Q3 2022 PepsiCo Inc Earnings Call

October 12, 2022

Yeah.

Good morning, and welcome to Pepsico's 2022 third quarter earnings question and answer session. Your lots have been placed on listen only until it is your turn to ask a question in order to ask a question or make a comment. Please press star 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 a chance this morning to review our press release and prepared remarks, both of which are available on our website.

Before we begin please take note of our cautionary statement, we may make forward looking statements on today's call, including about our business plans and our updated 2022 guidance.

Forward looking statements inherently involve risks and uncertainties and only reflect our view as of today October 12, 2022, and we are under no obligation to update.

When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results.

Please refer to our third quarter 2022 earnings release in our third 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.

Really differ from forward looking statements Joy.

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 one on your Touchtone phone at any time, one moment for our first question.

Our first question comes from Andrea Teixeira with Jpmorgan. Your line is open.

Thank you good morning, and congrats on the results I was hoping to get more clarity on both the price elasticity in the Reinvestments.

You called out.

Against a 1% negative that you bought in Q3, and then if I if I may I can I wanted to ask a cash flow question.

Yeah, Hey, Andrew.

Obviously, we've seen elasticity continue to be.

Strong and stronger than expected through two or three quarters of the year.

In terms of.

The math that you've done the math is certainly accurate and obviously we are.

Carefully watching what happens with the consumer we obviously exited the third quarter.

The consumer is still very healthy in terms of our.

Our particular categories I'm not sure that's true broadly with housing and other big ticket purchases.

So we'll see what elasticity has looked like in the fourth quarter, but I don't disagree with your math, what you said is accurate.

Thank you if I can squeeze.

Sorry.

Yes.

With regards to our investments.

Yes.

Sophie we've been using the last few years to continue to balance the short term and long term.

I think it's.

Realizing and good performance, we continued to invest in our brands.

Investing in digitizing the company.

And some of the long term sustainability bets that we're making as well. So we continue with that and next quarter will not be different than any of the other quarters.

In the year, so you should assume that.

Looking at.

Reinvesting in the next quarter and entering 2003 with strength on.

On the commercial side and on the investment side.

Thank you Ramon and Hugh I'll pass it on.

One moment for our next question.

Okay.

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

Great. Thanks, good morning.

I was just struck again by the strength in the pricing.

Everywhere, but particularly in Europe and.

How even though volumes are off holding on really well. So just curious knowing how much of that business is skewed towards western Europe , if you could talk a little bit about.

Revenue management versus straight list pricing and what you can tell us just to put a little bit more context and color around how that magnitude of pricing is being realized.

Yes, good morning.

Europe .

As you are well as.

Has it been impacted more than other parts of the world.

And the cost and therefore, we've had to lean into revenue management, probably stronger than other regions in the business.

The team has been investing in those capabilities for for some time already and it's been a combination of mix management and.

Your pricing.

Across most of the geographies eastern-west.

We've had a good summer, which tends to drive more impulse sales in those channels have higher price per liter price per kilo. So that is reflected in the pricing in Q3, and then also the teams have been courageous than.

Some of the large bags and in home formats as well across.

What do you call it Western Europe , So yes combination of.

Vishal pricing.

Some channel management.

The truth is that our brands have.

The investment we've made in the brands in the last few years are paying off in the sense that our brands are being stretched to higher price points and consumers are following us in Europe and in other parts of the world as you as you saw with the volume to two pricing realization in the U S or even other emerging markets.

Thank you one moment for our next question.

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

Okay.

Hey, good morning, guys.

So are there.

I was just hoping to get a bit of perspective on the sustainability of the organic sales growth. We're seeing as you look out longer term, obviously, the second straight year of double digit organic sales growth. So very robust levels, but there is some COVID-19 recovery in beverages, there is excess pricing with limited demand elasticity. So just looking for.

Some long term perspective on.

If youre incrementally positive to the mid single digit long term trajectory. After the last couple of years and as you look at some of those key drivers of growth.

Which ones are more sustainable longer term and then if I can slip. The second part is just to follow up on <unk> question have you seen anything in the business in September October so far in Q4.

Different than.

Generally the underlying momentum you saw in Q3, just given some worries about macros here et cetera, and some short term volatility.

Yeah, Hey, Hey, Dara.

Area two.

A couple of things number one.

You know our long term guidance on on revenue is four to six.

And as remote and I have talked about in the past and we've always been pushing ourselves to how do we get to the upper end of the range on that on a more consistent basis.

Given the.

A combination of high pricing right now is relative as well as relatively low elasticity I E.

It's difficult to figure out exactly how.

How that might project going forward and Thats sort of a long term comment for I'm not going to give it to 'twenty three on today's call as is our practice, we'll talk about that in February .

But our aspiration remains the same which is we want to go in and push hard on top line. We think it's great for the organization, we think it ultimately.

Ultimately creates more value than any other strategy, but no change in terms of the long term guidance at this point, it's just been there.

The times are just so interesting it's hard to figure out what what that project forward into.

Yes.

I would say on top of what he was saying is that our.

Our categories seem to be growing faster than food and food is growing faster than non fluid I don't think that's going to change we.

We've seen I think.

Both <unk> and small moments of pleasure continue to be.

Need state I think consumers today and in our categories play in that space.

I think what should we should assume that that will continue despite of all the ups and downs potentially economically around the world.

Element I think it's fair to assume as well is that we are gaining share in many many markets across our geographies both in snacks and beverages, we should assume that given the <unk>.

The investments, we're making the quality of brands and people that we have a lot of the markets. We should assume that in the future. We will continue to gain share at least that's our aspiration and we are trying to continue to invest and get better every year every quarter.

That respect so.

When you compare to the average of foot you should assume it will.

Better and hopefully with a better than our categories. Those are the variables that we look at every every month as we assess our performance and as you were saying our long term, 4% to 6% I think it remains valid clearly a 16% quarter is an outstanding quarter with a lot of pricing obviously in that space.

As a sustainable performance.

Performance of the business.

That obviously, we're aspiring to beat.

Beat our long term as many quarters as possible.

Thank you one moment for our next question.

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

Thank you good morning.

On your topline growth in the quarter.

<unk> been discussing with very impressive, but it was fully driven by strong price realization. So I guess my question is on your market share could you give us a sense of how you are.

Sure has been trending in both maybe your beverage and Frito lay businesses and then.

I know a priority of yours is to improve your op margins in <unk>, especially so maybe give us a sense of how youre going to balance market share growth with profit profitability growth going forward. Thanks.

Yes.

Bonnie let me start with.

With a share and then probably we will.

Chop it up with the margin philosophy on BVA.

Sure.

<unk> seen.

Consistent with the trends that we saw last year and earlier this year, we're seeing gains in I would say, 70%, 75% of our markets in what we call fluids can be in fluids. So I'll just snacks.

And we're seeing about 70% gains in about in the beverage markets internationally. So that's.

Basically we're competing well.

Across most of our geographies emerging markets developing markets and developed markets across both categories in particular to the U S. As you as you mentioned.

Frito Lay's is accelerating as share gains in the.

Q3 was it was very strong it was.

Almost a couple of points of share gains and what we measure of say very market.

<unk>.

Both in value and also there was a share gain in volume so both both volume and value when we look at the.

The beverage business in the U S. We held share in total LRB in the quarter. That's a good performance with very good performance in sports sports has been a priority category for us the recovery of the Gatorade.

Brand, we have invested a lot for the last couple of years. Our innovation is working our brand building is working our commercial execution is working and we gain meaningful share in the quarter, which makes us.

Very happy obviously, given the efforts the team has put in in that brand.

We're gaining share in in Ts, we're getting sharing coffees.

Multiple categories, where the business is performing very well and we are losing share in <unk>.

I would say Pepsi is doing quite well much of new is Brian that we're working on to continue to gain share, but overall, we measure our performance as total total LRB and total RV share in the quarter was flat to the category as you saw double digit growth, which is a pretty good performance for BBVA.

Right and I'll build on that Bonnie.

One of our goals clearly is to both gain share and to grow margins and frankly, that's something that I think we can do I don't view it as an either or I view, it as an and we ought to be able to do both.

Obviously, we try to price through inflation, and we always said that that out as a goal.

We were a little bit short of that in the quarter gross margins were down by about 20 basis points as Im sure. You have noted, but then we also focus on the balance of the cost structure, making sure that we're as efficient as we can possibly be and try to eliminate waste where wherever we can find that we were successful on that in the third quarter as well so.

Operating margins were up about 30 basis points. So.

Our plan is to be able to do exactly that gained share.

Price through inflation, if we're a little bit short of that.

We're going to continue to focus on driving the balance of the cost structure. So that if the revenue growth does start to soften up a little bit we'll still be in a position to deliver superior financial results regarding.

Regarding <unk> specifically in the margin goal that we've set out there of getting to mid teens that is still very very much intact that is absolutely. The plan. So that's that's where we stand.

Thank you <unk> next question.

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

Great. Thanks, Good morning, everyone and congratulations on the strong results question for Q.

On commodity inflation from here you may be a little bit concerned I know you don't want to give forward guidance, but.

We're starting to see key inputs soften here oil resin aluminum among others as youre well aware, hoping to get your updated thoughts on your inflation outlook anything you'd be willing to share with respect to hedge positions.

Preliminary outlook looking out to next year, and then your ability to continue to offset with pricing.

Cost and <unk> tools.

Is it fair to assume that.

Going forward it'll be a little bit more reliant on cost management revenue growth management as opposed to pricing do you feel like maybe a little bit more constrained given the extent of the pricing. It's been taken so far just two part question any thoughts there would be helpful. Thank you.

Yeah happy to try and Kevin I think I might've been for it as well.

We'll go with it anyway.

Anyway.

A couple of things number one commodity for this year high teens.

Is where we're going to land.

That's not a change relative to what we've talked about in the past.

In terms of hedge positions and forward buy as we've discussed before we tend to be out about six to nine months.

And Thats.

Consistent with past practice, that's where we're operating the commodity cycle.

That clearly puts us somewhat into next year, but not anywhere near all the way through next year.

As you've no doubt observed some of the commodity inputs for us although I'll remind you our basket is pretty dispersed theres not a single commodity that even accounts for 10% of the basket.

But you've seen some softening in commodity prices.

That'll play its way into our commodities going forward and then regarding specific numbers for next year I'm sure. It won't surprise you, but by telling you we'll talk about that in February for a couple of reasons. The biggest of which is we'll have more line of sight to be able to give you a better number.

And frankly to give you something that you really can model and rely on at this point I think it's just a little bit too early for that.

And in addition, it just takes us to a place where frac.

Frankly, we just wind up doing a lot of partial analysis. What it is I don't think is productive for you or for the company.

Regarding pricing, we increased prices at the beginning of the fourth quarter based on what we knew at that point and.

And going forward with the investments that we've made in brands I still think we're capable of taking whatever pricing we need.

Thank you one moment for our next question.

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

Great. Thank you very much and good morning.

Ramon I wanted to ask on on Gatorade and fast Twitch.

First I'd love some more detail around your expectations for that particular innovation in the role you see it playing in the Gatorade portfolio generally, but I guess more broadly I'm wondering how.

Youre thinking about the intersection of sports nutrition and energy categories on a broad basis.

How far you think Gatorade, maybe able to expand into what we've traditionally thought of as the energy drink and market and.

And where that ranks in terms of the priorities for future Gatorade investment.

Thank you Steve is a very good question.

One that we're obviously spending a lot of time thinking about how far down we take a gatorade, which is obviously a very strong franchise.

With.

I would say high performance athletes that much broader than that.

We're seeing is a lot of the innovation that we put under the brand in the last year and a half or so two years is working very well starting with zero.

As you know has been a great success for Gatorade.

Is brought into the franchise on lot of lapsed consumers that had left the brand because of the sugar content, especially I would say.

People that just exercise.

Regularly about not at high performance level.

One then the tool of recent innovations gayda light.

And <unk> also are working well for the brand we're getting incremental consumers are incremented allocations to the to the category. So we're happy with.

Obviously corrugator Ed by the two other three other new innovations with regards to.

Fast Twitch, where we're seeing is that more and more.

Athletes are drinking caffeine and then.

So hydration during the game before the game or at the end of the game so different parts of the out there their exercise so within there is a role for gateway to play in that space providing.

Some some additional stimulus to the performance of that also providing hydration.

And one single consumption, we've been told by.

Trainers and by other people that work with the athletes to.

Help them. So these industry has been.

Developed with the with the athletes better.

The trainers.

With that location in mind, and we think that the Gatorade plays very well it has a lot of.

I think credibility to play in that space of hydration and and caffeine for better performance.

We're launching it as you know with the NFL and.

And with a full glass itself early early next year.

Thank you <unk> next question.

Our next question comes from Robert <unk> with Evercore ISI. Your line is open.

Great.

First question just a follow up on the pricing on Frito lay North America, if you could kind of give us a breakout.

Between headline pricing product mix and channel and then my real question is as Youre, introducing a lot of additional complexity.

The portfolio with different flavors and package sizes can you just talk a little bit about how you are.

Looking at that from a supply chain side. Thank you.

Yes.

Okay.

As with any one of our businesses, we're looking at multiple ways to increase our revenue per kilo in this case.

With continuing to maintain the consumer in our brands and obviously gain share as we do that so thats. The strategy, we will use multiple levers.

So official pricing lower promotions pushing for the formats, where we.

Have higher revenue per liter per kilo moving into channels, obviously, where we can.

<unk> more because the consumer has.

Different price Spectation all of those tools are.

Well integrated into our full commercial program and Thats the way Frito is doing it but at the same as being that.

In beverages in North America, or any of our international markets emerging or developing or developed so that's a consistent capability. We've been investing we're becoming much more digital coming much more insightful and precise as a company and that applies Lincoln to your second question that applies also to our supply chain I think where we're becoming much more.

<unk> integrated in our forecasts into.

Demand forecasts into our supply and we're able to execute.

Search on level of higher complexity in our business.

We're automating, we're becoming better at execution in that respect I would say, we're not running a perfect company at this point given all the challenges there is still and in supply chain of ingredients and some of the.

Transportation bottlenecks, but I would say, we're able to cope with higher levels of complexity throughout the free delay given your question or any of the other organizations that we have.

Around the World. However, I will say that we have very strict processes of portfolio optimization that are being run quarterly in each one of our businesses. So each one of the business as it goes through a pretty strict process of rationalization and elimination of unnecessary complexity.

Regularly so.

On the one side, we want to have more complexity, because we know that consumers.

<unk> personalization and a lot of the.

<unk> is a key is a key.

I think advantage for us in our categories, but at the same time, we go through a rigid processes that eliminate unnecessary complexity and keep our costs down even supply chain, but in any respect even given what it is to run a good business.

Yes.

Thank you one moment for our next question.

Okay Gotcha wallet with credit Suisse. Your line is open.

Hey, guys. Good morning can we talk just a bit more about cash flow in the year coming in better than expected is there excess cash on the balance sheet any thoughts around that and then maybe in the same context, just maybe an update on what the M&A environment looks like at the moment, given we're going through it.

Kind of a difficult period I wonder if assets are more perhaps more interesting than they would have been before.

Yes, I'm happy to jump in on that will come off.

In terms of cash flow you are right.

We are performing well this year on cash flow and obviously you feel feel terrific about that.

I wouldn't necessarily characterize it as excess cash.

But certainly where we're coming from a relatively strong cash position.

In addition to that.

And you know our philosophy on how we manage the balance sheet well.

We actually are very much fixed in terms of our debt rates.

And our average maturity now I think is about 12 years at this point so the.

The refinancing elements of what we need to do or.

Relatively small our towers going forward or about two $5 billion to $3 billion a year going forward. So we've got a lot of flexibility.

In terms of managing rising interest rates.

In terms of where the where that might take us in the future again, we'll talk about that in in 'twenty three.

Guarding M&A no real change in our in our capital allocation policies broadly M&A is obviously played something of a role in our past.

We are still largely focused on tuck ins, where where frankly, we can.

Realize a lot of value.

But beyond that it's really difficult to speculate on what might or might not happen certainly not setting any indications at all that we've got anything on the horizon whatsoever.

But we'll always be looking at things, we don't really past in terms of taking a look at anything but as you know we rarely transact. So I don't expect any change at all in that regard.

Thank you.

Brian .

Our next question comes from Chris Carey with Wells Fargo. Your line is open.

Hi, good morning.

Good morning.

Can you just comment on the stickiness of pricing.

Across the CPG there has been a growing debate about whether some of these price increases would need to be dealt back.

With either list price of Russell.

Celebrate promotion I suppose the logic goes that essentially physical commodity environment and if the environment changes they typically either way during a recession or perhaps demand flows that price rollbacks are not entirely out of the question, even if theyre not historically.

Our consistent practice what are your thoughts on how the business might confront.

Pricing versus promotion.

Especially in an environment of commodity deflation.

Especially if demand starts to slow.

Yes.

I think there is a.

Difficult question to answer I pretty hypothetical.

Department of defense.

The environment clearly has seen.

Very inflationary with a lot of supply chain challenges across the industry.

And everybody trying to have responsible behaviors.

To maximize the value of each brand's itself philosophy is the same we continue to invest in advertising and market to make sure that we have very strong innovation very strong commercial plans that we put the focus of our organization and we're trying to be growth drivers to our customers.

If you look at the majority of our conversation with our customers centered around growth and how do we develop our categories continued to bring consumers into the category continued to bring in new occasions into their category. That's their role I think we play to our customers into the year and how we create value for the company long term. So we will continue with that focus.

Trying to create brands that can stand for.

Higher value to consumers and consumers are willing to pay more for our brands will continue with that with that philosophy, and we will see where the.

Where the cost environment goes into come in in the coming years obviously.

If anything that this last few years have taught us is that we want to become more agile and more nimble and more flexible and that's that's where we are what we're doing across the company.

Thank you one of them are for next question.

Okay.

Yes.

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

Hey, good morning, everyone and hope you're doing well so I wanted to ask about the Celsius distribution agreement.

Maybe just to start why was the structure of this partnership the right one for Pepsico.

And then I guess, maybe any initial views on kind of how the transition to your distribution network is going and maybe just.

Last if I can squeeze it in here just bigger picture I guess like what have you learned from either your own brands.

What happened with Bang that really gives you greater confidence in the success of this partnership looking ahead. Thanks.

Sure happy to talk a path that Peter.

First the transition is going very well.

At this point over 80%.

Integrated.

Celsius into the Pepsico system, and we think it's off to a terrific start and I think you'd probably hear the same thing from from the folks that itself yes.

We're excited about the business, we think it's got a nicely differentiated proposition and where we're at.

Proud and happy to have it on our trucks and I think it's going to be a great business for us.

In terms of the structure.

Frankly, we looked at it and said look we'd like to do a distribution agreement, but we knew we were going to create some some additional value for the company and we felt like we should participate in that value and we set up a structure that enabled us to do that doesn't take us any any further than what you see right now.

And it puts us in a position where.

It's a preferred so we.

We'll either get paid based on the preferred or down the road.

The relatively small position we have.

Could convert at some point so we felt like it was a good value creating structure for Pepsico.

Wouldn't read anything more into it than that and then more broadly on the energy portfolio.

Our approach has been one of having.

Portfolio of brands.

We like that approach because we think as the energy category starts to segment into different types of consumers in different types of need states.

<unk> portfolio approach will ultimately position us best to take advantage of that obviously, we are in a building position here, whether it's rockstar or mountain Dew energy or what we're doing with Celsius or for that matter, even the Starbucks coffee energy business, but we now think we have three or four different different ways to compete.

To capture that consumers business, so we like where we sit in that regard.

Yes.

Peter I would endorse what he was saying I think from their portfolio point of view Celsius proudly brings.

It's a better complement to the rest of the brands or vectors of growth that we had in this category earlier.

We feel good I think it appeals to consumers.

Thats different than what Rockstar would appeal to or what some of the Starbucks or obviously some of the year.

Gatorade.

Consumers would appeal to.

I think we're in a better place to play.

The broader category to continue to bring consumers too.

To our franchise and <unk>.

<unk> said the partnership is strong with earn outs on the how.

How to build a stronger and more strategically aligned partnerships.

No.

And obviously this one I'm sure it is going to be a much more durable and much more value creative for both companies. So it's still too early obviously, we only study October one and is 80% of the territory is about early signs are very positive.

The alignment in the.

The commercial collaboration between the two companies is very strong.

Okay. So I think I think.

The Q&A is over so I would like to thank everyone for joining us today and for obviously the confidence that you've placed in us with your investments.

Hope you guys all stay safe and healthy thank you very much.

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

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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Good morning, and welcome to Pepsico's 2022 third quarter earnings question and answer session. Your lines have been placed on listen only until it is your turn to ask a question in order to ask a question or make a comment. Please press star one on your Touchtone phone at any time.

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 a chance this morning to review our press release and prepared remarks, both of which are available on our website.

Before we begin please take note of our cautionary statement, we may make forward looking statements on today's call, including about our business plans and our updated 2022 guidance forward looking statements inherently involve risks and uncertainties and only reflect our view as of today October 12 2020.

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.

These refer to our third quarter 2022 earnings release in our third 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 material.

Differ from forward looking statements.

Thank you once again in order to ask a question or make a comment. Please press star one on your Touchtone phone at any time, one moment for our first question.

Our first question comes from Andrew <unk> with Jpmorgan. Your line is open.

Hi, Thank you good morning, and congrats on the results I was hoping to get more clarity on both the price elasticity in the Reinvestments.

You called out.

We all appreciate that you are conservative, but it seems that you're embedding a 7% organic growth for the fourth quarter and given the high single digit pricing are you expecting volumes to be negative in the range of two 3% against the one question negative. Thank you bought in Q3, and then if I. If I may I can I wanted to ask a cash flow question.

Yeah, Hey, Andrew to add too.

Obviously, we've seen elasticity continued to be.

Strong and stronger than expected through through three quarters of the year.

So in terms of.

The math that you've done the math is certainly accurate and obviously we are.

Carefully watching what happens with the consumer we obviously exited the third quarter.

With the consumer is still very healthy in terms of our <unk>.

Our particular categories I'm not sure that's true broadly with housing and other big ticket purchases.

So we'll see what elasticity has looked like in the fourth quarter, but I don't disagree with your math.

Said is accurate.

Thank you if I can squeeze.

Alright.

Yes.

With regards to our investments.

The philosophy, we have been used in the last few years to continue to balance the short term and long term.

I think it's it's realizing and good performance, we continued to invest in our brands.

We're investing in digitizing the company and.

And some of the long term sustainability bets that we're making as well. So we continue with that and next quarter will not be different than any of the other quarters.

In the year. So you should assume that we're looking at.

Reinvesting in the next quarter and entering 2003 with strength.

On the commercial side and on the investment side.

Thank you Ramon and Hugh I'll pass it on.

One moment for our next question.

Okay.

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

Great. Thanks, good morning.

I was just struck again by the strength in the pricing per ticket everywhere, but particularly in Europe .

And how even though volumes are off Hogan on really well. So just curious knowing how much that business is skewed towards western Europe , if you could talk a little bit about.

Revenue management versus straight list pricing and what you can tell us just to put a little bit more context and color around how that magnitude of pricing is being realized.

Yes, good morning.

Europe .

As you will.

Been impacted more than other parts of the world.

On the cost and therefore, we've had to lean into revenue management, probably stronger than other regions in the business.

Yes.

The team has been investing in those capabilities for for some time already and it's been a combination of mix management and.

Pure pricing.

Across most of the geographies eastern-west.

Some of the large bags and in home formats as well across.

When you call it Western Europe , so a combination of.

Visual pricing.

Some channel management.

Truth is that our brands have.

Thank you one moment for our next question.

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

Okay.

Hey, good morning, guys.

So are there.

Some long term perspective on.

If you are incrementally positive to the mid single digit long term trajectory. After the last couple of years and as you look at some of those key drivers of growth.

Which ones are more sustainable longer term and then if I can slip. The second part is just to follow up on <unk> question have you seen anything in the business in September October so far in Q4.

Different than.

Generally the underlying momentum you saw in Q3, just given some worries about macros here et cetera, and some short term volatility.

Yeah, Hey, Dan.

<unk> two.

A couple of things number one.

You know our long term guidance on on revenue is four to six.

And as remote and I have talked about in the past and we've always been pushing ourselves to how do we get to the upper end of the range on that on a more consistent basis.

Given the.

The combination of high pricing right now is relative as well as relatively low elasticity I E.

It's difficult to figure out exactly.

How that might project going forward and that's sort of a long term combat for I'm not going to give it to 'twenty three on today's call as is our practice, we'll talk about that in February .

Our aspiration remains the same which is we want to go in and push hard on top line. We think it's great for the organization. We think it is.

Ultimately creates more value than any other strategy, but no change in terms of the long term guidance at this point, it's just been there.

The times are just so interesting it's hard to figure out what what that project forward into.

Yes.

What I would say on top of what he was saying is that our categories seem to be growing faster than food and <unk> is growing faster than non fluid I don't think thats going to change we've.

We've seen I think.

Both <unk> and small moments of pleasure continues to be a.

Need state I think consumers today and in our categories play in that space. So.

I think what should we should assume that that will continue and despite of all the ups and downs potentially economically around the world and the second element I think it's fair to assume as well is that we are gaining share in many many markets across our geographies both in snacks and beverages, we should assume that given the <unk>.

That respect so.

When you compare to the average of fluids you should assume.

Better and hopefully with a better than our categories. Those are the variables that we look at every every month as we assess our performance and as you are saying our long term, 4% to 6% I think it remains valid clearly a 16% quarter is an outstanding quarter with a lot of pricing of athene that that's a sustainable.

Performance of the business.

But obviously, we're aspiring to.

Beat our long term as many quarters as possible.

Thank you one moment for our next question.

The next quarter company Herzog with Goldman Sachs. Your line is open.

Thank you good morning.

On your top line growth in the quarter.

<unk> been discussing with very impressive, but it was fully driven by strong price realization. So I guess my question is on your market share could you give us a sense of how you are.

Sure has been trending in both maybe your beverage and Frito lay businesses and then.

Yes.

Bonnie let me start with.

With a share and then probably Hugo will chop it up with the margin philosophy on BVA on share we're seeing.

Consistent with the trends that we saw last year and earlier this year, we're seeing gains in I would say, 70%, 75% of our markets in what we call fluids comedian fluids is <unk> and we're seeing about 70% gains in about in the beverage.

Internationally so that's.

Basically we're competing well across most of our geographies emerging markets developing markets and developed markets across both categories in particular to the U S. As you as you mentioned.

Frito Lay's is accelerating as share gains in the.

Q3 was it was very strong it was.

Almost a couple of points of share gains and what we measure a savory market.

<unk>.

Quality and value and also there was a share gain in volume so both both volume and value when we look at the.

The beverage business in the U S. We held share in total LRB in the quarter.

Performance with very good performance in sports the sports has been a priority category for us the recovery of the Gatorade.

Brand, we are investing a lot for the last couple of years. Our innovation is working our brand building is working our commercial execution is working and we gain meaningful share in the quarter, which makes us.

Very happy obviously, given the efforts the team has put in that in that brand.

We're gaining share in in Ts, we're getting sharing coffees.

So multiple categories, where the business is performing very well and we are losing share in <unk>.

I would say Pepsi is doing quite well much of new is it is a brand that we're working on to continue to gain share, but overall, we measure our performance as total total LRB and total RV share in the quarter was flat to the category as you saw double digit growth, which is a pretty good performance for BBVA.

I'll build on that one.

Obviously, we try to price through inflation, and we always said that that out as a goal.

If we were a little bit short of that in the quarter gross margins were down by about 20 basis points as I'm sure. You have noted, but then we also focus on the balance of the cost structure, making sure that we're as efficient as we can possibly be and trying to eliminate waste where wherever we can find that we were successful on that in the third quarter as well.

Operating margins were up about 30 basis points. So.

Our plan is to be able to do exactly that gained share.

Price through inflation, if we're a little bit short of that.

Regarding <unk> specifically in the margin goal that we've set out there of getting to mid teens that is still very very much intact that is absolutely. The plan. So that's that's where we stand.

Thank you <unk> next question.

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

Great. Thanks, Good morning, everyone and congratulations on the strong results question for Q4.

On commodity inflation from gear, you, maybe a little bit concerned I know you don't want to give forward guidance, but.

Preliminary outlook looking out to next year, and then your ability to continue to offset with pricing.

Cost and <unk> tools.

Is it fair to assume that.

Yeah happy to try Kevin I think I might've been for it as well.

We'll go with it anyway.

Anyway.

A couple of things number one commodity for this year high teens.

Where we're going to land.

That's not a change relative to what we've talked about in the past.

In terms of hedge positions and forward buy as we've discussed before we tend to be out about six to nine months.

And that's it.

Consistent with past practice.

Where we're operating the commodity cycle.

That clearly puts us somewhat into next year, but not anywhere near all the way through next year.

As you've no doubt observed some of the commodity inputs for us although I'll remind you our basket is pretty dispersed theres not a single commodity that even accounts for 10% of the basket.

But <unk> seen some softening in commodity prices.

That will play its way into our commodities going forward and then regarding specific numbers for next year I'm sure. It won't surprise you, but by telling you we'll talk about that in February for a couple of reasons. The biggest of which is we'll have more line of sight to be able to give you a better number.

And frankly to give you something that that you really can model and rely on at this point I think it's just a little bit too early for that.

And in addition, it just takes us to a place where frac.

Frankly, we just wind up doing a lot of partial analysis, whether its I don't think is productive for you or for the company.

Regarding pricing, we increased prices at the beginning of the fourth quarter based on.

What we knew at that point.

And going forward with.

The investments that we've made in brands I still think we're capable of taking whatever pricing we need.

Thank you one moment for our next question.

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

Great. Thank you very much and good morning.

Yes.

Ramon I wanted to ask on on Gatorade and fast Twitch.

First I'd love some more detail around your expectations for that particular innovation in the role you see it playing in the Gatorade portfolio generally, but I guess more broadly I'm wondering how.

Youre thinking about the intersection of sports nutrition and energy categories on a broad basis.

How far you think Gatorade may be able to expand into what we've traditionally thought of as the energy drink and market.

And where that ranks in terms of the priorities for future Gatorade investment.

Thank you Steve is a very good question.

One that we're obviously spending a lot of time thinking about how far down we take a gatorade, which is obviously a very strong franchise.

I agree with.

I would say high performance athletes that much further than that what we're seeing is a lot of the innovation that we put under the brand in the last year and a half or so two years is working very well starting with zero.

<unk> has been a great success for Gatorade.

Is brought into the franchise a lot of lapsed consumers that had left the brand because of the sugar content, especially I would say.

People that just exercise.

Regularly about not at high performance level. That's one then the tool of recent innovations Gator light.

And <unk> also are working well for the brand, bringing in incremental consumers are incremental locations to the to the category. So we're happy with.

Obviously, the corrugator aid by the two other three other new.

New innovations.

Regards to SaaS.

<unk>, where we're seeing is that more and more.

<unk> fleets are drinking caffeine and then.

Also hydration during the game before the game or at the end of the game.

<unk> parts of the year out there their exercise so within there is a role for gateway to play in that space providing.

Some some additional stimulus to the performance of that also providing hydration.

In one single consumption, we've been told by.

By trainers and by other people that work with the athletes to.

Help them. So this industry has been.

Developed with the with the athletes better with the with the trainers.

With that location in mine and within Navigators plays very well it has a lot of.

I think credibility to play in that space of hydration and and caffeine for better performance.

We're launching it as you know with the NFL and.

And with a full glass itself early early next year.

Thank you <unk> next question.

Our next question comes from Robert <unk> with Evercore ISI. Your line is open.

Great.

First question just a follow up on the pricing on Frito lay North America, if you could kind of give us a breakout.

Between headline pricing product mix and channel and then my real question is as Youre, introducing a lot of additional complexity.

Into the portfolio with different flavors and package sizes can you just talk a little bit about how your <unk>.

Looking at that from a supply chain side. Thank you.

Yes.

Sure.

Yes.

Any one of our businesses, we're looking at multiple ways to increase our revenue per kilo in this case.

With continuing to maintain the consumer in our brands and obviously gain share as we do that so thats. The strategy, we will use multiple levers.

So visual pricing and lower promotions pushing for the formats, where we.

Have higher revenue per liter per kilo moving into channels, obviously, where we can.

Price more because the consumer has.

Different price Spectation all of those tools R. R.

<unk> integrated into our full commercial program and Thats. The way Frito is doing it by the same as being that in and beverages in North America or any of our international markets emerging or developing or developed so that is a consistent capability. We've been investing we're becoming much more digital are becoming much more insightful and precise as a company and that.

Applies Lincoln to your second question that applies also to our supply chain I think where we're becoming much more.

Integrated in our forecasts into.

Demand for gas into our supply and we're able to execute.

A certain level of higher complexity in our business.

We're automating.

Were becoming better at execution in that respect I would say, we're not running a perfect company at this point given all the challenges there is dealing in supply chain of ingredients and some of the crush.

Transportation model next but I would say, we're able to cope with higher levels of complexity throughout the free delay given your question or any of the other organizations that we have.

Regularly so.

On the one side, we want to have more complexity, because we know that consumers appreciate personalization and a lot of the.

<unk> is a key is a key.

I think advantage for us and in our categories, but at the same time, we go through a rigid processes that eliminate unnecessary complexity and keep our costs down even supply chain, but in any respect even given what it is to run a good business.

Yes.

Thank you one moment for our next question.

Okay.

Gotcha wallet with credit Suisse. Your line is open.

Kind of a difficult period I wonder if assets is more perhaps more interesting than they would have been before.

Yes, I'm happy to jump in on that will come off.

In terms of cash flow you are right.

We are performing well this year on cash flow and obviously feel feel terrific about that.

I wouldn't necessarily characterize it as excess cash.

But certainly where we're coming from a relatively strong cash position.

In addition to that.

And you know our philosophy on how we manage the balance sheet well.

We actually are very much fixed in terms of our debt rates.

And our average maturity now I think is about 12 years at this point so the.

The refinancing elements of what we need to do or.

Relatively small our towers going forward or about two $5 billion to $3 billion a year going forward. So we've got a lot of flexibility.

In terms of managing rising interest rates.

In terms of where the where that might take us in the future again, we'll talk about that in in 'twenty three.

Guarding M&A no real change in our in our capital allocation policies broadly M&A is obviously played something of a role in our past, we're still largely focused on tuck ins, where where frankly, we can.

Realize a lot of value.

But beyond that it's.

It's really difficult to speculate on what might or might not happen certainly not setting any indications at all that we've got anything on the horizon whatsoever.

But we'll always be looking at things, we don't really pass in terms of taking a look at anything but as you know we rarely transact. So I don't expect any change at all in that regard.

Thank you.

Excellent.

Our next question comes from Chris Carey with Wells Fargo. Your line is open.

Hi, good morning.

Good morning.

Can you just comment on the stickiness of pricing.

Across the CPG, there's been a growing debate about whether some of these price increases would need to be dealt back.

With either list price of Russell.

Accelerated promotion I suppose the logic goes that essentially typical commodity environment and if the environment changes day typically the other way during a recession or perhaps.

Does that price rollbacks are not entirely out of the question, even if they are not historically.

Consistent practice.

What are your thoughts on how the business might confront.

<unk> versus promotion.

In an environment of commodity deflation.

Especially if demand starts to slow.

Yes.

I think there is a.

Difficult question to answer I pretty hypothetical.

The environment.

<unk> clearly is still very inflationary with a lot of supply chain challenges across the industry.

Everybody is trying to have responsible behaviors.

To maximize the value of each brand's itself.

The fee is the same we continue to invest in advertising and market to make sure that we have very strong innovation very strong commercial plans that we put the focus of our organization, we're trying to be growth drivers to our customers.

If you look at the majority of our conversation with our customers centered around growth and how do we develop our categories continue to bring consumers into the category continued to bring in new occasions into their category and that's the role that we play to our customers into the App, how we create value for the company long term. So we will continue with that focus.

Yes.

Trying to create brands that can stand for higher value to consumers and consumers are willing to pay more for our brands. We will continue with that with that philosophy, and we will see where the.

The cost environment goes into come in in the coming years obviously.

Sure.

Anything that these last few years have taught us is that we need.

Want to become more agile and more nimble and more flexible and that's that's where we are what we're doing across the company.

Thank you <unk> next question.

Okay.

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

Hey, good morning, everyone hope you're doing well.

Wanted to ask about the Celsius distribution agreement.

Maybe just to start why was the structure of this partnership the right one for Pepsico.

And then I guess, maybe any initial views on kind of how the transition to your distribution network is going and maybe just last if I can squeeze it in here just bigger picture I guess like what have you learned from either your own brands.

What happened with Bang that really gives you greater confidence in the success of this partnership looking ahead. Thanks.

Sure happy to talk a path that Peter.

First the transition.

Is going very well.

At this point over 80%.

Integrated.

Celsius into the Pepsico system, and we think it's off to a terrific start and I think you'd probably hear the same thing from from the folks that it's Lcs.

We're excited about the business, we think it's got a nicely differentiated proposition and we're proud and happy to have it on our trucks and think it's going to be a great business for us.

In terms of the structure.

And it puts us in a position where.

It's a preferred so.

We'll either get paid based on the preferred or down the road.

The relatively small position we have.

Convert at some point so we felt like it was a good value creating structure for Pepsico I wouldn't read anything more into it than that and then more broadly on the energy portfolio.

Our approach has been one of having.

Our portfolio of brands.

We like that approach because we think as the energy category starts to segment into different types of consumers in different types of need states.

Or for that matter, even the Starbucks coffee energy business, but we now think we have three or four different different ways to compete.

To capture that consumer business, so, we like where we sit in that regard.

Yes, I would.

I would Peter I would endorse what he was saying I think from their portfolio point of view Celsius proudly brings.

It's a better complement to the rest of the brands or vectors of growth that we had in this category earlier.

We feel good I think it appeals to consumers.

That's different than what Rockstar would appeal to what some of the Starbucks or obviously some of the year.

Gateway.

Consumers would appeal to shell.

I think where we're in a better place to play.

Play in that broader category to continue to bring consumers to.

Our franchise and as.

SKU said the partnership is strong with earn outs on the.

How to build a stronger and more strategically aligned partnerships.

No.

And obviously this one I'm sure it is going to be a much more durable and much more value creating for both companies. So it's still too early obviously, we only started October one and is 80% of the territory is about early signs are very positive and the.

The alignment in the.

The commercial collaboration between the two companies is very strong.

Okay. So I think I think.

The Q&A is over so I'd like to thank everyone for joining us today and for obviously the confidence that you've placed in us with your investments. We hope that you guys all stay safe and healthy. Thank you very much.

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

Q3 2022 PepsiCo Inc Earnings Call

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