Business News

Dr Pepper Snapple Group Reports Third Quarter 2008 Results

Thursday 13. November 2008 - Net sales declined 2% reflecting the absence of glaceau; excluding this item, net sales up 5%; Carbonated beverage volume up 0.5%; non-carbonated volume, excluding impact of glaceau, up 3%; Earnings per share were $0.41, or $0.45 excluding certain items; Strong cash generation; $295 million of debt repayment since spin-off; Reduced 2008 outlook reflects deteriorating economic conditions in U.S. and Mexico, the impact of a strengthening U.S. dollar and loss of Hansen Natural product distribution

Dr Pepper Snapple Group, Inc. (NYSE:DPS) reported third quarter 2008 earnings of $0.41 per share compared to $0.61 per share in the prior year period. The results reflect the company’s first full quarter as a stand-alone business following its separation from Cadbury plc on May 7, 2008. Excluding restructuring costs in both years and transaction and separation related costs in the current year, the company earned $0.45 per share compared to $0.63 per share in the prior year period. Excluding the impact from the loss of glaceau product distribution, net sales increased 5% on the strength of 1% volume growth and the ongoing benefit of pricing actions taken earlier in the year. Segment operating profit declined 17%, primarily reflecting unfavorable comparisons of fountain/foodservice and other beverage concentrates discounts, the absence of glaceau product distribution and higher transportation costs. Income from operations declined 26%.

Year-to-date, the company earned $1.21 per share compared to $1.42 per share in the prior year period. Excluding restructuring and separation related items, the company earned $1.46 per share compared to $1.50 per share in the prior year period. The company generated $523 million of cash from operating activities and since its separation from Cadbury in May, 2008, it has repaid $295 million of its floating rate term loan obligations.

DPS President and CEO Larry Young said, “Without a doubt, this is one of the toughest environments the beverage industry has faced in many years. With disposable incomes falling, consumers are thinking harder about what they buy. Despite these headwinds, we demonstrated during the quarter that our portfolio of flavored beverages has room to grow and that our business continues to generate strong cash flow. While CSD volume was up 0.5%, demand for our premium-priced products slowed significantly resulting in performance that was below our expectations.

“In these uncertain times, we remain committed to our long-term goals — leverage our strong portfolio of flavor brands, strengthen our route-to-market, rally around our customers and consumers and deliver results that outperform the industry. We continue to invest with an eye to the future and our recent organizational changes will ensure that we are better able to leverage our third-party and company-owned distribution models to drive process simplification, speed of decision making and total system profitability.”

Summary of 2008 results % Growth vs 2007 % Growth vs 2007
Third Quarter Year to Date
————- ————–
Volume (BCS) (1) (3)
Net sales ($)
Beverage Concentrates (3) (2)
Finished Goods 4 7
Bottling Group (5) (2)
Mexico and the Caribbean 7 7
— —
Net sales as reported (2) 1
Segment Operating Profit (17) (6)
Reported EPS (32) (14)
EPS excluding certain items (29) (3)

BCS – bottler case sales



Earnings per share Third Quarter Year to Date
reconciliation 2008 2007 % 2008 2007 %
——————- ———————
Reported EPS $0.41 $0.61 (32) $1.21 $1.42 (14)

Items affecting
comparability
– Restructuring costs 0.02 0.03 0.07 0.09
– Transaction and
separation costs 0.02 — 0.07 —
– Bridge loan fees and
expenses — — 0.06 —
– Separation related tax
items — — 0.04 —
—– —– —– —– —– —–
EPS excluding certain
items $0.45 $0.63* (29) $1.46* $1.50* (3)

* Does not sum due to rounding


Volume (BCS)


Volume declined 1%. Excluding the impact of glaceau, volume grew 1% as carbonated soft drinks (CSDs) increased 0.5% and non-carbonated beverages (NCBs) increased 3%.

In CSDs, Dr Pepper volume was up slightly. “Core 4” brands — 7UP, Sunkist, A&W and Canada Dry — increased 1.5% driven primarily by Canada Dry which was up 8% as Green Tea Ginger Ale continued to gain momentum. 7UP volume was down 3% but showed improvement in its trend. In Mexico, Penafiel declined mid single-digits reflecting necessary pricing actions taken earlier in the year.

In NCBs, Hawaiian Punch volume increased 24% on second half promotional activities and favorable comparisons to the prior year period. A slowdown in consumer spending and increased price competition in the tea and enhanced water categories impacted performance of the company’s premium-priced products with results that were below expectations. Snapple, including antioxidant waters, declined 7%. Issues with apple and lemon supplies, resulting from extensive crop damage, limited sales of Mott’s sauce and Realemon/Realime. In Mexico, Aguafiel declined 20% reflecting high single-digit price increases and a more competitive environment.

In North America, excluding the impact of glaceau, volume increased 2% and in Mexico and the Caribbean, volume declined 4%.

Sales Volume

Sales volume declined 1%. Excluding the impact of glaceau, sales volume increased 1% in line with BCS trends.

Net sales

Net sales declined 2%. Excluding the impact of glaceau, net sales increased 5% driven by volume growth of 1% and mid single-digit price increases taken earlier in the year, partially offset by unfavorable comparisons of fountain/foodservice and other beverage concentrates discounts which were $19 million higher. Beverage concentrates price/mix decreased low single-digits. Finished goods price/mix decreased mid single-digits on higher sales of Hawaiian Punch and lower than expected performance of the company’s premium-priced products. Bottling Group price/mix increased mid single-digits and Mexico and the Caribbean price/mix increased low double-digits.

Across all measured channels, as reported by ACNielsen, the company continues to lead the U.S. CSD category in dollar share growth with its share up 0.3 percentage points year-to-date.

Segment operating profit, corporate and other

Gross profit decreased 4% reflecting net sales declines and higher commodity costs. Cost of sales (COGS) per case increased 1%. The loss of glaceau product distribution reduced gross profit growth by 3 percentage points and COGS per case growth by 9 percentage points.

Segment operating profit declined 17% primarily reflecting unfavorable comparisons of fountain/foodservice and other beverage concentrates discounts ($19 million), the absence of glaceau product distribution ($17 million) and higher transportation costs ($15 million).

Below-the-line, costs were broadly in line with expectations. Restructuring costs related to previously announced actions were $7 million for the quarter. Transaction and other one-time separation costs totaled $9 million. Stock-based compensation expenses were $3 million for the quarter versus an $8 million gain in the prior year quarter due to a decrease in the fair value of options under the Cadbury stock plan. Other expenses were $4 million in the current quarter versus a $6 million gain in related party items in the prior year period.

Net interest expense increased $12 million to $56 million reflecting the company’s new capital structure as a stand-alone company and the absence of related party interest income totaling $19 million.

The effective tax rate for the quarter was 35.8%, which included $5 million related to certain tax items that are indemnified by Cadbury, improved utilization of foreign and other tax credits and a favorable impact from territory mix. Year-to-date, the effective tax rate was 39.2%, which included $18 million of separation related and indemnified items.

Year-to-date, the company generated $523 million of cash from operating activities. Adjusted for certain items, cash provided by operating activities was $582 million up $218 million from the prior year on strong working capital performance. Since its separation from Cadbury in May 2008, the company has repaid $295 million of its floating rate term loan obligations.

2008 full-year guidance

Further reductions in consumer spending given a more challenging macro economic environment are impacting near- and medium-term forecast visibility. The company currently expects full year 2008 net sales growth of about 1% and earnings per share of approximately $1.54 to $1.57, or approximately $1.83 to $1.86 excluding certain items. This reflects deteriorating economic conditions in the U.S. and Mexico, the impact of a strengthening U.S. dollar and the loss of Hansen Natural product distribution.

The company continues to expect: restructuring costs of $0.10 per share; transaction and separation related costs of $0.08 per share; bridge loan fees and net interest in connection with the spin-off from Cadbury of $0.06 per share; and separation related tax items of $0.04 per share.

The company is negotiating its settlement with Hansen Natural under the provisions of the distribution agreement.

Despite a recent fall in commodity prices, the company still expects 2008 COGS inflation of approximately 6%, as lower commodity costs are being offset by higher concentrate component and other ingredient costs. Fuel is now expected to add approximately $35 million to distribution costs which are recorded in SG&A.

During the third quarter, the company entered into a series of interest rate swaps that effectively converted a substantial portion of its floating rate term loan to fixed rate through December 2009. The blended interest rate, including amortization of fees and expenses, for the fourth quarter is expected to be approximately 6.4%.

The earnings per share guidance assumes a full-year 2008 tax rate of approximately 39.4%, which reflects improved utilization of foreign and other tax credits and a favorable impact from territory mix. The tax rate includes approximately $13 million of charges related to certain tax items that are indemnified by Cadbury. A corresponding amount to reflect the indemnity is recorded as other income. In total, these two items have no impact on our total results. Additionally, the rate includes $11 million of items that were mainly identified on separation when the company established its stand-alone financial statements.

Capital spending is expected to be about 5% of net sales.

2009 items


The company expects to provide more details about 2009 on its fourth quarter earnings call.

Investors are reminded that 2009 will be the company’s first full year as a stand-alone business. In establishing stand-alone operations, the company expects to incur approximately $25 million of higher general and administrative expenses, including stock-based compensation costs. Additionally, the absence of significant related party receivables from Cadbury will result in approximately $25 million of lower interest income.

The company’s agreement with Hansen Natural ended November 10, 2008. Through this date, the company estimates its net sales and operating profit from distributing these products to be approximately $200 million and $40 million, respectively.

The blended interest rate for the company’s debt obligations, including amortization of fees and expenses, is expected to be approximately 6.6%.

Capital spending is expected to be about 5% of net sales.

The company remains committed to using free cash to pay down its floating rate term loan obligations ahead of schedule.