PepsiAmericas, Inc.(NYSE:PAS) today reported third-quarter 2003 net income of $62.5 million, up 24.5 percent from $50.2 million in the third quarter of 2002. Diluted earnings per share (EPS) totaled $0.43, an increase of 30.3 percent compared to $0.33 in the prior-year third quarter. Excluding the $0.04 per share benefit of certain tax accrual reversals and special charges in 2002 and 2003, net income grew 12.7 percent over the third quarter of 2002 to $55.9 million. Excluding unusual items in both years, diluted EPS of $0.39 increased 18.2 percent from $0.33 in the prior-year third quarter.
For the first nine months of 2003, income from continuing operations totaled $120.6 million, or $0.84 per diluted share, compared to $0.84 for the prior-year nine-month period. Excluding unusual items included in the attached reconciliation table, year-to-date 2003 income from continuing operations was $116.9 million, or $0.81 per diluted share, versus $0.82 in the prior-year same period.
Results for the third quarter 2003 benefited from strength in U.S. pricing, continued improvement in international operations including the favorable impact of foreign exchange, continued cost management and fewer shares outstanding. These benefits offset a decline in worldwide volume. The company prospectively adopted Emerging Issues Task Force (“EITF”) Issue No. 02-16 in the first quarter of 2003. The results, assuming that EITF 02-16 had been in effect in 2002 are provided where applicable, and a reconciliation table and explanation are included with the financial statements attached to this release.
— Worldwide operating income increased 8.0 percent to $111.3 million.
— Total net sales declined by $9.3 million to $865.0 million compared to $874.3 million in the previous year. Assuming that EITF 02-16 was in effect during 2002, third-quarter 2003 net sales would have increased $12.0 million, or 1.4 percent, over the same period a year earlier.
— Worldwide volume declined 3.3 percent reflecting lower U.S and Central Europe volumes.
“We were very pleased with our 2003 third quarter results,” said Chairman and Chief Executive Officer Robert C. Pohlad. “We achieved these results through the disciplined implementation of our pricing strategy and cost containment programs as well as in comparison to strong prior-year volume gains. Our continued commitment to the effective execution of both our U.S. and international business strategies should position us to deliver our 2003 goals and consistent future growth.”
Operating Income and Financial Highlights
Strength in both U.S. and international pricing and the efficient management of costs drove an 8.0 percent increase in worldwide operating income, to $111.3 million in the third quarter. On a worldwide basis, the gross profit margin increased to 42.8 percent in the third quarter compared to 40.0 percent for the same period a year earlier. Had the company adopted EITF 02-16 at the beginning of 2002, the third quarter 2003 gross margin would have improved by 40 basis points to 42.8 percent from 42.4 percent in the prior-year quarter. If EITF 02-16 had been in effect in 2002, third-quarter 2003 cost of goods sold would have increased by less than one percent and SD&A would have increased $1.0 million, or 0.4 percent over the third quarter of 2002.
U.S. Operations Highlights
The profitability of the U.S. business improved in the third quarter. U.S. operating income increased 4.3 percent to $102.7 million compared to the third quarter in 2002. Net sales declined 1.8 percent year-over-year, and assuming EITF 02-16 had been in effect in 2002, net sales would have increased $8.0 million, or 1.1 percent, to $725.3 million. These results reflected improved net selling price per unit of 3.8 percent, which offset the 3.7 percent decline in U.S. volume. The net selling price increase was comprised of approximately 3.3 percent from rate and 0.5 percent from mix. A continued focus on the management of SD&A also contributed to the results.
Absolute volumes were stable in the third quarter compared to the second quarter of 2003. Trademark Pepsi volume benefited from the successful introduction of PepsiVanilla in the quarter and the continued success of Sierra Mist. The year-to-year decline in third-quarter U.S. volume reflected softness across all channels and continued weakness in trademark Pepsi. However, continuing softness in brand Pepsi contributed to trademark Pepsi’s low single-digit volume decline. In addition, the diet category continued to grow across all brands. Aquafina volume declined in mid-single digits.
International Operations Highlights
The international business performance continued to improve. International operating income from the combined Central Europe and Caribbean operations grew by $4.0 million to $8.6 million in the third quarter, as the reversals of special charges were approximately the same in both years. Favorable foreign exchange rates contributed $1.3 million to international operating income.
Central Europe continued to deliver positive results, with operating income of $7.9 million for the third quarter, a $2.9 million increase over the prior-year third quarter. Net sales for the quarter increased 3.8 percent to $90.6 million. As a result of a volume decline in the water category, Central Europe’s overall volume decreased by 3.2 percent in the quarter. However, the results for the current quarter reflected continued strength in core carbonated soft drink (CSD) and new age beverage categories’ volume and pricing. Net average pricing remained strong across all categories. As Central Europe continued to shift to a more efficient delivery model, SD&A improved, declining 3.5 percent to $33.1 million, assuming that EITF 02-16 was in effect during 2002.
Operating income for the Caribbean business totaled $0.7 million in the third quarter, comparing favorably with a loss of $0.3 million a year earlier. Volume growth of 1.4 percent and a 0.3 percent decline in cost of goods sold drove this improvement, as net selling price per unit remained relatively flat compared to the third quarter in 2002.
For the nine months ended September 27, 2003, PepsiAmericas reported income from continuing operations of $120.6 million, a decline of 6.1 percent from the comparable nine-month period in 2002. Worldwide operating income declined 10.1 percent to $242.2 million. The lower nine-month results were attributable to a weak first quarter of 2003. Worldwide net sales year-to-date decreased $64.0 million compared to the same period in 2002, to $2.4 billion. Assuming that EITF 02-16 was in effect during 2002, net sales would have declined $2.5 million, or 0.1 percent over the same period a year earlier. Total worldwide volume declined 4.3 percent, primarily due to the 4.7 percent decline in U.S. volume.
U.S. operating income totaled $242.2 million for the first nine months, a 12.3 percent decline from $276.2 million for the same period a year earlier. This decline primarily reflected a shortfall in the first quarter of 2003. Net sales in the U.S. declined 3.7 percent for the nine-month period, to $2.0 billion. Assuming that EITF 02-16 was in effect during 2002, net sales would have decreased by $18.0 million, or approximately 1.0 percent, over the same period a year earlier.
Central Europe’s operating income of $2.0 million for the first nine months of 2003 compared favorably with a loss of $2.4 million a year earlier. Volume declined 5.1 percent compared to the same nine-month period in 2002, with the greatest decline in the first quarter of 2003. Operating income benefited from a $4.4 million foreign exchange benefit and $3.8 million in cost improvements, which offset the volume declines.
The Caribbean improved its year-over-year performance in the first nine months, reporting an operating loss of $2.0 million for 2003, compared to a loss of $4.3 million for the same period in 2002. Net sales increased 3.9 percent to $136.0 million for the year-to-date, reflecting volume growth of 5.1 percent compared to this period.
“The year has unfolded as we expected and as we have discussed,” stated Mr. Pohlad. “This includes progressively improving quarterly performance, with the most significant improvement occurring in the second half of the year. The key drivers of this year’s results should provide an even greater benefit to PepsiAmericas in the fourth quarter, as we continue the disciplined implementation of our operating plans and compare 2003 results with a soft fourth quarter in 2002.”
The company confirms its EPS outlook for the full year 2003. As previously disclosed, excluding unusual items and the benefit of approximately six cents per share from share repurchase in 2003, PepsiAmericas expects to achieve EPS growth at the low end of the range of 9 to 11 percent. On a comparable 52 week basis, the company expects to achieve GAAP EPS growth in the range of 18 to 20 percent. This growth rate compares to 2002 diluted reported and adjusted EPS of $0.89 from continuing operations. On a full-year basis, PepsiAmericas now expects U.S. price increases in the range of 3 to 4 percent, offsetting worldwide volume declines in the low single digits. In 2003, PepsiAmericas full year includes 53 weeks. However, the company’s outlook and comments are based on 52 weeks for comparative purposes.
PepsiAmericas will hold its third quarter earnings conference call at 9:00 AM CST today, Wednesday, October 22, 2003 by telephone and through a live webcast over the internet. To listen via telephone to the conference call within the U.S., please dial 877-888-4034 and request the PepsiAmericas conference call. The live webcast will be available through the company’s website at www.pepsiamericas.com. A playback of the conference call will be available until October 29, 2003. To listen to the archived call within the U.S., please dial 888-203-1112 and enter the replay passcode 651160. A replay of the webcast will archived and available online through the Investor Relations section of www.pepsiamericas.com.
PepsiAmericas is the second largest Pepsi bottler with operations in 18 states, Central Europe including Poland, Hungary, the Czech Republic and Republic of Slovakia, as well as Puerto Rico, Jamaica, the Bahamas, Barbados, Trinidad and Tobago. In total, PepsiAmericas serves geographic areas with a population of more than 117 million people. PepsiAmericas manufactures, distributes and markets a broad portfolio of Pepsi-Cola, and other national and regional brands. PepsiCo, Inc. (NYSE:PEP) holds a 39.7 percent equity interest in PepsiAmericas.
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 offerings; weather conditions; cost and availability of raw materials; and changing legislation. 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 28, 2002.