Quaker merger boosts PepsiCo profits

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Related tags: Cent, Pepsico

The merger of PepsiCo with compatriot Quaker Oats gave a major
boost to operating profits at the giant snack food and soft drinks
group in 2002 - and the recent reorganisation of the international
business should lead to further gains in 2003.

The merger in 2000 with Quaker Oats continues to pay off for the soft drinks and snacks company PepsiCo. The company last week reported double-digit operating profit growth for the year to December 2002, boosted by expanded margins as a result of synergies from the Quaker deal. The company has already realised $250 million in synergies from the merger and this should rise to $400 million by the end of 2004.

PepsiCo reported net revenues for the full year of $25 billion, up 4 per cent on the previous year (or 5 per cent at constant exchange rates). Volume sales for the year were up 4 per cent, with a 5 per cent rise in snack sales and a 4 per cent increase in beverages.

But it was at the operating profit level that the synergies with Quaker were most clearly seen, rising 11 per cent for the year to $5.3 billion.

Frito-Lay North America (FLNA), the group's US snack business, posted sales of $8.6 billion for the year, up 4 per cent on 2001, while operating profits were ahead 8 per cent to $2.2 billion. Volume sales were ahead 4 per cent, helped by strong gains from the Go Snacks, Munchies Snack Mix and Baked Doritos brands, which contributed to a double-digit increase in total snack volumes.

Also in North America, the beverage business was aided by the consolidation of the Pepsi, Tropicana and Gatorade businesses in June, and volumes for the year increased 3 per cent on the back of double digit gains from the non-carbonated brands such as Aquafina bottled water and Gatorade sports drink. Growth from the carbonated soft drink brands was slower, but nonetheless welcomed, with Sierra Mist and Mountain Dew leading the growth.

Sales from the North American Pepsi-Cola unit, which includes Pepsi, Aquafina and Mountain Dew, among others, increased by 6 per cent for the year to $3.4 billion, while operating profits were ahead 12 per cent to $987 million. At Tropicana/Gatorade, sales were up 4 per cent to $3.8 billion, while operating profits rose 1 per cent to $590 million.

But it is the international PepsiCo business which is likely to be the focus of attention for the company in 2003, with the decision to merge its snacks and beverages operations into one unit. This new division, called PepsiCo International, reported sales up 5 per cent in volume terms, led by gains in the top markets, including Mexico and the UK and in developing countries such as Russia, India and China. However, volume growth was restrained by a boycott of American products in the Middle East and weak local macroeconomic conditions in Latin America.

Looking at the two divisions separately, the international snacks arm, Frito-Lay International, posted sales of $5.7 billion, up 4 per cent year-on-year, while operating profits surged 20 per cent to $781 million as a result of the Quaker merger. PepsiCo Beverages International, meanwhile, posted a 1 per cent increase in sales to just over $2 billion, with operating profits increasing 23 per cent to $261 million.

PepsiCo's other operating unit, Quaker Foods North America (QFNA), saw sales increase 2 per cent during the year to $1.5 billion, while operating profit was up 21 per cent to $481 million.

PepsiCo's chairman and chief executive officer Steve Reinemund said: "In 2002 our portfolio of businesses complemented each other and performed very well overall. We're pleased to report very strong operating profit and earnings per share growth.

"Our businesses are fundamentally very healthy. We're focused on driving top line growth through innovation and by leveraging our strong brands and go-to-market systems. At the same time we are driving productivity improvements that will allow us to re-invest in the top line and continue to expand our margins. Looking forward, over the long run we believe that we can sustainably grow volume and net revenues in the mid-single digits and earnings per share in the low double-digits."

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