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PepsiCo CFO on price hikes: ‘Consumers are staying with us’

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Hugh Johnston, PepsiCo Vice Chairman & CFO, joins Yahoo Finance Live to discuss earnings, inflation, and the company's pricing power.

Video Transcript

BRIAN SOZZI: PepsiCo has upped its full year revenue forecasts, as sales of consumer favorites like Cheetos and Doritos stand firm in the face of inflation. Joining us now is PepsiCo vice chairman and CFO, Hugh Johnston. Hugh, always great to see you. Every retail executive I've talked to in the past few weeks, they're noting that consumers are consolidating their trips. What has that meant for your business?

HUGH JOHNSTON: Yeah, good morning, Brian. Actually, it has meant generally good things for us. In a world where consumers are feeling somewhat economically stressed, we still represent that affordable treat that they can indulge in and enjoy, whether it's one of our great beverage products or convenient food products. So, obviously, overall, our growth is quite good and broad-based. Our portfolio has really been strong and resilient through all of these challenges. And we feel like consumers are still staying very much connected with us.

BRAD SMITH: Net revenue growth, 5.2% in the most recent quarter, while prices were up 12%. So what is the real impact in terms of what costs you're needing to pass on to consumers right now?

HUGH JOHNSTON: Yeah, so that the 5.2% that you mentioned is also reflective of a divestiture of our Tropicana business, which was, obviously, pretty substantial. Our organic revenue growth was 13%. We passed along about 12 points of pricing in aggregate. Volumes were up in the low to mid-single digits. So we obviously feel like the pricing, while certainly something that we never like to do at these levels, consumers are staying with us.

Now the reason for that, I think, more than anything, is, whenever we're facing inflation, the first thing we do is look at our own internal costs and say, let's make sure that we're tightening our belts as much as we can internally, whether it's spending in our offices or in our plants or in our distribution system. That leaves us with a balance, and that balance of inflation we tend to price through. But our pricing is actually less than the inflationary cost that we're facing in commodities and in other areas of our expenses.

JULIE HYMAN: Hey, Hugh, it's Julie here. And so, what do you expect to continue to do on the pricing front? And the sort of equation that you're describing, what effect is that going to have on margins?

HUGH JOHNSTON: Yeah, so, so far this year, margins are up slightly. And that's kind of what we're generally trying to do, is, we're basically trying to maintain our margins about level with where they were in the previous year. And thus far, we've been successful. As we look at the balance of the year, we do face a bit more inflation. We have more productivity activities in place for the balance of year. In fact, our productivity is about as strong as it's ever been.

And in terms of the other net revenue management activities we'll have to undertake, we're going to see how the year plays out. We're constantly looking at the consumer and their reactions to pricing and adjusting and evolving. We're trying to do as much as we can with product mix, rather than increasing the price on the bottle or on the bag. We'll see how it plays out over the course of the balance of the year. But we obviously feel confident in the equation we have, given that we raised revenue guidance to 10% for the year.

JULIE HYMAN: So, just to be clear here, continue to raise prices, or it sounds like you're not quite sure what's happening on that front?

HUGH JOHNSTON: Yeah, we haven't made that decision in the balance of the year yet. We'll make that decision as we see how costs evolve and what the consumer reaction is to the pricing that they have. Again, I think it's less about the pricing that we're taking, and more about the economic stresses that consumers are feeling elsewhere in their household budgets. Thus far, we remain very much a category that, in a world where they're perhaps dialing back on other expenses in the household, they're continuing to buy our products. So we'll continue to read those reactions and make a decision then.

BRIAN SOZZI: Hugh, you mentioned on the earnings call this morning, you're still seeing-- I believe this is reiterated-- mid-teens inflation for the year. That's some high inflation. Is the reality that inflation is just not going to come down to maybe the latter part of next year?

HUGH JOHNSTON: It's a good question. We'll see how next year evolves. Certainly, in the early portion of the year, given that we forward buy on our commodities by about nine months, we know we're going to face some inflation in the first half of the year. The broader question around what's likely to happen with inflation and the economy, I think a lot of it is going to depend on what the Fed actions are and how the economy and how aggregate demand responds to that. Early days to assess that. It's clear that the Fed is committed to taking inflation out of the economy. Question really is going to be how long it's going to take. And that's a tough one to forecast at this point.

BRIAN SOZZI: All right, let me ask you this one, Hugh. Since we last spoke, fellow food player Kellogg announced that they are breaking up into various pieces. Now I know you're not gonna sit here and tell me you're even considering something like this. Let me ask you this way. Do you feel as though your beverage business and your snacks business are being properly valued by the market?

HUGH JOHNSTON: Well, I always think our valuation should be higher. If I didn't think that, I probably shouldn't be the CFO of the company. That said, our multiple is among the highest in the sector. So I do think investors have good appreciation for the resilience and strength of our company and our ability to power through recessionary environments. Again, it's going to come down to performance. And obviously, we're optimistic about our performance going forward. So I think the market will continue to value us at a high level.

BRAD SMITH: PepsiCo vice chairman and CFO, Hugh Johnston, thanks so much for joining us post-earnings this morning.

HUGH JOHNSTON: Thanks for having me.