DBRS Confirms Pepsi Bottling Group, Inc. at A (high), AA (low) and R-1 (middle), with Stable Trends

DBRS has today confirmed the Senior Unsecured Debt rating of The Pepsi Bottling Group, Inc. (PBG, or the Company) at A (high), the Senior Unsecured Debt (guaranteed by PepsiCo, Inc.) at AA (low) and the Commercial Paper rating at R-1 (middle); the trends remain Stable. The Company’s ratings continue to benefit from the AA (low) rating of PepsiCo, Inc. (Pepsi) and its strong, diversified portfolio of beverage products and brands, which continues to help PBG withstand shifting consumer trends, rising commodity costs and mature home markets.

PBG’s volume growth continues to be pressured by the ongoing softness in North American carbonated soft drink (CSD) consumption, which has been exacerbated by weaker U.S. macroeconomic conditions. Slower volume growth combined with lower margins has started to affect PBG’s earnings growth to a greater degree than in the past. Margins continue to be affected by the significant and continued rise in commodity costs. DBRS notes that operating earnings through H1 F2008 were flat year over year as an 8% decline in U.S. and Canadian operating earnings offset strong earnings growth in Mexico and Europe.

DBRS expects the weak U.S. economy and higher pricing will continue to challenge PBG’s overall volume growth in F2008, despite the expectation of continued growth in the Company’s non-CSD portfolio and above-average growth in Europe. Raw material costs are also expected to increase further in F2008. While DBRS believes PBG will continue to implement price increases to offset higher commodity costs, we believe this strategy will become more difficult as food-price inflation continues to affect demand for PBG’s products and therefore we expect margins will be pressured to a greater extent. Although the Company may be challenged in achieving meaningful earnings growth in the near term, DBRS does not expect this to affect the Company’s ratings.

Stable cash flow generation continues to maintain PBG’s steady financial profile, while supporting increased capital investment and cash returns to shareholders. For F2008 DBRS expects cash flow from operations to remain fairly flat as increasing weakness in the U.S. market and higher commodity costs limit growth. DBRS expects free cash flow will continue to be used mostly for share repurchases, keeping the Company’s financial profile relatively stable.