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![Coca-Cola’s return on common shareholders’ equity of 41.7 percent is higher than its
return on assets of 19.4 percent, indicating that the company has positive financial
leverage. Financial leverage describes a company’s ability to leverage common shareholders’
equity by taking on debt at an interest rate lower than the company’s return on assets. For
example, assume a company has equity of $10,000 earning 10 percent. The company can
leverage this equity by borrowing $8,000 with a 6 percent interest rate. Assuming the company
uses this $8,000 to purchase assets that earn 10 percent, the company has created positive
financial leverage since the cost of borrowing is lower than the return on assets. This results in
a return on equity that is higher than the return on assets. (Note: For a one-year period, the
return on assets is $1,800 [= $18,000 × 10 percent] less the cost of debt of $480 [= 6 percent ×
$8,000], or $1,320. This results in a return on assets of 7.3 percent [= $1,320 ÷ $18,000].
Positive financial leverage causes the return on equity to be much higher at 13.2 percent [=
$1,320 ÷ $10,000 equity].)
Although some level of financial leverage is generally regarded as healthy, companies
that are highly leveraged tend to be riskier than similar companies with less leverage. Analysts
and shareholders should avoid drawing quick conclusions that increases in return on common
shareholders’ equity are always better than decreases without thoroughly reviewing the rest of
the data.
Return on Assets and Return on Equity for Coca-Cola, PepsiCo, and the Industry Average
Earnings per Share: Earnings per share indicates how much net income was earned for each
share of common stock outstanding. The earnings per share ratio states net income on a per
share basis and is calculated as the following:](https://image.slidesharecdn.com/chairspeakreport-pepsicodupontanlysiswithcoke-150321082054-conversion-gate01/75/Chair-speak-report-PEPSICO-Dupont-analysis-with-coke-64-2048.jpg)
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Chair speak report -PEPSICO(Dupont analysis with coke)
This document provides information about PepsiCo and the beverage industry. It discusses PepsiCo's CEO, Indra Nooyi, and provides an industry profile that describes the beverage industry and dominant economic factors like market size and growth rate. It also analyzes the financial statements of major companies like PepsiCo, Coca-Cola, and Cadbury Schweppes and notes trends in the industry like increasing globalization and changing consumer preferences.
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Chair speak report -PEPSICO(Dupont analysis with coke)
- 1. DEPARTMENT OF COMMERCEAND MANAGEMENT STUDIES UNIVERSITY OF CALICUT CHAIR SPEAK REPORT SUBMISSION COMPANY: PEPSICO CEO: INDRA K NOOYI SUBMITTED TO Dr.P.MOHAN FACULTY, DCMS UNIVERSITY OF CALICUT SUBMITTED BY AKSHARA C V VIDYA KRISHNA SUBMITTED ON 21-10-2014 INDUSRTY PROFILE
- 2. The beverage industryrefers to the industry that produces drinks. Beverage production can vary greatly depending on which beverage is being made. The website ManufacturingDrinks.com explains that, "bottling facilities differ in the types of bottling lines they operate and the types of products they can run". Other bits of required information include the knowledge of if said beverage is canned or bottled, hot-fill or cold-fill, and natural or conventional. Innovations in the beverage industry, catalyzed by requests for non-alcoholic beverages, include beverage plants, beverage processing, and beverage packing. The beverage industry is a major driver of economic growth. A National Council of Applied Economic Research (NCAER) study on the carbonated soft-drink industry indicates that this industry has an output multiplier effect of 2.1. This means that if one unit of output of beverage is increased, the direct and indirect effect on the economy will be twice of that. In terms of employment, the NCAER study notes that "an extra production of 1000 cases generates an extra employment of 410 man days." Barbara Murray (2006c) explained the soft drink industry by stating, “For years the story in the nonalcoholic sector centered on the power struggle between…Coke and Pepsi. But as the pop fight has topped out, the industry's giants have begun relying on new product flavors…and looking to noncarbonated beverages for growth.” In order to fully understand the soft drink industry, the following should be considered: the dominant economic factors, five competitive sources, industry trends, and the industry’s key factors. Based on the analyses of the industry, specific recommendations for competitors can then be created. The soft drink/beverage industry is dominated by two major competitors, PepsiCo and Coca-Cola. The industry is highly profitable, with an average return on assets rate of 14.70%, much higher than average return on assets rate for S&P 500 companies of roughly 7.00%. In spite of market maturity and saturation during recent years in the United States, the growth in international market is very strong and promising. Both PepsiCo and Coca-Cola had large market shares, dominated distribution channels, well-established brand names and consumer
- 3. loyalty. And bothcompanies possess their own secrete formulas. All of these serve as entry barriers that make it very difficult for a new company to enter soft drink/beverage industry. These high entry barriers also protect the profitability of the industry. Dominant Economic Factors Market size, growth rate and overall profitability are three economic indicators that can be used to evaluate the soft drink industry. The market size of this industry has been changing.Soft drink consumption has a market share of 46.8% within the non-alcoholic drink industry, Datamonitor (2005) also found that the total market value of soft drinks reached $307.2 billion in 2004 with a market value forecast of $367.1 billion in 2009. Further, the 2004 soft drink volume was 325,367.2 million liters (see Table 2). Clearly, the soft drink industry is lucrative with a potential for high profits, but there are several obstacles to overcome in order to capture the market share. The growth rate has been recently criticized due to the U.S. market saturation of soft drinks. Datamonitor (2005) stated, “Looking ahead, despite solid growth in consumption, the global soft drinks market is expected to slightly decelerate, reflecting stagnation of market prices.” The change is attributed to the other growing sectors of the non-alcoholic industry including tea and coffee (11.8%) and bottled water (9.3%). Sports drinks and energy drinks are also expected to increase in growth as competitors start adopting new product lines. Profitability in the soft drink industry will remain rather solid, but market saturation especially in the U.S. has caused analysts to suspect a slight deceleration of growth in the industry (2005). Because of this, soft drink leaders are establishing themselves in alternative markets such as the snack, confections, bottled water, and sports drinks industries (Barbara Murray, 2006c). In order for soft drink companies to continue to grow and increase profits they will need to diversify their product offerings.The geographic scope of the competitive rivalry explains some of the economic features found in the soft drink industry. According to Barbara Murray (2006c), “The sector is dominated by three major players…Coca-Cola is king of the soft drink-empire and boasts a global market share of around 50%, followed by PepsiCo at about 21%, and Cadbury Schweppes at 7%.” Aside from these major players, smaller companies such as Cott Corporation and National Beverage Company make up the remaining market share. All five of these companies make a portion of their profits outside of the United States. The US does not hold the highest percentage of the global market share, therefore companies need to be able to compete globally in order to be successful. Coca-Cola has a similar distribution of sales in Europe, North America, and Asia. On the other hand, the majority of PepsiCo’s profits come from the United. Compared to PepsiCo, Cadbury
- 4. Schweppes has astronger global presence with their global mix). Smaller companies are also trying to establish a global presence. Cott Corporation is a good example. The saturation of the US markets has increased the global expansion by soft drink leaders to increase their profits. The ease of entry and exit does not cause competitive pressure on the major soft drink companies. It would be very difficult for a new company to enter this industry because they would not be able to compete with the established brand names, distribution channels, and high capital investment. Likewise, leaving this industry would be difficult with the significant loss of money from the fixed costs, binding contracts with distribution channels, and advertisements used to create the strong brand images. This industry is well established already, and it would be difficult for any company to enter or exit successfully. Three leading companies have prominent presence in the soft drink industry. The leaders include the Coca-Cola Company, PepsiCo, and Cadbury Schweppes. According to the Coca-Cola annual report (2004), it has the most soft drink sales with $22 billion. The Coca- Cola product line has several popular soft drinks including Coca-Cola, Diet Coke, Fanta, Barq’s, and Sprite, selling over 400 drink brands in about 200 nations (Murray 2006a). PepsiCo is the next top competitor with soft drink sales grossing $18 billion for the two beverage subsidiaries, PepsiCo Beverages North America and PepsiCo International (PepsiCo Inc., 2004). PepsiCo’s soft drink product line includes Pepsi, Mountain Dew, and Slice which make up more than onequarter of its sales. Cadbury Schweppes had soft drink sales of $6 billion with a product line consisting of soft drinks such as A&W Root Beer, Canada Dry, and Dr. Pepper (Cadbury Schweppes, 2004). Financial Analysis The carbonated beverage industry is a highly competitive global industry as illustrated in the financial statements. According to John Sicher of Beverage Digest (2005), Coca-Cola was the number one brand with around 4.5 billion cases sold in 2004. Pepsi followed with 3.2 billion cases, and Cadbury had 1.5 billion cases sold. However, the market share shows a different picture. Coca-Cola and PepsiCo control the market share with Coca-Cola holding 43.1% and Pepsi with 31.7% (see Graph 1); however these market shares for both Coca-Cola and PepsiCo have slightly decreased from 2003 to 2004. Coca-Cola’s volume has also decreased 1.0% since 2003, whereas PepsiCo’s volume has increased 0.4% (see Graph 1). Diet Coke posted a 5% growth, but Coca-Cola’s other top 10 brands declined (Sicher, 2005). Overall, Coca-Cola’s market position has declined in 2004. The strategic group map (see Graph 1) also shows the growth of Cott Corp. of 18% which is significantly higher than that of Coca- Cola and PepsiCo.
- 5. The American BeverageAssociation (2006) states that in 2004, the retail sales for the entire soft-drink industry were $65.9 billion. Barbara Murray (2006e) analyzed the industry averages for 2004 and average net profit margin was 11.29%. The current ratio average was 1.11 and the quick ratio average was 0.8. These figures help analyze the financial statements of the major corporations in the industry. Coca-Cola has seen their net profit margin increase from 20.7% to 22.1% from 2003 to 2004. According to Coca-Cola’s annual report (2004), 80% of their sales are from soft drinks; therefore the total sales amount was used for their financial analysis. These figures show that their profits are increasing, but at a slow rate. This is in line with what is happening in the soft drink industry. The market is highly competitive and growth has remained at a stable level. The slight increase in Coca-Cola’s profit margin is most likely from their new energy drink product line. This industry is currently expanding rapidly, and is allowing the major beverage companies to increase their profits. Coca-Cola’s working capital was around $1.1 billion in 2004. This is a large increase from 2003 at only $500 million. This shows that they have sufficient funds to pursue new opportunities. However, their current ratio and quick ratio are a cause for concern. A current ratio of 2 or better is considered good and Coca-Cola’s was 1.102. This number shows that they may not have enough funds to cover short term claims. The quick ratio for 2004 was at 0.906 and is considered good when it is greater than 1. This illustrates that Coca- Cola may not have the ability to pay short term debt without selling inventory. These two numbers are a concern because they are not able to satisfy their short term obligations. The current and quick ratios are in line with the industry averages, however (Murray, 2006e), Coca- Cola needs to improve these ratios in order focus on long-term plans (Coca-Cola Company, 2004). PepsiCo’s financial statements cannot be analyzed for only the soft drinks industry because they do not distinguish between businesses. Over half their profits are from snacks or other beverage items; however there are sales and profit figures for their two beverage subsidiaries. These sales figures grew from almost $16.5 billion in 2003 to $18 billion in 2004 (Pepsi Co. Inc., 2004). Their operating profit margin also increased 1% from 2003 to 2004. This shows that beverage profits are increasing for them, but also at a slow rate. The increase could be due to the increase in market share that the Pepsi products gained in 2004 (Sicher 2004). The PepsiCo. Annual Report (2004) stated that beverage volume increased 3% in 2004, but was driven by the high growth of the non-carbonated beverage industry. Cadbury’s current and quick ratios are very similar to those of Coca-Cola. The current ratio and quick ratio for Cadbury Schweppes for 2004 were both 0.917. Again,
- 6. the current ratioshould be 2 or more, and the quick ratio should be over 1. This illustrates that Cadbury also has difficulty paying short term debt and claims. Cadbury’s net profit margin has increased by 0.7% from 2003 to 2004. This can be attributed to their market share growth in 2004 of 0.2% (Sicher, 2005). One ratio that is concerning is their debt to equity ratio for 2004. They have almost two times as much debt as they do to equity, which means that their funds are mainly provided by creditors as opposed to owners. This is concerning because they owe a lot of money, and must make a decent profit to be able to pay it off. The industry average for debt to equity is 81%, and Cadbury is far from that number (2006e). Also, Cadbury has a negative working capital for both 2003 and 2004, meaning they have more liabilities than assets. This shows that they do not have any funds to pursue new opportunities, as their current assets are being used to pay off liabilities (Cadbury, 2004). Overall, the financial statements of the three top competitors in the soft drink industry show that the industry is highly competitive and has little growth. Net profit margins increased for all three corporations, however only at a small rate. It also seems that all three companies lack sufficient current and quick ratios, but are all within a reasonable range of the industry average (2006e). This may be due to expanding their product lines to include energy drinks and non-carbonated beverages in order to increase profits and diversify their business. The soft drinks market is now in the matured stage of the life cycle. Growth in the industry has remained stagnant, and the financial statements of the major corporations in the industry illustrate that their sales and income are following this trend. The companies are in good financial positions; gross profits and net profit margins are continuing to increase each year. The leverage and activity ratios are all within reasonable range. However, one area all three corporations need to improve on is the liquidity ratios. Their quick and current ratios are low and need to be increased so they are able to meet short-term obligations. Industry Changes The soft drink industry is affected by macro environmental factors of the industry that will lead to change. First, the entry/exit of major firms is a trend in the industry that will likely lead to change. More specifically, merger and consolidation has been prevalent in the soft drinks market, causing some firms to exit the industry and then re-enter themselves. Several leading companies have been looking to drive revenue growth and improve market share through the increased economies of scale found through mergers and acquisitions. One specific example is how PepsiCo acquired Quaker Oats, who bought Gatorade which will help expand
- 7. PepsiCo’s energy drinksector (Datamonitor, 2005). This trend has increased competition as firms’ diversification of products is increasing. A second trend in the macro environment is globalization. With the growing use of the internet and other electronic technologies, global communication is rapidly increasing. This is allowing firms to collaborate within the country market and expand into world markets. It has driven competition greatly as companies strive to be first-movers. Specifically, the global soft drink market’s compound annual growth rate (CAGR) is expected to expand to 3.6% from 2004 to 2009 (Datamonitor, 2005). Third, changing societal concerns, attitudes, and lifestyles are important trends. In the United States and Europe, people are becoming more concerned with a healthy lifestyle. “Consumer awareness of health problems arising from obesity and inactive lifestyles represent a serious risk to the carbonated drinks sector” (Datamonitor, 2005, p. 15). The trend is causing the industry’s business environment to change, as firms are differentiating their products in order to increase sales in a stagnant market. Thus, the long-term industry growth rate, the fourth trend, shows low growth in recent years. Since 2000, the CAGR is 1.5 per cent (Datamonitor, 2005). The low growth rates are of concern for soft drink companies, and several are creating new strategies to combat the low rates. This leads to the fifth trend of growing buyer preferences for differentiated products. Because soft drinks have been around since as early as 1798 (American Beverage Association, 2006), buyers want innovation with the products they buy. In today’s globalizing society, being plain is not good enough. According to Barbara Murray (2006c), “The key for all of these beverage companies is differentiation. The giants have new formulations and appearances. Whatever the strategy, be it a new color, flavor, or formula, companies will strive to create the greatest brand awareness in the minds of the consumer in the hopes of crowding out its competitors.” Thus, the last trend, product innovation, is necessary to combat buyers need for a variety of tastes. Key Success Factors Key factors for competitive success within the soft drink industry branch from the trends of the macroenvironment. Primarily, constant product innovation is imperative. A company must be able to recognize consumer wants and needs, while maintaining the ability to adjust with the changing market. They must keep up with the changing trends (Murray, 2006c).Another key factor is the size of the organization, especially in terms of market share. Large distributors have the ability to negotiate with stadiums, universities and school systems, making them the exclusive supplier for a specified period of time. Additionally, they have the
- 8. ability to committo mass purchases that significantly lower their costs. They must implement effective distribution channels to remain competitive. Taste of the product is also a key factor for success. Furthermore, established brand loyalty is a large aspect of the soft drink industry. Many consumers of carbonated beverages are extremely dedicated to a particular product, and rarely purchase other varieties. This stresses the importance of developing and maintaining a superior brand image. Price, however, is also a key factor because consumers without a strong brand preference will select the product with the most competitive price. Finally, global expansion is a vital factor in the success of a company within the soft drink industry. The United States has reached relative market saturation, requiring movement into the global industry to maintain growth (Datamonitor, 2005). Recommendations Looking towards the future, the most important recommendation to Coca-Cola is continuing product innovation and expansion of their product line. The soft-drinks industry is fully saturated with competitors. Also, the industry is no longer expanding, and market share is actually decreasing as more consumers are looking to healthier options. By continually introducing new products, Coca-Cola will be able to increase their profits and allow the company to continue to grow. Also, having a diverse product line will make the corporation very stable, which is appealing to investors and creditors. A second recommendation would be to sustain or increase the global market share. Coca-Cola is very well-established globally, and is the global soft-drinks leader. This is very important to sustain because it is the source of the majority of their profits. If they lose global market share, their profits will decline dramatically. A final recommendation for Coca-Cola is to maintain and try to increase their brand loyalty. Diet Coke has the second highest brand loyalty of all the soft-drink competitors’ brands, and solid advertising campaigns will help maintain the brand loyalty. They can also strive to obtain higher brand loyalty in all other brands, not solely Diet Coke. The brand loyalty is important because it will allow Coca-Cola to sustain profits and maintain their market share.
- 9. PepsiCo CEO IndraK. Nooyi “Indra Nooyi is one of the most respected and inspiring CEOs in the world. She has guided PepsiCo to incredible heights and built a culture of respect, collaboration and success. Her business and life lessons are both inspirational and transferable to the challenges that bowling center business owners face every day,” said Steve Johnson, executive director of BPAA. “Indra and PepsiCo have also been tremendous friends to bowling. The partnership that we’ve enjoyed with PepsiCo has been so important in fueling our industry’s continued national growth, while also helping to drive the success of the thousands of small business owners who make up our industry.” Nooyi, who was named PepsiCo’s CEO in 2006, leads a $65 billion global food and beverage powerhouse with a portfolio that includes 22 brands that generate more than $1 billion each in annual retail sales. The company’s main businesses – Quaker, Tropicana, Gatorade, Frito-Lay and Pepsi-Cola – make hundreds of snacks and beverages sold around the world. Nooyi has been frequently ranked by such media as Forbes, Fortune, Wall Street Journal, TIME and U.S. News and World Report as one the most influential and powerful people in business. She is recognized for consistently delivering strong business and financial results, while also taking steps to set the company on a course toward sustainable, long-term growth. A message from PepsiCo’s President & CFO, Indra Nooyi I recently had the privilege of speaking to the 2005 graduating class of Columbia University’s Business School in New York City. Recognizing that these talented new leaders will influence both America and the world, I tried to provide some advice as they embark on their careers. I chose to speak about the powerful role that America, and we as Americans, hold in the world today. I hoped to encourage these graduates to be sure they make a positive and personal difference as representatives of our great country. In my comments, I used the analogy of a human hand to illustrate that people in countries around the globe need to join together to make the world work in harmony – just as all the fingers of a hand work together. It is an illustration that I learned when I was a student, and that I have shared with others on many different occasions. As part of this illustration, I assigned five of the world’s continents to the different fingers and thumb. I refer to North America and particularly the U.S. as the middle finger because it is the longest and anchors
- 10. every function thehand performs. The middle finger also is key to all the fingers working together effectively. That is how I view America’s place of importance in the world. The point of my analogy was to emphasize America’s leadership position. Equally critical is the need for each of us as citizens to take a constructive role in whatever we choose to do in life to ensure the U.S. continues as the world’s “helping hand.” Unfortunately, my remarks at Columbia University were misconstrued and depicted in a different context as unpatriotic. Although nothing could be further from the truth, I regret any confusion or concern that I may have inadvertently created. As I shared with the audience at Columbia, this country that I am proud and honored to call home is a “promised land” that I love dearly. I would never say or do anything to detract from our great nation and its people who have done so much for so many, including myself. Thank you for your understanding and allowing me to set the record straight. Indra K. Nooyi President & CFO, PepsiCo Q. You come home one day as president of the company, just appointed, and your mom is not that impressed. Would you tell that story? This is about 14 years ago. I was working in the office. I work very late, and we were in the middle of the Quaker Oats acquisition. And I got a call about 9:30 in the night from the existing chairman and CEO at that time. He said, Indra, we're going to announce you as president and put you on the board of directors... I was overwhelmed, because look at my background and where I came from—to be president of an iconic American company and to be on the board of directors, I thought something special had happened to me. Why Women Still Can't Have It All So rather than stay and work until midnight which I normally would've done because I had so much work to do, I decided to go home and share the good news with my family. I got home about 10, got into the garage, and my mother was waiting at the top of the stairs. And I said, "Mom, I've got great news for you." She said, "let the news wait. Can you go out and get some milk?" I looked in the garage and it looked like my husband was home. I said, "what time did he get home?" She said "8 o'clock." I said, "Why didn't you ask him to buy the milk?" "He's tired." Okay. We have a couple of help at home, "why didn't you ask them to get the milk?"
- 11. She said, "Iforgot." She said just get the milk. We need it for the morning. So like a dutiful daughter, I went out and got the milk and came back. I banged it on the counter and I said, "I had great news for you. I've just been told that I'm going to be president on the Board of Directors. And all that you want me to do is go out and get the milk, what kind of a mom are you?" And she said to me, "let me explain something to you. You might be president of PepsiCo. You might be on the board of directors. But when you enter this house, you're the wife, you're the daughter, you're the daughter-in-law, you're the mother. You're all of that. Nobody else can take that place. So leave that damned crown in the garage. And don't bring it into the house. You know I've never seen that crown." Q. What's your opinion about whether women can have it all? I don't think women can have it all. I just don't think so. We pretend we have it all. We pretend we can have it all. My husband and I have been married for 34 years. And we have two daughters. And every day you have to make a decision about whether you are going to be a wife or a mother, in fact many times during the day you have to make those decisions. And you have to co-opt a lot of people to help you. We co-opted our families to help us. We plan our lives meticulously so we can be decent parents. But if you ask our daughters, I'm not sure they will say that I've been a good mom. I'm not sure. And I try all kinds of coping mechanisms. In 2009, PepsiCo made a promise. For the next 10 years, we promised to deliver sustainable growth by investing in a healthier future for our consumers, our planet, our associates and external partners and the communities we serve. This promise is the cornerstone of our 'Performance with Purpose' mission: our belief that our financial success Performance must go hand-in-hand with our social and environmental responsibilities our Purpose. We call this 'The Promise of PepsiCo', a manifesto that includes ambitious global goals 47 commitments in all that will guide our company this decade. As the world's second-largest food and beverage business, we have a responsibility to help devise solutions to key global challenges where we can have the most impact. We categorize these responsibilities in three distinct areas: Human Sustainability addressing diverse and complex global nutrition needs; Environmental Sustainability being a good steward of our planet's natural resources; and Talent Sustainability creating meaningful employment
- 12. opportunities in thecommunities where we operate and developing our associates while fostering a diverse and inclusive workplace. Our strategy for long-term growth is an integral part of our 'Performance with Purpose' mission. In fact, we design our business plans to ensure that the work we do and the investments we make have a positive impact on society that's why our 2009 corporate citizenship report is titled Performance with Purpose: Investing in Sustainable Growth. Challenging economic times are still ahead, but we will not reduce our commitment to responsible business, and we are taking action to ensure sustainable, profitable growth across all our businesses. Despite many challenges, we see enormous opportunity for continued growth. One way is through the game-changing merger transaction with our two anchor bottlers. This merger allows us to create a lean, agile organization with an optimized supply chain, a flexible go-to-market system and enhanced innovation capabilities. Another critical path to growth is to continue to expand our R&D capabilities and increase investments to develop more nutritious products that taste great and add positive nutrition such as fiber, vitamins and calcium, among other benefits. Our 'Performance with Purpose' mission guides the way we conduct ourselves as we continue to seek valuable counsel from key external stakeholders like Ceres, the Carbon Trust and global experts in the nutrition, science and global health policy communities. Together, these actions will help us maintain our long-term commitment to the overall sustainability of our company.
- 13. MAY 07 2014/1.00 PM, PEP – PepsiCo Annual Shareholder Meeting C O R P O R A T E P A R T I C I P A N T S Indra Nooyi PepsiCo, Inc. - Chairman, CEO Larry Thompson PepsiCo, Inc. - EVP, Government Affairs, General Counsel and Corporate Secretary C O N F E R E N C E C A L L P A R T I C I P A N T S James Mackie - Shareholder Tamara Williams - Representative of Shareholder James Kiszka Computershare - Senior Relationship Manager P R E S E N T A T I O N Unidentified Company Representative Before we begin, please take note of our cautionary statement. This presentation includes forward-looking statements based on currently available information. Forward- looking statements inherently involve risks and uncertainties that could cause our actual results to differ materially from those predicted in such forward-looking statements. Statements made in this presentation should be considered together with the cautionary statements and other information contained in our most recent earnings release and in our most recent periodic reports filed with the SEC. Also, to find reconciliations of non-GAAP measures that we may use when discussing PepsiCo's financial results, please refer to the "Investors" section of PepsiCo's website under the "Events and Presentations" tab as well as our 2013 annual report. And now, please welcome the Chairman and Chief Executive Officer of PepsiCo, Indra Nooyi. Indra Nooyi - PepsiCo, Inc. - Chairman, CEO Good morning everyone and welcome. On behalf of PepsiCo's Board of Directors and our senior leadership team, welcome to PepsiCo's 2014. Annual Meeting of Shareholders. Whether you're here in New Bern, North Carolina or listening via webcast, I want to thank you for joining us this morning. You know, this is our third straight year of coming home to New Bern, the birthplace of Pepsi-Cola for our shareholder meeting. And for us, there are few things more humbling and more inspiring than the special connection between PepsiCo and New Bern. From the moment
- 14. we arrive intown, we can feel a sense of pride. Our shareholders, here and across the country, are proud to own a part of PepsiCo. It's a pride in knowing that this town, this country and PepsiCo all hold the same values dear. Values like ingenuity, dependability and accountability, the cornerstones of great communities and great institutions alike. They are the values we demonstrate every day and they are the values that Caleb Bradham demonstrated when, after closing up his drugstore in the corner of Middle and Pollock for the day, he would go to work perfecting his recipe for Brad's Drink, which would later become Pepsi-Cola. You know, we outgrew that drugstore but we have not outgrown our values. And as we continue to transform and grow, they will guide us and help us achieve the strong and consistent performance that has defined PepsiCo for decades. It's in that spirit that I want to take a few minutes to discuss our performance from last year and the steps we've taken to position ourselves to continue delivering the sustainable performance you, our shareholders, have come to expect. Before we officially get underway, I'd like to take a moment and recognize some special attendees. First, I'd like to thank Mr. James Mackie as well as Ms. Tamara Williams, who's here on behalf of Mr. Kenneth Steiner, for being here today. Each of them will be presenting a shareholder proposal this morning. And it's wonderful to have a number of our partners and members of the PepsiCo family here in attendance today. I'd like to take a special welcome to my predecessor, our former chairman and CEO, Steve Reinemund, who's finishing a fantastic stint as the Dean of the Wake Forest School of Business. Steve Reinemund. Where is Steve? Steve. Welcome. And it's a great honor for all of us to have Jan Calloway join us this morning, whose late husband Wayne Calloway, a proud native of North Carolina. I may add, who also served as PepsiCo Chairman and CEO. Welcome, Jan. Where's Jan? Hi, Jan. We're also very happy to be joined by Jeff Minges, the President and CEO of Minges Bottling Group, a respected local business leader and our franchise partner for a number of counties here in North Carolina. Jeff is joined by his son Miles. Jeff and Miles, welcome to the shareholder meeting. And I want to extend a very special welcome to members of the Brown family. They're long-time PepsiCo shareholders who've also been important distributors for PepsiCo in the Wilmington, North Carolina area over the years. I want to say thank you to Debbie, Bill, Pam, Allison, Amy and Clint for coming, the Brown family. Where are you? Welcome.
- 15. Now I'd liketo recognize our Board Members in attendance today who will each stand as his or her name is read. Shona Brown, George Buckley, Ian Cook, Dina Dublon, Ray Hunt, Alberto Ibarguen, Sharon Percy Rockefeller, Lloyd Trotter, Dan Vasella, Alberto Weisser, and our newest Board Member, former chairman and CEO of the Financial Times Group, Rona Fairhead. Rona welcome to your first PepsiCo shareholder meeting. One member of the board, Jim Schiro, is unable to attend today's meeting. Next, I'd like to introduce you to the members of the PepsiCo leadership team who are in the audience today. Will each member please stand as I say his or her name? Here on stage with me is Larry Thompson, Executive Vice President, Government Affairs, General Counsel and Corporate Secretary. We're also joined by Zein Abdalla, President of PepsiCo; Al Carey, Chief Executive Officer of PepsiCo Americas Beverages; Brian Cornell, Chief Executive Officer of PepsiCo Americas Foods; Hugh Johnston, Executive Vice President, Chief Financial Officer; Jim Wilkinson, Executive Vice President of Communications; Mehmood Khan, Executive Vice President, Chief Scientific Officer, Global Research and Development; and Cynthia Trudell, Executive Vice President of Human Resources and the Chief Human Resources Officer. Thank you all for joining us today. And now let me take a few minutes to talk about the state of PepsiCo, where we are today and where we are headed. Since the transformation of PepsiCo began in 2009, we have operated in service of two goals: to deliver top tier financial performance and to create long-term sustainable growth. I'm proud to say that in 2013 we met both of these goals. We performed as we transformed. Last year we met or exceeded each and every one of the financial goals we announced to you, our shareholders, at the beginning of the year. Our organic revenue grew 4%, core constant currency earnings per share grew 9%, core gross margins improved by 90 basis points and core operating margins improved by 40 basis points, even while we increased investment in the company. We captured more than $900 million of productivity, exceeding our target, and keeping us on track to deliver the three-year, $3 billion productivity program that we set for ourselves for the years 2012 to 2014. In fact, this success gave a confidence to extend this goal of $1 billion in annual productivity savings for five years beyond the 2014 timeframe. Core net return on invested capital improved 110 basis points, 60 points, 60 basis points, ahead of our target. And free cash flow excluding certain items was strong at $8.2 billion.
- 16. And finally, wereturned $6.4 billion of cash to shareholders through dividends and share repurchases. Returning cash to shareholders remains a top priority. Yesterday, our board of directors increased our annual dividend by 15% to an annual rate of $2.62 per share, which is our 42nd consecutive annual dividend increase. And in 2014, we expect to increase total cash returns by 35%, with $5 billion in share repurchases and $3.7 billion in dividends. You know, 2013 was a great year for us, not just for our immediate successes, because it showed that the investments we've made to future-proof the company are beginning to pay off. Our actions in 2013 were a continuation of six concrete steps we've taken over the past five years to position ourselves for the long-term. First, we invested to enhance the equity of our portfolio of $22 billion brands. And because of those stepped up investments, today we have 9 of the 40 largest packaged good trademarks in the United States, which is more than any other company out there; 9 of the top 50 packaged food and soft drink brands in Russia, again, number one; 7 of the top 50 in Mexico; and 6 of the top 50 in the United Kingdom. And a great example of our brand push is Pepsi's global "Live for Now" campaign, which is generating worldwide buzz. And this year it's getting even bigger with new spots featuring soccer superstars like Lionel Messi with Pepsi and Lay's. So that's the brands. The second thing we did was fine-tune and ramped up our innovation machine. And 2013 was PepsiCo's best year for innovation. We had nine of the top 15 new food and beverage product introductions across all measured channels in the United States, including Mountain Dew Kickstart, Tostitos Cantina Tortilla Chips, Starbucks Ice Coffee, Lipton Pure Leaf Tea, Muller Quaker Yogurt and Tropicana Farmstand, so great year for innovation. Third, we continued to invest in the developing and emerging markets that are critical to PepsiCo's long-term growth. Despite significant volatility in many key regions, our developing and emerging markets posted 10% organic revenue growth. With particularly strong performances in China, Pakistan, Saudi Arabia, Mexico, Brazil and Turkey. So investments in these markets are beginning to pay off. Fourth, we increased investment in, and expanded our portfolio of, nutritious products, which in 2013 accounted for approximately 20% of PepsiCo's total revenue. Building from positions of strength across four platforms and brands - Quaker, Tropicana, Gatorade and Naked Juice - we've developed new products that will unlock growth opportunities, categories such as dairy, hummus, baked grain snacks are all showing special promise. Fifth, we reinforced PepsiCo's global go-to-market capability, which is a critical strategic advantage for us. We increased number of routes in key markets, we improved our in-
- 17. store presence andput mobile technology in the hands of our sales team. And sixth, we redoubled and refocused our efforts on talent development. And we prioritized comprehensive leadership training for our leadership positions. And these are some of the reasons why our 2013 Organization Health Survey scores are impressive, 89% of our professional executive populations responded that they are proud to work for PepsiCo, which is well above the industry standard. All these efforts have been financially rewarding for PepsiCo and our shareholders too. Over the past decade our net revenue compound annual growth rate was 9%, earnings per share over the past decade has grown at 8% and through year-end 2013 we returned $57 billion to shareholders. Today our operating margins stands at 15% which puts us in the top tier of our food and beverage peer group. From 2000 to year-end 2013 PepsiCo's cumulative total shareholder returns outpaced the S&P 500 on an annualize basis by 170 basis points. And these numbers tell the story of a company that's been a model of durability, delivering for our consumers, our customers and most importantly our shareholders. We are poised to win now and for years to come. But that future success is continued in our ability to capitalize on the trend shaping the marketplace, and there are five trends in particular I want to spend a moment highlighting. First, as we look out over the next 5 to 10 years, growth in developing and emerging markets will continue to outpace the growth in developed markets. Additionally, by 2030, experts estimate that another 3 billion people might join the middle class, all in developing and emerging markets. These are both enormous opportunities we're committed to maximizing by further developing our people, skills and tools. Second trend, the ongoing consumer shift towards more nutritious products will continue to accelerate. You know, we anticipated these trends early, we took the necessary steps to transform our portfolio. And in 2014 and beyond, we will keep innovating to deliver the convenient and functional nutritious snacks and beverages that consumers demand today, while never sacrificing on taste. Third, digital technology will disrupt business at every point in the value chain. The way we interact with retailers, shoppers and consumers is changing dramatically. To keep up with the technological advancement and adapt to the dynamic digital landscape, we are laser focused on evolving all points where technology touches our business.
- 18. Fourth, geopolitical andsocial instability is now the norm and it requires new levels of vigilance against threats to our people and supply chains. Fortunately our PepsiCo local teams have an intimate understanding of the communities and how to do business in volatile environments. And finally we are facing increasingly extreme weather affecting everything from commodity prices to our ability to operate during extreme weather events. While our size and scale allows us to manage the risks, our R&D team is working on developing formulations for new products to be able to cope with changes in raw material availability and prices. We believe these five mega-trends make up the "new normal." And with our focus, investment strategy, product diversity, operating model and people, we believe PepsiCo is well prepared to deliver great returns going forward. As we look to the future, we believe one of PepsiCo's important strategic advantages as we address global challenges is the power of our combined food and beverage portfolio. Our consumers can wake up to a breakfast of Quaker Real Medleys and Trop 50, enjoy Pepsi Max and Sun Chips at lunch and unwind in the afternoon with Stacey's Pita Chips, Sabra hummus, and Lipton Iced Tea after work. No matter the time of day or the occasion, PepsiCo has a product for you. Our combined portfolio along with our scale and relationships with retailers allows us to create in-store destinations featuring a wide range of PepsiCo products. You know, for example during the fourth of July season last year, the combination of Pepsi and Lay's at one major retail chain drove about a 40% increase in display inventory. Our relationships with retailers also help us grow complementary categories. For example, an existing PepsiCo beverage business in a market can enable us to enter the snacks business in that market. And this advantage extends to food service as well. Look at one of our biggest wins last year, Buffalo Wild Wings. We will now serve our products at more than 1,000 Buffalo Wild Wings locations because of the combined strength of our food and beverage portfolio. And for structural standpoint, a combined business model has driven numerous cost benefits saving us approximately $1 billion a year by integrating everything from procurement, to go-to-market, to human resources. And because PepsiCo is a food and beverage company, we have the ability to find growth and efficiencies in places that competitors just don't have access to. And this combination has proven successful in the past and is positioned to do so in the future. To ensure our continued success, we must keep an eye on the long term and take actions that result in sustainable growth. And I believe the way we do that is by continuing to demonstrate our commitment to Performance with Purpose. This means that we at PepsiCo
- 19. will continue touphold our promise to provide a range of products from treats to healthy eats, minimize our impact on the environment, provide a safe and inclusive workplace for our employees globally and respect, support and invest in local communities in which we operate. Performance with Purpose is how we "future-proof" our company at a time of increased unpredictability and competition, and today it's more important than ever. By staying true to Performance with Purpose, we will uphold our promises to shareholders and stakeholders and remainstrong not just for future quarters, but for future generations. . You know, I began this morning talking about values. Value that define a community and a company. As shareholders, these values are what you are investing in when you invest in PepsiCo. So when we tell you that our goals are to give you the highest quality, best tasting products, contribute to the communities in which we operate, and focus on principled, long- term success for the benefit of all of our shareholders and all those who have a stake in PepsiCo, you'll know that it's not just talk, it's the core way we do business. When you invest in PepsiCo, you're investing in a lasting American born and bred institution that is now global. When PepsiCo is strong, you are strong, because after all PepsiCo is your company and these values are your values. So to all of PepsiCo's shareholders - you are stewards of a great legacy and a great company. A company committed to responsible, sustainable growth. A global company rooted in fundamental great American values. And a company that will work every day to do right by its consumers, customers, shareholders and communities just like this one. Thank you very much for your time. Now I'll turn the meeting over to Larry Thompson. Larry? Larry Thompson - PepsiCo, Inc. - EVP, Government Affairs, General Counsel and Corporate Secretary Thank you Madam Chairman. I am pleased to report that a majority of the votes entitled to be cast at this meeting are represented today in person or by proxy and therefore we have the necessary quorum under state law and our bylaws. If anyone has not yet voted and would like to do so by ballot during the meeting, please raise your hand. We have staff assistants who will distribute ballots to you. Now these ballots must be completed and turned in before the Inspectors of Election announce the closing of the polls. If you are a holder of convertible preferred stock, please tell our staff assistant so he or she can give you the appropriate ballot. Please remember to vote on all items, not just those on which you may want to change an earlier vote.
- 20. Please also rememberto print your name clearly and sign your ballot. If you have previously voted by proxy, you do not need to vote today unless you wish to change your vote. If you have a legal proxy, please hand it in with your ballot. Now the ballots and proxies will be held in the possession of our Inspectors of Election, James Kiszka and Sharon Tucker-Lockett, from Computershare Trust Company, who have previously taken their oath as Inspectors of Election at this meeting. Mr. Kiszka and Ms. Tucker-Lockett will you please stand and be recognized. Thank you. Consistent with state law and our bylaws, a list of the shareholders entitled to notice of this meeting is available for inspection at the registration desk throughout the meeting. Indra Nooyi - PepsiCo, Inc. - Chairman, CEO Now that we have a quorum, I declare this meeting to be duly convened for purposes of transacting such business as may properly come before it in accordance with state law and our bylaws. It is now in order to proceed with the meeting. Will the Inspectors of Elections please open the polls? James Kiszka - Computershare - Senior Relationship Manager I hereby declare the polls to be open. Indra Nooyi - PepsiCo, Inc. - Chairman, CEO We have six agenda items this morning: the first is the election of directors, the second is the ratification of the appointment of KPMG LLP as the company's independent registered public accountants for fiscal year 2014. The third is the advisory approval of executive compensation, the fourth is the approval of the material terms of the performance goals of the PepsiCo, Inc. Executive Incentive Compensation Plan, and two shareholder proposals will then be voted on if properly presented. In proceeding with the meeting, we will introduce all agenda items and then we will open the floor to questions on just the agenda items. I ask you to hold all questions on our agenda items until we actually open the floor and to please direct your questions only to me. The proponents of the shareholder proposals, or their representatives, will have five minutes to present each shareholder proposal. Because we did not receive notice in accordance with our bylaws of any additional matters to be considered, no other proposals or nominations may be introduced at this meeting. After we address any questions regarding the agenda items, we will collect all the ballots and then ask our Inspectors of Election to tabulate the voting results. And at the end of the meeting, we will open the floor to general questions. You should have a copy of the rules
- 21. of procedure thatwe will follow in the conduct of the meeting. And we please appreciate your cooperation. I've asked Larry Thompson to address any issues that arise under those rules. So let's begin with our first item, which is the election of directors. I place before the meeting to serve as directors for the coming year the 13 individuals whose names and biographies appear in our proxy statement. Our board recommends a vote "for" each of the nominees for director. We now turn to our second agenda item, the ratification of the appointment of KPMG as our independent registered public accountants for 2014, which I place before the meeting. Doug Ruud and Alan Colaco are here with us representing KPMG and will be available to answer questions or make a statement, if they would like to do so, later in the meeting. Our board recommends a vote "for" the ratification of the appointment of KMPG as our independent registered public accountants for 2014. The third agenda item is the advisory vote to approve the compensation of the executive officers named in our proxy statement, which I place before the meeting. Our board recommends a vote "for" the advisory resolution to approve executive compensation. We now come to our fourth agenda item, the approval of the material terms of the performance goals of PepsiCo Inc. Executive Incentive Compensation Plan, which I place before the meeting. Our board recommends a vote "for" approval of this agenda item. We'll now move on to the shareholder proposals in the order in which they appear in the agenda. Each of the shareholders or their representatives will present their respective proposals. Now we turn to our first shareholder proposal submitted by Mr. James W. Mackie regarding a political contributions policy. Would Mr. Mackie please introduce himself and the proposal? James Mackie - - Shareholder Madam Chairman and directors, my name is James W. Mackie, I reside in Bryn Mawr, Pennsylvania. Madam Chairman, directors and officers, thank you for the opportunity to present my proposal concerning political contributions. I move the adoption of the proposal concerning political contributions as stated in the proxy statement. I bring this proposal strictly on my own and do not represent any group, any organization or political party. In the simplest terms, I'm requesting that the board of directors prepare a clear and easily understood policy stating the circumstances under which PepsiCo will make political contributions in cash or in kind and submit the proposal to the stockholders for approval.
- 22. After the stockholderapproval, no political contributions would be permitted unless they were in accordance with the corporate policy. In the current political environment, we have seen candidates at all levels spend enormous sums of money to win an election. This has been spent to elect individuals who support political and, in particular, positions that may or may not in the best interest of the public. The use of super PACs and the large individual contributors has raised the stakes in the pay to play political arena and often the super PAC donors are not identified until after the election is over. The unfettered ability of a corporation or organization to contribute large sums to political campaigns can only lead to a lowering of the quality of governance and regulation. And that would be detrimental to both PepsiCo and the public. I chose to present my proposals to PepsiCo because I hold the current management in high esteem. And believe that Pepsi can be a leader in corporate governance with the publication of a corporate policy setting forth clear parameters for making political contributions. This would also benefit the directors and management if and when pressured by political groups to make a significant contribution. The current PepsiCo policy on political contribution relies on the integrity of the current management. With changing management in the future and without a stated corporate policy, stockholders might find PepsiCo funding candidates with whom they have severe differences of opinion. Having been employed by a large corporation, where I worked with state and federal regulatory agencies and with the state legislature, I recognize a need for business to provide honest and accurate input through direct and indirect contact with government and regulatory agencies. PepsiCo products are subject to many regulatory requirements, and it is imperative that the company provide transparent and truthful communication with appropriate agencies and regulatory bodies. I move that PepsiCo adopt a corporate policy clearly stating the criteria for making political contributions and have the policy submitted to the stockholders for approval. Thank you. Indra Nooyi - PepsiCo, Inc. - Chairman, CEO Thank you Mr. Mackie and thank you for taking the time to share your proposal with us. And let me take a minute to share with you our board's position on this matter as outlined in our proxy statement. You know, your proposal calls for a political contributions
- 23. policy to beapproved by at least 75% of shares outstanding and provides that no political contributions can be made by PepsiCo unless they are consistent with that policy. PepsiCo's active participation in public policy matters, including political expenditures and participation in lobbying activities on topics of relevance to our business, is essential and appropriate for our company and PepsiCo has already adopted a political contributions policy which we've clearly stated on our website. We've also developed various processes designed to further promote corporate accountability and transparency to shareholders including a requirement that all contributions must reflect PepsiCo's business or strategic interests and not that of individual officers or directors. It is important to note that PepsiCo's political contributions are focused on business issues that are critical to our company and our stakeholders. And PepsiCo's Public Policy and Government Affairs team works with the senior management to develop annual and long-term public policy priorities. And our board has active oversight of PepsiCo's public policy activities through the Nominating and Corporate Governance Committee which annually reviews and assesses PepsiCo's political expenditures. MAY 07, 2014 / 1:00PM, PEP - PepsiCo Annual Shareholder Meeting All political expenditures are made in a non-partisan manner and after careful consideration of specific criteria, including a candidate's commitment to the long-term public policy goals of PepsiCo. We understand that our engagement in public policy matters is an important issue for shareholders and we too believe that transparency and accountability are warranted. Accordingly our shareholders can obtain very detailed information on PepsiCo's website about our policy and procedures governing public policy matters including political contributions. On our website, you will find the specific criteria that are considered in connection with all political contributions. You will also find disclosure of the total amount of PepsiCo's annual corporate political contributions in the United States, as well as our annual expenditures on federal lobbying-related activities in the United States. I note that PepsiCo follows all applicable campaign finance, disclosure and other rules regarding both political giving and reporting on lobbying activities and has implemented internal controls to promote compliance with all these rules. We recommend that shareholders do not support this proposal. By setting an unduly high standard for shareholder approval, this proposal would be impractical to adopt and would
- 24. virtually shut downPepsiCo's ability to make political expenditures in support of public policy issues that are critical to the success of our business. The final item on the ballot today is a shareholder proposal submitted by Mr. Kenneth Steiner requesting adoption of a policy requiring our senior executives to retain a significant portion of stock. Will Tamara Williams, the representative of Kenneth Steiner please introduce herself and the proposal? Tamara Williams - - Representative of Shareholder Hello, my name is Tamara Williams and this is proxy item number six, policy regarding executive retention of stock by Kenneth Steiner of Great Neck, New York. Resolved: Executives to retain significant stock. Shareholders urge that our executive pay committee adopt a policy requiring senior executives to retain a significant percentage of shares acquired through equity pay programs until reaching normal retirement age and to report to shareholders regarding the policy before our company's next annual meeting. For the purpose of this policy, normal retirement age would be an age of at least 60 and determined by our executive pay committee. Shareholders recommend that the committee adopt a share retention percentage requirement of 50% of net after-tax shares. This single unified policy shall prohibit hedging transactions for shares subject to this policy which are not sales but reduce the risk of loss to the executives. This policy shall supplement any other share ownership requirements that have been established for senior executives and should be implemented so as not to violate our company's existing contractual obligations or the terms of any pay or benefit plan currently in effect. Requiring senior executives to hold a significant portion of stock obtained through executive pay plans would focus our executives on our company's long-term success. A Conference Board Task Force report stated that hold-to-retirement requirements give executives an ever- growing incentive to focus on the long-term stock price performance. Indra Nooyi - PepsiCo, Inc. - Chairman, CEO Thank you, Ms. Williams. And let me share with you our board's point of view on this topic as outlined in our proxy statements. Our board agrees with the proponent's view th, l,lat our executive officers should own a significant amount of PepsiCo stock in order to align their interest with those of shareholders. However, PepsiCo's executive compensation programs and robust governance policies are already designed to accomplish the objectives of this proposal. Our proxy statement contains substantial detail regarding these programs and policies, but here are some key points I'd like to highlight for you.
- 25. . First, PepsiCo'sexecutive officers are already subject to strong stock ownership requirements. As PepsiCo's Chief Executive Officer, I'm required to hold PepsiCo's stock having a value equal to eight times my annual salary. As noted in the proxy statement, I own PepsiCo stock worth more than 19 times my annual salary. Other executive officers of the company are required to hold PepsiCo stock having a value equal to either four or two times their annual salary, depending on their position. So while the shareholder proposal seeks a policy requiring executive officers to retain a certain percentage of the total shares granted to them, our current policies require stock ownership based on an executives' annual salary. Second, executive officers who have not yet achieved their stock ownership requirement are subject to PepsiCo's strict share retention policies. Our executive officers have five years from the date of appointment to their position to meet their ownership requirement. Until the ownership requirement is satisfied, our policies limit the cash proceeds that executive officers may receive upon exercise of stock options and upon payout of any PepsiCo units, which is PepsiCo's performance share rewards. Additional policies we already have in place to motivate our executive officers to deliver long-term performance include post-employment stock holding requirements, a strong clawback policy that continues to apply following an executive officer's retirement or termination and a prohibition on our executive officers engaging in any hedging involving PepsiCo stock. Finally, given that our executive compensation programs are designed with the objective of focusing our executive officers on PepsiCo's long-term success, our board is very confident that the underlying goal of this proposal has already been met. The annual long-term incentive award, which rewards business performance measured through a combination of critical internal operating metrics and market-based stock performance, is weighted more heavily than any other component of total direct compensation for our executive officers. And for all these reasons, we recommend that shareholders do not support this proposal. We will open the floor to general questions on other topics at the end of the meeting. For now, are there any questions on the agenda items we just reviewed? As reminder, in order to accommodate all of you who wish to pose a question, each shareholder will be limited to three minutes for questions or comments. And to facilitate this process, you will hear a chime indicating when it's time for you to begin to finalize your question or remarks.
- 26. So questions onjust on the agenda items? Comments on just the agenda items? Comments, questions, yes, what we just talked about. Thank you. Has everyone voted who wishes to do so? Please put your hand up if somebody has a ballot to be collected. Have all the ballots have been collected? Anyone? Two outstanding, okay. All the votes collected, good. We now seem to have all of the ballots and since those desiring to vote have done so, I will ask our Inspectors of Election to close the polls. Mr. Kiszka and Ms. Tucker-Lockett? James Kiszka - Computershare - Senior Relationship Manager I now declare the polls closed. Indra Nooyi - PepsiCo, Inc. - Chairman, CEO All right., 2014 / 1:00PM, PEP - PepsiCo Annual Shareholder Meeting Larry Thompson - PepsiCo, Inc. - EVP, Government Affairs, General Counsel and Corporate Secretary The responsibility of the Inspectors of Election is to tabulate the voting results and they will begin to do so now while we will take a brief break. Indra Nooyi - PepsiCo, Inc. - Chairman, CEO Larry Thompson will now announce the preliminary results of the balloting. Larry? Larry Thompson - PepsiCo, Inc. - EVP, Government Affairs, General Counsel and Corporate Secretary Thank you, Madam Chairman. I'd like to report the preliminary results of the voting. I remind everyone that the holders of our common stock and the holders of our convertible preferred stock vote together on all matters as a single class. With respect to the nominees for director, I'd like to report that all director nominees have been duly elected by the affirmative vote of a majority of the votes cast. Ballot item number two, the appointment of KPMG as our independent auditors for 2014, has been ratified by the affirmative vote of approximately 99% of the votes cast. Ballot item number three, the advisory vote on executive compensation, has been approved on an advisory basis by the affirmative vote of approximately 89% of the votes cast. Ballot item number four, the material terms of the performance goals of PepsiCo Executive Compensation Plan, has been approved by the affirmative vote of approximately 96% of the votes cast.
- 27. Ballot item numberfive, a stockholder proposal calling for a political contributions policy, has received approximately 3.6% of the votes cast and thus did not receive enough votes to pass. Ballot item number six, a shareholder proposal regarding a policy on executive retention of stock, has received approximately 25% of the votes cast and thus did not receive enough votes to pass. Again, I remind you that these are preliminary voting results and final results will be available after the votes have been certified by our Inspectors of Election. The final results will be disclosed on a Form 8-K that will be filed with the SEC. Indra Nooyi - PepsiCo, Inc. - Chairman, CEO Thank you, Larry. And this concludes the business portion of our meeting. I thank you all for your time and attention today. All of the proposals eligible for consideration by the shareholders at this annual meeting have been presented and the formal business portion of the meeting is now adjourned.
- 28. COMPANY PROFILE About PepsiCo PepsiCois a global food and beverage leader with net revenues of more than $65 billion and a product portfolio that includes 22 brands that generate more than $1 billion each in annual retail sales. Our main businesses – Quaker, Tropicana, Gatorade, Frito-Lay and Pepsi-Cola – make hundreds of enjoyable foods and beverages that are loved throughout the world. PepsiCo’s people are united by our unique commitment to sustainable growth by investing in a healthier future for people and our planet, which we believe also means a more successful future for PepsiCo. We call this commitment Performance with Purpose: PepsiCo’s promise to provide a wide range of foods and beverages from treats to healthy eats; to find innovative ways to minimize our impact on the environment by conserving energy and water and reducing packaging volume; to provide a great workplace for our associates; and to respect, support and invest in the local communities where we operate. PepsiCo India Region: Leadership through Performance with Purpose PepsiCo entered India in 1989 and in a short period, has grown into one of the largest food and beverage businesses in the country. PepsiCo growth in India has been guided by its global vision of “Performance with Purpose”. This means that while businesses maximize shareholder value, they have a responsibility to all the stakeholders, including the communities in which they operate, the consumers they serve and the environment whose resources they use.
- 29. Large investor andone of the largest food & beverage businesses in India One of the largest US multinational investors in the country, PepsiCo has been consistently investing in India and has built an expansive beverage and snack food business supported by 38 beverage plants and 3 food plants. PepsiCo and its partners recently announced an additional targeted investment of Rs. 33,000 Crore in India by 2020 in the areas of product innovation, increasing manufacturing capacity, ramping up market infrastructure, strengthening supply chain and expanding company’s agriculture programme. PepsiCo India’s diverse portfolio includes iconic brands like Pepsi, Lay’s, Kurkure, Tropicana, Gatorade and Quaker. In two decades, the company has been able to organically grow eight brands that generate Rs. 1000 crores or more in estimated annual retails sales and are household names, trusted across the country. A growing portfolio of enjoyable and wholesome snacks and beverages PepsiCo India’s portfolio reflects its commitment to nourish consumers with a diverse range of fun and healthier products. The portfolio includes several healthier treats like Quaker Oats, Tropicana juices, Tropicana fruit powders, rehydrator Gatorade, Tata Water plus, Lay’s baked range, Quaker flavoured oats and Quaker Nutri Upma & Nutri Poha breakfast range with the power of wholegrain. Model partnership with over 24,000 farmers PepsiCo India has pioneered and established a model of partnership with farmers and now works with over 24,000 happy farmers across nine states. More than 45 percent of these are small and marginal farmers with a land holding of one acre or less. PepsiCo provides 360- degree support to the farmer through assured buy back of their produce at pre-agreed prices, quality seeds, extension services, disease control packages, bank loans, weather insurance, and the latest technological practices. The association with PepsiCo India has not only raised the incomes of small and marginal farmers, but also their social standing. Global leader in water conservation In 2009, PepsiCo India achieved a significant milestone, by becoming the first business to achieve ‘Positive Water Balance’ in the beverage world, and has been Water Positive since then. This fact has been independently assured by Deloitte Touché Tohmatsu India Pvt. Ltd. In 2012, PepsiCo India saved 8.2 billion litres more that it consumed in its manufacturing operations. The company made this possible through innovative irrigation practices like direct seeding, community water recharging initiatives, and by reducing the consumption of water in its manufacturing facilities. PepsiCo is lauded for its efforts for water conservation and has
- 30. received numerous awardssuch as CII National award for water management, Water Digest award for water practices and Golden Peacock award for water conservation amongst others. Care for the environment PepsiCo India is now focused on reducing its carbon footprint. More than 40 per cent of its energy is today generated from renewable sources such as bio mass & rice husk boilers and wind turbines. Initiatives such as reduction in use of chemicals, eco-friendly packaging initiatives and efficient waste management help reduce load on the environment. PepsiCo in partnership with the NGO Exnora and local municipalities has also been working on a unique waste collection and treatment program called ‘Waste-to-Wealth’. The award winning programme has positively impacted more than 5,00,000 people. Exemplary employment practices PepsiCo India provides direct and indirect employment to almost 2,00,000 people. The company believes in providing employment and growth opportunities to local talent. Its ‘College of Leadership’, ensures early identification of talent, and employees’ focused development through critical experiences. PepsiCo firmly believes that encouraging diversity means encouraging policies and systems that respect people’s special needs. Not only does PepsiCo have a vibrant and diverse workforce, it takes the utmost care to make dynamic business leaders of its employees and foster their career and personal growth through differentiated experiences and a robust leadership development model. External Awards received by PepsiCo India in 2013 Doc T.S.R. Murali, Head R&D, was awarded a Gold Medal by Secretary, Ministry of Food Processing, Government of India for his outstanding contribution in supporting R&D, Innovation and growth of Food Processing Sector in India. Satharia plant was awarded LEED (Leadership in Energy and Environmental Design) Gold Green Certification by Indian Green Building Council. India Region Finance and BIS team won UK’s Adam Smith award in collaboration with Citibank for Best practices and innovation under the section Asia Pacific Regional Award for Best Practices in the “Highly Commended’ category. PepsiCo India won the award for “Excellence in Developing the Leaders of Tomorrow” at the second edition of the SHRM (Society for Human Resource Management) India HR Awards. PepsiCo India’s Sangareddy Plant was recognized by CII with “Commendation Certificate for Strong Commitment to Excel in Food Safety” in the category of “Large Manufacturing Food Businesses – Beverages.
- 31. PepsiCo India’sSathariya, plant won the CII Award for Outstanding Performance in Food Safety Excellence in the Category of ‘Rising Star; Large Manufacturing Food Businesses – Beverages.’ Performance with Purpose At PepsiCo, 'Performance with Purpose' means delivering sustainable growth by investing in a healthier future for people and our planet. As a global food and beverage company with brands that stand for quality and are respected household names — Pepsi, Frito-Lay, Quaker Oats, Tropicana and Gatorade to name a few — we will continue to build a portfolio of enjoyable and wholesome foods and beverages; find innovative ways to reduce the use of energy, water and packaging; and provide a great workplace for our employees. Additionally, we will respect, support and invest in the local communities where we operate by hiring local people, creating products designed for local tastes and partnering with local farmers, governments and community groups. Because a healthier future for all people and our planet means a more successful future for PepsiCo. This is our promise. Performance To all of our investors, it's a promise to strive to deliver superior, sustainable financial performance. Human Sustainability To the people of the world, it is a promise to encourage people to live healthier lives by offering a portfolio of both enjoyable and wholesome foods and beverages. As the world's nutrition needs continue to evolve, we are committed to encouraging people to live healthier by offering a portfolio of both enjoyable and wholesome foods and beverages. We're adding more whole grains, nuts, fruits and vegetables while reducing added sugars, lowering sodium and saturated fat levels and moving to heart-healthier oils and natural sweeteners. We're also embarking on many initiatives to improve calorie labeling, support nutrition education, bring physical education to schools and feed malnourished people in lower- income communities. Our R&D investment has increased by more than 40 percent over three years, helping us step across industry boundaries to address core challenges to make our products more nutritious.
- 32. Environmental Sustainability To theplanet we all share, it is a promise to be a good citizen of the world, protecting the Earth's natural resources through innovation and more efficient use of land, energy, water and packaging in our operations. While we continue to make great strides on our portfolio transformation, we are also committed to improving the environmental profile of our operations worldwide. Most recently, we opened a facility in Chongqing, China, that is designed to use 22 percent less water and 23 percent less energy than our existing in-country facilities. In the U.S., our Frito-Lay business developed a fully compostable bag for our SunChips multigrain snacks, and the facility in Arizona that produces these snacks just received the Environmental Contribution of the Year award at the 2010 Global Water Awards. One of our goals is to achieve positive water balance across all our businesses. For every liter we use, we intend to return one to the Earth. Sound impossible? We already did it across our India beverage operations. And India is just one step in our journey. Talent Sustainability To the employees of PepsiCo, it is a promise to invest in them to help them succeed, to work continually to develop and retain exceptional people and to create employment opportunities in the communities we serve. Another crucial element of our promise is our commitment to invest in our associates so they can succeed and develop the skills needed to drive our sustainable growth. To advance these imperatives, we have made our training and development regimen more robust, providing additional experiential learning to build leadership skills and functional capabilities across our businesses. Our efforts have earned external recognition in key talent and workplace rankings, including Fortune magazine's 'Top Companies for Leaders' list in 2009. We also remain committed to strengthening a diverse, inclusive and empowering workplace culture in which all our associates can thrive while helping to raise standards of living in the communities in which we operate. We are proud of the progress we continue to make, including increasing the number of women in management globally, reducing diversity turnover and creating thousands of new jobs in growing markets.
- 33. Human Sustainability It's apromise to encourage people to live healthier by offering a portfolio of both enjoyable and wholesome foods and beverages. Global goals include: Increasing the whole grains, fruits and vegetables, nuts, seeds and low-fat dairy in its product portfolio. Reducing the average sodium per serving in key global food brands in key markets by 25 percent by 2015. Reducing the average saturated fat per serving in key global food brands in key markets by 15 percent by 2020. Reducing the average added sugar per serving in key global beverage brands in key markets by 25 percent by 2020. PepsiCo India has been at the forefront of leading the human sustainability agenda and some of the initiatives include: The decision to eliminate the direct sale of full-sugar soft drinks to primary and secondary schools around the globe. Frito Lay's products are MSG and trans-fat free and contain voluntary on pack nutritional labeling. Breakfast cereal, Quaker Oats, is rich in soluble fibre, beta-glucan which helps in lowering cholesterol. The new Lay's Classic Salted has been launched with 25 percent less sodium. Lehar Gluco+ is a lemon-flavored drink with glucose, electrolytes and iron that provides instant energy and refreshment to consumers. Tropicana 100% juice range provides fruit nutrients PepsiCo offers products with zero or reduced calories such as Diet Pepsi, and Aquafina packaged water and bulk water. Gatorade, the world's leading sports drink, has valuable re-hydration benefits and is scientifically formulated to replenish electrolytes, and refuel carbohydrate energy. Most of PepsiCo's products are available in a range of packages so consumers can choose a size suited to particular consumption occasion, and offering choices for portion control.
- 34. Lehar IronChusti is an extruded snack fortified with best form of iron (NaEDTA) to address pervasive problem of Iron Deficiency Anaemia for base of pyramid population at an affordable price. Nutritionally a single pack delivers 25 percent of iron RDA and 50 percent of Vitamin B1, B12 and folate RDA for adolescent girls. The product has been specifically designed for adolescent girls recognizing the impact of micronutrient deficiency in context of intergenerational cycle of malnutrition. The product is made with wholesome local grains like ragi, soya and rice. Aquafina packaged water for safe hydration Environmental Sustainability To the planet we all share It is a promise to be a good citizen of the world, protecting the Earth's natural resources through innovation and more efficient use of land, energy, water and packaging in our operations. Our business focuses on sustainable growth and relies on the Earth's natural resources every day. As our business grows in developed, developing and emerging countries, we remain committed to minimizing the impact it has on the environment. We strive to use only methods and tools that are scientifically proven, socially responsible and economically sound. In India, we operate three ongoing initiatives to better the environment. These are closely linked to our business and are areas in which we believe we can make a very positive impact. Our initiative to replenish water has been a major success. 2009 was a milestone for us – we were able to achieve a positive water balance, giving back more water than we consumed through our various initiatives of recharging, replenishing and reusing water. Click here to know more Our efforts to convert waste to wealth have been very fruitful. We have educated community members on how to segregate and recycle their waste. In a project employing over 500 people, we transform bio-degradable waste into organic manure through vermi-culture. Click here to know more We have also partnered with farmers across the country to help them boost their productivity and income. We have pioneered contract farming, developed robust, high-quality potato seeds, arranged for farmer loans, and aided citrus growers in a variety of ways.
- 35. Our Goals andCommitments In 2009, we announced 15 global goals and commitments to guide our work to protect the Earth's natural resources through innovation and more efficient use of land, energy, water and packaging in our operations. We are focusing our work where we can make the most positive impact (water, packaging, climate change and agriculture) and on key policies and partnerships to help provide solutions to address the world's environmental challenges. Water: Respect the human right to water through world-class efficiency in our operations, preserving water resources and enabling access to safe water Improve our water use efficiency by 20 percent per unit of production by 2015. Strive for positive water balance in our operations in water-distressed areas. Provide access to safe water to 3 million people in developing countries by the end of 2015. Land and Packaging: Rethink the way we grow, source, create, package and deliver our products to minimize our impact on land Continue to lead the industry by incorporating at least 10 percent recycled polyethylene terephthalate (rPET) in our primary soft drink containers in the US, and broadly expand the use of rPET across key international markets. Reduce packaging weight by 350 million pounds, avoiding the creation of 1 billion pounds of landfill waste by 2012. Work to eliminate all solid waste to landfills from our production facilities. Climate Change: Reduce the carbon footprint of our operations Improve our electricity use efficiency by 20 percent per unit of production by 2015. Reduce our fuel use intensity by 25 percent per unit of production by 2015. Commit to an absolute reduction in GHG emissions across global operations. Community: Respect and responsibly use natural resources in our businesses and in the local communities we serve Apply proven sustainable agricultural practices on our farmed land. Provide funding, technical support and training to local farmers. Promote environmental education and best practices among our associates and business partners. Integrate our policies and actions on human health, agriculture and the environment to make sure they support each other.
- 36. Partnership with Farmers AtPepsiCo India, we see ourselves as an agriculture company. Since our entry into India in 1989, we have worked closely with farmers to help improve both their livelihoods and agricultural yield. Our journey began with our successful introduction of a high-yielding variety of tomato, and we went on to help paddy farmers increase their crop. Today our ventures into crop diversification and the farming of high-quality potatoes and other edibles have transformed the lives of thousands of Indian farmers. We continue to strengthen our partnerships with farmers across the country to boost their productivity and income. We plan to strengthen farmer connect from 21,000 in 2009 to 50,000 by 2012. HELPING FARMERS IMPROVE YIELD AND INCOME The company’s vision is to create a cost-effective, localized agri-supply chain for its business by: Building PepsiCo’s stature as a development partner by helping farmers grow more and earn more. Introducing new high-yielding varieties of potato and other edibles. Introducing sustainable farming methods and practising contact farming. Making world-class agricultural practices available to farmers and helping them raise farm productivity. Working closely with farmers and state governments to improve agri-sustainability and crop diversification. Providing customized solutions to suit specific geographies and locations. Facilitating financial and insurance services in order to de-risk farming. THE JOURNEY SO FAR Where we stand today, at a glimpse Today PepsiCo India’s potato farming programme reaches out to more than 12,000 farmer families across six states. We provide farmers with superior seeds, timely agricultural inputs and supply of agricultural implements free of charge. We have an assured buy-back mechanism at a prefixed rate with farmers. This insulates them from market price fluctuations.
- 37. Through ourtie-up with State Bank of India, we help farmers get credit at a lower rate of interest. We have arranged weather insurance for farmers through our tie-up with ICICI Lombard. We have a retention ratio of over 90%, which reveals the depth and success of our partnership. In 2010, our contract farmers in West Bengal registered a phenomenal 100% growth in crop output, creating in a huge increase in farm income. The remarkable growth has resulted in farmers receiving a profit between Rs. 20,000– 40,000 per acre, as compared to Rs. 10000–20,000 per acre in 2009. Contact farming PepsiCo pioneered contact farming in India in 1989, when in order to improve the performance of a tomato processing plant in Punjab, it imported and tested high-yielding varieties that thrived best in India. Consequently, yield improved by over 300% and the length of the tomato season more than doubled, resulting in a substantial increase of farmer incomes. Today, the success of contact farming has spread and PepsiCo engages with over 22,000 farmers across the country to grow a variety of crops. Through this partnership, PepsiCo has transformed the lives of thousands of farmers by helping them refine their farming techniques and raise farm productivity. Our high-quality seed programme In order to provide our farmers the ‘best quality potato seeds’, PepsiCo collaborated with the Thapar Institute of Technology to develop quality potato mini-tubers. PepsiCo has also invested in a world-class potato mini-tuber facility at Zahura in Punjab which helps getting robust and disease-free seeds to our company’s contact farmers. Potato farming PepsiCo India has introduced world-class, top-quality, high-yielding potato varieties. High-yielding potato seeds have allowed farmers to produce world-class potatoes and obtain higher returns. We have partnered with more than 11,000 farmers working across Punjab, Uttar Pradesh, Karnataka, Bihar, West Bengal, Gujarat and Maharashtra for the supply of world-class chip- grade potatoes. We have partnered with State Bank of India to get soft loans to all our contact farmers, thus reducing their cost of cultivation and saving them from the clutches of moneylenders (higher interest rates)
- 38. Replenishing Water Conserving theworld's most precious asset: Water PepsiCo India has pioneered several major initiatives to replenish water in communities. Our goal is to conserve, replenish and thus offset the water used in our manufacturing process through community water recharge projects and water conservation projects in agriculture. 2009 was a year of immense pride and joy for PepsiCo India. We were able to give back more water than we consumed through our various initiatives of recharging, replenishing and reusing water. Positive water balance In 2009, PepsiCo India achieved a significant milestone, by becoming the first business to achieve ‘Positive Water Balance’ in the beverage world, a fact verified by Deloitte Touché Tohmatsu India Pvt. Ltd. The company has been Water Positive since then. PepsiCo's community water initiatives Aurangabad Neelamangala Panipat Sangareddy PepsiCo Community Check–Dam Project Paithan, Aurangabad: The initiative PepsiCo conducted a water resource assessment study near its Aurangabad plant. In partnership with a civil society organization, Alternative Development initiatives (ADI), PepsiCo selected the village, Wahegaon, as well as Mudhalwadi,Rahatgaon and Esarwadi, as the core areas to implement its interventions to replenish ground water. PepsiCo India facilitated construction of 13 check-dams and recharged 100 wells. Impact The project created the potential to recharge more than 1 billion litres of water. It benefits nearly 12,000 community members through improved access to water, additional crops, increase in yield of rain-fed crops and the opportunity for a second cultivation cycle during the Rabi season due to improved availability of water. Water levels have visibly risen after implementation; old dry wells now have water and farmers’ incomes have improved by Rs. 20,000/acre. PepsiCo has also provided safe drinking water to Nagnath Vidyalaya, Wahegaon, by laying an underground pipeline, an overhead tank and taps.
- 39. Waste to Wealth PepsiCoSolid Waste Management Programme PepsiCo India continues to strengthen its Solid Waste Management initiatives in partnership with Exnora, an environmental NGO. This award-winning, income- generating partnership provides a clean environment to more than 500,000 people across India. A unique income-generating partnership with leading environmental NGO, Exnora, a pioneer in waste management. Community members enjoy the benefits of a clean environment and are educated on how to recycle waste, not just relocate it. Households segregate their bio-degradable waste from their recyclable waste, and the programme recycles 80 percent of household garbage. Bio-degradable waste is converted into organic manure through the process of vermi-culture. This project provides livelihood to more than 600 community green ambassadors memers. Recyclable waste such as PET and plastics, waste paper and tetra packs are recycled. The community awareness programme includes door-to-door campaigns and street plays to motivate people to segregate organic and inorganic garbage at source to enable recycling. Every aspect of the programme is built around community and government participation to help the programme evolve into a self-sustaining model. The initiative recycled nearly 35,000 tons that would have otherwise been relocated to landfills. Awards The unique PepsiCo–Exnora initiative in Pammal was awarded the environmental Golden Peacock Award for Innovation in 2006. The Zero Solid Waste Centre in Pammal was recognized as a model project by UNICEF in 2007. PepsiCo–Exnora Waste to Wealth programme won the BSE NASSCOM Social and Corporate Governance Award 2008.
- 40. Talent Sustainability To theemployees of PepsiCo… It is a promise to invest in them to help them succeed, to work continually to develop and retain exceptional people and to create employment opportunities in the communities we serve. As PepsiCo continues its journey of sustainable growth, we must continue to hire, retain and develop our leadership bench and a highly skilled and diverse workforce. After all, our employees are our greatest strength. We have an extraordinary talent base across our organization — in our manufacturing facilities, our sales and distribution organization, our marketing groups, our staff functions and our general managers. As we expand our business, we are heightening our focus on ensuring that we maintain an inclusive environment and develop the careers of our employees. Our goal is to continue to have the leadership talent, capabilities and experience necessary to grow our business well into the future. Our Goals and Commitments In 2009, we announced 12 new goals and commitments to achieve Talent Sustainability. These reinforce our promise to develop our employees. Our commitments include enabling our associates to thrive in a diverse, inclusive culture; providing a safe and empowering workplace; providing opportunities that strengthen our associates' skills and capabilities; and contributing to better living standards in the communities we serve. Culture: Enable our people to thrive by providing a supportive and empowering workplace. Ensure high levels of employee engagement and satisfaction as compared with other Fortune500 companies. Foster diversity and inclusion by developing a workforce that reflects local communities. Encourage our employees to lead healthier lives by offering workplace wellness programmes. Ensure a safe workplace by continuing to reduce Lost-Time Injury Rates while striving to improve other occupational health and safety metrics through best practices.
- 41. Support ethicaland legal compliance through annual training in our Code of Conduct, which outlines PepsiCo's unwavering commitment to its human rights policy, including treating every employee with dignity and respect. Career: Provide opportunities that strengthen our employees' skills and capabilities to drive sustainable growth. Become universally recognized through top rankings as one of the best companies in the world for leadership development. Create a work environment in which employees know that their skills, talents and interests can fully develop. Conduct training for employees from the frontline to senior management, in order to ensure that employees have the knowledge and skills required to achieve performance goals. Community: Contribute to better living standards in the communities we serve. Create local jobs by expanding operations in developing countries. Support education through PepsiCo Foundation grants. Support associate volunteerism and community involvement through company-sponsored programmes and initiatives. Goals & Commitments At PepsiCo, Performance with Purpose means delivering sustainable growth by investing in a healthier future for people and our planet. As a global food and beverage company with brands that stand for quality and are respected household names – Quaker Oats, Tropicana, Gatorade, Lay's and Pepsi-Cola, to name a few – we will continue to build a portfolio of enjoyable and wholesome foods and beverages, find innovative ways to reduce the use of energy, water and packaging, and provide a great workplace for our employees. Additionally, we will respect, support and invest in the local communities where we operate, by hiring local people, creating products designed for local tastes and partnering with local farmers, governments and community groups. Because a healthier future for all people and our planet means a more successful future for PepsiCo. This is our promise.
- 42. Other Community Initiatives Someof the Other Initiatives taken by PepsiCo: PepsiCo India HIV/AIDS Initiative PepsiCo India embarked on the HIV / AIDS journey in 2005, along with our Technical partner The International Labor Organization (ILO), with the purpose of spreading awareness amongst all our stakeholders. We have built the whole program in a manner to build capacity within and externally and have focused on the “Each one Teach one” approach to ensure sustainability. The program was kicked off by creating a pool of Master Trainers and Peer Educators who could cascade the program across all our work locations along with NGOs who were also trained along with PepsiCo employees. We started the program by cascading HIV / AIDS awareness amongst our employees. This was progressively enhanced to cover other stakeholders including spouses of employees, business partners, distributors, contractual workers, and our bottling partners. We further strengthened the impact of our efforts through community outreach programs where we leveraged our NGO partners across the country. Today we have 58 Master Trainers and 175 Peer Educators across both businesses and our endeavor is to continue to create more and most Master Trainers and Peer Educators. PepsiCo India has been awarded TERI Corporate Award for Business Response to HIV/AIDS in 2009. PepsiCo India – Akshay Patra Partnership PepsiCo India has partnered with Akshaya Patra, an NGO that supports the "Mid-day meal" program launched by Government of India feeding over 1.4 million underprivileged students every day of the school year, in 20 locations, across 9 states in India. For children belonging to the weaker economic sections of society, a full meal, even once a day, is a strong incentive to stay in school. This program enables hunger free education and it has lead to a significant rise in enrollment and attendance. So this partnership has a simple but powerful mission - to change the trajectory of countless lives in our community. In the first stage, PepsiCo India is funding equipment and vehicles to set up a kitchen, near Kapashera, Delhi which has the capacity to feed 75,000 children through the mid-day meal program. Through this program PepsiCo India employees can participate in this cause by contributing as little as Rs 3375 (@ Rs. 675 per child) to keep 5 children in a school in a year. PepsiCo foundation will match the employee contribution and double the impact.
- 43. FINANCIAL STATEMENTS OFPEPSICO INCOME STATEMENTS Fiscal year is January-December. All values USD millions. 2009 2010 2011 2012 2013 Sales/Revenue 43.23B 57.84B 66.5B 65.49B 66.42B Cost of Goods Sold (COGS) incl. D&A 20.14B 26.62B 31.74B 31.34B 31.18B COGS excluding D&A 18.57B 24.38B 29.13B 28.73B 28.52B Depreciation & Amortization Expense 1.56B 2.24B 2.61B 2.61B 2.66B Depreciation 1.5B 2.12B 2.48B 2.49B 2.55B Amortization of Intangibles 63M 117M 133M 119M 110M Gross Income 23.1B 31.21B 34.77B 34.15B 35.23B 2009 2010 2011 2012 2013 SG&A Expense 15.3B 21.81B 24.41B 24.62B 25.18B Research & Development 414M 488M 525M 552M 665M Other SG&A 14.88B 21.32B 23.89B 24.07B 24.52B Other Operating Expense 0 0 0 0 0 Unusual Expense (40M) 887M 643M 464M 415M EBIT after Unusual Expense 40M (887M) (643M) (464M) (415M) Non Operating Income/Expense 0 (120M) 0 0 (32M) Non-Operating Interest Income 67M 68M 57M 91M 97M Equity in Affiliates (Pretax) 365M 735M 0 0 - Interest Expense 191M 970M 938M 858M 809M Gross Interest Expense 194M 976M 948M 863M 816M Interest Capitalized 3M 6M 10M 5M 7M Pretax Income 8.08B 8.23B 8.83B 8.3B 8.89B Income Tax 2.1B 1.89B 2.37B 2.09B 2.1B
- 44. 2009 2010 20112012 2013 Income Tax - Current Domestic 1.36B 1.07B 735M 1.06B 1.22B Income Tax - Current Foreign 473M 728M 882M 940M 807M Income Tax - Deferred Domestic 244M 79M 843M 181M 70M Income Tax - Deferred Foreign 21M 18M (88M) (95M) 11M Income Tax Credits - - - - - Equity in Affiliates - - - - - Other After Tax Income (Expense) 0 0 0 0 (7M) Consolidated Net Income 5.98B 6.34B 6.46B 6.21B 6.78B Minority Interest Expense 33M 18M 19M 36M 47M Net Income 5.95B 6.32B 6.44B 6.18B 6.73B Extraordinaries & Discontinued Operations 0 0 0 0 0 Extra Items & Gain/Loss Sale Of Assets 0 0 0 0 0 Cumulative Effect - Accounting Chg 0 0 0 0 0 Discontinued Operations 0 0 0 0 0 Net Income After Extraordinaries 5.95B 6.32B 6.44B 6.18B 6.73B Preferred Dividends 6M 6M 7M 7M 1M Net Income Available to Common 5.94B 6.31B 6.44B 6.17B 6.73B EPS (Basic) 3.81 3.97 4.08 3.96 4.37 Basic Shares Outstanding 1.56B 1.59B 1.58B 1.56B 1.54B EPS (Diluted) 3.77 3.91 4.03 3.92 4.32 Diluted Shares Outstanding 1.58B 1.61B 1.6B 1.58B 1.56B EBITDA 9.36B 11.65B 12.97B 12.14B 12.71B RATIOS FROM INCOME STATEMENT
- 45. 2009 2010 20112012 2013 SG&A Expense 15.3B 21.81B 24.41B 24.62B 25.18B Research & Development 414M 488M 525M 552M 665M Other SG&A 14.88B 21.32B 23.89B 24.07B 24.52B SGA Growth - 42.55% 11.93% 0.85% 2.29% Other Operating Expense 0 0 0 0 0 Unusual Expense (40M) 887M 643M 464M 415M EBIT after Unusual Expense 40M (887M) (643M) (464M) (415M) Non Operating Income/Expense 0 (120M) 0 0 (32M) Non-Operating Interest Income 67M 68M 57M 91M 97M Equity in Affiliates (Pretax) 365M 735M 0 0 - Interest Expense 191M 970M 938M 858M 809M Interest Expense Growth - 407.85% -3.30% -8.53% -5.71% Fiscal year is January-December. All values USD millions. 2009 2010 2011 2012 2013 Sales/Revenue 43.23B 57.84B 66.5B 65.49B 66.42B Sales Growth - 33.79% 14.98% -1.52% 1.41% Cost of Goods Sold (COGS) incl. D&A 20.14B 26.62B 31.74B 31.34B 31.18B COGS excluding D&A 18.57B 24.38B 29.13B 28.73B 28.52B Depreciation & Amortization Expense 1.56B 2.24B 2.61B 2.61B 2.66B Depreciation 1.5B 2.12B 2.48B 2.49B 2.55B Amortization of Intangibles 63M 117M 133M 119M 110M COGS Growth - 32.22% 19.20% -1.25% -0.50% Gross Income 23.1B 31.21B 34.77B 34.15B 35.23B Gross Income Growth - 35.15% 11.39% -1.77% 3.16% Gross Profit Margin - - - - 53.05%
- 46. 2009 2010 20112012 2013 Gross Interest Expense 194M 976M 948M 863M 816M Interest Capitalized 3M 6M 10M 5M 7M Pretax Income 8.08B 8.23B 8.83B 8.3B 8.89B Pretax Income Growth - 1.89% 7.31% -6.00% 7.07% Pretax Margin - - - - 13.39% Income Tax 2.1B 1.89B 2.37B 2.09B 2.1B Income Tax - Current Domestic 1.36B 1.07B 735M 1.06B 1.22B Income Tax - Current Foreign 473M 728M 882M 940M 807M Income Tax - Deferred Domestic 244M 79M 843M 181M 70M Income Tax - Deferred Foreign 21M 18M (88M) (95M) 11M Income Tax Credits - - - - - Equity in Affiliates - - - - - Other After Tax Income (Expense) 0 0 0 0 (7M) Consolidated Net Income 5.98B 6.34B 6.46B 6.21B 6.78B Minority Interest Expense 33M 18M 19M 36M 47M Net Income 5.95B 6.32B 6.44B 6.18B 6.73B Net Income Growth - 6.29% 1.95% -4.11% 8.98% Net Margin Growth - - - - 10.14% Extraordinaries & Discontinued Operations 0 0 0 0 0 Extra Items & Gain/Loss Sale Of Assets 0 0 0 0 0 Cumulative Effect - Accounting Chg 0 0 0 0 0 Discontinued Operations 0 0 0 0 0 Net Income After Extraordinaries 5.95B 6.32B 6.44B 6.18B 6.73B Preferred Dividends 6M 6M 7M 7M 1M Net Income Available to Common 5.94B 6.31B 6.44B 6.17B 6.73B EPS (Basic) 3.81 3.97 4.08 3.96 4.37
- 47. 2009 2010 20112012 2013 EPS (Basic) Growth - 4.20% 2.77% -2.94% 10.35% Basic Shares Outstanding 1.56B 1.59B 1.58B 1.56B 1.54B EPS (Diluted) 3.77 3.91 4.03 3.92 4.32 EPS (Diluted) Growth - 3.71% 3.07% -2.73% 10.20% Diluted Shares Outstanding 1.58B 1.61B 1.6B 1.58B 1.56B EBITDA 9.36B 11.65B 12.97B 12.14B 12.71B EBITDA Growth - 24.42% 11.33% -6.35% 4.69% EBITDA Margin - - - - 19.14% BALANCESHEET Assets Fiscal year is January- December. All values USD millions. 2009 2010 2011 2012 2013 Cash & Short Term Investments 4.14B 6.37B 4.43B 6.62B 9.68B Cash Only 3.94B 5.94B 4.07B 6.3B 9.38B Short-Term Investments 192M 426M 358M 322M 303M Total Accounts Receivable 4.62B 6.32B 6.91B 7.04B 6.95B Accounts Receivables, Net 4.03B 5.51B 6.04B 6.22B 6.18B Accounts Receivables, Gross 4.12B 5.66B 6.19B 6.37B 6.32B Bad Debt/Doubtful Accounts (90M) (144M) (157M) (157M) (145M) Other Receivables 598M 809M 876M 826M 776M Inventories 2.62B 3.37B 3.83B 3.58B 3.41B Finished Goods 1.18B 1.59B 1.74B 1.53B 1.51B
- 48. Fiscal year isJanuary- December. All values USD millions. 2009 2010 2011 2012 2013 Work in Progress 165M 128M 207M 173M 168M Raw Materials 1.27B 1.65B 1.88B 1.88B 1.73B Progress Payments & Other - - - - - Other Current Assets 1.05B 1.35B 2.11B 1.39B 2.09B Miscellaneous Current Assets 1.05B 1.35B 2.11B 1.39B 2.09B Total Current Assets 12.43B 17.41B 17.28B 18.63B 22.14B 2009 2010 2011 2012 2013 Net Property, Plant &Equipment 12.67B 19.06B 19.7B 19.14B 18.58B Property, Plant & Equipment - Gross 24.91B 33.04B 35.14B 36.16B 36.96B Buildings 5.08B 7.05B 7.57B 7.79B 7.83B Land & Improvements 1.21B 1.98B 1.95B 1.89B 1.88B Computer Software and Equipment 1.1B 1.1B 1.3B 1.1B 1.1B Other Property, Plant & Equipment - - - - - Accumulated Depreciation 12.24B 13.98B 15.44B 17.03B 18.39B Total Investments and Advances 4.48B 2.02B 1.57B 2.35B 2.62B Other Long-Term Investments 0 653M 89M 718M 782M Long-Term Note Receivable 118M 165M 159M 136M 105M Intangible Assets 9.16B 28.47B 33.25B 33.5B 32.65B Net Goodwill 6.53B 14.66B 16.8B 16.97B 16.61B Net Other Intangibles 2.62B 13.81B 16.45B 16.53B 16.04B Other Assets 990M 1.03B 936M 887M 1.39B
- 49. 2009 2010 20112012 2013 Tangible Other Assets 601M 547M 522M 542M 419M Total Assets 39.85B 68.15B 72.88B 74.64B 77.48B Liabilities & Shareholders' Equity 2009 2010 2011 2012 2013 ST Debt & Current Portion LT Debt 464M 4.9B 6.21B 4.82B 5.31B Short Term Debt 362M 4.79B 3.66B 1.91B 3.08B Current Portion of Long Term Debt 102M 113M 2.55B 2.9B 2.22B Accounts Payable 2.88B 3.87B 4.08B 4.45B 4.87B Income Tax Payable 165M 71M 192M 371M 0 Other Current Liabilities 5.25B 7.06B 7.67B 7.45B 7.66B Dividends Payable 706M 766M 813M 838M 877M Accrued Payroll 1.29B 1.78B 1.77B 1.71B 1.79B Miscellaneous Current Liabilities 3.25B 4.51B 5.09B 4.91B 4.99B Total Current Liabilities 8.76B 15.89B 18.15B 17.09B 17.84B Long-Term Debt 7.3B 19.89B 20.45B 23.42B 24.2B Long-Term Debt excl. Capitalized Leases 7.3B 19.89B 20.45B 23.42B 24.2B Non-Convertible Debt 7.3B 19.89B 20.45B 23.42B 24.2B Convertible Debt 0 0 0 0 0 Capitalized Lease Obligations 0 0 0 0 0 Provision for Risks & Charges 1.7B 2.02B 2.17B 0 1.27B Deferred Taxes 659M 4.06B 5B 5.06B 5.99B Deferred Taxes – Credit 659M 4.06B 5B 5.06B 5.99B Deferred Taxes – Debit 0 0 0 0 0 Other Liabilities 3.89B 4.71B 6.1B 6.54B 3.66B
- 50. 2009 2010 20112012 2013 Other Liabilities (excl. Deferred Income) 3.89B 4.71B 6.1B 6.54B 3.66B Deferred Income 0 0 0 0 0 Total Liabilities 22.3B 46.57B 51.87B 52.12B 52.96B Non-Equity Reserves 0 0 0 0 0 Preferred Stock (Carrying Value) 0 0 0 0 0 Redeemable Preferred Stock 0 0 0 0 0 Non-Redeemable Preferred Stock 0 0 0 0 0 Common Equity (Total) 16.91B 21.27B 20.7B 22.42B 24.41B Common Stock Par/Carry Value 30M 31M 31M 26M 25M Retained Earnings 33.81B 37.09B 40.32B 43.16B 46.42B ESOP Debt Guarantee 0 0 0 0 0 Cumulative Translation Adjustment/Unrealized For. Exch. Gain (1.51B) (1.26B) (2.86B) (2.04B) (3.32B) Unrealized Gain/Loss Marketable Securities 47M 70M 62M 80M 109M Revaluation Reserves 0 0 0 0 0 Treasury Stock (13.38B) (16.75B) (17.88B) (19.46B) (21B) Total Shareholders' Equity 16.91B 21.27B 20.7B 22.42B 24.41B Accumulated Minority Interest 638M 312M 311M 105M 110M Total Equity 17.55B 21.59B 21.02B 22.52B 24.52B Liabilities & Shareholders' Equity 39.85B 68.15B 72.88B 74.64B 77.48B
- 51. RATIOS FROM THEBALANCE SHEET Assets Fiscal year is January- December. All values USD millions. 2009 2010 2011 2012 2013 Cash & Short Term Investments 4.14B 6.37B 4.43B 6.62B 9.68B Cash Only 3.94B 5.94B 4.07B 6.3B 9.38B Short-Term Investments 192M 426M 358M 322M 303M Cash & Short Term Investments Growth - 54.03% -30.52% 49.58% 46.22% Cash & ST Investments / Total Assets 10.38% 9.35% 6.07% 8.87% 12.49% Total Accounts Receivable 4.62B 6.32B 6.91B 7.04B 6.95B Accounts Receivables, Net 4.03B 5.51B 6.04B 6.22B 6.18B Accounts Receivables, Gross 4.12B 5.66B 6.19B 6.37B 6.32B Bad Debt/Doubtful Accounts (90M) (144M) (157M) (157M) (145M) Other Receivables 598M 809M 876M 826M 776M Accounts Receivable Growth - 36.74% 9.32% 1.87% -1.24% Accounts Receivable Turnover 9.35 9.15 9.62 9.30 9.55 Inventories 2.62B 3.37B 3.83B 3.58B 3.41B Finished Goods 1.18B 1.59B 1.74B 1.53B 1.51B Work in Progress 165M 128M 207M 173M 168M Raw Materials 1.27B 1.65B 1.88B 1.88B 1.73B Progress Payments & Other - - - - - Other Current Assets 1.05B 1.35B 2.11B 1.39B 2.09B
- 52. Fiscal year isJanuary- December. All values USD millions. 2009 2010 2011 2012 2013 Miscellaneous Current Assets 1.05B 1.35B 2.11B 1.39B 2.09B Total Current Assets 12.43B 17.41B 17.28B 18.63B 22.14B 2009 2010 2011 2012 2013 Net Property, Plant & Equipment 12.67B 19.06B 19.7B 19.14B 18.58B Property, Plant & Equipment - Gross 24.91B 33.04B 35.14B 36.16B 36.96B Buildings 5.08B 7.05B 7.57B 7.79B 7.83B Land & Improvements 1.21B 1.98B 1.95B 1.89B 1.88B Computer Software and Equipment 1.1B 1.1B 1.3B 1.1B 1.1B Other Property, Plant & Equipment - - - - - Accumulated Depreciation 12.24B 13.98B 15.44B 17.03B 18.39B Total Investments and Advances 4.48B 2.02B 1.57B 2.35B 2.62B Other Long-Term Investments 0 653M 89M 718M 782M Long-Term Note Receivable 118M 165M 159M 136M 105M Intangible Assets 9.16B 28.47B 33.25B 33.5B 32.65B Net Goodwill 6.53B 14.66B 16.8B 16.97B 16.61B Net Other Intangibles 2.62B 13.81B 16.45B 16.53B 16.04B Other Assets 990M 1.03B 936M 887M 1.39B Tangible Other Assets 601M 547M 522M 542M 419M Total Assets 39.85B 68.15B 72.88B 74.64B 77.48B Assets - Total - Growth - 71.03% 6.94% 2.41% 3.81% Liabilities & Shareholders' Equity 2009 2010 2011 2012 2013 ST Debt & Current Portion LT Debt 464M 4.9B 6.21B 4.82B 5.31B Short Term Debt 362M 4.79B 3.66B 1.91B 3.08B
- 53. 2009 2010 20112012 2013 Current Portion of Long Term Debt 102M 113M 2.55B 2.9B 2.22B Accounts Payable 2.88B 3.87B 4.08B 4.45B 4.87B Accounts Payable Growth - 34.15% 5.64% 9.01% 9.50% Income Tax Payable 165M 71M 192M 371M 0 Other Current Liabilities 5.25B 7.06B 7.67B 7.45B 7.66B Dividends Payable 706M 766M 813M 838M 877M Accrued Payroll 1.29B 1.78B 1.77B 1.71B 1.79B Miscellaneous Current Liabilities 3.25B 4.51B 5.09B 4.91B 4.99B Total Current Liabilities 8.76B 15.89B 18.15B 17.09B 17.84B Long-Term Debt 7.3B 19.89B 20.45B 23.42B 24.2B Long-Term Debt excl. Capitalized Leases 7.3B 19.89B 20.45B 23.42B 24.2B Non-Convertible Debt 7.3B 19.89B 20.45B 23.42B 24.2B Convertible Debt 0 0 0 0 0 Capitalized Lease Obligations 0 0 0 0 0 Provision for Risks & Charges 1.7B 2.02B 2.17B 0 1.27B Deferred Taxes 659M 4.06B 5B 5.06B 5.99B Deferred Taxes – Credit 659M 4.06B 5B 5.06B 5.99B Deferred Taxes – Debit 0 0 0 0 0 Other Liabilities 3.89B 4.71B 6.1B 6.54B 3.66B Other Liabilities (excl. Deferred Income) 3.89B 4.71B 6.1B 6.54B 3.66B Deferred Income 0 0 0 0 0 Total Liabilities 22.3B 46.57B 51.87B 52.12B 52.96B Non-Equity Reserves 0 0 0 0 0
- 54. 2009 2010 20112012 2013 Total Liabilities / Total Assets 55.97% 68.33% 71.17% 69.83% 68.35% Preferred Stock (Carrying Value) 0 0 0 0 0 Redeemable Preferred Stock 0 0 0 0 0 Non-Redeemable Preferred Stock 0 0 0 0 0 Common Equity (Total) 16.91B 21.27B 20.7B 22.42B 24.41B Common Stock Par/Carry Value 30M 31M 31M 26M 25M Retained Earnings 33.81B 37.09B 40.32B 43.16B 46.42B ESOP Debt Guarantee 0 0 0 0 0 Cumulative Translation Adjustment/Unrealized For. Exch. Gain (1.51B) (1.26B) (2.86B) (2.04B) (3.32B) Unrealized Gain/Loss Marketable Securities 47M 70M 62M 80M 109M Revaluation Reserves 0 0 0 0 0 Treasury Stock (13.38B) (16.75B) (17.88B) (19.46B) (21B) Common Equity / Total Assets 42.43% 31.21% 28.41% 30.03% 31.50% Total Shareholders' Equity 16.91B 21.27B 20.7B 22.42B 24.41B Total Shareholders' Equity / Total Assets 42.43% 31.21% 28.41% 30.03% 31.50% Accumulated Minority Interest 638M 312M 311M 105M 110M Total Equity 17.55B 21.59B 21.02B 22.52B 24.52B Liabilities & Shareholders' Equity 39.85B 68.15B 72.88B 74.64B 77.48B
- 55. CASH FLOW Operating Activities Fiscal yearis January-December. All values USD millions. 2009 2010 2011 2012 2013 Net Income before Extraordinaries 5.98B 6.34B 6.46B 6.21B 6.79B Depreciation, Depletion & Amortization 1.56B 2.24B 2.61B 2.61B 2.66B Depreciation and Depletion 1.5B 2.12B 2.48B 2.49B 2.55B Amortization of Intangible Assets 63M 117M 133M 119M 110M Deferred Taxes & Investment Tax Credit 284M 500M 495M 321M (1.06B) Deferred Taxes 284M 500M 495M 321M (1.06B) Investment Tax Credit - - - - - Other Funds (1.29B) (1.39B) 222M (1.1B) 338M Funds from Operations 6.53B 7.69B 9.79B 8.05B 8.73B Extraordinaries 0 0 0 0 - Changes in Working Capital 264M 763M (844M) 345M 958M Receivables 188M (268M) (666M) (250M) (88M) Accounts Payable (133M) 488M 520M 548M 1.01B Other Assets/Liabilities (127M) 144M (27M) 0 (51M) Net Operating Cash Flow 6.8B 8.45B 8.94B 8.39B 9.69B Investing Activities 2009 2010 2011 2012 2013 Capital Expenditures (2.13B) (3.25B) (3.34B) (2.71B) (2.8B) Capital Expenditures (Fixed Assets) (2.13B) (3.25B) (3.34B) (2.71B) (2.8B) Capital Expenditures (Other Assets) 0 0 0 0 0 Net Assets fromAcquisitions 0 0 0 0 0 Sale of Fixed Assets & Businesses 58M 81M 84M 95M 109M Purchase/Sale of Investments (346M) (4.48B) (2.35B) (398M) 82M
- 56. 2009 2010 20112012 2013 Purchase of Investments (529M) (4.52B) (3.19B) (459M) (112M) Sale/Maturity of Investments 183M 41M 846M 61M 194M Other Uses 0 (17M) (16M) 0 (21M) Other Sources 15M 0 0 12M 0 Net Investing Cash Flow (2.4B) (7.67B) (5.62B) (3.01B) (2.63B) Financing Activities 2009 2010 2011 2012 2013 Cash Dividends Paid – Total (2.73B) (2.98B) (3.16B) (3.31B) (3.43B) Common Dividends (2.73B) (2.98B) (3.16B) (3.31B) (3.43B) Preferred Dividends 0 0 0 0 0 Change in Capital Stock 406M (3.95B) (1.55B) (2.1B) (1.89B) Repurchase of Common & Preferred Stk. (7M) (4.98B) (2.5B) (3.23B) (3.01B) Sale of Common & Preferred Stock 413M 1.04B 945M 1.12B 1.12B Proceeds from Stock Options 0 0 0 0 0 Other Proceeds from Sale of Stock 413M 1.04B 945M 1.12B 1.12B Issuance/Reduction of Debt, Net (187M) 8.37B 936M 2.09B 1.47B Change in Current Debt (1.02B) 2.48B 303M (1.46B) 1.17B Change in Long-Term Debt 831M 5.89B 633M 3.55B 301M Issuance of Long- Term Debt 1.06B 6.45B 3B 6B 4.2B Reduction in Long- Term Debt (226M) (559M) (2.37B) (2.45B) (3.89B) Other Funds 16M (65M) (1.36B) 14M 64M Other Uses (26M) (172M) (1.43B) (110M) (53M) Other Sources 42M 107M 70M 124M 117M
- 57. 2009 2010 20112012 2013 Net Financing Cash Flow (2.5B) 1.39B (5.14B) (3.31B) (3.79B) Exchange Rate Effect (19M) (166M) (67M) 62M (196M) Miscellaneous Funds 0 0 0 0 0 Net Change in Cash 1.88B 2B (1.88B) 2.14B 3.08B Free Cash Flow 4.67B 5.2B 5.61B 5.68B 6.89B RATIOS FROM THE CASH FLOW STATEMENTS Operating Activities Fiscal year is January-December. All values USD millions. 2009 2010 2011 2012 2013 Net Income before Extraordinaries 5.98B 6.34B 6.46B 6.21B 6.79B Net Income Growth - 6.00% 1.96% -3.84% 9.22% Depreciation, Depletion & Amortization 1.56B 2.24B 2.61B 2.61B 2.66B Depreciation and Depletion 1.5B 2.12B 2.48B 2.49B 2.55B Amortization of Intangible Assets 63M 117M 133M 119M 110M Deferred Taxes & Investment Tax Credit 284M 500M 495M 321M (1.06B) Deferred Taxes 284M 500M 495M 321M (1.06B) Investment Tax Credit - - - - - Other Funds (1.29B) (1.39B) 222M (1.1B) 338M Funds from Operations 6.53B 7.69B 9.79B 8.05B 8.73B Extraordinaries 0 0 0 0 - Changes in Working Capital 264M 763M (844M) 345M 958M Receivables 188M (268M) (666M) (250M) (88M) Accounts Payable (133M) 488M 520M 548M 1.01B Other Assets/Liabilities (127M) 144M (27M) 0 (51M) Net Operating Cash Flow 6.8B 8.45B 8.94B 8.39B 9.69B Net Operating Cash Flow Growth - 24.31% 5.87% -6.19% 15.47%
- 58. Fiscal year isJanuary-December. All values USD millions. 2009 2010 2011 2012 2013 Net Operating Cash Flow / Sales 15.72% 14.61% 13.45% 12.81% 14.59% Investing Activities 2009 2010 2011 2012 2013 Capital Expenditures (2.13B) (3.25B) (3.34B) (2.71B) (2.8B) Capital Expenditures (Fixed Assets) (2.13B) (3.25B) (3.34B) (2.71B) (2.8B) Capital Expenditures (Other Assets) 0 0 0 0 0 Capital Expenditures Growth - -52.87% -2.64% 18.72% -2.98% Capital Expenditures / Sales -4.92% -5.62% -5.02% -4.14% -4.21% Net Assets fromAcquisitions 0 0 0 0 0 Sale of Fixed Assets & Businesses 58M 81M 84M 95M 109M Purchase/Sale of Investments (346M) (4.48B) (2.35B) (398M) 82M Purchase of Investments (529M) (4.52B) (3.19B) (459M) (112M) Sale/Maturity of Investments 183M 41M 846M 61M 194M Other Uses 0 (17M) (16M) 0 (21M) Other Sources 15M 0 0 12M 0 Net Investing Cash Flow (2.4B) (7.67B) (5.62B) (3.01B) (2.63B) Net Investing Cash Flow Growth - -219.37% 26.73% 46.51% 12.65% Net Investing Cash Flow -5.55% -13.26% -8.45% -4.59% -3.95% Financing Activities 2009 2010 2011 2012 2013 Cash Dividends Paid – Total (2.73B) (2.98B) (3.16B) (3.31B) (3.43B) Common Dividends (2.73B) (2.98B) (3.16B) (3.31B) (3.43B) Preferred Dividends 0 0 0 0 0 Change in Capital Stock 406M (3.95B) (1.55B) (2.1B) (1.89B)
- 59. 2009 2010 20112012 2013 Repurchase of Common & Preferred Stk. (7M) (4.98B) (2.5B) (3.23B) (3.01B) Sale of Common & Preferred Stock 413M 1.04B 945M 1.12B 1.12B Proceeds from Stock Options 0 0 0 0 0 Other Proceeds from Sale of Stock 413M 1.04B 945M 1.12B 1.12B Issuance/Reduction of Debt, Net (187M) 8.37B 936M 2.09B 1.47B Change in Current Debt (1.02B) 2.48B 303M (1.46B) 1.17B Change in Long-Term Debt 831M 5.89B 633M 3.55B 301M Issuance of Long-Term Debt 1.06B 6.45B 3B 6B 4.2B Reduction in Long- Term Debt (226M) (559M) (2.37B) (2.45B) (3.89B) Other Funds 16M (65M) (1.36B) 14M 64M Other Uses (26M) (172M) (1.43B) (110M) (53M) Other Sources 42M 107M 70M 124M 117M Net Financing Cash Flow (2.5B) 1.39B (5.14B) (3.31B) (3.79B) Net Financing Cash Flow Growth - 155.51% -470.49% 35.62% -14.61% Net Financing Cash Flow / Sales -5.78% 2.40% -7.72% -5.05% -5.71% Exchange Rate Effect (19M) (166M) (67M) 62M (196M) Miscellaneous Funds 0 0 0 0 0 Net Change in Cash 1.88B 2B (1.88B) 2.14B 3.08B Free Cash Flow 4.67B 5.2B 5.61B 5.68B 6.89B Free Cash Flow Growth - 11.29% 7.89% 1.27% 21.44% Free Cash Flow Yield - - - - 2.68%
- 60. Financial Ratios forCoca-Cola, PepsiCo, and the Industry Average Profitability Measures Coca-Cola 2010 PepsiCo 2010 Industry Average 2010 1. Gross margin ratio 63.9 percent 54.1 percent 56.1 percent 2. Profit margin ratio 33.6 percent 10.9 percent 19.2 percent 3. Return on assets 19.4 percent 11.7 percent 14.2 percent 4. Return on common shareholders’ equity 41.7 percent 32.3 percent 34.7 percent 5. Earnings per share $5.12 $3.97 Not applicable Short-Term Liquidity Measures 6. Current ratio 1.17 to 1 1.11 to 1 1.20 to 1 7. Quick ratio 0.85 to 1 0.80 to 1 1.10 to 1 8. Receivables turnover ratio 8.58 times 10.57 times 9.70 times 9. Average collection period 42.54 days 34.53 days 37.63 days 10. Inventory turnover ratio 5.07 times 8.87 times 7.50 times 11. Average sale period 71.99 days 41.15 days 48.67 days Long-Term Solvency Measures 12. Debt to assets 0.57 to 1 0.68 to 1 0.48 to 1 13. Debt to equity 1.33 to 1 2.17 to 1 0.94 to 1 14. Times interest earned 20.36 times 10.10 times 10.70 times Market Valuation Measures 15. Market capitalization $146,500,000,000 $100,700,000,000 $87,500,000,000 16. Price-earnings ratio 12.48 times 16.04 times 14.60 times
- 61. Before we discussthe various ratios, it is important to note that different terms are often used in financial statements to describe the same item. For example, some companies use the term net revenues instead of net sales, and the income statement is often called the statement of earnings, orconsolidated statement of earnings. Also be sure to review the income statement and balance sheet information for Coca-Cola shown in "Common-Size Income Statement Analysis for " and "Common-Size Balance Sheet Analysis for ". Profitability Ratios The five ratios used to evaluate profitability are as follows: 1. Gross margin ratio 2. Profit margin ratio 3. Return on assets 4. Return on common shareholders’ equity 5. Earnings per share Gross Margin Ratio The gross margin ratio indicates the gross margin generated for each dollar in net sales and is calculated as gross margin (which is net sales minus cost of goods sold) divided by net sales: The gross margin ratio for Coca-Cola using 2010 information is calculated as follows, with PepsiCoand industry average information following it: Coca-Cola 2010 Coca-Cola 2009 PepsiCo 2010 Industry Average 2010 Gross margin ratio 63.9 percent 64.2 percent 54.1 percent 56.1 percent The gross margin ratio indicates Coca-Cola generated 63.9 cents in gross margin for every dollar in net sales. This ratio decreased slightly from 2009 to 2010 and is substantially higher than PepsiCo’s54.1 percent. Coca-Cola is also higher than the industry average of 56.1 percent. (Alternative terms: Gross margin is often called gross profit, net sales is often called net revenues, and cost of goods sold is often called cost of sales.)
- 62. Profit Margin Ratio Theprofit margin ratio shows the profit generated for each dollar in net sales. It is calculated as net income divided by net sales: The profit margin ratio for Coca-Cola using 2010 information is calculated as follows, with PepsiCoand industry average information following it: Coca-Cola 2010 Coca-Cola 2009 PepsiCo 2010 Industry Average 2010 Profit margin ratio 33.6 percent 22.0 percent 10.9 percent 19.2 percent The profit margin ratio indicates Coca-Cola generated 33.6 cents in net income for every dollar in net sales. This ratio increased significantly from 2009 to 2010 and is substantially higher than PepsiCo’s10.9 percent. Coca-Cola is also higher than the industry average of 19.2 percent. (Alternative term: Net income is often called net earnings.) Return on Assets The return on assets ratio is used to evaluate how much net income was generated from each dollar in average assets invested. Return on assets is net income divided by average total assets: The average total assets amount is found by adding together total assets at the end of the current year and previous year (2010 and 2009 for this example) and dividing by two. The return on assets ratio forCoca-Cola for 2010 is calculated as follows, with PepsiCo and industry average information following it: Coca-Cola 2010 Coca-Cola 2009 PepsiCo 2010 Industry Average 2010 Return on assets 19.4 percent 15.3 percent 11.7 percent 14.2 percent
- 63. The return onassets ratio indicates Coca-Cola generated 19.4 cents in net income for every dollar in average assets. This ratio increased from 2009 to 2010 and is higher than PepsiCo’s 11.7 percent.Coca-Cola exceeded the industry average of 14.2 percent. Return on Common Shareholders’ Equity Common shareholders are interested in the return on common shareholders’ equityratio because this ratio tells them how much net income was generated from each dollar of common shareholders’ equity. The return on common shareholders’ equity ratio is calculated as follows: Note that preferred dividends are deducted from net income in the numerator. If the company does not have any outstanding preferred stock, as is the case with Coca-Cola, the preferred dividends amount is zero. Average common shareholders’ equity in the denominator is found by adding together all items in the shareholders’ equity section of the balance sheet at the end of the current year and previous year (2010 and 2009 for this example), except preferred stock items, and dividing by two. Because Coca-Cola does not have preferred stock, an average of all items in the shareholders’ equity section is in the denominator. The return on common shareholders’ equity ratio for Coca-Cola for 2010 is calculated as follows, with PepsiCo and industry average information following it: Coca-Cola 2010 Coca-Cola 2009 PepsiCo 2010 Industry Average 2010 Return on common shareholders’ equity 41.7 percent 29.5 percent 32.3 percent 34.7 percent The return on common shareholders’ equity ratio indicates Coca-Cola generated 41.7 cents in net income for every dollar in average common shareholders’ equity. This ratio increased significantly from 2009 to 2010 and is higher than PepsiCo’s 32.3 percent. Coca- Cola exceeded the industry average of 34.7 percent.
- 64. Coca-Cola’s return oncommon shareholders’ equity of 41.7 percent is higher than its return on assets of 19.4 percent, indicating that the company has positive financial leverage. Financial leverage describes a company’s ability to leverage common shareholders’ equity by taking on debt at an interest rate lower than the company’s return on assets. For example, assume a company has equity of $10,000 earning 10 percent. The company can leverage this equity by borrowing $8,000 with a 6 percent interest rate. Assuming the company uses this $8,000 to purchase assets that earn 10 percent, the company has created positive financial leverage since the cost of borrowing is lower than the return on assets. This results in a return on equity that is higher than the return on assets. (Note: For a one-year period, the return on assets is $1,800 [= $18,000 × 10 percent] less the cost of debt of $480 [= 6 percent × $8,000], or $1,320. This results in a return on assets of 7.3 percent [= $1,320 ÷ $18,000]. Positive financial leverage causes the return on equity to be much higher at 13.2 percent [= $1,320 ÷ $10,000 equity].) Although some level of financial leverage is generally regarded as healthy, companies that are highly leveraged tend to be riskier than similar companies with less leverage. Analysts and shareholders should avoid drawing quick conclusions that increases in return on common shareholders’ equity are always better than decreases without thoroughly reviewing the rest of the data. Return on Assets and Return on Equity for Coca-Cola, PepsiCo, and the Industry Average Earnings per Share: Earnings per share indicates how much net income was earned for each share of common stock outstanding. The earnings per share ratio states net income on a per share basis and is calculated as the following:
- 65. Note that preferreddividends are deducted from net income in the numerator. If the company does not have any outstanding preferred stock, as is the case with Coca-Cola, the preferred dividends amount is zero. The weighted average common shares outstanding amount used in the denominator is typically provided in the financial statements, either on the income statement or in the notes to the financial statements. Earnings per share for Coca-Cola using 2010 information is calculated as follows, with PepsiCo and industry average information following it (dollar amount and shares are in millions, except per share amount): Coca-Cola 2010 Coca-Cola 2009 PepsiCo 2010 Industry Average 2010 Earnings per share $5.12 $2.95 $3.97 Not applicable The earnings per share amount at Coca-Cola indicates the company earned $5.12 for each share of common stock outstanding. This ratio increased from 2009 to 2010. Although earnings per share is useful for looking at trends over time within a company, it cannot be compared in any meaningful way from one company to another because different companies have different numbers of shares outstanding.
- 66. COKE AND PEPSI:APPLYING DUPONT ANALYSIS The Coca-Cola Company (KO) and PepsiCo Inc. (PEP) are two iconic American brands and corporate behemoths based largely on their ability to sell sugar water. In 2013, KO tallied $46.9 billion in revenue while PEP, with the added benefit of its snack business, rang up $66.4 billion in sales. ROE = Profit Margin (Net Profit/Sales) X Asset Turnover (Sales/Total Assets) X Equity Multipliers (Total Assets/Total Equity) Introduction to DuPont Analysis Using DuPont Analysis is one way to dig a little further into the companies to see what similarities (or differences) there might be. DuPont Analysis is a view of breaking down Return on Equity (ROE) into factors that can be further analyzed. These factors are commonly a profitability measure, a turnover measure, and a leverage measure. DuPont Analysis was created by E. I. du Pont de Nemours and Company (DD) in the 1920s. For this analysis, I looked at a 5 factor analysis:
- 67. DuPont Analysis Factors FactorCalculation Asset Turnover Revenue/ Average Assets Profitability EBIT/ Revenue Interest Burden (EBIT - Interest Expense)/EBIT Tax Efficiency 1 - Tax Expense/(EBIT - Interest Expense) Leverage Average Assets/Average Equity More simplified versions of the DuPont Analysis will treat the middle three factors as a single profitability factor that looks at Net Income to Revenue. However, companies have become more focused on tax reporting, and this increases the overall complexity. While leverage is calculated in the Asset to Equity ratio, the cost of the leverage is lost in the profitability margin. Possibly one company has obtained lower cost debt than another, and that financial engineering is different from how it runs its day to day operations. It should also be noted that the values for tax expense are book accounting values, and not the same as the ones reported to the IRS, which are tax accounting values. It should also be noted that one should make adjustments for minority interests which has some impact on these results - hence the difference in the implied and calculated ROEs. Applying DuPont to KO and PEP Using basic financial data from Yahoo!Finance and 10-Ks for both KO and PEP, I assembled the following ROE breakdowns. The first table shows the financial data used for KO. KO Basic Financial Data ($ Millions) Financial data 2008 2009 2010 2011 2012 2013 Revenue 31,944 30,990 35,119 46,542 48,017 46,854
- 68. EBIT 7,877 9,30114,976 11,875 12,206 11,940 Interest 438 355 733 417 397 463 Tax Expense 1,632 2,040 2,384 2,812 2,723 2,851 Net Income 5,807 6,824 11,809 8,584 9,019 8,584 Assets 40,519 48,671 72,921 79,974 86,174 90,055 Equity of Shareholders 20,472 24,799 31,003 31,635 32,790 33,173 Source: Yahoo!Finance, SEC 10-Ks The next table shows KO ROE breakdown over the past 5 years. KO DuPont Analysis ROE Breakdown Lever 2009 2010 2011 2012 2013 Asset Turnover 0.69x 0.58x 0.61x 0.58x 0.53x Profitability 30.0% 42.6% 25.5% 25.4% 25.5% Interest Burden 96.2% 95.1% 96.5% 96.7% 96.1% Tax Efficiency 77.2% 83.3% 75.5% 76.9% 75.2%
- 69. Leverage 1.97x 2.18x2.44x 2.58x 2.67x Implied ROE 30.5% 42.5% 27.6% 28.2% 26.2% Calculated ROE 30.1% 42.3% 27.4% 28.0% 26.0% Source: Author Calculations The first observation is that asset turnover and profitability are declining. These are offset by increasing leverage. The hit to profitability in 2011 was a result of KO's acquisition of the North American bottling operations of Coca-Cola Enterprises Inc. (CCE) in 2010. This also attributed to a greater share of assets. KO relies upon other bottling operations outside of North America. Tax efficiency and interest burden remain similar over time. The next table shows the basic financial information for PEP. PEP Basic Financial Data ($ Millions) Financial data 2008 2009 2010 2011 2012 2013 Revenue 43,251 43,232 57,838 66,504 65,492 66,415 EBIT 7,350 8,476 9,135 9,690 9,203 9,802 Interest 329 397 903 856 899 911 Tax Expense 1,879 2,100 1,894 2,372 2,090 2,104 Net Income 5,142 5,946 6,320 6,443 6,178 6,740
- 70. Assets 35,994 39,84868,153 72,882 74,638 77,478 Equity of Shareholders 12,203 16,908 21,273 20,704 22,399 24,389 Source: Yahoo!Finance, SEC 10-Ks One can see similar trends in this financial data. PEP DuPont Analysis ROE Breakdown Lever 2009 2010 2011 2012 2013 Asset Turnover 1.14x 1.07x 0.94x 0.89x 0.87x Profitability 19.6% 15.8% 14.6% 14.1% 14.8% Interest Burden 95.3% 90.1% 91.2% 90.2% 90.7% Tax Efficiency 74.0% 77.0% 73.1% 74.8% 76.3% Leverage 2.61x 2.83x 3.36x 3.42x 3.25x Implied ROE 41.1% 33.2% 30.8% 28.8% 29.0% Calculated ROE 40.9% 33.1% 30.7% 28.7% 28.8% Source: Yahoo!Finance, SEC 10-Ks, Author Calculations This is pretty much the same story as KO. However, PEP has substantially more leverage, asset turnover and substantially lower profitability. Despite the higher leverage
- 71. figure, PEP's leveragehas increased at a slower pace. This is due to a greater portion of integrated production in contrast to KO's outsourced bottling in other parts of the world. PEP has superior turnover when compared to KO and comparable tax efficiency. It does have a higher interest burden as expected with its higher leverage. Its ROE has declined less from its 5 year peak value as well. Looking Beyond DuPont Analysis By no stretch of the imagination is DuPont Analysis the only work you should do prior to making an investment decision. The first comment is that operating income and EBIT do not align as well for KO as they do for PEP. KO has several other impacts, including $534 million of interest income and over $1 billion in other income. The $534 million of interest income in 2013 exceeds KO's interest expense of just $463 million. In contrast, PEP had just $97 million of interest income - a fraction of its $911 million of interest expense. This difference is from KO's over $30 billion in cash, short term investments and long term investments. In contrast, PEP has a little over $10 billion in those categories. Another key consideration about DuPont Analysis is that it offers no perspective on valuation. While high ROEs suggest the potential to sustain higher organic growth, it does not provide much insight as to what you should pay for the company or stock. The following table shows that despite similar ROEs - suggesting the potential for similar growth, KO trades at a higher PE multiple. PE Multiple Comparison Dimension KO PEP KO Premium Price $41.01 $85.25 na 2014 EPS $2.09 $4.54 na 2015 EPS $2.24 $4.89 na 2014 F PE 19.6x 18.8x 4.5% 2015 F PE 18.3x 17.4x 5.0% EPS growth 14-15 7.2% 7.7% -6.9%
- 72. EPS Long termgrowth 6.7% 7.2% -6.9% Source: Yahoo!Finance, Author calculations So it appears, from a quick simple look, that KO is somewhat overvalued - paying more for less growth. However, both companies appear to have slightly lower multiples than the broader S&P 500, which makes sense given their lower projected earnings growth. Some possible explanations would be that KO has a more valuable brand - it does. Forbes values KO's brand at $54.9 billion as the third most valuable brand, while PEP's brand is just $18.1 billion, good for 25th place. Another consideration would be the translation from earnings to cash flow. However, PEP generates almost as much operating cash flow as KO, despite a much lower enterprise value of $151.5 billion to $197.9 billion. Conclusion Based on this analysis, We would have to lean towards PEP due to a higher ROE and lower valuation. Furthermore, PEP appears to be able to grow its business without the same incremental asset needs of KO. However, there is substantial space for other considerations and clearly this is not the only analysis that should be done. Z score PepsiCo Inc (NYSE:PEP) Altman Z-Score 3.63 (As on 29-10-2014) Z-Score model is an accurate forecaster of failure up to two years prior to distress. It can be considered the assessment of the distress of industrial corporations. PepsiCo Inc's Altman Z-Score for today is calculated with this formula: Z = 1.2 * X1 + 1.4 * X2 + 3.3 * X3 + 0.6 * X4 + 1.0 * X5 = 1.2 * 0.0466 + 1.4 * 0.606 + 3.3 * 0.1247 + 0.6 * 2.484 + 1.0 * 0.8308 = 3.64
- 73. X1: The WorkingCapital/Total Assets (WC/TA) ratio is a measure of the net liquid assets of the firm relative to the total capitalization. Working capital is defined as the difference between current assets and current liabilities. Ordinarily, a firm experiencing consistent operating losses will have shrinking current assets in relation to total assets. Altman found this one proved to be the most valuable liquidity ratio comparing with the current ratio and the quick ratio. This is however the least significant of the five factors. X2: Retained Earnings/Total Assets: the RE/TA ratio measures the leverage of a firm. Retained earnings is the account which reports the total amount of reinvested earnings and/or losses of a firm over its entire life. Those firms with high RE, relative to TA, have financed their assets through retention of profits and have not utilized as much debt. X3, Earnings Before Interest and Taxes/Total Assets (EBIT/TA): This ratio is a measure of the true productivity of the firm’s assets, independent of any tax or leverage factors. Since a firm's ultimate existence is based on the earning power of its assets, this ratio appears to be particularly appropriate for studies dealing with corporate failure. This ratio continually outperforms other profitability measures, including cash flow. X4, Market Value of Equity/Book Value of Total Liabilities (MVE/TL): The measure shows how much the firm’s assets can decline in value (measured by market value of equity plus debt) before the liabilities exceed the assets and the firm becomes insolvent. X5, Revenue/Total Assets (S/TA): The capital-turnover ratio is a standard financial ratio illustrating the sales generating ability of the firm’s assets. PepsiCo Inc has a Z-score of 3.64, indicating it is in Safe Zones. This implies the Z-Score is strong. The zones of discrimination were as such: When Z-Score is less than 1.81, it is in Distress” Zones. When Z-Score is greater than 2.99, it is in Safe Zones. When Z-Score is between 1.81 and 2.99, it is in Grey” Zones.
- 74. PEP' s 10-YearAltman Z-Score Range Min: 2.73 Max: 7.61 Current: 3.63 During the past 13 years, PepsiCo Inc's highest Altman Z-Score was 7.61. The lowest was 2.73. And the medianwas 5.44. Trailing Twelve Months (TTM) ended in Sep. 2014: Total Assets was $80,466 Mil. Total Current Assets was $26,590 Mil. Total Current Liabilities was $22,844 Mil. Retained Earnings was $48,764 Mil. Pretax Income was 2655 + 2705 + 1616 + 2164 = $9,140 Mil. Interest Expense was -215 + -209 + -201 + -269 = $-894 Mil. Revenue was 17218 + 16894 + 12623 + 20118 = $66,853 Mil. Market Capitalization (Today) was $142,567 Mil. Total Liabilities was $57,395 Mil. X1 = Working Capital / Total Assets = (Total Current Assets - Total Current Liabilities) / Total Assets = (26590 - 22844) / 80466 = 0.0466 X2 = Retained Earnings / Total Assets = 48764 / 80466 = 0.606 X3 = Earnings Before Interest and Taxes / Total Assets = (Pretax Income - Interest Expense) / Total Assets = (9140 - -894) / 80466 = 0.1247 X4 = Market Value Equity / Book Value of Total Liabilities
- 75. = Market Capitalization/ Total Liabilities = 142566.700 / 57395 = 2.484 X5 = Revenue / Total Assets = 66853 / 80466 = 0.8308 The zones of discrimination were as such: Distress” Zones - 1.81 < “Grey” Zones < 2.99 - “Safe” Zones PepsiCo Inc has a Z-score of 3.64 indicating it is in Safe Zones. Study by Altman found that companies that are in Distress Zone have more than 80% of chances of bankruptcy in two years. HISTORICAL DATA PepsiCo Inc Annual Data Dec04 Dec05 Dec06 Dec07 Dec08 Dec09 Dec10 Dec11 Dec12 Dec13 X1 0.0674 0.033 0.0758 0.0693 0.0561 0.0957 0.0246 -0.0098 0.0219 0.0563 X2 0.6692 0.6656 0.8298 0.8139 0.8512 0.8483 0.5442 0.5532 0.5782 0.5991 X3 0.2041 0.2092 0.2415 0.2268 0.2049 0.2127 0.134 0.133 0.1233 0.1265 X4 6.0999 5.6314 7.0919 7.024 3.561 4.1291 2.1981 1.9844 2.0185 2.3838 X5 1.0455 1.0263 1.174 1.1399 1.2016 1.0849 0.8486 0.9125 0.8775 0.8572 Z- scor e 6.40 6.07 7.48 7.33 5.27 5.57 3.40 3.30 3.33 3.61 Zone s Safe Zones Safe Zones Safe Zones Safe Zones Safe Zones Safe Zones Safe Zones Safe Zones Safe Zones Safe Zones
- 76. PepsiCo Inc QuarterlyData Jun12 Sep12 Dec12 Mar13 Jun13 Sep13 Dec13 Mar14 Jun14 Sep14 X1 -0.0033 0.0412 0.0219 0.0254 0.0365 0.0581 0.0563 0.0494 0.0692 0.0466 X2 0.5702 0.5719 0.5782 0.5759 0.5808 0.593 0.5991 0.6035 0.5936 0.606 X3 0.1284 0.1245 0.1233 0.1213 0.1259 0.1253 0.1265 0.1282 0.1238 0.1247 X4 2.1198 2.0876 2.0185 2.306 2.3434 2.2409 2.3838 2.3179 2.3699 2.4393 X5 0.9204 0.8876 0.8775 0.8711 0.8609 0.8625 0.8572 0.8576 0.8273 0.8308 Z- sco re 3.41 3.40 3.33 3.49 3.54 3.52 3.61 3.58 3.57 3.61 Zo nes Safe Zones Safe Zones Safe Zones Safe Zones Safe Zones Safe Zones Safe Zones Safe Zones Safe Zones Safe Zones INDUSTRY ANALYSIS General Environment The beverage industry is a maturing, dynamic and fragmented industry. The industry greatly depends on movements of the external environment. The external environmental factors affecting the industry are illustrated below.Global demographic plays a vital role in the beverage industry. The global population is expected to rise by 2.2 billion to 9 billion by 2050. With the growing demand on food and beverage, it is predicted the food and beverage supply will increase by 70% (IMAP, 2010).In terms of the economy, most of the countries are suffering from the global recession since 2008. Yet, the beverage industry had grown at an incredibly fast rate even in such a harsh 3environment for the past years. From 2008 to 2013, the annual global consumer expenditure on beverages went from USD $327,436 million to USD $425,570 million (Euromonitor, 2014).
- 77. With the slowlyrecovering economy, the industry is likely to bloom in the close future.Other than economic factors, government policies also greatly affect the beverage industry. Beverage manufacturing must abide by the regulatory guidelines everywhere they do business (Epstein, 2008). In addition, in light of the health issues in most first world countries, numerous governments had raised concern regarding obesity of their citizens. Various policies against sugar-sweetened beverages have been implemented. In United States, 33 states had imposed a sales tax on soft drinks in 2009 (Kelly D. Brownell, 2009). In 2012, France followed and introduced a tax on soft drinks (Sparks, 2011). With this trend, countries are likely to enact various constraints to reduce the demand of sweetened beverages in the close future. Although health policies may lower beverage demand, the other advances in technology may aid the industry. With advances in technology and research, companies in the beverage industry developed and marketed sugarless beverages in the past decade and became a hit sincethey were released. Apart from creating sugar-less beverages, technology has allowed beverage
- 78. manufacturers to developdrinks with distinct flavors and explore undeveloped markets. The advancement of technology also includes wide spread Internet use in the last decade. In one hand, the World Wide Web allows potential customers to conveniently reach beverage distributors. In the other hand, companies within the beverage industry can interact with customers via an extra channel . The competition within the beverage industry is great and vigorous, mostly because of the race between PepsiCo and its nemesis, Coca-Cola Company (Coca-Cola). PepsiCo has been 4competing with Coca-Cola over prices, suppliers, spokespeople, retail space and customers’ changing needs over years (BHASIN, 2011). The attacks and responses between the two leading firms have created a great tension and high standards on products within the industry. This has forced other rivals to follow, differentiate their products, or exits the industry.Subject to the competition between the Coca-Cola and PepsiCo, the two companies havecreated great entry barriers. New entrants require tremendous capital investments and explies information for future development. Subject to the competition between the Coca-Cola and PepsiCo, the two companies havecreated great entry barriers. New entrants require tremendous capital investments and explicit research on beverages customer demands to begin their business. Yet, the two companies have developed tremendous beverages and patented most of their existing products. Despite the entry barriers, the production, distribution, and sales of beverages are also subject to environmental laws and governmental regulations in most countries, making the new entrants difficult to enter the beverage industry (Vulpala, 2007).The level of threats posed by suppliers, buyers and substitutes are near to the ground. Common ingredients of most beverages are usually sugar, water and common chemicals such as caffeine and carbonic acid. These materials are sold by plentiful of suppliers. Furthermore, products from different suppliers have minimal differentiation. Firms in the beverage industry can easily change suppliers. Buyers in the soft drink industry are mainly wholesalers or distributors. Their bargaining power was supposed to be higher than the suppliers. However, the rapid development and differentiation of products in the beverage industry has attracted more buyers and thus, lowered their bargaining power. Lastly, the beverage industry has almost no substitutes since it covers most edible liquids. Products such as soup or congee can hardly be classified as substitutes because tho Products such as soup or congee can hardly be classified as substitutes because those products have different functionality and are usually recognized as meal alternatives, rather than drinks.
- 79. Current Situation As of2013, PepsiCo Inc. is the second largest food and beverage multinational companyin the world (MarketLine, 2013). PepsiCo manufactures and sells twenty-two major brands of beverages and snack foods in more than 200 countries and territories (PepsiCo, 2013), each generating over $1 billion in sales each year (MarketLine, 2013). Brands under PepsiCo such as Pepsi-Cola, Lays Chips, Mountain Dew and Gatorade allow the firm to dominate a decent portion of the food and beverage industry. PepsiCo is in fact slowly losing its market share and competitiveness to its rivals in the industry every year. In 2012, the PepsiCo’s sales amounted to $65,492 million worldwide (PepsiCo, 2012). Although PepsiCo was performing exceptionally, it recorded a fall of 1% in net revenue compared to its performance in 2011. PepsiCo’s market share in the soft drink industry had also dropped from 10.3% to 9.9% in 2012 (Euromonitor, 2014). PepsiCo is also facing pressure from its stock price. PepsiCo’s stock had gone nowhere since Nooyi became CEO, while Coca-Cola’s stock price had increased by about 40% (Colvin, 2012). The fall on stock price began the day PepsiCo announced not to spin off its drink business in spite of the market share problems in North America; PepsiCo Inc. c.’s share price fell by 2.21% that day (Abrams. 2014).Current StrategyBusiness Strategy-Integrated Cost Leadership/differentiated Strategy.Integrated cost leadership/differentiated strategy allows PepsiCo to minimize production budgets and seize market share at low cost. PepsiCo is currently implementing the “Hybrid Every Day Value” strategy. By simply cutting down the discount on holidays but lower prices all through the year, the strategy aims to eliminate customers’ habit on buying soda only when it’s on sale (Reuters, 2013).
- 80. Corporate Strategy-Brand PortfolioStrategy PepsiCo is using brand portfolio strategy to achieve synergistic benefit through economies of scope and market power. PepsiCo categorizes its products into different portfolios. The Fun-for-You brands cater to global and regional flavors, such as Lay’s, Doritos, Cheetos, and Pepsi, etc. The Better-for-You brands include snacks with lower fat content and whole grains, and beverages with fewer or zero calories and less sugar. Good-for-You brands are comprised of nutritious foods and beverages that include fruits, vegetables, whole grains, and low-fat dairy like Tropicana, Quaker; and also healthy products with functional benefit, like Gatorade (PepsiCo Inc., 2014). Creation of a new Global Nutrition GroupComplementing the Corporate Level strategy, PepsiCo launched Global Nutrition Group (GNG) in 2010 as a long term strategy growing the “Good-For-You” portfolio, the GNG’s work focuses on innovation and brand development on the products within the portfolio. PepsiCo dedicates itself to offer consumers with a wide range of healthy products with the reduction of sodium, sugar, and saturated fat content (Kanter et. al, 2012).
- 81. Global Strategy-Strategic AllianceStrategy PepsiCo deliberately invests in market development in the Asia, Middle East and Africa (AMEA) region. Katty Lam, chairman of PepsiCo Greater China Region, describes China is one of the important emerging markets in PepsiCo’s global strategies. Katty highlights PepsiCo's success in China lies in developing products suited local customers’ preferences and tastes (Qindexing, 2013). To further understand Chinese’ preferences, PepsiCo formed a partnership with Tingyi Holding Corp. - a Chinese Food and Beverage Company. Meanwhile increasing its market share and enhance its brand leadership in the AMEA region. By creating the largest alliance in the Chinese beverage industry, the two companies are leading the second largest competitor by about 1.6% of relative market share (Sosland, 2012). Besides from expanding in the AMEA region, PepsiCo is also actively growing in other regions. In 2010, PepsiCo acquired Lebedyansky and the Wimm-Bill-Dann to expand its market in Russia. About the same period, Pepsico also acquired Mablel cookies and Lucky snakes in Brazil, and Dilexis cookies in Argentina to further enlarge its product range (PepsiCo Inc., 2014). Main Strategic Challenges 1. Resistance on increasing Beverage Market Share
- 82. PepsiCo’s third quarterresult in 2013 indicates the organic revenue of PepsiCo Americas Beverage has declined by 1.5% (PepsiCo’s Report, 2013). The main origin to the drop is the lack of innovation within PepsiCo. Even though PepsiCo has launched new products to the market, it is no match to Coca-Cola’s hugely successful Coke Zero and attention- grabbing bottle and can designs (Colvin, 2012). Currently, Coca-Cola is dominating the market with a market share of 15.4%, while PepsiCo’s only has a share of 8.9% in the global soft drink market (Euromonitor, 2014). Even if PepsiCo is performing well on the beverage industry and in the future, PepsiCo is unlikely to catch up the difference. 2. Challenges on making Profit on PepsiCo’s Nutrition Business The Chief Executive Officer of PepsiCo, Nooyi, adjusted the focus of the company from the “fun for you” product portfolio to the “good for you” portfolio. She projected the revenues of “good for you” product lines would contribute to the company’s revenue by 10% more (Reingold, 8 2011). However, the fact remains that “good for you” products were not as profitable as the branded carbonated beverages (Colvin, 2012). With such miscalculation, from 2010 to 2013, the company’s return on capital had dropped from 22% to 11% (Hooper, 2014). Investors expecting high returns on investment capital were greatly disappointed and demanded PepsiCo to restore emphasis on profitable product lines instead. 3. Challenges on expanding to Overseas Markets - Financial Since current markets are saturated, international markets are great platforms for PepsiCo to widen its profit margin. Yet, the global strategy creates transitional challenges while Implementing. Actions such as the forming partnership with Tingyi and exiting the Mexican Bottling operations have increased reintegration and restructuring costs (Trefis Team, 2013). The global expansion strategy requires tremendous investments in order to develop new markets and please new target customers. Hence, it is challenging for PepsiCo to convince its investors to put more money to establish new markets. 4. Challenges on expanding Overseas Markets – Sociocultural & Political With the current global strategy, PepsiCo focuses on developing the AMEA region. Without a doubt, the AMEA region has great market potential. However, expansion here comes with great political risk. Unlike any first world countries, countries in the AMEA region have relatively poor hardware and policies to support the establishment of international firms like PepsiCo. For example, copyright infringement is common in most second world countries like China. In addition, their local governments do not usually have well-developed laws and regulations in these matters. As a result, PepsiCo may suffer from a loss on profit margin. Even
- 83. worse, the plagiarizedgoods may damage PepsiCo’s reputation when consumers realize the existence of the pirate goods and stop purchasing any PepsiCo products. Five Forces Model Competitive Force 1: Rivalry Among Existing Firms Due to the fact that this industry’s growth has had relevantly little growth over the years, there is tremendous competition within the industry. This industry has low concentration. Three major firms account for 80% of the global market. These firms include PepsiCo, Coca- Cola, and Cadbury Schweppes. Coca-Cola has achieved 50% in global market share, while PepsiCo controls 21%, and Cadbury Schweppes maintains . Competition amongst these firms is not mainly based on price competition but rather product differentiation. Many firms rely on new flavors and have also branched into non-carbonated beverages and snack foods to give there firm a competitive advantage over others. PepsiCo has also been exceeding in this by acquiring Quaker Oats which owns Gatorade. PepsiCo has also added Tropicana, Aquafina, and Lipton into its product line making PepsiCo number one in the non-carbonated beverage industry. Coca-Cola has also entered into this arena by emerging with Nestea, Powerade, and Minute Maid brands to compete in this movement. PepsiCo has also branched into the breakfast and snack food industry with Quaker Oats and Frito-Lay. While PepsiCo has remained at number two in soft drinks, this diversification has helped make up the difference in competition. Switching costs are virtually inexistent in this industry as there are no costs for consumers to switch products. The only costs to switching would be a different taste, appearance, and appeal. This is mainly due to the fact that firms have cooperated to maintain the same price for there products. Consumers are faced with a decision of choosing a product not based on price but rather on style, taste, and other contributing factors. Under these circumstances, companies have spent considerable energy to market there products to achieve brand awareness. There is also a tremendous learning curve for these companies, resulting in extreme barriers to entrance of other emerging companies. Most companies have developed extensive distribution systems and have created relationships with suppliers and buyers. Also there are extensive economies of scale resulting in companies with massive size. This has been created by obtaining extreme amounts of capital and diversifying the company into other markets. In this type of industry there are relatively few exiting barriers which have left only a few companies to compete in. Competitive Force 2: Threat of New Entrants
- 84. Within this industrythere are large economies of scale. This results in an extreme amount of capital to propel the company. Using capital for manufacturing isn’t much of a concern as there are generic brands which cost less. Much capital is used to market and advertise there products to achieve brand awareness and differentiate there products from others. PepsiCo has done a tremendous job by creating a household name rivaling that of Coca- Cola’s. Such common household names are Pepsi, Mountain Dew, Gatorade, Tropicana, Lipton, and Quaker and Frito-Lay products. New companies trying to emerge into the industry have a distinct disadvantage due to the fact that the top companies have already developed such traits. This has caused new companies to not be able to compete head on with rivals. Also companies within the industry have developed extensive arrangements and relationships with manufactures and distributors. PepsiCo for example has Pepsi Bottling Group. This independent entity makes, sells, and distributes Pepsi brands around the world. Competitive Force 3: Threat of Substitute Products In PepsiCo’s industry there is a considerable threat of product substitution. Products offering the same qualities and features at a lower price can initiate customers to substitute. In this day of age of health consciousness, new products have been developed to meet this trend. To meet this concern many of the companies offer healthier alternatives that ultimately cut into their other brands profits. Brands such as Pepsi One, Diet Pepsi, and Coca-Cola’s C2, and Diet Coke have been developed to meet this concern head on. Another concern is that of generic brands such as grocery store brands. The relative concern is based on price. For example most grocery stores have their own brands of soda, juices, breakfast, and snack items. While the top companies have there own distinct image, these generic brands offer a similar taste but at a much lower price. This industry’s main concern is if customers become price conscious and stray away from popular brands such as PepsiCo products. As long as consumers place value on these companies products there shouldn’t be that much of a concern. Competitive Force 4: Bargaining Power of Buyers PepsiCo is more sensitive to price due to the fact that there are low switching costs involved in producing their products. Because the total cost of manufacturing their product comes from packaging, PepsiCo is more apt to search for the lowest price of their raw materials being that are readily available and are a common material (i.e. plastics and aluminum). Being that PepsiCo is such a large producer enables them to hold a strong bargaining position. Since they buy so many raw materials they are able to get lower prices for them buying in such bulk. Also the number of readily available materials to PepsiCo increases their bargaining power due to the fact if a specific supplier can not match a price or does not have the material available;
- 85. it is notdifficult to find it quickly and inexpensively. However these packaging and distribution expenses are taken by Pepsi Bottling Group which is a separate entity of PepsiCo and became publicly traded in early 1999. Even though PBG is a separate company; PepsiCo owns 40% of PBG’s equity interest. Competitive Force 5: Bargaining Power of Suppliers There are many different suppliers in PepsiCo’s industry. These suppliers are the bottlers and metal can suppliers. PepsiCo is in a unique position in which it used to own Pepsi Bottling Group. In 1999, Pepsi Bottling Group became independent and in which PepsiCo retains 40% of its shares. Because of this suppliers of bottlers have a relatively low bargaining power relative to PepsiCo because they are a continued vested interest of PepsiCo. This makes PepsiCo able to have a distinct advantage over other competitors in production and distribution. Pepsi Bottling Group also provides other ingredients that are used in the food and beverage businesses, these include: almonds, cocoa, corn, flavorings, flour, juice, oranges, potatoes, and different kind of fruits.This gives PepsiCo the chance to produce low cost products over competitors. PepsiCo also employs specialists to secure the best suppliers that are in the market for many of these items in order to produce quality products too. Competitive Strategy Analysis The beverage and snack industry is very competitive. Their competitive strategy is based on differentiation instead of cost leadership. This means that the giants of the business like PepsiCo should explore new formulas, flavors and appearances to compete with each other. This is what PepsiCo is already doing by introducig two different lime flavor drinks by the end of this month. PepsiCo is known for producing a variety of salty, sweet and grain-based snacks, carbonated and non-carbonated beverages and foods. They invest many resources to produce superior products and in marketing for brand awareness. This is one of the reasons that PepsiCo has been one of the leaders in the beverage and snack industry.
- 86. Another competitive advantagethat PepsiCo has is its non-carbonated beverage. PepsiCo has lost the war against Coke for the carbonated beverages, but they are the leader in the non-carbonated beverages category. They have done this by adding Gatorade’s 73% share of the sports drink market to its Tropicana and Lipton tea holdings. This means that PepsiCo is not only focusing on competing with Coke on the carbonated beverages but they are looking to win battles in other competitive areas. This is going to make PepsiCo maintain a competitive advantage over a wider array of its competitors. Another competitive advantage of PepsiCo is their flexibility of their distribution network. PepsiCo products are brought to the market through direct-store delivery, vending distribution networks and broker-warehouse. This distribution system is developed in a way to satisfy customer needs and to show product characteristic. By having a flexible distribution network PepsiCo is going to maintain their great reputation and their product are going to satisfy their customers. The last competitive advantage that PepsiCo has is its capital. PepsiCo is number one in the snack industry, number two in the non-alcoholic industry and they have revenue of about $29 billion. This means that they have excess money to spend on advertising, quality of products and differentiation. PepsiCo by having such great capital provides advertising, sales and promotional support to their beverage and food customers. That’s why PepsiCo has some of the most-recognized advertising in the world. By having such extensive capital PepsiCo is making some research and development to find new flavors and to produce an even higher quality product. In conclusion PepsiCo believes that their capital, differentiation, flexibility of their distribution network and their non-carbonated beverage is going to allow them to compete efficiently.
- 87. Key Success Factor Strengths: Oneof the biggest strengths of PepsiCo is its Officers and Directors. They They are a master of being honest, having analytical assessment and they have no shyness in terms doing what needs to be done. Minority Business News names PepsiCo Chairman and CEO Steve Reinemund “Executive of the Year.” (www.Forbes.com). It is because of them that the PepsiCo is one of the best companies in the beverage and food industry. Another strength of this company is their division Frito-Lay which has surpassed companies of all sizes through a combination of restructuring, new products, and lower prices. While Coke is synonymous with soda, so are Frito-Lay’s Fritos is with corn chips demonstrating its product-name association. Like James Stack an editor of InvesTech Research says, “While the company trails Coca Cola on the soft-drink industry, in the snack foods, Frito-Lay which controls 60% of the U.S. salty snack-food market, has the number one position in corn chips, potato chips, tortilla chips and pretzels.” They are the best-run company in the food business. For the twelve months ended Sept, 4, 2004 PepsiCo earned $3.93 billion on sales of $16.49 billion. This shows that company is very profitable, has a good financial footing, and is continuing to grow. While the soft drink segment is, as ever, PepsiCo is number 2, but is an extremely strong number 2. They control 21% of the soft-drink market. It is going to be hard to compete with Coke in the soft drink industry but PepsiCo is not just staying and accepting defeat. The company’s purchase of The Quaker Oats Company and its Gatorade brand show that they are still highly competitive. Weaknesses: Pepsi maybe is one of the weaknesses of PepsiCo due that is really far from the leader Coca- Cola in the international market. Coke is three times Pepsi's size in fountain sales and has more than ten times as many salespeople as Pepsi. In the U.S., Pepsi's market share lags behind Coke's by the widest margin in over two decades. The net sales of PepsiCo had increase in the past years but it is important to notice that this increase is only because of sales in USA. Internationally, Pepsi's drink business was a mess. They still haven’t figured out a way to increase their sales in the international market. But lately they have improved internationally and especially after Coke have lost a lot of sales in Europe. But PepsiCo has showed difficulties in the past in the international market and they are trying very hard to improve these weaknesses. Another weakness is their historically late entrance into carbonated beverage industry. Coca-Cola entered the market in 1886 while Pepsi emerged in 1919 giving Coca-Cola
- 88. a three decadehead start. Regardless of PepsiCo’s size, diversification, business acumen or bottom line, consumers still see the company as only Pepsi, a product. While Coke has fans (collector’s clubs, items, Christmas tree ornaments, etc.), Pepsi has purchasers. Opportunities: There are still some undeveloped markets in the world that PepsiCo should try to penetrate. They need to look for these markets and get established there before their competitors. PepsiCo traditional carbonated soft drinks and salty snacks continue to symbolize the company and it is going to do so for a long time. But you have to be risky to succeed in business and to beat your competition. We know that we live in a society where many people are worried about their nutrition. We hear about this topic through the media and we read it in magazines all the time. New good-for-you products from PepsiCo are going to include soon dairy products, more whole-grain items in its Frito-Lay line of salty snacks, products based on olive oil and a soy-enhanced Tropicana orange juice. This is going to be a great opportunity for PepsiCo to make healthier product and to expand its market. The key for the beverage companies is differentiation. The giants of the industry have different formulas and appearances. PepsiCo for being one of these giants has the opportunity to make better formulas and appearances for their customers so they can beat their competition. PepsiCo is going to introduce a lime-flavored soda that is going to compete with a similar offering of their rival Coca-Cola. By using a better formula and appearance and a great advertising plan in these new drinks, they have the opportunity to beat Coca-Cola. Threats: The prices of the items that PepsiCo purchase are subject of fluctuation. For example the increase the prices of the raw materials or the fuel can cause an increase of the costs of the production of their product, and in the business environment that PepsiCo operates, it is not possible to increase the product price because they are part in a very competitive environment. In the marketing department the PepsiCo brand image is very much linked to Pepsi image, which has label of second best brand. This can still give them the label of ‘loser’, linking its image to the rest of firm’s company. This can give them a bad brand image in their markets. They need to improve in their marketing department through advertising campaigns where they are appeared together with other PepsiCo Brands. Conclusion: PepsiCo has established itself as a very stable and profitable company in North America and all over the world.
- 89. As we mentionedabove they are number two in the non- alcoholic beverage industry and number one in the snack industry by owning Frito-Lay.PepsiCo, Inc operates four major businesses: Frito-Lay North America, 34% of the sales and 41% of operating profit; PepsiCo Beverages 29% of sales and 30% of operating profit; Quaker Food 5% of sales and 9% of operating profit; PepsiCo Int’l 32% of sales and 20% of operating profit. (Value Line) All these brands have a strong market position in North America and because of these PepsiCo has a growth potential for the years to come.