The significance of completing this transformational process should not be underestimated. Over the past two years, we have sold assets that in 2000 represented approximately $1 billion in revenues but added little, if any, profits. We have restructured our remaining businesses to reduce cost and simplify our processes and operations, and we have built a strong, high potential organization. Lastly, we have removed $200 million in cost over the last three years, approximately twice our pre-merger estimate.
In 2001, our business performance was mixed. Excluding non-recurring charges, full-year EPS performance was up modestly, reflecting a combination of a weak first half with a much-improved second half and a particularly strong fourth quarter. Importantly, we left 2001 with profit momentum as market factors began to turn our way, following more than two years of negative impact. With a soft first half, it was clear by June that the challenging marketplace factors that had affected our results in 2000 were not cooperating with our 2001 profit plan either. Demand for automotive consumer products remained weak because high gasoline prices squeezed auto budgets and resulted in motorists driving fewer miles. At the same time, increased feedstock costs forced us to continue to raise our retail prices for motor oil. The combination of softening demand for our products with the need to improve our financial position called for decisive measures, and we took prudent action by reducing the quarterly dividend. The new level places Pennzoil-Quaker State Company's dividend payout in line with comparable consumer products companies. At the current level, the company's free cash flow is improved by over $50 million per year, providing funds to continue to reduce debt and to invest in growth initiatives.
In addition, we accelerated an organizational restructuring of our Lubricants, Consumer Products and International segments. While this entailed restructuring charges, it has allowed us to set plans in place for 2002 that, I believe, will result in strong profit growth without relying on growth in the marketplace for our earnings success.
This organizational restructuring involved consolidating our four consumer products business units - Axius, Medo, Blue Coral/Slick 50 and the Automotive Chemicals Division - into our Houston headquarters and combining their sales forces with the Lubricants sales force, presenting one company face to our retail customers. In previous cost savings initiatives, we had eliminated duplication associated with the merger, reduced overhead in a G&A reduction program and lowered our supply chain costs. This new organizational alignment is designed to enhance our ability to serve our customers seamlessly across operating units, while maintaining dedicated marketing support for lubricants, appearance products and accessories. In Lubricants, the restructuring is also designed to reduce manufacturing and installed channel selling expense. While in International, we are scaling back low margin operations, facilities and distribution channels. When fully implemented, these actions will produce an organization with the correct balance and sharpened focus to produce near-term profit improvement and solid growth.
While our common stock (PZL) price was volatile like many others, it closed the year at $14.45, an appreciation of more than 12 percent for 2001, which built on the 26 percent increase our stock enjoyed during the year 2000. Despite the challenges we faced, 2001 was the second consecutive year that PZL shares outperformed the S&P 500 Index and the S&P Midcap 400 Index. Company insiders continued to build their investment in the company's stock. Since the start of 2001, officers and directors purchased more than 74,000 PZL shares in the open market, further aligning their interests with all shareholders and allowing their personal investments to speak for their commitment to and belief in our future success together.
- By the end of 2001, lubricant prices had finally caught up with increases in cost of goods. Cost-cutting efforts were bearing fruit, and we improved the product mix by growing our "premium" synthetic and synthetic blend motor oil volume. Premium motor oil volume was up 32 percent on a full-year basis and 37 percent in the fourth quarter. We have a solid plan for motor oil in 2002, backed up by a substantial increase in advertising spending.
- Consumer Products' performance in 2001 was disappointing, primarily due to poor cost, customer service and inventory management performance at the Axius business. We have moved aggressively to turn around this high potential business and it is on the right track. Management changes also were made as part of the consolidation program, which will save money and increase focus. With a single face and voice to the customer, we will do a more effective job of category and customer management to better leverage motor oil critical mass. Additionally, we have placed all supply chain operations under our Global Supply Chain Development Group, which has been very successful with lubricants. We are confident that we will achieve much better cost and top line growth performance across the board in 2002 as a result of these moves
- International improved modestly in 2001 compared to a weak prior year. We took a substantial charge to restructure our International business in 2001. In essence, we changed the business model away from direct installed motor oil operations that had low market shares and low margins and are vulnerable. In developed markets, such as Europe and Japan, we are focusing our efforts on large retailers with consumer products and packaged motor oil. In developing markets, we will go to market through strong local distributors and licensees, keeping invested capital low and costs variable. We plan to accelerate our International improvement in 2002.
- Jiffy Lube had another strong year, with solid 2001 comparable store sales growth and the introduction of new diagnostic services. We will continue to do a better and better job of delivering new services to consumers and expect continued improvement in 2002 from Jiffy Lube.
- Excel Paralubes had a record year in 2001, achieving solid profits and laying the groundwork for ongoing performance. An integral part of the company's supply chain, Excel Paralubes supplies much of the high quality base oil required to produce our motor oils and other lubricant products.
- Good cost performance also positively impacted 2001 earnings. On a full-year basis, we reduced SG&A by more than $45 million and improved total savings by $80 million versus 2000.
- Our innovation pipeline made solid progress in 2001 with the launching of 40 new products and designs for 37 new packages, including those of our flagship motor oil brands.
- Lastly, in 2001, we substantially improved our financial position. Between debt reduction, increases in cash and a reduced accounts receivable sales facility, we improved by $165 million versus 2000. We will build on that success in 2002.
Our dedication to corporate citizenship was evident throughout 2001 on several fronts, with a focus on diversity and community involvement. The company's supplier diversity initiative was designed and implemented to increase business opportunities for minority and women-owned business enterprises as part of the company's overall global supply chain development efforts.
In addition, Pennzoil-Quaker State Company employees gave generously in 2001 of their time and money to many community causes. In our third and final year as primary sponsor of the American Heart Association Houston Heart Walk, we were the nation's top team, raising more than $280,000. Our annual United Way Campaign exceeded prior year by more than $65,000. And in response to the devastating flood in Houston following Tropical Storm Allison, employees contributed generously to a fund for co-workers whose homes were damaged.
I am very enthusiastic about our prospects for 2002 and beyond. Many of the issues that plagued us in 2001 are now behind us. Our employees are energized as never before. We share a special spirit in the company, focused on success and winning, building on a track record of industry leadership and perseverance.
I particularly want to thank our shareholders for their ongoing support of, and investment in, Pennzoil-Quaker State Company. During the year, I had the pleasure of face-to-face meetings with investors representing about half of all outstanding shares. Pennzoil-Quaker State Company is your company, and I appreciate your continued confidence in our potential to create substantial near-term value.
The company we created three years ago is today a leading and dynamic force in an attractive industry. We are a young company whose time is just beginning. Together, everyone at Pennzoil-Quaker State Company is committed to delivering on our vision of being consumers' first choice for automotive products and services that enhance the car and the driving experience. The adversity we faced and lessons we learned these past three years have strengthened us.
James J. Postl, President & Chief Executive Officer
In 2002 and beyond, we can all look ahead to great things for Pennzoil-Quaker State Company.
James L. Pate, Chairman of the Board