Q1 2022 PepsiCo Inc Earnings Call

April 26, 2022

Good morning, and welcome to Pepsico's 2022.

First quarter earnings question and answer session. Your lines have been placed on listen only until it's your turn to ask a question in order to ask a question to make a comment. Please press star followed by one on your Touchtone phone at any time, you may remove yourself from the queue by pressing the pound key today's call is being recorded and will be archived at www Dot Pepsico Dot com. It is now my pleasure to introduce Mr. Ravi <unk> senior Vice.

I sort of Investor relations Mr. <unk> you may begin.

Thank you operator, I hope everyone has had a chance this morning to review our press release and prepared remarks.

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 Dot 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.

For forward looking statements joining.

Joining me today are pepsico's, chairman and CEO , Ramon Laguardia, and Pepsico's, Vice Chairman and CFO Hugh Johnston, we ask that you. Please limit yourself to one question and with that I will turn it over to the operator for the first question.

Thank you once again in order to ask a question or make a comment. Please press star followed by one on your Touchtone phone at any time. Our first question comes from Bryan Spillane with Bank of America.

Thanks, operator, good morning, everyone.

I wanted to ask about margins.

I guess on the last earnings call I think the expectation would that margins would be intact.

Now with today's guidance it implies maybe a step back in margins.

So maybe Keith could you talk a little bit about maybe how that's changed.

Where we stand now in terms of like net inflation as we exit the first quarter and then what are some of the actions you're taking maybe besides pricing to try to protect margins.

Yes, Hey, Brian good morning.

A couple of things one inflation.

Inflation is clearly gotten a bit more challenging for the year no question about that.

You'd previously indicated it was low teens several points higher than that now.

Number two and we've always talked about this in the past when we have inflation in the first thing we do is look internally.

Try to find opportunities to drive productivity.

We've been pretty good at driving productivity, but were really stepping it up.

Even a bit further this year, whether it's identifying areas of waste or whether it's <unk>.

Looking for the leverage digital in a faster and more effective way or whether it's looking to leverage shared services more and 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 are merchandising product in store packaging mix or shallow out 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.

Quarterly wheel.

Besides 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 will be relatively level year over year.

Thank you. Our next question comes from Dara <unk> with Morgan Stanley .

Hey, good morning.

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 are 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 as needed.

And how you think about that in light of potential consumer sensitivity.

With inflation being unprecedented type of levels. Thanks.

Yes, good morning there.

So it could go and then maybe you can add some comments.

Clearly.

Obviously, if you look at Q4 and Q1.

<unk> is it is that we have in the business are.

Better than historical and better than what we had planned so thats why we are raising our guidance for the year.

This is valid bodes for developed markets and developing markets, we were very concerned about developing markets.

We're seeing if you see the numbers in Latam.

In Africa Middle East APAC, we're seeing good elasticity is there as well so positive however.

The consumer is very early in this process of adjusting to the new inflationary environment, and I think theres going to be more consumer behavior.

Behaviors.

Into the to the new reality is theyre going to be channel mixes changes is going to be probably the packaging mix changes.

And some of the decision as consumers were stopped doing instead on the things that we're doing right now with more.

Maybe traveling and so on so we think we're early in the process I think our categories do normally quiet well.

Inflationary and what makes us feel.

Confident in is that.

Last few years, we've invested a lot in the brands.

And we've invested a lot in some new capabilities around revenue management also understanding better opportunities for waste.

Action in the company.

And with improved a lot in our execution capabilities in the store with more.

Information and better execution or tools.

I think we feel that we're early in the process at the same time, we feel rather confident that we can manage through this with a good balance between net revenue management and holistic those management and our number one.

<unk> objective is to keep the consumers with our brands and obviously, if we can get new consumers to our brands even better during this process. So that's how we're approaching this in the short term and then you were asking about long term.

These are the goals that we're setting for our teams.

Have.

I've always said that we have very experienced.

<unk> in the market and this is clearly a model that you find market by market and that gives us again.

A better position to win versus other companies that are facing the same kind of inflation.

The only thing I'd add to that there is if you look over time, our categories have always performed pretty well during during inflationary times.

And as a result of that I think as a company our performance has been pretty inflation resistant as well as.

A recession resistant, which obviously makes us a pretty good defensive stock.

Thank you. Our next question comes from Lauren Lieberman with Barclays.

Great. Thanks, good morning.

Was curious if you could talk a little bit about impacts from Russia, Ukraine that are embedded in the outlook of course.

Impairment charges on brands that you've talked about before that the conflict again and then also the charges on that.

On <unk> and so on but I was curious about how Russia, Ukraine is impacting our revenue outlook and also the EPS outlook for the year in terms of operational element.

Hi, Lauren.

Russia is 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, where 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.

And then with regards to Ukraine.

We had to stop on our operations their manufacturing operations, we're still doing some sales that's also impacting ourselves embedded India in our in our.

Guidance for the year were we reopened now our factory in <unk>.

Hopefully, we will try to get back to operations in Ukraine is it safety.

Situation.

Allows us Matt that's also embedded into our guidance.

Thank you. Our next question comes from Bonnie Herzog with Goldman Sachs.

Alright, thank you.

Hi.

Just wanted to get.

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 I know you mentioned your mobile selling better about <unk> going forward.

And then I'd be curious to hear.

How you are immediate consumption business.

Farming in key regions for both your fabric and snack business.

Asking in light of.

I think youll prices.

For instance, curious to hear if you guys just volatile type of pressure on this channel despite broad reopening in marine markets and then looking forward.

The strategy you have in place.

<unk>.

Some of the pressure continues to intensify.

Sure why don't I story.

Number one obviously the revenue guidance and that's a combination of a bit more volume in a bit more price. So balanced between the two in terms of the change from prior and previously we had indicated we don't expect much volume growth. So I think obviously that takes us through we expect a little bit of point of growth as the year progresses.

In terms of immediate consumption channels well.

Relatively small impact thus far.

We'll see how it plays out here.

Historically, it has impacted the beverage business a bit more than it has impacted the snack food business I think thats because beverage incidence is just higher than snack food incidents.

But so far relatively muted impact on that and the other channels are doing quite well.

Take home is still a big growth.

Foodservice is growing.

Nice healthy clip at this point.

If you think about immediate consumption the away from home channel is growing very fast across the world and also in the U S. As recovery. So that is a positive to immediate consumption.

There is a little bit of traffic decline in convenience stores, but not meaningful at this point and obviously there.

<unk> will be to gain <unk>.

<unk> and gain share in that channel and should compensate for whatever traffic.

Some might be.

Also trying to be conscious of.

Price points and entry points to the category in those 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 and in emerging markets. So overall I don't think that this is going to impact us India in the coming periods.

Yeah.

Thank you. Our next question comes from Andrew <unk> with JP Morgan.

Good morning.

Just trying to.

To check something in between the lines marketing and I know you had SG&A was up last year.

You are lapping $108 million in equity investment gain.

Thank you your last two years.

But just thinking as you were mentioning earlier does come in better obviously that may change, but what are you embedding for the end of the in terms of marketing.

From a dollar and rate perspective and.

And then for the places where you can on bottlers once that any impact of stocking this quarter.

Had a price increase thank you.

Yes, Andrew.

I hope we were up roughly in line with revenue for the year.

That's where that will likely land.

Okay.

And then your question.

Today on the buffers no there hasnt been any any loading and Bob <unk>.

For pricing because we're done with them follow these practices, neither neither with our retail partners.

<unk>.

Whenever you see a sales is basically the seventeens allowance that we've had for the business.

Thank you. Our next question comes from the rock conduct with Guggenheim.

Hey, good morning, Ramon and Hugh.

A question on <unk>.

Progressing about 100 basis points in the quarter, what goes back to the level of pre COVID-19 for the first quarter despite them.

Higher inflation could you please.

Sure I mean, the impact of the Iqos inflation <unk>, specifically in the quarter and also could you give us maybe more color as to where the gains are coming from.

Maybe just thinking between triple divestiture product mix.

Where do we go from here. Thanks.

Yes.

Thanks, a lot 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 the pathway to mid teens.

Margins for the <unk> business that thesis is still very much intact and that's that's the plan we're executing against.

Obviously inflation was put a bit more pressure on that but the combination of the additional cost management actions that we've taken as well as obviously sheltering our promotions and price increases and revenue management.

It allowed us to continue on that journey.

We still very much expect to do exactly what we've said in the past, which is well progressed along towards getting that business back to the margin levels that Ive mentioned earlier something something in the mid teens over the course of the next several years. So I think we're making good progress.

As we expected inflation, obviously is higher than we expected, but we're taking actions to manage that.

Yes, the key levers.

Of that margin improvement stay intact, Ryan if you think about the portfolio.

B launch that we're trying to do those arent really good work in progress.

The Gatorade performance, that's a high margin business for us clearly.

And again, a very hot space, we're making good progress in energy.

That part of the transformation is good we're also making good progress on efficiency and operating.

So there is there is the critical leavers off of that transformation continues intact clearly inflation is a factor been a SKU was saying, we're doubling down on productivity and trying to sharpen the pencil a bit more on revenue management as well.

Thank you. Our next question comes from Vivien <unk> with Cowen.

Hi, good morning.

I'm, hoping to dive in Pan European EBIT margin, while I recognize that <unk> is a seasonally low quarter.

I was wondering if you could offer any incremental color on.

Martin.

No question that you thought that that might require.

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 its seasonally low in terms of the revenue as well in terms of some of the factors in there obviously eastern Europe sort of place something of a role in terms of that number.

Second one we.

We made a U K pension contribution that I think of about $25 million at the relatively small number in the overall year, but in a two month quarter. It obviously has a disproportionate impact.

And then in addition to that the soda stream business was a little bit soft, but was a bit of a factor and recall, we reported soda stream through Europe , because that's the biggest market for for the soda stream business.

Thank you. Our next question comes from criminal Gartner wallet with credit Suisse.

Alright, thank you.

If I could if I can sneak into the guidance increase little bit a little bit better.

Volume incentive price this quarter of course.

Are your expectations the same grinding pricing dynamic as we go through the rest of the year or is it just kind of you.

Just kind of pushed you are just including the volume upside from this quarter as part of your full year okay.

There wasn't a lot of it go there if I understand your question was around.

Volume and pricing guidance.

Yes.

We've raised the guidance on <unk>.

Top line, because we've seen better less tissue is in the first part of the year.

Our assumptions for the balance of the year be more conservative on elasticity, because as I said earlier within the context for the consumer might change might not change.

Obviously trying 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 on a roll here.

Assumptions going forward on a little bit more conservative because we're seeing that the consumer will be feeling.

The overall inflation in there in their disposable income.

And that might have an impact on the <unk> of our categories as well, although we have seen that our categories are.

Normally fare quite well and inflationary and recessionary moments and Thats why we feel optimistic about raising the guidance to 8%.

On top of a very.

Very high fast growth nine 5% last year, so clearly.

We're growing we're growing very fast as a company.

Thank you. Our next question comes from Kevin Grundy with Jefferies.

Great. Thanks, Good morning, everyone I.

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 has been 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.

I know thats, not all frontline pricing some of its mix, but nevertheless, certainly not inconsequential for the consumer to cope with so my question is have the pricing discussions starting to become more difficult with retailers, particularly your large customers to point, where maybe we're closer to a tipping point, where it is going to be more difficult to put the pricing through or is the pricing win.

They are still very much open in your view do you thought there would be helpful. Thank you.

Yeah.

We're always.

Full commercial planned discussions with our customers and we try to create value for both.

Those joint business planning the essence of our growth strategy. So we do that in full coordination with our partners trying to.

Make sure that we keep the consumer with US we keep the shopper come into the stores 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.

And then in the buys and more insight and more value discussions and we plan to continue to do that as we go into the second half of the year end.

Into the coming years.

Obviously, we're all concerned about.

Elasticities and consumer reaction. So these two are both interest to take this into consideration as we as we build a commercial plant there is some there.

There's some geographies in the world.

These discussions are a bit more tactical I would say some of the European markets. There is a bit more.

Friction when it comes to pricing.

Actually some of our net revenue in Q1 reflect some of these conversations are difficult realities I would say in.

The majority of the markets. These are done in collaboration with our customers and in very good value creation when discussions.

Thank you. Our next question comes from Bob <unk> with Evercore.

Great. Thank you very much.

Just wondering if you could please.

Remind us.

What your exposure is to China, what Youre seeing there now and.

Your long term plans. Thank you.

Sure.

Hey, Robert.

Low single digits on revenue and very low single digits on.

<unk> is the number.

In terms of our plans I think we continue to execute in the marketplace, we own the snack business.

We have a bottler in China, where we've had a very successful relationship with <unk>.

Obviously a.

A challenging environment.

We will continue to do what we can do.

To continue to operate well, but low single digits and very low singles on the numbers.

Yes, I would say the.

Obviously, we're seeing that.

The impact of the Lockdowns in Shanghai, and some other cities in vaccines and how the consumer behavior.

In general I would say.

In home consumption is going up theres been some stocking of our food business in the last few weeks.

A little bit of lower mobility, India in the away from home channel, which is impacting most of the beverage business overall is performing as planned.

And obviously, we're doing business contingency planning and make sure that we're ready in case some of the Lockdowns in fact, our operating plans now.

<unk>.

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 you said.

Usually small from prior to the to this whole size of the company.

Just to build on <unk> point, I Should've 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.

Thank you. Our next question comes from Steve powers with Deutsche Bank.

Good morning, good morning, promoting too.

A quick follow up for me actually going back to Lauren's question.

On Russia, Ukraine here, you mentioned the contribution there low single digits, which I think is the profit perspective.

On revenue I thought it was more like mid single digits I think I think around four 5% last year. So I guess in that context can you talk about how Russia, Ukraine factors into that 8% organic outlook, because intuition would say, but the.

The business reductions there create a drag on organic growth that you're absorbing in that 8%, but then again, there's just 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 calculate it.

To what magnitude so just some clarity there would be helpful. Thank you.

Sure happy to.

Your thoughts are right last year, Russia was about four.

Obviously with the current environment, we would expect it to be less of that since by low single digit comment.

And yes, we it's incorporated into our guidance, we don't expect the business to deliver a lot of growth. This year, given given all of the challenges and the decisions we've made.

And it is in fact incorporated so that we've captured that is important so.

Yes.

Again without getting into a ridiculous level of detail.

Clearly the business is going to be.

Lower than it was in 2021 buyer by a meaningful amount.

Thank you. Our next question comes from Nik Modi with RBC capital markets.

Hey, Good morning, guys. This is Filippo for Lora also Nick.

A question on <unk>.

Average Alco strategy, maybe if you can comment on how the hard Martin do launch is performing in the states.

When you launch a product.

More longer time on bigger peaks are like.

Give us an update on kind of your expectations for the beverage alcohol category and any potential.

New launches are our initiatives there.

Yes.

I think we are testing and learning.

At a fast speed both.

Boston Beer company's learning how to market and improve the products in their responsibility in the partnership.

Also learning about how to.

Distribute and sell low alcohol beverages, which obviously have a lot of restrictions in the state.

Municipality level.

Turning to train our people.

The right way and so on so there's a lot of distance learning very encouraging and earnings actually is we're seeing the consumers.

Obviously.

Onto news if there is a big brand and is 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.

As the business stabilizes I would say good learnings for the organization is still very early in the process of building the infrastructure and the.

The talent base.

I'm pretty good 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 will be able to innovate meaningfully in these categories, but as I said too early too early yet to.

To call it.

A huge success.

Thank you. Our next question comes from Brett Cooper with consumer edge research.

Good morning, I was just hoping you could update us on where you are on digitizing your relationship with customers, who can consumers' aspirations on both level and then I guess, if I could mess underneath the consumer.

If there is any challenges you guys have and going direct given independent bottling contracts. Thanks.

Yes.

Brad is a journey that we started already quite some years ago.

Both on the.

On the consumer and the customer.

I would say different levels off.

Progress in different parts of the world, probably U S and Western Europe more advanced when it comes to <unk>.

Consumer interaction.

The way we can.

Kind of target our messaging in a much more granular way and we've made good progress we're doing that we're making our media much more efficient by targeting better. So that's a that's an important progress the same with retailers, where obviously we have platforms that.

A fully digitalized and allow retailers to buy from us directly.

We're sufficiently smaller customers fragmented trade around the world. That's a platform that we are we're benefiting both for better service and also some productivity being able to target. The regenerator. So progress good progress across each strategically a very important part of our of our journey trying to both generate additional.

<unk> growth through personalization.

Targeting the consumer and that's a journey through innovation through new digital tools through better learning of our training of our people our market tiers R. R.

Our leaders in the marketplace.

Journey I.

I would say in emerging markets were a bit behind.

But it's an investment that we're putting in place as part of our large investment in digitalization that we've been talking about for already a few years.

Thank you our last question comes from Chris Carey with Wells Fargo Securities.

Hi, good morning. Thank you so just to connect the questions on cost and productivity if I could.

<unk>.

The prior outlook with her commodity to be.

Low teens, I believe back to Cogs and companies that are 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 visibility you have into commodity expectations I understand youre locked.

Specifically for the next few quarters, but it's fine.

So exposure increases in Q4, and how youre thinking about incremental pricing in Q4, and then just connected Ramon I think you noted.

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.

But for the year or is this just more conceptual thanks so much.

Yes, Chris.

Your math is right, we said low teens before and it'll 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 different windows. So, we'll see what that what that looks like when we get a little bit closer to the time.

In terms of your your second question around productivity, Yes, we've historically said $1 billion and yet will be will be several hundred million dollars higher than that this year based on.

Based on the actions that we've needed to take to try to manage.

A challenging inflationary environment, but one that we have pretty well under control.

Okay.

So thank 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.

Okay.

Yes.

Okay.

[music].

Okay.

Yes.

[music].

<unk>.

Okay.

[music].

Good morning, and welcome to Pepsico's 2022.

First quarter earnings question and answer session. Your lines have been placed on listen only until is your turn to ask a question in order to ask a question to make a comment. Please press star followed by one on your Touchtone phone at any time, you may remove yourself from the queue by pressing the pound key today's call is being recorded and will be archived at www Dot Pepsico Dot com. It is now my pleasure to introduce Mr. Ravi <unk> senior Vice.

As president of Investor Relations. Mr. <unk>, you may begin.

Thank you operator.

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.

For forward looking statements joining me today are pepsico's, chairman and CEO Ramon Laguardia.

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.

Thanks, operator, good morning, everyone.

I wanted to ask about margins.

I guess on the last earnings call I think.

The expectation would that margins would be intact and I guess now with today's guidance. It implies maybe a step back in margins. So maybe if you could you talk a little bit about maybe how that's changed.

Where we stand now in terms of like net inflation as we exit the first quarter and then what are some of the actions you're taking maybe besides pricing to try to protect margins.

Yes, Hey, Brian good morning.

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 several points higher than that now.

Number two and we've always talked about this in the past when we have inflation in the first thing we do it internally.

Internally can you try to find opportunities to drive productivity and we've been pretty good at driving productivity, but were really stepping it up.

Even a bit further this year, whether it's identifying areas of waste or whether it.

Looking for to leverage digital in a faster and more effective way or whether it's looking to leverage shared services more we're obviously doing all of those things.

After that then then we obviously.

Look for revenue management opportunities whether it's.

We are.

Merchandising product in store packaging mix or shallow out promotions and then obviously price it 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 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 will be relatively level year over year.

Thank you. Our next question comes from Dara <unk> with Morgan Stanley .

Okay.

Hey, good morning.

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 as needed.

And how you think about that in light of Prudential consumer sensitivity.

In inflation being unprecedented type of levels.

Yes. Good morning, there and then maybe let me take a go and then maybe you can add some comments.

Clearly.

Obviously, if you look at Q4 and Q1.

<unk> is it is that we have in the business are.

Better than historical and better than what we had planned. So that's why we are raising our guidance for the year.

This is valid votes for developed markets and developing markets, where we're very concerned about developing markets.

We're seeing if you see the numbers in Latam.

In Africa, Middle East and APAC, we're seeing good elasticity is there as well so positive. However, we think the consumer is very early in this process of adjusting to the new penetration area environment, saying theres going to be more consumer new behaviors.

<unk> to the new reality is theyre going to be channel mixes changes is going to be probably packaging.

Makes it changes.

And some of the decision as consumers were to stop doing certain things that we're doing right now and more.

Maybe traveling and so on and so we think we're early in the process I think our categories do normally quiet well.

Inflationary.

What makes us feel.

Confident is that the last few years, we've invested a lot in the brands.

And we've invested a lot in some new capabilities around net revenue management also understanding better opportunities for waste.

The reduction in the company and.

It improved a lot our execution capabilities in the store with more.

Formation, and better execution or tools.

We feel that we're early in the process at the same time, we feel rather confident that we can manage through this with a good balance between net revenue management <unk> management.

Our number one.

These are the goals that we're setting for our teams.

I've always said that we have very experienced leaders in the market and this is clearly a model that you find through market by market and that gives us again.

I think a better position to win versus other companies that are facing the same kind of inflation.

Yes.

I'd add to that.

If you look over time, our categories have always performed pretty well during during inflationary times.

And as a result of that I think as a company our performance has been pretty inflation resistant as well as.

A recession resistant, which obviously makes us a pretty good defensive stock.

Thank you. Our next question comes from Lauren Lieberman with Barclays.

Great. Thanks, good morning.

I was curious if you could talk a little bit about impacts from Russia, Ukraine that are embedded in the outlook of course.

<unk>.

Impairment charges on brands that you've talked about before the conflict again and then also the charges on.

On PP&E and so on but I was curious about how Russia, Ukraine is impacting our revenue outlook and also the EPS outlook for the year in terms of operational elements.

Yes, Hi, Lauren.

Russia is as I think we've shared in the past is low single digits in terms of its overall size through us.

Obviously, it's a bit of a drag in terms of our overall outlook, but elsewhere in the company, where 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.

And then with regards to Ukraine.

We had to stop our operations their manufacturing operations, we're still doing some sales that's also impacting ourselves embedded India in our in our.

Guidance for the year were reopened now our factory in tears.

Hopefully, we will try to get back to operations in Ukraine is safety.

Situation.

Allows us Matt that's also embedded into our guidance.

Yes.

Thank you our next.

Question comes from Bonnie Herzog with Goldman Sachs.

Alright, Thank you Brian I just wanted to add.

Just 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 I know you mentioned your mobile selling better about last yesterday going forward and then I'd be curious to hear this technical how youre immediate consumption business.

Farming in key regions for both your fabric and snack business.

Asking in light of.

Rising fuel prices.

For instance, curious to hear if you guys are small little signs of pressure in this channel. Despite broad reopening in marine markets and then looking forward what strategy you have in place to mitigate.

Some of the pressures continued to intensify.

Sure why don't I story.

Number one obviously the revenue guidance. So that's a combination of a bit more volume in a bit more price. So balanced between the two in terms of the change from prior and previously we had indicated we don't expect much volume growth. So I think obviously that takes us through we expect a little bit of volume growth.

Year progresses.

In terms of immediate consumption channels well.

Relatively small impact thus far.

We'll see how it plays out here.

Historically, it has impacted the beverage business a bit more than it has impacted the snack food business I think thats because beverage incidents is just higher than snack food incidents.

But so far relatively muted impact on that and the other channels are doing quite well.

Take home is still a big growth.

Foodservice is growing.

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. As recovery. So that is a positive to immediate consumption.

There is a little bit of traffic decline in convenience stores without not meaningful at this point and obviously there.

<unk> 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.

Price points and entry points to the category in those in those channels internationally.

We're not seeing.

Mobility being impacted and.

We're seeing immediate consumption are very strong internationally as well as I was saying earlier, we're seeing elasticity quite positive and in emerging markets. So overall I don't think that this is going to impact us India in the coming periods.

Sure.

Thank you. Our next question comes from Andrew <unk> with JP Morgan.

Good morning.

Just trying to.

To check something in between the lines marketing and I know you had SG&A was that last year actually we are lapping a $108 million in equity investment gain from this.

Thank you your last two years.

But just thinking as you were mentioning.

Come in better obviously that may change, but what are you embedding for the end of the in terms of marketing.

From a dollar and rate perspective, and then for the places where you can on bottlers was that any impact of stocking this quarter.

Price increases thank you.

Yes, Andrew.

It must be were up roughly in line with revenue for the year.

That's where that will likely land.

Okay.

And then your question.

On the <unk> no. There is there hasn't been any at the loading of <unk>.

For pricing because we're done with them follow these practices, neither neither with our retail partners.

Yes.

Whenever you see a sales is basically 70% allowance that we've had for the business.

Thank you. Our next question comes from Laurent <unk> with Guggenheim.

Hey, good morning, Ramon and Hugh.

Question on <unk> margin.

Progressing about 100 basis points in the quarter was back to the level of pre COVID-19 for the first quarter despite them.

Higher inflation could you please.

Sure I mean, the impact of the Iqos inflation <unk>, specifically in the quarter and also could you give us maybe more color as to where the gains are coming from.

Maybe just thinking between Turkey divestiture product mix.

Where do we go from here. Thanks.

Yes.

Thanks, a lot 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 the our pathway to mid teens.

Margins for the <unk> business that thesis is still very much intact and that's 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 sheltering our promotions and price increases and revenue management.

It 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 will progress along towards getting that business back to the margin levels that Ive mentioned earlier something something in the mid teens over the course of the next several years. So I think we're making good progress in <unk>.

As we expected inflation, obviously is higher than we expected, but we're taking actions to manage that.

Yes, the key levers.

Of that margin improvement stay intact, Ryan if you think about it portfolio.

Besides that we're trying to do those are really good work in progress.

The Gatorade performance, that's a high margin business for us clearly.

And again, a very fast phase, we're making good progress in energy.

That part of the transformation is good we're also making good progress on efficiency and operating.

So there is there is the critical lever off of that transformation and J&J clearly inflation is a factor been a SKU was saying, we're doubling down on productivity and trying to sharpen the pencil a bit more on the revenue management as well.

Thank you. Our next question comes from Vivien <unk> with Cowen.

Hi, good morning.

I was hoping to dive into your.

European EBIT margin, while I recognize that <unk> is a seasonally low quarter.

Wondering if you could offer any incremental color on that.

Martin.

No question that you thought that that might require.

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 its seasonally low in terms of the revenue as well.

In terms of some of the factors in there obviously.

Astern, Europe sort of place something of a role in terms of that number.

The second one.

Made a UK pension contribution I think of about $25 million, that's a relatively small number in the overall year, but in a two month quarter. It obviously has a disproportionate impact.

And then in addition to that the soda stream business was was a little bit soft that was a bit of a factor and recall, we report soda stream through Europe , because that's the biggest market for for the soda stream business.

Thank you. Our next question comes from Criminal Guard your wallet with credit Suisse.

Alright, thank you.

If I could if I can sneak into the guidance increase a little bit a little bit better.

Volume incentive price this quarter of course, our euro or euro expectation volume growing price dynamic as we go through the rest of the year or is it.

Can you just kind of pushed you are just including the volume upside from this quarter as part of your full year. Okay. Thanks.

There wasn't a lot of it go there if I understand your question was around.

Our volume pricing guidance.

Yes.

We've.

Raise the guidance.

Because we've seen better elasticity is in the first part of the year.

Our assumptions for the balance of the year be more conservative on elasticities, because as I said earlier within the context for the consumer might change might not change.

Obviously trying 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 on a roll here.

On assumptions going forward on a little bit more conservative because we're seeing that the consumer will be feeling.

The overall inflation in there in their disposable income.

And that might have an impact on the elasticity of our categories as well, although we think that our categories are.

Normally fare quite well and inflationary and recessionary moments and Thats why we feel optimistic about raising the guidance to 8%.

On top of a very.

Very high fast growth nine 5% last year. So clearly we're growing we're growing very fast as a company.

Thank you. Our next question comes from Kevin Grundy with Jefferies.

Great. Thanks, good morning, everyone.

Had a question on pricing as well, but from a different angle really from a retailer's perspective so.

Context of course your portfolio has been 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 thats not all frontline pricing some of its mix, but nevertheless, certainly not inconsequential for the consumer to cope with.

So my question is have the pricing discussions starting to become more difficult with retailers, particularly your large customers to 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 windows still very much open in your view if you thought there would be helpful. Thank you.

Yes. It is.

We're always make full commercial plan discussions with our customers and we try to create value for both <unk> and <unk>.

John business planning the essence of our growth strategy. So we do that in full coordination with our partners trying to.

Make sure that we keep the consumer with US we keep the shopper come into their stores 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.

And then in the buys and more insight and more value discussions and we plan to continue to do that as we go into the second half of the year end.

Into the coming years.

Obviously, we're all concerned about.

Elasticities and consumer reaction. So it has two hour both insurer has to take this into consideration as we as we build a commercial plant there are some.

There's some geographies in the world.

These discussions are a bit more tactical I would say some of the European markets. There is a bit more.

Friction when it comes to pricing.

Actually some of our net revenue in Q1 reflect 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 very good value creation when discussions.

Thank you Sir our next question comes from Bob <unk> with Evercore.

Great. Thank you very much I was wondering if you could please.

Remind us.

What your exposure is to China, what Youre seeing there now and.

Your long term plans. Thank you.

Sure.

Hey, Robert.

Low single digits.

Revenue and very low single digits on.

As is the number.

In terms of our plans I think we continue to execute in the marketplace, we own the snack business.

We have a bottler in China, who we've had a very successful relationship with <unk>.

Obviously in what is a challenging environment.

We will continue to do what we can do.

To continue to operate well, but low single digits and very low singles on the numbers.

Yes, I would say.

Obviously, we're seeing the.

The impact of the Lockdowns in Shanghai, and some other cities impact based on how the consumer behavior.

In general I would say.

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, India in the away from home channel, which is impacting most of the beverage business overall business performance.

<unk>.

And obviously, we're doing business contingency planning and make sure that we're ready in case some of the Lockdowns in fact, our operating plans now.

<unk>.

In General I would say the team has responded very well and so far we haven't seen an impact in our business, which as you said is relatively small from a barrier to the to this whole size of the company.

Just to build on <unk> point, I Should've mentioned as well. Our guide does include a level of conservatism and an expectation that performance will be somewhat challenged based on the situation there.

Thank you. Our next question comes from Steve powers with Deutsche Bank.

Good morning, good morning, Ramon and Hugh.

A quick follow up for me actually going back to Lauren's question.

Russia, Ukraine here, you mentioned the contribution there low single digits, which I think is a profit perspective.

But the business reductions there create a drag on organic growth that you're absorbing in that 8%, but then again there is this 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 calculate it and.

And to what magnitude so just some clarity there would be helpful. Thank you.

Sure happy to.

Your your thoughts are right last year, Russia was about four.

Obviously with wood.

The current environment, we would expect it to be less of that by low single digit comment.

And yes, we.

It's incorporated into our guidance, we don't expect the business to deliver a lot of growth. This year, given given all of the challenges and the decisions we've made.

And it is in fact incorporated so that we captured that is important.

Again without getting into a ridiculous level of detail.

Clearly the business is going to be.

Lower than it was in.

In 2021 buyer by a meaningful amount.

Thank you. Our next question comes from Nik Modi with RBC capital markets.

Hey, Good morning, guys. This is Philip Wilson, our analysis Nick.

A question on <unk>.

Beverage alcohol strategy, maybe if you can comment on how the heart Mountain Dew launch is performing in the states.

You've launched the product.

More longer time on bigger picture.

Give us an update on kind of your expectations for the beverage alcohol category and any potential.

New launches are our initiatives there.

Yes.

I think we are testing and learning.

At a fast speed both.

Boston Beer company's learning how to market and.

<unk>.

Improve the products in their responsibility in the partnership.

We're also learning about how to.

Distribute and sell low alcohol beverages, which obviously have a lot of restrictions of the estate.

Even when you strip out any level.

Having to train our people the right way and so on so there's a lot of distance learning very encouraging and earnings actually is we're seeing the consumers.

Obviously.

Onto new is a big brand and is generating a lot of excitement there's a lot of initial trial.

As always in these circumstances, we have to wait and to see repeats and see really.

The business stabilizes, Matt I would say good learnings for the organization is still very early in the process of building the infrastructure and the.

The talent base.

I'm pretty good pretty good response from the consumer.

To call it.

A huge success.

Thank you. Our next question comes from Brett Cooper with consumer edge research.

If there is any challenges you guys have and going direct given the independent following contracts. Thanks.

It's a very it is a journey that we started already quite some years ago.

Both on the.

On the consumer.

The customer.

I would say different levels off.

Progress in different parts of the world, probably U S and Western Europe more advanced when it comes to <unk>.

Consumer interaction.

The way we can.

Kind of target our messaging in a much more granular way and we've made good progress with doing that how we're making our media much more efficient by targeting better. So that's a that's an important progress the same with retailers, where obviously we have platforms that.

A fully digitalized and allow retailers to buy from us directly.

<unk> growth through personalization through.

Targeting the consumer and that's a journey through innovation through new digital tools through better learning of our training of our people our market tiers R. R.

Our leaders in the marketplace as a journey I.

I would say in emerging markets were a bit behind.

But it's an investment that we're putting in place part of our large investment in digitalization that we've been talking about for already a few years.

Thank you our last question comes from Chris Carey with Wells Fargo Securities.

Hi, good morning. Thank you so just to connect the questions on cost and productivity if I could.

<unk>.

The prior outlook with her commodity to be.

Low teens, I believe thats impacted Cogs in companies that are 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 visibility you have into commodity expectations I understand youre locked.

Specifically for the next few quarters, but it's fine.

So the exposure increases in Q4, and how youre thinking about incremental pricing in Q4, and then just connected Ramon I think you noted.

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 that thanks so much.

Yes, yes.

Yes.

Your math is right, we said low teens before and it'll 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 and.

In the U S. In particular, obviously other markets have different different windows. So, we'll see what that what that looks like when we get a little bit closer to the time.

In terms of your your second question around productivity, Yes, we've historically said a $1 billion and yes. It will be will be several hundred million dollars higher than that this year based on.

Based on the actions that we've needed to take to try to manage.

A challenging inflationary environment, but one that we have pretty well under control.

Okay.

So thank you everybody.

Joining us today and for the confidence you've placed in us with your investments.

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.

Q1 2022 PepsiCo Inc Earnings Call

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