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PepsiCo CFO Hugh Johnston joins Yahoo Finance Live to discuss the company’s latest quarterly results, which topped expectations on the top and bottom lines, the state of the company’s snacking business and the biggest challenges to PepsiCo’s leadership amid the coronavirus pandemic.
MYLES UDLAND: We're joined now by PepsiCo CFO Hugh Johnston. The company coming off a quarter that beat expectations. Hugh, thanks for joining the show. I'd love to begin by talking about the year where you guys saw organic revenue growth across all of your major geographies and categories. And if I had said to you in June that that's what 2020 would look like, how surprised would you have been?
HUGH JOHNSTON: Probably very surprised, to tell you the truth. You know, the good news is we exist in a business where people need to eat and people need to drink. And that's going to happen regardless of what's happening in the broader context. But we had to spend a little bit of time figuring out, how do we operate in this new environment? Because it's quite different.
And what you saw was, Q2, we were down just like everybody else. We got stronger in Q3, and then even stronger in Q4, as we've really figured out how to navigate the environment. If you look at our operating results, every one of our reportable divisions grew 5% except for Quaker in Europe, and they grew 8%. So I think we've really figured that out.
And that's why we chose to, as we entered this year, to give guidance of mid-single digit, revenue high single digit EPS. And we raised the dividend 5%. I feel like we've figured out how to do well in the new operating environment.
BRIAN SOZZI: Hugh, another good quarter of volume gains, really throughout many areas of your business. What happens when folks around the world do get their COVID-19 vaccines?
HUGH JOHNSTON: I think it's going to be more of an evolution rather than a revolution, Brian. I think the rollout globally is going to take some time. In addition to that, even within the United States, it's coming in various degrees of speed depending on which state you're in. And I think what you're going to see is some return to the old normal but some retention of the pandemic behaviors.
So I think you'll see more work from home, which implies we're probably going to continue to see breakfast at home being an important variable. I think you'll see people venturing out, so the restaurant numbers will improve. But they're still going to be some reluctance, I suspect, for a period of time.
As I said, probably the best news for PepsiCo is as sort of this new world has evolved, we figured out how to get the consumer to-- give them what they want. So I think we're well-positioned, regardless of the pace of recovery.
MYLES UDLAND: You know, Hugh, thinking about some of those dynamics on the other side, I was able to kick my soda habit, but I've not kicked my chip habit. And so what I saw with the Tostitos and Cheetos results certainly stood out to me. How do you see those kinds of brands normalizing as I'm able to go do things in my life that are rewarding, whereas right now, a reward for me is a bag of Cheetos? Which is great, but I'm not sure that that's going to be true in 2022.
HUGH JOHNSTON: To tell you the truth, I don't think that we've seen that dramatic an increase in consumption in Frito-Lay as a result of the pandemic. Quaker business has clearly benefited from it because of breakfast at home, because of dinner meals at home, which is obviously playing well into our prepared meals business with Rice-A-Roni and Pasta Roni.
Frito, I think, what we're going to see more of is a channel mid-shift. So right now, the grocery business is growing at an accelerated rate, and the food service business is down pretty significantly. Both are important channels for us. So as consumers move to a more out of home environment and mobility increases even further, I think we'll just see different areas where we'll get those sales. It's not that the sales are going to be under pressure. It's certainly not the way we planned in the year.
JULIE HYMAN: Hugh, it's Julie here. I want to ask you about your workforce. You heard us talking to Patrick Spence of Sonos a little bit about how executives are thinking about their workforce right now. You guys have a workforce that's many multiples of that of Sonos, I think more than 250,000 people employed by Pepsi.
How do you keep them happy, especially right now? How are you thinking about women in your workforce? And I also would ask you if I could, you know, I imagine there's quite a gap in circumstances between the C-suite of Pepsi and sort of the lowest paid workers at Pepsi. How do you keep in touch with what they're experiencing and what their needs are?
HUGH JOHNSTON: Yeah, I think maybe the right way to think about it is the folks that we refer to as our frontline workers, because you're right, we have over a quarter of million employees in our company. And so the frontline workers who work in route trucks, who work in warehouses, and who work in our manufacturing plants, that's sort of one big population.
And then you have more of an office-based, more knowledge worker-based type of a worker inside of the company. As we started the pandemic, the first priority that we put in place was the safety of our associates is the number one priority for us. And we put a lot of money behind ensuring that safety.
Overall, the COVID-related costs for PepsiCo, we're almost $800 million. Now, we expect that to diminish as we come into the new year. But a lot of those things will, I think, stay in place as well, whether it's personal protective equipment, having an absenteeism policy that allows people to stay at home and they're not trying to come to work when, in fact, they're sick.
So we really did focus quite a bit on protecting our frontline workers and making sure that they would be safe in operating. And we got far smarter and better at it over time. Because when we first put it in place, it was literally, we had it seemingly days to figure out how to operate in this new environment.
As you think about their work, I think we've gotten at to a place where as sort of society changes, that profile will change. But by and large, I think we've figured out how to operate successfully with all the things we've got. From a knowledge worker standpoint, I think that world is probably permanently shifted. I'm not sure exactly where it's going to land yet.
But I think in terms of office work, it's certainly likely to be less than five days a week in the office, even post-pandemic. Where we land on that, I think it's going to be different by office. It's going to be different by geography. And it's going to be different by teams. Some teams need to do more work collaboratively, others can work from home a little bit more.
So we're going to learn through that over time. But I do think there will be a new normal that won't be just a return to the five days in the office anymore.
BRIAN SOZZI: Hugh, managing the PepsiCo workforce in that new normal, is that the biggest challenge for your leadership team this year?
HUGH JOHNSTON: It's certainly one of them. I mean, in a company of our size, we always have a multitude of challenges, whether it's meeting customer needs, figuring out how consumer priorities are shifting. But we maintain the number one priority that we have is ensuring the safety of our workforce and ensuring that we are providing them with what they need in order to be safe and successful in their jobs.
MYLES UDLAND: All right, Hugh Johnston is the CFO at PepsiCo. Hugh, really appreciate you taking some time to talk with us this morning. And I hope we'll be in touch in future quarters.
HUGH JOHNSTON: Thanks. It's great to be with you guys.