PepsiCo Q1 earnings: ‘The demand for our products continues to be quite high,’ CFO says

PepsiCo CFO Hugh Johnston joins Yahoo Finance Live to discuss company earnings, consumer demand, profit growth, using AI, reducing single-use plastic, supply challenges, and the outlook for PepsiCo.

Video transcript

JULIE HYMAN: And speaking of that not being all, we also have PepsiCo to talk about. The company not showing signs of fizzling out after the beverage giant reported net sales had climbed 10.2% in the first quarter despite overall prices rising 16%. Pepsi also raising its full-year outlook, now expecting organic revenue to jump 8% this year.

PepsiCo CFO Hugh Johnston is joining us now, and Sozz is still with us as well, as we do our earnings bonanza. Hugh, thanks for being a part of it. We have been, as we've been talking to you and your peers, not just in food, but in consumer products generally, about the sort of price-to-volume calculation. Talk to me about unit volumes and what kind of demand you are seeing on an absolute basis if you sort of try to back out the price effects.

HUGH JOHNSTON: Yeah, sure. Happy to be with you guys. Good morning. Look, volumes basically for PepsiCo were-- were flat in the quarter. Revenue was up 14%. Food volume was down a little bit, but a big chunk of that was driven by our South African commodity business Pioneer, which the country is experiencing some challenges with the power grid.

If you back that out, food volumes were flat. Beverage volumes were up slightly. I think what you see going on as much as anything is one, obviously we've taken some pricing to cover the inflation that we've been dealing with. Number two, as we move towards more of a unit focus, so with things like multipacks, the big boxes that we sell of Frito-Lay products that have smaller packages in them, those packages deliver less volume than you would get out of a big bag or something like that.

So you see a little bit of that going on. Same thing in beverages. As consumers move to smaller size packages, it affects volume a little bit as well. But overall, the demand for our products continues to be quite high. I mean, I think revenue is a much more reflective metric of what's happening. And with 14% revenue, obviously consumers are truly enjoying our products.

BRIAN SOZZI: Hugh, Brian here. Good to see you, as always. You've been doing this for a while, and I've been covering you and PepsiCo for a while. Are you surprised that consumers aren't out there trading down to more products or cutting back certain items? I talked to P&G's CO earlier in the week, Jon Moeller. He told me people are using less paper towels, but they're still out there buying these paper towels at a higher price.

HUGH JOHNSTON: No, I'm not that surprised. As you said, I've been through a few cycles on this. I mean, one of the reasons defensive stocks truly do well in these types of environments is because consumers still want to have these small, simple, affordable treats and luxuries in their lives.

So you may not be able to go out and get a new car. You may not be able to go out and get a really fancy piece of technology. But you can afford a bag of Doritos, or you can afford a Gatorade Zero after you work out, or you can afford an energy drink in the morning. So we tend to do pretty well through times when the consumer is more stressed on a macro basis because we are a simple treat in your life that makes you happy. So, no, I'm not terribly surprised by it.

BRAD SMITH: Hugh, have you seen a material improvement in the supply chain? And particularly, how that has trickled through to operations, especially as we've been looking for improvements in the supply chain to further provide improvements to consumers on price as well?

HUGH JOHNSTON: Yeah, we really have. I mean, if you compare it to where we were, say, two years ago, where we may have been operating at a 3 out of 10 on a qualitative basis, we're back almost to where we were before the pandemic. There's still occasional tightness in a particular item, a bottle or a cap or something like that.

But by and large, the supply chains are almost entirely back to normal. And we see it in our customer ratings as well. The advantage rating that we get, which is a survey of customers, we were just rated number one again. And we were rated number one for the seventh time in a row. And the scores on service have gone up pretty dramatically as we've been able to solve these supply chain issues.

BRIAN SOZZI: Hugh, I'm jumping around a little bit. But has the China business for PepsiCo roared back? And how do you see the trajectory of that business playing out in the back half of this year?

HUGH JOHNSTON: Yeah, I'm not sure I'd go all the way to roared back, but it's definitely gotten stronger. We grew mid-single digits in China during this past quarter. So you see it coming back, but it's coming back at a jogging pace, not at a-- not at a sprinting pace, is probably the best way to describe it. And I think it's going to get incrementally better each quarter. I think you'll see those growth rates continue to inch up quarter after quarter as things just return to normal in the country.

BRIAN SOZZI: And one of your longtime competitors-- I won't mention the name, Hugh-- yesterday, they came out with their earnings release. And--

JULIE HYMAN: Who could it be?

BRIAN SOZZI: No. I don't know. But halfway down, they mentioned that they are using ChatGPT. And suddenly, that competitor is now being viewed, at least on social media, as some form of AI play. My question to you is, is PepsiCo using ChatGPT? And do you see yourself as an AI play?

HUGH JOHNSTON: Well, AI is certainly broader than ChatGPT. What I would tell you is this. We are experimenting right now with AI, much-- much like what you heard yesterday. That said, I think we also need to be responsible with how we use AI.

We've actually filed with NIST a responsible AI framework. And we need to make sure that we protect employee data. We need to make sure we protect customer and consumer data. So we're using it, but we're using it in a very controlled environment so that we learn about all of this.

And frankly, what we're looking for over time is making sure that we use it in a way that's sustainable and it's appropriate for everyone. I think that the potential is huge, which is why we're certainly fully involved in it. But we're trying to do this in a very, very responsible way.

BRAD SMITH: Hugh, When you look across the portfolio of products right now, do you see-- in terms of the growth story that PepsiCo is charting for itself going forward, what is really going to spur that next leg of growth from the C-suite's perspective right now?

HUGH JOHNSTON: Yeah, look, the growth right now is so broad that I think you're going to see it come from many, many places, not just one or two. And let me put a little bit of context on that. We're in two businesses, right, beverage and convenient foods. Convenient foods is about a $600 billion business. Coincidentally, beverages is about the same.

And the categories themselves globally are growing at about 5%. So when you have two categories that add up to $1.2 trillion, $600 billion each, and they're going 5%, our job is to really just continue to grow those categories, try to outgrow them by a little bit. And if we do those things, we can do it US. We can do it internationally. We've got a huge opportunity to continue to grow with what we have.

JULIE HYMAN: Hugh, a little bit of a left turn for me, if you'll permit me for a moment. We were having a discussion yesterday about single-use plastics, which is obviously a big part of your industry. And you talked a little bit in the commentary, you and the other executives, about trying to move away from that, right, trying to reduce water use. Where are we on that, not just Pepsi, but sort of as the Earth? I mean, are we any closer to trying to reduce some of those single-use plastics?

HUGH JOHNSTON: Oh, I do think we're closer, to be sure. Number one, we're using lots more recycled materials. And frankly, we would love to use even more. The big challenge is supply. And the challenge on supply is getting the recycling infrastructure built around the world.

Recycling infrastructure in Europe is terrific. In the US, it's OK. But frankly, we could use more help and do more, and we're trying to lead some efforts in that regard. Elsewhere in the world, it varies quite a bit. But I think we're making progress.

We've got very specific goals out there for 2025 and 2030, and we're making good progress on those goals. Same thing with water utilization. We've got very specific goals, and we've got very specific plans and glide paths to achieve those goals. So as a company, we view it as our responsibility to take on those challenges. And we're doing it in a very serious way.

BRIAN SOZZI: Hugh, lastly, what is the state of PepsiCo's, I would say, emerging alcohol business?

HUGH JOHNSTON: Yeah, it's still early days on that. We're in 12 states right now. We've got licenses in a couple of dozen more states, and we'll be expanding it slowly over time.

Obviously, we've got the Hard Mountain Dew product, and that product is doing very well wherever we have it. We just launched a hard tea product as well. Too early to even give any results on that. I can tell you the product is quite good. So I'd encourage you to try it and enjoy it on a weekend day.

BRIAN SOZZI: Hey, I'm an easy sell. I'll go pull up one of those, Julie and Brad, and reread the PepsiCo earnings transcript. That's how my weekend goes.

JULIE HYMAN: One of a kind, Brian Sozzi. PepsiCo CFO Hugh Johnson, thank you so much for being here. Sozz is going to be back a bit later as well.