PepsiCo Q2 2022 Earnings Results & Report

PepsiCo EPS Results

• Actual EPS: $1.86
• Consensus EPS: $1.73
• Beat/Miss: Beat by +$0.13
• One Year Ago EPS: N/A
• EPS Beat Rate: 7 of last 8 quarters

PepsiCo Revenue Results

• Actual Revenue: $20.23 billion
• Expected Revenue: $19.77 billion
• Beat/Miss: Beat by +$458.32 million
• YoY Revenue Growth: N/A

PepsiCo (NASDAQ:PEP) is a global food and beverage company that develops, manufactures, markets and distributes a broad range of products. Its portfolio includes snacks such as Lay’s, Doritos and Cheetos, as well as beverages including Pepsi, Gatorade and Mountain Dew.

The company was formed in 1965 through the merger of Pepsi-Cola and Frito-Lay. Its products are sold in more than 200 countries and territories through retail, food-service and other distribution channels.

PepsiCo is headquartered in Purchase, New York. Ramon Laguarta has served as the company’s chairman and chief executive officer since 2018.

PepsiCo Q2 2022 Earnings Call Transcript

Key Takeaways

• Sales in U.S. convenience and gas channels remained stable at high-single-digit growth despite rising gasoline prices, with consumers trading off a bit of volume for higher price.
• PepsiCo continues to take strong pricing to offset commodity inflation, maintaining constructive discussions with retail partners and managing price/mix without significant pushback.
• Commodity inflation is expected in the teens for 2H ’22—higher than H1—while multi-year high productivity improvements in manufacturing help support margin resilience.
• Non-sugar beverages are growing three times faster than full-sugar drinks, and healthier snack formats like baked and popped products are outpacing fried snacks, underscoring a lasting shift toward better-for-you offerings.
• Latin America posted resilient performance as elevated remittances boosted disposable income and strong go-to-market execution drove continued market share gains in food and beverages.

Presentation

[Operator]

Good morning, and welcome to PepsiCo's 2022 second quarter earnings question-and-answer session. Your lines have been placed on listen only until it's your turn to ask a question. In order to ask a question and make a comment, please press star followed by one on your touchtone phone at any time. Today's call is being recorded and will be archived at www.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 the chance this morning to review our press release and prepared remarks, both of which are available on our website. Before we begin, please take note of our cautionary statement. We may make forward-looking statements on today's call, including about our business plans, updated 2022 organic revenue guidance, and the potential impacts of both the COVID-19 pandemic and the deadly conflict in Ukraine on our business. Forward-looking statements inherently involve risks and uncertainties and only reflect our views as of today, July 12, 2022, and we are under no obligation to update. When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results.

[Ravi Pamnani, SVP of Investor Relations at PepsiCo]

Please refer to our second quarter 2022 earnings release and second 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. 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 followed by one on your touchtone telephone. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Lauren Lieberman with Barclays. Your line is open.

[Lauren Lieberman, Managing Director at Barclays]

Great. Thanks. Good morning.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Morning.

[Lauren Lieberman, Managing Director at Barclays]

Such strong numbers across the board, but I was curious if we could talk a little bit about the convenience and gas channel in the U.S. I know that you've noted, you know, on one hand, you know, consumers making more frequent trips to get gas allows for more opportunities to go in and buy a snack or a drink. But on the other hand, they're spending a boatload of money to fill up their tank or to the degree they're filling it up. The counter could be less extra money to spend when they go into the store. I was just curious if you could talk about what it is that you're seeing currently.

[Lauren Lieberman, Managing Director at Barclays]

I know C&G has been an area of incremental investment for you in the last couple of months, particularly, on the Frito-Lay side, and just an update on, I guess, yield from those investments, and what you're seeing in terms of consumer purchasing behavior. Thanks.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Good morning, Lauren. Yeah, listen, these are important channels, as you're saying, and we've been investing in the U.S. and other parts of the world in this impulse channel. The trends are quite stable from what we've seen since Q4 and as the gasoline price went up. The consumption on beverages and snacks in that particular channel has been pretty stable. A bit less volume, a bit more price as we you know second quarter versus first quarter. Overall, sales has remained stable. A high single digit bit of a difference between beverages and snacks. Snacks a bit higher than beverages, but stable. That has continued into the last few weeks. We don't see any meaningful consumer behavioral change as gas prices go up. Obviously, we're watching this channel very carefully as an indicator of potential consumer behavioral change, but so far, high incidence in our categories.

[Operator]

Thank you. One moment for our next question. Our next question comes from Dara Mohsenian with Morgan Stanley. Your line is open.

[Dara Mohsenian, Managing Director of U.S. Beverage and Household Products Sectors at Morgan Stanley]

Hey, good morning, guys.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Morning, Dara.

[Dara Mohsenian, Managing Director of U.S. Beverage and Household Products Sectors at Morgan Stanley]

I just wanna talk a bit about pricing relative to cost. Obviously another quarter of very exceptionally strong pricing in Q2. Ramon, are you hearing any pushback from the retailer trade that's different than normal? It's been a topic of discussion more in CPG in general. Just curious for your views on retailer pushback and ability to continue to take pricing going forward, including what that might mean for the fall. Then, Hugh, can you just give us an update on the cost outlook for 2022? Given hedging, how much hedging do you have in place? Does that sort of create a hangover for 2023? I know you won't guide for 2023, but just how you think about the pricing versus cost gap for 2023 based on where we stand today might be helpful, at least conceptually. Thanks.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Yeah. Hi, Dara Mohsenian. Yeah, obviously, you know, our partners and ourselves, we're looking at consumers very carefully, and the evolution of their decision when it comes to the overall basket or particular categories. You know, normally we have pretty...

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Positive conversations with our partners. We're looking at, you know, how do we continue to keep our consumers in our categories as we obviously have to pass some of these costs to the consumer. How do we do it in a way that doesn't impact volume and it continues to generate growth for them and growth for us? Those are the type of conversations we're having. Obviously we're all concerned in a way about the high inflation and how that's gonna impact, especially as we look at the full consumer universe, the lower part of the income pyramid. That's where we're all looking more carefully and we're making decisions on entry point in the categories and how do we continue to have that particular consumer engaged in our categories.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

You know, the conversations are you know always you know there's always tensions in those conversations. There will continue to be tensions. In general, they're very positive conversations, the ones we have, because we play a role, and that's our strategic intent to be growth drivers for our partners. We go to these conversations very transparently and very positively to generate growth and additional margin for our customers. That's the way the situation is, and it will continue the balance of the year and into as we start thinking about the plans for next year.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

Right, hi, Dara. In terms of cost, as you know, our first focus whenever we're faced with inflation is to try to drive incremental productivity on our internal costs. I think we've been doing a pretty good job of that, and we've seen this year some of the strongest productivity we've seen in a number of years. That puts us in a relatively better position when we're faced with commodity inflation because we're not necessarily forced to price it all through. We can take a more consumer-centric approach to dealing with the inflation and the subsequent pricing. Balance of the year inflation is higher than it is for the first half of the year.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

I think we've mentioned in the past we're in the teens in terms of commodity inflation. That'll continue, but a little bit higher in the back half. We do expect stronger productivity in the back half as well. I think from an overall cost outlook, our guidance certainly captures all of that. I think it puts us in a position where we've got high confidence in delivering the year.

[Operator]

Thank you. One moment for our next question. Our next question comes from Andrea Teixeira with JPMorgan. Your line is open.

[Andrea Teixeira, Managing Director at JPMorgan]

Hi, good morning. The market share gains you alluded to in in PBNA and not PBNA, sorry, in snacks and in general, we've been pretty positive. I know there has been a narrative that there's some service level issues in both cases, and especially in North America. I'm wondering if you can comment on that. Then separately on LatAm, I think you mentioned Ramon and you in terms of like balancing what you just said, inflation getting worse. Of course, Latin America has been extremely resilient for a region that has obviously a lot of pressures on gas prices as well. I wonder if you can comment on where the strength is coming from, if you're getting more space in the big box.

[Andrea Teixeira, Managing Director at JPMorgan]

Is this also Bodega Aurrerá or Atacadão or anything like that that gives you comfort that you're continuing to gain share from a very organic basis and despite the pricing? If you can comment again on the service levels in the U.S. Thank you.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Great. Okay. Thank you, Andrea. Hi. Listen, I'll talk about share in a minute, but if you think about our role, and you're referring to snacks in your questions mostly, but you know, you can apply this to beverages. Our number one responsibility as a large player in both snacks and beverages is make sure the category grows and continues to grow in any circumstance, either you know, economic, positive economic or negative economic, high inflation, low inflation. That is our main responsibility because that's the health theory, the health of the business, really. You know, everything we're doing in our commercial plans in the U.S., outside of the U.S., is make sure that we have strong brand programs, channel programs, execution programs, innovation programs that continue to make our category preferred over other categories.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

We're seeing that, and that's the main reason why, you know, when you see the growth that we're delivering in, and the low elasticities we're having in many countries around the world, that is the main reason. We're continuing to have very strong commercial programs that continue to attract consumers to our categories because of innovation, because of execution and great brand programs. Now, having said that, on the share front, we're also seeing gains across many countries around the world. That has been a consequence of the investments we've been making in the brands for now, you know, several years. We've strengthened our go-to-market capabilities, our digital capabilities. Our brands are looking more modern and more engaging for consumers. Our innovation is great. I think those are the combinations.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

When you asked your question on Latin America, we're seeing I think it relates to the amount of money transfers that are coming from the U.S. into Latin America. We're seeing that number really high. It's a consequence of the high employment in the U.S. and the higher salaries. We're seeing that money being transferred to you know a lot of the economies in LatAm, and that's helping a lot of disposable income in those countries. We're seeing to our surprise really from the beginning of the year very low elasticities, actually positive elasticities, even though obviously we're passing price to the consumer in those markets in intelligent ways and in ways that consumers you know will feel less pressure on.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

I think disposable income in LatAm is above what it was in the past, a consequence of developed economies doing very well and money going into LatAm, and the consumers feeling good in Latin America. Also, you know, post-COVID, we're seeing behaviors of you know social expansion, if you want, so consumers coming out of the houses, consumers having more fun externally in LatAm and in many parts of the world. That tends to drive higher consumption of categories because people get together and have fun, and we are part of fun experiences normally. That's how we're seeing you know the trends in our categories. Yeah.

[Operator]

Thank you. One moment for our next question. Our next question comes from Bryan Spillane with Bank of America. Your line is open.

[Bryan Spillane, Managing Director Equity Research at Bank of America]

All right. Thanks, operator. Good morning, everyone. Maybe, Hugh, you know, if you could just talk a little bit about, maybe headwinds, tailwinds in the back half of the year, and I guess it's in the context of, you know, you raised organic sales guidance this morning but kept the EPS basically the same. Is that a function of concerns about cost? I know you mentioned some of that in response to Dara's question. Foreign exchange, just volatility in the world. Just kinda how you think about the, how maybe some of the risks or headwinds, tailwinds might have evolved as we look into the second half.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

Yeah, Bryan, obviously the first thing that we're thinking about these days is just the level of volatility in the world. We do what we can to insulate ourselves against that volatility. You know, we have zero floating rate debt, so we've insulated ourselves against that. We forward buy on commodities. We insulate ourselves against that. We try to do as much as we can to create a predictable work environment so that we can manage our labor costs well. There's obviously macros that are out there that, you know, are more volatile than they were a few years ago.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

As we sort of look at things clearly, as I mentioned before, commodities are a bit higher in the back half than they are in the first half. That's incorporated into all of this. You know, we're still watching elasticities closely, as Ramon just mentioned. Elasticities are good right now. We don't plan for them to be as strong in the back half, and we'll see what happens with that. It's certainly hard to gauge 'cause inflation is having so much impact on the consumer in so many ways. As we look at all of it and we're making choices around, okay, as you know, we like to give you numbers that are highly deliverable.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

The choice that we made was based on the things I just mentioned that we would raise the revenue guidance 'cause we felt highly confident in that. For EPS guidance, we made a choice to hold right now based on some of the volatility and some of the variables that I had mentioned.

[Operator]

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

[Bonnie Herzog, Managing Director at Goldman Sachs]

All right. Thank you. Good morning, everyone. Just a quick follow-up on, Hugh, just what you were discussing. Could you talk about, you know, if you are also planning to sort of reinvest or step up reinvestments into your business despite, you know, the cost inflation that you just called out in the second half? And I'm thinking about in the context of your very strong top line. And then I did wanna ask about, you know, your revenue growth management in this environment, and, you know, how strong you think your capabilities are to ensure you have the right packages in both your beverage and salty snack business to ensure, you know, you have affordable offerings, especially as we, you know, could see increasing pressures on the consumer.

[Bonnie Herzog, Managing Director at Goldman Sachs]

Could you touch on your beverage business and how your, you know, ownership of your bottling operations might actually be a competitive advantage, you know, or not, as it relates to this? Thank you.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

Okay. Thanks, Bonnie. I think that was three questions, but we'll take a shot at it. Three for one. Number one, in terms of investment in the back half, you know, we have some investment in the back half. It was planned for. You know, the way that we're collectively trying to run the company is to build sustainable results over a long period of time. That means you're constantly balancing delivering the near term while making sure that you're building capability for next year and the year after that and the year after that. So I think we have the right balance on that right now, and we'll see as the results come in whether we need to make adjustments to that.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

We think we have the right balance to deliver the results this year and also make the investments to deliver the results for next year. On your second question, regarding consumer value. Yeah. Listen, I think we actually are best in the industry to do that for a couple of reasons. One, our portfolio is so broad, you know, anywhere from premium products like Frappuccino to value products like Santitas. Because our supply chain, our distribution network enables us to shape the inventory in store by store. For stores that need more value products, we can weight the inventory in that store towards that. For stores that premium products are gonna turn better, we obviously have the ability to adjust inventory.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

The digital investments that we've been making in our route system actually make us even more and more capable of doing that. I think compared to where we were two or three years ago, we're even sharper in terms of being able to deliver exactly the right inventory in store. As for ownership of the beverage business, as I've talked about many times in the past, I think it is a significant competitive advantage for us. It's obviously more capital intensive, but I think it enables us to do things that it's difficult for our competitors to do. We think we're 100% on the right strategy by owning it, and I think this environment is gonna prove that more than it ever has before. Hopefully that answered one A, B and C in terms of your questions.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Yeah. Especially Bonnie, I think on the second question, the truth is that we've been investing in that revenue management now for four or five years. Has been in the developed markets, but also in the developing markets to try to add to the old capabilities we had, which were more related to the ability to you know change product size or understand better the channels to much more individual, almost understanding of the consumer and what we can do to keep that consumer in our brand and, you know, different levels of pricing and depending on obviously what that consumer prefers. That link to our you know precision execution as Hugh referred to, both in developed markets, but also in developing markets as well, where we reach normally very capillary distribution.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

That gives us, I think, a unique advantage end to end from consumer insights to point of sale execution that is quite, you know, it's hard to match in the industry, and we're seeing that. We're seeing that in, you know, across the world. It's good investments that we're getting the return, and we're gonna need more of it obviously as inflation keeps going up, and we're gonna have to be super agile and very precise on the choices we make with the consumer.

[Operator]

Thank you. One moment for our next question. Our next question comes from Nik Modi with RBC. Your line is open.

[Nik Modi, Managing Director at RBC]

Yeah, thank you. Good morning, everyone. Ramon, I was wondering if, you know, now with the decision on the Bang distribution rights out, can you just update us on the energy drink strategy here? What kind of financial implications should we expect as we think about, I guess questions for you two in terms of the beverage business, you know, over the course of the year now that I'm not sure if the distribution stops right away or do you still have some time left on the contract if it expires at the end of 2022?

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Yeah. Yeah, Nik. Listen, obviously our commitment to the energy category remains, you know, as solid as it was earlier. We continue to see this category as one that is growing and evolving and where we can play in multiple ways to capture sub-segments that are starting to develop. The multi-pronged approach that I've referred to in the past continues to be, you know, valid. We're gonna lead with Rockstar, and Rockstar, we're seeing several platforms in Rockstar that are starting to gain hold, I would say, in non-sugar and some of the more functional beverages. That's a big pillar. Second big pillar for us is our coffee business.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Obviously, we're having Doubleshot, Tripleshot and some additional innovation with Starbucks that it's clearly consumer preferred and continues to do very well. The third pillar is, you know, around our kind of flavor forward energy with Mountain Dew. We're seeing sports and energy segment growing more and more in this category, and we have some big ideas on how some of our large brands can play in sports and energy in the future, shortly in the future. The distribution part has always been an additional opportunity. We have, as we were talking earlier, a very strong DSD system, and we can put brands in our business and, you know, provide unique distribution, capillarity and execution. That's what we were intending with Bang.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

That relationship didn't start well from the beginning. Clearly, it was better to stop it, because it had no long-term value for both of us. Now, the financial implications are minor. It was never central to the energy strategy, and we continue to be open to other opportunities on distributing brands. That has always been, you know, a complementary part of the strategy. The big part of the strategy is, as I was saying, taking our brands and taking our innovation into new spaces and continue to disrupt this category, which is continuing to grow. The consumers like it. Consumers are looking for new benefits in that category. They're willing to pay reasonable prices, and that's not only the U.S., but it's internationally. We see it as a big opportunity for PepsiCo, today and into the future as well.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

Right. Nik, as Ramon mentioned, financial impact, not material.

[Operator]

Thank you. One moment before our next question. Our next question comes from Kevin Grundy with Jefferies.

[Kevin Grundy, Managing Director at Jefferies]

Great. Thanks. Good morning, everyone. Ramon, I wanted to pivot to your business venture with Boston Beer and Hard Mountain Dew. Maybe just provide an update there how that relationship has progressed since the partnership was announced, your early learnings to date. Importantly, you know, as you spend more time studying the alcohol space, maybe you can offer some updated thoughts on your broader ambitions to play a bigger role there, not only new product innovation, but also the potential to distribute non-PepsiCo products through your distribution. Thank you.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Yeah. Nothing has changed from the previous quarter when we talked about this topic as well. We've learned more, and we are probably more convinced of the potential of, as you were referring to the Boston Beer partnership. I think we have you know great product that they have developed. We've licensed the brand to Boston Beer, and we're providing distribution in some states. Execution is very good. The product is turning very well. High share in those states. It makes us feel positive about the potential of Hard Mtn Dew and the relationship with Boston Beer. They're great partners, and they have strong R&D capabilities and branding capabilities as they own the Hard Mtn Dew brand.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Now, going forward, obviously, you know, we get encouraged by this, and we're working in multiple new innovations that will come to the market shortly. You know, from the distribution point of view, the same as I said with energy, we want to leverage our assets for distribution. We think in alcohol we can bring new brands to the market. We don't wanna be distributing a lot of brands. That's not our intention to have many brands and a very complex set of brands in our distribution. We'd rather focus on a few large consumer opportunities and put them through a what is a very powerful DSD system. That is the way we're thinking about our alcohol distribution.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Not a lot of brands, not distributing beer or anything like that, but just a few large consumer ideas that we can bring to the market through our system, which we think is an advantage execution machine. That's what we're proving with Hard Mtn Dew.

[Operator]

Thank you. One moment for our next question. Our next question comes from Vivien Azer with Cowen. Your line is open.

[Vivien Azer, Analyst at Cowen]

Hi. Good morning. I was hoping to dive into consumer preferences, please. You guys have been consistent in calling out your aspiration to drive portfolio mix shift over the long term to reduce fat, reduce sodium, lower sugar propositions. As I think back over the last 2.5 years, it seems like at the start of the pandemic, consumers were understandably really leaning into indulgence. I'm curious whether you've seen any mean reversion in consumer preferences around health and wellness propositions within your portfolio. Thank you.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Yeah, Vivien. Yeah, I'll give you a few data so that helps you with the diagnostic. In beverages, non-sugar is growing three times the speed of full sugar. That gives you a sense of how consumers are and that's in the U.S., choosing with their choices. If you go to more developed markets around the world, like Western Europe, the categories are pivoting very quickly to non-sugar. In the U.K., for example, the non-sugar segment in beverages is already almost above 80% of the market. Clearly in beverages, non-sugar is king. You see some of our innovations in the last couple of years with, for example, Gatorade Zero.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

It's a huge innovation, I think it's $1.5 billion in only three years. You know, expansive to the category and recruiting new consumers into the brand. Non-sugar, I think is an unstoppable trend in the beverage category, something we're leaning in with our R&D, something we're leaning in with our commercial strategies with the customers. Every brand has a non-sugar leg that is gonna be the focus leg for the brand in the foreseeable future. That is in beverages. Obviously, you see other trends like functionality. You know, consumers looking for additional functionality and willing to pay for that. You know, your question was more about health, sugar clearly being a dimension.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Now, in snacks, I think consumers are also voting with their money. Permissible snacks, what we call permissible snacks, which are the kind of baked or popped or kind of not fried snacks, they're growing much faster than fried snacks, so that we see that as well in that category. We're seeing kind of more nutritious substrates growing faster than some of the more cereal-based substrates. One trend we're seeing across is portion control. Portion control. It's a huge consumer idea how we're eliminating some of the breaks, if you want, in consumer's mind to have higher frequency in our categories is portion control. We're seeing in snacks a huge growth on small format multi-packs, where not only is portion control, but variety.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

We're seeing that also in beverages, where full sugar products are going to smaller portions, right? Like mini cans or some other formats that give the consumer, you know, the little pleasure without a lot of calories. I would continue to bet long term on health being one of the vectors that consumers are choosing. There's also indulgent. Obviously, there's also functionality. There's also, you know, social moment. There's a lot of vectors in our categories, and that's the beauty of our categories. They attract a lot of consumers because of the multiple locations. But I would continue to bet on health being one of the vectors of choice for the consumer, and that's part of our innovation strategy and how we're trying to move the categories long term.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

It's part of the success. If you think about the sodium reduction, the fat transformation, the sugar reduction in our products, you know, a lot of the R&D investments we've been putting in the company in the last many years are starting to pay back in, you know, we're giving the consumer the option to make choices with no trade-offs in taste or any of the other key category choices. Yeah.

[Operator]

Thank you. One moment for our next question. Our next question comes from Stephen Powers, Deutsche Bank.

[Stephen Powers, Equity Research Analyst of U.S. Household and Personal Care, Beverages , and Food at Deutsche Bank]

Hey, good morning. Thank you. Maybe going back to the higher top line that you're now seeing for the year, could you maybe expand a bit more on that and talk about the incremental changes that have taken shape in your own expectations since last quarter? I guess, you know, would you frame the 2 points of organic growth upside more as volume or price mix driven versus prior expectations? Maybe would you call out any particular segments as more or less responsible? That'd be helpful.

[Stephen Powers, Equity Research Analyst of U.S. Household and Personal Care, Beverages , and Food at Deutsche Bank]

I know I'm only allowed one question, but Hugh, if I could, just going back to Bryan's question on second half costs, I wasn't fully clear on the answer whether the maintained EPS in light of the better top line was really more conservatism in the face of volatility or if there were known pockets of higher costs you're now facing. If the latter, if you could just be a little bit more specific there. Thank you.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

Yeah. Why don't I handle that piece first and maybe Ramon and I can tag team your first question. The latter piece, as you know, Steven, we're never conservative. We try to be accurate here. That said, we also try not to miss numbers. So, I think there is nothing new that we weren't aware of, frankly, a couple of months ago. So I don't think there's any incremental information that would cause us to be concerned about the back half. Regarding your question around why is the revenue number higher, I think that the primary reason is given the unknowns around consumer elasticity, as we came out of the first quarter, we were quite pleased with where elasticity sat.

[Hugh Johnston, Vice Chairman and CFO at PepsiCo]

We still had nine months left in the year, so we adopted a certain posture about the balance of the year. The second quarter has also held up from an elasticity perspective better than we thought, and we're sort of flowing that upside through. That said, the balance of the year, we still have six months to go. There's still plenty of unknowns in terms of what's gonna happen with consumer behavior. We think we're well positioned, both from a customer perspective as well as from a consumer perspective. We still have six months to go, and consumers are still sort of absorbing the impact of inflation on their overall spending. I think I wouldn't characterize it as conservatism. I think we go through a lot of scenario planning, and the sum of those scenarios led us to choose higher on revenue but not yet higher on EPS.

[Operator]

Thank you. One moment for our next question. Our 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. You've made a business decision, I guess, some years ago to own and retain the bottlers that you purchased, I guess, maybe 10-ish years ago. If we are indeed in a you know very different inflationary environment, does that change how you think about how asset light or asset heavy you'd prefer the business to be?

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Yeah, Kaumil. Hi, this is Ramon. No, listen, inflation will come and go. The reason why we're keeping the bottling business integrated with the brand business is much more longer term than you know the I don't know the economic cycle that will live for the next couple of years.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

It's a huge strategic decision that is more based on if you think about the consumer evolution and the shopper evolution and the way channels will evolve in the future. I think having an integrated brand to consumer value chain will give us flexibility and faster decision-making that we believe creates a lot of value for the company, right? In the short term, yeah, we will have inflation in S&D and we'll have inflation in some of the manufacturing. If you have a bottling system, that inflation happens anyhow. Your system still has that inflation. It's not like you know, nobody's isolated from inflationary pressures. I mean, your system consumer to you know, kind of manufacturing to consumer still has that inflation.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

We think, again, this is a very strategic decision we've made, thinking about the long term, where consumer is going, where the shopper is going, where the retailers are going, where we're gonna fulfill demand in the future and where demand will be in the future. Much more complex, much more long tail. You know, there's a lot of things that we feel that we're gonna be best positioned in the future, and we're talking about five, 10 years from now, to fulfill that demand in a much more integrated way from the brand to the consumer with all the value chain under one decision-making point. Again, you know, the economic cycles will differ. Now we'll have inflation. Maybe three years from now we'll have deflation and we'll, you know. We were not thinking that short term for what is a huge business model decision.

[Operator]

Thank you. One moment for our next question. Our next question comes from Brett Cooper with Consumer Edge. Your line is open.

[Brett Cooper, Managing Partner at Consumer Edge]

Good morning. From the data that we can see, your top line is benefiting by about 100 basis points from reductions in promotional depth and breadth. That's not just short term. We've seen that over the last several years. We can obviously only see part of your business. I was hoping that you could speak to the benefits from promotional optimization across your business, what's enabling that realization, and then given the enormous size of promotional spend in your business, what the potential is, for promotional optimization over the medium term. Thanks.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Yeah, it's good, great question. If you think about the way we're looking at all the costs in the company, the cost to fulfill demand, the cost to generate demand, we're looking at higher return on investment across all the costs that we have in the business. Obviously, the one you're referring to, along with our marketing investments, are the two big demand creation budget. We're looking at optimizing those investments both on the consumer side and on the consumer-customer side. That has been a journey. It has been done through much more intelligence, through much more data, through much better precision decisions in that space, along with our customers.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

That is a journey that I would see as a continuous journey to optimize all the budgets that we have in the company to maximize returns. Trade budget, as you say, is a large budget. We're gonna continue to optimize it and maybe move those resources to some other areas where we can get better demand generation, right? We'll do that in partnership with our customers and to the spirit of creating growth for the category as we've had in the past. Yeah.

[Operator]

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

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

Hi, good morning. Just a couple questions on some of these more topical markets. I guess just in Europe, you know, if anywhere, this is where elasticity seems to be playing out, are we finally seeing the consumer come undone a bit here? As pricing has built, are there other factors in play beginning to impact volumes, whether supply chain, product availability, basically anything else besides pure consumer elasticity? Just in China, despite lockdowns, still, you know, another strong number. Can you maybe just give us a sense of what's going on on the ground in China to continue to deliver this level of growth? Thank you.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Yeah. Good. Listen, Europe obviously is being impacted by more than other parts of the world by I would say the war. Our business has been impacted both in Ukraine and Russia. Ukraine because obviously we had to stop a lot of our manufacturing commercial activities, as reflected in our performance in Europe. Also in Russia, given the commitments we made to stop our beverage, some of our beverage large brands, and also stop advertising and promotion of our more essential food brands. Clearly that's part of the reason why the European business has been impacted. With regards to China, you know, clearly the lockdowns are impacting the operation of the business.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Our team has been incredibly agile to make the right pivots in how we are continuing to produce the, you know, our snacks or our beverages. We've been able to, you know, more or less manage that in what is an incredibly challenged situation to get raw materials and to get products out to consumers. We're doing that probably better than other companies, and that's why we're gaining share dramatically. That's the reason why our business is growing very fast. Now, if you think about the beverage business, there has been an impact to the consumption of the beverage business in the away-from-home. As consumers have obviously stayed more at home, there has been an impact in the last few months in that particular channel.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Not so much in the foods business. We're seeing both our Quaker business and our snack business continue to grow very fast. A bit less so on the beverage side of the business, basically because of the away from home impact. In-home consumption of beverages continues to be quite strong.

[Operator]

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

[Peter Grom, Equity Research Analyst at UBS]

Hey, good morning, everyone. I hope you're doing well. I was hoping to follow up on Nik's question around the energy portfolio. Ramon, you mentioned the willingness to leverage your distribution assets, but I would be curious if there are any major takeaways from the relationship with Bang that kind of informed your view on how you think about these agreements moving forward. Just, you know, any thoughts around, you know, timing, I guess. Is it a near-term focus to kind of find a new brand to fill that void, or is this something you think about opportunistically over time?

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Yeah. Listen, Peter, I think, as I said, the distribution part of the energy strategy is very marginal in one way or another. It's not the core part of the strategy. We continue to lean into our brands. We have very strong brands in our portfolio that I think as we see the category evolving, we're gonna be able to play in those new spaces and capture market share, you know, looking forward at where the consumer is going. Again, I'll repeat, at Rockstar, in some parts of Rockstar, where we're seeing, you know, a lot of consumer pull, especially non-sugar and some of the more functional. Starbucks coffee forward, flavor forward with Mountain Dew.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

As I said, we see sports and energy as a big space where, you know, we can capture with some of our large brands in that space, and innovation will be coming into the market soon. Those are the main. You think about our strategy, and we might evolve that strategy, you know, with new spaces and how our brands can go there. That's our core of the strategy. You know, again, leveraging our assets for distribution is marginal. To your question on Bang, you know, you need to have good long-term partnership for the relationship to work. That didn't exist, so we're turning the page. Yeah.

[Operator]

Ladies and gentlemen, this is.

[Ramon Laguarta, Chairman and CEO at PepsiCo]

Last question, right? Thank you everyone for joining us today, and I know it's summer and everybody has, you know, a lot of things to do. Obviously for the confidence that you're all placing with your investment in PepsiCo. We hope that you guys are safe and healthy and enjoy the summer. Thank you.

[Operator]

Ladies and gentlemen, this 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 at JPMorgan
• Bonnie Herzog, Managing Director at Goldman Sachs
• Brett Cooper, Managing Partner at Consumer Edge
• Bryan Spillane, Managing Director Equity Research at Bank of America
• Chris Carey, Equity Analyst and Head of Consumer Staples Research at Wells Fargo
• Dara Mohsenian, Managing Director of U.S. Beverage and Household Products Sectors at Morgan Stanley
• Kaumil Gajrawala, Managing Director of Equity Research at Credit Suisse
• Kevin Grundy, Managing Director at Jefferies
• Lauren Lieberman, Managing Director at Barclays
• Nik Modi, Managing Director at RBC
• Peter Grom, Equity Research Analyst at UBS
• Stephen Powers, Equity Research Analyst of U.S. Household and Personal Care, Beverages , and Food at Deutsche Bank
• Vivien Azer, Analyst at Cowen