PEP
#Thank you, <UNK>, and good morning, everyone
As you saw on this morning's release, we concluded 2016 with another strong quarter of operating performance, capping off a very successful year
The operating environment continued to be challenging in 2016. So in this context, I am pleased to report that we achieved or exceeded each of the financial goals we shared with you at the beginning of the year
To recap, we grew organic revenue 3.7%, in line with our goal of approximately 4%
We met our goal of expanding core operating margins, which were up 80 basis points compared to 2015. Core constant currency EPS grew 9% versus our initial goal of 6%
Keep in mind this includes the impact of deconsolidating Venezuela, which was approximate 2.5 point drag on earnings
Excluding the impact of deconsolidating Venezuela, core constant currency EPS grew 12%
We generated $7.8 billion in free cash flow, excluding certain items
We substantially exceeded our goal of $7 billion
Core net ROIC expanded by 190 basis points and now stands at 21.5%, well in excess of our cost of capital
And we met our goal of returning $7 billion in cash to shareholders through dividends and share repurchases, bringing our 5-year cumulative shareholder cash returns to $38 billion
And reflecting our continuing commitment to providing attractive cash returns to our owners, I'm also pleased to announce that we are increasing our annualized dividend per share for the 45th consecutive year beginning with our June 2017 payment, to $3.22 per share, which represents a 3% yield based on yesterday's closing share price
We had notably good operating performance across our operating segments for the year
Our two largest divisions, Frito-Lay North America and North America Beverages, each had strong well-balanced performance with volume gains, net price realization and margin expansion, driving high single-digit core constant currency operating profit growth
And despite the macro volatility and weak currencies in many of our key overseas markets that impacted our reported results, our international divisions delivered very solid organic revenue growth, led by high single-digit growth in our developing and emerging markets businesses as a group, with particularly strong performance in Mexico, China and Egypt, which grew organic revenue in the double digits
Our results reflect our commitment to plan and manage our business in a way that's self-sustaining and balances delivery of attractive short-term financial results with long-term shareholder value creation
We achieve this by executing a virtuous circle model that combines top-line growth, productivity and significant reinvestment in the business
Our top-line performance is underpinned by strong market positions in growing categories and an enviable portfolio of leading brands
And it is fueled by a product innovation engine built on consumer and shopper insights, deep research and development capabilities, and the broad market reach afforded by our advantaged go-to-market systems
Our top line growth is also supported by strong collaborative customer relationships
Customers value our relationships with them because we deliver growth
Our brands and products drive basket size and an extremely high velocity off the shelf, and therefore generate significant cash flow for our retail partners
Our customers value our robust innovation, the in-store labor benefits of DSD [Direct Store Delivery], and our sophisticated consumer and shopper insights
The strength of our customer relationships was evident in the most recent Kantar Retail PoweRanking in the United States, where we achieved the top spot as the number one best-in-class manufacturer, and we earned top marks in the individual categories of most important brands, use of digital platforms, insights and category management, growth and profitability, supply chain management, clear company strategy, and sales force and customer teams
Beyond this impressive recognition, our capabilities and diligent execution enabled us once again to be the largest driver of growth for our food and beverage retail partners in the United States, which is our largest market
In fact, while we represent less than 10% of retail food and beverage sales, in 2016 we drove 18% of the total retail sales growth of food and beverage
This compares to a net decline in sales for all other $5 billion-plus manufacturers combined
Our success is also supported by an aggressive and relentless drive for productivity that contributes to current financial performance and provides the funding for investments that will sustain our growth into the future
These substantial investments have largely been directed at capabilities that fuel top line growth
So to strengthen our brands, we've increased our advertising and marketing as a percent of sales by 145 basis points over the past five years and increased it by 40 basis points in just this past year alone
At the same time, we have directed a higher percentage of our A&M budget from non-working A&M to consumer-facing working A&M to increase returns in our A&M spending
And we have strengthened our capabilities in digital marketing, enabling us to execute marketing campaigns that seamlessly weave together social media, traditional media, and point of sale for greater impact
We've increased our investment in R&D by 45% since 2011 and have spent approximately $3.5 billion on R&D and food quality and safety initiatives cumulatively over the past five years
In addition, over the past several years, we have amplified our own financial investments in R&D by expanding and strengthening our relationships with key strategic suppliers and academic and research institutions to leverage their capabilities to our benefit
We've also established a global design center staffed with world-class creative talent
Increasingly, we are incorporating design beginning in the earliest stages of innovation to take into account the entire purchase-to-consumption cycle, and this is resulting in the creation of not just products, but truly memorable experiences for our consumers
Our R&D capability investments have led to the creation of new products in the short term and to the development of new platforms, ingredients, and packaging with longer-term potential for breakthrough benefits, such as sugar, calorie, fat and sodium reductions, and more sustainable packaging alternatives
Under this robust innovation agenda, net revenue from new products, which we define as products introduced within the past three years, has averaged more than $5 billion since 2013. And we are pleased to report that in 2016, PepsiCo accounted for over 17% of innovation sales at retail, as measured by IRI in the United States, more innovation than from the next four innovation contributors combined
And it has also advanced our portfolio transformation
For example, we launched a number of new low and reduced calorie drinks in 2016, such as new recipes of Mirinda and 7UP with 30% less sugar, which is rolling out in over 80 international markets
Meanwhile, we saw great momentum across our nutritious and functional beverages
Naked Juice is on its way to being our next $1 billion brand, while Tropicana launched Tropicana Essentials Probiotics, making it the first brand to bring probiotics to the mainstream juice consumer
Gatorade Frost exceeded $1 billion in measured retail sales, pushing Gatorade over a high watermark of $5 billion in measured retail sales
And our Russia team launched a new J7 apple juice that delivers all the fiber of a single apple in every glass
At the same time, we grew our portfolio of healthier snacks with Quaker Breakfast Flats, a snack we plan to roll out in more than a dozen countries over the next two years
We are building on the success of Baked Lay's by broadening our lineup of baked products
And we're expanding Sabra, a brand that generates roughly $800 million in estimated annual retail sales
We are expanding it beyond hummus into a range of products, from guacamole and salsa to Greek yogurt dips and spreads
Simply put, when it comes to transforming our portfolio, we are making considerable progress
In fact, some people are surprised to learn that our beloved Pepsi-Cola trademark accounted for 12% of net revenue in 2016. What we refer to as everyday nutrition products account for approximately 25% of our portfolio by net revenue
These are products that include positive nutrients like grains, fruits and vegetables, or protein, plus those that are naturally nutritious like water and unsweetened tea
And what we refer to as guilt-free products comprises about 45% of net revenue
This broader definition includes the everyday nutrition products plus diet beverages and other beverages with fewer than 70 calories per 12 ounce and snacks with low levels of sodium and saturated fat
We've also made disciplined investments in our physical infrastructure
Over the past five years we've invested approximately $14 billion in property, plant, and equipment to support the growth of our business, maintain a safe work environment, use less energy and water, and achieve the highest levels of quality and safety in our products
We also recognize that we're living in an era where all of our stakeholders, from shareholders like you to our consumers, associates, and partners, are all increasingly expecting corporations like ours not only to make a profit, but to do so in a way that's responsive to the needs of the local communities where we operate
And that's exactly what we've been doing, making investments to lift up farmers and workers, small businesses, families and children, from Mexico, where Quaker launched a pin oat malnutrition prevention trial with over 1,000 low-income children; to Pakistan, where we tripled the number of girls benefiting from our I am PepsiCo mentoring and social program; and forging strong ties with local communities
Forging strong ties with local communities isn't just the right thing to do
It's also the right thing to do for our business, reinforcing the bonds that will sustain our success over the long-term
And finally, we are investing in our most valuable asset of all, our people by: expanding paid family leave; adopting flexible work arrangements; enhancing our learning and development programs; and many other actions
We are building a workplace that is diverse and inclusive and that will continue to attract the top talent in industry in all levels of the organization
In summary, we've established solid momentum in our business, with strong financial performance generated through a healthy balance of top-line performance and productivity
And we have made, and will continue to make, investments in capability and infrastructure that we believe will strengthen the competitiveness of our business and lengthen the duration of our financial returns
Our results for 2016 reflect the effectiveness of this approach and gives us confidence in our ability to continue to perform well going forward
With that, I'll turn the call over to <UNK> to cover the 2017 outlook
Good morning, <UNK>
<UNK>, go ahead
Well, thank you
I'm going to let <UNK> answer this
I'll just tell you one thing, <UNK>
As I mentioned in my script, investments in A&M, R&D, those we're not backing off of
We've increased investment in A&M
We've increased investment in R&D and we'll keep investing money in areas that drive the top-line growth of the company, but, <UNK>, why don't you talk about the SG&A productivity plan and the share repurchase guidance?
And basically what we're saying is what is under our control, we intend to execute very well
And then, whatever happens in the macro environment, we'll try to manage through it as best we can
Good morning, <UNK>
<UNK>, go ahead
This is all walking through the P&L and balance sheet
On DSD, DSD is the strength of our company
Given the nature of our categories, which are high velocity, relatively low value density, DSD is critical because they're impulse, and how we merchandise the product really drives the growth of the category
So we are totally committed to DSD
And we continue to make investments in DSD to modify it as we go along to account for whatever disruption happens in the retail channels
So PepsiCo remains committed to DSD
Regarding the beverage outlook in North America, we've always tracked liquid refreshment beverage growth as a whole
We've expected for the past decade or more that there will be shifts within the category from carbonated soft drinks to non-carbonated soft drinks, and we've managed the portfolio accordingly
So I think you should focus on LRB [Liquid Refreshment Beverage] as a whole
And our expectation is that the overall LRB category will grow slightly above population growth and around GDP growth
And that's really what our anticipation is for the LRB category growth going forward
Yes, good morning
In the case of share in North America, we track LRB share
We track savory share
We track salty share, macro snack share
We track it every which way
And as we've always said, we want to make sure we balance share growth and profitability very, very judiciously
Our goal is never to hit the pricing lever too much in order to gain share
We want to make sure that we keep the pricing architecture across our portfolio very, very consistent over the quarter and over the year
So I wouldn't worry about small perturbations in share in any one quarter, in any one category
This is something we monitor very, very carefully
And I'd say both Frito-Lay North America and our North America Beverage business as a whole are doing well
Gatorade, in particular, is one of our crown jewels, and the business is performing very, very well
We have a leadership position in the isotonic category
And the business is performing exceedingly well in the category, which involves active thirst, which is really what we track
So, <UNK>, let me turn it over to you to answer the first part of the question
Good morning, <UNK>
I think that's way too detailed a question, <UNK>
I'd just say that over time, across the company, not just Frito-Lay, but across all of PepsiCo, we have actually dialed up our revenue management capabilities
We've built revenue management centers of excellence across North America
And we've improved our understanding of household down to a very granular level that allows us to tailor products and packaging for individual households and get the price utilization we need, because we can put the right assortment on the shelves based on the trading area of that particular store and the households that that store targets
I think that's what drives revenue management
And you're going to see that being deployed across North America
And hopefully, that'll result in better revenue realization as we go forward
<UNK>, good morning
Good to hear you
The Mountain Dew franchise is alive and energetic, pardon the pun
If you include regular Mountain Dew, Diet, all the variants in Kickstart, it's a thriving franchising and perhaps one of the best-performing franchises in the CSD universe
And we intend to continue to invest behind Mountain Dew
We intend to continue to invest behind Kickstart and the franchise is doing well
Regarding Diet Pepsi, we had a bit of a hiccup with Diet Pepsi with the rollout of the aspartame-free product, but now with the relaunch of the zero-sugar Pepsi, putting it on the Super Bowl, we're back in business
It's a great tasting product
It is a great tasting product
In fact, I'd say it's the best tasting diet in the market
Try it
And I think our plan is to invest behind the zero-sugar Pepsi rollout and make sure that it is the diet for the Pepsi portfolio
And on demonetization, across the board for pretty much all of industry and CPG in particular, because it hit the individual retailers significantly, demonetization had a significant impact on our India business in Q4. And there's still some lingering effects
I'm not sure we are totally out of the woods
It's a big country, a massive change because it's currency that was about 80% of the circulation out in the country that was taken out of circulation, and the implementation had its share of challenges
So our hope was that by the time Q2 rolls by, we would be through the bulk of the demonetization challenges
And the new currency and the digital currency will be back in circulation and we'll be back to retail activity coming back to normal
We are basic food and beverage
I don't believe political actions impact consumption of our products
And we're not seeing any deterioration in activity versus our products, and the market growth continues
Thank you for your questions
So to summarize, we are pleased with our results for 2016 and that gives us confidence in our performance as we enter 2017. We are committed to continue to manage everything within our control in what we expect will be a volatile and uncertain macro environment in order to deliver attractive results in the short-term, as we continue to position the business for long-term success
Thank you all for joining us this morning and for the confidence you have placed in us with your investment
