Pepsi Bottling Q3 Net Income Rises 10%

Somers, N.Y., Oct. 6 - The Pepsi Bottling Group, Inc. today reported third quarter 2009 net income of $254 million, or diluted earnings per share (EPS) of $1.14.

This includes a net after-tax gain of $17 million, or $0.08 per share, resulting from the favorable settlement of tax audits, previously announced restructuring charges, advisory fees relating to the pending PepsiCo transaction, and mark-to-market gains relating to our commodity hedges. This compares to net income of $231 million, or $1.06 per diluted share, that the Company reported in the third quarter of 2008.

“Our third quarter results reflect the continued success of our three strategic platforms for growth. The work we’ve done to strengthen and reposition our brand portfolio, transform our performance through operational excellence and capitalize on geographic growth opportunities drove operating profit and topline growth across all of our reporting segments in the quarter. These factors, combined with easing commodity costs and diminished foreign currency headwinds, are driving sequential improvement in our performance versus the first half of 2009,” said PBG Chairman and Chief Executive Officer Eric Foss.

“We remain confident in our full-year earnings outlook and we’re on track to deliver a very good year despite the challenging macroeconomic environment,” Foss continued.

Financial Highlights

• On a currency neutral basis, worldwide revenue increased two percent in the third quarter. Reported worldwide revenue decreased five percent. The Company’s revenue performance reflects solid currency neutral net revenue per case growth partially offset by soft volume.
• Net revenue per case improved four percent on a currency neutral basis. This included currency neutral growth of three percent in the U.S. and Canada, seven percent in Europe, and six percent in Mexico. On a reported basis, worldwide net revenue per case declined three percent.
• Total worldwide physical case volume declined two percent for the third quarter. Volume in the U.S. and Canada segment was down one percent. In Mexico, volume increased one percent, while European volume declined five percent.

• On a comparable basis, currency neutral worldwide operating income increased 10 percent in the third quarter. This includes a positive impact of four percentage points from acquisitions. Comparable currency neutral operating income increased in each of the Company’s reporting segments, with growth of two percent in the U.S. and Canada and double-digit growth in both Mexico and Europe, which includes the impact of acquisitions.
• Reported worldwide operating income declined four percent for the quarter. The net impact of previously announced restructuring charges, advisory fees related to the pending PepsiCo transaction, and mark-to-market gains reduced reported worldwide operating income by five percentage points. In the U.S. and Canada segment, reported operating income declined seven percent.
• COGS per case increased six percent on a comparable, currency neutral basis for the quarter, consistent with the Company’s expectations. Reported COGS per case declined two percent.
• Comparable worldwide SD&A expenses improved four percent on a currency neutral basis in the third quarter, reflecting the success of the Company’s global productivity initiatives. On a reported basis, PBG’s SD&A expenses declined eight percent, which included a two percentage point increase from advisory fees related to the pending PepsiCo transaction and restructuring charges.

2009 Guidance

For 2009, PBG continues to expect results at the high-end of its full-year comparable diluted EPS guidance of $2.30 to $2.40. This includes a $0.13 per share negative impact from translational foreign currency headwinds. The Company forecasts currency neutral top-line growth in the low-single digits. Currency neutral operating income on a comparable basis is expected to grow in the low to mid-single digits for the year. Operating free cash flow is now expected to be approximately $550 million, an increase of $100 million from the beginning of 2009, including increased pension funding and foreign currency headwinds but excluding advisory fees related to the pending PepsiCo transaction. The Company anticipates capital expenditures of about $550 to $600 million.

Currency neutral results are calculated using prior year’s exchange rates.

Items Affecting Comparability

2009 Items

2008 Restructuring Actions

In the fourth quarter of 2008, PBG announced a restructuring program to enhance the Company’s operating capabilities in each of its reportable segments. Since the inception of the program, the Company has incurred pre-tax charges of $102 million or $0.32 per diluted share. Of this amount, we recorded $5 million, or $0.02 per diluted share, in the third quarter of 2009, of which $1 million was recorded in our U.S. & Canada segment, and $4 million was recorded in our Mexico segment. For the 36 weeks ended September 5, 2009, we recorded $19 million in pre-tax charges, or $0.06 per diluted share, of which $8 million was recorded in our U.S. & Canada segment, $10 million was recorded in our Mexico segment and $1 million was recorded in our Europe segment. These charges are primarily for severance and related benefits, pension and other employee-related costs and other charges, including relocation and asset disposal costs.

Certain of the restructuring actions have been delayed due to the pending transaction with PepsiCo, therefore, the restructuring actions may not be completed by the end of 2009 as originally intended.

Advisory Fees

On August 3, 2009, PBG and PepsiCo entered into a definitive merger agreement, under which PepsiCo will acquire all outstanding shares of PBG common stock it does not already own. The transaction is subject to PBG shareholder approval and certain regulatory approvals and is expected to be finalized in late 2009 or early 2010.

In connection with this transaction, the Company has retained certain external advisors and expects to incur aggregate fees in the range of $40 million to $60 million. For the 12 and 36 weeks ended September 5, 2009, the Company has recorded pre-tax charges of $22 million, or $0.09 per diluted share, and $37 million, or $0.13 per diluted share, respectively, relating to these services.

Mark-to-Market Net Impact

The Company’s corporate headquarters centrally manages commodity derivatives on behalf of our segments. During 2009, we expanded our hedging program to mitigate price changes associated with certain commodities utilized in our production process. These derivatives hedge the underlying price risk associated with the commodity and are not entered into for speculative purposes. Certain commodity derivatives do not qualify for hedge accounting treatment. Others receive hedge accounting treatment but may have some element of ineffectiveness based on the accounting standard. These commodity derivatives are marked-to-market each period until settlement, resulting in gains and losses being reflected in corporate headquarters’ results. The gains and losses are subsequently reflected in the segment results when the underlying commodity’s cost is recognized. Therefore, segment results reflect the contract purchase price of these commodities. During the third quarter of 2009, the Company recognized a net gain of $4 million ($2 million after taxes and non-controlling interest or $0.01 per diluted share) related to these commodity derivatives.

Tax Audit Settlements

During the first quarter of 2009, PBG recorded a net non-cash tax benefit of approximately $39 million, or $0.18 per diluted share, which was reflected in income tax expense. The benefit resulted from the settlement of U.S. audits with the IRS for our 2003-2005 tax years.

During the second quarter of 2009, the statute of limitations closed for our IRS audit in the U.S. for the 2003 and 2004 tax returns. In addition, we reached a settlement with the Canadian tax authorities on an issue related to the 1999-2005 tax years. As a result, we recorded a tax benefit related to these items of $54 million after non-controlling interest, or $0.25 per diluted share.

During the third quarter of 2009, we settled various audits in our international jurisdictions, which resulted in a tax benefit of $40 million after non-controlling interests, or $0.18 per diluted share.

During the fourth quarter of 2009, the statute of limitations closed for our 2005 U.S. tax audit. As a result, we anticipate a tax benefit related to this item of $17 million, or $0.07 per diluted share.

2008 Items

2007 Restructuring Actions

In the third quarter of 2007, PBG announced a realignment in the Company’s organization to adapt to changes in the marketplace and improve operating efficiencies. Over the course of the program, the Company incurred pre-tax charges of $29 million or $0.09 per diluted share. Of this amount, we recorded $3 million in the first half of 2008, primarily relating to relocation expenses in our U.S. & Canada segment.

Asset Disposal Charge

During the fourth quarter of 2007, PBG adopted a Full Service Vending (FSV) Rationalization plan to dispose of older underperforming assets and to redeploy assets to higher return accounts. Over the course of the FSV Rationalization plan, we incurred pre-tax charges of $25 million or $0.06 per diluted share, the majority of which was non-cash, including costs associated with the removal of these assets from service, disposal costs and redeployment expenses. Of this amount, we incurred a pre-tax charge of $2 million associated with the FSV Rationalization plan in the first half of 2008.

Impairment Charge

As a result of the 2008 impairment test for goodwill and other intangible assets, the Company recorded pre-tax charges of $412 million or $1.26 per diluted share in the fourth quarter of 2008, relating primarily to distribution rights and brands for the Electropura water business in Mexico.

2009 Third Quarter Results

Growth rates in tables are presented as compared to the similar periods in the prior year.

* Does not add due to rounding to the whole percent.

* Does not add due to rounding to the whole percent.

* Does not add due to rounding to the whole percent.

2009 Full-Year OFCF Guidance

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

PBG expects its full-year 2009 OFCF to be about $550 million, excluding advisory fees related to the pending transaction with PepsiCo. The Company anticipates capital expenditures to be in the range of $550 to $600 million and cash provided by operations plus the excess tax benefits from the exercise of equity awards to be over $1.1 billion.

Note: Beginning in the first quarter of 2009, we adopted Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51,” the provisions of which, among others, require that minority interest be renamed noncontrolling interests and that a company present a consolidated net income measure that includes the amount attributable to such noncontrolling interests for all periods presented.

Note: Certain reclassifications were made to our 2008 Condensed Consolidated Statement of Cash Flows to conform to the 2009 presentation.