PepsiCo (PEP) Q3 2026 earnings call transcript

It is now my pleasure to introduce Mr. Robbie Paminani, Senior Vice President of Investor Relations. Mr. Paminani, 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 Steve Schmidt. 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.

Good morning, Darin. 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 it's responded as much as some have 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 one 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, the 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. Hey, Dara, this is Steve. Good morning, 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. 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 increased 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 a stellar 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 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 in 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 are just not in a position today to provide a complete view of what our expectations might be, and I would rather not give a partial view now. So we will give more detail on our 2027 expectations in Fed when we report the fourth quarter. So I know that was a lot, but now I will kick it over to Ramon and give a State of the Union.

Ramon Pellettis, Okay. So you guys got a lot of the framework there. So we are pleased with the acceleration of the business. Going into the year, our priority number one 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 a 4% in snacks globally, the snacks business, not the foods. We had some, you know, 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 crossed a threshold at 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 tactics. 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, you know, year to date, international is already 45 percent of our profit so that, you know, 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 bet 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. So that is a major turnaround. And 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, you know, good progress there. We're going to keep investing in those platforms going forward. I think we can accelerate the category. We gain sharing volume now for multiple quarters in Foods North America and 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 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 putting all the urgency of the business and the focus in improving our performance in soft drinks We cutting costs in many areas of the business We you know including corporate and allocated including overhead costs everywhere to invest back into the you know the beverage business also the food business in North America And we looking at any other opportunities to improve our execution because I think there is also an element of execution that can be improved So that is the State of the Union For us priority as Steve was saying going into next year is to maintain the top momentum That is 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.

Thank you.

Yeah, I think it's a good, good point, Bonnie. I think 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. And we don't expect the consumer to suddenly become much more, you know, 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 and 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. The first one is portion control and affordability, and we talked about this in the past. We think that, you know, 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 Sun Chips, Smart Foods, Naked, Simply, Popcorners, 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, And the indulgence continues to be a great space, right? So if you think about, you know, Miss Vicky's with avocado oil or baked with olive oil, so those are spaces where we're also investing and where we can premiumize the brand. So, listen, I think the portfolio is in a very good place from the, you know, where the consumer is today and where the consumer is going tomorrow.

Now, is there opportunities for M&A in small sub-segments? We've been looking at that for quite some time, both in foods and beverages. We acquired Ciete not too long ago. Pulpy was another good example in the beverage business. And we keep looking at opportunities to complete the portfolio, smaller tacking opportunities that we never say no. If it has strategic value, it has financial returns, and it makes sense for the levers of growth that we can provide. 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.

Thank you.

Yeah, I would think about the, you know, starting from the last point, I would think that way. I think we're expecting sequential improvement as we go into Q4 and especially as we go into next year. So continue to invest. It's a number one 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, you know, how we're thinking about top line. Now, soft drinks U. S. , or let's start with LRB U. S. , right?

LRB U. S. , I think one important priority for us this year was to accelerate the hydration business. That business has accelerated in volume and in revenue. The overall category is very important for us, the dehydration category, which has tailwinds given some of the food, you know, the eating habits and drinking habits of the population. So that was critical. We made that happen. It's working well, and we continue to innovate in Gatorade 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 Celsius 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, as you said, we're dissatisfied. I think there is two things that we're trying to do. One is increase the 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 that's the focus, execution, improvements, and more investments in the brands to be competitive with our key competitors that have increased their investment in the portfolio, and it's working.

Thank you.

Hey, Lauren and 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, costs, 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 typically six to 12 months and it shielded us from some costs up until this point where we starting to see these hedges roll off and essentially our input costs starting to ramp 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 PEPSICO INC, that is important to model is we did have 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 more underlying pressure on the North America beverages business that we didn't have in the third quarter. Investments in A&M, we will continue to do that. Obviously we want to have momentum going into next year.

Okay. On the enemy 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 allocations. Including, you know, 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 foods, and they both deserve. 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 a few weeks ago a partnership with Publicis. 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. 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 telling every consumer about our products and telling them in a way that they will be much more enlightened 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.

Thank you.

Yeah, 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, the, you know, raising the bar on what is expected from everyone in the company in every, you know, customer negotiation, in executing at every point of sale, in, you know, the levels of granularity and executional activity. We are looking at all the decisions that we have made in terms of how we execute the business, the right decisions.

Should we look at partnerships in other ways? We are looking at every single element of the strategy in terms of executing in the U. S. , and we are not taking anything for granted in that space. What was the other? Pricing North America. Pricing North America. We're pleased with, 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. You know, we were negative lows single digit in volume in snacks in the U. S. Now we're positive volume and units and gaining shares. 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, you know, 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, you know, the inflation that is coming through our various lines of the P&L, as Steve was saying earlier.

You want to say anything else, Steve? No, he covered it. Okay. Thank you.

Yeah, thanks. Listen, obviously, you know, we're not satisfied with the performance, and that means that we have to look at options that improve our performance long term, right? I mean, it's not only about the short term, it's the long term. So, you know, we have been talking about how, especially to your point on go-to-market and business model, we're open to revisiting every option. We're working with the team on, you know, accelerating some of the tactics on the integration part so where we can eliminate costs. But also, we're looking at are there opportunities to expand or accelerate some of the re-franchising in some parts of the country where we have good partners and where it makes sense that, you know, that partnership will drive better execution and potentially, you know, better margin for the company.

So we're opening all the avenues. Clearly, as you were saying, the performance of the business requires that we are open and we're realistic with, you know, the realities of the marketplace, the inflation, you know, the consumer realities, and where does it make more sense to invest the resources of the company to drive growth long term. So, yes, we're looking at everything, and, you know, these are important decisions that we'll be making with a sense of urgency and with the strategic mid-term, long-term vision that we always run the company with.

Thank you.

Good. So listen, we've been with beer companies around the world for quite some time. ABI, we have partnership in Brazil and Argentina and some other parts of the world. And with Kalsbergs, we've had relationships for many years in Norway and Sweden. So this is an expansion of a strategy, which is in countries where we have a business that competes well, but is not the leading business, merging with the resources with a beer company makes a lot of sense. This gives us presence in the on-premise channel, and it gives us very good execution scale in the in-home channel. So this is working. Carlsberg has been an incredible partner.

The latest example of that partnership is in the UK, the Britvik acquisition they made, and that has been a very successful investment for Carlsberg and also for PepsiCo as we keep growing share We are in the UK. Now we've expanded to other geographies. The strategic, I would say, we're both together for the long term, and we believe this is a win-win, and the resources are being invested on both sides. It's great. So we'll continue with Scaldsburg, but it's the same philosophy we have with many of our bottlers globally.

Now, on One North America, we keep working, you know, not so much the strategy anymore, but the execution of this tactic. And, you know, there is a lot of positive news. We will update you to all the investors in a future meeting. Now, the integration is working well on the physical side with warehouses and the transportation. Now we're into the details of delivery into the small shops, the bigger shops. Clearly, there is a lot of value we're seeing, both for the customer and for us. This will apply to some parts of the country, as we said. I think long-term, this will apply to some parts of the country. Now, there are other parts of the country where this will not apply, and that's the comment I made earlier about, you know, can we accelerate re-franchising in some other parts of the country and take value earlier?

So, you know, again, this is the hybrid approach, the nuanced approach by geographies, and this is the team continues to, I think, learn and execute the details that matter in this kind of transformation. Thank you.

Hey, Andrea, it's Steve. Steve, thanks for the question. Maybe I'll just talk a little bit about urgency. The sense of urgency around the company, as you would expect, is very high in all that we're doing, and the business reviews and how we're operating, and our attention to detail on costs, and looking at other parts of the company, whether even that's corporate unallocated, to make sure every dollar we're spending on shareholders' behalf is providing a benefit to the business and a return that we'd be proud of. And so there's a lot in the question that you asked. I don't think I'll go through all of the different details, but just you should know from a sense of urgency standpoint.

Just in the short time that I've been here, you can see it shifting gears in all that we're doing.

Yeah, and then, you know, if you think about growth margin and long-term marketplace performance, we're looking at execution as an important lever. And so everything you said around where can we execute better as a combined business from the growth cost or where we can leverage a partner, I think we're obviously looking at all of it at this point. And the solution will be a mix of solutions for different parts of the country, the key point being growth, marketplace execution, competitive performance, and margin. And we'll get to that when the moment comes.

Thank you.

Yeah, I think the same answer I gave to the food business. I think there will be a mix of tactics on net revenue, trying to provide as much value as possible to consumers in the right occasions and the right moments with the right brands. And then continue to go very aggressively at productivity, you know, not only – I mean, we've been on product. Productivity for multiyear, and we mentioned automation, digitalization, standardization of the company network, rationalization that you've seen in some of the beverage business with some asset divesting.

But we're even accelerating that even with more structural productivity and making sure that, you know, all the money that is not linked to growth disappears from the company, all the duplications. You know, I referred earlier in the call to overheads, to corporate and allocated. Things that don't make sense, make sure that we, with a sense of urgency, we pivot those resources towards growth and making sure that we're affordable, that we capture the opportunities for net revenue management and growth in the business.

Thank you.

You're welcome. Look, the piece that I would assume is commodities are ramping up, right? And we'll see some of that in Q4 as the hedges roll off. Our hedging program, again, is 6 to 12 months. We'll give you a more complete view on how that all comes together in February, but as a general trend, commodities continue to ramp up.

Thank you for the conversation today, and thank you for the investment in PEPSICO and the confidence you give us by investing in our company. Thank you, and see you all around.