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Pepisco CFO on Q3 earnings beat, innovation, global recovery

Hugh Johnston, PepsiCo CFO, joins Yahoo Finance’s The First Trade with Alexis Christoforous and Brian Sozzi to discuss the company's third-quarter earnings report, innovation, impact of the coronavirus pandemic on emerging markets, and much more.

Video Transcript

ALEXIS CHRISTOFOROUS: PepsiCo did it again, beating Wall Street estimates on the top and bottom line. Its beverage business improved, but it was really the snacks business that was the standout. Joining us now is PepsiCo CFO Hugh Johnston.

Hugh, always good to see you. Good morning. I've got to tell you, PepsiCo is one of our top trending tickers right now on the Yahoo Finance website. I know that third quarter revenue grew 5.3%, organic revenue up 4.2%. Can you tell us which product lines got you there?

HUGH JOHNSTON: Yeah, the gains were remarkably strong [? in various. ?] Good morning to both of you as well. We really feel good about, as you mentioned, the snack food business. Globally, it was about 6%. And the North American beverage business, as well as the global beverage business, grew 3%.

If we dial into some of the specifics in the beverage business where I think there was a big surprise on the upside, Gatorade grew high single digits, primarily on the strength of Gatorade Zero, which continues to perform extremely well as a new product. Mountain Dew, a notable turnaround. We've been challenged a bit on Mountain Dew. Mountain Dew grew mid single digits for the quarter, again, primarily behind the new Mountain Dew Zero product, which we think is going to be a very big idea.

And even Pepsi is back to the growth. Pepsi was low single digits in North America. So overall, the beverage business did-- did quite strongly, and the snack food business continues to deliver the strength that we've had in recent quarters.

BRIAN SOZZI: You guys were peppered on the earnings call this morning with regards to COVID-19 costs, about $150 million impact this quarter and the fourth quarter. Some of these costs, do they start to unwind next year as we start to return back to work?

HUGH JOHNSTON: They will. As we start to see vaccines and we start to see the pandemic move away, whenever that happens, then I'd certainly expect those costs to fade away as well. Look, our first and foremost priority has to be protecting our people, giving them the type of protective equipment that they need, ensuring that we're doing the right level of sanitation, and we'll continue to do those things, obviously. But I do think over the course of next year, those-- those costs will probably fade away over time.

ALEXIS CHRISTOFOROUS: We know you're a global company. International business reporting organic sales growth of 4%. Did you see any pockets of weakness, though, when you look outside of North America? And is part of that tied to the virus and perhaps stricter lockdowns in different parts of the world?

HUGH JOHNSTON: Yeah, you're-- you're exactly right, Alexis. If you look at developing and emerging markets, they-- they grow only 2. Now historically, those markets have grown somewhere in the 6% to 8% range. And really what you see happening is where-- where the virus is picking up, it clearly has an impact on the economy, which has an impact on our business to some degree.

Now, our categories tend to be relatively resilient through economic downturns, but clearly, it takes a little bit of the top off of the growth. Latin America clearly has challenges in that regard, and India does as well to some degree. As we get past the virus, I do expect that we'll see those growth rates return back to their high normal levels.

BRIAN SOZZI: Yeah, we're still-- we're getting reports that grocery chains, major grocery chains, are-- are hoarding goods in their warehouses in anticipation of a next wave of COVID. Are you seeing that as well?

HUGH JOHNSTON: We don't see a lot of that because our business model is a little bit different. Recall that we actually bring the product ourselves right into the store. So we go to the back of the store, we put product on the shelves. And we're in most stores just about every day, so we don't see a lot of that. I've heard some of those reports as well. It's not much of an impact for PepsiCo.

BRIAN SOZZI: One of your-- your large competitor down in Atlanta is getting ready to launch hard seltzer. Any plans for PepsiCo to get in that category?

HUGH JOHNSTON: No, I really don't have any comment on that one. What I would tell you is, as a company, we leave no stone unturned. We look at every growth opportunity. So we'll evaluate all those on our merit-- on their merits, and we'll see if it makes sense for us, but nothing new to report there at this point.

ALEXIS CHRISTOFOROUS: Anything to report on CBD-infused beverages? You still looking at that, Hugh?

HUGH JOHNSTON: Yeah, still looking. Same answer. It really is something where-- we look at everything, because we feel like we have an obligation to look at everything. And if we decide to develop a product in that direction, you guys will be the first to know. Right now our innovation is tending towards things that are a little bit more in the mainstream of what we do.

One of the ones I really did want to share with you is this box of Cheetos Mac 'n' Cheese. Right now that product is flying off the shelves. We literally cannot make enough. So every box we make, we're selling almost immediately. And I expect that over time we're going to be adding a lot of capacity. We think this one's really a big new idea.

BRIAN SOZZI: Well, I know-- I can tell you our producer Nick Monty is very excited about that product, Hugh. But what would go good with that are energy drinks. Tell us about the 2021 plans for your energy drink portfolio. You have really bulked up on this business this year.

HUGH JOHNSTON: Yeah, so three-- three elements to that. Number one is obviously Rockstar, which we acquired recently. And we've got lots of innovation plans around Rockstar to really get that business tracking even at a higher and better growth rate than it's been doing.

Number two is Bang, which we're distributing, and we're at 85% distribution on that product. It's off to a terrific start. And then Mountain Dew, as I talked a little bit about in the past, more to come on that.