PepsiCo topped analyst expectations in its Q2 2022 earnings report today, as 5.2% quarterly net revenue growth ($20.23 billion) moved the company to raise its full year organic revenue outlook two points to 10%.
Earnings per share in Q2 were $1.03 with a -39% change and foreign exchange impact of -2%. Foreign exchange impact on net revenue was -3%. Organic revenue growth was up 13% in Q2 with core EPS of $1.86, up 10%.
The results roundly surpassed last week’s analyst predictions; Credit Suisse projected just 7% organic revenue growth for the quarter and an EPS of $1.72, and suggested the company would be hesitant to raise its outlook again due to the volatile marketplace.
Broken down by division, PepsiCo Beverages North America reported Q2 organic revenue growth of 9% while volume fell 1%. Frito-Lay North America organic revenue was up 14% and volume down 2% and Quaker Foods North America organic revenue grew 18% with volume up 2%. Internationally, organic revenue in Latin America increased 22%; Europe grew 9%; Africa, Middle East and South Asia was up 10%; and Asia Pacific, Australia and New Zealand and China Region was up 13%.
“We are pleased with our results for the second quarter as our business momentum continued despite ongoing macroeconomic and geopolitical volatility and higher levels of inflation across our markets,” said chairman and CEO Ramon Laguarta in a statement. “Our results are indicative of our highly dedicated employees, the strength and resilience of our categories, agile supply chain and go-to-market systems and strong marketplace execution.”
Although high gasoline prices have put strain on consumer wallets, Laguarta said that the convenience and gas channel has been “pretty stable” with high-single digit growth as double-digit price increases across the portfolio have offset volume declines. Snacks, he noted, performed slightly better than beverages, but added “we don’t don’t see any meaningful consumer behavioral change as gas prices go up.”
PepsiCo vice chairman, executive VP and CFO Hugh Johnston noted that the company is prepared for inflation to continue to rise for the foreseeable future. Uncertainty around the global market, including the ongoing invasion of Ukraine, has also led PepsiCo to further protect itself from instability.
“The first thing that we’re thinking about these days is just the level of volatility in the world and we do what we can to insulate ourselves against that volatility,” Johnston said. “We have zero-floating rate debt. So we’ve insulated ourselves against that. We forward buy on commodities. We insulate ourselves against that. We try to do as much as we can to create a predictable work environment so that we can manage our labor costs well.”
Commenting on the company’s step into the alcohol space via Hard MTN Dew, created via partnership with Boston Beer Company, Laguarta said “the product is turning very well” with high market share in the select states it is currently sold in. He added that the brand is now working on multiple new innovations set to launch in the near future.
As well, PepsiCo will continue to look at opportunities to launch additional alcohol brands, but Laguarta said the company will focus only on a small number of products and has no plans to become a beer distributor.
“From the distribution point of view, [it’s] the same, as I said, with energy – we want to leverage our assets for distribution,” he said. “We think in alcohol, we can bring new brands to the market. We don’t want to be distributing a lot of brands. That’s not our intention to have many, many brands and a very complex set of brands in our distribution. We’d rather focus on a few large consumer opportunities and put them through what is a very powerful DSD system.”
As for energy drinks, Laguarta said the “distribution part of the energy strategy is very marginal” and not a core pillar of PepsiCo’s approach to the category. Touching on Pepsi’s termination of its distribution pact with Bang last month, Laguarta said the “relationship didn’t start well from the beginning” and that “it was better to stop it because it has no long-term value for both of us.” Calling the financial implications of the split “minor,” he said Bang was never central to PepsiCo’s energy strategy.
However, PepsiCo remains open to future distribution deals within the energy category, suggesting complementary brands would be welcome.
“You need to have a good long-term partnership for the relationship to work,” he said. “That didn’t exist, so we’re turning the page.”
He said the company will “continue to lean into” its in-house energy brands – Rockstar, MTN Dew and Starbucks, with Rockstar serving as a leader via platform expansion and functional innovations. While Starbucks, through its Double Shot and Triple Shot SKUs, covers the coffee occasion – as well as its new energy line Baya – Laguarta said MTN Dew will be primarily built around “flavor-forward energy.” He also teased a potential crossover with the sports drink category, suggesting “big ideas” for how PepsiCo’s large brands could play in the space.
“We see sports and energy as a big space we can capture with some of our large brands in that space and innovation will be coming into the market soon,” he said. “You think about our strategy and we might evolve that strategy with new spaces and how our brands can go there, that’s our core of the strategy. Then leveraging our assets for distribution is marginal.”