Raw material costs hit PBG quarterly profits

Related tags Soft drink Coca-cola

Rising raw material price rises have contributed to a significant
dip in first quarter profits for the Pepsi Bottling Group.

Net income for the first quarter 2005 was $39 million, compared to 2004's first quarter income of $50 million. This is the first time that quarterly profit has fallen in almost two years.

Chief executive officer John Cahill said in December that $100 million in added costs for plastic resin, aluminium and sweeteners would cut profit in 2005. Price increases the past two years by Pepsi Bottling and Coca-Cola bottlers have reduced consumer demand for soft drinks and spurred sales of store brands of sodas.

The root of problem for many soft drink packaging firms has been the ever-increasing cost of raw materials. The cost of natural gas and petroleum, the starting point for the production of many types of packaging resins, has increased consistently over the past 12 months.

Oil-based resin used in plastic packaging has increased in price by seven per cent over the past six months, suggesting that the price increase trend is far from abating.

As a result, PBG's physical case volume in the US declined one per cent in the first quarter on a constant territory basis. (Constant territory calculations assume all significant acquisitions made in 2004 were made at the beginning of 2004 and exclude all significant acquisitions made in 2005.) Cold drink volume grew one per cent, but the take-home business was down one per cent.

Cahill was nonetheless keen to point out the positive points. "Our European businesses delivered solid revenue and volume results in the first quarter - which comprises only the months of January and February for our Europe and Mexico territories - with Turkey and Russia leading the way,"​ he said.

"In Turkey, we were able to capture our share of the overall category growth while, in Russia, our non-carbonated products fuelled the volume increase."

The company's reported net revenue per case growth in the US was four per cent in the first quarter. Rate increases contributed about two-thirds of this growth while mix added one-third. PBG also generated solid net revenue per case growth in Canada, where the company's pricing actions have held in the marketplace.

The Pepsi Bottling Group​ is the world's largest manufacturer, seller and distributor of Pepsi-Cola beverages with operations in the US, Canada, Greece, Mexico, Russia, Spain and Turkey.

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