PepsiCo CFO on inflation: ‘We have no intention of cutting prices’

PepsiCo CFO Hugh Johnston joins Yahoo Finance Live to discuss company earnings, cutting prices, recessionary pressures, profit growth, beverage stocks, and the outlook for PepsiCo.

Video transcript

[AUDIO LOGO]

BRIAN SOZZI: PepsiCo posted a beat on the top and bottom lines in its latest quarter and reported a nearly 11% rise in sales, as higher snack and drink prices offset rising costs. Joining us now is PepsiCo vice chairman and CFO Hugh Johnson. Hugh, always great to get some time here.

So I'm listening to your earnings call moments ago. And I'm like, wow, PepsiCo really crushed again. Good soda sales, new push into Zero Sugar, lots of new innovation in Frito-Lay. And then towards the end of the call, Hugh, you mentioned you may see a recession later this year. I mean, how severe do you see this getting? Do you have to cut prices? Just walk us through some of that thinking.

HUGH JOHNSTON: Yeah, let me try to characterize that. Good to be with you guys again, as always. What I was really laying out is we put together a set of planning assumptions around that because we always try to plan multiple scenarios. We pick one and then we say, OK, look, if it does better than what we plan, great. We know how to handle that. It's always harder to catch up if you plan a better case scenario and then you're dealt with something worse than that.

So no, we have no intention of cutting prices. That's certainly not part of the year. Frankly, we're coming out of 2022, which was just an outstanding year. I mean, 14% revenue growth, strong EPS. Obviously, the company is just firing on all cylinders, competing very effectively.

We've got good momentum coming into the year. But we're also well aware of the fact that, you know, in a high-interest rate environment, it could start to drag on consumer spending at some point. If it does, we've planned a lot of productivity in the year so that we can manage that and still deliver the numbers and deliver a good return to shareholders. And if it turns out to be better than that, well, that's terrific. Then, you know, we'll be able to both invest back in the business and deliver even more to shareholders. So everyone will win in that scenario.

BRIAN SOZZI: Solid guidance, Hugh. 6% organic revenue growth expectations for this year, 8% core EPS growth expectations. Within that, is a mild recession your base case?

HUGH JOHNSTON: Correct.

BRIAN SOZZI: And how sustainable-- you know, given that guidance, how sustainable are the margins in the Frito-Lay business? I think you got some commentary on that in the call.

HUGH JOHNSTON: Well, I think they're incredibly sustainable. I mean, what you see happening in Frito-Lay right now is we're investing to drive accelerated growth. So, look, Frito-Lay for the year grew revenue, 17%. I mean, this is a gigantic consumer products business growing revenue 17%. And it grew operating profit 11%. So I'd much rather be in that scenario than lower-- much lower growth and margin accretion.

That said, I think Frito-Lay with 27 margins will be in and around that space, I think, for a long, long time. We don't give the division specific guidance. But I think Frito's margins in the high 20s is a reasonable place for us to be. But in a business with 27 margins, you always want to grow it as fast as you can because you're making so much money on every sales dollar.

JULIE HYMAN: Hugh, it's Julie here. I want to know a little bit more about pricing and about your thoughts on the Fed word of the day, "disinflation," right? The price increases that you guys have been seeing over the past couple of years, are they starting to slow at all, your input costs that is? And can you give me a little bit of color on the different areas and what you're seeing.

HUGH JOHNSTON: Yeah, input costs will still be up for us during the course of the year, more in the first half and less in the second half.

JULIE HYMAN: But at the same rate as they have been?

HUGH JOHNSTON: In the first half, it'll be similar. In the second half, it'll be lower. So as a reminder on that, Julie, we forward buy about nine months on most of our commodities. So the commodities that we're selling right now, we locked the price in on that some time last June. That's very similar to most of the players in the consumer product space.

So as prices started to-- or as inflation started to diminish, still positive inflation but diminished, over the course of the last months, you'll see that start to play in our financials particularly over the latter half of the year. Less so in the former half of the year.

And frankly, our pricing will be roughly in line with what our inflation numbers are. For the year, we had gross margins basically level. I'd expect our gross margins this year, which is, obviously, it's pricing less commodity inflation, they'll probably be pretty level to maybe slightly up versus 2022.

BRAD SMITH: Hey, Hugh, you were projecting that the North American divisions would stay resilient and the international markets perform well in 2023. Just wondering if you can kind of quantitate-- kind of give us that on a quantitative basis.

HUGH JOHNSTON: Well, we don't get into division specific guidance because, A, it's too volatile anyway. And B, candidly, we wind up getting into a level of granularity that would rather not talk about.

Here's what I would say is, we think the categories that we operate in will continue to do well. Our plan is to gain share in those categories. So whatever the categories do, we expect to do a little bit better than that. And I think that generally means good strong growth, not just for North America but for international as well.

BRIAN SOZZI: And, Hugh, it sounded like a new push in the Zero Sugar soda game. Now, you reformulated the Pepsi Zero Sugar. What changes in the formula? And how big is that overall portfolio now?

HUGH JOHNSTON: Yeah, so our Pepsi Zero Sugar formula has been around for a while in the US. And it's a bit of a different formula than the international one. It had a bit more caffeine in it and some other ingredients. We've decided to harmonize more on the one that we've used internationally.

As Ramon noted on the call, it's a softer taste. I find it to be a more refreshing and delicious product. So I think by virtue of bringing that in, we'll actually get the-- gain access to more consumers. You'll see it prominently featured in the Super Bowl. We'll have Ben Stiller, as well as Steve Martin created some terrific Super Bowl commercials for us. And we're excited about it. I think you're gonna get a lot of trial on that product. And once people try it, they tend to stick with it because we think it's the best-tasting product out there.

BRIAN SOZZI: Noted, as I go to-- as I get ready to shop at Target or Walmart this weekend. And then, you know, on the topic of Super Bowl, Hugh, how much will you spend this year versus last year? Just curious on what your investments look like in the big game this year?

HUGH JOHNSTON: Yeah, it won't be dramatically different. Obviously, we don't have the halftime show. We had it for 10 years. We felt it was time to move on. But you'll see four big commercials on four big brands featuring some huge celebrities.

We've got Elton John. We've got Missy Elliott. As I mentioned, Steve Martin, Ben Stiller, Jack Harlow, and in addition to that, we've got the guys from "Breaking Bad" in what I think is going to be an outstanding Poppables ad.

JULIE HYMAN: Well, I hope that you got to at least be on the sidelines while those were being shot, Hugh, because that sounds like a lot of fun, those various ads. Great to catch up with you. I hope you enjoy the game and snack on some Doritos while you're watching it this weekend. PepsiCo Vice Chairman and CFO Hugh Johnston, great to catch up with you.

HUGH JOHNSTON: Thanks, it's great to be with you guys.