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Minneapolis, MN, October 25, 2006 -- PepsiAmericas, Inc. (NYSE: PAS) today reported third quarter 2006 net income of $53.1 million, with revenue up 8.3 percent including acquisitions. Diluted earnings per share (EPS) was $0.41 for the third quarter of 2006. The reported results compare to net income of $63.7 million in the third quarter of 2005, or EPS of $0.47. These prior year results include a $0.01 per share benefit related to the fructose settlement proceeds received in the third quarter of 2005. During the third quarter of 2006, the company completed the acquisition of the bottling operations in Romania and Moldova, as previously announced. These geographies are referred to as the acquisition territories in this release.
"We are pleased with our top-line performance in the third quarter, reflecting pricing gains and volume increases in all of our geographies," said Robert C. Pohlad, Chairman and Chief Executive Officer of PepsiAmericas. "In the U.S., our top-line growth continued, with a better balance between volume and pricing. However, significant volume increases in our take home Aquafina business and a soft single-serve business continue to unfavorably impact our net pricing. This, along with higher raw material costs, has resulted in lower domestic profits than a year ago."
"In our international businesses," continued Mr. Pohlad, "revenue and operating profits grew double digits in our existing markets. We have a broadened product portfolio, a more efficient infrastructure, and a strong commitment to brand investment, driving sustainable growth in our international markets."
Third Quarter U.S. Operations Highlights
U.S. volume was up 0.6 percent in the quarter compared to prior year. Carbonated soft drink volume declined mid single-digits reflecting continued overall softness in the category. The company grew the non-carbonated beverage category over 30 percent in the quarter. Aquafina volume grew 40 percent, while the balance of the non-carbonated beverage portfolio grew over 25 percent, led by Lipton Iced Tea, Frappuccino and SOBE. The company continues to advance its beverage portfolio to better position it with the consumer, driving non-carbonated beverages to 21 percent of the U.S. volume mix in the quarter, up 5 percentage points over 2005.
Net sales in the U.S. grew 2.3 percent to $841.5 million in the third quarter, driven by both volume and net pricing increases. Net pricing per unit increased 1.3 percent, a sequential improvement from the previous quarter, driven by a more balanced package mix. The company's single-serve packages in the quarter were flat compared to the prior year, representing an improvement from the previous quarter, while take home packages slowed to 1 percent growth over the prior year. Domestic cost of goods sold per unit increased 4 percent, reflecting increases in raw material costs across all commodities, as well as higher costs associated with growth in the non-carbonated portfolio. Gross profit declined 1.4 percent to $350.7 million, reflecting higher cost of goods sold per unit.
Selling, delivery and administrative expenses increased 5.9 percent to $260.6 million, driven mainly by a fixed asset charge, investment behind Nutrisoda, and higher fuel costs. As reported, third quarter operating income in the U.S. was $90.1 million, down $21.4 million from the prior year quarter. The prior year third quarter benefited from the $1.8 million fructose settlement.
Third Quarter International Operations Highlights
Central Europe volume increased 50.5 percent, including the acquisition territories. Volume was up 13.1 percent on a constant territory basis, reflecting growth in all categories and across all markets. Reported net sales for Central Europe were $157.2 million in the third quarter, up 57.8 percent, with over 35 percentage points of the increase coming from the acquisition territories. Existing markets delivered strong top- line growth of over 20 percent in the quarter. Net pricing increased 8.3 percent while cost of goods sold per unit increased 7.2 percent, with foreign currency translation driving approximately 3 percentage points of growth in each. Reported gross profit increased 60.2 percent to $65.7 million in the quarter, with the acquisition territories driving almost 40 percentage points of the increase and constant territory growing over 20 percent. Reported selling, delivery and administrative expenses of $47.7 million increased 43.7 percent compared to the previous year, with over 25 percentage points of growth coming from the acquisition territories and the remainder reflecting higher advertising spending and higher volume in existing territories. Operating income grew to $18 million compared to $7.8 million in the prior year quarter, driven by the contribution from the acquisition territories, and strong growth of almost 40 percent in existing markets.
The Caribbean business reported a volume increase of 3.8 percent. Net pricing improvements of 4.6 percent helped to drive Caribbean net sales to $65.5 million, up 8.3 percent in the third quarter. Higher raw material and utility costs drove a cost of goods sold per unit increase of 7.2 percent. Caribbean gross profit grew 4.9 percent from last year to $17.2 million in the quarter. Selling, delivery and administrative costs increased 6.3 percent, reflecting transition costs related to a new third party distributor arrangement in Jamaica. The Caribbean business delivered operating income of $1.9 million, essentially flat to prior year.
U.S. Business Reorganization
The company plans to strategically realign its U.S. business to further strengthen its customer focused go-to-market strategy. PepsiAmericas' domestic team will be aligned by customer and channel with dedicated functional support teams. This is a change from the current structure, which is organized by geography. The company will incur a charge related to this reorganization, with a majority of the charge reflected in the fourth quarter of this year and the balance of the charge to be recorded in 2007. The company will provide information on the amount of this charge in a future announcement.
"This reorganization of our U.S. business represents a significant change in how we sell to our customers, providing focused and dedicated teams to specific channels and individual customers," said Mr. Pohlad. "At the same time, we are further enhancing our capabilities in revenue growth management, as well as supply chain productivity."
Outlook
"In the fourth quarter, we expect to maintain our top-line growth based on rate increases in the U.S. and continued strength in our international businesses. Additional raw material cost challenges, however, will put pressure on our full year earnings," remarked Mr. Pohlad.
Based on recent upward trends in commodity prices, the company expects higher raw material costs of approximately $0.02 per share in the fourth quarter. Mr. Pohlad continued, "While 2006 has been a challenging year, I am encouraged by the fundamentals of our business: we have a strong distribution system, an advantaged product portfolio, and growing international markets. We are working to better position ourselves with our customers – through a more aligned, simpler, and more efficient way to do business. These strategic initiatives, along with strong innovation and growing contribution from our international businesses better position us for long term sustainable growth."
The full year adjusted EPS outlook of $1.30 to $1.33 excludes the impact of special charges but includes a $0.01 per share charge related to stock option expenses and the adoption of Statement of Financial Accounting Standards (SFAS) No. 123R "Share Based Payment."
The company's 2006 guidance compares to adjusted EPS of $1.37 in 2005. The 2005 reported EPS of $1.42 benefited from several items that increased EPS by $0.05, as previously reported.
PepsiAmericas will hold its third quarter earnings conference call at 10:00 AM CDT today, Wednesday, October 25, 2006, through a live webcast over the internet. The webcast will be available at www.pepsiamericas.com. A replay of the webcast will be archived and available online through the Investor Relations section of www.pepsiamericas.com.
PepsiAmericas is the world's second-largest manufacturer, seller and distributor of PepsiCo beverages with operations in 19 U.S. states, Central Europe and the Caribbean. For more information on PepsiAmericas, please visit www.pepsiamericas.com.
Cautionary Statement
This release contains forward-looking statements of expected future developments, including expectations regarding anticipated earnings per share and other matters. These forward-looking statements reflect management's expectations and are based on currently available data; however, actual results are subject to risks and uncertainties, which could materially affect actual performance. Risks and uncertainties that could affect our future performance include, but are not limited to, the following: competition, including product and pricing pressures; changing trends in consumer tastes; changes in our relationship and/or support programs with PepsiCo and other brand owners; market acceptance of new product and package offerings; weather conditions; cost and availability of raw materials; changing legislation; outcomes of environmental claims and litigation; availability of capital including changes in our debt ratings; labor and employee benefit costs; unfavorable interest rate and currency fluctuations; costs of legal proceedings; and general economic, business and political conditions in the countries and territories where we operate. Any forward-looking statements should be read in conjunction with information about risks and uncertainties set forth in our Securities and Exchange Commission reports, including our Annual Report on Form 10-K for the year ended December 31, 2005.
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Contact:
Investor Relations:
Sara Zawoyski, 612-661-3830
sara.zawoyski@pepsiamericas.com
