We met our merger integration objectives in 2001. Today we have a stronger organization that is aligned and focused on achieving our long-term plan. We also met our pricing objectives and increased volume .4 percent, driven by targeted growth in flavored CSDs and non-carbonated beverages. However, we fell short of our overall volume growth objective due to low single-digit volume declines on trademark Pepsi products and soft volume trends on other franchised brands, which caused domestic operating income to decline slightly and EBITDA to be flat compared to 2000 results.

Brand Building and Innovation

As noted, 2001 volume grew .4 percent, driven by 1.4 percent growth in PepsiCo products, offset by declining volume on other franchised brands. Volume growth was led by a 50 percent increase for Aquafina, which represents a small but rapidly growing percentage of our mix, 15 percent growth for Pepsi branded flavored CSDs, such as Sierra Mist and Diet Sierra Mist Ð introduced in 2001 Ð and two percent gains for trademark Mountain Dew, reflecting the highly successful 2001 introduction of Mountain Dew Code Red. We also completed the full introduction of SoBe across all of our Domestic markets.

Despite volume growth for Diet Pepsi and Wild Cherry Pepsi and the introduction of Pepsi Twist and Diet Pepsi Twist in the second half of 2001, volume for trademark Pepsi brands continued to be soft Ð especially in our high-share Heartland markets Ð though this is consistent with industry trends. As trademark Pepsi products represent slightly more than half of our Domestic volume, reversing this trend is our primary challenge, while we continue to pursue our higher growth opportunities Ð and increase our under-developed portfolio representation Ð for Aquafina, other non-carbonated beverages and flavored CSDs.

Channel Progress and Growth

Channel package dynamics are a key part of PepsiAmericas growth and profitability. The large format channel includes supermarkets, supercenters and mass merchandisers, and represents more than half of our volume. The small format channel includes primarily convenience and gas station stores (C&G) and drugstores, and represents about one-fifth of our volume. The on-premise channel, which consists of foodservice and vending, accounts for the balance.

In 2001, our large format channel reversed a several-year trend and increased volume slightly, while the small format channel was flat and on-premise declined modestly. However, 20-ounce single-serve continued to grow and contributed to a more profitable mix.

Integration Completed

In 2001, we successfully completed the integration of the domestic operations of the former PepsiAmericas and Whitman. This included taking action to strengthen the organization and achieve targeted cost-savings. At the same time, we are investing in systems capability and technology and training that will improve productivity. As part of the integration process, we replaced disparate IT platforms with a common platform and added an enterprise resource planning system, which should improve productivity.

This year we began testing a next generation hand-held selling system and began converting from conventional route sales to a pre-sell system. This is likely to be a 2- to 3-year process, but the result will be a stronger sales force that can sell and deliver the multitude of new products that will drive our future growth.

While we are on track to achieve targeted integration savings, most of these savings will be offset by the investment in the next generation selling system and higher insurance and benefit costs, including those costs resulting from the alignment of our compensation and benefit plans. Our new benefit plan emphasizes incentives for productivity.

Outlook and Strategies

As we enter 2002, our top priority is to achieve 1.5 to 2 percent Domestic volume growth through the following strategies:

• Stabilize cola volume through increased support for Diet Pepsi and Pepsi Twist, as well as strong display activity, especially in our high-share Heartland markets;
• Continue the momentum on Mountain Dew, driving growth with Mountain Dew Code Red and the introduction of Diet Mountain Dew Code Red, in addition to our other flavored CSDs;
• Accelerate growth for Aquafina – especially through expanded capacity, registered shrink-wrap capability, new packages and increased merchandising support – and the other non-carbonated beverages in our portfolio to increase their contribution to total volume; and
• Support core brands and drive growth in single-serve packaging through account-specific programs, company-wide single-serve consumer events and continued equipment investment to expand single-serve presence and points of access.

We anticipate that net pricing will increase at about the same rate as in 2001, with most of the gain derived from carryover price increases and favorable product mix. And, we will continue to focus on operating costs and improving ROIC, while leveraging our investment in technology and training.

Kenneth E. Keiser
President and Chief Operating Officer
Worldwide