Minneapolis, 22 Oct, 2008 - PepsiAmericas, Inc. today reported net income of $73.1 million in the third quarter of 2008, with revenue up 12 percent including acquisitions.
Diluted earnings per share (EPS) was $0.58 in the third quarter of 2008, which included a $0.05 reduction for special charges and a $0.07 reduction associated with previously discontinued operations. The special charges are primarily related to the restructuring of the Caribbean operations. These results compare to third quarter reported net income in 2007 of $71.5 million, or EPS of $0.55. EPS in 2007 included a $0.01 reduction for special charges related to the realignment of the U.S. sales organization.
Chairman and Chief Executive Officer Robert C. Pohlad said: "We are pleased with our third quarter results. We successfully navigated what continues to be a challenging US environment through disciplined pricing, strong marketplace execution and effective productivity initiatives. Our Central and Eastern European business delivered strong revenue growth, led by solid results in Poland, Romania and Ukraine."
"We are also taking steps over the balance of this year to improve profitability in our Caribbean business. It is a combination of our clear operating priorities, along with our strong and diverse geographic portfolio, that continue to drive our results, and position us to achieve our full year adjusted EPS of $1.92 to $1.96."
Third Quarter Worldwide Financial Highlights
Revenue increased 12 percent to $1.3 billion, reflecting 8 percentage points from acquisitions, strong pricing across all markets and modest volume growth in Central and Eastern Europe (CEE).
Volume grew 7.9 percent, with constant territory volume down 2.2 percent reflecting U.S. volume declines.
Operating income increased 5 percent to $146.3 million. These results included special charges totaling $7.1 million, compared to special charges of $1.3 million included in prior year operating income of $140 million.
Foreign currency contributed 3 percentage points of growth to revenue, 2 percentage points to cost of goods sold and 4 percentage points to selling, delivery and administrative expenses. The net effect was an 8 percentage point benefit to operating income.
The results also included the benefit from a reduction in the company's effective tax rate, which reflected favorable country mix and various other items that contributed 4.1 percentage points of favorability. The effective tax rate in the current quarter was 27 percent compared to 35.1 percent in the prior year's third quarter.
Third Quarter U.S. Operations Highlights
Net sales in the U.S. increased 1 percent to $882.7 million in the third quarter as pricing offset a 2.4 percent decline in volume. The decline in volume was primarily driven by non-carbonated beverages with declines in the lower margin Aquafina take-home package as well as Trademark Lipton. Total carbonated soft drink (CSD) volume declined only 1 percent, which was an improvement from the first and second quarters' performances, aided by strong holiday volume, innovation and strong growth in flavored CSDs. Single-serve volume decreased 4.8 percent due to softness in the foodservice channel, including third-party operators and full service vending.
Net pricing grew 3.2 percent, primarily reflecting rate increases to cover the higher raw material costs. Domestic cost of goods sold per unit increased 2.3 percent, reflecting increased raw material costs and higher non-carbonated mix related costs. Gross profit increased 1 percent in the quarter to $361.6 million.
Selling, delivery and administrative expenses increased 3 percent to $271.9 million driven by higher fuel costs and increased compensation and benefit expenses. Third quarter operating income was $89.1 million, compared to $90.8 million in the prior year quarter, which included special charges of $0.6 million and $1.3 million, respectively.
Third Quarter International Operations Highlights
CEE's net sales were $382.4 million in the third quarter, up 61 percent, with 38 percentage points of the increase attributed to acquisitions. CEE volume grew 38.2 percent, with constant territory volume up 1 percent led by continued strong growth in Poland and Romania partly offset by a decline in Hungary.
Average net pricing increased 18.4 percent reflecting a 7 percent improvement in local currency and a 16 percent increase from foreign currency partly offset by a 5 percent negative impact from acquisitions. Cost of goods sold per unit increased 24.5 percent reflecting 6 percent increases from both local currency and acquisitions, with the remainder coming from foreign currency. Gross profit grew 51 percent to $164.7 million for the quarter, with acquisitions driving 23 percent of the increase. Selling, delivery and administrative expenses of $101.7 million were up 61 percent, which included 24 percent from acquisitions and 21 percent from foreign currency. The remaining increase was driven mainly by continued investments in advertising and marketing.
CEE's operating income increased to $62.4 million, a $16.1 million improvement over the prior year driven by acquisitions and currency benefits.
Caribbean net sales were $62.4 million, down 7 percent, as volume declined 15.5 percent driven mainly by Puerto Rico. While net pricing increased 7.9 percent to cover cost of goods sold per unit increases of 9.2 percent, gross profit declined 10 percent to $15.9 million reflecting the volume declines. Selling, delivery and administrative expenses increased 3 percent to $15.2 million due to higher energy costs. The Caribbean reported an operating loss of $5.2 million, including special charges of $5.9 million, compared to operating income of $2.9 million in the prior year.
A strategic restructuring of the Caribbean business was initiated in the third quarter to streamline operations and improve profitability, resulting in a $5.9 million non-cash special charge.
Outlook
The following table details our full year 2008 EPS guidance:
