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

Good morning and welcome to PepsiCo's 2026 Second 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.

Thank you, Kevin, and good morning, everyone. I hope everyone has had a chance this morning to review our press release and prepared remarks, both of which are available on our website. Before we begin, please take note of our cautionary statement. We may make forward-looking statements on today's call, including about our business plans, guidance and outlook. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, July 9, 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 second quarter 2026 earnings release and second 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 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 Bonnie Herzog with Goldman Sachs.

I had a question on PFNA. Your volume was flat in the quarter despite what seems to be a stepped-up affordability initiatives and innovation. So hoping you could spend some time helping us understand the changes you've made what's working, what's not working. And then whether you need to lean in further maybe on affordability or maybe innovation to drive better volume growth.

And let me just step back for a minute and give a full company perspective. There's a lot of things we feel good about the business. And there's a few things that we're going to be very focused in the second half to accelerate the business. So if you step back, the company, the first half reported almost 7% revenue growth. And we've grown global volumes, 3% in foods and 2% in beverages. That's the fastest growth in volume since 2022, including that -- those volume growth is the volume growth in the U.S. Foods business, which it was very strategic for us to get the category back to volume growth and to get our business to gain share of volume in the category. So we feel good about that particular turnaround, and it's -- we feel good about how the business is performing. There are 2 pillars to how that happened. One was as you mentioned, affordability investments and the second one has been the growth on the permissible part of the portfolio and the portion console part of the portfolio. That part is going very well. Now on the affordability part, we feel good about the investment. I think in the second half of the year, we're going to have to optimize the return on investment on some of those pricing investments. it depends by channel, by customer, and the teams are learning. But I want you to step back and take the bigger picture that a category that was negative in volume now is positive in volume. We were losing share in volume. Now we're gaining share in volume, and that is all very, very positive. And it was the first strategic intent that we had early in the year when we decided to lower the prices of the business. I don't know, Steve, anything else from your side?

I think that pretty much covers it.

Our next question comes from Filippo Falorni with Citi.

So Ramon, you mentioned in the prepared remarks that in the U.S., consumer behavior clearly were impacted by rising inflationary pressures in the quarter. I was wondering if you can give us an update on what you've seen more recently? Have you seen like an improvement in consumer behaviors as gas prices and some other inflationary metrics have come down. And then as we think about the back half, before you talked about a potential to get to the higher end of the organic sales range, can you give us an update on how you're thinking about the back half at this point?.

Yes. So I think the -- obviously, the Iran war and the impact on gas prices has been meaningful, not only in the U.S. but across the world. Our international business, as you saw, continues very strong, and we were able to grow 7% accelerating. In the U.S., we're seeing the consumer change in behaviors, basically an acceleration of some of the behaviors we saw in the past, probably some channels, more the impulse channels have been impacted where there is more of a correlation with the price of gas, certain company stores and some other independent. We're seeing a slowdown of the conversion of traffic into purchases. So we're seeing that. Now will it change in the coming months. It all depends on the price of gas. So clearly, that's something that is beyond our control. We continue to invest in affordability. In those particular channels, we're working with our customer partners in solutions to convert more of the traffic in the store, bundles, link into meals, solutions to address that particular channel. But no, we're not that is the only element that we're seeing in the last few months. Now we continue to see, as we look at the second half of the year, a very strong international business and it's continuing to perform well into the summer. We see an acceleration of our U.S. business, both in the foods and the beverage business, and we continue to have a line of sight to the low end of our long-term 4% to 6% in the second half of the year. We were fighting for that. We see a lot of green shoes in our portfolio transformation. We feel good about our permissible, we feel good about some of the innovation that we launched, we're going to scale them in the second half. And we see our affordability investments to return better for us in the second half as we optimize the tactics for different channels, different consumers.

Ramon, it's Steve. The -- just maybe a little bit on guidance since we talked a little bit about that. So if we think about guidance overall, you saw that we reaffirmed our guidance for the year. If I take a step back and look at the performance of the whole company and to reiterate some of what Ramon said a minute ago, the overall net revenue of the company grew 7% in the first half of the year, and Ramon just talked about the volume growth that we're seeing globally that makes us feel really good about the health of the brands. Reported EPS grew 6% in the first half. Constant currency EPS grew 3%. We continue to see strong international performance and a softer North America business than we expected in Q2. And so how does that play out for the rest of the year. So as we look at the second half, we continue to expect the international business to remain strong. We expect the North America business to gradually improve, but at a more moderate pace than we thought coming into Q2 as Q2 was less than what we expected. We do expect some more pressure on the business from a commodity standpoint. But we also expect refund claims for tariffs paid last year to help offset some of the commodity pressures that we have and allow us to continue to play offense and the refund claims on the tariffs paid last year will be about a full -- 1 full point of EPS growth for the year. And the other piece is we expect to keep pushing productivity on the business. So we've taken costs out. We'll continue to do that. We have more work to do here. I think what's important for you to know is we're not making decisions that hurt the top line in our assessment. We're going to continue to make investments in growth the North America advertising and marketing expense is projected to increase in the second half versus prior year as an example. So we're going to continue to play offense. And so when we add it all up, we're in a position to reaffirm our full year guidance. And as Ramon said, it might be towards the low end of the EPS range that we've given.

Our next question comes from Dara Mohsenian with Morgan Stanley.

So obviously, strong international results in the quarter, but I wanted to focus on North America a bit. We talked about the sequential improvement in volume in PFNA in Q2, but I don't think it was to the level you expected and maybe you can also comment on PBNA, where it looked like the volumes were also weaker than expected. And just was hoping for a little more of a short-term report card, do you think that's less payback on some of the initiatives you put in place? Is it more the general consumer environment? But really what I want to focus on is more longer term, just your perspective on the level of spending behind that North American business as we look out longer term, do you think to sort of revitalize organic sales growth in this environment? You might need some level of greater spending, a bit of an earnings reset as you look out? And just how do you think about investment levels behind the business looking out given both the short-term performance you're seeing in the consumer environment?

That's a good question, Dara, and the way we think about it is the we still see the international business has obviously continued to be very strong, and this is a business now is going to cross $40 billion in this year. International beverage volumes is 2/3 of the total company volumes and international food volumes is over 50%. So clearly, the international business is becoming a very scaled part of our business and profit accretive. So we're creating a diversification in our business that long term will give us a lot of rewards. Now when you focus on the U.S. We continue to think that the 3 pillars that we said were going to help us transform and accelerate our growth in the U.S. One was affordability investments to make sure that our brands are in consumers' lives in the portions and prices that consumers can afford today. That's one vector, continue to transform the portfolio at a faster pace, following the new dietary habits and food habits and food and beverage habits of consumers. And the third one was accelerate Away From Home as incremental locations for us to capture new occasions for our brands. The portfolio transformation is working very well. We feel good about the nonsugar part of our beverage business. We feel good about the functional hydration. We feel good about our energy business, and we feel good about some of the innovation that we're going to scale in the second half of the year. So that part is good. We feel good about the permissible portfolio in Foods. It's already $3 billion. They're going almost double digit. The portion control. So all those elements that we explained quite well in our prepared remarks, we feel good. And I think that is really the long term of the business as you see how consumers will engage with our categories. The Away From Home business continues to be a priority internationally in the U.S. It slowed down a little bit in Q2. We think that it's going to help us accelerate in the second half, but it's a strategic opportunity where we're innovating, creating new business models and adding some incremental locations. Now the affordability part, which is the one you're referring to, it's -- we accomplished what we wanted to accomplish, which was to get volume back into our categories in our core brands. And that was not an obvious thing to do, and we managed to do this in the first half of the year. Now we're optimizing the return on those investments. And what we learned is that, yes, because of the consumer environment and the fact that gasoline prices were higher, consumers felt a little bit more the economic impact but we think that we will continue to optimize the investments for grocery, high loathers one type of investments for everyday low price at the top of investments, et cetera. And the system is getting much knowledgeable and much more intelligent in how we get the best return from those investments. Now what was different this quarter that we were not planning is the performance on the impulse channels. And that is something that we're working on to tell you the truth in the last few months to try to get more conversion between people getting into the gas station and convert it into purchases of beverages and foods. And that's something that we're working with our partners. That is new. The gas prices have impacted. The gas prices will at one point come down and then that will become hopefully less of an issue second half of the year or early into next year. So that's the full picture. We don't think we need any sort of reset because we have a very strong productivity, record productivity in the first half of the year. We're going to add new layers of productivity second half of the year to be able to fund all these growth investments, be it price, with portfolio transformation or the growth into Away From Home, which will drive the portfolio acceleration. So that's how we're thinking about this now. Steve, any...

You've covered it well.

Okay.

Our next question comes from Andrea Teixeira with JPMorgan.

On the guidance for the second half, you're now adding about, I believe, $0.07 to $0.09 in EPS from the tariffs every investment. And then -- and you also mentioned that EPS would be more back loaded into the Q4. So I just wanted to double click on what Ramon just said about the affordability pillar. Should we expect more price rollback similar to what your biggest customer in the U.S. has recently announced rolling to other retailers? And if so, can you give us some examples of how these reinvestments have converted into better volumes. You just talked about the CNG, the [indiscernible] gas. Anything you can point out to one of your biggest partners that would allow us to think about like volumes finally reflecting some of these channels in Away For Home. And When you think about the $0.07 to $0.09 reinvestment, it implies more flattish 3Q. I just wanted to double check that math. And if that's the case, how you would -- we should be thinking, is that mostly to absorb the commodity pressures that you highlighted or the A&P investments or AM investments or should we think about the affordability of pricing investments being the bulk of it?

Andrea, it's Steve. Thank you for your question. It's good to hear from you. I think on the first part of it, we're going to continue to run our play. We have a strategy that we believe in. Ramon talked a little bit about maybe we'll likely have to make some tweaks based on what we're learning. From a value standpoint, but we're going to continue to run our play there. On the impact to -- from the tariffs, maybe I'll talk a little bit about Q3 and then Q4 because you mentioned both. Look, on the -- if I talk about Q3, and I don't like to give specific guidance on quarters, but I think it's relevant to give you a little bit about the timing since I shared some in my prepared remarks. On the positive side, we continue to expect international to be strong. And we do expect, like you said, about approximately 1 point of EPS benefit from tariff refund claims likely in the quarter. . We expect a gradual improvement in North America, and we will be using the tariff, essentially, the refunds to help offset some commodity inflation that we're seeing and allow us to continue to play offense in the business. So that's how we're thinking about that. Also unique to Q3, we expect to have a higher tax rate year-over-year than what we've seen so far this year. So that should go into the math. And there will be timing of certain costs and investments that we expect to impact Q3 more than Q4. So we'll continue to focus on productivity. We expect more productivity in Q4 and Q3, but that's kind of how we're thinking about the overall math of the back half.

Yes, Andrea, if you think about the big picture, the -- clearly, the impact of the gas prices or the oil price in our cost of goods globally and the impact of higher gas prices and demand. These are new elements that obviously we're looking at to compensate with higher productivity. The tariff refunds comes obviously very handy and some other trade-offs that we have to make in the business. So these are normal trade-offs that we make during the year because there's no new data points on some elements of our P&L that we have to compensate with others. So that's how we're thinking about the overall pool of money that we have available to continue with our guidance, which is the higher order deliverable now on the high growth and the EPS numbers that we gave you earlier in the year.

Our next question comes from Kevin Grundy with BNP.

Great. I wanted to come back -- sorry for beat a dead horse here, but I wanted to come back to the North America food performance. Ask from a little bit different angle, maybe play back some of your comments, Ramon. And specifically, the thrust of the question is around performance currently versus the strength that you saw in the test markets back in the fall, where there's a lot of enthusiasm, both from a PepsiCo perspective as well as from a retail perspective, as best we gather. So can you help us sort of delineate between the macro factors, you talked about tighter consumer budgets and high levels of inflation versus more company-specific factors and how that looks versus say, 9 months ago or so when you performed when you did the test market work? And I guess on the call, I'm hearing better -- you're looking for better ROI on some of the price investment, maybe better execution in the impulse channels, but really just trying to gauge the key factors, the big areas that have changed since the best market work versus what we should expect now going forward and why things may get better.

Yes. The -- I would say higher order is we've been able to accelerate volume growth in the category. Salty snacks is one of the few categories that is growing volume in the overall food space in the U.S. So that was a positive. That was the #1 in 10. The second one is for us to be a driver of that volume. We're gaining share of volume in the U.S. in salty snacks, which was also the other objectives. So that's the number one. Now is the volume as much as we expected, no, not in Q2. And we -- it's couple of elements. I think the consumer is worse than what we had anticipated and driven mainly by gas prices. Second, the execution of the price investment in some customers have had some delays, I would say, because of multiple commercial reasons. That has been solved, so we'll see an acceleration in the second half. The consumer reaction to the investments is pretty much along the lines of what we had initially anticipated. So I wouldn't question the strategic logic of the investment. There are tweaks that we have to make commercially, and there are obviously different circumstances in the U.S. consumer budget trade-offs that consumers are making given some of the inflation -- recent inflation, especially on gas prices. So that's where I would leave it here. We remain focused, as Stephen said -- as Steve said, on continuing the playbook. We continue to invest on our portfolio. We continue to invest on our affordability. We continue to invest in our way from home. And we think that the food business in the U.S. will continue to grow volume and grow net revenue in the coming quarters.

Our next question comes from Peter Grom with UBS.

Great. Maybe there's been a lot of focus on North America this morning. So maybe just pivoting to the international business. Ramon, maybe you could just give us a walk around the world in terms of what you're seeing around category [indiscernible] health of the consumer? Were there any notable differences in NG regions as you move through the quarter here? And then Steve, [indiscernible] not to get too specific, but when you speak to international growth remaining resilient in the balance of the year, should we be extrapolating the growth that we saw in the second quarter for the balance of the year?

Yes. So yes, thanks for putting the international business in the center of the conversation. Yes, I mean, this is a business that, as you know, we've been investing for the last 5, 6 years, and it's now as I said earlier, a big part of our volume globally and a big part of our revenue and profit globally. So this is clearly a success story for the company and will continue to be a big driver of growth for us in the coming years given the per capita and given the share of market opportunities that we have globally. The -- around the world, I would say, going into the quarter, we were a little bit concerned obviously with the performance around the Middle East and some of the Asian markets, where the gasoline prices were more obvious. The truth is that all those markets have remained very resilient of, I think, about Vietnam, Thailand China, some of the markets where the gas prices were elevated. And the same with the Middle East. Our Middle East business continues to perform at a very good level. We're seeing that our procurement global capabilities and the agility of the business is proving to be an advantage for us. In some of the markets we're pivoting faster than competition in terms of raw materials availability and ability to compensate for the inflation. Europe remains resilient, more pretty good. Clearly, the World Cup is helping. And the fact that we're sponsoring the World Cup in our food business is helping us to activate the category in a better way. It's creating locations, we're capturing, and we started Q3 very strong in international. Latin America, a little bit less growth than in the rest of the business, as you saw. But clearly trending very positive and the World Cup obviously having a very big impact in that part of the world. So overall, a broad, good performance. Part of that is category acceleration. Part of that is better share of market. I would say better in beverages than in food. In food, we still have opportunities to improve our share of market in some parts of the world. But we continue to see the business trend in well throughout the summer and into the winter.