The Pepsi Bottling Group Reports First Quarter 2008 Results

Somers, N.Y., Apr. 23 - The Pepsi Bottling Group, Inc. today reported first quarter 2008 revenue of $2.7 billion, a seven percent increase over prior year. Net income was $28 million, or diluted earnings per share (EPS) of $0.12. This includes a net charge of $2.5 million or $0.01 per share from restructuring charges and an asset disposal charge, all of which were initiated in 2007. This compares to net income of $29 million, or $0.12 per diluted share, that the Company reported in the first quarter of 2007.

“The first quarter marked a solid start to the year, as we exceeded both our worldwide profit and earnings per share objectives. The diversity and strength of our geographic portfolio, combined with significant cost productivity gains, helped offset a challenging macroeconomic environment in the U.S.,” said Eric Foss, PBG President and Chief Executive Officer. “We also remained committed to investing for future growth, announcing two acquisitions that will enhance our competitive position in Russia and unlock new opportunities to expand our international business.

“Our focus in the second quarter and beyond is on improving our profitability in the U.S. and Canada, capturing the growth potential in Europe, and building upon our encouraging progress in Mexico,” Foss continued. “I believe we have the right plans in place to continue to deliver long-term growth and create shareholder value.”

Executive Summary

• Worldwide revenue increased seven percent in the quarter, driven by growth across each of the Company’s geographic segments. The U.S. and Canada segment reported a five percent revenue increase.
• Total worldwide physical case volume was up two percent, as every country had positive volume growth. Worldwide volume benefited in total by two percentage points due primarily to the shift of the Easter holiday into the first quarter of 2008 in the U.S. and Canada. Volume in the U.S. and Canada segment increased two percent. European volume grew a strong seven percent, driven by double-digit growth in Russia and positive performance in the balance of the countries. In Mexico, volume improved two percent.

• PBG reported net revenue per case growth of five percent, which was led by robust growth in Europe and Mexico. Net revenue per case improved three percent in the U.S. and Canada segment, with pricing gains and foreign currency translation offset by a negative mix impact due to declines in the cold drink channel and shifts into take-home volume due to Easter occurring in the first quarter of 2008 as compared to the second quarter of 2007. In the U.S., net revenue per case was up one percent for the quarter.

• Reported worldwide operating income for the first quarter declined 10 percent versus the first quarter of 2007, reflecting a three percentage point decline from foreign exchange, a four percentage point negative impact from consolidation of the Russian joint venture and a two percentage point reduction from the restructuring charge and asset disposal charge.
• The Company repurchased approximately five million shares of its stock in the first quarter. In March, the Company approved a 21 percent increase in its annual dividend, representing its fifth consecutive annual dividend increase.

In the U.S. and Canada segment, physical case volume increased two percent as the Company benefited from the shift of the Easter holiday. Total volume growth was driven by take-home growth of four percent with cold drink down two percent. U.S. volume growth was one percent. In Mexico, volume improved two percent, as positive CSD and bottled water volume growth was offset by non-carbonated and jug water declines. Volume grew seven percent for the quarter in Europe. This was again led by Russia, which delivered double-digit growth in both CSDs and non-carbonated beverages.

Foreign currency translation contributed about three percentage points of growth to net revenue, cost of goods sold (COGS) and selling, delivery and administrative (SD&A) expenses. The net effect was a decrease of three percentage points on operating income.

Reported COGS per case was up eight percent in the first quarter. COGS performance was impacted by increases in input costs, as well as foreign currency translation.

PBG’s reported SD&A expenses grew six percent in the first quarter, with the U.S. flat due to the continued success of cost and productivity initiatives.

2008 Guidance

In 2008, PBG expects to achieve top-line growth of about six to seven percent. PBG’s comparable operating profit is expected to grow four to six percent for the year. Comparable diluted EPS are forecasted to be $2.30 to $2.38. Operating free cash flow is expected to be at least $620 million.

Items Affecting Comparability in 2008 Results

Restructuring Charges

In the third and fourth quarters of 2007, PBG announced realignments in the Company’s organization. The total pre-tax charge for the realignments is expected to be approximately $35 million. Since the inception of the program and through March 22, 2008, the Company incurred a pre-tax charge of approximately $32 million, with a pre-tax cash charge of approximately $2 million being recorded in the first quarter of 2008.

Asset Disposal Charge

During the fourth quarter of 2007, PBG adopted a Full Service Vending Rationalization plan to dispose of older underperforming assets and to redeploy assets to higher return accounts. The total pre-tax charge for this plan is expected to be about $30 to $35 million and will be completed by the end of the second quarter. Since the inception of the program and through March 22, 2008, the Company incurred a pre-tax charge of approximately $24 million with a pre-tax cash charge of $1 million being recorded in the first quarter of 2008.

2008 First Quarter Results

2008 Full-Year Guidance

Operating Free Cash Flow

The Company defines Operating Free Cash Flow (OFCF) as Cash Provided by Operations, less capital expenditures, plus excess tax benefits from the exercise of stock options.

The Company uses OFCF to evaluate the performance of its business and management considers OFCF an important indicator of the Company’s liquidity, including its ability to satisfy debt obligations, fund future acquisitions, pay dividends to common shareholders and repurchase Company stock.

OFCF is a non-GAAP financial measure and should be considered in addition to, not as a substitute for Cash Provided by Operations as well as other measures of financial performance and liquidity reported in accordance with U.S. GAAP. The Company’s OFCF may not be comparable to similarly titled measures reported by other companies.

2008 Full-Year OFCF Guidance

PBG expects its full-year 2008 OFCF to be at least $620 million. The Company anticipates capital expenditures to exceed $800 million and Cash Provided by Operations plus the excess tax benefits from the exercise of stock options to be over $1.4 billion.