DEAR FELLOW SHAREHOLDERS:

At PepsiAmericas, our business is quenching thirsts. Satisfying this basic need requires powerful brands, flexible distribution methods and people driven to win.

We’ve enjoyed great success in a dynamic industry that continues to change and evolve. Consumers crave more variety, value and brands that resonate with their lifestyles. At the same time, our retail customers are requiring complex solutions to help them manage productivity. Additionally, our raw materials are costing dramatically more.

Our strengths — the power of our brands, the flexibility of our distribution system, and the experience and capability of the PepsiAmericas organization — remain core to our ability to respond to these challenges.

This past year was not without its challenges — chief among them an evolving portfolio in the U.S. and significantly higher raw material costs. The resulting adjusted earnings per share of $1.32* and comparable adjusted return on invested capital of 7 percent* were short of our expectations, but the year also showed the promise and potential of our growth markets and portfolio of brands.

Consumer choices are changing, and so are we. Our product portfolio is broader and more relevant today than just a year ago. In our domestic portfolio, the non-carbonated beverage category grew 30 percent in 2006. Aquafina, Lipton Iced Teas, Frappuccino and our lineup of energy drinks continue to provide significant growth. Non-carbonated beverages now represent over 18 percent of our U.S. volume mix, compared to 14 percent just a year ago. Strong growth should continue as these brands become an even larger part of our business.

Carbonated soft drinks, however, are the foundation of our business. Trademarks Pepsi and Mountain Dew alone account for over 68 percent of our U.S. product mix. Our carbonated soft drink category declined 4 percent in 2006. Clearly, there continues to be a place in our consumers’ tastes for these brands, but it is changing. Innovation and a strong marketing calendar are critical to managing this category, and we are excited and confident about both as we begin 2007.

We are finding more effective and efficient ways of doing business. The maturity of our U.S. markets, along with their scale and cash generation, requires an even greater focus on the way we sell to and service our customers. Having an efficient supply chain is critical to our ongoing success. With the completion of our “pre-sell” selling system rollout in 2005, we built a more flexible and efficient way to do business. During 2006, we took this several steps further, virtually rebuilding our U.S. sales organization to align more directly with the way our customers do business. We call it Customer Alignment. Fully implemented at the beginning of January, this new structure moves us from a sales organization based on geography to one built around customers and the business segments they serve. As part of the reorganization, we will also have new tools, added resources and more centralized processes around our pricing framework.

Customer Alignment provides the structure upon which we will add our Customer Optimization initiative in 2007. We have set the stage to improve our demand forecast planning, optimize our selling time, and decrease our delivery costs through technology and process. The end result will be reduced out-of-stocks, a more efficient supply chain and better customer service.

We are expanding internationally in both product and geography. In our existing international markets, we expanded our portfolio, increased front-line selling, and invested in marketing and advertising. As a result, revenues grew over 13 percent in our existing markets, with broad-based growth across all markets, channels and categories, including carbonated soft drinks. Our portfolio, especially in the non-carbonated categories of juice, juice drinks, water and teas, is broader both in Central Europe and the Caribbean. And our investment in advertising, marketing and selling resources in our European markets increased brand awareness and drove cooler placements and incremental retail space.

We also completed the purchase of the Pepsi business in Romania in July 2006. This investment — in both scale and potential — will make our international business a much more significant contributor to our profit growth and better position us for long-term, sustainable growth

Managing these changes will drive success in 2007 and beyond. We are committed to improving our U.S. business performance and continuing to increase scale and profitability in our international markets. Our success depends on both, and our plans are clear and achievable.

• Our top priority is balanced top-line growth in the U.S., specifically between carbonated soft drinks and non-carbonated beverages, as well as between single serve and take-home packages.
• Second, we will continue to strengthen capabilities and drive efficiencies throughout our organization, building upon our Customer Alignment work and through our new Customer Optimization initiative.
• Finally, and most significant in terms of profit contribution, is our continued investment in our international businesses.

We feel good about our plans for 2007, as these initiatives not only help us manage through this environment of higher costs and portfolio transition, but also better position us for long-term growth.

Our track record over the past six years is one of creating opportunities, meeting challenges and achieving success. Our industry is changing and so are we. Our potential is great with brands that have promise and excitement and are a part of today’s lifestyles. The effort, experience and ability of each person within PepsiAmericas continue to be the underpinning of our strength. We’re a talented, capable and resilient organization satisfying a basic need: We quench thirsts. As we begin 2007, we are committed to managing change to create value for you, our shareholders. 

Robert C. Pohlad
Chairman of the Board and Chief Executive Officer
March 7, 2007