Dr Pepper Snapple Group, Inc. Reports 5 Percent Net Sales Gain In Third Quarter

Dr Pepper Snapple Group, Inc. reported third quarter 2011 diluted earnings of $0.71 per share compared to $0.60 per share in the prior year period. Year-to-date, the company reported earnings of $1.97 per diluted share compared to $1.68 per share in the prior year period. Excluding a separation-related foreign deferred tax charge, diluted earnings per share in the prior year-to-date period were $1.73.

For the quarter, reported net sales increased 5 percent. Price/mix added approximately 3 percentage points to net sales growth while revenue recognized under The Coca-Cola Co. (Coca-Cola) licensing agreements and the favorable impact of repatriated brands added approximately 1 percentage point. Reported segment operating profit (SOP) increased 8 percent as net sales growth, the absence of strike-related costs from the prior year and supply chain productivity and other benefits from rapid continuous improvement more than offset higher packaging and ingredient costs. Foreign currency added 1 percentage point each to net sales and SOP growth. Reported income from operations for the quarter was $261 million, including $11 million of unrealized mark-to-market losses on commodity hedging. Reported income from operations was $260 million in the prior year period, including $4 million of unrealized mark-to-market gains.

Year-to-date, reported net sales increased 5 percent and reported income from operations was $753 million compared to $757 million in the prior year period. Net income was $440 million compared to $416 million in the prior year period.

DPS President and CEO Larry Young said in a prepared statement, "As we continue to operate in challenging times, I remain pleased with the performance of our portfolio. Our teams are committed to executing our focused strategy with the goal of providing value to our customers while managing price, mix and productivity to offset higher input costs. The national launch of Dr Pepper TEN is bringing excitement and energy to the Dr Pepper trademark, and we are continuing to build per capita consumption with new fountain availabilities and cold drink placements. Our rapid continuous improvement efforts are gaining traction across the organization, and we're beginning to experience meaningful results."

For the quarter, BCS volume declined 1 percent with carbonated soft drinks (CSDs) flat to prior year and non-carbonated beverages (NCBs) down 5 percent.

In CSDs, Sun Drop added 2 million cases, Canada Dry volume grew double digits and Squirt grew low-single digits. Dr Pepper volume was flat. Crush and Sunkist soda declined double digits while 7UP and A&W grew low-single digits. Fountain foodservice volume grew 4 percent.

In NCBs, Clamato volume grew double-digits and Snapple grew 2 percent. Both Hawaiian Punch and Mott's volume declined as net pricing increased, driving sales dollar increases for both brands. Aguafiel also declined double-digits.

By geography, U.S. and Canada CSD volume was flat while NCB volume declined 5 percent. In Mexico and the Caribbean, CSD volume grew 4 percent while NCB volume declined 6 percent.

Year-to-date through September and across all measured channels, as reported by The Nielsen Co., U.S. CSD dollar share declined 0.2 percentage points.

Sales volume

For the quarter, sales volume increased 1 percent with branded sales volume flat and contract manufacturing up double-digits.

Beverage concentrates net sales for the quarter increased 5 percent reflecting low-single digit price increases and revenue recognized under the Coca-Cola licensing agreements, partially offset by the impact of repatriated brands. SOP increased 7 percent reflecting net sales growth and lower marketing investments.

Packaged beverages net sales for the quarter were up 4 percent reflecting price increases and 1 percentage point of growth from brands repatriated under the Coca-Cola licensing agreements. SOP increased 4 percent reflecting net sales growth, the absence of $15 million of strike-related costs from the prior year and ongoing supply chain productivity benefits. This was partially offset by higher packaging and ingredient costs.

The company continues to expect full year reported net sales to increase 3 percent to 5 percent and diluted earnings per share to be in the $2.70 to $2.78 range.

Packaging and ingredient costs are expected to increase COGS between 7 percent and 9 percent on a constant volume/mix basis. Additionally, the company expects transportation costs to increase selling, general and administrative expenses by approximately $35 million.

The tax rate is expected to be approximately 35 percent, including an $18 million benefit related to the PepsiCo and Coca-Cola transactions.

The company now expects capital spending to be approximately 4 percent of net sales.

Impact of the Coca-Cola Co. licensing agreements

In October 2010, the company completed its licensing agreements with Coca-Cola. Under the new agreements, Coca-Cola began distributing Dr Pepper in the U.S. and Canada Dry in the Northeast U.S. where they were previously distributed by Coca-Cola Enterprises (CCE). These agreements have an initial term of 20 years, with 20-year renewal periods, and require Coca-Cola to meet certain performance conditions. Coca-Cola will distribute Canada Dry, and C'Plus in Canada, will offer Dr Pepper and Diet Dr Pepper in local fountain accounts previously serviced by CCE and will include Dr Pepper and Diet Dr Pepper on its Freestyle fountain dispenser.

Additionally, effective January 2011, in certain U.S. territories where it has a manufacturing and distribution footprint, the company began selling Squirt, Canada Dry, Schweppes and Cactus Cooler, which were previously sold by CCE.

The one-time cash payment of $715 million was received in October 2010, was recorded as deferred revenue and is being recognized as net sales over 25 years. The company recognized $7 million of revenue in the third quarter of 2011.