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Supply chains drove ‘consumers to the big brands,’ PepsiCo CFO says

Hugh Johnston, PepsiCo CFO & Vice Chairman, joins Yahoo Finance Live to discuss Pepsi earnings, raising prices due to inflation, supply chain shortages, and Mountain Dew releasing a new alcoholic beverage line.

Video Transcript

BRIAN SOZZI: It's almost time for the Pepsi Super Bowl Halftime Show with artists from my generation, such as Dr. Dre, Snoop Dogg and Eminem and Mary J. Blige taking center stage. But first there are earnings from the company paying for these sizzling big game show. PepsiCo is out with better than expected sales and profits for the fourth quarter, despite being hit by inflation.

The company sees organic sales rising 6% this year with core earnings up 8%. Joining us now is PepsiCo Vice Chairman and CFO Hugh Johnston. Hugh, always good to see you.

Look, I was just on the call briefly, the earnings call just wrapped, and you talked about want to protect profit margins this year in this high inflationary environment. What does that mean? Does that mean you're going to have to take more price increases?

HUGH JOHNSTON: Yeah, good morning. Great to be with you all as well. Yeah, obviously. Look, the whole world is quite inflationary right now. I mean, everyone's talking about it in the media and obviously, consumers are talking about it as well.

When we deal with inflation, the first thing we actually look at is, how can we drive productivity? How can we make our company more efficient? And as a result of doing some of those moves, we don't have to take as much pricing as we otherwise would. But with levels of inflation and commodities as high as they are right now, we clearly are going to have to take some pricing.

Now, we've been investing heavily in our brands. We've been investing heavily in product innovation. And because the world is a bit of a stressful place, the simple pleasures that our products give people, I think they're generally finding they're worth paying a few pennies more for.

So yeah, you'll see pricing up a bit. We right now we're in a place where we should be able to keep our margins pretty well intact for the year. And as we get to the fourth quarter, we'll see if we have to take a little bit more pricing or not. We'll react to the facts in terms of what the prices of commodities are at that time.

BRIAN SOZZI: Is this the type of inflationary environment, Hugh, where you have to break that glass and try to push through 10% price increases this year, overall for the year?

HUGH JOHNSTON: Yeah, it'll likely be high single digits. And it remains to be seen. Based on the inflation that we know of right now, and as you know, we tend to buy commodities out about nine months. We've got our pricing in place for that. For the fourth quarter, we don't buy out to the fourth quarter until a bit later in the year.

Once we have some visibility into that, we'll decide what the next round of pricing looks like, if any. But based on what we see right now, yes, it's going to be high single digits to 10%. And that is very much a function of the input cost going up as much as they are.

- Hugh, I know you saw the overall CPI number that we just talked about for January, rising 7.5%. I also mentioned that most economists think we are at least going to see a deceleration from here, hopefully. That, that rate of increase will start to go down. Is that your view as well? That even though some level of increase is going to be sustained, it'll hopefully be a little smaller as the year goes on?

HUGH JOHNSTON: It's a great question and it's one that's always hard to estimate. Obviously, there's economists out there with a wide variety of forecasts. What we do is we build scenario plans around various levels of inflation and then say, OK, if this were to happen, what would we do?

The fact is, it is so hard to predict, and that's exactly why we buy commodities ahead by about nine months, because at least it gives us certainty in terms of the input cost that we have. And to the degree that we have to take more pricing, we can do it in a thoughtful way. We don't have to react sort of in the moment. So candidly, hard to guess whether inflation will come down in the second quarter, third quarter, fourth quarter. Candidly, supply chains are tight right now, so it remains to be seen.

BRIAN SOZZI: Amidst this backdrop of inflation, Hugh, lost in the sauces, your sales are still growing. Now in the beverage business, quarter over quarter, your sales actually accelerated. What is going on with consumers? How are you seeing them spend differently now compared to a couple of months ago?

HUGH JOHNSTON: Well, the good news in the beverage business is two things. Number one, we're ubiquitous. We basically exist everywhere. If you're in home, we obviously have products in the large format stores that people tend to take home.

If you're out of the home, we are all over the convenience stores and vending channels and the like. If you're going to a restaurant, we've got a pretty good market share in restaurants. So what we see as much as anything is, and this sort of occurred at the earlier part of the pandemic, there was really a return of consumers to the big brands. And I think part of that was driven by supply chain.

We were available more than perhaps a lot of the smaller ones were. But as those consumers came back, I think they discovered that they liked the variety that we provide, they like our ingredients list, they like the product innovation that we've done. And as a result, they've come back and they've stayed. So we're seeing sort of continued demand increases from consumers across all channels because of the fact that they really appreciate that the strong brands and they appreciate the product innovation that we've been able to create for them.

- Hugh, ahead of the Super Bowl, it reminds me to ask what the mix looks like in terms of at home consumption versus out in the world consumption and what trends you guys are seeing right now?

HUGH JOHNSTON: Yeah. Both are actually continuing to grow pretty strongly. This notion of the home is the hub, where it's both a place to live and to some degree, for many people, a place to work, is a notion that I think is continuing and it's likely to continue. I think that, that's permanent change that we've seen.

The restaurant business, and what we call food service business, is growing about 30%. So that piece has come back quite strongly. And then even the convenience store businesses, which sort of gets a different angle on away from home, growing close to double digits.

So we see really across the board behavior toward more consumption of our products. The mix is going to change a little bit based on, obviously, how much people are out versus being in their homes. But I think what we're likely to see is good growth regardless of where consumers go.

- Hugh, Brian Sozzi is very excited about some kind of Mountain Dew alcohol hybrid. How big is the opportunity for you guys in alcoholic drinks and what can consumers expect?

HUGH JOHNSTON: It's a great question. And we have a terrific collaboration with the Boston Beer Company to leverage our brand, the Mountain Dew brand, and their expertise in producing low alcohol products. And frankly, I'm excited about it, I'm optimistic about it. This is our first Foray into this area, so I think we're going to learn as we go. I don't really know how big it can be yet.

The second piece of it for us is we are building a distribution capability so that we can actually bring these products to market. So we basically get the product from the Boston Beer Company, they produce the product, and then we put it on our trucks and we bring it out to the marketplace. That's a separate, but perhaps interesting, growth opportunity that we're going to learn about over time. The market is obviously quite huge. How successful we're going to be in it remains to be seen.

- OK, lastly Hugh, really quickly, Super Bowl pick and who are you most excited about in that halftime show?

HUGH JOHNSTON: I'm excited about all the performers. So I couldn't be happier about the halftime show. More than anything, I'm rooting for a good game. So we have a lot of Rams fans and we have a lot of Bengals fans who like our products and we love them all. So I'm not going to make a prediction on the game, I'm just rooting for a great game.

- That is a very diplomatic answer. I like it. Hugh Johnston, good to catch up with you.

PepsiCo CFO and Vice Chairman. Thank you. Appreciate it.