PepsiCo Inc (PEP)

• PepsiCo is strategically improving margins in its beverage business in the U.S., aiming for mid-teens margins in PBNA (PepsiCo Beverages North America) in a couple of years, and is also enhancing international margins through scale and efficiency. - , -
• The company is evolving its food portfolio to align with consumer trends towards more permissible snacks and mini meals, particularly among Gen Z, with its permissible snacks portfolio already a significant and growing $2 billion business. - , - , -
• PepsiCo's systemic productivity and cost transformation programs, including automation of the supply chain and digitalization, are generating growth and efficiency, enabling high EPS performance even in challenging times and providing flexibility to invest in business growth. - , -

• Margins under pressure in Frito-Lay North America due to required reinvestments: PepsiCo's Frito-Lay North America division experienced a significant 200 basis point decline in operating margin, and margins are expected to remain pressured into next year due to continued investments to stimulate consumer demand. -
• Deceleration in international convenience foods amid geopolitical tensions and weaker consumer spending: PepsiCo is facing a slowdown in key international markets, including China and Mexico, with the convenience foods segment decelerating more than beverages. Geopolitical tensions in the Middle East are also impacting performance, which may continue in the coming months. -
• Potential structural shifts in consumer habits affecting snacks business growth: There are concerns that the slowdown in the snacks business may be due not only to cyclical factors but also to structural or secular changes in consumption habits, with consumers moving towards more permissible snacks and unstructured meals. This requires significant strategic investments and could impact growth and profitability. -

1. Balancing Cost Cuts and Investment
   Q: How are you balancing cost cuts with investment to stimulate demand?
   A: Management is focusing on productivity and cost transformation through automation and digitalization across the value chain, generating both growth and productivity. - This approach provides flexibility to invest responsibly in the business while delivering the financial returns expected by investors, even in a challenging consumer backdrop. - They continue to invest in marketing, long-term transformation, and sustainability without compromising short-term results, thanks to best-in-class productivity programs deployed over the coming years. -

2. EPS Growth Amid Low Revenue
   Q: Can you still deliver 8% EPS growth with low revenue growth?
   A: Management believes their multi-pronged productivity efforts will allow them to deliver their EPS targets even if organic revenue growth remains low. - They expect their categories to grow more than 1% long term and are not considering a low-growth scenario in their planning. - They will focus on what they can control, such as productivity and keeping consumers in their brands, to continue delivering financial returns. -

3. Lowered Organic Sales Guidance
   Q: What drove the reduction in organic sales guidance to low single digits?
   A: The reduction from 4% to low single-digit organic sales growth is due to a slower recovery of the consumer in the U.S. and, to a lesser extent, geopolitical impacts on international markets. - Geopolitical issues resulted in about a 0.5-point drag on total revenue growth in the quarter. - Management does not expect a significant change in conditions for Q4. -

4. Margin Outlook and Investments
   Q: Should we expect margins to remain pressured due to investments?
   A: Management is focused on stimulating consumer demand responsibly, prioritizing investment in the business over short-term margin expansion in segments like Frito-Lay. - They are managing margins at the total portfolio level and expect to expand margins meaningfully at the PepsiCo level while investing in the long-term health of the business. -

5. International Business Challenges
   Q: Which international markets are negatively impacting results?
   A: Certain markets are seeing deceleration, including China due to a weaker consumer and Mexico ahead of elections. - Geopolitical tensions in the Middle East have impacted results, causing about a 0.5-point drag on total revenue growth in the quarter. - -

6. Cyclical vs. Structural Slowdown
   Q: Is the slowdown cyclical or due to structural changes in consumption?
   A: Management believes long-term trends favor growth, with consumers snacking more and eating mini meals. - While acknowledging current affordability concerns, they are confident in the long-term prospects and are evolving their portfolio accordingly, including the planned acquisition of Siete Foods to capture permissible and meal occasions. -

7. Gatorade Transition and DSD System
   Q: How is the Gatorade transition and DSD system affecting margins?
   A: The Gatorade transition is performing well, with improved service levels and market share gains. - Propel is growing double digits, enhancing DSD system economics in some states. - Management is optimizing warehousing, transportation, and delivery models to improve efficiency and is on track to reach mid-teens operating margins for PBNA in a few years. -

8. Frito-Lay Volume Growth Drivers
   Q: What are the drivers for returning to volume growth in Frito-Lay?
   A: Management is focusing on providing more value in core brands like Lay's, investing in brand events and bonus packs for Tostitos and Doritos, and expanding their permissible portfolio with brands like SunChips and Simply. - They are also entering new channels and leaning more on value offerings in the near term. -

9. Energy Drinks and CELSIUS
   Q: What is the outlook for energy drinks and CELSIUS slowdown?
   A: Management believes the energy need remains strong long term, despite recent impacts due to reduced convenience store traffic. - They remain optimistic about the CELSIUS partnership, executing their part with increased distribution points and service levels. -

10. Investments in Tostitos and Positive Choices
    Q: Have you invested behind Tostitos like Lay's? Progress on Positive Choices?
    A: They are increasing investments in Tostitos during the fall season with brand events and bonus packs offering 20% more product. - The permissible portfolio is growing, with brands like SunChips, Simply, PopCorners, and they continue to invest in distribution and trial generation. -

11. Actions Taken in Frito-Lay
    Q: Are you tweaking actions in Frito-Lay for greater payoff?
    A: Management is applying a multi-pronged strategy, providing more value on core brands, investing in brand events, and working on long-term portfolio evolution. - They are introducing bonus packs, investing in permissible and multicultural offerings, and entering new channels to create new occasions. -

12. Q4 Expectations within Guidance
    Q: Where do you expect to fall within Q4 organic revenue guidance range?
    A: Management does not anticipate a significant change in conditions and does not expect a huge inflection up or down from the conditions that existed in Q3. -

Annual guidance for FY 2024:

• Full-year Organic Revenue Growth: low single digits - - - (no prior guidance)
• EPS: 8% - - - (no prior guidance)