PepsiCo Inc. announced plans to increase advertising and marketing support behind its global brands by $500 million to $600 million in 2012, with particular focus on North America; going forward, it expects to maintain or increase that rate of support as a percentage of revenues.
The multi-year productivity program is expected to generate $1.5 billion of incremental cost savings by 2014 through optimization of operating practices and organization structure, including a reduction in force of about 8,700 employees, about 3 percent of global workforce
PepsiCo announced a series of strategic investment and productivity initiatives to deliver top-tier, sustainable long-term growth for its shareholders. These decisions are based on a comprehensive review by the company's management of its portfolio, brands, costs, organization 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.
"In a volatile global environment over the past five years, PepsiCo has delivered double-digit compound annual growth in core net revenue, 8 percent compound annual growth in core EPS (earnings per share), and returned about $30 billion to shareholders in the form of dividends and share repurchases," said PepsiCo Chairman and CEO Indra Nooyi in a prepared statement. "Our goal is to continue on that earnings trajectory over the next five to 10 years, fully recognizing 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: "The board of directors has been engaged throughout the review process. 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."
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 iconic brands and in bringing innovation to market. Advertising and marketing spending will increase by $500 million to $600 million 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 topline growth and enable greater price realization;
- Implement a 3-year productivity program that is expected to generate over $500 million in incremental cost savings in 2012, further incremental reductions in the cost base of about $500 million 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 organization 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 percent of the company's global workforce. The productivity programs 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 it will be reducing capital expenditures by 10 percent versus 2011. The emphasis is on systematically improving the efficiency of the existing asset base; and
- Enhance returns to shareholders in 2012 through both a 4 percent 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 $3 billion.
"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 percent 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 million to $600 million, 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 $100 million 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 percent, about 50 basis points higher than in 2011.
- Productivity: Partially offsetting these additional costs, major productivity initiatives are expected to result in about a $500 million incremental reduction in operating expenses in 2012.
Based on the current forex market consensus, foreign exchange translation would have a three percentage point unfavorable impact on the Company's full-year core EPS growth in 2012.
On a reported basis, the company's results will reflect charges from its 3-year productivity program, primarily severance costs associated with workforce reductions. In the fourth quarter of 2011, the company incurred pre-tax non-core restructuring charges of $383 million, and it anticipates additional charges of approximately $425 million in 2012 and another $100 million from 2013 through 2015.
The company is targeting about $8 billion in cash flow from operating activities and more than $6 billion in management operating cash flow (excluding certain items) in 2012, which will include the favorable impacts of a 10 percent 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.
Reflecting the company's commitment to return capital to shareholders and confidence in its long-term growth targets, PepsiCo announced that it will raise the annualized common stock dividend, effective with the dividend payable in June 2012, by 4 percent to $2.15 per share, the 40th consecutive year of dividend growth. The company anticipates increasing share repurchases in 2012 by at least $3 billion, which will be financed by operating cash flow and additional debt.
PepsiCo provided its long-term target of mid-single-digit constant currency net revenue growth. It also announced that it is targeting long-term core constant currency operating profit growth of 6 percent to 7 percent, and long-term high-single-digit core constant currency EPS growth after a transition year in 2012, driven by positive returns from executing its strategic initiatives.