Q2 2022 PepsiCo Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial stolen.
[music].
Okay.
Good morning, and welcome to Pepsico's 2022 second quarter earnings question and answer session. Your lines have been placed on listen only until it's your turn to ask the question in order to ask a question or make a comment. Please press star followed by one on your Touchtone phone at any time 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 President of Investor Relations. Mr. <unk> you may begin.
Thank you operator, I hope everyone has had the chance this morning to review our press release and prepared remarks.
All 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 updated 2022 organic revenue guidance and the potential impacts of both the COVID-19 pandemic and the deadly conflict in Ukraine on our business.
Looking statements inherently involve risks and uncertainties and only reflect our views as of today July 12, 2022, and we are under no obligation to update.
When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results.
Please refer to our second quarter 2022 earnings release, and second 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.
Forward looking statements.
Joining me today are pepsico's, chairman and CEO , Ramon Laguardia, and Pepsico's, Vice Chairman and CFO Hugh Johnston.
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 to make a comment. Please press star followed by one on your Touchtone telephone we will pause for a moment, while we compile our Q&A roster.
Yeah.
Our first question comes from Lauren Lieberman with Barclays. Your line is open.
Great. Thanks, good morning.
Such strong numbers across the board, but I was curious if we could talk a little bit about the convenience and gas channel in the U S. I know that you've noted on one hand.
Consumers, making more frequent trips to get gas allows for more opportunities to go in and buy a snack or a drink.
Other hand, theyre spending a boatload of money to fill up their tank or to the degree they are filling it up.
So the counter could be less extra mine at this time when they go into the store. So I was just curious if you could talk about what it is that Youre seeing currently I know <unk> has been an area of incremental investment for you in the last couple of months, particularly on the Frito side and just an update on I guess yield from those investments.
And what Youre seeing in terms of consumer purchasing behavior. Thanks.
Yes, good morning Laurent.
Listen.
These are important channels you are saying.
We've been investing in the U S and other other parts of the World and this impulse channel.
The trends are quite stable from what we've seen since Q4 and as the gasoline price went up.
The consumption on beverages and snacks in that particular channel, it's been pretty stable a bit less volume a bit more price as we can.
Second second quarter versus first quarter, but overall.
Sales.
<unk> remained stable at high single digit bit of a difference between beverages and snacks snacks, a bit higher than beverages that stable and that has continued through the last few weeks. So we don't see any meaningful consumer behavioral change.
As gas prices go up.
Obviously, we're watching this channel very carefully as an indicator of potential consumer.
Behavioral change that so far.
Incidents in our categories.
Thank you one moment for our next question.
Our next question comes from Dara <unk> with Morgan Stanley . Your line is open.
Hey, good morning, guys.
Right there.
So I just wanted to talk a bit about pricing relative to costs, obviously, another quarter, a very exceptionally strong pricing in Q2.
Ramon are you hearing any pushback from the retailer trade that that's different than normal it's been a topic of discussion more in CPG in general.
So just curious.
For your views on retailer pushback and ability to continue to take pricing going forward.
Including what that might mean for the fall and then Hugh can you just give us an update on the cost outlook for 2022.
Given the hedging how much hedging do you have in place does that sort of create a hangover for 'twenty three I know you won't guide for 'twenty three but just how you think about the pricing versus cost gap for 'twenty three based on where we stand today it might be helpful at least conceptually.
<unk>.
Yes, hi, there.
Yes, obviously.
Our bus partners and ourselves, we're looking at consumers and very carefully.
And the evolution of their decision when it comes to the overall basket or particular categories.
So yes.
Normally we have pretty positive conversation with our partners.
We're looking at.
How do we continue to keep our consumers and our categories. As we obviously have to pass some of these costs to the consumer and how do we do it in a way that doesn't impact volume and it continues to generate growth for them in growth for us and those are the type of conversations we're having.
Obviously overall.
Concern in a way about the high inflation and how thats going to impact, especially as we look at the full consumer universe. The lower part of the income pyramid, that's where we're all looking more.
Carefully.
Making decision as an entry point into categories and how do we continue to have that particular consumer engaging our in our categories.
The conversations are always.
<unk>.
There is always tension in those conversations that we will continue to be tension, but in general they're very positive conversations. They are ones that we have because we play a role and that's our strategic intend to be growth drivers for our partners and we go through these conversations very transparently and very positively to generate growth and additional margin for <unk>.
Customers. So that's the way the situation is and will continue.
The balance of the year and into as we start thinking about the plans for next year, right and hi, Dara in terms of cost as you know our first focus whenever we're faced with inflation is to try to drive incremental productivity on our internal costs.
And I think we've been doing a pretty good job of that I mean, we've seen this year some of the strongest productivity we've seen in a number of years.
That puts us in a relatively better position when we're faced with commodity inflation, because we're not necessarily forced to price at all through we can take a more.
Consumer centric approach to dealing with the.
The inflation and the subsequent pricing.
The balance of the year inflation is higher than it is for the first half of the year I think we've mentioned in the past where we are in the teens in terms of commodity inflation that'll continue but a little bit higher in the back half but.
But we do expect stronger productivity in the back half as well so I think from an overall cost outlook.
Sure.
Our guidance certainly captures all of that and I think it puts us in a position where we've got got high confidence in delivering the year.
Thank you one moment for our next question.
Our next question comes from Andrew <unk> with Jpmorgan. Your line is open.
Hi, good morning.
So the market share gains you alluded to.
And with DNA and I'm not going to be in a fight in snacks.
And in general we have been pretty positive and I don't know has been a narrative that there is some service level issues in both cases, and especially here in North America I'm wondering if you can comment on that and then separately.
And I think you mentioned Ramon and hearing some of like balancing what you just said inflation getting worse.
Latin America has been extremely resilient.
For a region that has obviously a lot of pressure.
Gas prices as well so I'm wondering if you can comment on where the strength is coming from.
You are getting more space in the in the big boxes.
OXXO, particularly at our Buckeye.
Dow or anything like that that gives you comfort that you're continuing to gain share from very organic basis, despite the pricing and and if you can comment again on.
The service levels in the U S.
Great.
Okay. Thank you.
Yes.
This is Matt.
I'll talk about share in a minute.
If you think about our role in you are referring to snacks and your questions, mostly bad you can apply this to beverages. Our number one responsibility as a large player in both snacks and beverages is to make sure that category grows and continues to grow in any circumstance now either economic positive.
Dynamic or negative economic.
Inflation or inflation that is our main responsibility because thats the health.
Of the business really.
Everything we're doing in our commercial plans in the U S outside of the U S is make sure that we have strong brand programs channeled programs execution programs innovation programs that continue to make our category preferred over other categories and we're seeing that and that's the main reason why.
When you see the grow there we are delivering in the low elasticities were having in many countries around the world that is the main reason we're continue to have very strong commercial programs that continue to attract consumers to our categories because of innovation because of execution and great brand program now having said that on the <unk>.
We're also seeing gains across many countries around the world that has been a consequence of the investments we've been making in the brands from it for now.
Several years.
We've strengthen our go to market capabilities, our digital capabilities. Our brands are looking more modern and more engaging for our consumers. Our innovation is great. So I think those are the combinations.
Your question on Latin America, we're seeing.
And I think it relates to the amount of transfers of money transfers that are coming from the U S into Latin America, we are seeing that number really high as a consequence of the high employment in the U S and the higher salaries were seeing that money being transferred to.
A lot of the economies in Latam and Thats, helping that is helping a lot of disposable income in those countries and we're seeing to our surprise really from the beginning of the year very low elasticity is actually positive elasticities, even though obviously, we're passing price through to the consumer in those markets in intelligent ways in new ways.
Consumers.
We will see less pressure on that but I think this possible income in.
Latam is above what it was in the past that consequence of develop economies doing very well and money going into Latam.
And the consumer is feeling good in Latin America also.
Pascal data, we're seeing behaviors.
Sure shall expansion if you want so consumers coming out of the houses consumers, having more fine externally in Latam and in many parts of the world that tends to drive higher consumption of categories.
People get together and have fun and we are part of fan experience is normally so that's how we're seeing.
The trends in our categories.
Thank you one moment for our next question.
Our next question comes from Bryan Bryan Spillane with Bank of America. Your line is open.
Alright, Thanks, operator, and good morning, everyone.
Maybe if.
If you could just talk a little bit about me.
Maybe headwind tailwind to the back half of the year I guess within the context of you raised organic sales guidance this morning, but cap.
The EPS basically the same so.
Is that a function of concerns about cost.
I know you mentioned some of that.
<unk> question Foreign exchange volatility in the world.
Kind of how you think about maybe how some of the risks or headwind tailwind.
Evolve if we look into the second half.
Yes, Brian obviously the first.
Thing that we're thinking about these days, it's just a level of volatility in the world.
We do what we can do insulate ourselves against that volatility we have zero floating.
<unk> debt, so we've insulated ourselves against that we forward buy on commodities, we insulate ourselves against that.
We try to do as much as we can to create a.
Predictable work environment. So that we have we can manage our labor cost well.
But theres, obviously macros that are out there that are more volatile than they were a few years ago. So.
As we sort of look at things clearly as I mentioned before commodities are bit higher in the back half and then they are in the first half that's incorporated into all of this.
We are still watching elasticity as closely as remote just mentioned elasticities are good right now we don't we don't plan for them to be as strong in the back half.
And we will see what happens with that.
It's certainly hard to its hard to gauge because inflation is having so much impact on the consumer in so many ways, but as we looked at all of it and we're making choices around okay. As you know we have we like to give you numbers that are highway deliverable.
The choice that we made was based on the things I just mentioned.
That we would raise the revenue guidance, because we felt highly confident in that and for EPS guidance. We made a choice to hold right now based on some of the volatility in some of the variables that I've mentioned.
Thank you one moment for our next question.
Our next question comes from Bonnie Herzog with Goldman Sachs. Your line is open.
Alright. Thank you good morning, everyone.
Just a quick follow up on Hugh just what you were discussing could you talk about.
If you are also planning to sort of reinvest or step up reinvestments into your business. Despite.
The cost inflation that you just called out in the second half and I'm thinking about in the context of your Youre very strong top line and then I did want to ask about your revenue growth management in this environment.
How strong you think your capabilities are to ensure you have the right packages in both your beverages salty snack business can sure.
You have affordable offerings, especially as we.
You could see increasing pressures on the consumer and then could you touch on your beverage business and how your ownership of your bottling operations might actually be a competitive advantage or not as it relates to that thank you.
Okay. Thanks, Bob I think that was three questions, but it will take a shot at it.
A different one.
Yeah.
Number one in terms of investment in the in the back half.
We have some investment in the back half of it was planned for.
The way that.
We're collectively trying to run the company.
Is to build sustainable results over a long period of time and that means youre constantly balancing delivering near term, while making sure that you're building capability for next year and the Europe to that and the year after that.
So I think we have the right balance on that right now and we will we will see as the results come in whether we need to make adjustments to that but.
We think we have the right balance to deliver the results. This year and also make the investments to deliver the results were for next year.
On your second question.
Regarding.
Considerable consumer value.
Listen I think we actually are best positioned to just about anybody in the industry to do that for a couple of reasons. One our portfolio is so broad anywhere from premium products like for Abbott Chino to value products like Sam Peters.
And because our supply chain, our distribution network enables us to shape the inventory in store by store so for stores that need more value products. We can wait the inventory in that store towards that for stores that premium products are going to turn better. We obviously have the ability to adjust inventory and the digital invest.
That's that we've been making in our route system actually make us even more and more capable of doing that so I think compared to where we were two or three years ago, where even sharper in terms of being able to deliver exactly the right inventory in store.
As for ownership of the beverage business.
As I've talked about many times in the past I think it is a significant competitive advantage for us. It's obviously more capital intensive, but I think it enables us to do things that it's difficult for our competitors to do so we think we are 100% on the right strategy by owning it and I think this environment is going to prove that more than more than it ever has been.
So hopefully that answered.
Nancy in terms of your questions.
Yes.
Especially Bonnie I think.
And the second question.
And the truth is that we've been investing on net revenue management now for four or five years.
<unk> has been in the developed markets, but also in the developing markets to try to add to the.
To deal.
But it is we had which were more related to the ability to.
Changed product size or understand better the channels to much more individual almost in the standing of the consumer and what we can do to keep that consumer in our in our brand and different at different levels of pricing, depending on obviously, what that consumer prefers that link to our.
Precision execution as he referred to both in developed markets, but also in developing markets as well, where we can reach normally got very copier distribution that gives us I think a unique advantage into and from consumer insights to point of sale execution that is quite high.
Hard to match in the industry and we're seeing that we're seeing that in.
Across the world.
Good investments that we're getting the return and we're going to need more of it obviously is inflation keeps going up and we're going to have to be super agile and very very precise on the choices, we make with the consumer.
Thank you one moment for our next question.
Our next question comes from Nik Modi with RBC. Your line is open.
Yes. Thank you good morning, everyone.
One I was wondering if you know the season on the bundled distribution right out.
Can you just update us on the energy drink strategy here and what kind of financial implications can be expected as we think about it.
Questions in turn.
Okay.
The course of the year now that.
I'm not sure it would be distribution stops right away or do you still have some time last fall.
On the contract expires end of 2022.
Yes, yes.
Yes, I think listen.
Obviously, our commitment to the two.
The energy category remains.
Solid as it was earlier, we will continue to see this category.
One that is growing and evolving and where we can play in multiple ways.
To capture sub segments are starting to develop.
So the.
The multi pronged approach that I've referred to in the past continues to be.
Valid so we're going to lead with the Rockstar and Rockstar were seeing several platforms in rock stars that are starting to gain.
Hold I would say in non sugar and some of the more functional beverages. So that's a big pillar second big pillar for US is our coffee business, obviously, we're having double triple shot in some additional innovation with Starbucks that.
Clearly.
Clearly consumer preferred and continues to do very well there.
Third pillar is.
Around our kind of flavor for award energy with Mountain Dew.
And we're seeing.
Sports and energy segment growing more and more in this category and we have some big ideas on how some of our large brands campaigns portion of energy in that.
In the future shortly in the future.
The distribution part has always been.
Additional opportunity we have as we were talking earlier, a very strong DSD system and we can put brands in our business and provide unique distribution capillarity and execution Thats, what we are intending with Baghdad relationship started.
Started well from the beginning and clearly it was better to stop it because he.
We had no long term value for both of US now they are the financial implications are minor it was never central to the energy strategy and we continue to be open to other opportunities on distributing brands.
That has always been.
A complementary part of this strategy the big part of their strategies, as we were saying and taking our brands and taken our innovation into new spaces and continue to this Rob This category, which continued to grow the consumers like it consumers are looking for new benefits in that category. They are willing to pay a reasonable price.
And that's not only the U S. But it is internationally and we see it as a big opportunity for Pepsico today and into the future as well.
Nick as Ramon mentioned financial impact not material.
Thank you one moment for our next question.
Our next question comes from Kevin Grundy with Jefferies.
Great. Thanks, good morning, everyone.
I wanted to pivot to your business venture with Boston beer and.
In hard mountain Dew, maybe just provide an update there how that relationship has progressed since the partnership was announced your early learnings to date and importantly, as you spend more time studying the alcohol space. Maybe you can offer some updated thoughts on your broader ambitions to play a bigger role there not only new product innovation, but also the potential to dish.
Tribute Pepsico.
Alex.
Through your distribution. Thank you.
Yes, nothing has changed from the previous quarter, when we talked about this topic as well we've learn more and we are probably more convinced.
The potential of.
As you were referring to the Boston Beer partnership I think we have.
Great product that they have developed with license the brand to Boston beer, and we're providing distribution in some states.
Execution.
Very good the product is starting very well.
I share in those in those in those states. So it makes us feel positive about the potential of higher mountain view and our relationship with Boston Beer. There are great partners and there have strong R&D capabilities and branding capabilities as they as they owned the harp them onto a new brand.
Now going forward.
Obviously, we get encouraged by this and we are working in multiple.
New innovations that.
It will come to the market shortly.
And.
From the distribution point of view the same as I said with.
And with.
Energy, we want to leverage our assets for distribution, we think an alcohol, we can bring new brands to the market, we don't want to be a.
Distributing a lot of brands that's not our that's not our intention to have many many brands and a very complex set of brands and our distribution, we'd rather focus on a few large consumer opportunities and put them through a.
What is a very powerful DSD system. So that is the way we're thinking about our alcohol distribution not a lot of brands not distributing beer or anything like that but just a few large consumer.
<unk> that we can bring.
To the market through our system, which.
Which we think is an advantage execution machine and that's what we're proving with Harman to do.
Thank you one moment for our next question.
Our next question comes from Vivien <unk> with Cowen Your line is open.
Hi, good morning.
I was asking.
Consumer preferences.
You guys have been calling out your aspirations to drive.
Volume mix shift over the long term to reduce that.
The sodium lower sugar proposition.
Thank Bob over the last five.
Five years it seems like at the start of the pandemic consumers were understandably really.
Dalton I'm curious whether you.
I don't mean, reversion and consumer preferences around health and wellness propositions within your portfolio. Thank you.
Yes, Vivien ill give you a few data.
So.
That helps you.
With the diagnostic.
In beverages.
Non sugar is growing.
Three times the speed of full sugar. So that gives you a sense of how consumers are and thats in the U S are choosing with their with their choices. If you got more developed markets around the world like Western Europe .
<unk> are pivoting very quickly turn on sugar in the UK. For example, then on sugar segmenting in beverages is already almost.
<unk>, 80% of the market. So clearly in beverages non sugar is skiing, you see some of our innovations in the last couple of years with for example, Gatorade zero.
Wasn't he is a huge innovation things a billion and a half.
Three years and.
Expansive to the category and recruiting new consumers into the brand. So non sugar I think is an unstoppable.
<unk> in the beverage category, something we're leaning in with our R&D Center.
We're leaning in with our commercial strategy with their customers.
Every brand it has a non sugar.
Lag that is going to be the focus leg for the brand in the foreseeable future. So that is in beverages, obviously youll see other trends like functionality.
Tumors looking for additional functionality and willing to pay for that.
Your question was more about health.
Sure clearly.
<unk> bin.
As I mentioned now in snacks.
I think consumers are also voting with their with their money sell permissible snacks, and we call permissible snacks.
Which are the kind of made a path or kind of not fried snacks, they're growing much faster than fried snack. So that we see that as well in that category we're seeing.
Kind of more nutritious substrates.
Growing faster than some of the more serial base.
Substrates.
One trend we're seeing across is portion control portion control.
A huge consumer idea, how we are eliminating some of the brakes. If you want in a consumer's mind to have higher frequency in our categories is portion control that we're seeing in snacks are huge growth on small format.
<unk> bags, where not only is Portugal until about variety and we're seeing that also in beverages were full sugar products that go into smaller portions right like mini cans or some other formats that give the consumer.
Little pleasure for without a lot of calories, so I would I would continue to.
That long term on health being one of the vectors that consumers are choosing and Theres also indulgent. Obviously theres also functionality Theres also social moment, there's there's a lot of vectors in our categories and that's the beauty of our categories. They attract a lot of consumers because of the multiple locations.
I will continue to bet on health being one of the.
Vectors of choice for the consumer and that's part of our innovation strategy and how we're trying to move the categories long term and as part of the success. If you think about the sodium reduction.
The <unk> transformation, the sugar reduction in our products.
A lot of the R&D investments that we've been putting the company in the last many years are starting to pay back.
We're giving the consumer the option to make choices with no trade tradeoffs in taste or any of the other key category choices.
Thank you one moment for our next question.
Our next question comes from Stephen powers with Deutsche Bank.
Hey, good morning, Thank you.
Maybe going back to the higher top line that you are now seeing for the year could you maybe expand a bit more on that and talk about the incremental changes that have taken shape.
And your own expectations since last quarter, I guess would you frame the two points of organic growth upside more volume.
Volume or price mix driven versus prior expectations and maybe what you call. It any particular segments are more or less responsible that'd be helpful and I know I'm wondering.
One question, but Hugh if I could just going back to Brian's question on second half comp.
It wasn't fully clear on the answer whether the maintained EPS in light of the better top line was was really more conservatism in the face of volatility or if there were no in pockets of higher costs are now facing and if the latter if you could just be a little bit more specific there. Thank you.
Yes, why don't I.
Handle that piece first then maybe Ramon and I can tag team. Your first question.
The latter piece as you know, Steve we're never Conservative we try to be accurate here that said, we also try not to miss numbers. So.
I think there is nothing new that debt.
We weren't aware of frankly, a couple of months ago.
Don't think theres any any incremental information that would cause us to be concerned about the back half.
Regarding your question around why is the revenue number higher I think the primary reason is given given the unknowns around consumer elasticity.
As we came out of the first quarter, we were quite pleased with wireless to city set.
But we still have nine months left in the year. So we adopted a certain posture about the balance of the year.
Second quarter has also held up from an elasticity perspective, better than we thought and we're sort of flowing that upside through.
That said the balance of the year, we still have six months ago.
Plenty of unknowns in terms of what's going to happen with consumer behavior. We think we're well positioned both from a customer perspective, as well as from a consumer perspective, but.
We still have six months ago, and consumers are still sort of absorbing the impact on inflation on their overall spending so.
I think I wouldn't characterize it as conservatism I think we go through a lot of scenario planning and the sum of those scenarios led us to choose higher on revenue, but not yet higher on EPS.
Thank you one moment for our next question.
Our next question comes from <unk> <unk> with credit Suisse. Your line is open.
Hi, guys good morning.
You've made a business decision I guess, some years ago to own and retain the bottlers.
That you purchased I guess, maybe 10 ish years ago.
If we are indeed in a.
Very different inflationary environment.
Does that change how you think about how asset light or asset heavy you prefer the business to be.
Yes.
Hi, This is Ramon now listen.
Inflation will come and go.
And the reason why we keep in the powertrain business integrated with the brand business is much more a longer term then.
I don't know if the economic cycle that will leave for the next couple of years is a huge strategic decision that.
It's more based on if you think about the consumer.
Evolution and the shopper evolution in the way channels would evolve in the future.
Having an integrated brand to consumer.
Value chain will give us flexibility and faster decision, making that we believe creates a lot of value for the company right in the short term.
Yes, we will have inflation in SMB, and we will have inflation in and some of the manufacturing that you have a bottling system that inflation happens anyhow. So your system is still has that inflation is not like.
Nobody's isolated from inflationary pressures I mean your system consumer too.
Manufacturing to consumers still has that inflation. So we think again. This is a very strategic decision. We've made thinking about the long term, where consumer is going where the shopper is going where the retailers are going where we're going to fulfill demand in the future and where demand will be in the future much more complex much more long tail.
There is a lot of things that.
We feel that we're going to be better positioned.
In the future and we're talking about 510 years from now to fulfill that demand in a much more integrated way from the brand to the consumer with all the value chain under one decision making points again.
Again.
The economic cycles will will differ now will have inflation may be three years from now we'll have deflation and it will be in a hotel.
We're not thinking that short term for what is a huge.
Business model decision.
Thank you one moment for our next question.
Our next question comes from Brett Cooper with consumer edge. Your line is open.
Good morning from the data that we can see your top line is benefiting by about 100 basis points from reductions in promotional depth and breadth and thats not just short term we've seen that over the last several years and we can obviously only seeing part of your business I was hoping that you can speak to the benefits from promotional optimization across your business, what's enabling that realization and then given the enormous.
The promotional spend in your business, what the potential is for promotional optimization over the medium term. Thanks.
Yes, great question and.
If you think about there where we're looking at all of the costs in the company the cost to fulfill demand at costs to generate demand and we're looking at higher return on investment across all of the costs that we have in the business. Obviously, the one you're referring to along with our marketing investments are the two big demand creation.
We're looking at optimizing those.
Investments both in the consumer side and on the consumer customer site and that's has been a journey.
It has been done.
Through much more intelligence through much more data at much better precision decisions in that in that space along with our customers.
And that is a journey that I would see is a continuous journey to optimize all the budgets that we have in the company to maximize returns. So trade by did as you say is a large budget.
We're going to continue to optimize it and maybe move those resources to some other areas, where we can get better demand generation rate and we will do that in a.
Partnership with our customers and to the to this period of creating growth for the category as we've had in the past.
Thank you one moment for our next question.
Our next question comes from Chris Carey with Wells Fargo.
Okay.
Hi, Good morning, So just a couple of questions on some of these more topical market in Europe .
If anywhere this is where you asked it.
To be playing out.
Are we finally seeing the consumer coming down a bit here.
Pricing has built are there other factors in play beginning to impact volumes, whether supply chain product availability basically anything else. Besides pure consumer elasticity and then just in China. Despite Lockdowns mill. Another strong number can you maybe just give us a sense of what's going on on the ground in China.
It continued to deliver this level of growth. Thank you.
Yeah.
This in Europe , obviously has been impacted by a more than other parts of the world by.
I would say the awards our business has been impacted.
Both in Ukraine, and Russia, Ukraine, because obviously, we had to stop a lot of our <unk>.
Manufacturing and commercial activities as reflected in our in our performance in Europe and also in Russia, given the commitments we've made to stop our beverage some of our beverage large brands and also stop advertising and promotion of our.
More essential fluid brand. So clearly that's part of the reason why the European business has been impacted.
<unk>.
With regards to two.
To China.
Clearly the Lockdowns are impacting the operation of the business. So our team has been incredibly agile too.
To make the right <unk> in how we are continuing to produce.
Our our snacks or beverages.
And we've been able to more or less manage that and what is an incredibly challenged situation to get raw materials and to get products out to consumers.
Doing that probably better than other companies and that's why we're gaining share dramatically. That's the reason why our business is growing very fast now.
If you think about the beverage business there has been an impact to the consumption of the beverage business in a way from home. So as consumers have obviously stayed more at home that has been an impact in the last few months in that particular channel.
Not so much India in the fluids business, we're seeing both our Quaker business in our snack business continued to grow very fast.
Yes on the beverage side of the business basically because of the away from home impact in.
Home consumption of beverages continues to be quite strong.
Thank you one moment for our next question.
Sorry.
Our last question comes from Peter Grom with UBS. Your line is open.
Hey, good morning, everyone and I hope you're doing well so I was hoping to follow up on Nick's question around the energy portfolio. So Ramon you mentioned the willingness to leverage your distribution assets, but.
I would be curious if there are any major takeaways from our relationship with them and that kind of informs your view on how you think about these agreements moving forward and then just any thoughts around timing I guess is it a near term focus to kind of find a new brand and fill that void or is this something you'd think about opportunistically overtime.
Yeah. This is Peter I think as I said.
The distribution part of the energy strategy is very marginally one way or another.
The core part of the strategy continue to lean into our brands, we have very strong brands in our portfolio that I think as we see that category evolving we're going to be able to play in those new spaces and capture market share looking forward and where the consumer is going so again I'll repeat at Rockstar and some parts of Rockstar what we're seeing.
<unk>.
A lot of consumer pool, especially non sugar and some of the more functional Starbucks coffee forward flavor forward with mountain Dew and as I said, we we see a sports and energy is a big space, where we can capture.
With some of our large brands in that space and innovation will be coming into the market. Soon those are the main if you think about our strategy and we might evolve that strategy with new space and how our brands can go there that's our core of the strategy.
Again, leveraging our assets for distribution is marginal.
To your question on Bang.
You need to have good long term partnership for.
The relationship to work that didn't exist.
Turning to page.
Ladies and gentlemen.
Question right. So thank you everyone for joining us today, and then those summer and everybody has.
A lot of things to do and then obviously for the confidence that you are placing with your investment and Pepsico.
We hope that you guys are safe and healthy and enjoy the summer. Thank you.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
Yeah.
Yes.
The conference will begin shortly to raise your hand during Q&A you can dial stolen.
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Good morning, and welcome to Pepsico's 2022 second quarter earnings question and answer session. Your lines have been placed on listen only until it's your turn to ask the question in order to ask a question or make a comment. Please press star followed by one on your Touchtone phone at any time 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 President of Investor Relations. Mr. <unk> you may begin.
Okay.
Thank you operator, I hope everyone has had the 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 updated 2022 organic revenue guidance and the potential impacts of both the COVID-19 pandemic and the deadly conflict in Ukraine on our business.
Forward looking statements inherently involve risks and uncertainties and only reflect our views as of today July 12, 2022, and we are under no obligation to update.
When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results.
Please refer to our second quarter 2022 earnings release, and second 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.
Forward looking statements.
Joining me today are pepsico's, chairman and CEO , Ramon Laguardia, and Pepsico's, Vice Chairman and CFO Hugh Johnston.
I 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 I'll make a comment. Please press star followed by one on your Touchtone telephone we will pause for a moment, while we compile our Q&A roster.
Yeah.
Okay.
Our first question comes from Lauren Lieberman with Barclays. Your line is open.
Great. Thanks, good morning.
Such strong numbers across the board, but I was I was curious if we could talk a little bit about the convenience and gas channel in the U S. I know that you've noted on one hand.
Consumers, making more frequent trips to get gas allows for more opportunities to go in and buy a snack or a drink.
The other hand, theyre spending a boatload of money to fill up their tank or to the degree they are filling it up.
So the counter could be less extra money to spend when they go into the store. So I was just curious if you could talk about what it is that Youre seeing currently I know CMG has been an area of incremental investment for you in the last couple of months, particularly on the Frito side and just an update on I guess yield from those investments.
And what Youre seeing in terms of consumer purchasing behavior. Thanks.
Yes.
Yes, good morning Lauren.
Yes.
These are important channels, you are saying and we've been investing in the U S and other other parts of the world and this impulse channel.
The trends are quite stable from what we've seen since Q4 and as the gasoline price went up.
The consumption on beverages and snacks in that particular channel, it's been pretty stable, albeit less volume had been more price as we announce second second quarter versus first quarter, but overall.
Sales.
<unk> remained stable at high single digit bit of a difference between beverages and snacks snacks a bit higher than beverages.
Stable and that has continued into the last few weeks. So we don't see any meaningful consumer behavioral change.
As gas prices go up.
We're watching this channel very carefully as an indicator of potential consumer behavioral.
Behavioral change that so far.
High incidence in our categories.
Yes.
Okay.
Thank you one moment for our next question.
Our next question comes from Dara <unk> with Morgan Stanley . Your line is open.
Hey, good morning, guys.
Alright there.
So I just wanted to talk a bit about pricing relative to costs, obviously, another quarter, a very exceptionally strong pricing in Q2.
Ramon are you hearing any pushback from the retailer trade that's different than normal it's been a topic of discussion more in CPG in general So just curious.
For your views on retailer pushback and ability to continue to take pricing going forward.
What that might mean for the fall and then Hugh can you just give us an update on the cost outlook for 2022.
And given the hedging how much hedging do you have in place does that sort of create a hangover for 'twenty three I know you won't guide for 'twenty three but just how you think about the pricing versus cost for 'twenty three based on where we stand today it might be helpful. At least conceptually. Thanks.
Yes, hi, there.
Yes, obviously.
Our bus partners and ourselves, we're looking at consumers and very carefully.
And the evolution of their decision when it comes to the overall basket or particular categories.
So yes.
Normally we have pretty positive conversation with our partners.
We're looking at.
How do we continue to keep our consumers and our categories. As we obviously have to pass some of these costs to the consumer and how do we do it in a way that that has an impact volume and it continues to generate growth for them in growth for us and those are the type of conversations we're having.
Obviously overall.
Concern in a way about the high inflation and how thats going to impact, especially as we look at the full consumer universe. The lower part of the income pyramid, that's where we're all looking more.
Carefully.
Making decisions on entry point into categories and how do we continue to have that particular consumer engage in our in our categories.
The conversations are always.
Louise.
There is always tension in those conversations that we will continue to be 10 shows that in general there are very positive conversations they want that we have because we play a role and thats, our strategic intend to be growth drivers for our partners and we go through these conversations very transparently and very positively to generate growth and additional <unk>.
Margin for our customers. So that's the way the situation is and will continue.
Balance of the year and into as we start thinking about the plans for next year, right and Hi Dara.
In terms of cost as you know our first focus whenever we're faced with inflation is to drive to drive incremental productivity on our internal costs.
And I think we've been doing a pretty good job of that I mean, we've seen this year some of the strongest productivity we've seen in a number of years.
That puts us in a relatively better position when we're faced with commodity inflation, because we're not necessarily forced to price at all through we can take a more consumer centric approach to dealing with.
The inflation and the subsequent pricing.
The balance of the year inflation is higher than than it is for the first half of the year I think we've mentioned in the past where we are in the teens in terms of commodity inflation that will continue but a little bit higher in the back half.
But we do expect stronger productivity in the back half as well so I think from an overall cost outlook.
Our guidance.
Certainly captures all of that and I think it puts us in a position where we've got got high confidence in delivering the year.
Thank you one moment for our next question.
Our next question comes from Andrew <unk> with Jpmorgan. Your line is open.
Hi, good morning.
So the market share gains you alluded to in <unk>.
The BNA and not going to be in ASI in snacks.
And in general we've been pretty positive and I know has been a narrative that there is some service level issues in both cases and especially in North America wondering if you can comment on that and then separately I'll outline.
And I think you mentioned <unk> in terms of like balancing what you just said inflation getting worse.
Latin America has been extremely resilient.
For a region that has obviously a lot of pressure.
Gas prices as well so wondering if you can comment on where the strength is coming from.
You are getting more space in the in the big boxes.
OXXO, but theyre already at all or all Packer, Dell or anything like that that gives you comfort that you're continuing to gain share from very organic basis, and despite the pricing and and if you can comment again.
On the surface level. Thank you.
<unk>.
Okay. Thank you.
This is Matt.
No.
I will talk about share in a minute, Matt if you think about our role and you're referring to snacks.
<unk> Moseley.
You can apply this to beverages, our number one responsibility as a large player in both snacks and beverages is to make sure that category grows and continues to grow in any circumstance now either.
<unk> positive economic or negative economic high inflation or inflation that is our main responsibility because thats the health.
The health of the business really.
Everything we're doing in our commercial plans in the U S outside of the U S is make sure that we have strong brand programs channeled programs execution programs innovation programs that continue to make our category preferred over other categories and we're seeing that and that's the main reason why when you see the.
Grow there we're delivering in the low elasticity as we're having in many countries around the world that is the main reason, we're continuing to have very strong commercial programs that continue to attract consumers to our categories because of innovation because of execution and great brand program now having said that on the share front, where we are.
Also seen gains across many countries around the world that has been a consequence of the investments we'll be making in the brands from MIT for now several years.
We've strengthened our go to market capabilities, our digital capabilities. Our brands are looking more modern and more engaging for our consumers. Our innovation is great. So I think those are the combinations.
And then your question on Latin America, we're seeing.
Sure.
And I think it relates to the amount of transfers and Mani transfers that are coming from the U S into Latin America, we are seeing that number really high as a consequence of the high employment in the U S and the higher salaries were seeing that money being transferred to a lot of the economies in Latam and thats, helping.
That's helping a lot of disposable income in those countries and we're seeing to our surprise really from the beginning of the year very low elasticity is actually positive elasticities, even though obviously, we're biased in price through to the consumer in those markets in intelligent ways in ways that consumers.
We will see less pressure on that but I think this possible income in Latam is above what it was in the past the consequences of develop economies doing very well and money going into Latam.
And the consumer is feeling good in Latin America also.
<unk>, we're seeing behaviors.
Sure shall expansion if you want so consumers coming out of the houses consumers, having more fine externally in Latam and in many parts of the world that tends to drive higher consumption of categories because people get together and have fun and we are part of fan experience is normally so that's how we're seeing.
The trends in our categories.
Sure.
Thank you one moment for our next question.
Our next question comes from Bryan Bryan Spillane with Bank of America. Your line is open.
Alright, Thanks, operator, and good morning, everyone.
Maybe Hugh.
If you could just talk a little bit about <unk>.
Maybe headwind tailwind through the back half of the year I guess within the context of you raised organic sales guidance this morning, but.
The EPS basically the same so.
Is that a function of concerns about call.
I know you mentioned some of that in response to <unk> question Foreign exchange volatility in the world.
Kind of how you think about that how maybe how some of the risks or headwinds tailwind.
Evolved as we look into the second half.
Yes, Brian obviously, the the first.
The thing that we're thinking about these days is just the level of volatility in the world.
We do what we can to insulate ourselves against that volatility we have zero floating.
Right that so we've insulated ourselves against that we forward buy on commodities, we insulate ourselves against that.
We try to do as much as we can to create a.
Predictable work environment. So that we have we can manage our labor costs well.
But theres, obviously macros that are out there that are more volatile than they were a few years ago. So.
As we sort of look at things clearly as I mentioned before commodities are bit higher in the back half and then they are in the first half that's incorporated into all of this.
We are still watching elasticity as closely as remote just mentioned elasticities are good right now we don't we don't plan for them to be as strong in the back half.
And we will see what happens with that.
It's certainly hard to hard to gauge because inflation is having so much impact on the consumer in so many ways, but as we looked at all of it and we're making choices around okay. As you know we have we like to give you numbers that are highway deliverable.
The choice that we made was based on the things I just mentioned.
That we would raise the revenue guidance, because we felt highly confident in that and for EPS guidance. We made a choice to hold right now based on some of the volatility in some of the variables that I've mentioned.
Thank you one moment for our next question.
Our next question comes from Bonnie Herzog with Goldman Sachs. Your line is open.
Alright. Thank you good morning, everyone.
Just a quick follow up on what you were discussing could you talk about.
If you are also planning to sort of reinvest or step up reinvestments into your business. Despite.
The cost inflation that you just called out in the second half and I am thinking about in the context of your.
Youre very strong top line and then I did want to ask about your revenue growth management in this environment.
How strong you think your capabilities are to ensure you have the right packages in both your beverages salty snack business can sure.
You have affordable offerings, especially as me.
The increasing pressure on the consumer and then could you touch on your beverage business and how your ownership of your bottling operations might actually be a competitive advantage or not as it relates to that thank.
Thank you.
Okay. Thanks, Bob I think that was three questions, but I'll take a shot at it.
For one.
Number one in terms of investment in the in the back half, yes, we have some investment in the back half it was planned for.
The way that we're collectively trying to run the company is to build sustainable results over a long period of time.
That means youre constantly balancing delivering near term while.
Making sure that you're building capability for next year in Europe to that and the year after that.
So I think we have the right balance on that right now and we will we will see as the results come in whether we need to make adjustments to that but.
We think we have the right balance to deliver the results. This year and also make the investments to deliver the results for for next year.
On your second question.
Regarding.
Supervalu Prime consumer consumer value, yes, yes.
Listen I think we actually are best positioned to just about anybody in the industry to do that for a couple of reasons one our portfolio is so broad.
We're from premium products like for Abbott Chino to value products like <unk>.
And because our supply chain, our distribution network enables us to shape the inventory in store by store.
For stores that need more value products, we can wait the inventory in that store towards that for stores that premium products are going to turn better. We obviously have the ability to adjust inventory and the digital investments that we've been making in our route system actually make us even more and more capable of doing that so I think compared to where we were two or three years ago.
We're even sharper in terms of being able to deliver exactly the right inventory in store.
As for ownership of the beverage business.
As as I've talked about many times in the past.
I think it is a significant competitive advantage for us, it's obviously more capital intensive, but I think it enables us to do things that it's difficult for our competitors to do so we think we are 100% on the right strategy by owning it and I think this environment is going to prove that more than more than it ever has before so hopefully that answered.
<unk> in terms of your questions.
Especially Bonnie ethane.
On the second question and the truth is that we've been investing on net revenue management now for four or five years.
And it has been in the developed markets, but also in the developing markets to try to.
To the.
Two deals.
But it is we had which were more related to the ability to change.
Changed product size or understand better the channels to much more individual homeowners and the standing of the consumer and what do we can do to keep that consumer in our in our brand and different have different levels of pricing depending on obviously, what that consumer prefers that link to our.
Precision execution as you referred to both in developed markets, but also in developing markets as well, where we can reach normally got very capillary distribution that gives us I think a unique advantage into and from consumer insights to point of sale execution that is quite high.
Hard to match in the industry and we're seeing that we're seeing that in.
Across the world.
Good investments that we're getting into a return and we're going to need more of it obviously is inflation keeps going up and we're going to have to be super agile and very very precise on the choices, we make with the consumer.
Thank you one moment for our next question.
Our next question comes from Nik Modi with RBC. Your line is open.
Yes. Thank you good morning, everyone.
One I was wondering if now the season on the bundled solution right out.
Can you just update us on the energy drink strategy here and what kind of financial implications can be expected as we think about.
Question <unk> in terms of bookings over the course of the year now that.
I'm not sure if the distribution swaps right away or do you still have some time last fall on the contract expires end of 2022.
Yes.
Yes, listen obviously, our commitment to the.
To the energy category remains.
As solid as it was earlier, we will continue to see this category.
One that is growing and evolving and where we can play in multiple ways.
To capture sub segments are starting to develop.
So.
Multi pronged approach that I've referred to in the past continues to be.
So we're going to lead with Rockstar and Rockstar were seeing several platforms in rock started there are starting to gain.
Hold I would say in non sugar and some of the more functional beverages. So that's a big pillar second big pillar for US is our coffee business, obviously, we're having double Shah triple shot in some additional innovation with Starbucks that.
Clearly consumer preferred and continues to do very well the third pillar is.
Around our kind of flavor for ward energy with mountain Dew and we're seeing.
Sports and energy segment growing more and more in this category and we have some big ideas on how some of our large brands campaigns bores on energy.
In the past in the future shortly in the future.
The distribution partner has always been an additional opportunity we have as we were talking earlier, a very strong DSD system and we can put brands in our business and.
Unique distribution capillarity and execution that is what we were intending with Baghdad relationship didn't start well from the beginning and clearly it was it was better to stop it because we had no long term value for both of US now they are the financial implications are minor it was never central to the energies.
And we continue to be open to other opportunities on distributing brands.
That has always been.
A complementary part of this strategy the big part of their strategies as it was say in taking our brands and taken our innovation into new spaces and continue to disrupt this category, which is continuing to grow the consumers like it consumers are looking for new benefits in that category, they're willing to pay a reasonable price.
<unk> and Thats not only the U S, but internationally and we see it as a big opportunity for Pepsico today and into the future as well.
Nick as Ramon mentioned financial impact not material.
Thank you one moment for our next question.
Our next question comes from Kevin Grundy with Jefferies.
Great.
Everyone.
I wanted to pivot to your business venture with Boston beer and.
Hard mountain Dew, maybe just provide an update there how that relationship has progressed since the partnership was announced your early learnings to date and importantly, as you spend more time studying the alcohol space. Maybe you can offer some updated thoughts on your broader ambitions to play a bigger role there not only new product innovation, but also the potential to.
Pepsico products through your through your distribution. Thank you.
Yes.
Yes, nothing has changed from the previous quarter, when we talked about this topic as well with learn more and we are probably more convince.
The potential of.
As you were referring to the Boston Beer partnership thing we have.
Great product that they have developed with license the brand to Boston beer, and we're providing distribution in some states.
Execution.
Very good.
<unk> is starting very well of high share in those in those.
In those states. So it makes us feel positive about the potential of higher months of new and our relationship with Boston beer. They are great partners and there have strong R&D capabilities and branding capabilities as they as they owned the harp them onto new brand now going forward.
Obviously, we get encouraged by this and we are working in multiple.
New innovations that.
We will come to the market shortly.
And.
From the distribution point of view the same as I said with.
And with energy, we want to leverage our assets for distribution, we think an alcohol, we can bring new brands to the market. We don't want to be a distinguishing a lot of brands. That's not our that's not our intention to have many many brands and a very complex set of brands and our distribution we'd rather.
Focus on a few large consumer opportunities and put them through a.
What is a very powerful DSD system. So that is the way we're thinking about our alcohol distribution not a lot of brands not distributing beer or anything like that but just a few large consumer.
Ideas that we can bring to them.
To the market through our system.
Which we think is an advantage execution machine and that's what we're proving with Harman to do.
Okay.
Thank you one moment for our next question.
Our next question comes from Vivien <unk> with Cowen Your line is open.
Hi, good morning, all.
I was hoping you could guide then call.
Consumer preferences.
You guys have been consistent in calling out your aspirations to drive portfolio mix shift over the long term to reduce that.
Sodium lower central proposition, but as I think back over the last five.
Five years it seems like at the start of the pandemic consumers were understandably really.
Dalton I'm curious whether you anymore.
Reversion in consumer preferences around health and wellness propositions within your portfolio. Thank you.
Yes, Vivien ill give you a few data.
And so.
That helps you.
With the diagnostic.
And in beverages non.
Non sugar is grow in <unk>.
Three times the speed of full sugar. So that gives you a sense of how consumers are and thats in the U S are choosing with their with their choices. If you got more developed markets around the world like Western Europe . The categories are pivoting very quickly on sugar in the UK for example.
Then on sugar segmenting beverages is already almost <unk>, 80% of the market. So clearly in beverages non sugar is skiing, you see some of our innovations in the last couple of years with for example, Gatorade zero that was actually is a huge innovation things a billion and a half.
In only three years.
<unk>.
Our expansive to the category and recruiting new consumers into the brand. So non sugar I think is an unstoppable.
Trends in the beverage category something we're leaning in with our R&D Center, we're leading with our commercial strategy with their customers.
Every brand it has a non sugar.
Lag that is going to be the focus leg for the brand in if youre in the foreseeable future. So that is in beverages, obviously youll see other trends like functionality.
We're looking for additional functionality and willing to pay for that.
Your question was more about health.
Sure clearly.
<unk>.
As I mentioned now in snacks.
I think consumers are also voting with their with their money sell permissible snacks, and we call permissible snacks.
Which are the kind of made a pod or kind of not fried snacks, they're growing much faster than fried snacks. So that we see that as well in that category we're seeing.
Kind of more nutritious substrates.
Growing faster than some of the more serial base.
Substrates.
One trend we're seeing across is portion control portion control.
A huge consumer idea how were eliminated in some of the brakes. If you want in the consumer's mind to have higher frequency in our categories is portion control and we are seeing in snacks are huge growth on small format.
Multi bags, where not only is portion control blood variety and we're seeing that also in beverages were full sugar products that go into smaller portions right like mini cans or some other formats that give the consumer.
Little pleasure for without a lot of calories, so I would I would continue to bed.
That long term on health being one of the vectors to that consumers are choosing and there is also an indulgent. Obviously theres also functionality. There's also social moment, there's there's a lot of vectors in our categories and that's the beauty of our categories. They attract a lot of consumers because of the multiple locations that will continue to bear.
On health being one of the.
Vectors of choice for the consumer and that's part of our innovation strategy and how we're trying to move the categories long term and as part of the success. If you think about the sodium reduction.
The <unk> transformation, the sugar reduction in our products.
A lot of the R&D investments, we've been putting the company in the last many years are starting to pay back in.
Given the consumer the option to make choices with no trade tradeoff.
Tradeoffs in taste or any of the other key category choices here.
Sure.
Thank you one moment for our next question.
Our next question comes from Stephen powers with Deutsche Bank.
Hey, good morning, Thank you.
Maybe going back to the higher top line that you are now seeing for the year could you maybe expand a bit more on that and talk about the incremental changes that have taken shape.
And your own expectations since last quarter, I guess would you frame the two points of organic growth upside more volume.
Volume or price mix driven versus prior expectations, maybe would you call out any particular segments is more or less responsible that'd be helpful and I know I'm only.
One question, but Hugh if I could just going back to Brian's question on second half comp.
It wasn't fully clear on the answer whether the maintained EPS in light of the better topline was was really more conservatism in the face of volatility or if there were no in pockets of higher costs are now facing missed the latter if you could just be a little bit more specific there. Thank you.
Yes, why don't I handle that piece first and then maybe remind and I can tag team. Your first question.
The latter piece.
Steve We're never Conservative we try to be accurate here that said, we also try not to miss numbers. So.
I think there is nothing new that debt.
We weren't aware of frankly, a couple of months ago. So I don't think theres any any incremental information that would cause us to be concerned about the back half.
Regarding your question around why is the revenue number higher I think the primary reason is given given the unknowns around consumer elasticity.
As we came out of the first quarter, we were quite pleased with wireless <unk> set.
But we still have nine months left in the year. So we adopted a certain posture about the balance of the year.
Second quarter has also held up from an elasticity perspective, better than we thought and we're sort of flowing that upside through.
That said the balance of the year, we still have six months ago.
So plenty of unknowns in terms of what's going to happen with consumer behavior. We think we're well positioned both from a customer perspective, as well as from a consumer perspective, but.
We still have six months ago, and consumers are still sort of absorbing the impact on inflation on their overall spending so.
I think I wouldn't characterize it as conservatism I think we go through a lot of scenario planning and the sum of those scenarios led us to choose higher on revenue, but not yet higher on EPS.
Thank you one moment for our next question.
Our next question comes from <unk> <unk> with credit Suisse. Your line is open.
Hi, guys good morning.
You've made a business decision I guess, some years ago to own and retain the bottlers.
That you purchased I guess, maybe 10 ish years ago.
If we are indeed in a.
Very different inflationary environment does that change how you think about how asset light or asset heavy for the business to be.
Yes.
Hi, This is Ramon now listen.
Inflation will come and go.
And the reason why we keep in the bottling business integrated with the brand business is much more a longer term then.
The economic cycle that will leave for the next couple of years is a huge strategic decision that.
It's more based on if you think about the consumer.
Evolution and the shopper evolution in the way channels will evolve in the future.
Having an integrated brand to consumer.
<unk> chain will give us flexibility and faster decision, making that we believe creates a lot of value for the company right in the short term.
Yes, we will have inflation in SMB, and we will have inflation in some of the manufacturing.
You have a bottling system that inflation happens anyhow. So your system is still has that inflation is not like.
Nobody is isolated from inflationary pressures I mean your system consumer too.
Manufacturing to consumers still has that inflation. So we think again. This is a very strategic decision. We've made thinking about the long term, where consumer is going where the shoppers are going where the retailers are going where we're going to fulfill demand in the future and where demand will be in the future much more complex much more long tail.
Theres a lot of things that.
We feel that we're going to be better positioned.
In the future and we're talking about 510 years from now to fulfill that demand in a much more integrated way from the brand to the consumer we saw the value chain under one decision making points.
Again.
The economic cycles will will differ now will have inflation may be three years from now we'll have deflation and it will be.
We're not thinking that short term for what is a huge.
Business model decision.
Thank you one moment for our next question.
Our next question comes from Brett Cooper with consumer edge. Your line is open.
Good morning, Dave.
Data that we can see your top line is benefiting by about 100 basis points from reductions in promotional depth breadth and thats not just short term we've seen that over last several years and we can obviously only seeing part of your business I was hoping that you can speak to the benefits from promotional optimization across your business, what's enabling that realization and then given the enormous size of promotional spend in your business.
What the potential is for promotional optimization over the medium term. Thanks.
Yes, good great question and.
If you think about that where we're looking at all of the costs in the company the cost to fulfill demand at cost to generate demand and we're looking at higher return on investment across all of the costs that we have in the business. Obviously, the one you're referring to along with our marketing investments are the two big demand creation.
We're looking at optimizing those invest.
The investment both in the consumer side and on the consumer customer site and that's has been a journey.
It has been done.
Through much more intelligence through much more a date at much better precision decisions in that in that space along with our customers.
And that is a journey that I would see is a continuous journey to optimize all the budgets that we have in the company to maximize returns on trade budget as you say is a large budget.
We're going to continue to optimize it and maybe move those resources to some other areas, where we can get better demand generation and we will do that in.
A partnership with our customers and to the to this period of creating growth for the category as we've had in the past.
Thank you one of them before our next question.
Our next question comes from Chris Carey with Wells Fargo.
Yes.
Hi, Good morning, So just a couple of questions on some of these more topical markets I guess just in Europe .
If anywhere this is where <unk> needs to.
To be playing out.
Are we finally seeing the consumer come on non debate here at.
As pricing has built are there other factors in play beginning to impact volumes, whether supply chain product availability basically anything else. Besides pure consumer elasticity and then just in China. Despite lockdowns.
Another strong number can you maybe just give us a sense of what's going on on the ground in China to continue to deliver this level of growth. Thank you.
Yeah good.
This in Europe , obviously has been impacted by a more than other parts of the world by.
I would say the awards our business has been impacted.
Both in Ukraine, and Russia, Ukraine, because obviously, we had to stop a lot of our.
Manufacturing commercial activities as reflected in our in our performance in Europe and also in Russia, given the commitments we've made to stop our beverage some of our beverage large brands and also scarp advertising and promotion of our.
More essential food brands.
That's part of the reason why the European business has been impacted.
<unk>.
With regards to.
To China.
Clearly the Lockdowns are impacting the operation of the business. So our team has been incredibly agile too.
To make the right <unk> in how we are continuing to produce.
Our our snacks or beverages.
And we've been able to more or less manage that and what is an incredibly challenged situations to get raw materials and to get products out to consumers.
We're doing that probably better than other companies and that's why we're gaining share dramatically. That's the reason why our business is growing very fast now.
Think about the beverage business there has been an impact to the consumption of the beverage business in a way from home so as consumers have.
These lease stayed more at home and it has been an impact in the last few months in that particular channel.
Not so much in the in the fluids business, we're seeing both our Quaker business in our snack business continued to grow very fast.
Lessor on the beverage side of the business basically because of the away from home impact.
Home consumption of beverages continues to be quite strong.
Thank you one moment for our next question.
Okay.
Our last question comes from Peter Grom with UBS. Your line is open.
Hey, good morning, everyone I hope you're doing well so I was hoping to follow up on next question.
The energy portfolio. So Ramon you mentioned the willingness to leverage your distribution assets, but I would be curious if there are any major takeaways from our relationship with them and that kind of informs your view on how you think about these agreements moving forward and then just any thoughts around timing I guess.
Near term focus to kind of find a new brand to fill that void or is this something you'd think about opportunistically overtime.
Yeah. This is Peter I think as I said.
The distribution bar of the energy strategy is very marginally one way or another and I'd say, it's not the core part of the strategy continue to lean into our brands. We have very strong brands in our portfolio that I think we see that category evolving we're going to be able to play in those new spaces and capture market share.
Forward and where the consumer is going so again I will repeat at Rockstar and some partial of Rockstar what we're seeing.
A lot of consumer pool, especially non sugar and some of the more functional Starbucks coffee forward flavor forward with mountain Dew and as I said, we we see a sports and energy is a big space, where we can capture.
With some of our large brands in that space and innovation will be coming into the market. Soon those are the main if you think about our strategy and we might evolve that strategy with new space and how our brands can go there thats our core of the strategy.
Leveraging our assets for distribution is marginal.
To your question on Bang.
You need to have good long term partnership for.
For the relationship to work that didn't exist. So we are turning the page.
Ladies and gentlemen.
Question right. So thank you everyone for joining us today, and then those summer and everybody has.
A lot of things to do and then obviously for the confidence that euro, placing with your investment and Pepsico.
We hope that you guys are safe and healthy and enjoy the summer. Thank you.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.