PepsiAmericas Reports Second Quarter 2008 Results

Minneapolis, Jul. 22 - PepsiAmericas, Inc. today reported net income of $90.8 million in the second quarter of 2008, with revenue up 12 percent including acquisitions. Diluted earnings per share (EPS) was $0.72 in the second quarter of 2008. These results compare to second quarter reported net income in 2007 of $78 million, or EPS of $0.61. 2007 results increased by a $0.01 per share for non-comparable items as reconciled in footnote 1.

Chairman and Chief Executive Officer Robert C. Pohlad said: “PepsiAmericas continues to execute its long-term strategy, which drove strong results for the quarter and helped deliver a good first half of the year.

“Central and Eastern Europe – led by Poland, Romania and Ukraine – continues to fuel this growth. In the U.S., pricing and productivity gains helped to offset our volume performance. I'm pleased with the way we continue to manage our U.S. business.

“We are raising our earnings guidance for 2008; we now expect to deliver full year adjusted EPS of $1.92 to $1.96 – a growth range of 16 to 18 percent from continuing operations.”

Second Quarter Worldwide Financial Highlights

• Revenue increased 12 percent to $1.3 billion, reflecting 9 percentage points from acquisitions, strong pricing across all markets, and volume growth in Central and Eastern Europe (CEE).
• Volume grew 8.4 percent, with constant territory volume down 3.6 percent reflecting U.S. volume declines.
• Operating income increased 15 percent to $165.5 million, including 10 percentage points from acquisitions. Operating margins expanded as the company offset the worldwide cost of goods sold per unit increase of 5.7 percent with improved pricing and mix, and effectively managed its selling, delivery, and administrative expenses (SD&A).
• Foreign currency contributed 3 percentage points of growth to revenue, 2 percentage points to cost of goods sold and 4 percentage points to SD&A. The net effect was an 8 percentage point benefit to operating income. The results also included a benefit from a reduction in the company’s effective tax rate which reflects the growth in its CEE business.
• The company returned $40.9 million to shareholders during the quarter through share repurchases and dividends.

Second Quarter U.S. Operations Highlights

Net sales in the U.S. decreased 1 percent to $917.2 million in the second quarter resulting from volume declines of 5.4 percent. This volume performance reflected an estimated 1 percentage point decrease from the Easter holiday shift, 1 percentage point decline from continued softness in lower margin Aquafina take home packages, 1 percentage point decline from teas, and a 1 percentage point decrease from the foodservice channel, including full service vending. Single serve volume, down 2 percent, improved from the previous quarter due to innovation and marketplace execution.

Net pricing growth of 3.7 percent primarily reflected rate increases that covered higher cost of goods sold and included a 1 percentage point benefit from favorable mix. Domestic cost of goods sold per unit increased 3.4 percent, reflecting increased raw material costs and higher non-carbonated mix related costs. Gross profit decreased 1 percent in the quarter to $383.9 million.

Selling, delivery and administrative expenses decreased 1 percent to $271.2 million. Favorable compensation and benefit expenses and effective productivity management helped offset higher fuel costs in the quarter. Second quarter operating income was $112.6 million, compared to $113.8 million in the prior year quarter, which included special charges of $1.4 million.

Second Quarter International Operations Highlights

CEE volume grew 51.7 percent. Constant territory volume was up 1 percent led by double digit growth in Romania and modest growth in Poland, in line with expectations, partly offset by lower volume in Hungary. CEE’s net sales were $359 million in the second quarter, up 73 percent, with 50 percentage points of the increase attributed to acquisitions.

Average net pricing increased 19 percent, reflecting a mid-single digit pricing increase in local currency, with foreign currency benefits being offset, in part, by a 7 percentage point acquisition impact. Cost of goods sold per unit increased 29 percent with acquisitions adding 4 percentage points and reflecting high single digit local currency increases driven by mix and higher raw material costs. Gross profit grew 59 percent to $146.6 million for the quarter, with acquisitions driving 32 percentage points of the increase. Selling, delivery and administrative expenses of $94.9 million were up 52 percent, which included 23 percentage points from acquisitions. The remaining increase was driven mainly by foreign currency.

CEE’s operating income increased to $51.7 million, a $22.1 million improvement over the prior year driven by acquisitions and foreign currency benefits.

The Caribbean business reported a volume increase of 1.3 percent driven mainly by Puerto Rico. Net sales were $64.6 million, up 4 percent with a 3.7 percent improvement in pricing. While cost of goods sold per unit increased 3.8 percent, gross profit increased 1 percent to $16.3 million in the quarter. Caribbean selling, delivery and administrative costs decreased modestly, down 2 percent, resulting in operating income of $1.2 million a 50 percent improvement over the prior year.

Outlook

The company is raising its 2008 adjusted EPS guidance to a range of $1.92 to $1.96 from $1.77 to $1.83. Consistent with the company’s previous guidance, the EPS outlook includes an estimated $0.01 benefit related to the impact of the 53^rd week offset by a $0.01 reduction related to special charges. This raised outlook includes an estimated mid-single digit currency benefit to 2008 operating income, offset, in part, by reinvestments in our Central and Eastern European business.

Notes to condensed consolidated financial statements (unaudited):

1. Reconciliation of Non-GAAP disclosures: In response to the U.S. Securities and Exchange Commission's Final Rule, "Conditions for Use of Non-GAAP Financial Measures," included below is a reconciliation of certain non-GAAP financial measures compared to U.S. GAAP measures.

Non-GAAP Adjusted Comparisons: In order to provide a supplemental comparison of current period results of operations to prior periods, we have adjusted for and summarized the nature of certain transactions or events. These adjustments relate to operating income, income from continuing operations, net income and basic and diluted earnings per share. To calculate the adjusted comparisons, management has excluded special charges relating to various restructuring initiatives, gain on sale of non-core property and the impairment of marketable securities.

Management believes that the adjusted comparisons provide a supplemental view of operations that excludes items that are unusual, infrequent or unrelated to the ongoing core operations or involve special charges. Management believes these non-GAAP measures provide useful information to investors through the summarization of transactions impacting the current period results of operations that are not necessarily indicative of our future results, nor comparable with prior period results. These non-GAAP adjusted comparison measures are provided as supplemental information and should not be considered in lieu of the GAAP measures. There are limitations in the use of adjusted comparisons due to the subjective nature of items excluded by management in calculating adjusted comparisons.

These supplemental comparisons are consistent with the manner in which management internally reviews results of operations and evaluates performance in that management reviews the results of operations on both a GAAP basis and using adjusted comparisons. Management does not use the adjusted comparisons in lieu of the comparable GAAP measures, but rather uses the adjusted comparisons to supplement its review of operations.

We have provided the tables below that summarizes these adjustments that impact comparability of the periods presented: