PepsiCo Q2 Earnings Beat Expectations, Citing International Sales

PepsiCo ($PEP) rose 2.4% after beating Q2 earnings estimates and projecting strong guidance for the year.

While Wall Street anticipated $1.93 earnings per share, the beverage maker delivered $2.09, reporting $22.3bn in revenue, a 10.4% increase year-over-year. The company’s organic revenue, which strips out the impact of acquisition and divestitures, rose 13% in the quarter.

"Our strong performance and the progress we are making on our strategic priorities gives us confidence that investments we are making to become an even faster and stronger and even better organization by winning with Pepsico Plus are working," PepsiCo CEO Ramon Laguarta noted in a statement.

The best results came from abroad, with growth of 18.3% in Latin America and 13.4% in Europe.

After reviewing, management is now expecting fiscal year 2023 organic revenue growth of 10% (revised from 8%). They expect the core constant currency EPS to grow at 12% (previously 9%) and the core EPS at $7.47 vs. $7.27.

Yet, growth came with a higher cost of marketing and advertising.

“We’re investing in advertising and marketing, which was up 50 bps in the second quarter. You’re going to continue to see us invest in it. You’re going to continue to see us invest in capabilities. And our investment cycles tend to be more back half oriented than they are front half oriented when we have a sense as to how the year is going to turn out,” CFO Hugh Johnston clarified the updated guidance.

On the earnings call, Wells Fargo Analysts said the company added about a 2% cost increase on top of inflation. PepsiCo Executives disagreed, arguing that the 15% price increase for the quarter is essentially equal to commodity inflation.

Artificial Sweeteners

In a separate comment, Johnston rejected plans to change the product portfolio relative to aspartame.

This artificial sweetener, first discovered in 1965 by American chemist James Schlatter, is about 200 times sweeter than regular table sugar and, thus, a popular ingredient in zero-sugar beverages. On July 14, The World Health Organization (WHO) classified it as “possibly carcinogenic to humans.”

"The only thing to keep in mind is aspartame is one sweetener. There are lots of different sweeteners we use, and candidly it's relatively easy for us to shift sweeteners if it became something that was important to do," Johnston stated for Reuters.

PepsiCo and aspartame already have a complicated relationship. After removing it from its U.S. diet sodas in 2015, they re-introduced it a year later.

Aspartame is one of the cheapest artificial sweeteners, and phasing it out might put additional pricing pressures on end consumers, potentially hurting sales volumes that have declined across several business units.

Overall, volume dropped 3% for food divisions and 1% for beverages. Quaker Foods North America’s volume fell 5%, while the North American beverage unit shrank 4.5%. Still, Frito-Lay North America scored a 1% volume growth. The management praised the Doritos and Ruffles brands that achieved double-digit revenue growth, likely owing to the expansion of the product lineup and the introduction of new packaging sizing.

While Johnston expects the volumes to remain flat for the year, Laguarta acknowledged that lower-income shoppers are hunting for better deals; still, he kept the optimistic view.

“Moving forward, we will look to elevate our focus on productivity initiatives to further support investments in innovation, brand building, digitalization, and sustainability to win in the marketplace and fortify our businesses for the long term,” Laguarta concluded.