PepsiAmericas reports double-digit operating income growth

by Keith Nunes
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MINNEAPOLIS — PepsiAmericas, Inc. reported third quarter 2005 net income of $63.7 million. The results include a 1c per share benefit related to additional high-fructose corn syrup litigation settlement proceeds received in the third quarter. The reported results compare with net income of $64.3 million in the third quarter of 2004.

For the first nine months of 2005, the company posted net income of $157.1 million. This compares with net income of $146.5 million for the same period in 2004.

"We are pleased with our third-quarter performance as we continued to deliver consistent revenue growth," said Robert C. Pohlad, chairman and chief executive officer. "Our U.S. business was the primary driver of our operating results in the quarter, fueled by strong execution in our noncarbonated portfolio, balanced pricing and the meaningful contribution from CIC. Our non-carbonated drink category grew to almost 16% of our overall volume mix in the U.S. CIC has performed even better than we expected this year, as we accelerate the integration and rationalization of procurement, production, and back office activities."

In the quarter, net sales grew 11% to $982.9 million driven by worldwide volume growth and favorable pricing in the U.S. Cost of goods sold per unit was up 4%. On a worldwide basis, gross profit increased 10% to $413.1 million, with foreign currency translation contributing 1 percentage point. Selling, delivery and administrative expenses increased 9%. CIC contributed approximately 7 percentage points of the increase in gross profit and selling, delivery and administrative expenses. Reported worldwide operating income increased to $121.3 million compared with $107.1 million in the third quarter of 2004.

U.S. volume grew 0.4% on a constant territory basis. Non-carbonated brands were up more than 16%, driven by double-digit growth in Aquafina, Lipton Tea, and Frappuccino. The company’s diet portfolio continued to benefit from innovation with 4% growth in the third quarter, helping to mitigate the impact of regular carbonated soft drink volume declines. Single-serve volume, which accounts for approximately 23% of the company’s bottle and can volume, was up 3%. Take home volume was essentially flat with the continued migration from cans to multi-serve polyethylene terephthalate (PET) packages.

Net sales in the U.S. grew 12% to $822.8 million in the third quarter of 2005, with average net selling price per unit up 3%. CIC contributed approximately 8 percentage points of the U.S. top-line growth. PepsiAmericas achieved balanced net pricing between rate and mix in the U.S., consistent with the previous quarter.

Domestic cost of goods sold increased 13% to $467.1 million, with CIC representing approximately 8 percentage points of the increase. Cost of goods sold per unit in the U.S. was 3% higher than the prior year quarter, reflecting higher raw material costs. Gross profit increased 11% over the third quarter of 2004 to $355.7 million.

U.S. operating income in the third quarter increased 14% to $111.5 million, which included the $1.8 million pre-tax fructose settlement gain offset by Hurricane Katrina related losses of approximately $1.2 million.

In Central Europe, volume grew 4% in the third quarter. Poland delivered double-digit volume growth, while volume declined in Hungary due to the continued competitive marketplace. Net sales in Central Europe increased 10% to $99.6 million in the third quarter, aided by the expansion of snack and beer distribution. Average net pricing increased 3% driven primarily by foreign currency translation. Cost of goods sold in Central Europe increased 17% to $58.6 million due, in part, to snack and beer distribution. The sequential increase in cost of goods sold per unit slowed from previous quarters to 7% as anticipated, as the company began to lap the higher sugar costs related to the E.U. accession. Gross profit of $41 million in the quarter was up 1% compared to the prior year. Selling, delivery and administrative expenses of $33.2 million in the third quarter remained relatively flat to the previous year's third quarter, as cost savings from productivity initiatives continued.

In the Caribbean, volume was down in the third quarter primarily as a result of hurricanes and a government labor dispute in Puerto Rico that limited raw material supply. Net sales increased 6% to $60.5 million, as average net selling price increased 6% driven primarily by planned rate increases. Cost of goods sold increased 6% to $44.1 million related primarily to higher PET and utility costs. Selling, delivery and administrative costs increased 8% to $14.4 million due, in part, to higher fuel and employee compensation and benefit costs.

The international operations reported combined operating income of $9.8 million in the third quarter of 2005, up 5% from the prior year same period. Foreign currency translation favorably impacted the operating results for the quarter by $2.7 million.

"Our third-quarter performance keeps us on track to deliver the operating targets we established at the beginning of year," Mr. Pohlad said. "We are well positioned to continue the trend of double-digit profit improvements through our consistent ability to drive revenue growth and control costs."

PepsiAmericas reaffirmed its full year adjusted e.p.s. outlook of $1.35 to $1.38. The adjusted e.p.s. outlook includes an estimated 2c to 3c per share for both the direct Hurricane Katrina impact on the Louisiana territories, net of insurance, as well as the resulting higher raw material costs. On a reported basis, PepsiAmericas expects to achieve e.p.s. of $1.39 to $1.42, 1c per share higher than previously anticipated due to an estimated lower facility charge in the fourth quarter of 2005.

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