PepsiCo, Inc. (PEP) Earnings Call Transcript & Summary

Good morning, and welcome to PepsiCo's 2026 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.

Good morning, everyone. Thank you, Kevin. I hope everyone has had a chance this morning to review our press release and prepared remarks, both of which are available on our website. Before we begin, please take note of our cautionary statement. We may make forward-looking statements on today's call, including about our updated business plans, guidance and outlook. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, October 8, 2026, and we are under no obligation to update. When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results. Please refer to our third quarter 2026 earnings release and third quarter 2026 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 Executive Vice President and CFO, Stephen Schmitt. [Operator Instructions] And with that, I will turn it over to the operator for the first question.

[Operator Instructions] Our first question comes from Dara Mohsenian with Morgan Stanley.

So Ramon, I thought, first, maybe we could just get a bit of a state of the union from you on the revenue side as we approach calendar year-end here. Obviously, internationally, another strong set of results in the quarter. You did have some weather and World Cup boost in theory. We are seeing a volatile environment. So just would love your thoughts on the sustainability of the strong growth that you're seeing internationally and the forward growth opportunities? And then just shifting to NA, again, from a revenue standpoint, numerous strategy changes this year, volume I don't think has responded as much as some as hoped, clearly in North America. So just look back on the efforts in '26 so far, any plans to tweak pricing or plans from here? We've heard a lot about snacks pricing recently in the marketplace. So just any strategy tweaks going forward? And then, Steve, if I can just slip in 1 on the margin side. Obviously, the earnings revision in Q4 is margin driven with the top line expectations holding. So just help us understand what changed there. But I think really the context is when you have a big Q4 revision, it may imply further pressure in '27. So just -- as we look out to '27, I know you won't give guidance, but just some of the key buckets to margins as we look out to '27, reinvestment to reinvigorate North American volumes, commodity pressure, given that's a big change for Q4. Any incremental cost savings thoughts. Those would all be helpful just conceptually for '27.

Great. Dara, this is Steve, and thanks for the question. Good morning, everyone. Maybe I'll start with the second question and then kick it to Ramon for the State of the Union where you began your question. So -- before I get into the guidance revision, maybe I'll talk a little bit about the quarter, at least from a highlight standpoint. And the reality is that we're pleased with many aspects of our Q3 performance. Organic revenue accelerated to 3.1%, reported revenue was north of 5%, core operating profit increased 3% and EPS to increase 2%. Importantly, as we look at the health of the business around the world, global beverage volume was up 3%, global food volume was up 1%, and it's actually up 4% if you exclude the grains business in South Africa. And overall, International had really quarter. Organic revenue increased 8%, operating margin expanded 105 basis points. Now shifting to the North America business. Our Foods business in North America, organic sales improved from Q2 and our beverage business in North America decelerated. So if I turn to guidance, there are always a number of factors that go into how we think about guidance. The largest changes and you mentioned, we said in our prepared remarks, was margin performance is below where we expected it to be. Input costs are trending higher and mix has been a headwind in particular. But despite these pressures, I think it's important to note that we've decided to sustain key investments around the company to make sure that we stimulate growth and build momentum. This includes A&M, which increased in international. It also increased in North America importantly. So it's the margin piece that's driving the guide down EPS, but sales, as you mentioned, we expect to be robust. Another mention, we're also identifying structural cost reduction areas, and we're going to be using revenue management tools in the coming months to partially mitigate this margin pressure that we have in the fourth quarter, these benefits should start helping as we turn the calendar year. So that's how I think about guidance, the revision. You mentioned '27, so maybe I'll touch on that, too. In '27, we have clear priorities. We certainly want North America to grow faster and more efficiently. We're going to continue to fuel the international business and maintain momentum there. And we're going to be very disciplined with costs and capital allocation. So as you imagine, we've been working through our '27 plans for some time. We're just not in a position today to provide a complete view of what our expectations might be, and I'd rather not give a partial view now. So we'll give more detail on our 2027 expectations in Feb when we report the fourth quarter. So I know that was a lot, but now I'll kick it over to Ramon and give a state of the union.

Okay. So you guys got a lot -- the framework there. So -- listen, we're pleased with the acceleration of the business. So going into the year, our priority #1 was to accelerate top line across the company. Now if you think about the enterprise, we grew 3.1% in organic net revenue in Q3. That is the fastest rate of growth since Q4 '23. So clearly, an important milestone for us to cross the 3%. And we like the way that growth came, which was volume led. So if you think as Steve mentioned, a 3% growth in beverages, global beverage volume and 4% in snacks globally, the snacks business, not the foods. We had some large business in South Africa that are very heavy kind of commodity type that impacted the overall global. So -- good, I would say, very positive threshold, we cross the threshold of 3%. And obviously, it is on its way to the long-term 4% that we want to get to. Now international was a big driver of that, and we're very pleased with the momentum that we've been building on international now for many quarters. It is not there, you mentioned weather and some -- I think it's much more structural. I think we're becoming much more competitive in both foods and beverages in more markets. The scale of the business now is to the point that we put on the remarks, that is year-to-date, international is already 45% of our profit so that we keep building it. And it's broad. It's broad based. It's in Europe, it's in Middle East, it's in Asia. It's in LatAm. So good performance overall. Now we're not satisfied with the performance in the U.S. And as Steve mentioned, I would provide some nuance though. The volume bed that we made in Snacks, North America, especially with the price reset, we're happy with the turnaround in the volume performance. If you think about last year, that business was low single-digit negative volume growth. This year, we're low single-digit positive volume growth. That is a major turnaround. And it was -- it is the price, but it's also some of the innovation, some of the new platforms we're building aligned with the portfolio of the future. So good progress there. We're going to keep investing in those platforms going forward. I think we can accelerate the category. We gained share in volume now for multiple quarters in Foods North America, in Snacks North America, we're starting to turn that into value share as well. So that was the playbook. As you said, less volume growth than what we had initially anticipated. It had to do with the consumer environment. It had to do with some of the commercial execution, that's getting better, and we feel good. Now we don't feel good about the beverage business. I think in the beverage business, as we put in our remarks, we're competing well in some platforms like hydration, like energy, and we're not competing well in soft drinks. So we're putting all the urgency of the business and the focus in improving our performance in soft drinks. We're cutting cost in many areas of the business where including corporate and allocated including overhead costs everywhere to invest back into the beverage business, also the food business in North America. And we're looking at any other opportunities to improve our execution because I think there's also an element of execution that can improve. So that is the state of the union there. For us, priority, as Steve was saying, going into next year, is to maintain the top line momentum. That's why we continue to invest in the business, double-digit A&M in both businesses in the U.S. this quarter. We continue to invest in A&M going forward. We want to go enter '27 with a lot of momentum and make sure that we manage the business for the long term, which is what we're doing.

Our next question comes from Bonnie Herzog with Goldman Sachs.

I guess a follow-up on all of Dara's questions. Maybe just a question on PFNA. Curious if you would consider accelerating SKU rationalization and some of the underperforming brands in that business, thinking about maybe in an attempt to redeploy investments behind SKUs that are actually showing signs of improvement or momentum? And I guess, if not, could you just maybe walk us through the puts and takes of your current portfolio and why you believe you have the right brands in place? And then how should we think about you potentially supplementing growth as you potentially pursue M&A in that business to, again, kind of reignite growth?

Yes. I think it's a good point, Bonnie. I think the -- there are two elements or two big vectors of growth in the U.S. Foods business. One is making sure that you provide the right value, right? So affordability, price points, entry points to the different categories, subsegments, making sure that we're competitive in that space with a consumer that is clearly challenged, we don't expect the consumer to suddenly become much more in a much better place in the next 12, 18 months. So value, affordability, price points, giving the people the right format. The second one is, I guess, what you're referring to, which is the portfolio, the portfolio of the future and how we're evolving the portfolio to satisfy the various demand moments of that business. Now there is -- I think we have been investing in multiple platforms that position us very well for the future. Then the first one is portion control and affordability, and we talked about this in the past. We think that 100-calorie packs, 120-calorie packs, that is critical for the future. That business is already $3-plus billion. We continue to invest. All the permissible portfolio we have over $3 billion as well of permissible portfolio, which is going to be the growth space for the future, I think we have great brands in that space. If you think about SunChips, Smartfood, Naked, simply, pop corners and others that I forget at this point, so that is a great portfolio that is growing. We're obviously launching Doritos protein and some other variants that we see also having very good consumer momentum. So we're doing both things, trying to make sure the core is still very relevant with the right pricing, right advertising, right emotional connection with the consumer. And then building these new platforms that is where the double-digit growth are including, I wouldn't say indulgence continues to be a great space, right? So if you think about Misvikis with avocado oil or baked with olivo oil, so those are spaces where we're also investing and where we can premiumize the brand. So I think the portfolio is in a very good place from the -- where the consumer is today or when the consumer is going tomorrow. Now is there opportunities for M&A in small subsegments? We've been looking at that for quite some time, both in Foods and Beverages. We acquired not too long ago. was another good example in the beverage business. And we keep looking at opportunities to complete the portfolio, smaller tuck-in opportunities that we don't -- we never say no. If it's -- it has strategic value, it has financial returns and it makes sense for the levers of growth that we can provide. So -- but I think we're in a good place from where the portfolio is going. Now we need to put more investment in scaling up those platforms. That's what we're trying to do taking cost from other parts of the portfolio -- of the P&L and investing in those growth platforms for the future.

Our next question comes from Peter Grom with UBS.

Great. So I wanted to ask just on North America and maybe just carbonated soft drinks in general. Remember, it's pretty clear that you are not pleased with kind of the performance of the business. But as you take a step back, can you maybe unpack why performance has fallen short of expectations. And as you think about the path forward, what you plan to do differently? And then, Steve, just maybe more of a housekeeping question on the organic sales outlook. Approximately 3% growth can mean a lot of different things. So I'm just curious if the right takeaway is that you would expect sequential improvement from the 3% growth or 3.1% growth that we just saw in the third quarter and the fourth quarter.

Yes. I would think about the -- starting from the last point. I would think that way. I think we're expecting sequential improvement as you -- we go into Q4 and especially, as we go into next year. So I'll continue to invest. It's our #1 priority, invest in growth, invest in growth. Steve mentioned, we didn't take any resources away from the business in Q4. On the contrary, we're trying to invest more in growth across the world, international and the U.S. to make sure that we continue the sequential improvement or acceleration of the business on the top line. So that's from the -- how we're thinking about top line. Now soft drinks U.S., let's start with LRB U.S., right? LRB U.S., I think we're -- one important priority for us this year was to accelerate the hydration business. That business is -- has accelerated in volume and in net revenue. The overall category is very important for us that the hydration category, which has tailwinds given some of the food -- the eating habits and drinking habits of the population. So that was critical. We made that happen. It's working well, and we'll continue to innovate in and in Propel and investing in those brands to accelerate. So that part is a good one for us. Energy as well. I think the Alani plus sales use makes sense. By the time we get the two brands into the business, and well executed, that will be an important source of growth for us. Now in soft drinks, we -- as you said, we're dissatisfied. I think there is a -- two things that we're trying to do. One is increased investment behind the brands. So invest more behind Poppy, Pepsi, Mountain Dew and some of the other brands we have in soft drinks. And the second one is improve the execution. I think there's opportunities for us to become a better -- raise the bar on execution in our beverage business, and the team is fully focused. We have great partners in our bottling partners as well. And we're -- that's the focus, execution improvements and more investments in the brands to be competitive with our key competitors that have having increased their investment in the portfolio and it's working.

Our next question comes from Lauren Lieberman with Barclays.

I'm going to do two things because everyone is doing two things. So the first was just in thinking about the 4Q guide and the margin, I just wanted to ask again maybe a little bit differently. If you can try to clarify how much of the margin pressure is incremental investment versus incremental unexpected inflation. So I think that's really important to just understand both what you're doing versus what you're dealing with is an external environment standpoint. And then the second thing is just the ROI on the spending you're doing. I know, Ramon, you pointed to volumes in U.S. Snacks starting to get better. But like the time to think bigger, if you will, like the innovation platform you've had is massive and super impressive. But everything that you've been talking about of them on is sounds a little bit tactical. So like are there things you need to reevaluate on, how you communicate with consumers, how you're doing your A&P, Bonnie's point on SKU rationalization. But like the innovation is there, but is it time to step back and have bigger thoughts about like how you do things -- going to be so tactical in nature?

Lauren, it's Steve. Let me talk a little bit about margin first. I won't get into granular detail, but I can give you at least a few things on, I guess, cost A&M and tariffs. So one, I would talk about on cost inflation overall, the teams internally have done a really nice job with our hedging programs. They're typically 6 to 12 months and it yielded us from some costs up into this point where we're starting to see these hedges roll off in our -- essential input costs starting to ramp. So in spite of that, we are going to be investing in growth across the company. I think it's important to mention not just internationally, but we want to make sure we build momentum in the North America business. The piece on margin that is important to model is we did have a benefit in our Beverage North America business in the third quarter related to tariffs. We talked a little bit about in our remarks about how much that was. And so once that goes away, that puts some more underlying pressure on the North American Beverages business that we didn't have in the third quarter. Sorry, in investments in A&M, we will continue to do that. Obviously, we want to have momentum going into next year.

On the -- on the A&M investment, I think two points there. One, quantity and then quality. I think quantity, we're looking at every cost in the company and making sure that any cost that is not linked to growth is not there, including overheads, including corporate and allocated, including any line that you can think of because we think quantity matters and we need to invest more in growth in the U.S. business, both beverages and food, and they both -- they share. Now quality is, as you saw, we're making some important pivots in how we're thinking about investing that A&M with much higher return. We just announced -- we announced a few weeks ago a partnership with publishers. That is an important capability for us as we go into this partnership, we'll be able to invest with much more data, much more granularity, understand consumers and be able to talk to consumers in a different way, where I think we're going to get better return on the investment -- not one thing. I'm sure given what I know about the capabilities we both have. So I think both quantity and quality, you will see more investment in A&M, and you see better investment in selling every consumer about our products and selling them in a way that they will be much more enlighted with it. So I think that's how we're thinking about it. Obviously, we continue the journey of increasing the competitiveness in the U.S. and accelerating the categories, which is the role that we need to play for the long term.

Our next question comes from with Jefferies.

I know there have been many questions around this topic, but just to make sure that we understand specifically, particularly because of various media reports of higher pricing or lower pricing or whatever it happens to be, what exactly is the plan? Which direction are you -- what is the correct direction of travel? And that's on North American Foods. And then on beverages, the word urgency you've used many, many times. What does that mean? Because urgency sounds tactical, as Loren had mentioned, but brand building and all those other things usually take a lot of time and could use a pivot. So just trying to understand what do you really mean by urgency in terms of what you want to do on the beverage side? Both of these questions, of course, are North America specific.

Yes. I would say urgency, means we're going to look at every cost with aggressive lenses and with the lenses that everything that is not related to growth will not be part of the company. So that, to me, is an important mindset and then putting the money against the brands that will drive us growth. So that from the -- then on the executional side, raising the bar on what is expected from everyone in the company in every customer negotiation, in executing in every point of sale, in the levels of granularity and executional excellence that we're going to look in our people. So those is how we're thinking about it. Now we're also looking at are all the decisions that we've made in terms of how we execute the business, the right decision should we look at partnerships in other ways. So we're looking at every single element of the strategy in terms of executing in the U.S., and we're not taking anything for granted in that space. Now what was the other -- price in North America. Price in North America. We're pleased with the -- as I was saying earlier, in Dara's question, we're pleased with how the pricing investment has worked for us in the food business. We were negative low single digit in volume in snacks in the U.S., now we're positive volume and units and gaining share. So that gives us, I think, flexibility in what do we do to absorb this new wave of inflation that is coming to every country, not only the U.S., given energy prices and given agricultural prices. So we're going to see a mix of net revenue management tactics that will impact some pricing, but also mix and all the decisions that we can make around that. And we're going to see a lot of productivity the one we've been doing for many years, but additional areas of productivity to minimize the decisions we have to make in increasing the cost to our consumers. Now we feel good about the way we're thinking about this. We're putting some guardrails to our people, making sure that next year's pricing is going to be below 25. So we continue to be very affordable. In most of the take home parts of the business. We don't set pricing. Obviously, our customers do, but we have the right conversations, and we have the right partnership in how we drive volume in the category. So we're trying to be very cautious, but there's going to be a set of tactics between net revenue management and productivity to mitigate the inflation that is coming through our various lines of the P&L, as Steve was saying earlier. Do you want to say anything else, Steve?