Business News
Dr Pepper Snapple Group Reports Fourth Quarter 2008 Results
Thursday 26. March 2009 - Fourth quarter earnings per share excluding certain items were $0.39. Reported loss of $2.44 per share reflects non-cash impairment charges, previously announced restructuring plans and separation related costs.
Full year 2008, the company generated $709 million of cash from operating activities and repaid $395 million of debt since spin-off.
2009 earnings per share excluding certain items are expected to be $1.59 to $1.67. 2009 Reported EPS is expected to be $1.71 to $1.79.
Dr Pepper Snapple Group, Inc. (NYSE:DPS) reported a fourth quarter 2008 loss of $2.44 per share compared to earnings of $0.54 per share in the prior year period. Due to the recent deterioration in macroeconomic and market conditions, the company recorded a non-cash, after-tax impairment charge of $696 million or $2.74 per share in the quarter related to goodwill and certain intangible assets. Excluding this charge and certain other items, the company earned $0.39 per share compared to $0.48 per share in the prior year period.
For the fourth quarter, net sales declined 1% and the loss from operations totaled $836 million compared to income of $273 million in the prior year period. Excluding the impact of glaceau and Hansen U.S. product distribution losses, net sales increased 3% reflecting a 1% increase in sales volume and the ongoing benefit of pricing actions taken earlier in the year. Segment operating profit increased 4% reflecting continuing strength in the company’s carbonated soft drinks (CSD) business.
For the year, the company reported a loss of $1.23 per share compared to earnings of $1.96 per share in the prior year period. Excluding certain items, the company earned $1.85 per share compared to $1.98 per share in the prior year period. The company generated $709 million of cash from operating activities. Since its separation from Cadbury in May 2008, the company has repaid $395 million of principal of its floating rate term loan, covering both its 2008 and 2009 obligations.
DPS President and CEO Larry Young said, “With the U.S. economy facing its worst recession in postwar times and rising unemployment rates, consumers have dramatically changed the way they shop. Value, quality, product satisfaction and increased at-home usage are key factors in purchasing decisions. With our portfolio of leading flavored CSDs and value-priced juices, we continue to offer consumers affordable treats every day. For the quarter, our CSD case volume contracted only slightly at a time when liquid refreshment beverages declined low single-digits. Weak demand for our premium products, especially Snapple, continued during the fourth quarter and in to 2009.
“While we have certainly increased our focus on cost containment, we remain committed to our long-term strategy and continue to invest behind growth initiatives. Stepped up marketing spend and increased media leverage ensure we are reaching more consumers every day.
“In our first year as a public company, and in what is arguably one of the toughest economic environments on record, we are proud of what we have accomplished so far.” Young added, “Our CSD and value juice momentum continues and, together with expanded distribution of Crush, we’re off to a solid start in 2009. The strength of our brands, the passion of our people and strong relationships with our retail partners and bottlers, along with the realization of a strengthened company owned route-to-market, provide the fuel that will support our growth plans for many years to come.”
Earnings per share Fourth Quarter Full Year
reconciliation
2008 2007 % 2008 2007 %
Reported
(loss)/earnings per
share ($2.44) $0.54 NM ($1.23) $1.96 NM
Items affecting
comparability
– Impairment of
goodwill and
intangible assets 2.74 0.01 2.74 0.01
– Gain on glaceau
termination – (0.17) – (0.17)
– Restructuring costs 0.06 0.10 0.14 0.18
– Transaction and
separation costs 0.01 – 0.08 –
– Bridge loan fees and
expenses – – 0.06 –
– Separation related
tax items 0.02 – 0.06 –
—- —— —— —- —— ——
EPS excluding
certain
items $0.39 $0.48 (19) $1.85 $1.98 (7)
Volume (BCS), sales volume, net sales and segment operating profit, as adjusted, in the table and commentary below are net of intersegment eliminations and foreign currency and exclude the impact of glaceau and Hansen U.S. distribution losses and the acquisition of SeaBev. For a reconciliation of non-GAAP to GAAP measures see pages A-5 to A-7 accompanying this release.
Summary of 2008
results % Growth vs 2007 as reported % Growth vs 2007 as adjusted
Fourth Quarter Full Year Fourth Quarter Full Year
Volume (BCS) (2) (2) (1) (1)
Net sales ($)
————-
Beverage
Concentrates 5 1 9 1
Finished
Goods (5) 4 (4) 4
Bottling
Group (2) (1) 7 5
Mexico and the
Caribbean (2) 2 (15) 1
— —
Total net sales (1) 0 3 4
Segment Operating
Profit 4 0
(Loss) / Income from
Operations NM NM
BCS – bottler case sales
Volume (BCS)
For the quarter, volume declined 1%. CSDs declined less than 1% and non-carbonated beverages (NCBs) decreased 2%.
In CSDs, Dr Pepper volume was up 0.5%. “Core 4” brands — 7UP, Sunkist, A&W and Canada Dry – were flat driven primarily by Canada Dry which was up 4% as Green Tea Ginger Ale continued to gain momentum. 7UP volume was down 4% in line with trends seen in the third quarter. In Mexico, Penafiel declined high single-digits reflecting substantially weaker economic conditions.
In NCBs, Hawaiian Punch volume increased 19% on second half promotional activities and favorable comparisons in the prior year period. Pressure on the company’s premium products continued with Snapple volume down 17%. Mott’s juices and sauces declined 9% on mid-single-digit price increases taken at the beginning of October 2008. In Mexico, Aguafiel declined 15% on single-digit price increases taken earlier in the year.
By geography, U.S. and Canada volume declined less than 1%, and in Mexico and the Caribbean, volume declined 2%.
For the year, CSD volume declined 1% and NCBs were flat. Dr Pepper volume declined less than 1% and Core 4 brands declined 2%. Hawaiian Punch and Mott’s volume grew 9% and 2%, respectively, and was offset by Snapple declines of 7% and Aguafiel declines of 17%. By geography, U.S. and Canada volume declined 1%, and in Mexico and the Caribbean, volume declined 4%.
Sales volume
For the quarter, sales volume increased 1% on higher than expected concentrate sales to third-party bottlers reflecting inventory build ahead of the January 1, 2009 concentrate price increase as well as expanded distribution of Crush. For the year, sales volume decreased slightly.
Net sales
Net sales for the quarter increased 3% reflecting sales volume growth and the ongoing benefits of price increases taken earlier in the year. Beverage concentrates net sales increased 9% reflecting the higher than expected concentrate sales to third-party bottlers and lower discounts to customers. Weaker premium beverage trends impacted Finished Goods with price/mix decreasing low single digits. Bottling Group continued to benefit from high single-digit price increases taken earlier in the year as well as favorable mix.
The impact of foreign currency reduced total company net sales growth by 2 percentage points for the quarter and had no net impact on full year growth. The impact of foreign currency reduced Mexico and Caribbean net sales growth by 14 percentage points for the quarter and 1 percentage point for the full year.
Across all measured channels, as reported by The Nielsen Company, the company grew U.S. CSD dollar share 0.3 percentage points for the quarter and 0.2 percentage points for the full year.
Segment operating profit
For the quarter, segment operating profit increased 4% reflecting net sales growth and savings from the 2007 restructuring program offset by high single-digit COGS per case increases and the impact of foreign currency, which reduced segment operating profit growth by 2 percentage points.
Higher than expected concentrate sales to third-party bottlers, ahead of the January price increase and Crush inventory build, as well as lower than expected fuel costs contributed $12 million to operating profit growth for the quarter.
For the year, segment operating profit was flat. Net sales growth and savings from the 2007 restructuring program were offset by high single-digit COGS per case increases and higher fountain/foodservice discounts, transportation and labor costs. Foreign currency had no net impact on the full year segment operating profit growth.
Corporate and other items
For the quarter, restructuring costs were $26 million. This amount included $16 million of additional pension expenses related to a previously announced restructuring action.
Unallocated general and administrative costs were $15 million reflecting steady state stand-alone costs.
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” and due to deteriorating macroeconomic and market conditions in the fourth quarter, the carrying values of both the Bottling Group’s goodwill and distribution rights and the Snapple brand intangible were reduced to their fair values. The non-cash, after-tax impairment charge was $696 million.
Net interest expense increased $24 million to $56 million reflecting the absence of related party interest income in light of the company’s new capital structure as a stand-alone company.
The effective tax rate was 29.5%. This included a tax benefit of $343 million related to impairment, a tax expense of $12 million related to certain tax items indemnified by Cadbury and a $5 million tax expense for additional items related to separation. Excluding these items, the tax rate for the quarter was 45.5%. Higher than expected deferred tax expense items and unfavorable territory mix adversely impacted the tax rate for the quarter by $9 million.
For the year, the effective tax rate was 16.3% which included $343 million related to impairment, $19 million related to Cadbury indemnified items and $16 million related to separation.
Cash flow
For the year, the company generated $709 million of cash from operating activities. Capital spending totaled $304 million. The company repaid $395 million of principal of its floating rate term loan, covering both its 2008 and 2009 obligations.
2009 full-year guidance
The company expects full year 2009 net sales to decline 2% to 4%. Excluding the impact of the loss of Hansen product distribution and on a currency neutral basis the company expects comparable net sales to grow 2% to 4%.
The company will record a net one-time pre-tax gain of $51 million, or $0.12 per share, in the first quarter of 2009 related to the Hansen contract termination in the U.S. and Mexico. Excluding this item, the company expects earnings per share of approximately $1.59 to $1.67.
The full year tax rate is expected to be approximately 39% to 40% which includes approximately $16 million of charges related to items that are indemnified by Cadbury.
Unfavorable comparisons to prior year are expected to be more pronounced in the first half reflecting the impact of our stand-alone financial structure as well as a shift in marketing expenses to coincide with the timing of innovation and increased consumer communications. Additionally, the Easter holiday falls in the second quarter in 2009 versus the first quarter in 2008.
The company expects to make cash contributions of $43 million to its pension and post-retirement benefit plans in 2009.
Capital spending is expected to be approximately 5% of net sales.
The company remains committed to using its free cash flow to pay down debt and expects to reduce its debt obligations by at least $400 million, prepaying all of 2010 and part of 2011 principal.
Segment reporting changes
Effective with its first quarter 2009 results, the company will begin reporting three operating segments:
— Beverage Concentrates;
— Packaged Beverages; and,
— Latin America Beverages.
In aligning its reporting structure, the company is changing the following:
1. The former Bottling Group and Finished Goods segments will be combined
to form the Packaged Beverages segment, which will be tasked with
strengthening and growing the company’s Direct-Store-Delivery (DSD) and
Warehouse Delivery systems;
2. Concentrate sales and profit related to intercompany transactions with
Packaged Beverages will be eliminated at the Beverage Concentrates
segment level. Packaged Beverages will record concentrate at cost;
3. Trade, marketing and general and administrative costs will be allocated
to each segment to the extent they are directly related to that
segment. As a result, certain shared costs, that were previously
allocated, will now be reported in the corporate line.
In addition, the financial metric measuring the segment’s operating results will be redefined from Underlying Operating Profit (UOP) to the Segment Operating Profit (SOP) level.
These changes are designed to provide greater clarity and transparency into the economic drivers of each business, ensure resources are allocated for maximum return and drive efficiency through simplification and reduction of non value-added intercompany transactions.
To assist investors, the company expects to provide unaudited supplemental information presenting historical results under the new segment reporting format by the end of April 2009.
Restatement of net sales and cost of sales intercompany eliminations
The company identified certain intercompany transactions that should have been eliminated in consolidation. The correction equally reduces net sales and cost of sales in the 2008 and prior year periods and has no impact on gross profit, income from operations, net income, cash flows or balance sheet. For full year 2008, net sales and cost of sales were each reduced by $50 million. For fourth quarter 2007, net sales and cost of sales were each reduced by $13 million, and for full year 2007, each were reduced by $53 million.