Success for The Pepsi Bottling Group is built on capability and discipline. Based on marketplace conditions and opportunities, we set clear objectives, ensure that everyone understands their roles in achieving them, and then go out and get the job done. Our results paint a compelling picture of the power of this formula for success and our people's desire to win. The year 2002 marked another chapter in the growth story of PBG.

Growth Through Innovation
Consumers continue to look for new choices in beverages - both in flavors and in packaging - and we have a brand lineup to satisfy every preference. In 2002, we announced our decision to unite the entire PBG U.S. system behind Sierra Mist, Pepsi's refreshing lemon-lime brand, which outperforms other national brands in taste tests. We have already made huge strides in growing the awareness and consumption of this brand in all of our PBG markets. The launch of Pepsi Blue had a positive effect on the Pepsi trademark and on the cola category as a whole. We continue to work closely with our partners at PepsiCo to identify the next big idea - something as powerful as Mountain Dew Code Red, now a 50 million case brand in PBG's U.S. markets, and Pepsi Twist, currently 38 million cases (both measurements in 8-ounce servings) in all of our channels. Across the Pepsi system, we are committed to innovation and what it brings to our customers, our consumers and our category.

Growth Through Execution
In the U.S., we once again showed our strong suit in execution - store by store. Our display inventory numbers were at an all-time high in 2002. For every 100 cases our chief competitor got on the floor at food stores, we placed 108. We boosted our business in the food store channel by 4% in 2002, and our in-store execution was a key factor in that success.

Growth Through Acquisitions
Growth also came to us in 2002 through a number of bottling acquisitions. Each is important, but one, by virtue of its size and potential for growth, will be more pivotal than any other to our success. Our acquisition of Pepsi-Gemex, completed in November 2002, opened up exciting possibilities for PBG's future. Mexico is the second largest soft drink market in the world, after the United States. This business represents two-thirds of the Pepsi volume sold in Mexico and produces healthy margins, with powerful brands in the categories of colas, flavors and water - both bottled and jug.

Earlier in the year, we acquired the Pepsi bottler in Turkey, which brought with it a host of popular local soft drink brands and access to one of the youngest and fastest-growing populations in Europe.

Growth Through Financial Discipline
In addition to outstanding execution, product and package innovation and the new bottling operations we've acquired, our ability to increase our revenues through mix management and pricing contributed significantly to our financial success in 2002. We maintained our market share and posted very solid financial results:

• Constant Territory Net Revenue per Case was up 3%, both U.S. and worldwide.


• Earnings Before Interest, Taxes, Depreciation and Amortization were up 13% for the year, including acquisitions, which contributed about two points of growth.


• Diluted Earnings Per Share were $1.46 for the year.


• Return on Invested Capital increased to 8.3%, well above our 7% cost of capital.


• Cash Provided by Operations increased 15% to more than a billion dollars.

I'm particularly proud of these results, given some of the challenges that we faced toward the end of the year. As the economy slowed late in 2002, so did consumer traffic. Our customers began to experience retail sales shortfalls, which affected our business as well. And, in the fourth quarter, unseasonably cold and wet weather dominated much of the United States, resulting in weaker cold drink sales.

We are focused on using all the advantages we have to convert these challenges into opportunities. PBG has the variety of brands and packages that consumers love, and we have the sales and executional capability to convert possibility into profitability for our customers and for ourselves. The Liquid Refreshment Beverage category continues to be one of the fastest-growing grocery categories, and colas remain the number one dry goods product sold in food stores. Our products have the power to draw consumers into our customer locations, and that, of course, is what our customers want and need. The beverage category is an important driver of our customers' businesses - both in volume and in profit. And we want to make sure we are contributing more than our fair share to our customers' profits - in every market and in every store across PBG territory.

Investing in our Future
We are making well-placed strategic investments - in capacity, infrastructure, training and technology - to ensure we are prepared for the future and ready to meet it head on. Our vision for the future is called the Next Horizon. It's an intensified focus on the things we have done well, designed with tomorrow's dynamics in mind. Our capital plan in 2003 calls for a significant increase in spending, the bulk of which is allocated to manufacturing capacity for the future to accommodate consumers' changing tastes and preference for variety.

In 2002, we began the first year of a three-year training agenda for every employee who is in a selling capacity, designed to provide the right skills for world-class selling. Our sales force began taking advantage of the power in our Next Generation Handheld computer, which is revolutionizing today's sales calls with customized selling information and other data important in selling proposals and buying decisions. We're also focusing on service improvements - not just at the customer location, but all the way through the supply chain, ensuring that the right products are in our warehouses, that our trucks are loaded perfectly, and that we're constantly measuring and improving our performance in the eyes of our customers.

During the first stage of our company, one leader set us on our course for success. I'd like to offer our special thanks and best wishes to Craig Weatherup, PBG's "founding father," who spent almost 30 years in the Pepsi system before retiring in January 2003. We thank him for all he did to lead this business in the early days and to get us off to such a great start. I am honored to follow him and uphold his approach of keeping the mission and goals of our business simple and clear, focusing on customer satisfaction and building on our results-oriented culture.

All of us at PBG look forward to a Next Horizon that honors the past, builds on the present and brings the future to life... a future where every possibility, powered by increasing capability, becomes reality.

John T. Cahill
Chairman of the Board and Chief Executive Officer