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Pepsi Bottling Beats Expectations, Raises Outlook

Pepsi Bottling Group said Tuesday quarterly profit rose 9.5%, outpacing earnings estimates, and prompting the largest bottler of Pepsi products to raise its earnings forecast for the full year.

"The reality is that our volume was stronger than anticipated in the U.S. as well as in Russia, and that strong top-line growth also flowed through to the margin line," said Chief Executive Eric Foss, in an interview on CNBC's "Squawk Box."

Pepsi bottles line the self of a supermarket in Springfield, Ill., Tuesday, July 11, 2006.  PepsiCo Inc., the No. 2 soft-drink maker, said second-quarter profit jumped 14 percent, helped by sales of non-carbonated beverages.  (AP Photo/Seth Perlman)
Seth Perlman
Pepsi bottles line the self of a supermarket in Springfield, Ill., Tuesday, July 11, 2006. PepsiCo Inc., the No. 2 soft-drink maker, said second-quarter profit jumped 14 percent, helped by sales of non-carbonated beverages. (AP Photo/Seth Perlman)

"We had very strong cost controls and financial discipline, and I'd say in addition to the key financial metrics, we also saw strong market share growth in our U.S. business as well as Canada and Russia, so we were able to raise our full-year guidance," Foss said.

The Somers, N.Y., company said net income in the quarter ended June 16 rose to $162 million, or 70 cents a share, from $148 million, or 61 cents a share, a year earlier.

Revenue rose 7% to $3.36 billion from $3.14 billion.

Analysts, on average, were expecting Pepsi Bottling to earn 63 cents a share on revenue of $3.28 billion, according to Thomson Financial.

Worldwide sales by volume, which excludes the impact of price changes and currency translation, rose 1% as growth in Europe helped offset a decline in Mexico and flat results in the U.S.

Volume growth was particularly strong in Russia, where it rose 22%.

According to Foss, Russia has been a "very strong growth market" for the company. He said volume growth was strong in Russia across Pepsi's portfolio, which includes Pepsi-Cola and Lipton tea.

However, Stifel Nicolaus analyst Mark Swartzberg attributed the bottler's stronger-than-expected performance to the bottler's results in the U.S. market, which accounts for 85% of its profits.

"Region volume was flat, better than our estimate of a 1.0% decline on stronger-than-expected take-home growth," Swartzberg said. He had expected U.S. profits to rise 2%, but instead, earnings were up 12%.

Pepsi Bottling, which is facing soaring prices for the aluminum it uses for cans and the high fructose corn syrup it uses for sweetener, has seen its gross margins under pressure for some time, but the company said that strong price increases had more than offset a 6% increase in costs.

The company now expects earnings for the full year to be between $2.02 and $2.07 a share. Previously, the company anticipated earnings in the range of $1.90 to $1.98 a share.

This year, volume is expected to rise about 1% to 2% worldwide, and be flat to up 1% in the U.S. and Canada.

Pepsi Bottling, which is 44% owned by PepsiCo , said it expects net revenue per case to grow 4% on a worldwide basis.

The company also said it will record a noncash benefit of about $45 million in the third quarter due to the reversal of net tax contingencies related to the expiration of the statute of limitations for an audit of its 2001 and 2002 tax returns. The impact is not included in its earnings forecast.

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