2016 Annual Report

Illustration by: Craig & Karl, designers of one of the first bottle labels for LIFEWTR, PepsiCo’s new premium water brand. See Page 9. 2016 PepsiCo Annual Report | 02 Delivering Performance with Purpose Our 2016 results demonstrate our continued ability to generate attractive shareholder returns while creating value for all of our stakeholders. 3.7% 1 organic revenue growth cost savings since 2011 associated with environmental 9% sustainability initiatives core constant currency EPS growth1 $600M ~25% net revenue from Everyday Nutrition2 products annual savings enabled by >$7B our productivity agenda cash returned to shareholders through >$1B dividends and share repurchases 1. Reported net revenue declined 0.4%, primarily due to foreign currency translation. Reported EPS increased 19%. Organic, core and constant currency results, free cash flow excluding certain items, as well as ROIC and core net ROIC, are non-GAAP financial measures. Please refer to “Reconciliation of GAAP and Non-GAAP Information” beginning on page 146 of this Annual Report for definitions and more information about these results, including a reconciliation to the most directly comparable financial measure in accordance with GAAP. 2. PepsiCo products with nutrients like grains, fruits and vegetables, or protein, plus those that are naturally nutritious like water and unsweetened tea. 2016 PepsiCo Annual Report | 03 Indra K. Nooyi PepsiCo Chairman of the Board of Directors and Chief Executive Officer Dear Fellow Shareholders, I’m so pleased to report that 2016 marked another exceptional year for PepsiCo. Across the company, Table of Contents we delivered top- tier financial performance, the 03 Letter to Shareholders kind of performance that’s commensurate with 12 Financial Highlights the confidence you’ve placed in us to steward this 13 PepsiCo Board of Directors iconic corporation. 14 PepsiCo Leadership 15 PepsiCo Form 10-K Here is a snapshot of what we accomplished over the past year1: 146 Reconciliation of GAAP • As a result of a number of factors — from the strong positions we’ve built in growing and Non-GAAP Information categories, to an expanding portfolio that includes 22 billion- dollar brands, to world- class go- to-market systems and strong retail and foodservice partnerships — we 147 Forward- Looking Statements grew organic revenue 3.7%, in line with our goal of approximately 4%. 148 Common Stock and • Our core operating margins increased 80 basis points compared to 2015, enabled by Shareholder Information our topline performance and productivity agenda, which has yielded approximately $1 billion in annual savings since 2012. 149 Corporate Information • Even as we’re growing our organic topline and expanding our core operating margins, we’re also investing in the future of our company, increasing advertising and marketing as a percent of sales by 145 basis points over the past five years — 40 basis points over the past year alone. We’ve also increased our investment in research and development (R&D) by 45% since 2011, spending approximately $3.5 billion cumulatively on R&D over the past five years. • Core constant currency earnings per share (EPS) grew 9% versus our initial goal of 6%. This growth includes the impact of deconsolidating Venezuela in 2015, which caused an approximately 2.5 percentage point drag on earnings. Excluding the impact of deconsolidating Venezuela, core constant currency EPS grew 12%. 2016 PepsiCo Annual Report | 04 Transforming our Portfolio We continue to meet changing taste preferences by offering new products that appeal to health-conscious consumers and expanding our Everyday Nutrition business, unlocking new opportunities for topline growth. Tropicana Essentials Probiotics Quaker “Bring Your Best Bowl” Tropicana Essentials Probiotics, a 100% juice with one billion Quaker set out to find its next oatmeal flavor by inviting live and active cultures per serving, earned an “Innovation Americans to participate in the first-ever “Bring Your Best Bowl” of the Year” award from Beverage Industry magazine. The contest. Fans across the country helped celebrate the versatility brand was the first to bring probiotics to the mainstream of oats by submitting unique and creative recipe ideas. Quaker juice consumer. ran similar programs in China and India. Sabra Spreads Simply Snacks from Frito-Lay Sabra launched Sabra Spreads, a line of wholesome, refrig- Frito-Lay expanded its Simply lineup, offering great-tasting ver- erated sandwich spreads with 75% less fat than the leading sions of classic snacks that appeal to changing consumer prefer- mayonnaise brand. The launch continued the expansion of the ences. Simply Organic Tostitos chips are gluten free, non-GMO Sabra brand into new categories, which now include guaca- verified, made with sea salt, and have no artificial colors, flavors, mole, salsa and other dips. or preservatives. 2016 PepsiCo Annual Report | 05 • Our disciplined capital allocation and prudent working capital management enabled us to improve core net return on invested capital 190 basis points to 21.5% and generate approximately $7.8 billion in free cash flow, excluding certain items, which substantially exceeds our goal of more than $7 billion. • And we met our goal of returning approximately $7 billion in cash to shareholders through dividends and share repurchases. In fact, we increased our annualized dividend per share for the 45th consecutive year beginning with our June 2017 payment. These are impressive accomplishments. And they build on the progress we’ve made over the 10 years I’ve had the honor We continued to expand our range of beverages, offering consumers a set of choices that are of serving as Chairman and CEO of this on-trend and well-positioned for future growth. great company. Looking back on the past decade, our annualized total shareholder return has been 8.2%, 130 basis points With increasing strains on natural resources, and the increasing importance govern- ahead of the S&P 500. And our com- ments were placing on protecting our planet, we needed to transform our operations to pounded annual dividend growth has limit our environmental footprint. been roughly 10%. In fact, we’ve returned And with Millennials entering the workforce in large numbers, we needed to trans- almost $70 billion to you in the form of form our workplace and our culture to make sure we were meeting the evolving dividends and buybacks. expectations of a new generation of associates. By nearly any measure, that’s a strong The urgency of responding to all these shifts — the necessity of navigating a series record of performance, especially dur- of demographic, environmental and societal trends that were challenging us like never ing a period of time that witnessed the before — is what gave rise to the approach all of us have come to know as “Performance 2008 financial crisis and a number of with Purpose.” From the start, Performance with Purpose has been more than a slogan, other major challenges. And reflecting more than a single program. It has been an overarching vision — a governing philoso- on the strength, the consistency, of that phy — guiding every aspect of our business. performance today, I’m reminded of how At heart, it’s about building a healthier future for all our stakeholders. And that starts we achieved it. Part of the reason was with generating healthy financial returns for all of you, my fellow shareholders. But the our momentum when I took the helm. As a truth is, that’s just table stakes. Our challenge is to do more than simply deliver healthy result of able stewardship by generations returns. Our challenge is to deliver them consistently, sustainably, quarter after quarter, of associates — from the c- suite to the year after year. And the way we’ll continue doing that is by doing the same thing we’ve front line — we inherited a solid founda- been doing over the past ten years. And that means: tion, along with a proud legacy, that we • Making healthier foods and beverages for our consumers; could build on. But from the beginning, it was also • Generating healthy growth for our retail and foodservice partners; clear that if we wanted to make sure • Contributing to a healthier planet while boosting our bottom line; our future was as bright as our past, we • Creating a healthy workplace and culture for our associates; and needed to transform our company in a number of critical ways. • Promoting healthier communities wherever we operate. With changing consumer preferences, Together, these steps form a virtuous cycle that is powering our ongoing transformation reflecting a growing shift toward a healthier as a company, enabling us to do well by doing good, positioning us for success not lifestyle in the U.S. and around the world, only over the short run, but also over the long run, and securing our place as one of the we needed to transform our portfolio with defining corporations of the 21st century. more nutritious options. 2016 PepsiCo Annual Report | 06 No.1 Contributor to U.S. Food & Beverage Retail Driving Retail Sales Sales Growth3 Cutting- edge consumer engagement programs once again made PepsiCo a powerful driver of food & beverage retail sales growth around the world. Clockwise: We launched a global campaign behind our UEFA Champions League partnership, involving our iconic brands Pepsi and Lay’s; Gatorade introduced the “Future of Sports Fuel,” showcasing breakthrough innovation that promises to change the way athletes hydrate and fuel; Sabra launched its “Unofficial Meal” campaign, inviting consumers to enjoy wholesome food together; and our PepsiMoji campaign spread across more than 100 markets globally. 3. Source: IRI Total Store Advantage ILD, POS data ending 12/25/16, IRI Consulting analysis. 2016 PepsiCo Annual Report | 07 Making healthier foods and beverages for our consumers Our portfolio is wonderfully architected, offering consumers a wide range of options from treats to healthy eats, from beverages to snacks, from products that are right for the morning to products that are right throughout the day.

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