PepsiCo confirms investments to drive growth

These decisions are based on a comprehensive review by the company’s management of its portfolio, brands, costs, organisation and capital structure. As a result of its review, the company reaffirmed its commitment to an integrated food and beverage portfolio through a one-​company platform.

PepsiCo chairman and CEO Indra Nooyi, said: “In a volatile global environment over the past five years, PepsiCo has delivered double-​digit compound annual growth in core net revenue, 8% compound annual growth in core EPS, and returned about $30bn to shareholders in the form of dividends and share repurchases. Our goal is to continue on that earnings trajectory over the next 5–10 years, fully recognising that we need to make changes in how we operate to address the challenges we identified in the review process. 2012 will be a transition year, in which we will be taking the appropriate steps to build a stronger, more successful company going forward.”

James Schiro, PepsiCo’s presiding director, said: “We are fully aligned with and supportive of management with respect to both the strategic direction of the Company and also the initiatives being announced today.”

Key Initiatives include:

• The company reaffirmed the underlying strength of its integrated food and beverage portfolio and concluded that PepsiCo offers the most compelling value to shareholders as one company.
• Beginning in 2012, PepsiCo is undertaking a number of key actions to further strengthen the company and enhance shareholder value.

The Company said it plans to:

• Significantly increase investments in its brands and in bringing innovation to market. Advertising and marketing spending will increase by $500-$600m in 2012, the majority in North America. Going forward, it expects to maintain or increase that rate of support as a percentage of revenues. To drive efficiencies, it will reduce the number of agency partners and also take steps to leverage the global scale of its top brand platforms. The brand investments are expected to drive top-​line growth and enable greater price realisation.
• Implement a three-​year productivity programme that is expected to generate over $500m in incremental cost savings in 2012, further incremental reductions in the cost base of about $500m in 2013, and an additional $500 million in 2014. The productivity savings will span every aspect of the business: leveraging new technologies and processes across operations, go-​to-​market and information systems; heightened focus on best practice sharing across the globe; consolidating manufacturing, warehouse and sales facilities and implementing simplified organisation structures, with wider spans of control and fewer layers of management. This effort includes headcount reductions of about 8,700 employees across 30 countries, about 3% of the company’s global workforce. The productivity programmes will enhance the company’s cost-​competitiveness as well as provide a source of funding for future brand-​building and innovation initiatives.
• Improve its net return on invested capital by at least 50 basis points annually beginning in 2013 through increased focus on capital spending and working capital management. As an example, in 2012 we will be reducing capital expenditures by 10% versus 2011. The emphasis is on systematically improving the efficiency of the existing asset base.
• Enhance returns to shareholders in 2012 through both a 4% increase in its annual dividend beginning with the June 2012 dividend payment, and also the execution of a share repurchase program this year of at least $3bn.

“As we implement our strategic priorities in 2012, we’ve had to make some tough decisions,” said chief financial officer, Hugh Johnston. “As a result, 2012 will be a year of transition, one in which we will make the right investments to position PepsiCo properly to achieve long-​term high-​single-​digit core constant currency EPS growth.”

For 2012, the company is targeting mid-​single-​digit core constant currency net revenue growth, in-​line with its long-​term target. It expects a decline in core constant currency EPS of approximately 5% from its fiscal 2011 core EPS of $4.40, reflecting a combination of strategic and macroeconomic factors, primarily:

• Marketplace Investments: In 2012, the company will step-​up its strategic brand investments by $500-$600m, particularly in North American beverages and food — the benefits from which will be increasingly seen in the second half of 2012 and into 2013. Further, the company anticipates a larger increase in consumer-​facing spending through marketing efficiency initiatives. Additionally, incremental investments in routes and display racks will total about $100m in 2012.
• Commodities: The company anticipates a second consecutive year of global commodity cost inflation that is well above historic levels. In a different economic climate the company would likely offset these additional costs through increased pricing. However, it does not anticipate that it can pass through all of the higher commodity costs to its consumers in 2012 given the continuing challenges that consumers are facing, particularly in the developed economies.
• Pension/​interest/​taxes: Additionally, the company expects higher pension costs as a result of a lower discount rate, higher net interest expense as it increases indebtedness and also terms-​out debt in a low interest rate environment, and a core tax rate of approximately 27%, about 50 basis points higher than in 2011.
• Productivity: Partially offsetting these additional costs, major productivity initiatives are expected to result in about a $500m incremental reduction in operating expenses in 2012.
• Based on the current forex market consensus, foreign exchange translation would have a three percentage point unfavourable impact on the company’s full-​year core EPS growth in 2012. 0 million from 2013 through 2015.

The company is targeting about $8bn in cash flow from operating activities and more than $6bn in management operating cash flow (excluding certain items) in 2012, which will include the favourable impacts of a 10% reduction in capital expenditures and incremental working capital efficiency. The company also expects to make a pre-​tax discretionary pension and retiree medical contribution of $1 billion in 2012.

Source: PepsiCo

• If you enjoyed this article, you may also like this: PepsiCo to invest $1bn in Russia

See also

Latest news

• Starbucks celebrates 10 years in Spain
• Coca-​Cola opens $17m production plant in Somaliland
• New Leaf Brands signs distribution agreement with DNA Brands
• Judge says Pom Wonderful’s advertising is misleading
• Vitafoods Europe 2012, in pictures