PepsiCo, Inc. (NYSE:PEP) Chief Financial Officer Hugh Johnston speaks with FOX Business Network’s (FBN) Maria Bartiromo on Opening Bell with Maria Bartiromo about their decision to raise their forecast, calls to split off their Frito-Lay division, and the impact the events with Russia are having on the company. Johnston says “the consumer is cautious right now without a doubt,” but they have been able to perform so well because “we’ve driven productivity and invested that productivity back in our brands and invested it innovation” and as a result, “our brand strength is increasing across virtually all of our big brands.” He went on discuss activist investor Nelson Peltz’s suggestion of breaking the company up, saying, “this portfolio is truly better together” and splitting the company up would cause “a slower revenue growth rate and frankly…you’d add a lot of costs back into the business where you should be looking to take costs out of the business.” When asked about the impact the geopolitical events in Russia are having on the company, Johnston said, “we saw revenue grow in the mid-single digits in Russia over the last quarter” but “transactional forex is one of the issues we have to manage but we have been able to price our way through that. So we feel good about the Russian business.”
PepsiCo CFO: Innovation and value are key to growth
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PepsiCo CFO on their decision to raise guidance:
“It was a very good quarter for us. If you look at our revenue growth at 3.6 percent, it was a very solid number, it beat expectations. And really it was broad based across the globe. Our Asia, Middle East and Africa business grew 7, our European business grew 5, our Americas foods business grew 4. So, good solid growth. And we have revenue growth in Americas beverages as well. I think the thing that we feel best about is we do see good momentum in the marketplace and we have been able to drive the growth in a broad based way. In the north America environment where the consumer is undoubtedly cautious, PepsiCo, Inc. (NYSE:PEP) was the number one contributor for retail sales growth across the top retailers in the country of the 30 big food and beverage manufacturers. So we certainly feel good about that. And in developing and emerging markets we saw 8 percent revenue growth across our developing and emerging markets. So certainly feel like we are competing effectively there because we have this powerful beverage and snack portfolio. If you take that and combine it with the billion dollar productivity program we have in place that enabled us to drive 65 basis points of operating margin improvement, you saw 9 percent EPS growth and combine that with our strong Q1 performance we concluded in fact we should raise guidance for the year and we feel comfortable doing that.”
PepsiCo CFO on volume trends in the market:
“The consumer is cautious right now without a doubt. The economy is undoubtedly still healing and the broad based consumer economy is certainly doing that. That said, one of the things we have done is we’ve driven productivity and invested that productivity back in our brands and we’ve invested it in innovation and that’s what’s enabled us to perform as well as we have. Our brand strength is increasing across virtually all of our big brands. And from an innovation perspective, about 5 percent of our sales used to come from products introduced within the last couple of years. That number is up to about 9 percent. If you look at terrific products like Doritos Loaded which we put out in the market right now with our great customer 7-Eleven and combine that with Mountain Dew Solar Flare, we’ve got a winner and we are selling basically as many as we can make. So the challenge these days in order to be successful with the consumers, you have to be innovative and you have to deliver great value to them.”
PepsiCo CFO on the marketplace moving away from soft drinks:
“I think you are going to see more of it from the non-carbonated business, and we really start from the place beverages are a repertoire category so people move from carbonated soft drinks, to teas, coffees, to sports drinks depending on the specific occasion and the specific need they have at that moment. Without question you’ve seen more and more consumption moving into the non-carbonated beverages. From a PepsiCo perspective, that’s good news because if you look across the non-carbonated category. We have the leader in just about every non-carbonated subcategory…we really are well positioned as those products tend to get sold more than carbonated soft drinks.”
PepsiCo CFO on whether they will offer activist investor and Train Partners CEO Nelson Peltz a board seat:
“Well of course I never comment on any conversations with individual investors, I don’t think that would be appropriate.”
PepsiCo CFO on the suggestion of splitting up the company:
“What I will say is you have a company that’s performing awfully well, we had 9 percent EPS growth last year, we’re in 9 plus percent EPS growth in the first half of this year. And one of the biggest reasons why that is happening is that this portfolio truly is better together. Whether you look at examples like the 7-Eleven example I just used where we’re selling a beverage and a snack and that’s what’s enabling us to get not just sales, but good margin type of sales. Or if you look at our developing or emerging markets sales with 8 percent growth, that’s driven because the beverage business tends to consumerize first and then we build the snack business on top of the beverage business. I do believe if you split the company up as has been suggested, you’d see a slower revenue growth rate and frankly…you’d add a lot of costs back into the business where we should be looking to take costs out of the business.”
PepsiCo CFO on the impact the events in Russia are having on the company:
“The reality of operating a company that does business in 200 countries is unfortunately there are constantly flair ups around the globe. Right now obviously in Russia there are some geopolitical issues that everyone is having to manage. From our perspective, we saw revenue grow in the mid-single digits in Russia over the last quarter. So the fact is our products tend to be very local products we tend not to bring a lot of materials in and out of the country. And consumers still need to eat and still need to drink even in the midst of challenging geopolitical times. We do see the business continue to perform well. Without a doubt, transactional forex is one of the issues we have to manage but we have been able to price our way through that. So we feel good about the Russian business. We think we’ve been successful to date and we expect to continue to be.”
