Q3 2023 PepsiCo Inc Earnings Call - Q&A

October 10, 2023

Good morning, and welcome to Pepsico's 2023 third quarter earnings question and answer session or lots of are placed on listen only until it's your turn to ask a question 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, and good morning, everyone. I hope everyone has had a chance. This morning to review our press release and prepared remarks, both of which are available on our website before we begin. Please take note of our cautionary statement. We may make forward looking statements on today's call, including about our business plans guidance and outlook.

We're looking statements inherently involve risks and uncertainties and only reflect our view as of today October 10th 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 2023 earnings release, and third quarter 2023 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 from forward looking statements.

Joining me today are pepsico's, chairman and CEO , Ramon Laguardia, and Pepsico's, Vice Chairman and CFO Hugh Johnston.

We ask that you please limit yourself to one question and with that I will turn it over to the operator for the first question.

Thank you once again in order to ask the question to make a comment. Please press star followed by one one on your Touchtone phone.

We will pause for a moment, while we compile our Q&A roster.

Our first question comes from Bryan Spillane with Bank of America. Your line is open.

Thanks, operator, good morning, everyone.

Brian .

Mike My question is just around volume that's been a lot of focus on that topic not just for Pepsi, but just I think more broadly so.

I know in the prepared remarks, there is a little bit there was some commentary about a shift of small packs, but maybe remote if you could touch on what was happening specifically volumetric Lee for <unk> in the in.

In the quarter, and then kind of relative to what your outlook was for volumes coming out of <unk>, just how that might have evolved.

As the quarter progressed.

Yes, good morning, Brian .

Let me step back.

Beyond <unk> to the rather company, we're seeing sequential volume improvement if you take the last few quarters, how globally, we're improving our volume, but more philosophically, how we're thinking about.

How are we managing the company there's two there's two.

There's two big variables that we're trying to optimize one is.

Consumer interaction with our brands and the proxy we are using for that as you needs or or specific.

Purchasing act and then the other one is obviously margin for the overall business and those are the two variables that we're maximizing.

In both cases unions are growing much faster than volume.

We're seeing we're seeing that you mentioned consumers move into a smaller bags were also.

In a way.

Facilitate and to add to our pricing and mix. It strategy and then we're obviously, obviously optimizing margin that as you saw.

It was a good improvement of our margin across the company and their particular businesses that you referred to so that's how we're thinking about about a volume and margin when it comes to <unk>.

A bit more aggressive than in the other in the other business said with regards to volume optimization, and we've made some decisions, especially around them.

Take home water that.

We were we're able to prune some promotions that where we're not.

Were not profitable for the business and that has a almost two five points of volume impact.

That's how we're managing volume is clearly an important and valuable for asthma.

Efficiency in the plants and some others that are unit transaction in consumer interaction with our brands either a metric that we're we're trying to maximize as we as we're making these trade offs between volume.

Unknown Executive: Good morning and welcome to PepsiCo's 2023 Third Quarter Earnings Question and Answer session. Your lines have been placed on this and only until it's your turn to ask a question. Today's call is being recorded and will be archived at www.pepsico.com.

Net revenue on margin expansion.

Thank you one moment for our next question.

Ravi Pamnani: It is not my pleasure to introduce Mr. Ravi Pamnani, Senior Vice President of Investor Relations. Mr. Pamnani, you may begin. Thank you, operator. Good morning, everyone. I hope everyone has had a chance this morning to review our press release and prepare for marks, both of which are available on our website.

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

Great. Thanks, good morning.

Carrying on Brian's question, but taking it a little bit further out into 2024 and it was great to get kind of some preliminary perspective on.

Ravi Pamnani: 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, guidance, and outlook. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, October 10th, 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 2023 Earnings release and third quarter 2023 Form 10 Q available on PepsiCo.com for definitions and reconciliations of non-GAAP measures and additional information regarding our results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements.

Next year, so early but im also curious how youre thinking about that now.

Balancing volume and price mix.

As we go into next year, because price next have continued to outperform and so.

Or just kind of thinking about that that felt more forward luck as well. Thanks.

Yes Laurent.

We'll give you more details obviously in February when it comes to the composition of some of our key metrics.

What I would what I would tell you at this point as we've obviously seen all the commercial plans from the different markets and our innovation plans on our productivity plans and our cost.

Trends that there will be steel.

Higher inflation.

In our business and therefore, there will be higher price mix.

Ravi Pamnani: Joining me today are PepsiCo's Chairman and CEO Ramon Maguarda and PepsiCo's Vice Chairman and CFO Hugh Johnson. 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 the question to make a comment, please press star followed by one on your touch-tone phone. We'll pause for a moment while we compile our Q and A roster.

This is not the last couple of years about the if you think about the historical price mix that we had in the past I think.

24 will have a bit more elevated price mix in the equation that.

In the previous years.

Yes right.

To add a final point through a month comment, Florida, if you think of pre pandemic inflation being kind of in that 2% to 3% range inflation is going to be a little elevated relative to that that our pricing will be roughly in line with inflation.

Bryan Spillane: Our first question comes from Brian's plane with Bank of America. Your line is open. Thanks, operator. Good morning, everyone. My question is just around volume. There's been a lot of focus on that topic, not just for Pepsi, but just, I think, more broadly.

So that should at least give you a rough sense as to how things might shake out.

Thank you one moment for our next question.

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

Ramon Laguarta: I know in the prepared marks, there's a little bit that there's some commentary about a shift to small packs, but maybe Ramon, if you could touch on what was happening specifically, volumetrically, for PVNA in the quarter. And then kind of relative to what your outlook was for volumes coming out of two Q, just how that might have evolved as a quarter progressed. Yeah, good morning, Brian.

Thank you good morning, so going back to your comments about volumes in <unk> was that specific to the quarter or should we still see about <unk>, 5% headwind to volumes included and potentially into the first half of 'twenty 'twenty four and if you can also comment on the volumes it will have a mirror.

How should we should be thinking.

Towards the end of the year and potentially into 'twenty to 'twenty four thank you.

Ramon Laguarta: Let me step back beyond PVNA to the brother company. We're seeing sequential volume improvement if you take the last few quarters, globally we're improving our volume. But more philosophically, how we're thinking about how we manage in the company. There's two big variables that we're trying to optimize. One is consumer interaction with our brands. And the proxy we're using for that is units or specific purchasing acts. And then the other one is obviously margin for the overall business.

Yes.

With regards to <unk>, we continue to optimize the.

The portfolio.

We should be probably thinking about a few a couple more quarters, where we will continue to see.

Ramon Laguarta: And those are the two variables that we're maximizing. In both cases, units are growing much faster than volume. And we're seeing that you mentioned consumers moving to smaller packs, we're also in a way facilitating that through our pricing and mixed strategy. And then we're obviously optimizing margin that as you saw, you know, it was a good improvement in our margin across the company and the particular businesses that you refer to. So that's how we're thinking about volume and margin.

Volume decisions that again, where we.

We're trying to maximize units and transactions.

Trying to continue to optimize the margin of the business and you saw that this quarter in and balance of the year, we feel very good about the margin expansion in <unk> now when it comes to Latam.

It's mostly our snack business, what you see there and in our in our numbers and we've been making again.

Decisions around affordability.

Mixing sure that our brands continue to be within affordable price points to consumers that we know that this possible income is limited and they make decisions based on price points. So we've been reducing size portion size of our of our products and making sure that we're still very affordable and that has an <unk>.

<unk> has an impact on the actual volume, but again the transactions are much healthier and that's a metric that we use to assess the health of the business with regards to consumer along with along with brand equity and some other metrics that we use obviously to understand through consumer picture. So we will continue to make optimizations in there as we.

Ramon Laguarta: When it comes to PVNA, we've been a bit more aggressive than in the other businesses with regards to volume optimization. And we've made some decisions, especially around take home water that we were able to prune some promotions that were not profitable for the business. And that has almost a two and a half points of volume impact. So that's how we manage in volume. It's clearly an important variable for us, but for efficiency in the plant and some others that you know, unit transaction and consumer interaction with the brands are a metric that we're trying to maximize as we're making this trade-offs between volume revenue and margin expects. And so that's how we're making this trade-offs.

Unknown Executive: Thank you, one moment for our next question.

As we need to absorb inflation in.

Make sure that our brands remain.

Joyce for consumers that are clearly more limited in their disposable income.

Thank you one moment for our next question.

Our next question comes from Dara <unk> with Morgan Stanley . Your line is open.

Okay.

Hey, guys good morning.

Could you just discuss the motivation behind the decision to provide guidance for 2024, a bit earlier than is typical what do you think your level of visibility is at this point versus the typical year and as you look out maybe what are some of the areas that give you confidence.

Lauren Lieberman: Our next question comes from Lauren Lieberman with Barclays, your line is open. Great, thanks, good morning. Carrying on Bryan's question, but taking it a little bit further out, you know, into 2024 and it was great to get kind of some preliminary perspective on next year so early. But it's also curious how you're thinking about that balance in volume and price mix as we go into next year, because price mix has continued to outperform and so just kind of thinking about that that felt more forward with love as well.

What might be some of the areas where theres more uncertainty.

Particularly given the volatile consumer environment here.

Yes, Hi, Dara I can answer that one.

I think in general as we build the plans were focused on a couple of things.

Number one is obviously the level of commodity inflation and you know we buy forward about nine months.

Lauren Lieberman: Thanks. Yeah, Lauren, we'll give you more details obviously in February when it comes to the question, but I will tell you at this point, as we've obviously seen all the commercial plans from the different markets and our innovation plans and our productivity plans and our cost trends, that there will be still a higher inflation in our businesses and therefore there will be higher price mix versus not the last couple of years, but if you think about the historical price mix that we had in the past, I think 24 will have a bit more elevated price mix in the equation that in the previous years.

So that's roughly in line with.

In the past.

Number two is the balance of the Pepsico cost structure and as we've talked about the last couple of quarters.

We've put even higher focus than we've had in the past.

On driving productivity and driving out unnecessary costs.

The tools that we've discussed the investments in digitalization and the investments in global business services the.

The investments in driving.

Driving out overlaps.

Within the organization.

Because of that work has been going on for a longer period of time I think that gave us earlier line of sight into what we would expect.

Our cost outcome could be for next year, and then number three.

Lauren Lieberman: Yeah, so right, they had a finer pointer amongst comments, Lauren, if you think of pre-pandemic inflation being kind of in that 2-3 percent range, inflation is going to be a little elevated relative to that and our pricing will be roughly in line with inflation so that should at least give you a rough sense as to how things might check out. Thank you, one moment for our next question.

We're in a good spot and in many of the developed markets in terms of our commercial plans, we do joint business planning with our customers.

We're probably in line to maybe even a little ahead of where we've been historically with all of that so given the information was available to us a little bit earlier and given there was undoubtedly questions in the investment community on what 24 look like given the evolving pricing in inflationary environment. We felt it was prudent to at least give some indication of what.

Andrew Teixeira: Our next question comes from Andrew Techshare with JP Morgan, your line is open. Thank you, good morning.

Ramon Laguarta: So going back to your comments about volumes in PBNA, was that it specific to the quarter, or should we see about this 2.5 percent headwind to volumes you could in potentially into the first half of 2024? And if you can also comment on the volumes in Latin America, how should we should be thinking towards the end of the year and potentially into 2024? Thank you. Yeah, Andrea. So with regards to PBNA, we continue to optimize the portfolio.

<unk> would look like in 2004, so thats what drove the decision.

Thank you one moment for our next question.

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

Thanks, operator, and good morning, everyone.

Wanted to follow up on <unk> question, there, but just more in the context of your actual performance versus your initial expectations historically, because it's really been a while since organic revenue growth was actually falling short of your initial outlook outlook. So.

Ramon Laguarta: So we should be probably thinking about a few a couple more quarters where we will continue to see volume decisions that, again, we are trying to maximize units and transactions and we are trying to continue to optimize the margin of the business and you saw that this quarter and the balance of the year, we feel very good about the margin expansion in PBNA. Now, when it comes to a lot of time, there is mostly our snack business, what you see there in our numbers.

Can you maybe just characterize your confidence in the 'twenty four outlook at this stage and really whether or not you've embedded enough conservatism just given what remains a pretty choppy backdrop for the consumer.

Sure happy to address that.

We obviously have a long history here of meeting or exceeding expectations, both our internal expectations as well as.

The guidance, including this quarter, where we beat revenue and we beat EPS. In fact, we have now met or beat consensus for 55 straight quarters.

Ramon Laguarta: And we have been making, again, decisions around affordability, making sure that our brands continue to be within affordable price points to consumers that we know that this possible income is limited and they make decisions based on price points. So we have been reducing size, portion size of our products and making sure that we are still very affordable. And that has a repercussion on, has an impact on the actual volume, but again, the transactions are much healthier and that's the metric that we use to assess the health of the business with regards to consumer, along with brand equity and some other metrics that we use obviously to understand full consumer picture.

So we tend to be.

I think appropriately conservative.

And the way that we communicate to you all.

So from that perspective, I think you can go into 2024 with a similar expectation that.

We should at least achieve the numbers that we've laid out for you.

Thank you one moment for our next question.

Our next question comes from Nik Modi with RBC capital markets. Your line is open.

Thank you good morning, everyone.

Ramon Laguarta: So we will continue to make optimizations as we need to absorb inflation and make sure that our brands remain a choice for consumers that are clearly more limited in their responsibilities. Thank you, one moment for our next question.

I was hoping maybe you can just provide some of the macro underpinnings that kind of go into 2024.

You point at this point.

Good luck.

<unk> state of the Union on the consumer and the economy kind of how you guys are thinking that will shape up as you go through 2020. Thanks.

Sure.

Why don't I start and then remote obviously youre super deep on the consumer.

As well, but I'm happy to start on this one.

Dara Mohsenian: Our next question comes from Dara Mohsenian with Margaret Stanley, your line is open. Hey guys, good morning.

Number one I do think that we see the consumer right now being more selective and you see it in a variety of ways.

Hugh Johnston: Can you just discuss the motivation behind the decision to provide guidance for 2024 a bit earlier than its typical, what do you think your level of visibility is at this point versus a typical year. And as you look out, if you wonder some of the areas that give you confidence and what might be some of the areas where there's more uncertainty, particularly given the volatile consumer environment here. Thanks. Yeah, hi, Dara.

You see some trade down in terms of channels of trade that they are purchasing products.

You see some some orientation towards value at the same time, the things that I, usually look at with the consumer to detect whether.

There is high stress.

We see good results in there number one is the convenience store channel.

Typically when gas prices are up and concern consumer incomes are stressed.

You see revenue in those channels under stress as well.

Hugh Johnston: I can answer that one. I think in general, as we build the plans, we're focused on a couple of things. Number one is obviously that the level of commodity inflation, and you know, we buy forward about nine months. So that's roughly in line with the past. Number two is that the balance of the PepsiCo cost structure, and as we've talked about the last couple of quarters, we've put even higher focus than we've had in the past on driving productivity and driving out on necessary costs, using the tools that we've discussed, the investments in digitalization, the investment in global business services, the investments in driving out overlaps within the organization.

For Q3, we saw.

Revenue up, 5% and beverages and 8% in foods.

In the convenience channel number two is foodservice. That's also typically a leading indicator that is still growing double digits. So I think we've gone into the year with an approach that says given all that I laid out during Gary's question.

We expect the consumer to continue to be cautious and to the degree that they are worse and that we have.

Got cost plans in place that we would use to mitigate whatever whatever challenges we face, but we think our revenue outlook.

Accommodates an increasingly cautious consumer next year.

Hugh Johnston: Because that work has been going on for a longer period of time, I think that gave us earlier a line of sight into what we would expect our cost outcome to be for next year. And then number three, we're in a good spot in many of the developed markets in terms of our commercial plans. We do joint business planning with our customers, and we're probably in line to maybe even a little ahead of where we've been historically with all of that.

Yes, the other thing.

I would say is all the.

Long term or structural tailwind of our categories will continue if you think about.

No.

Iran Ization demographic shifts.

Lifestyles et cetera that have been driving our snacking categories are a beverage category that move from package to package all of those things will continue.

Hugh Johnston: So given the information was available to us a little bit earlier, and given there was undoubtedly questions in the investment community on what 24 look like, given the evolving pricing and inflationary environment, we thought it was prudent to at least give some indication of what guidance would look like in 24. So that's a draw of the decision. Thank you.

And they drive a lot of our confidence in our categories then obviously.

We have almost completed by now our innovation plans our commercial plans are.

I think we got better at affordability TM premium amortization of our portfolio. We think are our share of market will be.

Unknown Executive: One more for our next question.

We'll be good next year as well.

So that's what's driving our confidence for next year.

Peter Grom: Our next question comes from Peter Graham with UBS. Your line is open. Thanks operator and good morning everyone. So I actually wanted to follow up on Darren's question there.

Thank you one moment for our next question.

Hugh Johnston: But just more in the context of your actual performance versus your initial expectations historically, because it's really been a while since organic revenue growth has actually fallen short of your initial outlook. So you may just characterize your confidence in the 24 out look at this stage and really whether or not you've embedded enough conservatism, just given what remains a pretty choppy backdrop for the consumer. Thanks. Sure. Happy to address that. We obviously have a long history year of meeting or exceeding expectations, both our internal expectations as well as the guidance, including this quarter, where we beat revenue and we beat EPS.

Our next question comes from Bonnie Herzog with Goldman Sachs. Your line is open.

Again, Bonnie Herzog. Your line is open to that if you have a question go ahead and ask it.

Okay.

It looks like they didn't have a question do you want me to go and move on to the next person.

Yes, please okay sure thing one moment.

Yes.

Sure.

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

Hi, good morning.

Thanks, Chris.

Hugh Johnston: In fact, we've now met or beat consensus for 55 straight quarters. So we tend to be I think appropriately conservative in the way that we communicate to you all. So from that perspective, I think you can go into 2024 with a similar expectation that we should at least achieve the numbers that we've laid out, for you. Thank you, one moment for our next question.

The inflation got a bit worse quarter over quarter in the <unk> segment specifically.

And the rest of the segment.

Trend is for continued easing can you just comment on some of the puts and takes that you're seeing from commodity inflation standpoint in this segment, particularly and how.

The beverage side is driving the inflation expectations going into next year relative to food really.

Speaking to hughs comments on above average inflation next year and just given what we see from <unk>.

Nick Modi: Our next question comes from Nick Modi with RBC Capital Market, your line is open. Thank you, good morning, everyone.

Commodities in general I'm trying to parse out where exactly that outlook is coming from so thanks. So much.

Yes, good morning, Chris Chris, we don't get into by commodity levels of Av.

Hugh Johnston: Hugh, I was hoping maybe you can just provide some of the macro underpinnings that kind of go into your 2024 viewpoints. At this point, you know, just would love to kind of get your state of the union on the consumer of the economy and kind of how you guys are thinking that will shape up as you go through 2024. Thanks. Sure, one and I start and then Ramon, obviously you're super deep on the consumer as well, but I'm happy to start on this one.

Dissecting the numbers and guidance, that's something that historically, we havent done.

As you know the beverage segment is a little more packaging exposed in fluids is just by virtue of the nature of the products.

I'd, rather not go any further than that to get into the specifics of individual commodities for competitive reasons.

Thank you one of them before next question.

Hugh Johnston: Number one, I do think that we see the consumer right now being more selective, and you see it in a variety of ways. You see some trade down in terms of channels of trade that they're purchasing products in. You see some orientation toward value. At the same time, the things that I usually look at with the consumer to detect whether there's high stress, we see good results in. Number one, if the convenience store channel, typically when gas prices are up and consumer incomes are stressed, you see revenue in those channels under stress as well.

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

Great. Thank you very much.

Just wanted to shift a little bit more kind of to the long.

And I was just wondering if you can give us.

Since the disease and your vision.

For the business.

The beverage business in the food business in the U S.

In light of your large investment in <unk>.

Hugh Johnston: For Q3, we saw revenue of 5% in beverages and 8% in foods in the convenience channel. Number two is food service. That's also typically a leading indicator. That's still growing double digits. So I think we've gone into the year with an approach that says, given all that I laid out during Darry's question, we expect the consumer to continue to be cautious and to the degree that they are worse than that. We've got cost plans in place that we would use to mitigate whatever challenges we face, but we think our revenue outlook accommodates an increasingly cautious consumer next year.

What youre trying to accomplish there and other kind of strategic moves youre doing on the digital side.

And all.

All the underlying work that youre doing in terms of automation.

And productivity just kind of what do you see the business looking like in the future and how does instant card play into thank you.

Yes, good question.

Obviously.

As Hugh was saying we continue to drive.

The transformation of the business with automation at the center of it and digitalization as well with digitalization and we're trying to obviously.

Give much more precision through our decision making across everything we do from how we talk to consumers how we invest in our.

Hugh Johnston: The other thing I would say is all the long-term structural tailwinds of our categories will continue. If you think about, you know, urbanization, demographic shifts, lifestyles, et cetera, that have been driving our snacking categories or beverage categories. They move from and packets to package. All those things will continue and they drive a lot of our confidence in our categories. Then obviously we've, you know, we have almost completed. By now, our innovation plans, our commercial plans, our, you know, I think we've got better at affordability and premiumization of our portfolios. We think our share of market will be good next year as well. So that's what's driving our kind of confidence for next year. Thank you. One moment for next question.

In our pricing with our customers and how we run our end to end operations from micro to the to the consumers how we run our routing on everything all of these all of these activities that we do to generate value for our for our consumers.

That is that is an investment we've been making over time and we continue that that still is the priority of the company to make the company more precise on intelligence and empower our frontline to make better decisions. All the time with the best information possible real time and ideally for for information.

So that is a that is a continuous investment now.

When it comes to in Stuttgart.

Yes.

There is a.

There is a commercial relationship trying to enhance the.

Yes, the capabilities of our DSD system with.

With the shoppers that they have in the store and that is that is that.

Bonnie Herzog: Our next question comes from Bonnie Herzog with Bob Goldman Sachs, your line is open. Again, Bonnie Herzog, your line is open. If you have a question, go ahead and ask.

Our continuous focus I think.

<unk> continues to be a competitive advantage and I think we can enhance that capability with.

Supporting activities from the in stock, our shoppers and Thats commercial relationship led to a very minor investment in in Stuttgart and.

Unknown Executive: It looks like they didn't have a question. Do you want me to go and move on to the next question?

Unknown Executive: Yes, please. Okay, sure thing one moment.

Just.

To reinforce the commitment to the commercial relationship.

Theres nothing more than that in terms of a strategic.

Long term.

Intentionality with that investment.

Chris Carey: Our next question comes from Chris Carey with Wells Fargo. Your line is open. Hi, good morning.

Thank you, we'll now move for our next question.

Hugh Johnston: Chris, the inflation got a bit worse quarter to quarter in the PB&A segment specifically, whereas in the rest of the segment, the trend is for continued easing. Can you just comment on some of the puts and takes that you're seeing from the commodity inflation standpoint in this segment, particularly and how the beverage side is driving the inflation expectations going into next year, relative to food. I'm really speaking to Hugh's comments on about beverage inflation next year and just given what we see from commodities in general, I'm trying to parse out where exactly that outlook is coming from.

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

Hey, thanks.

<unk>.

Two questions if I could one just following up on the 24 outlook given the visibility you have on cost and the commercial planning at this point.

Should we be expecting a relatively.

Even performance in cadence of growth, both top and bottom top and bottom line throughout the year or is the reason to the.

To see that growth weighted first half versus second half and then I did want to ask on Gatorade because the improvement we saw this quarter sequentially volumetric Lee did occur just didn't occur.

The level of improvement that we were expecting from a shipment perspective, I think we went from down high single digits in the second quarter down.

Hugh Johnston: So thanks so much. Yeah, good morning, Chris. Chris, we don't get into by commodity levels of dissecting the numbers and guidance that that's something that historically we haven't done. As you know, the beverage segment is a little more packaging exposed than food just by virtue of the nature of the products, but I'd rather not go any further than that to get into the specifics of individual commodities for competitive reasons. Thank you. One moment for our next question.

Down mid in the third so just would love some perspective on how you view that business performing thank you.

Listen we wanted to go into a more details on 24. It will cover that in February in due time when it comes to Gatorade.

We're very pleased with that.

<unk> G to DSD.

The movement of gateway to the DSD platform.

Over the summer, we're seeing sequential improvement in the performance of the brand and a better performance in.

In August that we saw early in the summer et cetera.

Robert Ottenstein: Our next question comes from Robert, I can see with every core eyesight, your line is open. Great. Thank you very much.

Inventory on display in a number of secondary location et cetera.

That move is working on the <unk>.

Ramon Laguarta: So I want to shift a little bit more kind of to the long term and is this wondering if you can give us a sense of division, your vision for the business, the beverage business and the food business in the US. In light of your large investment in Instacart, what you're trying to accomplish there, another strategic move you're doing on the digital side and all the underlying work that you're doing in terms of automation and productivity.

On the velocity of their brand and we also saw that there Brian is improving as velocity.

It is true that the.

The emergence of price I mean, the category too.

Some share from gateway less than other brands in the category of less proportionally to the size of the brand.

I would say.

Impacted Gatorade in a way at some transactions during the peak of the season, we're seeing that.

The size of prime in the category getting smaller as we go into the fall, which gives us very good optimism that with any of the infrastructure, we have with our DSD business some of the innovation with <unk>.

Ramon Laguarta: What do you see the business looking like in the future and how does Instacart play into it? Thank you. Yeah, good question. Obviously, as you were saying, we continue to drive the transformation of the business with automation at the center of it and digitalization as well. With digitalization, we're trying to obviously give much more precision to our decision making across everything we do from how we talk to consumers, how we invest in our pricing, with our customers, how we run our end-to-end operations from Agro to the consumers, how we run our routing and all these activities that we do to generate value for our consumers.

<unk> zero, our fathers on tablets that are.

Very well received by consumers that we have a very good.

We're going to have a very good 24 for Gatorade.

We have a stronger foundation to go into next year with potentially.

Weaker competition, but obviously I don't know what their plans are.

Thank you one moment for our next question.

Our next question comes from Philip <unk> with Citi. Your line is open.

Hey, good morning, everyone.

So clearly there's been a lot of concern in the market around the adoption of <unk> drugs.

Ramon Laguarta: That is an investment we've been making over time and we continue, that still is the priority of the company to make the company more precise and intelligent and empower our front line to make better decisions all the time with the best information possible at real time and ideally forward information. That is a continuous investment now. When it comes to Instacart, there is a commercial relationship trying to enhance the capabilities of our DSD system with the shoppers that they have in store and that is a continuous focus.

In the U S and the potential impact on your business. So maybe can you comment a bit while you've seen so far based on your consumer Scott is bolt on the beverage and food side and how you're thinking that can evolve over the next couple of years.

Changing consumer behaviors, and then from a Pepsi specific standpoint, what changes can you make to adopt your portfolio to these.

These new consumer preferences that could emerge.

Sean is greater than that.

Thank you Filippo.

Good question.

Obviously, we're looking at this.

Long.

Along with many other positive and negative potential risks for our business our category.

Ramon Laguarta: DSD continues to be a competitive advantage and I think we can enhance that capability with supporting activities from the Instacart shoppers and that commercial relationship led to a very minor investment in Instacart. And yes, to reinforce the commitment to the commercial relationship, it's nothing more than that in terms of strategic long-term intentionality with that.

So far the impact is negligible in our business.

Overall, if you take global consumption.

Obviously, a lot of question marks with regards to the.

To this.

The city drags.

When it comes to medical testing or scalability of the usage of this or what is the impact really on consumer choices. So lot of question marks we continue to believe that all of this structure all positive trends that we had to our categories remain.

Unknown Executive: Benjamin. Thank you, one number for our next question.

As I mentioned I referred to that earlier in the conversation. So we're seeing urbanization is a big driver of adoption of our categories. We're seeing middle class development, we're seeing lifestyle and <unk>.

Stephen Powers: Our next question comes from Stephen Powers with Deutsche Bank. Your line is open. Hey, thanks.

Unknown Executive: On two questions, if I could, one, just following up on the 24 outlook, given the visibility you have on cost and the commercial planning at this point, should we be expecting a relatively even performance and cadence of growth both top and bottom lines throughout the year, or is there reason to see that growth weighted first half versus second half. And I didn't want to ask on Gatorade because the improvement we saw this quarter sequentially volumetrically did occur, it just didn't occur at quite the level of improvement that we were expecting from a certain perspective, I think we went from down high, from the second quarter to down mid in the third. So just with both some perspective on how you view that business performing. Thank you.

People.

Snacking to eat some meals will become even more meaning meals and much more honest structure during the day being a big driver of our categories, both beverages and snacks. So we're seeing a lot of tailwind that will continue to drive our categories of course, we're observing.

The growth of these new drags and its potential impact.

The other thing we're looking at is our strategy is sound when it comes to portfolio transformation and everything we've been doing for the last five six years, when it comes to reducing sodium reducing fat reducing sugar.

<unk> seen the portion control portions of our products.

Adding some new cooking methods to our to our snacks. Those are all very positive trends that will will help us pivot the portfolio if needed in the future. We'll continue to do it obviously, where it's one of our key strategic pillars.

Ramon Laguarta: Listen, we will not go into any more details on 24. We'll cover that in February and new time. When it comes to Gatorade, we're very pleased with the G2DSD or the movement of Gatorade to the DSD platform. Over the summer, we're seeing sequential improvement in the performance of the brand, better performance in August that we saw early in the summer, et cetera, inventory on display and number of secondary locations, et cetera.

Ramon Laguarta: So that move is working. On the velocity of the brand, we also saw that the brand is improving its velocity. It is true that the emergence of prime in the category took some share from Gatorade less than other brands in the category or less proportionally to the size of the brand. But I would say prime impacted Gatorade in a way, some transactions during the peak of the season. We're seeing that the size of prime in the category getting smaller as we go into the fall, which gives us very good optimism that with any infrastructure we have with our DSD business, some of the innovation with G-Feed, Gatorline, G-Zero, our fathers and tablets that are being very well received by consumers that we have a very good, we're going to have a very good 24 for Gatorade. So we have a stronger foundation to go into next year with potentially weaker competition, but obviously, I don't know what their plans are.

Again negligible impact today, a lot of these structural trends that are in that category I think remain very solid that even we see them accelerating on our portfolio strategy. We think is very solid and when it comes to a potential.

Unknown Executive: Thank you.

Protection against some of the timing.

Some of these future developments 510 years from now.

Unknown Executive: One number for our next question.

Thank you our last question comes from Brett Cooper with consumer edge one moment.

Good morning question for you on our North American beverage business.

You've said in the past our goal is to hold share.

That business when you begin to add the Celsius and the organic business.

Hi.

Beverage performance.

With the loan portfolio or.

Distributed brands.

The component to hold share.

Yes.

Mr led a little bit of a question about hopefully we got.

Trying to ask.

Sales to us obviously.

As part of our.

Energy drink strategy, we said, we had multiple pillars and our ability to.

Distribute in our in our system.

Some third party brands.

As part of that is part of that strategy.

Obviously Celsius is continuous to grow.

<unk> doubled.

The distribution and the presence in store.

The brand in the last year or so, especially in the convenience channel, which is which is a key channel for energy consumption.

Filippo Falorni: Our next question comes from Philip Opholone, you would say, your line is open. Hey, good morning, everyone. So Cliff, there's been a lot of concern in the market around the adoption of GLP-1 drugs in the US and potentially on your business. So maybe can you comment a bit of what you've seen so far based on your consumer studies, both on the beverage and food side and how you're thinking that can evolve over the next couple of years.

That participation of sales is in our track maze are our full system more efficient it makes our sales men more relevant in the store. It makes our in our cooler more a go to cooler in the store and that those are all positives that eventually have a halo effect as well and the rest of our portfolio. So.

I don't know if im answering the question because it really I couldn't we couldn't hear it very well.

I guess youll get a sense of the importance of sales is in our energy strategy and the value we get from both the actual monetization of that distribution, but also the halo It has India and the rest of the portfolio.

Filippo Falorni: Changing consumer behaviors, and then from a Pepsi-specific standpoint, what changes can you make to adopt your portfolio to these new consumer preferences that could emerge if the adoption is greater than that? Thank you. Thank you, Filippo. Good question. Listen, obviously we're looking at this along with many other positive and negative potential risk for our business and our category. So far, the impact is negligible in our business. Overall, if you take global consumption, there's obviously a lot of question marks with regards to these obesity drugs.

Okay.

Thank you very much for for your questions and for joining us today and especially thank you for the confidence you've placed in us with your investment we hope you all stay.

Safe and healthy thank you very much.

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

Okay.

Filippo Falorni: When it comes to medical testing or scalability of the usage of this or what is the impact really on consumer choices. So a lot of question marks. We continue to believe that all this structural positive trends that we had to our categories remain, and I mentioned referred to that earlier in the conversation. So we're seeing a lot of tailways that will continue to drive our categories. Of course, we're observing the growth of these new drugs and its potential impact.

Okay.

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Filippo Falorni: The other thing we're looking at is our strategy sound when it comes to portfolio transformation. And everything we've been doing for the last five, six years when it comes to reducing sodium, reducing fat, reducing sugar, reducing the portions of our products, adding some new cooking methods to our snacks. Those are all very positive trends that will help us people to portfolio. If needed in the future, we'll continue to do it obviously. We're one of our key strategic pillars. So, again, negligible impact today. A lot of these structural trends that are in our category remain very solid, and even we see them accelerating.

Okay.

Yes.

Ramon Laguarta: And our portfolio strategy, we think, is very solid when it comes to a potential protection against some of these future developments, five, ten years from now. Thank you.

Okay.

Yeah.

Brett Cooper: Our last question comes from Brett Cooper with Consumer Edge, one moment.

Brett Cooper: Good morning. Question for you on the North American beverage business. You've set the path to goals to hold share in that business. When you begin to ask about the Celsius organic business, I'd love to hear how you've accepted that risk of falling into the whole share with the along portfolio, or you've distributed brand and with component to hold share. Thanks. Yeah. We missed a little bit of the question, but hopefully we got what you're trying to ask.

Brett Cooper: Celsius, obviously, is part of our energy drink strategy. We said we had multiple pillars, and our ability to... You know, distribute in our system some third-party brands is part of that strategy. Obviously, sales users continue to grow with doubled the distribution and the presence in store of the brand in the last year or so, especially in the convenience channel, which is a key channel for energy consumption. That participation of sales is in our track, it makes our full system more efficient, it makes our salesmen more relevant in the store, it makes our cooler, more a go-to cooler in the store and those are all positive that eventually have a halo effect as well in the rest of our portfolios.

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Brett Cooper: I don't have a answer in the question because really we couldn't hear it very well, but I guess you get a sense of the importance of sales in our energy strategy and the value we get from both the actual monetization of that distribution but also the halo it has in the rest of the portfolio.

Unknown Executive: Thank you very much for your questions and for joining us today and especially thank you for the confidence you've placed in us with your investment. We hope you all stay safe and healthy. Thank you very much.

Unknown Executive: Ladies and gentlemen, that's conclude today's presentation, you may now disconnect and have a wonderful day. Thank you very much.

Good morning, and walk the types of course 2023 third quarter earnings question and answer session. There are lots of are placed on listen only until it's your turn to ask the question. Today's call is being recorded and will be archived at www 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.

Forward looking statements inherently involve risks and uncertainties and only reflect our view as of today October 10th 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.

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.

With that I will turn it over to the operator for the first question. Thank.

Thank you once again in order to ask the question to make a comment. Please press star followed by one one on your Touchtone phone.

We will pause for a moment, while we compile our Q&A roster.

Okay.

Our first question comes from Bryan Spillane with Bank of America. Your line is open.

Thanks, operator, good morning, everyone.

Hey, Brian .

So my question is just around volume there has been a lot of focus on that topic not just for Pepsi, but just I think more broadly so.

I know in the prepared remarks, there is a little bit there was some commentary about a shift of small packs, but maybe ramon if you could touch on what was happening specifically volumetric Lee for PD and a and the <unk>.

In the quarter, and then kind of relative to what your outlook was for volumes coming out of <unk>, just how that might have evolved.

As the quarter progressed.

Yes, good morning, Brian .

Let me step back.

Beyond <unk> to the rather company, we're seeing sequential volume improvement if you take the last few quarters sell globally, we are improving our volume, but more philosophically, how we're thinking about.

How are we managing the company. There's two there's two there's two big variables that we're trying to optimize one is.

Consumer interaction with our brands and the proxy we are using for that is the units or or specific.

Purchasing act and then the other one is obviously in margin for the overall business and those are the two variables that we're maximizing.

In both cases unions are growing much faster than volume.

We're seeing we're seeing that you mentioned consumers move into a smaller bags were also.

In a way.

Facilitating that through our pricing and mix the strategy and then we're obviously, obviously optimizing margin that as you saw.

It was a good improvement of our margin across the company and their particular businesses that you referred to so that's how we're thinking about about volume and margin. When it comes to <unk> would have been a bit more aggressive than in the other in the other businesses with regards to volume optimization and we've made some decisions, especially.

Take home water that.

We were we're able to prune some promotions that were were not.

Not profitable for the business and that has a almost two five points of volume impact.

So.

That's how we're managing volume is clearly an important and valuable for asthma for.

For efficiency in the plans and some others that are unit transaction in consumer interaction with our brands at a metric that we're trying to maximize as we as we were making these trade offs between volume.

Unknown Executive: Good morning, and welcome to PepsiCo's 20-23 edition of the 3rd quarter earnings question and answer session, you're lying to have placed on this and only until it's your turn to ask a question. Today's call is being recorded and will be archived at www.pepsico.com.

Net revenue on margin expansion.

Thank you one moment for our next question.

Ravi Pamnani: It is not my pleasure to introduce Mr. Ravi Pamnani, Senior Vice President of Investor Relations, Mr. Pamnani, you may begin. Thank you, operator. Good morning, everyone. I hope everyone has had a chance this morning to review our press release and prepare for marks, both of which are available on our website.

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

Great. Thanks, good morning.

Carrying on Brian's question, but taking it a little bit further out into 2024 and it was great to get kind of some preliminary perspective on next year. So early but im also curious how youre thinking about that now.

Ravi Pamnani: 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, guidance, and outlook. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, October 10th, and we are under no obligation to update. When discussing our results, we refer to non-gap measures which exclude certain items from reported results. Please refer to our 3rd quarter 2023 earnings release and 3rd quarter 2023 form 10Q available on PepsiCo.com for definitions and reconciliations of non-gap measures and additional information regarding our results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements.

Balancing volume and price mix as we go into next year because price next have continued to outperform.

Kind of thinking about that that felt more forward luck as well thanks.

Yes Laurent.

We will give you more details obviously in February when it comes to the to accomplish in of some of our key metrics.

What I would what I would tell you at this point as we've obviously seen all the commercial plans from the different markets and our innovation plans on our productivity plans and our cost.

Trends that there will be steel.

The higher inflation.

In our business and therefore, there will be higher price mix.

Ravi Pamnani: Joining me today are PepsiCo's Chairman and CEO Ramon Maguarda and PepsiCo's Vice Chairman and CFO Hugh Johnson. 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 the question to make a comment, please press star followed by one on your touch-tone phone. We'll pause for a moment while we compile our Q&A roster.

<unk> is not the last couple of years about the if you think about the historical price mix that we had in the past.

24, we will have a bit more elevated price mix in the equation that that.

The previous years.

Yes right.

Final point, there are months comment, Florida, if you think of pre pandemic inflation being kind of in that 2% to 3% range inflation is going to be a little elevated relative to that and our pricing will be roughly in line with inflation.

Bryan Spillane: Our first question comes from Brian's plane with Bank of America. Your line is open. Thanks, operator.

So that should at least give you a rough sense as to how things might shake out.

Ramon Laguarta: Good morning, everyone. So my question is just around volume. There's been a lot of focus on that topic, not just for Pepsi, but just, I think, more broadly. So I know in the prepared marks, there's a little bit, there's some commentary about a shift to small packs, but maybe Ramon, if you could touch on what was happening specifically, volumetrically, for PV&A in the quarter, and then kind of relative to what your outlook was for volumes coming out of 2Q, just how that might have evolved as a quarter progress.

Thank you one moment for our next question.

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

Thank you good morning, so going back to your comments about volumes in <unk> was that specific to the quarter or should we still see.

This <unk>, 5% headwind to volumes included and potentially into the first half of 'twenty 'twenty four and if you can also comment on the volumes in Latin America, how should we should be thinking.

Ramon Laguarta: Yeah, good morning, Brian. Let me step back beyond PV&A to the brother company. We're seeing sequential volume improvement. If you take the last few quarters globally, we're improving our volume, but more philosophically, I would think about how we manage in the company. There's two, there's two big variables that we're trying to optimize. One is consumer interaction with our brands, and the proxy we're using for that is units or specific purchasing acts, and then the other one is obviously margin for the overall business, and those are the two variables that were maximizing.

Towards the end of the year and potentially into 'twenty to 'twenty four thank you.

Yes.

With regards to <unk>, we continue to optimize the.

The portfolio.

We should be probably thinking about a few a couple more quarters, where we will continue to see.

Volume decisions that again, where we are.

Trying to maximize units and transactions.

Turning to continue to optimize the margin of the business and you saw that this quarter in and balance of the year, we feel very good about the margin expansion in <unk> now when it comes to Latam.

Ramon Laguarta: In both cases, units are growing much faster than volume, and we're seeing that you mentioned consumers moving to smaller packs, we're also in a way facilitating that through our pricing and mixed strategy, and then we're obviously optimizing margin that as you saw, it was a good improvement in our margin across the company and the particular businesses that you refer to, so that's how we're thinking about volume and margin. When it comes to PV&A, we've been a bit more aggressive than in the other businesses with regards to volume optimization, and we've made some decisions, especially around take home water, that we were able to prune some promotions that were not profitable for the business, and that has almost a two and a half points of volume impact.

It's mostly our snack business, what you see there and in our in our numbers and we've been making again this.

Decisions around affordability.

As we need to absorb inflation in.

Make sure that our brands remain at <unk>.

Joyce for consumers that are clearly more limited in their disposable income.

Ramon Laguarta: That's how we manage in volume. It's really an important variable for us, for efficiency in the plants and some others, that unit transaction and consumer interaction with the brands are the metric that we're trying to maximize as we're making this trade-offs between volume and revenue and margin expats. Thank you, one moment for our next question.

Thank you one moment for our next question.

Our next question comes from Dara <unk> with Morgan Stanley . Your line is open.

Okay.

Hey, guys good morning.

Could you just discuss the motivation behind the decision to provide guidance for 2024, a bit earlier than is typical what do you think your level of visibility is at this point versus a typical year and as you look out maybe what are some of the areas that give you confidence in what might be.

Unknown Executive: Our next question comes from Lauren Lieberman with Barclays, your line is open. Great, thanks. Good morning. Carrying on Bryan's question, but taking it a little bit further out, you know, into 2024 and it was great to get kind of some preliminary perspective on next year so early. But it's also curious how you're thinking about that balance in volume and price mix as we go into next year, because price mix has continued to outperform and so just kind of thinking about that that's more forward look as well.

Some of the areas, where theres more uncertainty.

Particularly given the volatile consumer environment here. Thanks.

Yes, Hi, Dara I can answer that one.

I think in general as we build the plans were focused on a couple of things.

Number one is obviously the level of commodity inflation and you know we buy forward about nine months.

So that's roughly in line with.

Unknown Executive: Thanks. Yeah, Lauren, we'll give you more details obviously in February when it comes to the actual composition of some of our metrics that what I would tell you at this point as we've obviously seen all the commercial plans from the different markets and our innovation plans and our productivity plans and our cost trends that there will be still a higher inflation in our businesses and therefore there will be higher price mix versus not the last couple of years, but if you think about the historical price mix that we had in the past, I think 24 will have a bit more elevated price mix in the equation that in the previous years.

The past.

Number two is the balance of the Pepsico cost structure and as we've talked about the last couple of quarters.

We've put even higher focus than we've had in the past on driving productivity and driving out unnecessary costs.

The tools that we've discussed the investments in digitalization and the investments in global business services the.

The investments in driving.

Driving out overlaps.

Within the organization.

Because of that work has been going on for a longer period of time I think that gave us earlier line of sight into what we would expect.

Our cost outcome to be for next year, and then number three.

We're in a good spot and in many of the developed markets in terms of our commercial plans, we do joint business planning with our customers.

Unknown Executive: Yeah, right. They had a finer point of amongst comments, Lauren. If you think of pre-pandemic inflation being kind of in that 2-3% range, inflation is going to be a little elevated relative to that and our pricing will be roughly in line with inflation. So that should at least give you a rough sense as to how things might check out. Thank you.

Lauren Lieberman: One moment for our next question.

Andrew Teixeira: Our next question comes from Andrew Techshare with JP Morgan. Your line is open. Thank you.

<unk> would look like in 2004, so thats what drove the decision.

Ramon Laguarta: Good morning. So going back to your comments about volumes in QBNA, was that specific to the quarter or should we still see about this 2.5% headwind to volumes you could have in potentially into the first half of 2024? And if you can also comment on the volumes in Latin America, how should we be thinking towards the end of the year and potentially into 2024? Thank you. Yeah, Andrea. So, you know, with regards to PBNA, we continue to optimize the portfolio.

Thank you one moment for our next question.

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

Thanks, operator, and good morning, everyone.

Ramon Laguarta: So we should be probably thinking about a few a couple more quarters where we will continue to see volume decisions that again, we're trying to maximize units and transactions and we're trying to continue to optimize the margin of the business and you saw that this quarter and the balance of the year we feel very good about the margin expansion in PBNA. Now, when it comes to a lot of time, there is mostly our snack business that what you see there in our numbers.

Sure happy to address that.

We obviously have a long history here of meeting or exceeding expectations, both our internal expectations as well as.

The guidance, including this quarter, where we beat revenue and we beat EPS. In fact, we have now met or beat consensus for 55 straight quarters.

So we tend to be.

Ramon Laguarta: And we've been making, again, decisions around affordability, making sure that our brands continue to be within affordable price points to consumers that we know that this possible income is limited and they make decisions about based on price points. So we've been reducing size, portion size of our products and making sure that we're still very affordable. And that has a repercussion on, has an impact on the actual volume, but again, the transactions are much healthier and that's the metric that we use to assess the health of the business with regards to consumer along with brand equity and some other metrics that we use obviously to understand full consumer picture.

I think appropriately conservative.

And the way that we communicate to you all.

So from that perspective, I think you can go into 2024 with a similar expectation that.

We should at least achieve the numbers that we've laid out for you.

Thank you one moment for our next question.

Our next question comes from Nik Modi with RBC capital markets. Your line is open.

Thank you good morning, everyone.

I was hoping maybe you can just provide some of the macro underpinnings that kind of go into your 2024.

Ramon Laguarta: So we'll continue to make optimizations under as we need to absorb inflation and make sure that our brands remain a choice for consumers that are clearly more limited in their responsibilities. Thank you, one moment for our next question.

You points at this point.

Would love to kind of.

<unk> state of the Union on the consumer or the economy kind of how you guys are thinking that will shape up as you go through 2024.

Sure.

Why don't I start and then remote obviously youre super deep on the consumer.

As well, but I'm happy to start on this one.

Dara Mohsenian: Our next question comes from Dara Mohsenian with Margaret Stanley, your line is open. Hey guys, good morning.

Number one I do think that we see the consumer right now being more selective and you see it in a variety of ways you see some trade down in terms of channels of trade that they're purchasing products.

Hugh Johnston: Can you just discuss the motivation behind the decision to provide guidance for 2024 a bit earlier than as typical, what do you think your level visibility is at this point versus a typical year? And as you look out, if you wanted some of the areas that give you confidence and what might be some of the areas where there's more uncertainty particularly given the volatile consumer environment here. Thanks. Yeah, hi, Dara. I can answer that one.

You see some some orientation towards value at the same time, the things that I, usually look at with the consumer to detect whether.

There is high stress.

We see good results in there number one is the convenience store channel.

Typically when gas prices are up and consumer consumer incomes are stressed you see revenue in those channels under stress as well.

Hugh Johnston: I think in general, as we build the plans, we're focused on a couple of things. Number one is obviously that the level of commodity inflation, and you know, we buy forward about nine months. So that's roughly in line with the past. Number two is that the balance of the PepsiCo cost structure. And as we've talked about the last couple of quarters, we've put even higher focus than we've had in the past on driving productivity and driving out unnecessary costs using the tools that we've discussed, the investment in digitalization, the investment in global business services, the investments in driving out overlaps within the organization.

For Q3, we saw revenue up 5% and beverages and 8% in foods and the convenience channel number two is foodservice. That's also typically a leading indicator that is still growing double digits. So I think we've gone into the year with an approach that says.

Hugh Johnston: Because that work has been going on for a longer period of time, I think that gave us earlier line of sight into what we would expect our cost outcome to be for next year. And then number three, we're in a good spot in many of the developed markets in terms of our commercial plans. We do joint business planning with our customers. And we're probably in line to maybe even a little ahead of where we've been historically with all of that.

Given all that I laid out.

<unk> <unk> question.

We expect the consumer to continue to be cautious and to the degree that they are worse and that we've got cost plans in place that we would use to mitigate whatever whatever challenges we face, but we think our revenue outlook.

<unk> and increasingly cautious consumer next year.

And the other thing.

I would say.

All the.

Long term structural tailwind of our categories will continue if you think about.

Huron Ization demographic shifts.

Lifestyles et cetera that have been driving our snacking categories are a beverage category that moved from a baggage to package all of those things will continue.

Hugh Johnston: So given the information was available to us a little bit earlier, and given there was undoubtedly questions in the investment community, on what 24 look like, given the evolving pricing and inflationary environment, we thought it was prudent to at least give some indication of what guidance would look like in 24. So that's a drove decision. Thank you.

They drive a lot of our confidence in our categories.

And obviously we.

<unk> almost completed by now our innovation plans our commercial plans are.

I think we got better at affordability TM premium amortization of our portfolio. We think are our share of market will be will.

Peter Grom: One number for next question. Our next question comes from Peter Graham with UBS. Your line is open. Thanks operator. Good morning, everyone. So I actually wanted to follow up on Darren's question there. But just more in the context of your actual performance versus your initial expectations historically, because it's really been a while since organic revenue growth has actually fallen short of your initial outlook. So you may just characterize your confidence in the 24 outlook at this stage. And really, whether or not you've invented enough conservatism, just given what remains, you know, a pretty choppy backdrop for the consumer. Thanks.

It will be good next year as well.

So that's what's driving our.

Confidence for next year.

Thank you one moment for our next question.

Next question comes from Bonnie Herzog with Goldman Sachs. Your line is open.

Again, Bonnie Herzog. Your line is open if you have a question go ahead and ask it.

It looks like they didn't have a question do you want me to go and move on to the next person.

Yes, please okay sourcing one moment.

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

Hi, good morning.

Okay great.

The inflation got a bit worse quarter over quarter in the <unk> segment specifically.

Hugh Johnston: Sure. Happy to address that. We obviously have a long history year of of meeting or exceeding expectations, both our internal expectations as well as the guidance, including this quarter where we beat revenue and we beat EPS. In fact, we've now be met or beat consensus for 55 straight quarters. So we tend to be, I think, appropriately conservative in the way that we communicate to you all. So from that perspective, I think you can go into 2024 with a similar expectation that we should at least achieve the numbers that we've laid out, for you.

Unknown Executive: Thank you, one moment for our next question.

And the rest of the segment.

Trend is for continued easing can you just comment on some of the puts and takes that you're seeing from commodity inflation standpoint in this segment, particularly and how.

The beverage side is driving the inflation expectations going into next year relative to food really.

Speaking to Hughes comment on above average inflation next year and just given what we see from <unk>.

Commodities in general I'm trying to parse out where exactly that outlook is coming from so thanks. So much.

Yes, good morning, Chris Chris, we don't get into by commodity levels of Av.

Dissecting the numbers and guidance, that's something that historically, we havent done.

As you know the beverage segment is a little more packaging exposed in fluids is just by virtue of the nature of the products.

Nick Modi: Our next question comes from Dick Modi with RBC Capital Market, your line is open. Thank you, good morning, everyone.

I'd, rather not go any further than that to get into the specifics of individual commodities for competitive reasons.

Hugh Johnston: Here I was hoping maybe you can just provide some of the macro underpinnings that kind of go into your 2024 viewpoints at this point, you know, just would love to kind of get your state of union on the consumer of the economy and kind of how you guys are thinking that will shape off as you go through 2024. Thanks. Sure, one I started and then Ramon obviously, you're super deep on the consumer as well, but I'm happy to start on this one.

Thank you one of them before next question.

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

Great. Thank you very much.

Just wanted to shift a little bit more kind of to the long term.

And I was just wondering if you can give us.

Since the disease and your vision.

Hugh Johnston: Number one, I do think that we see the consumer right now being more selective and you see it in a variety of ways, right? You see some trade down in terms of channels of trade that they're purchasing products in. You see some orientation toward value. At the same time, the things that I usually look at with the consumer to detect whether there's high stress, we see good results in. Number one is the convenience store channel.

For the business.

The beverage business and the <unk>.

Food business in the U S.

In light of your large investment in <unk>.

What youre trying to accomplish there and other kind of strategic moves youre doing on the digital side.

And the.

All the underlying work that youre doing in terms of automation.

Hugh Johnston: Typically when gas prices are up and consumer incomes are stressed, you see revenue in those channels under stress as well. For Q3, we saw revenue up to five percent in beverages and eight percent in foods in the convenience channel. Number two is food service. That's also typically a leading indicator. That's still growing double digits. So I think we've gone into the year with an approach that says, given all that I laid out during Darra's question, we expect the consumer to continue to be cautious and to the degree that they are worse than that.

And productivity just kind of what do you see the business looking like in the future and how does instant card play into thank you.

Yes.

Yeah.

Obviously.

As Hugh was saying we continue to drive.

The transformation of the business with automation at the center of it and digitalization as well with digitalization and we're trying to obviously.

<unk> gave much more precision through our decision making across everything we do from how we talk to consumers how we invest in our.

Our pricing with our customers and how we run our end to end operations from micro to the to the consumers how we run our routing on everything all of these all of these activities that we do to generate value for our for our consumers that is that is an investment we've been making over time and we continue.

Hugh Johnston: We've got cost plans in place that we would use to mitigate whatever challenges we face, but we think our revenue outlook accommodates an increasingly cautious consumer next year. The other thing I would say is that all the long-term structural tailwinds of our category will continue. If you think about humanization, demographic shifts, lifestyles, et cetera, that have been driving our snacking categories or beverage categories. They move from and packets to package. All those things will continue and they drive a lot of our confidence in our categories.

That still is the priority of the company to make the company more precise on intelligence and empower our frontline to make better decisions all the time.

With the best information possible real time.

Forward for information so that is a.

That is a continuous investment now when it comes to in Stuttgart.

There is a.

There is a commercial relationship trying to enhance the.

Hugh Johnston: Obviously, we have almost completed. By now, our innovation plans, our commercial plans, I think we've got better at affordability and premiumization of our portfolio. We think our share of market will be good next year as well. That's what's driving our confidence for next year.

Unknown Executive: Thank you, one moment for next question.

Yes, the capabilities of our DSD system with the with the.

The shoppers that they have in the store and that is a <unk>.

Our continuous focus I think DSD continues to be a competitive advantage and I think we can enhance that capability with.

With supporting activities from the in stock, our shoppers and Thats commercial relation led to a very minor investment in in Stuttgart and.

Bonnie Herzog: Our next question comes from Bonnie Herzog with our Goldman Sachs, your line is open. Again, Bonnie Herzog, your line is open. If you have a question, go ahead and ask it.

Just to reinforce the commitment to the commercial relationship.

Unknown Executive: It looks like they didn't have a question. Do you want me to go ahead and move on to the next question? Yes, please. Okay, sure thing one moment.

Nothing more than that in terms of our strategy.

Long term.

Intentionality with that investment.

Hugh Johnston: Our next question comes from Chris Carey with Wells Fargo, your line is open. Hi, good morning. Chris, the inflation got a bit worse quarter to quarter in the PB&A segment specifically, whereas in the rest of the segment, the trend is for continued easing. Can you just comment on some of the puts and takes that you're seeing from the commodity inflation standpoint in this segment particularly and how the beverage side is driving the inflation expectations going into next year relative to food.

Thank you, we'll now move for our next question.

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

Okay.

Hey, thanks.

Two questions if I could one just following up on the 24 outlook.

Given the visibility you have on cost with the commercial planning at this point.

Should we be expecting a relatively.

Even performance in cadence of growth, both top and bottom top and bottom line throughout the year or is the reason to.

To see that growth weighted first half versus second half and then I did want to ask on Gatorade because the improvement we saw this quarter sequentially volumetric Lee did occur just didn't occur quite the the.

Hugh Johnston: I'm really speaking to Hugh's comments on about beverage inflation next year and just given what we see from commodities in general, I'm trying to parse out where exactly that outlook is coming from. So we don't get into by commodity levels of dissecting the numbers and guidance that that's something that historically we haven't done. As you know, the beverage segment is a little more packaging exposed than food just by virtue of the nature of the products, but I'd rather not go any further than that to get into the specifics of individual commodities for competitive reasons.

The level of improvement.

We were expecting from a shipment perspective, I think we went from down high single digits in the second quarter.

Unknown Executive: Thank you.

Down mid third so just would love some perspective on how you view that business performing thank you.

Listen we wanted to go into more details on 24, it will cover that in February in due time when it comes to our Gatorade.

Unknown Executive: One more for our next question.

We're very pleased with.

The G to DSD.

Movement of gateway to the DSD platform.

Over the summer, we're seeing sequential improvement in the performance of the brand.

Better performance in.

In August that we saw early in the summer et cetera.

Robert Ottenstein: Our next question comes from Robert. I just seen with Evercore ISI. Your line is open. Great. Thank you very much.

Inventory on display in a number of secondary location et cetera.

That move is working on.

Ramon Laguarta: I just want to shift a little bit more kind of to the long tone and I was just wondering if you can give us a sense of division, your vision for the business, the beverage business and the food business in the US in light of your large investment in Instacart, what you're trying to accomplish there and other strategic moves you're doing on the digital side and all the underlying work that you're doing in terms of automation and productivity. Just kind of, what do you see the business looking like in the future and how does Instacart play into it?

On the.

The velocity of their brand and we also saw that there Brian is improving as velocity.

It is true that the.

The emergence of prime in that category too.

Some share from gateway less than other brands in the category of less proportionally to the size of the brand.

I would say.

<unk> impacted Gatorade in a way as some transactions during the peak of the season, we're seeing that.

The size of prime in the category getting smaller as we go into the fall it which gives us very good optimism that with any of the infrastructure, we have with our DSD business some of the innovation with <unk>.

Ramon Laguarta: Thank you. Yeah, good question. Obviously, as you were saying, we continue to drive the transformation of the business with automation at the center of it and digitalization as well. With digitalization, we're trying to obviously give much more precision to our decision making across everything we do from how we talk to consumers, how we invest in our pricing with our customers, how we run our end-to-end operations from agro to the consumers, how we run our routing and everything, all these activities that we do to generate value for our consumers.

<unk> zero, our fathers on tablets that are.

Very well received by consumers that we have a very good.

We're going to have a very good 24 for Gatorade.

So we have a stronger foundation to go into next year with potentially.

Weaker competition, but obviously I don't know what their plans are.

Thank you one moment for our next question.

Our next question comes from Philip <unk> with Citi. Your line is open.

Hey, good morning, everyone.

So clearly there's been a lot of concern in the market around the adoption of <unk> drugs.

In the U S and the potential impact on your business. So maybe can you comment a bit of what you've seen so far based on your consumer studies, both on the beverage and food side and how you're thinking that can evolve over the next couple of years.

Ramon Laguarta: That is an investment we've been making over time and we continue that still is the priority of the company to make the company more precise and intelligent and empower our front line to make better decisions all the time with the best information possible at real time and ideally forward information. That is a continuous investment. Now, when it comes to Instacart, there is a commercial relationship trying to enhance the capabilities of our DSD system with the shoppers that they have in store and that is a continuous focus.

Changing consumer behaviors, and then from a Pepsi specific standpoint, what changes can you make to adapt to your portfolio.

Did these new consumer preferences that could emerge if that.

The option is greater than that.

Thank you.

Thank you Filippo.

Question <unk>.

Obviously, we're looking at this as long.

Along with many other positive and negative potential risks for our business our category.

So far the impact is negligible in our business.

Ramon Laguarta: DSD continues to be a competitive advantage and I think we can enhance that capability with supporting activities from the Instacart shoppers and that commercial relationship led to a very minor investment in Instacart and just to reinforce the commitment to the commercial relationship. It's nothing more than that in terms of a strategic long-term intentionality with that in front of us. Benjamin. Thank you, one number for our next question. Our next question comes from Stephen Powers with Deutsche Bank, your line is open. Hey, thanks.

Overall, if you take global consumption. There is obviously a lot of question marks with regards to the.

These obvious.

Obviously drags.

When it comes to medical testing or scalability of the usage of this or what is the impact really on consumer choices.

Lot of question marks we continue to believe that all of this structure all positive trends that we had to our categories remain.

And I didn't mention I referred to that earlier in the conversation. So we're seeing urbanization is a big driver of adoption of our categories. We're seeing middle class development, we're seeing lifestyle and people.

Snacking to eat some meals will become even more mini meals and much more on structure during the day being a big driver of our categories, both beverages and snacks. So we're seeing a lot of tailwind that will continue to drive our categories of course, we're observing.

Unknown Executive: On two questions if I could, one, just just following up on the 24 outlook, given the visibility you have on cost and the commercial planning at this point, should we be expecting a relatively even performance in cadence of growth, both top and bottom lines throughout the year, or the reason to see that growth weighted first half versus second half. I didn't want to ask on Gatorade because the improvement we saw this quarter sequentially volumetrically did occur.

The growth of these new.

<unk> and its potential impact.

The other thing we're looking at is our strategy is sound when it comes to portfolio transformation and everything we've been doing for the last five six years when it comes to <unk>.

Unknown Executive: It just didn't occur at quite the level of improvement that we were expecting from a shipment perspective, I think we went from down high single digits from the second quarter to down mid in the third, so just with both some perspective on how you view that business performing. Thank you. Good listen, we will now go into more details on 24. We'll cover that in February and new time. When it comes to Gatorade, we're very pleased with the G2DSD or the movement of Gatorade to the DSD platform over the summer.

We're reducing sodium reducing fat, reducing sugar, reducing the portion control portions of our products.

Adding some new cooking methods to our to our snacks. Those are all very positive trends that will will help us pivot the portfolio if needed in the future. We will continue to do it obviously.

Unknown Executive: We're seeing sequential improvement in the performance of the brand, better performance in August that we saw early in the summer, etc, inventory on display and number of secondary locations, etc. So that move is working. On the velocity of the brand, we also saw that the brand is improving its velocity. It is true that the emergence of prime in the category took some share from Gatorade less than other brands in the category or less proportionally to the size of the brand, but I would say a prime impacted Gatorade in a way, some transactions during the peak of the season.

One of our key strategic pillars, so negligible.

Negligible impact today, a lot of these structural trends that are in that category I think remain very solid that even we see them accelerating on our portfolio strategy. We think is very solid when it comes to a potential.

Protection again, some of the timing.

Some of these future developments 510 years from now.

Thank you our last question comes from Brett Cooper with consumer edge one moment.

Good morning question for you on our North American beverage business.

You've said in the past the goal is to hold share.

That business when you begin to add the Celsius, and the organic business love to hear how it.

The beverage performance.

With the loan portfolio.

Distributed brand.

The component to hold share.

Yeah.

Yes.

Unknown Executive: We're seeing that the size of prime in the category getting smaller as we go into the fall, which gives us very good optimism that with any infrastructure we have with our DSD business, some of the innovation with G-Feed, Gatorline, G-Zero, our fathers and tablets that are being very well received by consumers that we have a very good, you know, we're going to have a very good 24 for Gatorade, so we have a stronger foundation to go into next year with potentially weaker competition, but obviously I don't know what their plans are.

We started a little bit of a question about hopefully we got.

Trying to ask.

Celsius is obviously.

As part of our.

Energy drink strategy, we said, we had multiple pillars and our ability to.

Distribute in our in our system.

Some third party brands as part of that is part of that strategy.

Obviously Celsius is continuous to grow.

<unk> doubled.

The distribution and the presence in store.

The brand in the last year or so, especially in the convenience channel, which is which is a key channel for energy consumption.

Unknown Executive: Thank you, one number four next question.

Filippo Falorni: Our next question comes from Philip O'Fillorny with City, your line is open. Hey, good morning, everyone.

That participation of sales is in our track maze are our full system more efficient it makes our sales demand and more relevant in the store. It makes our in our cooler more a go to cooler in the store and that those are all positives that eventually have a halo effect as well in the rest of our portfolio. So.

Ramon Laguarta: So please, there's been a lot of concern in the market around the adoption of GLP1 drugs in the US and the potentially on your business, so maybe can you comment a bit of what you've seen so far based on your consumer studies, both on the beverage and food side and how you think that can evolve over the next couple of years, changing consumer behaviors, and then from a Pepsi-specific standpoint, what changes can you make to adopt your portfolio to these new consumer preferences that could emerge if the adoption is greater than then. Thank you.

I don't know if im answering the question because it really I couldn't we couldn't hear it very well.

I guess, you'll get a sense of the importance of sell throughs in our energy strategy and the value we get from both the actual monetization of that distribution, but also the halo It has India and the rest of the portfolio.

Okay.

Thank you very much for for your questions and for joining us today and especially thank you for the confidence you've placed in US with your investment helped you stay.

Ramon Laguarta: Thank you, Filippo, with question. Listen, obviously we're looking at this along with many other positive and negative potential risks for our business and our category. So far, the impact is negligible in our business. Overall, if you take global consumption, there's obviously a lot of question marks with regards to these obesity drugs when it comes to medical testing or scalability of the usage of this or what is the impact really on consumer choices.

Safe and healthy thank you very much.

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

Ramon Laguarta: So a lot of question marks. We continue to believe that all this structural positive trends that we had to our categories remain, and I mentioned, I referred to that earlier in the conversation. So we're seeing urbanization as a big driver of adoption of our categories. We're seeing middle class development. We're seeing lifestyle. And people snacking to eat some meals becoming more mini meals and much more unstructured during the day being a big driver of our categories, both beverages and snacks.

Ramon Laguarta: So we're seeing a lot of tailwinds that will continue to drive our categories. Of course, we're observing the growth of these new drugs and its potential impact. The other thing we're looking at is our strategy sound when it comes to portfolio transformation and everything we've been doing for the last five, six years when it comes to reducing sodium, reducing fat, reducing sugar, reducing the portions of our products, adding some new cooking methods to our snacks.

Ramon Laguarta: Those are all very positive trends that will help us people to portfolio if needed in the future. We'll continue to do it obviously. We're one of our key strategic pillars. So, again, negligible impact today. A lot of these structural trends that are in our category remain very solid, and even we see them accelerating. And our portfolio strategy, we think, is very solid when it comes to a potential protection against some of these future developments five ten years from now. Thank you.

Brett Cooper: Our last question comes from Brett Cooper with Consumer Edge, one moment.

Unknown Executive: Good morning. Question for you on the North American beverage business. You've set the path to goals to hold share in that business. When you begin to ask the Celsius and organic business, I'd love to hear how to assess the beverage performance. If you want me to hold share with the old portfolio or produce you distributed brand and the component to hold share. Thanks. We missed a little bit of the question, but hopefully we got what you're trying to ask.

Unknown Executive: Celsius obviously is part of our energy drink strategy. We said we had multiple pillars and our ability to distribute in our system some third party brands is part of that strategy. Obviously, Celsius continues to grow with double the distribution and the presence in store of the brand in the last year or so, especially in the convenience channel, which is a key channel for energy consumption. That participation of Celsius in our track makes our full system more efficient.

Unknown Executive: It makes our salesman more relevant in the store. It makes our cooler more a go-to cooler in the store, and those are all positive that eventually have a halo effect as well in the rest of our portfolio. I don't have a answer in the question because we couldn't hear it very well, but I guess you get a sense of the importance of Celsius in our energy strategy and the value we get from both the actual monetization of that distribution, but also the halo it has in the rest of the portfolio.

Unknown Executive: Thank you very much for your questions and for joining us today, and especially thank you for the confidence that you've placed in us with your investment. We hope you all stay safe and healthy. Thank you very much.

Unknown Executive: Ladies and gentlemen, this concludes today's presentation.

Unknown Executive: You may now disconnect and have a wonderful day.

Q3 2023 PepsiCo Inc Earnings Call - Q&A

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