PepsiCo Q3 2022 Earnings Results & Report

PepsiCo EPS Results

• Actual EPS: $1.97
• Consensus EPS: $1.85
• Beat/Miss: Beat by +$0.12
• One Year Ago EPS: N/A
• EPS Beat Rate: 7 of last 8 quarters

PepsiCo Revenue Results

• Actual Revenue: $21.97 billion
• Expected Revenue: $20.88 billion
• Beat/Miss: Beat by +$1.09 billion
• YoY Revenue Growth: N/A

PepsiCo (NASDAQ:PEP) (NASDAQ:PEP) is a global food and beverage company whose portfolio includes Pepsi-Cola, Mountain Dew, Gatorade, Lay’s, Doritos, Cheetos, Quaker, Tostitos, Fritos, and SodaStream. Its products span carbonated soft drinks, sports and energy beverages, bottled water, juices, convenient foods, snacks, and other packaged food offerings.

The company sells products through retail stores, restaurants, food-service providers, e-commerce platforms, and other distribution channels. PepsiCo serves consumers in North America and international markets across Latin America, Europe, Africa, the Middle East, and Asia-Pacific. Its operations include both company-owned businesses and partnerships, licensing arrangements, and distribution relationships.

PepsiCo was formed in 1965 through the merger of Pepsi-Cola and Frito-Lay. The company is headquartered in Purchase, New York, and has expanded its portfolio through organic development and acquisitions over its history. Ramon Laguarta has served as PepsiCo’s chairman and chief executive officer since 2018.

PepsiCo Q3 2022 Earnings Call Transcript

Key Takeaways

• PepsiCo delivered 12.4% organic growth in Q3, driven by high-single-digit pricing that offset a ~1% decline in volumes as pricing elasticity remained strong.
• Q4 guidance of ~7% organic growth implies volumes could decline ~2–3% against elevated pricing, reflecting management’s cautious view on consumer demand.
• Full-year 2022 commodity inflation is expected to settle in the high-teens percent, with hedges covering ~6–9 months, and the company plans to lean on pricing and cost controls if input costs moderate.
• PepsiCo gained share in ~70–75% of its global snacks and beverage markets, including ~2 points of share in U.S. Frito-Lay and meaningful share gains for Gatorade in sports drinks.
• Despite gross margin pressure (down ~20bps), operating margin expanded ~30bps in Q3, supported by strong cash flow, a long debt maturity profile, and a disciplined focus on tuck-in M&A.

Presentation

[Operator]

Good morning, and welcome to PepsiCo's 2022 third quarter earnings question and answer session. Your lines have been placed on listen only until it is your turn to ask a question. In order to ask a question or make a comment, please press star one one on your touchtone phone at any time. Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Ravi Pamnani, Senior Vice President of Investor Relations. Mr. Pamnani, you may begin.

[Ravi Pamnani, SVP of Investor Relations at PepsiCo]

Thank you, operator. I hope everyone has had a chance this morning to review our press release and prepared remarks, both of which are available on our website. Before we begin, please take note of our cautionary statement. We may make forward-looking statements on today's call, including about our business plans and our updated 2022 guidance. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, October 12, 2022, and we are under no obligation to update. When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results. Please refer to our third quarter 2022 earnings release and our third quarter 2022 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.

[Ravi Pamnani, SVP of Investor Relations at PepsiCo]

Joining me today are PepsiCo's Chairman and CEO, Ramon Laguarta, 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.

[Operator]

Thank you. Once again, in order to ask a question or make a comment, please press star one one on your touch-tone phone at any time. One moment for our first question. Our first question comes from Andrea Teixeira with JPMorgan. Your line is open.

[Andrea Teixeira, Managing Director and Senior Equity Research Analyst at JP Morgan]

Thank you. Good morning, and congrats on the results. I was hoping to get more clarity on both the price elasticity and the reinvestments you called out. We all appreciate that you're conservative, but it seems that you're embedding a 7% organic growth for the fourth quarter. Given the high single-digit pricing, are you expecting volumes to be negative in the range of 2% or 3% against the 1% negative that you got in the Q3? If I may, I wanna ask a cash flow question.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

Yeah. Hey, Andrea, it's Hugh. Look, you know, obviously we've seen elasticity continue to be strong and stronger than expected through three quarters of the year. In terms of the math that you've done, the math is certainly accurate. Obviously, we are carefully watching what happens with the consumer. We obviously exited the third quarter with the consumer still very healthy in terms of our particular categories. I'm not sure that's true broadly with housing and other big-ticket purchases. We'll see what elasticities look like in the fourth quarter, but I don't disagree with your math. What you said is accurate.

[Andrea Teixeira, Managing Director and Senior Equity Research Analyst at JP Morgan]

Thank you. Sorry.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Yeah, this is Ramon. With regards to reinvestments, as you know, the philosophy we've been using the last few years to continue to balance the short term and long term, I think it's resulting in good performance. We continue to invest in our brands. You know, we're investing a lot in digitizing the company and some of the long-term sustainability bets that we're making as well. We continue with that, and next quarter will not be different than any of the other quarters during the year. You should assume that we're looking at reinvesting in the next quarter and entering 2023 with strength on the commercial side and on the investment side.

[Andrea Teixeira, Managing Director and Senior Equity Research Analyst at JP Morgan]

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

[Operator]

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

[Lauren Lieberman, Managing Director and Equity Research Analyst at Barclays]

Great. Thanks. Good morning. I was just struck again by the strength in the pricing, well, everywhere, but particularly in Europe, and how even the volumes are holding on really well. Just curious, knowing how much that business is skewed towards Western Europe, if you could talk a little bit about revenue management versus straight list pricing. You know, what you can tell us just to put a little bit more context and color around how that magnitude of pricing is being realized. Thanks.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Yeah. Good morning, Lauren. Yeah, you know, Europe, as you well said, has been impacted more than other parts of the world on the cost, and therefore we've had to lean into revenue management probably stronger than other regions in the business. You know, the team has been investing in those capabilities for some time already, and it's been a combination of mix management and you know, pure pricing across most of the geographies, East and West. You know, we've had a good summer, which tends to drive more impulse sales and those channels have higher price per liter or price per kilo, so that is reflected in the pricing in Q3.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

The teams have been courageous in you know some of the large bags and in-home format as well across you know the what you call Western Europe. Yeah, a combination of you know visual pricing and some channel management. The truth is that our brands have you know the investment we've made in the brands in the last few years are paying off in the sense that our brands are being stretched to higher price points and consumers are following us in Europe and in other parts of the world, as you saw with the volume to price and realization in the U.S. or even other emerging markets.

[Operator]

Thank you. One moment before our next question. Our next question comes from Dara Mohsenian with Morgan Stanley.

[Dara Mohsenian, Managing Director and Equity Research Analyst at Morgan Stanley]

Hey, good morning, guys. Morning, Dara. Was just hoping to get a bit of perspective on the sustainability of the organic sales growth we're seeing as you look out longer term. Obviously, the second straight year of double-digit organic sales growth, so very robust levels. There is some COVID recovery in beverages. There's excess pricing with limited demand elasticity. Just looking for some long-term perspective on if you're incrementally positive to the mid-single digit long-term trajectory after the last couple of years, and as you look at some of those key drivers of growth, you know, which ones are more sustainable longer term.

[Dara Mohsenian, Managing Director and Equity Research Analyst at Morgan Stanley]

Then if I can slip a second part in, just to follow up to Andrea's question, have you seen anything in the business in September or October so far in Q4 that's different than generally the underlying momentum you saw in Q3, just given some worries about macros here, et cetera, and some short-term volatility? Thanks.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

Yeah. Hey, Dara. It's Hugh. A couple of things. Number one, you know our long-term guidance on revenue is 4%-6%. And as Ramon and I have talked about in the past, and we've always been pushing ourself to how do we get to the upper end of the range on that on a more consistent basis.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

You know, given the combination of high pricing right now as well as relatively low elasticity, it's difficult to figure out exactly how that might project going forward. That's sort of a long-term comment for 2023. I'm not gonna give it to 2023 on today's call. As is our practice, we'll talk about that in February. But our aspiration remains the same, which is, you know, we wanna go and push hard on top line. We think it's great for the organization. We think it ultimately creates more value than any other strategy. But no change in terms of long-term guidance at this point. It's just been, you know, the times are just so interesting. It's hard to figure out what that projects forward into.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

I mean, what I would say on top of what he was saying is that our categories seem to be growing faster than food, and food is growing faster than non-food. I don't think that's gonna change. We've seen, I think affordable treats and small moments of pleasure continuing to be a key, you know, need state, I think, in consumers today. Our categories play in that space, so that I think we should assume that that will continue in spite of all the ups and downs potentially economically around the world. The second element, I think it's fair to assume as well, is that we are gaining share in many markets across our geographies, both in snacks and beverages.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

We should assume that given the investments we're making, the quality of brands and people that we have in a lot of the markets, we should assume that in the future, we will continue to gain share. At least that's our aspiration, and we try to continue to invest and get better every quarter in that respect. You know, when you compare to the average of food, you should assume we'll do better and hopefully we'll do better than our categories. Those are the variables that we look at every month as we assess our performance. As Hugh was saying, our long-term 4%-6%, I think remains valid.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Clearly, a 16% quarter is an outstanding quarter with a lot of pricing, and we don't think that's a sustainable performance for the business. Obviously, we're aspiring to beat our long term as many quarters as possible.

[Operator]

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

[Bonnie Herzog, Managing Director and Senior Consumer Analyst at Goldman Sachs]

Thank you. Good morning. Your top line growth in the quarter, as we've all been discussing, was, you know, very impressive, but it was fully driven by strong price realization. I guess my question is on your market share. You know, could you give us a sense of how your, you know, share has been trending in both maybe your beverage and Frito-Lay businesses? You know, I know a priority of yours is to improve your op margins in PBNA especially. Maybe give us a sense of how you're going to balance, you know, market share growth with profitability growth going forward. Thanks.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Yeah. Bonnie, let me start with the share and then probably Hugh will top it up with the margin philosophy on PBNA. On share, we're seeing consistent with the trends that we saw last year and earlier this year, we're seeing gains in, I would say, 75% of our markets in what we call foods, convenient foods, salty snacks. We're seeing about 70% gains in the beverage markets internationally. That's basically, we're competing well across most of our geographies, emerging markets, developing markets, and developed markets across both categories. In particular to the U.S., as you mentioned. Frito-Lay is accelerating its share gains. Q3 was very strong.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

It was almost a couple of points of share gains in what we measure as savory market, both in value and also there was share gains in volume, so both volume and value. When we look at the beverage business in the U.S., we held share in total LRB in the quarter, that's a good performance, with very good performance in sports. Sports has been a priority category for us, the recovery of the Gatorade brand. We have invested a lot for the last couple of years.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Our innovation is working, our brand building is working, our commercial execution is working, and we gain meaningful share in the quarter, which makes us, you know, very happy, obviously, given the the efforts the team have put in that brand. We're gaining share in teas, we're gaining share in coffees, so multiple categories where the business is performing very well. We are losing share in CSDs. I would say Pepsi is doing quite well. Mountain Dew is a brand that we're working on to continue to gain share. Overall, we measure our performance as total LRB, and total LRB share in the quarter was flat to the category. With, as you saw, double-digit growth, which is a pretty good performance for PBNA.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

Right. I'll build on that, Bonnie. One of our goals clearly is to both gain share and to grow margins. Frankly, that's something that I think we can do. I don't view it as an either/or, I view it as an and. We ought to be able to do both. Obviously, we try to price through inflation, and we always set that out as a goal. We were a little bit short of that in the quarter. Gross margins were down by about 20 basis points, as I'm sure you've noted. We also focus on the balance of the cost structure, making sure that we're as efficient as we can possibly be and trying to eliminate waste wherever we can find it.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

We were successful on that in the third quarter as well. Operating margins were up about 30 basis points. You know, our plan is to be able to do exactly that, gain share, ideally price through inflation. If we're a little bit short of that, we're gonna continue to focus on driving the balance of the cost structure so that if the revenue growth does start to soften up a little bit, we'll still be in position to deliver superior financial results. Regarding PBNA specifically and the margin goal that we've set out there, of getting to mid-teens, that is still very, very much intact. That is absolutely the plan. That's where we stand.

[Operator]

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

[Kevin Grundy, Equity Research Analyst at Jefferies]

Great. Thanks. Good morning, everyone, and congratulations on the strong results. Question for you on commodity inflation from here, and you may be a little bit constrained, I know you don't want to give forward guidance, but, you know, we're starting to see key inputs soften here, oil, resin, aluminum, among others, as you're well aware. Hoping to get your updated thoughts on your inflation outlook, anything you'd be willing to share with respect to hedge positions, preliminary outlook looking out to next year, and then your ability to continue to offset with pricing, and cost and RGM tools. Is it fair to assume that, you know, kind of going forward, it'll be a little bit more reliant on cost management, revenue growth management as opposed to pricing?

[Kevin Grundy, Equity Research Analyst at Jefferies]

Do you feel like you'd be maybe a little bit more constrained given the extent of the pricing that's been taken so far? Two-part question. Any thoughts there would be helpful. Thank you.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

Yeah happy to try, Kevin, although I think it might have been 4 parts, not 2, but we'll go with it anyway. Anyway, a couple things. Number one, commodity for this year, high teens%, is where we're gonna land. That's not a change relative to what we've talked about in the past. In terms of hedge positions and forward buy, as we've discussed before, we tend to be out about 6-9 months, and that's consistent with past practice. That's where we're operating the commodity cycle. That clearly puts us somewhat into next year, but not anywhere near all the way through next year. As you've no doubt observed, some of the commodity inputs for us, although I'll remind you, our basket is pretty dispersed.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

There's not a single commodity that even accounts for 10% of the basket. You've seen some softening in commodity prices. That'll play its way into our commodities going forward. Regarding specific numbers for next year, I'm sure I won't surprise you by telling you we'll talk about that in February for a couple reasons. The biggest of which is we'll have more line of sight to be able to give you a better number, and frankly, to give you something that you really can model and rely on. At this point, I think it's just a little bit too early for that.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

In addition, it just takes us to a place where, frankly, we just wind up doing a lot of partial analysis, which I don't think is productive for you or for the company. Regarding pricing, we increased prices at the beginning of the fourth quarter based on what we knew at that point. Going forward, with the investments that we've made in brands, I still think we're capable of taking whatever pricing we need.

[Operator]

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

[Steve Powers, Managing Director and Senior Equity Research Analyst at Deutsche Bank]

Great. Thank you very much, and good morning. Ramon, I wanted to ask on Gatorade and Fast Twitch. You know, first, I'd love some just more detail around your expectations for that particular innovation and the role you see it playing in the Gatorade portfolio generally. But

[Steve Powers, Managing Director and Senior Equity Research Analyst at Deutsche Bank]

I guess more broadly, I'm wondering how you're thinking about the intersection of sports nutrition and the energy drink categories, you know, on a broad basis. You know, how far you think Gatorade may be able to expand into what we've traditionally thought of as the energy drink end market, and where that ranks in terms of the priorities for future Gatorade investment.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Thank you, Steve. That's a very good question, and you know, one that we're obviously spending a lot of time thinking about. How far can we take Gatorade, which is obviously a very strong franchise, not only with I would say high performance athletes, but much broader than that. What we're seeing is a lot of the innovation that we put under the brand in the last year and a half or so, two years, is working very well, starting with Zero. Zero has been a great success for Gatorade. It's brought into the franchise a lot of lapsed consumers that had left the brand because of the sugar content, especially I would say people that just exercise regularly, but not at high performance level. That's one.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

The two recent innovations, Gatorlyte and Gatorade Fit, also are working well for the brand, bringing incremental consumers or incremental occasions to the category. We're happy with the obviously core Gatorade, but the two other the three other new innovations. With regards to Fast Twitch, what we're seeing is that more and more athletes are drinking caffeine and then also hydration during the game or before the game or at the end of the game, so different parts of their exercise. We think there is a role for Gatorade to play in that space, providing you know you know some additional stimulant to the performance, but also providing the hydration you know in one single consumption.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

We've been told by, you know, by trainers and by other people that work with the athletes to go and help them. This drink has been developed with the athletes, developed with the trainers, with that occasion in mind. We think that Gatorade plays very well. It has a lot of, I think, credibility to play in that space of hydration and caffeine for better performance. We're launching it, as you know, with the NFL and we'll go full blast as of early next year.

[Steve Powers, Managing Director and Senior Equity Research Analyst at Deutsche Bank]

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

[Robert Ottenstein, Senior Managing Director and Partner at Evercore ISI]

Great. First question, just a follow-up on the pricing on Frito-Lay in North America. If you could kinda give us a breakout between headline pricing, product mix, and channel. You know, my real question is you're introducing a lot of additional complexity into the portfolio with different flavors and package sizes. Can you just talk a little bit about how you're looking at that from a supply chain side? Thank you.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Yeah, as with any one of our businesses, we're looking at multiple ways to increase our revenue per kilo, in this case, with continuing to maintain the consumer in our brands and obviously gain share as we do that. That's the strategy. We'll use multiple levers, you know, various pricing, lower promotions, pushing for the formats where we, you know, have higher revenue per liter or per kilo, moving into channels obviously, where we can, you know, price more because the consumer has, you know, different price expectations. All those tools are well integrated into our full commercial program, and that's the way Frito's doing it, but the same is being done in, you know, in Beverages North America or any of our international markets, emerging or developing or developed.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

That's a consistent capability. We've been investing. We're becoming much more digital. We're becoming much more insightful and precise as a company. That applies, linking to your second question, also to our supply chain. I think we're becoming much more integrated in our forecasting to, you know, demand forecasting to supply, and we're able to execute, you know, a certain level of higher complexity in our business. We're automating. We're becoming better at execution in that respect. I would say we're not running a perfect company at this point, given all the challenges there is still in supply chain of ingredients and some of the transportation bottlenecks.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

I would say we're able to cope with higher levels of complexity throughout the Frito-Lay, given your question or any of the other organizations that we have around the world. However, I will say that we have very strict processes of portfolio optimization that are being run quarterly in each one of our businesses. Each one of the business goes through a pretty strict process of rationalization and elimination of unnecessary complexity, you know, regularly. On the one side, we wanna have more complexity because we know that consumers appreciate personalization and a lot of the variety is a key, you know, I think advantage for us in our categories.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

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

[Operator]

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

[Kaumil Gajrawala, Managing Director of Equity Research at Credit Suisse]

Hi, guys. Good morning. Can we talk just a bit more about cash flow and, you know, with the year coming in better than expected, is there excess cash on the balance sheet? Any thoughts around that? Maybe in the same context, just maybe an update on what the M&A environment looks like at the moment, given, you know, we're going through a kind of a difficult period. I wonder if assets are perhaps more interesting than they would have been before.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

Yeah, I'm happy to jump in on that one, Kaumil. In terms of cash flow, you're right. We are performing well this year on cash flow and obviously feel terrific about that. I wouldn't necessarily characterize it as excess cash, but certainly we're coming from a relatively strong cash position. In addition to that, you know our philosophy on how we manage the balance sheet well, we actually are very much fixed in terms of our debt rates, and our average maturity now, I think is about 12 years at this point. The refinancing elements of what we need to do are relatively small.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

Our capex going forward is about $2.5 billion-$3 billion a year going forward. We've got a lot of flexibility in terms of managing rising interest rates. In terms of where that might take us in the future, again, we'll talk about that in 2023. Regarding M&A, no real change in our capital allocation policies broadly. M&A has obviously played something of a role in our past. We're still largely focused on tuck-ins where frankly we can realize a lot of value. You know, beyond that, it's really difficult to speculate on what might or might not happen. Certainly not sending any indications at all that we've got anything on the horizon whatsoever.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

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

[Operator]

Thank you. One moment for our next question. Our next question comes from Chris Carey with Wells Fargo. Your line is open.

[Chris Carey, Head of Consumer Staples Research and Senior Equity Analyst at Wells Fargo]

Hi, good morning.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

Good morning.

[Chris Carey, Head of Consumer Staples Research and Senior Equity Analyst at Wells Fargo]

Can you just comment on the stickiness of pricing? You know, across CPG, there's been a growing debate about whether some of these price increases would need to be dealt back with either list price reversal or accelerated promotion. I suppose the logic goes that it's such an atypical commodity environment, and if the environment changes atypically the other way during a recession or perhaps demand slows, that you know, price rollbacks are not entirely out of the question, even if they're not historically you know, a consistent practice. You know, what are your thoughts on how the business might confront pricing versus promotion, you know, especially in an environment of commodity deflation, you know, especially if demand starts to slow?

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Yeah. Listen, I think this is a you know, difficult question to answer.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

Pretty hypothetical. You actually took over the environment as well.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

The environment clearly is still very inflationary with a lot of supply chain challenges across the industry and everybody trying to have responsible behaviors, you know, to maximize the value of its brands. Our philosophy is the same. We continue to invest in advertising and marketing, make sure that we have very strong innovation, very strong commercial plans. That's where we put the focus of our organization. We're trying to be growth drivers to our customers. I mean, if you look at the majority of our conversation with our customers center around growth and how do we develop our categories, continue to bring consumers into the category, continue to bring new occasions into the category. That's the role I think we play to our customers and to the how we create value for the company long term.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

We'll continue with that focus, trying to create brands that can stand for higher value to consumers, and consumers are willing to pay more for our brands. We'll continue with that philosophy, and we'll see where the cost environment goes in the coming years. Obviously, if anything that these last few years have taught us is that we wanna become more agile and more nimble and more flexible, and that's what we're doing across the company.

[Operator]

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

[Peter Grom, Executive Director and Senior Equity Research Analyst at UBS]

Hey, good morning, everyone, and hope you're doing well. I wanted to ask about the Celsius distribution agreement. You know, maybe just to start, you know, why was the structure of this partnership the right one for PepsiCo? Then I guess maybe, you know, any initial views on kind of how the transition to your distribution network is going. Maybe just last, if I can squeeze it in here, just bigger picture, I guess. Like, what have you learned from either your own brands, what happened with Bang that really gives you greater confidence in the success of this partnership looking ahead? Thanks.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

Sure. Happy to talk about that, Peter. First, the transition is going very well. We're at this point over 80% integrated Celsius into the PepsiCo system, and we think it's off to a terrific start. I think you'd probably hear the same thing from the folks down at Celsius. We're excited about the business. We think it's got a nicely differentiated proposition, and we're proud and happy to have it on our trucks and think it's gonna be a great business for us.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

In terms of the structure, frankly, we looked at it and said, "Look, we'd like to do a distribution agreement," but we knew we were gonna create some additional value for the company and felt like we should participate in that value. We set up a structure that enabled us to do that. Doesn't take us any further than what you see right now. It puts us in a position where it's a preferred, so we'll either get paid based on the preferred or down the road, you know, the relatively small position we have could convert at some point. We felt like it was a good value-creating structure for PepsiCo. I wouldn't read anything more into it than that.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

Then more broadly on the energy portfolio, our approach has been one of having a portfolio of brands. We like that approach because we think as the energy category starts to segment into different types of consumers and different types of need states, having a portfolio approach will ultimately position us best to take advantage of that. Obviously, we're in a building position here, whether it's Rockstar Energy or Mountain Dew Energy or what we're doing with Celsius, or for that matter, even the Starbucks coffee energy business. We now think we have three or four different ways to compete to capture that consumer's business. We like where we sit in that regard.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Yeah, Peter, I would endorse what Hugh was saying. I think from the portfolio point of view, Celsius probably is a better complement to the rest of brands or vectors of growth that we had in this category earlier. We feel good. I think it appeals to consumers that are different than what Rockstar would appeal to, or what some of the Starbucks or obviously some of the Gatorade consumers would appeal to. I think we're in a better place to play in the broader category, to continue to bring consumers to our franchise. As Hugh said, the partnership is strong. We've learned also on how to build stronger and more statistically aligned partnerships.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Hopefully this one, I'm sure it is gonna be a much more durable and much more value creating for both companies. It's still too early, obviously. We only started October first, and it's 80% of the territories, but early signs are very positive and the alignment and the commercial collaboration between the two companies is very strong. Okay, I think the Q&A is over. I'd like to thank everyone for joining us today and for obviously the confidence that you've placed in us with your investments. We hope that you guys all stay safe and healthy. Thank you very much.

[Operator]

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

Participants

Executives

• Hugh Johnston, Vice Chairman and CFO
• Ramon Laguarta, Chairman and CEO
• Ravi Pamnani, SVP of Investor Relations

Analysts

• Andrea Teixeira, Managing Director and Senior Equity Research Analyst at JP Morgan
• Bonnie Herzog, Managing Director and Senior Consumer Analyst at Goldman Sachs
• Chris Carey, Head of Consumer Staples Research and Senior Equity Analyst at Wells Fargo
• Dara Mohsenian, Managing Director and Equity Research Analyst at Morgan Stanley
• Kaumil Gajrawala, Managing Director of Equity Research at Credit Suisse
• Kevin Grundy, Equity Research Analyst at Jefferies
• Lauren Lieberman, Managing Director and Equity Research Analyst at Barclays
• Peter Grom, Executive Director and Senior Equity Research Analyst at UBS
• Robert Ottenstein, Senior Managing Director and Partner at Evercore ISI
• Steve Powers, Managing Director and Senior Equity Research Analyst at Deutsche Bank