across developed and developing markets. So we feel good about the flywheel in Europe. But at the center of that is a very strong productivity, cost discipline, and reinvestment strategy that is, in a way, what we're trying to do across the full company, elevating our productivity and driving our investments both into affordability, availability, a better brand equity and then investing back into our future, digitalization and sustainability at the center of that investment. So it's a flywheel that we're trying to do for all the world. Clearly, Europe is doing a good job at implementing it.

Thank you. Ladies and gentlemen, this does conclude the question-and-answer session. I would like to turn the call back to Ramon Laguarta for any closing remarks.

Yeah. Thank you, everyone, for joining us this morning and for the confidence that you've placed in us and in our stock. And we hope that you all stay healthy and safe. Thank you.

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

Thank you, gentlemen. Appreciate your help.

You're welcome.