Dr Pepper Snapple Group Reports Third Quarter 2008 Results

14/11/08 Dr Pepper Snapple Group, Inc. 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.

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, 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 interes