Dear Fellow Shareholders,
At PBG, hundreds of thousands of transactions occur every day. We look on these opportunities to make a sale and bring a smile to a consumer's face as our "moments of truth." Creating preference for our products and providing the best service in the business are the goals that get us up in the morning. And keep us on the job 24 hours a day, seven days a week. They're at the heart of what motivates employees at PBG. And, ultimately, these countless opportunities are what make this business so dynamic and exciting.
The year 2003 saw the convergence of several trends that affect our industry. Some of these trends have been building over time, moving hand in hand with changing consumer demographics. Some were brought to the fore by sluggish economic conditions in several of the markets where we do business. Others are the result of the quickening pace of customer consolidation, brought on by the drive to gain scale and improve efficiency. All of them are areas of focus for PBG in our continuing drive to be the best at what we do - selling soda.
The Numbers
One of the most important moments of truth for us at PBG is meeting our own and your expectations. Despite all our effort in 2003, we fell short in several key areas, and that was a disappointment for all of us.
Since October 1999 with the launch of our stock repurchase program, we have returned considerable cash to our shareholders. With the addition of the $483 million we spent to by back our shares in 2003, to date we have returned more than $1 billion dollars to our shareholders.
But numbers alone don't tell the story. And falling short of our goals was a strong motivational force for an organization that prides itself on results. I am proud of how PBG people across the globe assessed the situation, faced reality and then took appropriate actions to get us back on track. And, at the end of the year, our final results showed share gains against our major competitor in all of our regions.
Addressing Consumer Needs
The first issue that has changed the landscape for the beverage industry over the past several years is the consumer desire for more variety and convenience. No longer happy with a few choices to quench their thirst, consumers are showing their enthusiasm for new flavors, new packages and new places to purchase. This has driven a multitude of changes across the beverage industry.
Growing concern about health and weight control has fueled the growth of diet soft drinks, non-carbonated products and water. Lifestyle trends such as meals consumed away from home, portability of beverages, and size of servings are also increasingly important. At PBG, one of our most important priorities is to work alongside our partners at PepsiCo to provide a broad portfolio of products in a variety of package configurations and to increase our points of distribution - all to ensure that we are capturing every possible sales opportunity.
In 2003, PepsiCo provided a number of exciting product launches and promotions, and at PBG, we took them to the finish line by ramping up our focus on execution.
We enjoyed some notable successes, including:
Defining Consumer Value
Delivering value to our consumers is always essential, but never more than in tight economic conditions, as was the case in 2003 in many of our markets. With less spending power, consumers became more price sensitive. In a few markets, new competitors emerged and had an initial burst of success by capitalizing on those dynamics. In the U.S., we faced a lackluster economy and reduced foot traffic in stores. In Mexico City, we saw the rapid rise of the "B brands", spurred by general economic weakness, the devaluation of the peso, and reduced consumer purchasing ability. In Turkey, a strong local brand emerged as a contender and rapidly gained market share.
We dealt with each of these issues, applying our focus and determination to make the changes necessary to rebuild our strength. In the U.S., we ensured good consumer value by establishing the right price, market by market, and offering even more variety in packaging to meet emerging consumer needs. In Mexico City, we changed both our pricing architecture and package offerings to reflect the new competitive dynamics and we began to see improvements in our share position in both colas and flavors as the year drew to a close. In Turkey, focus on the marketplace execution and strategy, coupled with a strengthening distributor network, yielded continuously improving results, and we ended the year with double-digit volume growth in the last quarter.
Bringing Solutions to Our Customers' Biggest Issues
Our customers in the U.S. have continued to consolidate and, with each passing year, they demand improvements in product availability and supplier efficiency and better, faster customer service so that they, in turn, can focus their attention on ways to serve their customers - our consumers - better. They want products that will generate excitement, drive traffic into their stores and improve their bottom line. We have those products, and great service to match. We continue to make headway in improving our supply chain, strengthening an already powerful direct store distribution system and ensuring that every advantage it brings benefits our customers.
Moving Ahead
The challenges we faced in 2003 encouraged us to recalibrate our goals and strategies in light of the changing marketplace circumstances. Our revised outlook, completed before year end, is a clear and realistic view of what we expect to deliver long term.
In 2004, we are confident we will improve PBG's topline by balancing situational pricing opportunities with a strong focus on achieving our volume targets. We expect operating profit growth in the mid-single digits, earnings per share of $1.62 to $1.70 and an increase in our operating cash flow, after capital spending, of 10 percent.
Our teams across the company are energized by our plans. Our employees have a desire to win that is second to none, and the demonstrated ability to make that goal a reality.
Moments of Truth - The Final Goal
At PBG, we are doing everything in our power to ensure that each and every moment of truth ends the same way. Every time a customer, a consumer, a shareholder or a potential employee has a chance to make a choice, we want the choice to be clear and unquestionable. We want the choice to be PBG.
John T. Cahill
Chairman of the Board and Chief Executive Officer
All references to volume are stated in constant territory terms.
At PBG, hundreds of thousands of transactions occur every day. We look on these opportunities to make a sale and bring a smile to a consumer's face as our "moments of truth." Creating preference for our products and providing the best service in the business are the goals that get us up in the morning. And keep us on the job 24 hours a day, seven days a week. They're at the heart of what motivates employees at PBG. And, ultimately, these countless opportunities are what make this business so dynamic and exciting.
The year 2003 saw the convergence of several trends that affect our industry. Some of these trends have been building over time, moving hand in hand with changing consumer demographics. Some were brought to the fore by sluggish economic conditions in several of the markets where we do business. Others are the result of the quickening pace of customer consolidation, brought on by the drive to gain scale and improve efficiency. All of them are areas of focus for PBG in our continuing drive to be the best at what we do - selling soda.
The Numbers
One of the most important moments of truth for us at PBG is meeting our own and your expectations. Despite all our effort in 2003, we fell short in several key areas, and that was a disappointment for all of us.
- Our U.S. volume was down two percent and our worldwide volume was flat on a constant territory basis.
- Diluted earnings per share were $1.56, before an accounting change and the effect of Canadian tax law changes. That was 7 percent above prior year, but still below our expectations.
- Our return on invested capital was 7.5 percent.
- However, net cash provided by operations remained a strong positive.
- Our cash provided by operations after capital investments was $440 million in 2003, an increase of 13 percent. We have delivered an impressive 33% compounded annual growth rate in this measure in the nearly five years since our IPO.
Since October 1999 with the launch of our stock repurchase program, we have returned considerable cash to our shareholders. With the addition of the $483 million we spent to by back our shares in 2003, to date we have returned more than $1 billion dollars to our shareholders.
But numbers alone don't tell the story. And falling short of our goals was a strong motivational force for an organization that prides itself on results. I am proud of how PBG people across the globe assessed the situation, faced reality and then took appropriate actions to get us back on track. And, at the end of the year, our final results showed share gains against our major competitor in all of our regions.
Addressing Consumer Needs
The first issue that has changed the landscape for the beverage industry over the past several years is the consumer desire for more variety and convenience. No longer happy with a few choices to quench their thirst, consumers are showing their enthusiasm for new flavors, new packages and new places to purchase. This has driven a multitude of changes across the beverage industry.
Growing concern about health and weight control has fueled the growth of diet soft drinks, non-carbonated products and water. Lifestyle trends such as meals consumed away from home, portability of beverages, and size of servings are also increasingly important. At PBG, one of our most important priorities is to work alongside our partners at PepsiCo to provide a broad portfolio of products in a variety of package configurations and to increase our points of distribution - all to ensure that we are capturing every possible sales opportunity.
In 2003, PepsiCo provided a number of exciting product launches and promotions, and at PBG, we took them to the finish line by ramping up our focus on execution.
We enjoyed some notable successes, including:
- the rollout of Sierra Mist, PepsiCo's lemon-lime, across all our U.S. markets, which resulted in 11% growth of lemon-lime year over year.
- the addition of Pepsi Vanilla, both regular and diet, to our lineup, which grew to two percent of our mix in just four short months.
- PBG's first "in-and-out" product positioning with the orange-flavored Mountain Dew LiveWire, which lifted the overall trademark by four percent during its 20 weeks in the marketplace.
Defining Consumer Value
Delivering value to our consumers is always essential, but never more than in tight economic conditions, as was the case in 2003 in many of our markets. With less spending power, consumers became more price sensitive. In a few markets, new competitors emerged and had an initial burst of success by capitalizing on those dynamics. In the U.S., we faced a lackluster economy and reduced foot traffic in stores. In Mexico City, we saw the rapid rise of the "B brands", spurred by general economic weakness, the devaluation of the peso, and reduced consumer purchasing ability. In Turkey, a strong local brand emerged as a contender and rapidly gained market share.
We dealt with each of these issues, applying our focus and determination to make the changes necessary to rebuild our strength. In the U.S., we ensured good consumer value by establishing the right price, market by market, and offering even more variety in packaging to meet emerging consumer needs. In Mexico City, we changed both our pricing architecture and package offerings to reflect the new competitive dynamics and we began to see improvements in our share position in both colas and flavors as the year drew to a close. In Turkey, focus on the marketplace execution and strategy, coupled with a strengthening distributor network, yielded continuously improving results, and we ended the year with double-digit volume growth in the last quarter.
Bringing Solutions to Our Customers' Biggest Issues
Our customers in the U.S. have continued to consolidate and, with each passing year, they demand improvements in product availability and supplier efficiency and better, faster customer service so that they, in turn, can focus their attention on ways to serve their customers - our consumers - better. They want products that will generate excitement, drive traffic into their stores and improve their bottom line. We have those products, and great service to match. We continue to make headway in improving our supply chain, strengthening an already powerful direct store distribution system and ensuring that every advantage it brings benefits our customers.
Moving Ahead
The challenges we faced in 2003 encouraged us to recalibrate our goals and strategies in light of the changing marketplace circumstances. Our revised outlook, completed before year end, is a clear and realistic view of what we expect to deliver long term.
In 2004, we are confident we will improve PBG's topline by balancing situational pricing opportunities with a strong focus on achieving our volume targets. We expect operating profit growth in the mid-single digits, earnings per share of $1.62 to $1.70 and an increase in our operating cash flow, after capital spending, of 10 percent.
Our teams across the company are energized by our plans. Our employees have a desire to win that is second to none, and the demonstrated ability to make that goal a reality.
Moments of Truth - The Final Goal
At PBG, we are doing everything in our power to ensure that each and every moment of truth ends the same way. Every time a customer, a consumer, a shareholder or a potential employee has a chance to make a choice, we want the choice to be clear and unquestionable. We want the choice to be PBG.
John T. Cahill
Chairman of the Board and Chief Executive Officer
All references to volume are stated in constant territory terms.