PepsiCo and Quaker Oats will file a proxy statement/prospectus and other
relevant documents concerning the proposed merger transaction with the SEC.
INVESTORS ARE URGED TO READ THE PROXY STATEMENT/PROSPECTUS WHEN IT BECOMES
AVAILABLE AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC BECAUSE THEY WILL
CONTAIN IMPORTANT INFORMATION. You will be able to obtain the documents free of
charge at the website maintained by the SEC at www.sec.gov. In addition, you may
obtain documents filed with the SEC by PepsiCo free of charge by requesting them
in writing from PepsiCo, Inc., 700 Anderson Hill Road, Purchase, New York 10577,
Attention: Secretary, or by telephone at (914) 253-2000. You may obtain
documents filed with the SEC by Quaker Oats free of charge by requesting them in
writing from The Quaker Oats Company, 321 North Clark Street, Chicago, Illinois
60610, Attention: Corporate Secretary, or by telephone at (312) 222-7111.
PepsiCo and Quaker Oats, and their respective directors and executive officers,
may be deemed to be participants in the solicitation of proxies from the
stockholders of PepsiCo and Quaker Oats in connection with the merger.
Information about the directors and executive officers of PepsiCo and their
ownership of PepsiCo shares is set forth in the proxy statement for PepsiCo's
2000 annual meeting of shareholders. Information about the directors and
executive officers of Quaker Oats and their ownership of Quaker Oats stock is
set forth in the proxy statement for Quaker's 2000 annual meeting of
stockholders. Investors may obtain additional information regarding the
interests of such participants by reading the proxy statement/prospectus when
its becomes available.
PEPSICO INCORPORATED
12-04-00
Confirmation #560104
PEPSICO INCORPORATED
Moderator: Kathleen Luke
December 4, 2000
Operator: At this time for opening remarks and introductions I would
like to turn the call over to Ms. Kathleen Luke, Vice
President of Investor Relations. Please go ahead ma'am.
Kathleen Luke: Thank you and good morning. I'm Kathleen Luke,
Vice President of Investor Relations for PepsiCo. Here in
New York joining me are Roger Enrico, and Quaker's Bob
Morrison. In Chicago we have Sue Wellington, head of US
Beverages, that's Gatorade and the three food heads, Polly
Kawalek Hot Breakfast, Chuck Maniscalco, Convenience
Foods and Margaret Stender, Ready to Eat.
I'd like to thank you all for joining us this morning
particularly on such short notice. As I hope you know,
this morning we announced some very exciting news. We have
reached an agreement under which PepsiCo will combine with
the Quaker Oats Company. And that's what we'd like to talk
about today. In a moment I'll turn the call over to Roger
Enrico, Chairman and Chief Executive Officer of PepsiCo.
But before I do that please bear with me while I read our
Safe Harbor language. This presentation contains certain
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These
statements are based on management's current expectations
and are naturally subject to uncertainty and changes in
circumstances.
Actual results may vary materially from the expectations
contained herein. The forward-looking statements contained
herein include statements about future financial operating
results and the benefits of the pending merger between
PepsiCo and Quaker Oats.
Factors that could cause actual results to differ
materially from those described herein include the
inability to obtain shareholder or regulatory approval,
action of the US, foreign or local government, the
inability to successfully integrate the businesses of
PepsiCo and Quaker Oats. Costs related to the merger, the
inability to achieve cost cutting synergies resulting from
the merger, changing consumer or marketplace trends, and
the general economic environment.
Neither PepsiCo nor Quaker Oats is under any obligation to
and expressly disclaimed any such obligation to update or
alter this forward-looking statement whether it was the
result of new information, future events or otherwise. We
urge investors to read the proxy statement prospectus or
any other relevant documents that PepsiCo and Quaker Oats
have filed or will file with the Securities and Exchange
Commission because they contain important information.
Thank you for your patience. Now let me turn the call over
to Roger Enrico.
Roger Enrico: Well good morning. I'm delighted that so many of you have
been able to be with us this morning both on this
conference call and I'm sure many more on the world wide
web on the PepsiCo Web site which is simulcasting this
call.
We're happy that you're here with us at what is I think
one terrific moment in the history of PepsiCo and Quaker.
And what I'd like to do this morning is walk you through
this historic combination. And if you'll bear with me with
some patience this may take some time. But I'll try to
communicate as clearly as I can what we believe are the
benefits and why we are so enthusiastic about this
combination of PepsiCo and Quaker.
I'll take you through the structure of the deal, the
financials that we expect, our strategic value that we see
in this combination, the hard synergies that we expect
this combination to bring about. And what you might expect
of PepsiCo from a financial perspective after this
combination is completed, along with a discussion of our
implementation plans and the leadership team that will be
driving this company going forward. And then of course
we're going to take your questions.
Now one of the things that you will hear me say repeatedly
throughout this discussion is this is conservative and
this is not in the model and this assumption is not rolled
into our numbers. Basically what we have done here is I
think as you'll agree as you listen to what I have to say
is modeled a very, very conservative approach in terms of
what we have put into the numbers that we'll you about
with regard to this combination.
So listen carefully if you would please to what's in and
what's not in the numbers. We obviously expect and will
charge our people with performing against all of the
synergies and strategic values we see but keeping with our
practice at PepsiCo of being very conservative in the
expectations that we set for investors. And to be a
consistent performer that outperforms expectations, we
have modeled this business combination conservatively.
Let me go first now to the transaction terms. This will be
a transaction on a pooling basis with 2.3 PepsiCo shares
exchanged for each share of Quaker Oats. At Friday's close
that makes the offer value at about $13.3 billion. The
mechanics of the deal are that the deal price, if you
will, is capped at $105 per Quaker share. And that would
mean a PepsiCo stock price of $45.65.
Now below a PepsiCo stock price of $40 which would at 2.3
mean a Quaker value of $92 The Quaker Oats Company has
the right not to conclude this deal unless PepsiCo should
choose to top up the exchange to equal the $92 minimum. At
above $105 a Quaker share, in other words above PepsiCo
share price of $45.65 the exchange ratio would decline so
that Quaker shareholders would receive a value equaling
$105 a share.
Assuming that the 2.3 exchange ratio will in fact be
implemented that is the share prices will be somewhere
below the cap if you will, the pro forma ownership of the
new company once the deal is completed would be 83% of
PepsiCo, present PepsiCo shareholders and 17% present
Quaker Oat shareholders.
We have included in our agreement a deal protection
mechanism which includes a $420 million breakup fee should
Quaker for some reason choose not to proceed with this
deal other than of course the walk away for a minimum
price. And the ability for PepsiCo to exercise up to a
19.9% option on Quaker stock. We would expect this deal to
close sometime between the first quarter and the second
quarter of next year, 2001.
So that's the deal mechanics. Now before I talk about what
Quaker brings to PepsiCo, let me step back if I may and
remind you that since our restructuring PepsiCo has been
already operating at a new and higher level. We have
refocused our corporation to participate in three high
growth businesses, refreshment beverages, enhanced or
functional beverages, specifically with Tropicana juice
portfolio and the salty snack business.
From that overall goal of participating in the convenient
food and beverage market worldwide, a huge market with
very good growth, both historically and prospectively, we
have set clear financial objectives for PepsiCo. And those
objectives have been that we would generate 6% to 7% top
line growth in the company, that is sales revenue growth.
And that would yield an operating profit growth from our
divisions of about 10% to 11% per year.
And with some leverage that we get below the line from
interest and corporate expenses and share repurchases and
the like, that would yield 12% to 13% earnings per share
growth consistently. And with the kind of discipline that
we have put into this company with regard to capital
expenditures and the management of cash, we would expect
our business to grow - our return on invested capital I
should say to grow by 50 to 100 basis points per year.
Now that financial discipline that we have put into this
corporation has resulted now in five quarters of
consistent solid growth in which we have met or exceeded
all expectations. And we expect this quarter, the fourth
quarter of 2000, to meet expectations as well. And that
will result in a full year EPS growth rate for PepsiCo
well above mid teens for 2000.
In addition to the income and performance that this
corporation has delivered over the last five and now six
quarters, we have employed stringent strategic criteria
and extremely tight financial screens as we look at all
kinds of capital expenditures. Whether those be for plants
and equipment or for acquisition activities. And as a
result share repurchases have been a major element in our
portfolio over the last several years having bought back
nearly $9 billion worth of PepsiCo stock.
Now, we're delighted that this combination of PepsiCo and
Quaker meets the lion share of our strategic criteria.
Plus, it absolutely passes the rigorous financial screen
that we've had in place here for acquisition activities.
So what does this deal all add up to financially, giving
you the base level of what PepsiCo was doing and will
continue to be able to do? The fact is that our
corporation has a great deal of scale. There is no
compelling, strategic void that requires us to do an
activity - an acquisition activity like this. So what does
this all add up to in terms of the combination of Quaker
and Pepsi?
Well the headline here is that the combination is going to
solidify our growth prospects but more importantly,
enhance them going forward. Now we've used a conservative
base model for Quaker and we have been conservative as I
suggested earlier in modeling synergies. And the results
that we expect from all of this, even with the
conservatism are terrific.
First of all, we expect the combination to enhance the top
line. We were as I mentioned, expected to grow at 6% to 7%
a year. We now believe we can deliver upwards of 7% growth
going forward on a consistent basis.
Secondly, it enhances EBIT growth. We committed as I
mentioned to 10% and 11% operating profit growth from our
operating divisions with modest synergies that I'll detail
in this conversation. We will add a percentage point to
that growth rate going forward looking at 11% to 12% EBIT
growth from this combined company.
Thirdly, it will enhance EPS growth. I said we expect 12%
to 13% growth for PepsiCo. We now expect our pro forma
combined company to do 13% to 14% earnings per share
growth going forward.
And finally, return on invested capital. The combination
of Quaker and Pepsi will immediately improve PepsiCo's
return on invested capital by almost 200 basis points, in
as much as Quaker has as it stands, a higher ROIC than
does PepsiCo. And over the next five years, by year five,
we expect the return on invested capital of PepsiCo to
improve by over 600 basis points. All in all, I think
you'll agree, an excellent financial outcome.
Now we'd like to walk through this transaction and lay out
what I see as the strategic fit between PepsiCo and
Gatorade - and Quaker, excuse me. I'll start with
Gatorade. Now clearly base Gatorade did the most important
part of the portfolio that's being added into the PepsiCo
Corporation. It is a powerhouse brand generating $2.1
billion in sales with a three year historical growth rate
of 12% in sales and 15% a year in profits.
Now in creating a base case if you will for the Gatorade
business in a model, we projected growth rates going
forward that are less than that three year historical
growth rate I just mentioned. In fact we are expecting a
bit better than 9% growth in revenues versus the 12% that
Gatorade performed over the last three. And an EBIT growth
rate of around 13.5% less than the of course 15% growth
over the last three years.
Now, our conservatism in all of this has absolutely
nothing to do with confidence in the Gatorade brand. This
clearly is one of the best brands in anything in consumer
products in the United States today. It has one of the
greatest track records of brands, not only over the last
three years but over the last 40 years, virtually, since
it was acquired by Quaker Oats.
We are simply again being conservative in our modeling so
that this is all about PepsiCo will continue to be all
about meeting and exceeding expectations. Now Gatorade is
a great story in and of itself but it's even better when
you see what Gatorade brings to PepsiCo.
So let me start first by talking about PepsiCo's beverage
portfolio within the US and International beverage market.
Now in the United States we have - you can think about it.
We have two beverage businesses within PepsiCo. We have a
Pepsi Cola refreshment beverage portfolio and we have a
Tropicana functional beverage portfolio.
Now within the Pepsi Cola refreshment beverage portfolio
we have carbonated soft drinks and we have non-carbonated
soft drinks. Now most of our portfolio presently is
carbonated soft drinks, about 90%. Ten percent of our
portfolio on the Pepsi side is non-carbonated soft drinks.
And of course that is the most rapidly growing part of our
business with Aquafina, with Lipton teas, with Frappacino
and with FruitWorks, and soon to be added the Dole line of
juices into the Pepsi system.
On the Tropicana side of the business we can kind of look
at this in two ways. One is we have a chilled business,
Tropicana not from concentrate pure premium and others.
And we have a shelf stable or ambient business, such items
as Tropicana Twister juice drinks. Our business breaks
down about 80% chilled in Tropicana and 20% shelf stable
or ambient.
Now for the purposes of this discussion going forward I'd
like you to think about a business that incorporates the
non-carbonated soft drinks part of the Pepsi Cola
portfolio and the juice business that we have with
Tropicana, both the ambient part and the chilled part and
then graph Gatorade into this combination. So the addition
of Gatorade to PepsiCo significantly enhances clearly our
share of non-carbonated beverage business in the United
States.
Along with the addition of Sobe in the number, PepsiCo
will have a 25 share of the non-carbonated beverage
business. And that will be about 1.5 times the next
largest player. Now it's not just the starting point we're
excited about. It's the growth prospects. Now
non-carbonated refreshment and functional beverages are
about 28% of the total beverage market in this country.
And they're growing at 8% to 9% a year as compared to the
carbonated beverages in the marketplace growing at say 2%
to 3% a year.
Now, so the addition of Gatorade has strengthened the
growth prospects of our portfolio significantly. But
clearly there is more. Now what I'd like to do is kind of
walk you through the synergies that we see coming out of
Gatorade and PepsiCo being combined.
Now, clearly, there is an opportunity to increase
penetration of Gatorade in the United States and abroad.
But let me think about the United States now and I'd like
to walk you through these opportunities kind of channel by
channel because they're quite different as you think about
the various ways of getting product to market and to
various kinds of customers.
First of all, think about the large format stores out
there. These are the supermarkets, the warehouse clubs,
the large stores. Gatorade is already distributed,
extremely cost effectively through their warehouse system.
And we do expect this to continue. You think about
Gatorade's presence in those kinds of stores and its
availability, the range of SKUs that are available.
Clearly the Quaker Oats Company has done a superb job of
bringing that product to market through large format
stores. And we think that would just continue.
The second group or channel I'll talk about are chain
convenience stores and the like. Now in this case Gatorade
has also distributed very effectively through a broker
system. Again if you think about going into a 7 Eleven or
a Circle K out there you will find a wide range of
Gatorade SKUs available, well merchandised in the cold
vault. And again the Quaker Oats Company has done an
excellent job and their sales organization has done an
excellent job of getting that product out.
And I would say that this is highly likely to continue as
is unless there is some sort of (unintelligible) in any
kind of region in the country. In which case obviously we
have the ability to fall back upon if you will or to look
to the Pepsi bottling system on a selective basis.
Now the third sort of group or channel I'll describe here
is what I'll call for the purposes of this discussion, the
unorganized channel or the old way of saying it I guess
were the moms and pops but I don't think we're really
talking about moms and pops anymore. Now here we clearly
can selectively put Gatorade through the Pepsi bottling
system where we have under-served regions and under-served
customers.
In addition there are also have opportunities in vending
and schools. So in delis and the moms and pops and the
small convenience chains and the schools and the vending
and so on and the like there is a clear opportunity.
Because Gatorade's penetration and presence and
availability is no where near in those kinds of accounts
the high level it is in the organized C stores and in the
large format.
So clearly that benefit is there. A number of people have
written about that. We absolutely believe that will be an
opportunity for Gatorade and PepsiCo. But I want to tell
you that we have not modeled any top line growth synergies
from this. So as relates to the Gatorade business, okay,
we expect Gatorade to grow at the rates that I described
earlier in the base case. That is, a little over 9% of
revenue growth and something around 13.5% in profit growth
and that's what's in the model that we're talking about
this morning.
Now turning to International, Gatorade International is
presently a $380 million business. And clearly there are
opportunities to increase the availability and presence
working with our Pepsi Cola International bottling system
and even with our Frito-Lay International capabilities
around the world. Those opportunities are not that
dissimilar from the ones that I just described for the
United States. But again in modeling this merger, this
combination of companies, we have assumed zero upsides
from the international business.
So let me turn now to where we see some very real hard
synergies. And the big story here is Tropicana. Now as I
mentioned, the Tropicana business has two parts. The
chilled business representing 80% of it's portfolio,
Tropicana Pure Premium being the biggest brand. And the
ambient business, Tropicana Twister, Season's Best and so
on which represents 20% of the portfolio.
Now the thing to know about the ambient business is to
think about the market. It is a big market, it's about
$7.5 billion in the United States and it's been growing at
over 3% a year. The second thing to think about that
business, the ambient market if you will, it is a - it is
highly fragmented. Now Tropicana's juice portfolio, unlike
Pepsi's beverage business, goes to market through a broker
warehouse system much like Gatorade does.
However, Tropicana especially on the shelf stable or
ambient side lacks the national scale and presence that
Gatorade has which we recognize is in part, that is the
Gatorade presence, we recognize is in part as a result of
the overall scale of the combined Quaker food business as
well, and Gatorade. So piggybacking off of this scale
broker warehouse and commercial organization, the major
account sales, broker management and so on, we believe
could result in significant benefits for Tropicana.
Now let me give you a bit more detail on that. In the
large format stores, as I mentioned earlier, Gatorade has
extremely good presence, extremely good availability of
SKU's and is extremely well merchandised. And it happens
to be merchandised in the same aisle as this - these
ambient products I've been talking about, Tropicana
ambient and the other ambient juice drinks and the like.
A combination of Gatorade and Tropicana will give PepsiCo
a 12% to 13% share of the large format alternative
beverage aisle business. And what this does is gives us
the legitimacy to be the category captain of the
alternative aisle. That means that we would be the
preferred partner with retailers on an intellectual basis
and a know how basis to help retailers to unclutter the
aisle, to improve the turns in the aisle, improve the cash
flows profitability and so on.
As I said, this aisle is extremely fragmented in clutter
and if any of those of you would choose to go out into a
supermarket after we finish if you walk down that aisle
you will certainly see what I'm talking about. So we
believe there is a significant amount of upside capability
from combining the Tropicana and the Gatorade go to market
system and sales and marketing capability in terms of the
benefit being to significantly improve our sales of
Tropicana ambient products.
Now outside of the large format stores and again in C
stores, Tropicana will be able to take advantage of
Gatorade's excellent presence as I mentioned before to get
more presence for itself in the all important cold vault
where the margins are high. Now this is definitely a top
line opportunity that we are excited about.
And let me tell you how we've included this in our model.
So what's in the model here now is that over the next five
years Tropicana's ambient business in combination with
Gatorade will grow significantly. We believe what we can
grow that business to be up 50% from what it currently is
in large format stores and up by three fold or 300% in
small format stores.
Now the net incremental benefit of that to PepsiCo would
be $400 million in additional revenue by year five. And
the operating profit flow through of that additional
revenue would add $45 million pre tax to our bottom line
by year five.
Now, this upside of Tropicana ambient beverages is the
only beverage top line synergy opportunity we have modeled
in the financial case for this combination. And that sits
upon what I believe is already a relatively conservative
base case of 9.5% thereabouts for revenue growth on
Gatorade and 13.5% in profit growth.
Now let me turn away for the moment on the beverage side
here from top line synergies and top cost synergies
resulting from Gatorade and the rest of the Quaker
portfolio being part of PepsiCo. The first major bucket
here is procurement savings. Now clearly the overall scale
of PepsiCo and Quaker combination can help reduce costs of
direct materials like PET, cartons, et cetera, as well
as that of all other goods and services.
And while the procurement savings as I mentioned sort of
apply to all of Quaker, we're going to model it here in
beverages since it's the largest single contributor. Now
we've included $60 million of benefits, pre tax benefits
by year five from purchasing savings. Now frankly we're
pretty confident that we can get a lot more than that. But
again, in keeping with the overall theme of conservatism,
we feel comfortable with committing to this number at this
time.
Now the next element to think about, excuse me, on cost
savings is that Tropicana and Gatorade and for that
matter, the Quaker non-snack food business are warehouse
delivered products. And we believe there are considerable
savings available through consolidating the go to market
capabilities of the combined companies.
Now Tropicana, Gatorade and other Pepsi Cola products like
Lipton, Sobe Frappacino are all hot fill products.
And we think there are opportunities for better system
capacity rationalization and therefore cost reduction as
we will be able to manage all of these things now in a
coordinated way.
There is also a significant cost reduction opportunity in
looking at the overall supply chain in adding to the
manufacturing and selling things that I've mentioned, the
warehousing and logistics. So between the SG&A effect of
this rationalization if you will, and the rationalization
relating to hot fill, again conservatively modeled, we
expect to realize an additional $65 million pre tax
savings by year five.
Now, there's a third area of opportunity from this
Gatorade PepsiCo acquisition or combination I should say
which is truly, truly exciting. And this relates to laying
the pipeline for the future building capabilities starting
with R&D.
With the Gatorade Sports Science Institute and the
Tropicana Nutrition Center, we will lead the beverage
industries capability in nutrition and physiology. And we
will have the beverage industry's leading expertise in
functional beverage manufacturing technology as well...
capabilities of continuing to generate profitable topline
growth.
Let me turn our attention just a second back to the
international side of things. Under what I'll described as
sort of international network building.
If you think about putting Tropicana, Gatorade, teas and
the like together, we can now justifiably selectively
justify selectively building or making it attractive for
others to put in hot fill production capacity in some
regions of the world. And that creates tremendous growth
opportunities for the company. That's an opportunity that
would be difficult for us to capitalize on now without the
kind of scale that this combination might bring about.
Again, keep in mind, we haven't modeled any upsides from
those sorts of capabilities. So let me now summarize if I
can, the Gatorade, PepsiCo, beverage story. First, what's
in the model. What's in the model is Gatorade based volume
- base case, excuse me, a little over 9% revenue growth
and 13-1/2% EBIT growth.
And added to that we had $400 million of incremental
revenues of the Tropicana ambient business by year five,
and the profit flow-through resulting from that of $45
million pre-tax. In addition to that, we expect by year
five, $60 million procurement savings, and $65 million of
other cost savings relating to SG&A, hot fill
manufacturing, logistics, the go to market combination and
the like.
What's not in the model is the Gatorade sales benefit from
Pepsi-Cola's US and international system capability or the
new innovation capability from combined R&D and marketing
know-how.
Now I'd like to turn your attention to the other pillar of
PepsiCo which is snacks. Now virtually all the focus up to
this moment in the press and with me here now this morning
has been - virtually everything anyone talks about is
Gatorade. And that's understandable considering the
powerhouse brand that is it.
But we think this combination gives us a great deal more
than that. It gives us a terrific second brand in Quaker
itself, and a great business in snacks. Now as you know,
Quaker is already in snacks, rice cakes and bars --
granola bars and the like -- with a portfolio of
leadership products and brands. They presently have a $380
million business which has grown at 10% in revenues in
EBIT over the past three years.
I think you're also quite familiar with Frito-Lay's
strategy that we articulated a little over a year ago that
we call the add more strategy. That is to selectively
build out from our powerhouse core salty snack business
adding - growing out from that core to add products now
that perhaps are not salty snacks but are close-in type of
products in terms of the way consumers would consume them.
And to make that add more strategy a reality, we have been
reengineering the Frito sales organization in our pre-pick
system which will help us to increase capacity, increase
the number of SKUs that we can effectively handle through
the Frito-Lay system which would allow us to immediately
distribute these products through Frito-Lay and realize
upsides.
Now, let's talk a little bit about the model assumptions
here for the Quaker snack food business in combination
with PepsiCo. I said that the - over the last three years
that the EBIT and revenues in EBIT have grown at 10%. We
are assuming a base growth rate for that business of 8% in
revenues and just shy of 11% in EBIT going forward.
Now given - in combination with PepsiCo and Frito-Lay's
distribution capability in the United States, we would
expect to significantly increase the revenues of that
snack food business. In fact I think we believe that we
can quite conservatively double that business which would
add - double the rate of growth I should say of that
business, which would add $200 million with the revenues
by year five. And the flow-through of pre-tax basis for
that would be $34 million.
So we'd have a business in the base case growing at 8% and
aisles accelerating to mid teens in sales adding $200
million more than otherwise would be the case, a profit
growth rate in the base case of just shy of 11% to which
we would add $34 million by year five of incremental
pre-tax profits.
This does not include international upsides from
leveraging exactly the same thing which we of course know
exists but we've chosen not to model in at this time.
Now to us here at PepsiCo, the even more exciting story
about the Quaker brand here is that as with beverages, the
growth platform that the Quaker snack food business brings
to us is truly exciting. If you think about what's going
on in the consumption of meals in the United States, and
in fact, in many countries in the world today, we have a
continuation of the - as they say, the deconstruction of
meals.
What it simply means, is more and more people are getting
their nutritional and caloric intake on an on-the-go
basis. And it seems as though the same consumer trend
which is effecting beverages and the tremendous growth of
single serve and cold bottle beverages is also effecting
the way we consume food products. We are moving toward the
sweet spot of convenient food and beverages of one-handed
meals, on-the-go eating.
And clearly that has been the case up to now for fun
foods. That in fact is the way fun foods are consumed. We
see this market migrating over the years into something
more than fun foods, as a legitimate way for people to get
their nutritional needs or part of their nutritional needs
for the day. And I believe that that is going to be a huge
business in this country.
Now it's already quite big. If you think about it, the way
it's manifested most clearly today is in the bar business.
We have granola bars. We have protein bars. We've got
energy bars and the like. And those business right now are
about $2 billion. That is, the market's about $2 billion.
It's growing at 9% a year. And I think as I said, that
consumer trends are going to sustain if not accelerate
this growth rate going forward.
Now you can think about it this way. As consumers look for
nutritious snacks for some day parts, bars are an ideal
way to kind of smuggle the nutrition in to the fun. Now
today, PepsiCo is not in this business although we have
identified it as a critical add more need. Now with Quaker
Oats, we get a bar business that gives us legitimacy over
night in this category. We get the brands, the products
and the R&D in manufacturing and marketing expertise.
In addition, we get some very important strategic
capabilities. The Quaker brand name allows us to build now
a morning snacking business, a segment of the day that's
undeserved by Frito-Lay. The Gatorade mark allows us to
build an afternoon snack business. And for those of you
that have not had the opportunity to taste the new
Gatorade Energy Bar, I encourage you to do so. I think it
is clearly the best tasting energy bar on the market bar
none.
And the Quaker trademark as I said, gives us the
legitimacy, the nutrition credentials if you will, to
think about effectively playing in all of this and being a
leader in this whole trend.
So the net net of all of this, is I can say that the
Quaker snack business may only be about 8% of their
present portfolio. But it sure has a much higher share of
excitement to us at PepsiCo.
Now let me turn the attention to the balance of the Quaker
portfolio. And for the purpose of this discussion just to
keep it simple, let's call it the non-snack food business.
Now first and foremost, I want to go on record as saying,
the non-snack food business is a good business. It has
sales estimated this year of $2.6 billion. It has an EBIT
margin of about 17%. It has had a four-year EBIT growth
rate of about 4%. And it throws off a relatively
prodigious amount of cash.
Now, to put it all in perspective, when we combine PepsiCo
and Quaker, this non-snack food business will represent
about 10% of pro forma PepsiCo sales and about 11% of EBIT
day one. And it is that we do not expect - inasmuch as we
don't expect it to grow as fast as the rest of our
portfolio, that percentage will go down over time.
The non-snack food business of Quaker has great leadership
brands like Quaker Oatmeal, Life, Cap'n Crunch, Aunt
Jemima, Rice-a-Roni, et cetera. And most of the brands
that are in this portfolio, have leadership shares in
their category. I'd also say as I mentioned earlier, that
the scale of this non-snack food business is important to
the overall warehouse go-to-market capability that will
generate synergies for our Tropicana portfolio. And this
business has been managed extremely well by the Quaker
management team, which we intend to lock in -- that is the
management team -- so that they can continue to deliver
the great results that they've been posting for the last
number of years.
So we've modeled this non-snack food business to deliver
conservative revenue growth of 3.3% over the next five
years and what I think is modest profit growth of 4-1/2% a
year over the next five years. Now I would think about
this business as one with consistent predictable earnings
with some upsides now and then.
Now clearly in no way does the presence of non-snack foods
in our portfolio change PepsiCo's core strategy to focus
on three high-growth business -- refreshment beverages,
functional beverages and snacks. We have no plans, no
intention for non-snack foods to evolve into a fourth
strategic leg for PepsiCo.
Now that summarizes the lines of business, their outlook
in synergies. Let me turn now to another smaller set of
synergies that come from a combination of corporate G&A
and multiple other sources.
Now we've modeled modest reductions for this whole bucket
of sort of corporate redundancies that get created because
of this combination to add up to $26 million pre-tax by
year five.
So just to recap now our financial projections, standalone
PepsiCo is expected to deliver revenue growth of 6% to 7%
and EBIT growth of 10% to 11%. As a result of the
combination with Quaker, we've layered in synergies of
$230 million pre-tax by year five of which we expect $65
million will be realized in year one.
And when you add together all of the top and bottom signed
synergies, the resulting algorithm is accompanied with
revenues growing at 7% plus and EBIT at 11% to 12%.
Now let me turn our modeling assumptions to below the
operating profit line to kind of fill out the income
statement for you starting with interest expense.
Net interest expense pro forma 2000 for PepsiCo will be
about $215 million. Now pooling as you know, requires us
to cease share repurchases causing cash to build up on our
balance sheet. So net interest expense will come down to
$50 million by year two -- by year two after the deal is
completed. And we will have around $5 billion in cash with
some modest levels of debt.
Now after two years, the rules allow us if we so chose,
we're free to repurchase shares. And if we look out to
year five, we estimate net interest expense for the
combined PepsiCo to be somewhere around $200 million a
year.
Now let me turn to the tax rate. Let me mention by the
way, that the interest expense numbers that I just
described are in the model, the financial model for the
combination. Now turn to the tax rate.
We've assumed Quaker's tax rate at 34%. As you know,
PepsiCo's is presently 32%. So just working the
arithmetic, the pro forma tax rate's 32.4% for... PepsiCo
are working independently on tax strategies combining this
- if you combine this with the opportunities resulting
from working together.
Now we expect the outcome of the work we're doing now to
be a reduction of the combined company's tax rate by 1 to
2 points within the first two years after close. However
we have not modeled what we believe will be a significant
tax benefit into our financial projections at this time
for the combination.
Now moving from income to cash, let's talk a little bit
about cap ex or capital expenditures. If we were to simply
add our respective company's cap ex's together, the
result is a capital expenditure rate of approximately 5.5%
of sales year one. Cap ex projections for the two
companies independently combined with the topline
synergies from the combination that I've talked about,
cause this cap rate to come down to approximately 4-1/2%
by year five. Now this of course doesn't include any cap
ex for any ongoing or further tuck-in acquisitions, you
know, principally for the Frito-Lay and the soft drink
business of PepsiCo. And this is what we've modeled into
our cap ex assumptions.
Again we believe that that's a conservative approach and
we think there are upsides to what I just said. Because as
we jointly work on supply chain rationalization, cap ex
needs are likely to go down further. And the sheer scale
of the combined company will allow us to procure capital
equipment more efficiently. Again, we haven't modeled in
any of these efficiencies, merely the base assumptions
that I've described earlier.
Now as we kind of come down to the cash line if you will,
in our modeling, we've sort of mentally set aside and
estimated $400 million for merger-related restructuring
costs. Now that's about typical for deals of this size.
And to be conservative again, we're going to assume for
the moment that all of that $400 million's going to be
cash cost, unlikely but we'll assume that to be
conservative, and that it'll be spent in the first two
years.
Now over the next few months, obviously we're going to
work to refine these numbers and provide you with a more
accurate picture of what that is likely to be. But year
one, the pro forma free cash flow per share which as I'll
remind you, excludes dividends, share repurchases, ongoing
acquisitions, et cetera, is modestly diluted.
Beyond year one, cash flow per share will be accretive as
we expect cap ex requirements to decline and as the cash
benefits of the profit synergies flow through.
Cumulatively, that is adding up all the first five years
together, based upon this conservative model that I've
taken you through, we expect free cash flow per share to
increase by roughly 20 cents a share over the next five
years setting aside the merger expenses.
So if I may let me kind of try to roll all this together
for you again. New PepsiCo revenue growth goes up from 6%
to 7% to a solid 7% plus. EBIT growth goes up a whole
percentage point from 10% to 11% to 11% to 12%. Earnings
per share goes up a point from 12 to 13 expected to 13 to
14 expected. Return on invested capital goes up 200 basis
points closing, and then improves to 600 basis points
improvement by year five.
The deal we would expect is 1 to 2 cents accretive to
earnings per share in its first full year. And this
combination of PepsiCo and Quaker creates multiple new
avenues to accelerate the growth of our refreshment
beverage, functional beverage and snack food portfolios.
So now I hope you can see and I hope you share our
excitement about this combination.
A little note on 2001, as I'm sure you'd all like to kind
of work the models as quickly as possible. As of now of
course, we have no way of knowing when the deal will
close. We expect it will happen in four to six months.
Because of timing on closing, I would recommend you not
add much if anything to 2001 EPS targets at this point.
2001 EPS guidance for PepsiCo has been 12% to 13%. I said
- as I said, I expect the combination to be 1 to 2 cents
accretive in the first 12 months post-merger. But deal
won't close until half way through the year. And the $65
million in savings that we expect, that is the cost
synergies pre-tax, we expect to bring in in the first 12
months, are going to build over time. So it's not going to
fall equally from the - between the first half of that
period of time and the second half. It will obviously go
up the curve pretty sharply into the second half of that
first year.
So there you have it. There's now a new PepsiCo, stronger
than ever, still highly focused on three phenomenal growth
businesses -- snacks, refreshment beverages and functional
beverages. It's a company that will be among the largest
of the global food and beverage companies in terms of both
sales and EBIT. It's a company that will represent in the
United States, one of the most important partners for our
customers. We will continue to be the fastest contributor
to the growth of our retail customers, the most important
contributor to their profits, and the most important
contributor to their cash flow.
And we would expect with your confidence and help that we
will have a company with a market capitalization well
North of $80 billion -- a true powerhouse in convenient
foods and beverages.
Now that's the deal and that's the strategy and that's the
hard numbers and what we're so excited about. But let me
share with you now, switch over and talk about
implementation, because it's one thing to do a deal and
have the rationale and have all the arithmetic work. It's
another thing to actually get out there and make it
happen.
And from the moment that Steve Reinemund and I and Indra
Nooyi for that matter, thought about this, we began
thinking about how do we deliver the goods? How do we
implement? How do we assure smooth and superb execution?
And that's really a question all about people. So I'd like
you to think about another important asset, maybe the most
important asset that will come in this combination to
PepsiCo. And that's the Quaker team.
I think those of you who have been investors in Quaker
would agree with me to say that over the last several
years under Bob Morrison's leadership as Chairman and CEO,
this has been a team that has delivered to the nines. It's
a highly professional, capable, extremely well performing
team.
So I'm happy to say first of all, when we think about how
you assure execution, is you make sure that you have the
people who know all about it stay with you. And the first
person that I'm delighted to announce that will stay with
us is Bob Morrison himself. Bob is going to be joining
PepsiCo. He's committed to stay a minimum of 18 months
after the close. We are hoping and expecting that his
arithmetic value is about as good as Karl Von Der Heyden's
who you may recall came here some four years ago for a
12-month stint. And if it works out way, we'll have Bob
for a long time indeed.
Now as I thought about Bob's role changing with this
combination from CEO and Chairman of a public company, and
what he was doing in terms of the right thing I think he
believe and I certainly believe and I'm sure his
shareholders believed for his shareholders and for his
employees in agreeing to come on and joining us at PepsiCo
for this period of time at a minimum so that the
shareholders of the combined companies would see the
benefits that I've talked about here this morning, and
that the employees would see the opportunities that I've -
kind of implied this morning.
Anyway, as I've thought about Bob's willingness to do that
in the example of his unselfish willingness to do that, I
felt it was only fitting that I do the same thing. And so
therefore, I did recommend to our board of directors, some
management changes that will take effect upon the closing
of this deal.
Bob will as I said, join PepsiCo as Vice Chairman. And
he'll be elected to our Board of Directors. And Bob will
also be Chairman, President and CEO of Quaker and be an
overall - the single person most responsible for
integrating Quaker into PepsiCo and for -- along of course
with Steve Reinemund and others -- for realizing the
benefits of this combination.
Now Steve will at that time, become Chairman and CEO of
PepsiCo. As you know, we announced a number of months ago
that that was our intention and we would transition over
the next two years with sometime in 2001, Steve becoming
CEO and sometime in 2002, him becoming Chairman.
We decided that it makes a lot of sense to move that up,
and that's what we intend to do. Indra Nooyi will become
President of PepsiCo, responsible for all of the corporate
activities, and retain her Chief Financial Officer title
and be elected to the Board of Directors are well.
And I will join Bob as the Vice Chairman of PepsiCo. And
he and I will report to Steve once Steve becomes Chairman
and CEO of the company.
Now I'd just like sort of wrap this up with kind of a
personal statement if you will. I've never been more
enthusiastic about PepsiCo than I am at this moment. I am
extraordinarily enthusiastic about working with this team,
obviously continuing to work with the PepsiCo team that I
know and love and have come to know in this last month or
so especially, a number of the members of the Quaker team
and of course, Bob himself.
This earlier transition date that we're talking about
between Steve and myself, does not suggest a lessening of
my commitment of time or energy to PepsiCo in any way. And
in fact, I look upon this as the most exciting way I could
possibly imagine to conclude if you will, my career at
PepsiCo over the next couple of years.
So with that, let me turn this discussion and meeting back
over to Steve Reinemund who will become the new Chairman
and CEO of PepsiCo to field your questions. Steve?
Steve Reinemund: Thank you Roger. And today is truly a defining moment for
PepsiCo and for Quaker. Along with everybody at both
organizations, I'm proud to be a part of such a defining
moment in the history of our combined companies. And I'm
obviously very pleased about the vote of confidence that
Roger and the board and the rest of the great PepsiCo
management team has given me. And I must say that the
honor of serving and the privilege of leading PepsiCo is
more than a little bit humbling when you consider the past
trio who have been the CEO and the legacies they have left
at this company.
And my enthusiasm for the opportunity to lead PepsiCo has
been incredibly strong over the past months since Roger
made this decision. But I have to say, today's development
takes it to completely a different level. And we were in
my opinion, a premier consumer products company before
today's announcement. But the combined PepsiCo and Quaker
is truly now in a league of its own.
And PepsiCo and I'm sure that Quaker feels the same way,
we often talk about what attracted us here and what it
inevitably comes down to is a thinking about our dynamic
businesses and our brands, the world-class talent that we
work with, and the chance to make a significant difference
with our personal impact. And I would have to say today's
news only strengthen those attributes for everyone on the
combined PepsiCo Quaker team.
I'd like to take just a moment if I can to mention Roger's
decision to move to Vice Chair. And it's certainly not
unusual for CEOs to turn over the reins. But I can't think
of another case -- I've never heard of another case --
where the CEO turns them over and then he volunteers to
stay on and keep contributing. And I think it's just
consistent with the life time of commitment that Roger's
made to PepsiCo and the depth of his personal loyalty to
this company.
I appreciate Roger's support and I intend to keep counting
on it. And he mentioned that he hoped that Bob's
arithmetic is not any better than Karl's. And I would
only add that I hope that Roger's arithmetic is no better
than either one of them and that I can count on all three
of them for many years to come. And I must say that I
treasure the friendship that I've had with Roger, and I
value all the lessons that he has taught me in the past
and the ones that he will teach me in the future.
Now I've only known Bob Morrison for a short time, But I
have to tell you that being that he was a former Marine
hero, I knew that I would like him before I even met him.
And it felt right from the day we walked into the same
room together. And it's certainly proven out by the events
that led up to today.
He's committed to his company, his shareholders and his
people. He's open and candid in his style. And he's
passionate about what he does. And I know Bob will be as
good to work with as he was to deal with. And that was
pretty exceptional. And I kept - to say this morning that
I'm as delighted about Indra's promotion as I am about
this transaction overall. Because she is one of the most
talented and deserving leaders that I've ever known. She's
not only played a key role in making this combination
work, but as all of you know, she's been instrumental in
everything that we've done over the last five years. And
it's been a real privilege to work alongside her. She's
not only very good at what she does, but she's also a lot
of fun.
So sort of in closing, I'd like to reinforce Roger's
points about the tremendous enhancement that this
combination offers to both companies and to our
stakeholders, our customers, our partners, shareholders
and all of our associates.
You know, as I think back, the last time we talked about
something like this, was when we shared the announcement
of the addition of Tropicana to our family. And we were
very optimistic at that time as you can remember, about
the potential. But we never expected that it would turn
out as well as it has. And I believe there are lots of
parallels to what we deal today. We're confident that we
will be sitting here a year from today, and that we will
have great...
...our business press or very importantly, Quaker
employees, want everybody to know that I'm personally,
absolutely thrilled with the prospect of combining the
Quaker Oats company with PepsiCo. It's obvious I think,
that this merger is a good thing for Quaker shareholders.
For the three years through October 31 of this year -- and
I'm picking that date because it was just a couple of days
before the takeover rumors hit the press, for that
three-year period, Quaker shareholders had seen an average
annual return of nearly 22% -- a return that as you know,
far out-distanced the performance of any of our food peers
over that period. At Friday's close, we anticipated
Pepsi's deal will provide a premium of nearly 20% on top
of the October 31 price.
So I think clearly, this represents a very attractive
immediate return. But of far greater importance to those
shareholders who have taken a longer term view, I think
there's an opportunity here to participate in one of the
most dramatic growth stories in food and beverage history.
I think everybody's aware that in recent times, mergers in
our industry or others, often bring together one
struggling company with another, or at best, one
struggling company with one who is doing well. This merger
is really unusual in that respect. It's combining two
companies that are both firing on all cylinders, leading
their industries in every respect, combining two companies
each with highly respected management teams.
This combination presents the prospect of a truly awesome
growth story and therefore very impressive future returns
for our Pepsi-shareholders over time.
I just want to say that I think this merger is also good
for our employees at Quaker. Quaker employees I think,
have proven that they're winners. This merger will provide
them with a very significant increase in the resources
available to keep on winning in the marketplace. And the
merger will also provide them with an opportunity to grow
on a personal level, in a company long known for
identifying and developing a diverse group of strong
leaders.
Our employees, I think are going to thrive in this
environment and will see greater career growth
possibilities than were even possible in a standalone
Quaker Oats company.
I'm genuinely excited to join Roger, Steve and Indra as
part of the PepsiCo leadership team. I firmly believe we
are going to do great things together.
Man: Thank you Bob. And at this point, we'd be happy to
entertain any questions.
Operator: Thank you. The question and answer session will be
conducted electronically today. If you would like to ask a
question, please press the star or asterisk key followed
by the digit 1 on your telephone. We will proceed in the
order that you signal us and take as many questions as
time permits. Once again, that is star 1 to ask a
question.
And our first question comes from Blaine Marder of GE
Assessments.
Blaine Marder: Hi. Do you anticipate reissuing any shares to kind of
conform with pooling criteria?
Man: Indra, do you want to handle that?
Indra Nooyi: Yes, we have to reassure about 20 million shares to cure
the taint.
Blaine Marder: Okay, and that will be done immediately upon closing?
Indra Nooyi: It'll be done just before closing.
Blaine Marder: Thank you very much.
Operator: Our next question will come from Nick Booth of
Wellington Management.
Nick Booth: Yes hi there. I've got a question on synergies that may or
may not be in your model. The cold drink channel, any
opportunities there for enhancing Gatorade's position
there with your bottling distribution system?
And then secondly in the international markets where you
may have a particularly strong presence I'm thinking of
Mexico, what are the synergies there that you model into
the projections of forward-looking earnings growth?
Steve Reinemund: Well (Nick), as Roger said, we think that there are
opportunities all over our businesses to add. But we did
not include synergies for either one of the examples that
you mentioned in our model.
Nick Booth: Okay, thank you.
Operator: Our next question comes from John Faucher of JP Morgan.
John Faucher: Thanks. Just wanted to follow-up on Nick's comment. Can
you compare the Gatorade percentage of volume by
distribution channel specifically? I `m thinking vend in
some of these small format stores where you've said it's
underdeveloped? Can you compare Gatorade's percentage of
volume through those channels to sort of your standard CSD
lines?
Steve Reinemund: I might ask if Sue Wellington in Chicago who leads the
Gatorade business would answer that question.
Sue Wellington: Sure, hello. Hi, it's Sue. About 90% of the Gatorade
business in the United States is through what Roger would
have described as either large format or chain convenience
store, drug, mass merchant club business. We have a
relatively small on-premise business that is very, as you
know, targeted to points of sweat to be under 10% of our
business.
And I would echo although it's not modeled, that there
certainly is an opportunity for us to expand our view of
on-premise and specifically go after the vend opportunity
again, although it's not in any of the numbers you just
heard.
Blaine Marder: So that 10%, would that include sort of the mom and pop
(bodegas) type of volume? Or would that be mostly - would
that be in the 90%?
Sue Wellington: It'd be in the 90%. And that's really less than 2% of the
90%.
Blaine Marder: Great thanks.
Operator: And we'll go next to Andrew Conway of Morgan Stanley.
Andrew Conway: Thank you operator. A couple of brief questions. Indra, in
your modeling, if you could give an idea in terms of your
base case revenue and EBIT growth in the non-snack food
business, talk a little bit about, Steve perhaps, when
you've looked at the non-food business, or Roger, the
opportunities you see going forward in revenue
opportunity? And finally, comparing the (unintelligible),
a little bit of the capital intensity in both businesses
please?
Indra Nooyi: Andrew, let me just talk about the non-snack food business
Andrew. What we've modeled in our base case, is 3.3%
revenue growth going forward and 4-1/2% EBIT growth going
forward. And as Roger mentioned to you, on Gatorade we
have modeled 9.4% revenue growth and 13-1/2% EBIT growth.
This does not include any of the synergies.
And on the snack side, we've included 8% revenue growth
and 10.8% EBIT growth. This is again, Quaker standalone
base case. And if you total all these together, we have a
base case Quaker of 6.4% revenue growth and 8.7% EBIT
growth between the years 2000 and 2005.
Steve Reinemund: Andrew, to the second question, as Roger said, we think
that this opportunity to take the Quaker legitimacy and
the snack brands that they already have and the extensions
to that into the Frito system is an enormous upside. We
have obviously accelerated the growth from the current
business because of that. But frankly the upside to that
is what makes us all very optimistic about the
combination.
Operator: Anything further Mr. Conway?
Andrew Conway: Just a comparison if Indra would provide a view as to the
capital intensity please of Quaker versus Pepsi as
revenues should grow faster than capital spending. Are
they taking into account the high single volume growth of
the Gatorade brand?
Indra Nooyi: Let's just talk about capital. As again, Roger mentioned
in his opening comments Andrew, PepsiCo standalone today
is about 5-1/2% capital expenditures percentage of sales.
And Quaker has a higher cap ex as a percentage of sales
this year.
The combination, just a simple summation, gets us to
5-1/2%. What we've done in our modeling is looked forward
and adjusted for this unusually high capital expenditure
that Quaker has this year and looked at our own plan. And
excluding any acquisition related cap ex, and including
all the costs - I mean the topline synergies that come
into the model, this capital expenditure as a percentage
of sales comes down to 4-1/2%.
And again, as we mentioned to you earlier, this number
does not include any cap ex that we might avoid because of
all the supply chain rationalization opportunities
available to us, nor does it include a reduction in the
cost of capital equipment procured because of the
additional scale that PepsiCo brings to Quaker.
So we still have to go kick the tires and the number. But
for the sake of modeling today, again staying with this
whole thing of conservatism, my suggestion is between now
and 2005, you draft this 5.5% number down to 4-1/2%.
Andrew Conway: Thank you.
Operator: And our next question today comes from David Nelson of CS
First Boston.
Mr. Nelson, please go ahead. Your line is open. Without
hearing response sir, I would like to move on to
Jennifer Solomon of Salomon Smith Barney.
Jennifer Solomon: Thanks so much. I just want to make sure that I've got
this correct numbers for the synergies. You talked about
65 million of cost savings for (unintelligible) for
rationalization of hot sell on the beverage side. What
about any kind of cost savings purchasing leverage on the
domestic food side? Do you see really much opportunity
there? Do you want to give us any kind of number at this
point?
Roger Enrico: Jennifer, let me take this - Roger. Let me take that one
because I also understood that I transposed a number
during my presentation. So I'll just take you down quickly
again through the synergies trip from the standpoint of
the pre-tax operating impact going out to year five.
As I said, they were $230 million. Forty-five million of
the 230 comes from the improvement in Tropicana ambient
sales in the - essentially in the Gatorade Quaker system.
Thirty-four million dollars of the opportunity comes from
the improvement in Quaker snack sales in the Frito-Lay
system. Sixty million dollars comes from procurement which
is the question you had just raised to $60 million by year
five.
While I said that, I ascribed that all to beverages. In
fact, that is all across the Quaker product line. And it's
other goods and services. It's everything. Now frankly our
purchasing people think that is extraordinarily
conservative number. And we're going to count on them
proving us wrong. That is, proving themselves right that
this very conservative.
And then the next one was this - the whole question of
Tropicana and Pepsi-Cola non-carbs and Gatorade with the
hot fill production, the warehousing, the - all that sort
of supply chain go-to-market capability. That was $65
million.
And then finally by year five, we'd have 26 million of
savings of corporate and other. So that's the way the 230
shakes out.
Jennifer Solomon: Thank you.
Operator: And from AG Edwards, Timothy Swanson has our next
question.
Timothy Swanson: Yes, good morning everyone. You clearly pointed out what
happens in year five as well as what happens in year one.
My question is more so if you were to take a look at what
your baseline is and you have a target of the 13% to 14%,
how does year two through four relate to that 13% to 14%?
And is there enough leverage in the tax rate as well as
the - some other non-operating issues to reach that target
in the first maybe two - or three year?
Indra Nooyi: Let me just say that one of the - the reason we've modeled
this combination with PepsiCo is that in no year do we
move away from our stated topline, EBIT or earnings per
share growth. In absolutely no year between the first year
of the deal and the fifth year of the deal.
Rather than walk you through the assumptions year by year,
why don't we do that off-line to the extent that we can.
But what you should assume is stay within those financial
guides we have committed to you, and then work backwards
from that, counting in the synergies on the schedule that
we've just given you.
Timothy Swanson: Okay, so really you are holding yourself to 13% to 14%
earnings per share growth in year two through year five?
Indra Nooyi: Year two - the first full year after the merger, you've
got to be very careful about the calanderization of the
merger. So it's not just in a fiscal year two which would
be 2002. But it would be the second full year after the
merger. So that's the way you should work in the numbers.
But yes, if we ramp up closer, you know, to 13% in the
first year and then slowly work up, you know, to the
higher number, closer to 14, but, it's that range of 13 to
14.
Timothy Swanson: Okay, thank you.
Operator: And we'll go next to John McMillin of Prudential
Securities.
John McMillin: Good morning everybody. Bob, on behalf of Quaker
shareholders, good job. So now you can drink soft drinks
at your desk without feeling guilty. You always used to
amaze me watching you drink...
Man: Never mind.
John McMillin: I won't mention it was a toast. Just - this deal sounds
great for Pepsi. But just taking the Devil's advocate
point of view for a second, let's just assume Pepsi's
stock in a weak market goes down to 36, 37. Sorry for the
background noise. What - basically, I'm just trying to get
what kind of protection's going to be made Bob, in terms
of your willingness one to walk, and Pepsi's willingness
to kind of make us whole at 92. Can you just kind of walk
through that scenario and make a guess of what happens?
Bob: Yes, that's the kind of hypothetical question that's very
very difficult to deal with because I would be
flabbergasted with the story we've got here if the stock
ever got to 40 or below 40. So I think that's something
that I think it's an academic question we're never going
to have to deal with. But I appreciate the question John.
John McMillin: I hope you're right.
Bob: So do I.
John McMillin: That must mean you have been. My only comment to the
numbers which appear conservative but, you know, Bob, if
you're - if this non-snack food business can do 3.3%
sales, I want to do a lot more than 4-1/2% earnings. Is
anything - my only comment to the Quaker numbers is the
sales goal that appeared to be a little bit high in
relation to the earnings goal for the non-snacks business,
am I missing something... cereal margin compression of
whatever you're assuming?
Bob: Yes, I wouldn't read too much into that. As you know, our
board's approved this on Saturday. We were not part of all
the discussion on it. I will tell you that everything that
Pepsi used in modeling it was based on numbers that we
provided them during due diligence.
I'll tell you that without question, we would - our whole
management team would stand behind all of the total
assumptions used in this total model that they've got from
the standpoint of revenue growth and profit growth. If
you're asking me, do I hold my people to higher EBIT
growth on the food business knowing we've got all this
cost savings coming out from the restructuring -- and we
told you about that absolutely -- but I think the totals
that we're looking at which were what - in six and nearly
nine, are very consistent with our numbers and very
consistent with everything I've always told you - told the
analysts and the investors.
(John McMillian): Okay, well congratulations.
Bob: Thank you.
Operator: And from UBS Warburg, Caroline Levy has our next question.
Caroline Levy: Good morning everybody, couple of questions. One, why will
a deal take so long to close? You know, are you being very
conservative in thinking around April or, you know, if you
could just run us through that a little bit?
And secondly, if we could just touch on what the pricing
assumptions are for Gatorade going forward?
Man: Caroline, let me ask our General Counsel Rob Sharpe, to
field your first question.
Rob Sharpe: Caroline, I think in this day and age with the
unpredictability of what comes out of Washington and how
long regulatory approvals take, we're planning this to be
conservative. We really think we have a great story to
tell from a regulatory standpoint. And I'm hopeful we can
get through it sooner than that.
But just for our modeling purposes, consistent with
everything else we've done in the model, we're trying to
be conservative.
Caroline Levy: Okay. And on the pricing for Gatorade?
Indra Nooyi: Be more specific Caroline if you must - if you may.
Caroline Levy: Just of the 9% revenue growth or 9-1/2% in Gatorade, how
does this break out volume and pricing?
Bob: We really can't talk about forward-looking pricing. It
would not be good competitively for us to do that. What
I'll tell you is very basically, these numbers are
consistent with our numbers and are not really driven by
pricing. I think I can tell you that.
Caroline Levy: Okay, can I ask for clarification from Roger on one thing?
On free cash flow per share, you mentioned 20 cents a
share. Is that per year?
Roger Enrico: No, that was cumulative over the first five years.
Caroline Levy: Okay thanks.
Indra Nooyi: Caroline, there's one other point. The Gatorade base case
number is 9.4% revenue and 13-1/2 EBIT is a global
Gatorade number. It's not just a US number. So it's a
global Gatorade number which includes improvement in
certain other countries of the world too.
Caroline Levy: Thank you.
Operator: And our next question comes from (Eric Katzman) of
Deutsche Bank.
Eric Katzman: Hi, good morning. I have two questions. The first is is it
possible given the structure of the deal, that if you got
unsolicited bids for the non-snack business, that
underpooling those could be sold if Quaker had not spoken
to the bidder beforehand? And then second, it would seem
to me from a total Pepsi perspective -- although I'm not a
beverage analyst -- 1% topline growth should generally
translate into much more than 1% EBIT growth. So do you
have more of an optimistic scenario that you could share
with us? Because 1% top to 1% EBIT seems pretty
conservative.
Man: Eric, let me ask Rob to handle your first question.
Rob Sharpe: Eric, I think within the bounds of preliminary
regulations, our basic intention is not to sell these
businesses. I think that consistent with the position on
the accounting, your right the facts and circumstances in
pooling situations can change going on - what goes on in
the future. But any deal that might happen in the future I
think is pure speculation. And I certainly wouldn't assume
it. I think we're very comfortable with the quality of
these businesses in the context of the overall
transaction.
Roger Enrico: And Eric, in relation to your second question, we've
said, you know, throughout this presentation that we
believe our assumptions are conservative and we certainly
would have internal expectations what would be higher. And
I think I'd leave your question at that in a sense that we
today want to stand on the commitments that we make
conservative as they are.
Eric Katzman: Okay thank you.
Operator: And we'll move next to -Ann Gurkin of Davenport
Incorporated.
Ann Gurkin: Good morning, congratulations everybody.
Man: Thank you.
Ann Gurkin: One question you touched a little bit about your goal and
FruitWorks. Any changes to the launching of those
products, timing of those products, support behind those
products -- anything like that?
Man: No changes. As you know, FruitWorks is in the market.
They have been very successful this year, exceeded our
expectations quite frankly. And Dole is on track to -
actually almost as we speak to be in the marketplace.
Ann Gurkin: Great, thank you.
Operator: And we'll go next to Manny Goldman of ING Barings.
Manny Goldman: Good morning everyone. Just a couple of questions if I
may. First one, with the non-carbonated drinks business
and the US strengthening so significantly over the last
couple of months including this transaction, what would
you look for over the next several years in terms of US
soft drink unit volume growth rate?
And the second thing, totally different. In the
international business, could you comment on the energy
bar business and what exists outside of the US and the
potential let's say over the next several years?
Steve Reinemund: On your first question Manny, I think Roger alluded to
it in his opening comments that we think that that
carbonated beverage piece of US business will probably
grow in the 2% to 3% range -- somewhere in that
neighborhood. And I think that's really what we said all
along. And we don't see any major changes to that at this
point.
On your second question, the energy bar business outside
the United States we think is a big upside. It is not very
well developed. Quite frankly, there's probably a lot of
development yet to be in the United States but certainly
upside. And we think with our distribution business it's
quite a good fit.
Roger Enrico: And I would add Manny, on the US beverage business, if
we think about carbs as you said and then we talked about
the non-carbs, since the non-carbonated business category,
the market if you will, is drawing about 9. And if we take
the broadest interpretation of non-carb that I talked
about earlier in the presentation which would include the
juice businesses from Tropicana, both chilled and the
ambient, and then the non-carbs that Pepsi-Cola already
has in the Aquafina and so on, and then kind of loop
Gatorade into that just for the arithmetic of this whole
discussion, you know, obviously we would have a non-carb
portfolio that is growing faster than the total carbonated
market. And we would have a much higher percentage of the
mix of our present - and we presently do. Because
Tropicana pure premium is growing high single digit real
growth. And at Gatorade we expect high single digit
revenue growth. You know what Aquafina and the rest of
these are doing.
So we're going to see if you think about our beverage
portfolio and that sort of universal kind of look at it,
you're going to see a step-up that's fairly significant in
our US volume growth rates.
Manny Goldman: So a 2% to 3% number would probably - under those
theoretical assumptions anyway could very well be too low.
Roger Enrico: Well 2% to 3% on the carb side I think is probably not -
that's probably reasonable. But if you can add non-carb
into it it's going to be much higher than that.
Manny Goldman: Got you. Okay, thanks very much.
Operator: From Prudential Securities, George Thompson has our next
question.
George Thompson: Good morning.
Man: Good morning George.
George Thompson: Steve, maybe you could answer this question. It seems to
me that when you look at the beverage business, what Pepsi
brings to the table here are higher margin channel mix.
And I'm wondering how you work that into the 9-1/2% growth
number?
And the second thing that I'm wondering about is the
promotional levels on Tropicana. Typically the promotional
expenditures on - or not Tropicana, excuse me, Gatorade,
are typically the promotional spending on a Gatorade even
close to what they are maybe on a Pepsi or the carbonated
soft drink business in general?
Steve Reinemund: George, on your first question, I'm not sure what you're
actually asking. I think that Roger just sort of amplified
the growth rates that we're looking at.
Roger Enrico: Yes, I think George that the 9.4% Gatorade revenue growth
assumes zero benefit -- none -- from any combination with
PepsiCo. So those benefits that you and I could quite
easily articulate are upsides to this model. And we've
just not worked any numbers in - through we do believe
there are going to be some benefits. And we've not
included any numbers either domestically or
internationally. So 9.4 if you will, revenue growth from
Gatorade is the base case.
George Thompson: I guess my question through is how significant could that
be, mix change?
Roger Enrico: Well some people have modeled up to a 10% increased in
sales from this kind of synergy. You know, frankly, I
haven't struck all those numbers yet myself and I don't
know okay, nothing that I'd be comfortable sharing with
you today.
George Thompson: Okay.
Steve Reinemund: On your second question, Sue would you try to handle that
one?
Sue Wellington: Excuse me, can I get the question again?
Man: Go ahead Steve.
Steve Reinemund: Go ahead and restate it George.
Sue Wellington: In terms of the trade expense?
Steve Reinemund: Yes, right.
Sue Wellington: I - rather than talking specifically because I
think it's getting into a price discussion, I would
just... in with the warehouse delivered beverage. And it
was probably more in line with Tropicana ambient business
then they are in the Pepsi-Cola refreshment business.
To be fair, it's almost an irrelevant comparison because
as Roger has stated, in the grocery, large format chain
convenience store chain drug, chain mass merchant et
cetera business, it's the intention to keep those
businesses warehouse delivered and operating very similar
to where they are today.
George Thompson: From the promotional spending in the mom and pop side of
the business is minimal. Is that correct?
Sue Wellington: If they are a mom and pop business period it is relatively
small. Certainly the financial investment would also be.
George Thompson: Okay, fine. Thank you.
Operator: And we do have time for two more questions at this point.
I will go ahead and more our next question to Marc Cohen
of Goldman Sachs.
Marc Cohen: Good morning. I'm not sure who wants to field this. But I
was wondering if you might bring a little more life to
this opportunity in the new grocery aisle for beverages.
You talked about 400 million increased Tropicana sales.
And I wonder if you can just give us better perspective or
more perspective on what the key segments of this, you
know, newer area that you're talking about really are in
your mind, how Pepsi's products really are lining up, you
know, where you see the business headed and what the
competencies that you have really to leverage as you look
at this area are?
Steve Reinemund: Let me make a comment there and let Roger and Bob give
their thoughts. But right now, between Gatorade and
Tropicana as it exists, we have a pretty significant
presence there. But we think from the sales side, from the
product development side, from the manufacturing and
procurement side, there's just an enormous amount of
synergy that allows us to work together to really be a
leader in this aisle. And I thought Roger's suggestion of
taking a look at this aisle would be very helpful to you
as you try to think through what the potential upside
would be. You only have to walk down the aisle and imagine
what this could be and the leadership that could be
provided here by the scale of these two players.
And frankly, Gatorade has the leading position there
today. And we think that Gatorade can bring an enormous
amount of leadership to the ambient Tropicana business.
Roger Enrico: Yes Mark, I would add by saying one way to think about
this is just think about these grocery stores and various
aisles. You know, really Tropicana is primarily a
chilled-juice company. And a very high proportion of its
total business really is in one block-buster product,
Tropicana Pure Premium.
So when you think about the chilled section of the store
where these products are merchandise, in most parts of the
country and in most accounts, Tropicana is by far the big
gut-- fastest turns, the highest profits, the greatest
out of stocks I might add okay, in the grocer's
offerings.
And so it's natural that Tropicana is looked to by our
retail customers to be the category captain people they
would expect to bring the best insight on how to manage
that section to the customer's benefit -- to the greatest
customer benefit.
Now we walked down the soft drink aisle of the store. Now
clearly now that's a DSD aisle okay. And, you know,
certainly we've got a pretty significant competitor there.
I wouldn't suggest that we didn't. But nonetheless,
Pepsi-Cola in more cases than anyone else is selected to
be the category captain for the soft drink aisle,
presumably because our folks are pretty good at brining
the insight to the customer as to how to optimize his
returns and his sales.
Needless to say, when we go down the snack food aisle,
Frito-Lay is by far the preferred partner of the retail
customers out there and has done a really superb job in
optimizing the retailer sales and profits and profit
growth from snack foods.
Now we have the opportunity to go down a fourth aisle, an
aisle in which we presently participate in only a very
modest way with Tropicana Twister and a few other
products, an aisle that is highly fragmented, an aisle
that from a large format standpoint represents - is the
representation of the larger category of $7-1/2 billion,
and an aisle in which Gatorade really has the biggest
share of anything sold in that aisle -- about 10%.
And what we expect to be able to do now is what we've done
in these other three aisles that I've just described, is
be able to bring the insights to our retail customers that
would allow us to improve our position in that category.
Now I'm not suggesting this is only all about insights and
category management. Right along with that, we would
expect more product innovation, more product news, more
package news -- you name it -- all the things that come
together to build the growing and healthier business.
So that's kind of the way we look at it. And frankly, one
way to think about this is that while we've all thought
about a lot and modeled in our own minds maybe, what
PepsiCo's store door or distribution system, both PepsiCo
beverage and snack could bring to the Quaker portfolio,
what we're suggesting is of equal importance is something
that we should give as much thought to is what - Quaker
very capable warehouse selling and go-to-market system can
bring to the PepsiCo portfolio.
And in fact we see very hard synergies coming from that.
And it now gives us the scale that Tropicana alone does
not have to be able to be a premier warehouse delivery
partner to our customers as well as a premier store
door partner.
Marc Cohen: Thank you.
Operator: And our final question today comes from Doug Lane of
Merrill Lynch.
Doug Lane: Yes, good morning everybody. First, to follow on Mark's
question, I assume that aisle that you're talking about
Roger, there's nobody really that have category
management. I mean how is that aisle being run now? So can
you just put some color on that? So I think just adding a
category manager in general would be viewed as a positive
there.
And then this is an expertise, obviously your DSD side
has. Will this be managed in conjunction with the
Pepsi-Cola system or independently? And then a couple
other questions.
You talked about the hot fill capabilities that go along
with the manufacture of the functional beverages. Can you
just drill down a little bit on what kind of hot fill
capabilities the combined Tropicana and Gatorade has and
Pepsi-Cola with co-packers and whatever and how that
compares to competitors and what really logistical
opportunities there are there?
And then my last question is - deals with a specific
channel with the convenience channel. It seems to me that
with the combination of Gatorade and the PepsiCo brand,
that you're going to have an awfully large presence in the
convenience stores. So can you elaborate on the health of
the convenience channel, both pricing and volume growth
and then how you plan to continue to gain share there?
Roger Enrico: Okay, that's a big order but let me give it a shot. On the
first question with respect to category management of the
aisle I described, given the way I described the aisle --
and not to sound focetious -- if there is anyone of those
category managers I don't think they'll admit it. So I
would say that is not a - it is not an aisle that has had
the benefits of category management.
Now with respect to where we'll get that capability if you
will for category managing that aisle, I think first off
I'd say that the Quaker sales organization is certainly
quite familiar with the category management techniques and
the State of the Art know-how how to do that.
And obviously they would get all the assistance that
PepsiCo can provide which includes by the way, a power one
center that we have out of Dallas that specifically does
highly sophisticated research and analyticals on category
management on the categories we work. So obviously they'll
be able to tap into that whole capability that we have.
Now, on the hot fill thing, I'm going to come up short on
that one because that's a whole lot more than I am
confident that I know. I may think I know some of it, but
I'm not sure I actually do.
I would say that the combination of all of these, we
believe would make us by far the largest hot fill
manufacturer in the United States. Some of our hot fill
right now is done co-packed. Some of it is - and when I
say our, I mean the combined companies now. A good deal of
it is done in-house. And point in fact, in the Pepsi
system, there are some underutilized hot fill facilities
where we hot fill Lipton Tea and frapaccino. And as you
know, the Lipton tea business has moved more toward brisk
which is a cold filled product. So we have some additional
capacity within the Pepsi system that also can be
utilized. Then of course Tropicana's ambient products are
hot filled.
So all of this in combination along with the warehousing
and over-the-road delivery type logistics costs related
not too much now to the Pepsi system but to the total
Tropicana business chilled and ambient and the Gatorade
business, that's where we see getting the 65 million by
year five of pre-tax saves.
And your final point on convenience stores, clearly this -
we're already an extraordinary important supplier to
convenience stores. As you know, as measured by IRI, we
are - Pepsi-Cola is the leading supplier in the
refreshment beverage business to convenience stores. Added
to that, we have a small but pretty nicely growing now,
business with Tropicana in convenience stores. And as you
well know, Gatorade has a very successful and highly
developed convenience store business.
And I have no doubt that we're going to see some
opportunities going forward to make all of that more
efficient and more effective -- nothing we've modeled into
our combination models again. But I would expect that that
business would continue to be, if not an accelerating -
and excellent source of growth if not an accelerating
source of sales and profit growth for the combined
companies.
Doug Lane: I assume that channel still is among the more rapidly
growing distribution channels, the convenience?
Roger Enrico: Yes. Yes, that's correct. And not only distribution, but
on same store sales growth because you're just getting a
lot of sales growth out of this channel on beverages as
people move to these single serve and cold bottle as
opposed to simple the take home business.
Doug Lane: And just finally Roger, I appreciate the response, but in
trying to put convenience in perspective, do you have what
percentage of PepsiCo. And let's include Frito-Lay in
there as well is - of the convenience channel or
vice-versa what the convenience channel is of the combined
PepsiCo here. Do you have those?
Roger Enrico: Well I'll tell you, rather than give you an off-the-top
head answer which is probably wrong given I've got about
400,000 numbers in my head and that's not one of them
right now - let us - we'll go off-line and get you that
answer
Doug Lane: Okay.
Roger Enrico: Of course we can get the number for you.
Doug Lane: Okay, thank you.
Operator: That concludes today's question and answer session. At
this time, I would like to turn the call back over to
Kathleen Luke for closing remarks.
Kathleen Luke: I just wanted to thank everybody for joining us today. A
couple housekeeping matters for just a second.
First, we really want to apologize to those who are on the
Web site. Apparently we understand there were some slide
shows that were (unintelligible). And I guess due to the
high level of interest, the server went down in the
middle. But the entire Web cast will be available for
replay on our Web site which is www.PepsiCo.com. The audio
portion on the Web site will be available by noon. And the
complete audio and slide show together will be posted by
the end of the day.
We also have the call recorded. And it's available for
playback on the phone by dialing in the US, 888-203-1112.
And if you're outside of the US, you can dial in at
719-457-0820. And in either case, you should use the
reservation number 496950. And that playback will be
available commencing at noon today and will be available
through 5 o'clock on Friday.
So thank you all for joining us and we'll talk to you
another time.
Operator: And that concludes today's conference. Thank you for
choosing Premier conferencing.
END
