PepsiCo CFO: we're about to be the beneficiary of our investments during COVID

Yahoo Finance’s Brian Sozzi and Myles Udland break down PepsiCo’s Q1 earnings report with Hugh Johnston, PepsiCo CFO.

Video Transcript


BRIAN SOZZI: PepsiCo clobbered Wall Street sales and profit estimates for the first quarter of this morning, and the company credited strength in variety packs and its Frito-Lay division and a tight control on costs for the better than expected results. PepsiCo Vice Chairman and CFO Hugh Johnston joins us now for more. Hugh, always good to speak with you here. I was on the conference call, the earnings call this morning, a lot of discussion about inflation. And you did have a what, a five point hit because of higher commodity costs in the quarter. Where are you seeing those increases? And what do you see for the balance of the year?

HUGH JOHNSTON: Yeah, good morning, Brian, great to be with you guys again. We clearly have some level of commodity inflation. It's in things like vegetable oil and resin, and on the transportation side as well. One of the advantages I think we have relative to most of our peers is, we do tend to forward by most of our commodities on average by about nine months.

It really does help us mitigate some of the sort of spikes that happen in the short term in commodities. By and large at this point, we're about 90% covered for the balance of the year. So while it's certainly a cost pressure for us, it's one that we've anticipated and managed well in terms of our guidance.

BRIAN SOZZI: And where have you had to take pricing actions?

HUGH JOHNSTON: Generally speaking, our pricing is much more oriented towards our brand proposition and in our innovation, rather than just sort of input costs. So we've seen some pricing across most of our markets, nothing extraordinary, a couple percent a year. That's something that PepsiCo has typically done. But again, it tends to be more reflective of the fact that we have products that consumers are willing to pay a little bit more for, and we obviously innovate against those products. And consumers appreciate the innovation and they find it differentiated, and therefore, it's worth paying for.

MYLES UDLAND: And Hugh, I want to ask a little bit about what's happening over in the Frito business, and certainly the benefit you guys have seen from stay at home trade. I mean, I know we talked about this last quarter, but you guys calling out Funyuns as a big gainer for you guys in the most recent period. How are you seeing these start to evolve, at least here in the US, as things are normalizing? And how are you thinking about that mix of at home versus out of home as we get into hopefully a more normal year?

HUGH JOHNSTON: It is likely to normalize as we sort of move on a little bit. Even in the latter portion of the first quarter, where we had been seeing away from home consumption, food service, we refer to it, running at about 25% down for a number of months. In the latter portion of the quarter, it was only down about 13%. So as people are starting to venture out a little bit more, that'll clearly benefit our convenience store business, and it'll clearly benefit our restaurant and away from home business.

Frankly, we're prepared for it from both a growth and a margin perspective. It's a tailwind for us. So we certainly feel good about how we've sort of kept leaning into innovation, kept leaning into investing in the business through the pandemic. And I think we're about to be the beneficiary of those investments that we've made during that time frame.

BRIAN SOZZI: But as we go back out and venture back out into the wild, what happens to the core snacking business? I know if I go back to the office, I may have one less bag of chips.

HUGH JOHNSTON: Well, I hope you're unusual, because I think for an awful lot of folks, they're likely to have one more bag rather than one less. Generally speaking, people don't consume dramatically different amounts, whether they're in home or away from home, is the reality. And in the Frito-Lay business, because our penetration is so high across all the channels, we are really somewhat channel agnostic as to where people sit.

Now you may not have that bag of chips while you're in the office, but if you go out for lunch or if you're driving to and from work and you stop and get gas, I bet there's a pretty good chance that you're going to pick up some type of a snack, and probably a beverage with it as well. So generally speaking, mobility's a tailwind for us, not a headwind.

MYLES UDLAND: Yeah, let's not Sozzi's clean living lifestyle speak for all of us, because I agree, Hugh, I'm still half chip over here. Looking at your results by geography, I know it's a smaller part of your business, but the growth that you saw in the Asia-Pacific region, Australia and New Zealand, really economies that are, I mean what? 95% open at this point? Revenue almost doubling over the same quarter last year.

Certainly revenue's not going to double in your developed markets, but is that kind of big acceleration as things normalize, are you thinking about that as a possibility? I know you had the guide that you gave formally, but are you thinking about these upside scenarios for growth as things normalize?

HUGH JOHNSTON: Yeah, we actually certainly are. Now there's a little bit of noise, as you noted in our Asia-Pacific numbers as well, with Chinese New Year and some of the shipment timing. That said, Asia-Pacific is performing really well. We're actually over the last couple of years, we've sort of shifted our strategy from being a more margins and returns-oriented company to a growth-oriented company, while still maintaining efficiency.

And part of that shift in strategy has been, we've added more capacity. We've intentionally lowered our capacity utilization. So to the degree that the demand is in excess of what we think it's going to be, we're actually going to have the opportunity to meet that demand in a way that we couldn't have in the past. So we hope we get that type of great growth, because we'll absolutely have product available for consumers.

BRIAN SOZZI: We haven't talked since you secured LeBron James to promote the new Mountain Dew Rise energy drink. That was in mid-March. How do you, how did you really, ultimately secure him from Coca-Cola? He worked with them for 18 years. And then, how will he be used in coming months?

HUGH JOHNSTON: Yeah, I mean, you're absolutely right. Mountain Dew Rise is a product we feel great about. In fact, I've got a can of it right here in front of me, and this is my second can of the day, so I'm excited about this one personally.

BRIAN SOZZI: Hey, it's earnings day, drink up, Hugh, earnings day.

HUGH JOHNSTON: Absolutely. So let's see, LeBron James is obviously an amazing basketball player, one of the best of all time. And in addition to that, a real icon in terms of social media and as a commentator on what's happening, particularly in the United States. We feel terrific that he was so excited about the proposition that we put in front of him and what we're trying to do with Rise, that he felt like it was something that he wanted to attach his name to as well.

So in terms of the specifics as to how we're going to leverage him, I'll let the marketing guys roll all of that out over the course of the coming months. But we're excited to have LeBron and have him on team Pepsi relative to where he was before.

BRIAN SOZZI: Go easy on those drinks, Hugh. They're what? About 180 milligrams of caffeine? Second one, that's, the day's still, it's still young.


HUGH JOHNSTON: I like to get my caffeine in before noon.

BRIAN SOZZI: Fair enough, me too. All right, we'll leave it there. PepsiCo Vice Chairman and CFO, Hugh Johnston, always good to see you. Stay safe.