PepsiCo's Q3 2025 Earnings Call: Contradictions Emerge in Volume Growth, Profitability, and International Strategy

The above is the analysis of the conflicting points in this earnings call

Guidance:

• Expect to return to long-term net revenue algorithm during 2026, likely in 2H.
• PBNA: continued net revenue acceleration; Q4 margin expansion; full-year margin up despite Q3 tariffs.
• PFNA: near-flat organic sales in Q4; margin improvement in 2026 as fixed costs are resized.
• International: after weather headwinds, growth back to mid–high mid-single digits for the balance of 2025.
• Companywide margin expansion expected in 2026; sizable 1H26 carryover from 2025 productivity actions.
• Growth to balance volume and price; service levels at 97–98% support faster growth.
• Major relaunches (Lay’s, Tostitos now; Gatorade in Q1–Q2’26) plus protein/zero-sugar platforms to drive volume.
• One North America distribution model piloted in Texas; broader rollout to be market-specific.
• Acquired brands (Siete, poppi, Alani Nu) will benefit organic comps as they anniversary.

Business Commentary:

* Volume and Revenue Challenges in Food and Beverages: - PepsiCo's volume declined in both food and beverage businesses, with deferred volume recovery expected. - The decline was largely due to changes in promotional strategies, impacting volumes, and service level issues earlier in the year. - The company aims to improve volume growth through innovation, service level improvements, and price realization strategies.

• Accelerated Top-Line Growth and Innovation Focus:
• PepsiCo anticipates a return to long-term top-line growth by the end of 2026, driven by strategic initiatives.
• This is driven by innovations in permissible snacks, functional hydration, and protein products, along with portfolio reshaping and pricing strategies.

• The company is focusing on expanding platforms like botanic beverages and functional hydration to capture growing market segments.

• Cost Management and Margin Improvement:

• PepsiCo is focusing on cost structure improvement, especially in North America, to enhance margins.
• This includes rightsizing manufacturing and warehouse infrastructure, rationalizing fixed costs, and leveraging technology to enhance efficiency.

• The company plans to use cost synergies to support future growth, with expectations for margin improvement in 2026.

• International Business Performance:

• The international business experienced a weaker summer but showed recovery in September, driven by improved weather conditions.
• PepsiCo's international performance is expected to revert to high mid-single-digit growth, despite macroeconomic pressures in certain regions like Latin America and Asia.
• The company is focusing on digitalization and consumer engagement to drive growth in international markets.

Sentiment Analysis:

• Management sees “clear line of sight to going back to algorithm throughout ’26.” Beverages “grew volume” excluding case-pack water changes. PFNA “very close to flat” with growth in the last 4 weeks. International: “September was strong,” returning to mid–high mid-single digits. Company expects “margin improvement next year,” with PBNA “expansion of the margin again in Q4… positive margin expansion for the full year.”

Q&A:

• Question from Bonnie Herzog (Goldman Sachs): How much of ongoing volume pressure is due to smaller pack pivot vs. softer categories/share, and when could volumes inflect given the innovation pipeline?
  Response: Volumes should improve as execution normalizes; beverages already grew ex-case-pack water, and the outlook is for balanced volume/price growth with PBNA acceleration.

• Question from Dara Mohsenian (Morgan Stanley): Which initiatives most drive a 2026 top-line acceleration, and is there line of sight to returning to the long-term algorithm in 2026?
  Response: Yes—returning to the algorithm in 2026 via basics execution and major brand relaunches plus growth platforms (away-from-home, zero sugar, protein) and recent portfolio moves.

• Question from Lauren Lieberman (Barclays): How will higher COGS from cleaner-label, protein-rich innovation impact margins and A&M support into 2026?
  Response: Margins are set to expand, funded by structural cost reductions and pricing; innovation is margin accretive and A&M will be supported via reallocations and savings.

• Question from Stephen Robert Powers (Deutsche Bank): Details on PFNA fixed-cost rightsizing and One North America progress?
  Response: PFNA is removing inefficient plants, rationalizing warehouses (some shared with beverages), and trimming go-to-market; benefits carry into 2026; One North America is being piloted in Texas.

• Question from Filippo Falorni (Citi): Health of international consumer and confidence in acceleration given macro pressures?
  Response: Q3 softness was largely weather-driven; September rebounded and management expects mid–high mid-single-digit growth, with consumer dynamics varying by market.

• Question from Michael Lavery (Piper Sandler): What’s driving Pepsi brand momentum and is marketing being reduced or made more efficient?
  Response: Growth is led by Zero Sugar and flavors, with greater away-from-home focus; marketing is being optimized for ROI, not cut.

• Question from Peter Grom (UBS): PFNA improvement in the last month—lapping or execution/innovation?
  Response: Improvement stems from better basics (service, pricing, execution), not easy laps; trajectory appears sustainable.

• Question from Andrea Teixeira (JPMorgan): How does SKU rationalization affect organic growth, and how are entry-level price investments performing in PFNA?
  Response: Cutting tail SKUs boosts efficiency with minimal sales loss; PFNA is sharpening mainstream take-home pricing to drive demand.

• Question from Peter Galbo (BofA Securities): Why push protein via in-house brands (Muscle Milk, Propel) vs. acquisitions?
  Response: Leveraging Muscle Milk and Propel offers better ROI and credibility; still open to tuck-in M&A where platforms are lacking.

• Question from Robert Ottenstein (Evercore ISI): Is the issue costs vs. top line, and thoughts on hiring an external CFO?
  Response: Pursuing both portfolio and cost transformation, using technology/AI for agility; an external CFO is joining to help execute Strategy 2030.

• Question from Kaumil Gajrawala (Jefferies): Openness to refranchising beverage operations regionally?
  Response: Open to all value-creating options; solutions will be market-specific and optimized for future demand and technology while maximizing PepsiCo’s total P&L.

• Question from Christopher Carey (Wells Fargo Securities): Cyclical vs. structural trends by geography?
  Response: Structural global shifts—digital purchasing, cleaner labels, and affordability—are shaping strategy on portfolio and cost structure.

• Question from Robert Moskow (TD Cowen): Engagement with the activist and views on setting a Frito-Lay margin target?
  Response: Constructive engagement with Elliott; broad alignment on accelerating Strategy 2030 to unlock value; focus is on urgent execution.