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PepsiCo CFO on selling juice brands: ‘We're always optimizing our portfolio to get the best results’

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PepsiCo vice chairman and CFO Hugh Johnston joins Brian Sozzi and Myles Udland to discuss the company’s recent move to sell Tropicana and other juice brands to a private equity firm for $3.3 billion.

Video Transcript

- PepsiCo is shaking up its beverage portfolio. Company said today, it will sell Tropicana naked and other select juice brands to private equity firm PEI partners.

The transaction will net PepsiCo pre-tax cash proceeds of about $3.3 billion. It will also retain a 39% stake in the new joint venture. Joining us now for more is PepsiCo Vise Chairman and CFO Hugh Johnston. What are you doing here? It's not earnings.

HUGH JOHNSTON: Brian and Miles, how are you?

- We're hanging tough. Good to see you again here. So take us through this. Why do you decide to make this transaction?

HUGH JOHNSTON: Sure. You know, as Pep's, we're pretty focused on capital allocation and ensuring that, that we're always optimizing our portfolio to get the best results. And as we went through an exercise on that over-- over the past 18 months or so, we came to the conclusion that given our orientation towards higher growth and improving our margins, Tropicana was probably less of a fit with the portfolio than it was before.

So we made a decision that it probably made sense to move Tropicana elsewhere. At the same time, we thought there was some untapped potential in the business. And PEI as a private equity firm has got a great history of extracting value out of good assets like-- like they did with nestle with their fornari transaction and you'll play.

So we put together a deal where we're going to participate in the upside going forward. But at the same time, we're going to focus the capital, as well as our-- our efforts against the categories that are higher growing. Oftentimes, that's going to be things like healthier snacks, or zero calorie beverages, or of course, our great SodaStream business.

- Does this transaction help lift the profit margins in your North America beverage business? Does it take it to double digits now?

HUGH JOHNSTON: It'll take it up. It doesn't quite get it to double digits. But it clearly is moving in the right direction. And in that regard, now that said, for the first half of this year, beverage margins have been in double digits anyway.

So we're feeling good about the progress on that. Our goal is obviously to get somewhere up around the mid teens over the course of the next couple of years. And we've got a significant plan in place that Kurt Warner who runs the business and myself. And obviously, our CEO are highly focused on executing against.

- Now, who you guys talked in the most recent quarter as you have for some time about that $1 billion in savings through 2026 plan. And I'm curious, how we're supposed to think about this in the context of that initiative, or is this maybe something different with respect to, you know, reshaping the portfolio?

HUGH JOHNSTON: Sure. No, those are completely separate. The billion is-- is the business that PepsiCo will be running going forward. So that-- that number absolutely still remains the same.

This is really just a portfolio optimization decision that we think makes sense. Because if you look at what we've done recently in terms of M&A type activity, it's mostly geared toward higher margin, higher growth businesses. Rockstar obviously is a higher margin business.

The SodaStream deal was higher margin and higher growth. Pioneer is a great long term growth place. So we've been steering the portfolio in that direction.

That said, with the proceeds of this transaction, we expect to use these proceeds to strengthen the balance sheet and to organically invest back in the business.

- Hugh, when you say strengthen the balance sheet, is this-- are you looking at a special dividend, or raising your stock buyback plan, or this is almost all going to flow through to the bottom line?

HUGH JOHNSTON: No. It's really going to be geared. The portion that strengthen the balance sheet is about debt reduction. Because obviously, when-- when you're losing a bit, you're going to take debt down as well in parallel with that. So that-- that was with that reference was about.

- Hugh, for as long as I've covered PepsiCo, I've only known the company to be an acquirer. Do you have other brands that you're looking at within the portfolio that may not fit any longer?

HUGH JOHNSTON: No, nothing to share today. What I would tell you, though, is we're always looking to optimize the portfolio. And you're right, Brian. Generally speaking, we have been an acquirer.

But we've also franchised bottling businesses over time and in international as well. So we're constantly looking at how do we make this portfolio even better and even stronger, so that we can grow it faster.

- Lastly, real quick, Hugh, does PepsiCo deserve a higher multiple on its business today as compared to yesterday after this deal?

HUGH JOHNSTON: Well, I think the market will decide that for us. But you know what? My point of view is the multiple should always be higher.

- Fair enough. Well, we'll be asking about that multiple come earnings season, which is probably in a couple of weeks. PepsiCo CFO and Vise Chairman, Hugh Johnston, always good to see you.

HUGH JOHNSTON: Thanks. Great to be with you guys.

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