(PEP)
Q3 2020 Earnings-Transcript
Ravi Pamnani - Senior Vice President, Investor Relations
Ramon L. Laguarta - Chairman and Chief Executive Officer
Hugh Johnston - Vice Chairman and Chief Financial Officer
Dara Mohsenian - Morgan Stanley - Analyst
Andrea Teixeira - JPMorgan - Analyst
Bonnie Herzog - Goldman Sachs - Analyst
Bryan Spillane - Bank of America-Merrill Lynch - Analyst
Nik Modi - RBC Capital Markets - Analyst
Lauren Lieberman - Barclays Investment Bank - Analyst
Kaumil S. Gajrawala - Credit Suisse - Analyst
Robert Ottenstein - Evercore ISI - Analyst
Steve Powers - Deutsche Bank - Analyst
Kevin Grundy - Jefferies - Analyst
Laurent Grandet - Guggenheim - Analyst
Grant - Truist Securities - Analyst
Ravi Pamnani - Senior Vice President, Investor Relations
Good morning, everyone, and welcome to this pre-recorded management discussion of PepsiCo's Third Quarter Earnings Results. My name is Ravi Pamnani, and I am the Senior Vice President 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.
Before we begin, please take note of our cautionary statement. We will make forward-looking statements on today's call, including about our business plans and 2020 guidance and the potential impact of the COVID-19 pandemic on our business. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, October 1, 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 today's earnings release and 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.
As a reminder, our financial results in the United States and Canada, or North America, are reported on a 12-week basis, while substantially all of our international operations report on a monthly calendar basis, for which the months of June, July and August are reflected in our results for the 12 weeks ended September 5, 2020.
And now, it's my pleasure to introduce our Chairman and CEO, Ramon Laguarta.
Ramon L. Laguarta - Chairman and Chief Executive Officer
Thank you, Ravi, and good morning, everyone. My agenda today will include a detailed discussion of our business performance and a reiteration of the guiding principles and priorities on becoming a faster, stronger and better Company. I will then turn it over to Hugh for additional perspectives on our financial results and 2020 outlook.
But before I start the business review, I would like to note that I am very pleased with how our people and businesses have performed in what continues to be a complex and volatile environment. As this environment continues to evolve, we remain very focused on controlling what we can with an unwavering commitment to: keeping our employees safe; servicing our customers to the very best of our ability; and supporting our communities in both good and difficult times. The dedication and resilience of our employees have been nothing short of exemplary during these times and I want to thank them for everything they do.
Now, with respect to our business performance, our organic revenue growth accelerated in the third quarter. Our global snacks and food business remained resilient, while our global beverage business returned to growth. Specifically, our Q3 organic revenue growth accelerated to 4.2%, with both our North America and International businesses delivering mid-single-digit growth. Our global snacks and food businesses delivered 6% organic revenue growth, while our global beverage business delivered 3% organic revenue growth. The global beverage business meaningfully improved versus the previous quarter with especially encouraging results in our PepsiCo Beverages North America division.
Core constant currency operating profit increased 5% and reflected an increase in our advertising and marketing spend, and core constant currency EPS increased 9%.
Now, starting with North America snacks and food, both Frito-Lay and Quaker Foods continued to deliver robust growth as at-home consumption trends have remained strong despite the measured reopening of economies and activities in certain areas since May. Frito-Lay sustained its strength with 6% organic revenue growth and gained market share in the macro-snack category in the quarter. These results were powered by strong net revenue growth across each of our $1 billion brands, including double-digit growth for Tostitos, high-single-digit growth for Cheetos, and mid-single-digit growth for Doritos and Ruffles. We also saw continued strength in the e-commerce and large format channels, while trends in the convenience and gas channel meaningfully improved versus the previous quarter. And finally, Frito's core constant currency operating profit increased 4% in the quarter, which included a strong double-digit increase in advertising and marketing spend and additional COVID-19-related costs.
Quaker Foods delivered 6% organic revenue growth, along with an improvement in household penetration rates in the quarter. Quaker's revenue growth was in-line with what we had expected and consistent with where the business was trending after economies in certain areas began to reopen during the second quarter. Quaker's third quarter performance included strong double-digit net revenue growth in lite snacks and side dishes such as pasta and macaroni and cheese. Pancake mixes and syrup sales increased at a high-single-digit rate, while both hot and ready-to-eat cereal also delivered good growth. Quaker's strong net revenue growth and cost management initiatives resulted in a 170 basis point increase in core operating margin and 14% increase in core constant currency operating profit.
Now, I will turn to our North America beverages business, where we delivered a strong improvement in results with 3% organic revenue growth and 12% core constant currency operating profit growth. Many of our large brands performed well with double-digit net revenue growth for bubly, Lipton and Starbucks, high-single-digit growth for Gatorade, mid-single-digit growth for Mountain Dew and Tropicana, and low-single-digit growth for Pepsi.
Innovation has continued to play an important role in the portfolio. For example, Gatorade Zero, bubly and Mountain Dew Zero Sugar, in aggregate, have delivered more than $1 billion in retail sales on a year-to-date basis. We also continue to invest in our successful Pepsi Zero Sugar product, which has grown in its retail sales by more than 30% year-to-date.
From a channel performance perspective, both the large format and convenience and gas channels delivered strong growth, while the decline in the foodservice channel moderated. Our market share trend within the liquid refreshment beverage category improved versus the previous quarter and we gained market share in the coffee, tea and juice categories. We also executed well on our net revenue management initiatives in larger categories such as carbonated soft drinks and sports drinks.
In addition, our expanded presence in the energy category contributed to our net reported growth and reported operating profit in the quarter. We are very excited about our expanded presence in this highly profitable category with our recent acquisition of Rockstar and distribution agreement with Bang. Our focus will remain on improving the performance and marketplace execution of these terrific brands, while also effectively competing in the category with existing brands such as Mountain Dew. Overall, I'm very pleased with PBNA's performance during the third quarter and I'm encouraged by our North America energy integration process as it nears its completion. Moving forward, I remain optimistic about the long-term potential of the North America beverage business and believe we have the right plans and portfolio in place to deliver sustainable growth and margin expansion over time.
In summary, our North America businesses performed well in the quarter and we expect our snacks and foods business to remain resilient, while our beverage business should sustain its momentum for the balance of this year.
Now, I will turn to our international businesses, which improved meaningfully versus the previous quarter and delivered 4% organic revenue growth in the third quarter. Our international snacks business remained very resilient and delivered 5% organic revenue growth, while our international beverage organic revenue increased nearly 2% as pandemic-related closures and restrictions eased to a certain extent in some markets.
Within our international markets, developed market organic revenue growth increased 8% and outpaced developing and emerging markets, which increased 2%. Some notable highlights include double-digit organic revenue growth in France, Australia, and Brazil, high-single-digit growth in India and mid-single-digit growth in the UK, China and Russia. We gained savory share in many of our key snack markets, including Mexico, Brazil, China and Russia, and for beverages, we gained share in the UK, Russia, Turkey, France, Germany and Thailand.
And finally, we again delivered strong double-digit net revenue growth in our SodaStream business, as consumers continue to adopt this environmentally-friendly, convenient, at-home beverage system.
Now, to touch on the outlook for our international businesses, we expect our snacks business to remain resilient, while the recovery for our beverage business may take more time due to ongoing and reinstated pandemic-related restrictions and closures as it relates to certain channels. And from a geographical perspective, we continue to expect our performance to vary between developed and developing and emerging markets due to differences in: pandemic-related impacts and responses; disposable income and affordability metrics; foreign exchange dynamics; and, fiscal and monetary policy support.
To conclude, I believe our overall business is performing well and is benefiting from the diversity and breadth of our portfolio and strategic actions we have taken to complement our growth agenda. We are content with the composition of our portfolio and are more focused now on maximizing the full potential of our existing and recently acquired assets to drive improved growth and returns over time as we aim to become an even faster, stronger and better organization.
And I'd like to spend a few minutes on reinforcing this strategic framework that prioritizes our actions and behaviors within the Company. When we say faster, we mean that we must win in the marketplace and improve market share by being more consumer-centric and investing in both large, established brands and smaller, emerging brands to accelerate our growth. Our key priorities to become faster include: sustaining or improving growth and market share in our high-return snacks and food businesses in North America; improving the profitability of our North America beverage business and capturing our fair share of category growth; accelerating our growth and presence in international snacks and food, while investing wisely in beverages to balance between growth and returns; and making the necessary investments in our manufacturing capacity, go-to-market systems and digital initiatives, such as improving our presence and scale in our e-commerce business, which nearly doubled during the third quarter.
When we say stronger, we mean that we must continue to transform our cost structure, capabilities, and culture. Our priorities here include a renewed focus on driving holistic cost management throughout all our organizations to support our investments in advantaged capabilities such as: a highly agile and flexible end-to-end value chain; more precision around revenue management; investing in data analytics that can provide more granularity around consumer insights; and we continue to invest to further expand global business services into new capabilities, which will enable better insight and support for our businesses at a much lower cost.
With respect to transforming our culture, we are committed to diversifying our workforce, balancing internal views with more outside-in thinking, and reinforcing The PepsiCo Way, where we emphasize that employees act like owners to get things done quickly.
And when we say better, we're focused on further integrating purpose into our business strategy and brands by becoming planet positive, strengthening our roots in our communities, and advancing social justice. For example, we are committed to becoming planet positive by supporting practices and technologies that improve farmer livelihoods and agricultural resiliency. We are also focused on using precious resources such as water more efficiently, accelerating our efforts to reduce greenhouse gas emissions throughout our value chain and driving progress towards a world where plastics need never become waste by focusing on reducing, recycling, and reinventing packaging.
And when it comes to our people across the value chain, PepsiCo remains committed to advancing respect for human rights, building diverse and inclusive workplaces, and investing to promote shared prosperity in local communities where we live and work.
In summary, I believe we are executing well against our strategic framework and remain well-positioned for future success with our: portfolio of large, trusted brands that participate in attractive and growing categories; a team of trusted and highly seasoned business leaders; a very powerful go-to-market distribution system; and, an agile, end-to-end supply chain network.
Before I conclude my portion of this discussion today and turn it over to Hugh, I want to reiterate that I'm incredibly proud of the way our organization has executed and performed in what has been an incredibly complex and dynamic environment. And I want to thank everyone again for their dedication and efforts.
With that, I'll turn it over to Hugh.
Hugh Johnston - Vice Chairman and Chief Financial Officer
Thank you, Ramon, and good morning, everyone. As Ramon covered in detail, our business performance improved in the third quarter and we delivered 4.2% organic revenue growth. I'll focus my commentary on our profit performance and financial outlook for 2020.
From a margin perspective, our core gross margin declined 60 basis points in the quarter. The year-over-year decline is driven by our recently completed acquisitions of Pioneer Foods and Be & Cheery and certain COVID-19-related costs included in our cost of goods sold. Our core operating margin decline moderated and was down 40 basis points in the quarter as we increased our advertising and marketing spend and experienced $147 million of higher labor, personal protective equipment, and logistics and service costs associated with COVID-19. When excluding the incremental COVID-19-related costs, our core operating margin increased 40 basis points. We expect some of the COVID-19-related costs to persist and remain committed to making the necessary long-term investments to support our employees and customers, while also investing in capabilities that drive competitive advantages for our business.
To mitigate some of these challenges, we have continued our efforts to control what we can. This includes tightly managing our discretionary expenses, reducing non-essential advertising and marketing spend to reflect the realities of the current environment and sharpening our revenue management capabilities across brands and packages.
Now, as we look forward, and consistent with Ramon's earlier comments, we do expect our North America businesses to remain resilient for the balance of this year, while the recoveries across international markets will likely remain uneven across both developed and developing and emerging markets. So, based on what we can reasonably predict for the balance of this year, we are updating our full-year guidance and now expect: organic revenue growth of approximately 4%; and core earnings per share of approximately $5.50; and we continue to expect a core annual effective tax rate of approximately 21%. Based on current market consensus rates, we now expect foreign exchange translation headwinds to negatively impact our net revenue and core earnings per share performance by negative 2 percentage points and this expectation is reflected in our core EPS guidance.
With respect to cash flow, we now expect full-year cash flow of approximately $6 billion, which reflects net capital spending of approximately $4 billion and continue to expect total cash returns to shareholders of approximately $7.5 billion, comprised of dividends of $5.5 billion and share repurchases of $2 billion. Our expected cash returns reflect a 7% increase in the annualized dividend per share that began in June. This represented the Company's 48th consecutive annual dividend per share increase.
With respect to our liquidity and balance sheet, we continue to believe that we have ample flexibility to meet the reinvestment needs of the business and return cash to shareholders.
With that, we conclude our prepared remarks for today. We thank you for your time and the confidence you've placed in us with your investment. We invite you to listen to our live question-and-answer webcast, which will begin today at 8:15 a.m. Eastern Time and will be available on pepsico.com.
Operator
Good morning, and welcome to PepsiCo's Third Quarter Earnings Question-and-Answer Session. [Operator Instructions]. 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 - Senior Vice President, Investor Relations
Thank you, operator. I hope everyone has had a chance this morning to review our press release and prepared comments, 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, 2020 outlook and the potential impact of the COVID-19 pandemic on our business.
Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, and we are under no obligation to update. When discussing our results, we may refer to non-GAAP measures, which excludes certain items from reported results. Please refer to today's earnings release and 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.
And with that, I will turn it over to the operator for the first question.
Operator
[Operator Instructions]. Our first question comes from the line of Dara Mohsenian of Morgan Stanley.
Dara Mohsenian - Morgan Stanley - Analyst
Hi, can you hear me?
Ravi Pamnani - Senior Vice President, Investor Relations
We can.
Dara Mohsenian - Morgan Stanley - Analyst
Okay, great. So good morning. With the better than expected results here in Q3 and for full year earnings guidance, we're likely to end up with a pretty solid 2020 earnings result, all things considered, post-COVID. So I know you won't guide explicitly for next year, but just trying to understand at a high level, do you view 2020 as a depressed earnings result in sort of a depressed earnings phase that we should see outsized growth off of as we look out to 2021 particularly as COVID cost drop off or is your bias [Phonetic] more to reinvest any assumed drop off in COVID cost? And perhaps you can just discuss some of the key puts and takes potentially looking out to 2021 relative to what's obviously an abnormal 2020.
Ramon L. Laguarta - Chairman and Chief Executive Officer
Okay. Good morning, Dara. Yeah, listen, we're very happy with the quarter and how our investments are starting to deliver in terms of, you know, I would say, a global market share improvement and sustain top line acceleration, and also how some of that is flowing down to the - to the bottom of the P&L as you saw in our EPS numbers.
In terms of your question of, are we going to keep investing or not, you - I think you know our philosophy. We've been trying to have sustainable growth for the business, top line, bottom line, very balanced in that respect. I think there are continuous reinvestments required in terms of brands pivoting into new spaces or new capabilities required because of the new ways consumers are shopping, especially around the omnichannel transformation. There are sustainability reinvestments required.
So we're going to continue to run the business in a very balanced way, right, where we are going to flow to the bottom line along the lines of what we said a couple of years ago when we defined our high single-digit ambition for EPS long term. And, but make sure that we don't sacrifice the reinvestments that are required for a Company of our scale to remain competitive long-term given what's going on externally.
So that's how we're thinking about the business. Obviously we'll give you more information in February, would know more about how the pandemic evolves, the cost that will still be required to run the business. I would not be assuming at this point that the pandemic cost will go away by next year. I think we'll continue to have to put some cost back into the business to run the business safely. So more - more in February, but I just wanted you to get the philosophy how we're thinking about the long-term reinvestment in the business and the delivery of our EPS on a yearly basis.
Operator
Your next question comes from the line of Andrea Teixeira of JPMorgan.
Andrea Teixeira - JPMorgan - Analyst
Hi, good morning and I hope all is well. So you have spoke on the resilience of the business in developed markets and the recovery in beverage, in particular in North America and also in Europe. So I was hoping if you can elaborate more, Ramon on the trends for the on-premises will be reopening and how are you planning your price points in places in emerging markets where the recession may be, will be hitting more the consumer?
Ramon L. Laguarta - Chairman and Chief Executive Officer
Yeah. Hi, Andrea. Good. Yes. Listen - yeah, I can give you a bit more color on the away from home business. It has rebounded from the very lows of April, May, right. It's better, there is more mobility, there is more traffic in some channels. I would say there is a lot of innovation in a lot of the customers. So they are adapting to the new reality, especially restaurants and some entrepreneurs are finding ways to adjust. But it still is a very big drag into - in our business. I would say in the levels of 30% to 40% versus the [Indecipherable] negative still in most of the developed markets.
So it's still a very negative. It's better than the minus 67-ish [Phonetic] that we had in the April-May. But I'm sure it is going to be improving, right. We see some channels still hurting a lot like hospitality or entertainment or transportation, those are still very low. We see some other channels improving and we're obviously going to lean into those channels to capture most of the growth.
So that's the first part. On the second part, Andrea, the - yeah, we see developing markets especially, I would say, Latin America, parts of Africa, Middle East, starting to feel the economic challenges for a lot of the households. So people are starting to - you know, there's a bit more unemployment, and there's obviously this possible income challenges for many families. We tend to do well in those circumstances. We can adjust our price points quite fast and we have good playbooks on how to play in recessions, how to adjust entry points to the category, how to deliver a good value on some of the family sizes that are now preferred as well.
So I think we're going to do okay. We tend to do okay in these situations. But yes, there is, I would say, Latin America and Africa, Middle East signs of economic challenges for many households.
Operator
Your next question comes from the line of Bonnie Herzog of Goldman Sachs.
Bonnie Herzog - Goldman Sachs - Analyst
Thank you. Good morning, everyone. I had a question on your FY'20 guidance which implies that organic sales growth should, I guess modestly accelerate to I think around 5% in Q4 versus the 4.2% you reported in Q3. But then when I think about your full year EPS guidance that implies EPS growth in the fourth quarter will moderate a fair amount to around, from the 9% that you reported in Q3 to around 3%.
So just really wanted to understand how conservative your guidance might be especially as I think about you facing, maybe even fewer COVID related headwinds as you round out the year. And then maybe you guys could touch on what that assumes for A&M spending in Q4, I guess it could assume a pretty big step-up and maybe put pressure on your margins, but drive an acceleration on your top line. So, any color there would be helpful. Thank you.
Ramon L. Laguarta - Chairman and Chief Executive Officer
Hugh, you want to cover this one?
Hugh Johnston - Vice Chairman and Chief Financial Officer
Yeah, happy to. Good morning, Bonnie. A couple of things. Maybe you and Ravi can talk a little bit. My math is a little different on the top line for Q4. I think I'd land somewhere in the mid-4s based on the implied full year, backing into Q4. In terms of the margin implications, probably the biggest factor in all of it will continue to be the COVID cost. We mentioned that we had about a $150 million worth of COVID cost in Q3 and that will continue to some degree in Q4 as well. And it's a bit of a longer quarter in that regard.
In addition to that, you know that we're - our A&M spend is booked on a curve, and as we get into the fourth quarter, the curve will be affected by the - by the full year A&M spend. So I think it's a bit more of a drag in Q4 than it was in Q3. So nothing beyond those things. Nothing in terms of other big notable cost other than higher A&M and COVID costs that will continue based on what you've seen so far.
Operator
Your next question comes from the line of Bryan Spillane of Bank of America.
Bryan Spillane - Bank of America-Merrill Lynch - Analyst
Hey, good morning everyone. Wanted to ask a question about PBNA and a good sequential improvement in the third quarter and I guess Ramon, what I'd like to understand now is, now that you've got an energy drink, a more comprehensive energy drink portfolio, can you elaborate a little bit more on some of the things you're going to do to potentially, I guess, take advantage of the situation?
You've got a largely Company owned bottling system, you've got the resources to spend. So, are there opportunities to begin to accelerate market share from here? And then maybe if you could just touch on in this - in the third quarter specifically, were there any market share issues or any issues with out-of-stocks relative to maybe can shortages or packaging?
Ramon L. Laguarta - Chairman and Chief Executive Officer
Yeah. Hey, Bryan, how are you? Good - yes, good question. Listen, I'll - when we talked about PBNA about a year ago, we said we're going to try to go one step at a time trying to fix all the different opportunities we had with the different brands, right. And the truth is that Q3 is a good reflection of that effort that the team has done over the last year, year and a half. If you look at every - every one of our large brands is accelerating, so Pepsi is growing, Mountain Dew, good, good growth. Gatorade good - very good growth, I would say. Our coffees, our teas, our juices are growing double-digit.
So very good performance across. We've then with regards to the energy integration, as you can imagine there is a lot of small details right in - operational details in integrating a business like Bang which is quite sizable and trying to move it from a very dispersed distribution set up to a more consolidated one. So in every state we had different anecdotes, and also the Rockstar integration.
So I think the team has done a very good job in terms of both the integration, and now we're starting to run it as a full business now. So, to your question on the future, I think we're going to continue to double down on what I think has driven the success, which is very good innovation, right. So if you think about - all our Zero innovation is doing very well, Gatorade Zero massive innovation, Mountain Dew Zero is doing very well, starting to bring new consumers into the franchise, a younger consumers that we had not been very successful with. So we feel good about that. Pepsi Zero growing very nicely. Then, obviously bubly continues to do very well. So we'll continue to double down on innovation as a lever.
We will continue to double down on execution and becoming a better operating Company. So I think the changes we made to our organization to more of a division structure is giving us more granularity and more local excellence if you wish. In terms of execution, we're going to double down on that. The energy portfolio gives us a much more scale in the convenience channel, which was a some sort of a weakness for us.
And so, we are improving in that channel, if you see the market share in convenience stores, in the summer, great progress. And so we're happy with with how we're doing in that respect. So we'll continue with the playbook, it's working for us. Now we have one more set of tools in our arsenal with this energy portfolio. We're happy with the way Gatorade is working. We're seeing a lot of more people exercising is a good trend, we like it. People are exercising at home, people are embracing daily routines of exercising that helps the sports drink category and obviously Gatorade as a leader in that category.
So we see a lot of positives for growth in the portfolio and then we're happy with Mountain Dew. Mountain Dew Zero has been a great addition to the team and it's - I mean, it is getting the scale and it is getting very good trial, very good repeats in - and is very incremental to the brand. So I think you will see, I think that sustained performance in PBNA. And hopefully we can, yeah, improve our market competitiveness as we go along.
Operator
Your next question comes from the line of Nik Modi of RBC Capital Markets.
Nik Modi - RBC Capital Markets - Analyst
Hi, good morning everyone. I just had a quick clarification question and then my real question, Ramon, I was hoping you could just clarify your comments around the COVID related costs in saying that you expect them to stick around in 2021 or beyond this year. I just wanted to see if you can just clarify like how much of it actually out of the total pool of COVID cost you actually think will stick around?
And then my - my actual question is just on Pepsi Beverages North America and its margin profile. So margins today are 400 basis points, 500 basis points below the peak, so I'm just trying to understand how you're philosophically thinking about the migration of that margin back up to kind of where they used to be. I mean, is this something that you want to really see happen quickly or you think it will be much more of a measured pace, any thoughts around that would be helpful.
Ramon L. Laguarta - Chairman and Chief Executive Officer
Yeah, yeah. On the COVID cost, my point is, I don't know how the pandemic would evolve. But I think it's going to be very likely that we still have to be very careful and keep our people safe for a large part of the year, next year. It's not going to be as much as what we had this year, especially at the beginning, I think we're getting better at this, we're finding more effective ways to run the business under this difficult circumstances, but there is going to be a still some inefficiency and some additional cost because of COVID. So that was my point.
And with regards to the PBNA business and the shape of its - the portfolio and the profitability, obviously, we want to get back to a much higher levels. The speed of the transition to the higher levels will depend on our success to drive market share and to drive efficiency on our especially SMB and supply chain, which is where I think we have more of the opportunities. So we have a sense of urgency in all these in becoming a better performing topline Company and in improving the efficiency of the business as you can see from the Q3 results, it's a good performance.
But we're not going to sacrifice the long term for the short term. So we're going to continue to invest in our brands, make sure that they are well funded, that we continue to keep our consumers in our brands, keep them engaged. We innovate, well funded innovation and that we invest in data, especially data and infrastructure investments are required to be well [Phonetic] to the multi, the omnichannel world that we're living. And we're not going to sacrifice those investments for an accelerated profit improvement. But you should see profit improvement in PBNA going forward.
Hugh Johnston - Vice Chairman and Chief Financial Officer
Hey, Ramon, if I can just add to next question a bit on the COVID cost, Nik to build on Ramon's answer a bit, I - obviously upfront there were - there were sort of two implications, one was around taking reserves around potential losses due to customers exiting their businesses, particularly in the foodservice area. And then the second piece of the cost is personal protective equipment and sanitation and things like that, which is more, more ongoing. In Q3 and Q4 those numbers are sort of landing at about $150 million or so depending on the course of the pandemic for next year, obviously, we're going to need to continue to protect our people. So those costs obviously will continue until we get to a point where we have a different outcome from the perspective of the virus.
Operator
Your next question comes from the line of Lauren Lieberman of Barclays.
Lauren Lieberman - Barclays Investment Bank - Analyst
Great. Thanks, good morning. You touched a little bit on your ability to move quickly in emerging markets to adjust pricing in a challenging macroeconomic environment. I was curious, number one, the degree to which you've already started to make those moves because in some of those markets, the price mix is a little bit below than what I'd modeled, but volume was a bit better. So, I was curious kind of to what degree you've already started to put that playbook into place?
And then from a longer-term perspective, Ramon, I think 1.5 year ago when you first started communicating with The Street about your longer term plans, you talked about the need to broaden out the portfolio in international staffing into the value tiers and that's where kind of your share performance wasn't quite what it could be.
So, I was curious if you've made any progress on that front, of course, knowing COVID kind of interrupted business as usual. But I was curious about any progress there as well.
Ramon L. Laguarta - Chairman and Chief Executive Officer
Yeah, yeah. It's good. No, listen, I think international is probably the biggest opportunity we have long-term, right. I mean the per caps in both our beverages and our snacks did very low, and we see that as our number one driver of future value for the Company. So that's a big focus for us. We've seen the levers to drive per capita consumption. Affordability clearly is a big one for us. And we continue to make progress on adjusting our cost structures to the different market realities and that allows us to have much more flexibility on the price points and on the then what we decided to do with the different levels of tiering of the markets.
So the big enabler, if you want for being a really affordable product and that would drive for caps is our cost structures. And I think we're making great progress on adjusting a lot of the levers of that at the end are the cost, be it in the supply chain, be it in the - in the G&A, be it in the selling and distribution.
So we're - I think we're making great progress on adjusting the decisions we make on supply, delivery and management for the different realities in the different developing markets and that's driving affordability and that's driving as you were saying volume increase. Even in a situation where a lot of those markets are suffering obviously a lot of small stores are still closed and there is a lot of adjustment to the COVID reality, many of those markets from the consumer and customer point of view. But our strategic intent continues to be that one, a reduction of costs, adjustment of the price points and continue to invest in the brands and the innovation that will drive the per cap development in international.
Operator
Your next question comes from the line of Kaumil Gajrawala of Credit Suisse.
Kaumil S. Gajrawala - Credit Suisse - Analyst
Hey, good morning guys. Can we talk a little bit about Quaker? And if we should be thinking about Quaker differently long term and that right now, obviously it's benefiting from the environment that we're in, but is there anything happening there that might suggest trends could look different on a run rate basis for that part of your business?
Ramon L. Laguarta - Chairman and Chief Executive Officer
Yeah. Couple of things there. Number one, we are gaining penetration in the - in a good way with Quaker most of the segments in the Quaker business in this last six months. So we've gained penetration, we're investing to retain those new families and obviously to increase frequency in the - it was a pretty large penetrated brand, it's not a small penetrated. So make sure that consumers kind of re-connect with the brand and with the transformation we've made to the portfolio in the last few years, eliminating artificial or making the product, I would say more more forward-looking product.
So I think that work is in motion. And I think consumers are voting that they like our products and they're - we're gaining share in many of the sub-segments of the Quaker family. Now, going forward, our assumptions and - but it is still to be validated with future, we need to see where the consumer really ends up. I think there's going to be more cooking and eating occasions at home, going forward. And specially we think that breakfast, there will be at least one or two more occasions at home every week, because I don't think we're going to go back to work in the same way that we used to.
And that's our assumption at this point, obviously, we can be right or we can be wrong. But if you judge by how in developed markets everybody is thinking about their return to the offices, I think it's going to be a much more flexible environment and much more tech enabled remote kind of work where consumers will be at home a few days of the week, and that will drive I think a different behavior in terms of breakfast consumption and potentially some of the other meals during the day, especially lunch.
So that's how we're thinking about the long-term category growth and we're trying to position ourselves to compete well in that new environment where there should be more occasions for our products.
Operator
Your next question comes from the line of Rob Ottenstein of Evercore.
Robert Ottenstein - Evercore ISI - Analyst
Great. Thank you very much. First just a clarification of your prerecorded tape in which you said you expect the U.S. to be fairly steady, but international being somewhat choppy. I'm wondering if you could tell us kind of what you actually saw in September in international markets to drive that. And then my main question is you put out now some very interesting direct to consumer businesses in the U.S. realizing that they're very small today, but can you talk about what you're learning from those in terms of the consumer behavioral habits and innovation and how you expect to use those direct to consumer channels in the future. Thank you.
Ramon L. Laguarta - Chairman and Chief Executive Officer
Yeah. The direct to consumer models as you are saying is more of an attempt for us to stay closer to the consumer and read them understand reaction to early innovation, and then obviously take it mainstream into the balance of the channels. So it is still as you're saying very embryonary, smaller, smaller percentage, but we're getting good insights and we plan to obviously scale them up a little bit and get better at reading consumers early, test and learning with our innovation and also improving the way we segment consumers, we have prototypes of consumers that we can innovate and talk to in our communication. So that's the - that's the journey going forward.
In terms of the COVID in international, as you read around, there is an increase in COVID cases in especially Europe, I would say they had managed to control the pandemic pretty well. Now in September they've seen the number of cases going up. The way we're seeing governments managing the situation so far is with local restrictions and when that happens, the business gets a little bit impacted, but not as much, obviously, as it was during the April, May more dramatic restrictions on people mobility.
So we're not seeing the business being impacted much at this point. That doesn't mean that as the winter comes and there is either have - the governments have to take more restrictions that the business may be a little bit more impacted especially on the away from home and some of the more capillary channels. So far we haven't seen that and we've seen the governments making very - a bit more balanced decisions between keeping the economy going and trying to protect everybody against the spread of the pandemic.
So, that's the situation especially in Europe, as we have seen the situation evolving there.
Operator
Your next question comes from the line of Steve Powers of Deutsche Bank.
Steve Powers - Deutsche Bank - Analyst
Yes. Thanks very much. Ramon, when you think back to the original faster, better stronger framework that you laid out early last year, and the investment priorities that you laid out alongside that, I guess I'm curious just to hear whether the experiences of 2020 have altered those priorities at all. And I'm interested whether there are key things that have been permanently accelerated or added new to the mix versus other things that maybe have been de-prioritized even if only temporarily.
And I guess related to that, maybe this is for Hugh, just I just note that capex for the year is about, is now coming in about $1 billion lower versus the original outlook when 2020 started, and should we consider that simply a deferral or have you found efficiencies to more structurally reduce those investments? Thanks.
Ramon L. Laguarta - Chairman and Chief Executive Officer
That's good - good question. Listen, I think we're happy that we had that framework going into these pandemic, right, though The PepsiCo Way is with very clear behaviors for our people and has helped us a lot in managing through the pandemic, especially when we have now a more kind of empowered organization making more decisions in the front line and they have a very, I think a good framework clarity on what's expected and that - and that's helping us perform.
In terms of the three vectors you were referring to, the Faster, Stronger, Better, we're happy with the Faster. Clearly, we're becoming more competitive in the marketplace. As we look into the future, I think we - we're going to have to probably go more after drivers of share, because categories might slow down a little bit. So I think innovation brands, execution will play a very high role in trying to capture that market share.
When you look at the Stronger, we had - we had some obviously it was part of the agenda to invest in becoming a much better omnichannel company, right. So e-commerce was big, supply chain flexibility was big to enable that omnichannel. Obviously, I mean the - what's happened, you saw the numbers, the penetration of e-commerce or e-grocery is just accelerated by three years now. So what we had forecasted to be three, four years from now is happening now. So that is a big focus of the organization.
How do we accelerate the pivot into the omnichannel much faster, which means that we're going to have to have some of the capabilities that we have. I think we've made great progress in how we deal with consumer data and how we have a much more performance marketing. We're improving a lot of the - those capabilities creating internal content. All of that is happening on the flexibility of the supply chain as well, you know, I think we were lucky that we made a lot of investments in additional capacity last year and that's helping us this year, big time and helping us to have more flexibility.
So a good progress there. I think we need to pivot with more of a sense of urgency. The other area where we're doubling down is what we call holistic cost management. Holistic cost management was a capability we had that clearly we need more of that in terms of being able to repurpose money from one part of the P&L to another part of the P&L and where we have inefficiencies to get rid of those inefficiencies to reinvest back where the - where we're going to get the best ROI in terms of growth and flow through.
So that capability, I think we've made good progress, that's another area where we put in a lot of emphasis. On the better side, I would say the social consciousness, I mean the need for becoming much more of a social Company - not social Company, but social aware Company, both in terms of the environment and the qualities, I think that's also increased given the pandemic.
So you saw we increased the foundation funding. We're also quite focused on improving all of our environmental footprint. So those are areas that more than changed in the trajectory, is more a sense of urgency to get them done earlier as the consumer and society is expecting us to I think go faster in those areas.
Hugh Johnston - Vice Chairman and Chief Financial Officer
[Speech Overlap] Yeah. And Steve, to finish off on your question around capex, clearly there is some element of timing as COVID has made it more difficult to execute capital projects. But I would also tell you, we've spent a lot of time and energy around identifying new low cost sources of capital in doing things in a much more efficient way. That clearly is going to benefit the level of spending going forward. So in terms of specifics, more to come in February. But I would tell you, we are getting more efficient with capital spending.
Operator
Your next question comes from the line of Kevin Grundy of Jefferies.
Kevin Grundy - Jefferies - Analyst
Great, thanks. Congratulations guys. Great results so far year-to-date. Ramon question for you. We've covered a lot of ground, I did want to ask you about your openness to moving into the alcohol space, specifically Hard Seltzer. So, as you know the category has been growing rapidly, you've seen Coca-Cola's launch here with Topo Chico in Latin America, recently they planned to launch in the U.S. next year with Molson Coors. There is also discussion that Monster and perhaps some others non-alcohol players maybe moving into the space. So I was hoping you could comment on your openness to moving into Hard Seltzer, is this an area that PepsiCo was looking at? How much time are you spending internally and then maybe some of the governors that may be in place around that possible decision. Thank you very much.
Ramon L. Laguarta - Chairman and Chief Executive Officer
Yeah. Welcome. Now listen, our focus today 100% focus is getting the energy strategy right, right? In terms of executing that, I think as I said earlier it is a multi-vector strategy that requires both Rockstar doing very well. It requires to do a great job with Bang. It requires innovation in Mountain Dew to move into that space. And then do a great job with Starbucks. So those four big pillars, that's taking a lot of our focus and that's going to be our priority, right especially 2021. And I think you will see great progress in all those four fronts.
Now obviously we look at every opportunity, right, there is in the industry - and a couple of years ago, it was CBD, now it's more alcohol. So we get a lot of - a lot of opportunities in front of us. Of course, we're looking at all of them. And of course we have people that are thinking more long-term versus the very immediate 2021. So we're reflecting, we're thinking what are the best options, and we will make decisions in the coming quarters whether this is an area where PepsiCo wants to play. And then more importantly, how do we capture a lot of value of these opportunity is, given the three-tier system, it's not obvious how you capture a lot of value.
So there is a, first, I would say that we play or not, second very important is, who do we play with and who do we partner to maximize the value for PepsiCo.
Operator
Your next question comes from the line of Laurent Grandet of Guggenheim.
Laurent Grandet - Guggenheim - Analyst
Hey, good morning, Ramon, and Hugh. And despite the current environment, we could see a strong quarter, so congrats to the entire team. Let us [Indecipherable] so just a clarification maybe on PBNA results, strong results in the quarter, especially in the on-premises, as the on-premises in there continued to suffer, so maybe you could help us reconcile the difference between what we are seeing in Nielsen from your reporting numbers. So could you tell us how big now is e-commerce and on-premise channels for PBNA and the growth you are seeing in those two channels. Thank you.
Ramon L. Laguarta - Chairman and Chief Executive Officer
Yeah, Laurent, I mean there has been quite a discrepancy always between the Nielsen numbers and the full performance of PBNA. So I would - I would not go into the details of what is its channel, obviously e-commerce is booming and e-commerce is large, but there is much more than e-commerce between the final, I would say, results of the Company and what Nielsen covers in its review samples.
So that's as much as I can say. There is obviously away from home, there's many channels that are not well covered, including some, I would say organized channels that are not well covered by Nielsen.
Operator
Our final question will come from the line of Bill Chappell of Truist Securities.
Grant - Truist Securities - Analyst
Hey, this is actually Grant [Phonetic] on for Bill, thanks for taking my question. Just quick one on Frito and the competitive dynamics in that space. You had a fairly large regional competitor that is now public and talked about some geographic expansion opportunities across the U.S. So, wondering if you guys have seen anything different so far in the competitive financial pricing in that space, or if you would expect to maybe over the next couple of years, I know there's been a focus on share, and holding share, gaining share in this call. So I'm wondering if that changed your strategy or their strategy going forward. Thank you.
Ramon L. Laguarta - Chairman and Chief Executive Officer
Yeah, great question. We like obviously our - our category savory, and there is other people that like it as well. So it's obviously driving new entrants from people that were not playing in savory and people that were playing in savory and have extended their ambitions to play beyond their original geographical limitations.
So I think we welcome competition in that sense to me, the more competitors and more investments in the brands, the higher, the larger the category becomes. That's my experience globally, and I think it's everywhere in the world. So we welcome players to the arena, players that they play with the levers that I think develop the category, which is advertising, innovation, better products. Those are the levers that develop a category and we welcome anyone in the business.
It's hard to compete with Frito right, given the advantages that the Company has, the scale of the brands, the distribution systems, the cost advantage, everything else. So it's not easy to compete with Frito. But I think it's good that we have multiple competitors and that develops the category.
Operator
That was our final question. Are there any closing remarks?
Ramon L. Laguarta - Chairman and Chief Executive Officer
Yeah. Thank you very much everybody for your time this morning and your questions, insightful questions and thank you for the confidence, you've put in the Company and your investments in PepsiCo, and please stay safe and look forward to talking to you soon. Thank you.
Operator