Pepsi Bottling sees 22% drop in Q1 net income from year ago

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SOMERS, N.Y. — The Pepsi Bottling Group, Inc. today reported first quarter 2005 net income of $39 million, or diluted earnings per share of 15c. This compares with reported net income in first quarter 2004 of $50 million, or 19c per diluted share.

Worldwide physical case volume was flat year-over-year on a constant territory basis as the company lapped very strong volume growth in the first quarter of 2004. In the U.S., Pepsi's volume was down 1% for the quarter, while the company's territories in Europe generated 3% volume growth. Volume was flat in Pepsi's Mexican business.

PBG reported strong net revenue per case performance in the U.S., up 4% for the quarter. This growth reflects both rate increases and mix improvement. Worldwide, net revenue per case grew 3%.

"We're pleased with our performance in the first quarter, which positions us well to deliver on our commitments for the full year," said John T. Cahill, chairman and chief executive officer. "We expected soft volume in the U.S. this past quarter as we lapped last year's strong innovation in the form of Tropicana juice drinks and Pepsi Vanilla.

"Our non-carbonated portfolio, however, continued to grow with Aquafina delivering a high single-digit increase. The U.S. pricing environment was favorable, and the rate increases we implemented in the fourth quarter of 2004 have held in the marketplace.

"As we enter the second quarter, we have terrific product and package innovation planned, including the introduction of Pepsi Lime and Tropicana Twister as well as a new Fridgemate of 12-oz. plastic bottles for Aquafina and soft drinks. This innovation will be supported by a great line- up of in-store promotions, all designed to drive consumer excitement as we enter the summer-selling season."

Mr. Cahill said European businesses delivered solid revenue and volume results in the first quarter, which comprises only the months of January and February for Europe and Mexico territories, with Turkey and Russia leading the way. In Turkey, Pepsi was able to capture share of the overall category growth while, in Russia, the non-carbonated products fueled the volume increase, he said.

In Mexico, Mr. Cahill said Pepsi experienced softer volume, primarily driven by results in the metro Mexico City region.

"Recently, we've seen improvement in the pricing environment in several territories, and the productivity initiatives we executed last year have begun to yield measurable results," he said. "As in the U.S., we have a solid innovation and promotion calendar planned for the second quarter, which should give a lift to our volume in Mexico."

Pepsi's physical case volume in the U.S. declined 1% in the first quarter on a constant territory basis. Constant territory calculations assume all significant acquisitions made in 2004 were made at the beginning of 2004 and exclude all significant acquisitions made in 2005. Cold drink volume grew 1%, but the take-home business was down 1%.

Volume trends in Canada were similar to those in the U.S., with cold drink in positive territory. In Mexico, physical case volume was essentially flat for the quarter, with carbonated soft drinks and bottled water volume each down 4% and jug water up 7%.

Pepsi's territories in Europe delivered volume growth of 3%. In Turkey, volume growth was in solid double-digit territory with brand Pepsi up more than 30% year over year.

The company's reported net revenue per case growth in the U.S. was 4% in the first quarter. Rate increases contributed about two-thirds of this growth, while mix added one-third.

The company also generated solid net revenue per case growth in Canada, where pricing actions have held in the marketplace, Mr. Cahill said.

Reported operating income in the first quarter was down 12% on a worldwide basis. These results were expected because of the lapping of a particularly strong first quarter in 2004 and ongoing raw materials cost pressures.

Cost of goods sold per case was up 6% in the first quarter, with foreign currency translations accounting for about one point of that growth.

During the first quarter, Pepsi Bottling repurchased 4.3 million shares of common stock. Since the inception of the company's share repurchase program in October 1999, 88 million shares have been repurchased.

The company reaffirmed its full-year operational guidance and modified slightly its profit and earnings guidance. In fiscal 2005, Pepsi Bottling now expects to achieve pro forma diluted e.p.s. of $1.78 to $1.84, which excludes the impact of the 53rd week.

Worldwide constant territory volume is expected to grow 2% to 3% for the year and pro forma operating income will likely be up 1% to 3%. These projections also exclude the impact of the 53rd week.

Pepsi Bottling expects net cash provided by operations less capital expenditures to be approximately $500 million, with capital expenditures in the range of $675 million to $725 million. This guidance does not reflect the impact to earnings from the expensing of stock options, which the company is required to adopt by the fourth quarter of 2005.

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