Q2 2024 Earnings Summary
- Confidence in accelerating organic sales growth in the second half, driven by the recovery of Quaker supply, favorable laps, and targeted investments in North America. Management expects mid-single-digit growth in H2.
- International business is a major growth driver, with revenues approaching $40 billion, higher margins than the company average, and strong performance in regions like Europe and India. Management sees International as the largest growth opportunity over the next decade.
- Positive momentum in PepsiCo Beverages North America (PBNA), with Gatorade gaining share and accelerating growth, Mountain Dew returning to growth, and zero sugar products experiencing strong demand. Improved execution in foodservice channels is also contributing to growth.
- PepsiCo has adjusted its full-year organic revenue growth expectations from around 5% to around 4%, citing a more challenged U.S. consumer and potential softness in domestic demand.
- There is a demand weakness in snacks, particularly in the salty snacks category, affecting both PepsiCo and the category as a whole. Consumers across income levels are becoming more price conscious and seeking more value, which could potentially impact margins.
- Multiple years of inflation have led consumers to perceive that food is expensive, causing them to make cautious spending choices. This shift in consumer behavior may negatively affect PepsiCo's food volumes and growth prospects.
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Guidance Confidence and Frito-Lay North America
Q: What gives you confidence in hitting H2 sales targets amid Frito-Lay softness?
A: We've adjusted our guidance from around 5% to around 4%, reflecting the challenged U.S. consumer environment. Confidence stems from several factors: First, our Quaker business is recovering supply chain issues and will be at nearly 100% supply by Q4, leading to material growth. Second, favorable lapping in H2 will aid in achieving mid-single-digit growth. Third, our International business grew 7% in H1 and is expected to maintain that level. Additionally, we're addressing U.S. consumer demand for value in certain areas, with tactics already showing results. We're investing in marketing and see strong momentum heading into 2025. -
Reinvigorating PBNA
Q: How are you progressing in reinvigorating PBNA, and what drives growth?
A: We're seeing positive momentum in PBNA. Gatorade is gaining share meaningfully year-to-date and accelerating, driven by innovation, execution, and branding rather than promotions. Propel is also performing well in functional hydration. Mountain Dew is back to growth after making multiple flavors a structural part of the portfolio, attracting incremental consumers. Our Zero portfolio across colas, soft drinks, Gatorade, teas, and coffees is booming as consumer trends shift. Additionally, our foodservice business is stronger with better execution and expanded distribution in local restaurants, enhancing profitability. -
Salty Snacks Category Pressure
Q: Salty snacks seem pressured and unresponsive to promotions; is the category more discretionary?
A: We believe the issue is value, not demand. Addressing the value gap requires targeted promotions rather than blanket approaches. For example, unsalted potato and tortilla chips need a value reset for some consumers, while flavored chips see consistent purchases. Our "Positive Choices" portfolio, including SunChips, PopCorners, Smartfood, and others, is growing rapidly, driven by marketing and execution rather than value adjustments. We're confident in driving category growth in the short term, and our guidance reflects expected improvements in Q3 and Q4. -
Frito-Lay Margins and Productivity
Q: Will tapping into productivity this year impact future gains? Is the H2 margin step-back the new base?
A: We're managing total PepsiCo operating margin, which improved by almost 100 basis points this quarter and has been consistently improving. Our productivity pipeline is strategic and multiyear, focusing on automation, digitalization, simplification, and standardization. We don't expect to slow down productivity gains in coming years. For Frito-Lay, the key is ensuring it grows at 4% to 5%, keeping the category healthy. We'll continue investing to achieve this growth and manage profitability across Frito-Lay, PBNA, and International with different strategies. -
International Regional Performance
Q: How are specific international regions performing, particularly Europe and Asia?
A: Europe has been very resilient, with strong topline growth, market share gains, and significant margin improvement. We're in a positive cycle there, expected to continue. In Asia, particularly India, we're seeing significant growth opportunities and are investing heavily for the long term. In China, despite a cautious consumer saving more than spending, our low-ticket categories perform well. We're gaining share, especially in food, through increased penetration, distribution, and localized products from our strong R&D center. Our International business has grown to almost $40 billion, is accretive with higher margins, and represents our largest growth opportunity in the next decade. -
Latin America Performance
Q: Latin America's organic revenue was weak; what drove this, and will it improve?
A: We view Latin America's performance over six months rather than quarterly due to moving parts. The weakness was mainly due to Mexico, where election-related changes in government distributions affected disposable income, temporarily impacting demand. As funds resumed to consumers, demand rebounded. We don't foresee issues in LatAm and expect it to remain high-performing, expanding margins and building scale across markets. -
Food Volume Pressure
Q: Food volumes are under pressure; where is the volume going, and is GLP-1 affecting demand?
A: Multiple years of inflation led consumers to perceive food as expensive. They're making choices like cooking at home versus buying finished products to manage budgets. With input costs normalizing and focus on productivity, we're deploying resources to reignite growth through a rational, data-based, segmented approach to create value without destroying it. We don't believe GLP-1 drugs are impacting our category; it's about the economic value relationship. -
Energy Drinks Slowdown
Q: U.S. energy drink growth has slowed; are consumers trading down or making value decisions?
A: The energy category offers strong long-term prospects. Short-term fluctuations may be due to factors like hot weather shifting demand to hydration products—we've seen massive hydration growth over six weeks. There may be some cannibalization, but we shouldn't overinterpret short-term trends. By providing energy products that are price-friendly, functional, and have clean labels, the category should continue to grow and create value. -
Broad Consumer Value Focus and Frito Outlook
Q: Is demand weakness affecting all income levels? Any concerns about Frito's long-term outlook?
A: The need for value impacts consumers across all income levels. Everyone is more price conscious and seeking value, with higher-income consumers adjusting habits like choosing affordable restaurants or entertaining at home. While consumers are cautious, they're willing to spend where they see value. We're confident that by addressing this value-consciousness, we'll return to growth. We feel good about our tools, resources, and recent performance, with no concerns about Frito's long-term outlook. -
Carlsberg-Britvic Transaction
Q: Thoughts on the Carlsberg-Britvic deal; why didn't PepsiCo buy Britvic, and implications for U.S. bottlers?
A: This was Carlsberg's decision to invest in the U.K. business, which makes sense for them. We partner with Carlsberg in other geographies and have a strong, trusted relationship. We supported the transaction but wouldn't extrapolate broader implications from it. It's a specific U.K. decision by Carlsberg.