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MINNEAPOLIS, July 25, 2007 -- PepsiAmericas, Inc. (NYSE: PAS) today reported net income of $78.0 million in the second quarter of 2007, with revenue up 12.6 percent and worldwide volume up 6.2 percent including acquisitions.
Diluted earnings per share (EPS) was $0.61 in the second quarter of 2007, including a net $0.03 increase related to a gain on the sale of non-core property partially offset by special charges and a write-down of a legacy investment as further explained in the financial schedules attached to this release. The results also included a $0.02 reduction related to discontinued operations. These results compare to second quarter reported net income in 2006 of $65.0 million, or EPS of $0.50.
Chairman and Chief Executive Officer Robert C. Pohlad said, "We're very pleased with our second quarter performance. Continued business momentum in Central Europe and good U.S. performance delivered an EPS improvement of over 20 percent in the quarter."
"By executing our key initiatives in the U.S., we successfully cycled through strong volume growth of a year ago and expanded our gross margins. Our revenue strategy is working, with our new sales organization, Customer Alignment, playing a key role. We continue to build scale in our non-carbonated beverage portfolio, now 22 percent of our volume sold in the U.S."
"Central Europe delivered strong revenue growth, all markets showed double digit operating profit improvements, and operating margins doubled. The business fundamentals are strong. We continue to pursue both growth and expansion, like we have done in Romania and Ukraine."
Mr. Pohlad continued, "As a result of the strong first half performance and the confidence we have in the balance of the year, we are raising our full year adjusted EPS guidance to a range of $1.55 to $1.60."
During the third quarter of 2006, the company completed the acquisition of bottling operations in Romania and distribution rights in Moldova. These geographies are referred to as the acquisition territories in this release.
Second Quarter Worldwide Financial Highlights
Second Quarter U.S. Operations Highlights
Volume was down 3.3 percent in the quarter compared to prior year as carbonated soft drinks (CSD) declined by 6 percent. The company estimates that a shift in the Easter and Fourth of July holiday weeks had a 2 percentage point unfavorable impact on volume this quarter. This is evident by a decline in CSD can volume of 8 percent. The company continued to build scale in its non-carbonated beverage business, up 23 percent excluding water, behind the strength of our Lipton tea business. Aquafina was down 4 percent as we lapped significant distribution and promotional activity from a year ago.
Net sales in the U.S. grew 4.2 percent to $929.9 million in the second quarter, driven by net pricing growth of 7.3 percent. Net pricing improvements reflected roughly 1.5 percentage points due to the shift in holiday weeks, as the company compared against promotional pricing of a year ago. Mix contributed over 1 percentage point to net pricing, driven by improved single serve CSD trends and lower take-home water volume. The remaining approximately 4.5 percent reflected rate increases consistent with the company's expectations. Gross profit increased 5.7 percent to $388.8 million, as pricing covered cost of goods sold per unit increases of 5.4 percent and resulted in margin expansion of 50 basis points.
Selling, delivery and administrative expenses increased to $273.6 million, up 8.5 percent and consistent with the company's expectations. This increase reflected the comparison to lower compensation and healthcare costs from a year ago. Second quarter operating income was $113.8 million, including special charges of $1.4 million, compared to $115.9 million in the prior year quarter.
Second Quarter International Operations Highlights
Central Europe volume grew 56.3 percent, including acquisition territories, with constant territory volume up 10.7 percent, reflecting improvements in all markets. Central Europe net sales were $207.0 million in the second quarter, up 85 percent, with nearly 51 percentage points of the increase coming from the acquisition territories. Existing markets generated top-line growth of 34 percent due to strong volume and net pricing, with over 20 percent growth in non-carbonated volume.
Average net pricing increased 19.5 percent reflecting 9 percentage points from foreign currency translation and the remainder due to rate and mix increases. Cost of goods sold per unit increased 10.3 percent with foreign currency translation accounting for 6 percentage points of the increase. The remainder was driven mainly by higher ingredient costs. Gross profit increased 101.1 percent to $92.1 million for the quarter with the acquisition territories driving nearly 63 percentage points of the increase and constant territories contributing the remaining 38 percentage points. Selling, delivery and administrative expenses of $62.5 million were up 64 percent, and up 30 percent on a constant territory basis, reflecting unfavorable foreign currency translation and higher volume.
The Central European business reported operating income of $29.6 million in the quarter, an improvement of $21.9 million from prior year operating income of $7.7 million. Continued strong results from the acquisition territories, favorable foreign currency translation, and improvements in the company's base markets contributed to the strong overall operating results in Central Europe.
The Caribbean business reported a volume decrease of 4.1 percent, driven mainly by the continued soft economic conditions in Puerto Rico. An average net selling price improvement of 5.1 percent helped offset volume declines and drive top-line growth of 1.3 percent to $62.0 million in the second quarter. Cost of goods sold per unit increased 4.2 percent to $45.8 million driven mainly by higher ingredient costs. Selling, delivery and administrative costs increased 4.1 percent, resulting in an operating profit of $0.8 million for the quarter, essentially flat to last year.
Outlook
The company is raising its full year adjusted EPS guidance to a range of $1.55 to $1.60 from $1.35 to $1.40. The company now expects U.S. pricing to be in the range of 4.5 to 5 percent. At the same time, the company is forecasting selling, delivery and administrative expenses to now increase to the 9 to 10 percent range, which includes constant territory in the 6 to 7 percent range. Consistent with the company's prior guidance, the EPS outlook includes an estimated $0.02 to $0.03 dilution from the previously announced Sandora acquisition, which is expected to close the end of the third quarter.
The company also lowered its estimated effective tax rate from 36.5 percent to 35.1 percent.
The company expects to be at the high end of its adjusted operating cash flow guidance of $190 million to $200 million, now including proceeds from the sale of properties. Capital spending is estimated to be in the $200 million to $215 million range.
PepsiAmericas will hold its second quarter earnings conference call at 10:00 AM CDT today, Wednesday, July 25, 2007, through a live webcast over the internet. The live 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 and cost 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 30, 2006.
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