Dr Pepper Snapple Group Reports Fourth Quarter and Full Year 2010 Results

PLANO, Texas, Feb. 17, 2011 /PRNewswire/ -- Dr Pepper Snapple Group, Inc. (NYSE: DPS) reported fourth quarter 2010 diluted earnings of $0.49 per share compared to $0.44 per share in the prior year period. Excluding the loss on the early retirement of a portion of the 6.82% 2018 notes and certain tax-related items, diluted earnings per share were $0.67 compared to $0.44 in the prior year.

For the quarter, reported net sales increased 4% reflecting sales volume growth, positive pricing and deferred revenue recognized under the PepsiCo, Inc. (PepsiCo) and The Coca-Cola Company (Coca-Cola) licensing agreements. Reported segment operating profit (SOP) increased 3% reflecting net sales growth and supply chain productivity benefits partially offset by a $19 million increase in marketing, higher packaging, ingredient and transportation costs and higher LIFO-related inventory provisions. Reported income from operations for the quarter was $268 million compared to $251 million in the prior year period.

For the year, reported net sales increased 2%. Excluding the loss on the early retirements of a portion of the 6.82% 2018 notes and certain tax-related items in the current year and a net gain on certain distribution agreement changes and separation-related tax benefits in the prior year, the company earned $2.40 per diluted share, an increase of 22%, compared to $1.97 in the prior year. On a reported basis, diluted earnings per share were $2.17 in both the current and prior year.

DPS President and CEO Larry Young said, "As we look ahead, I'm encouraged by some of the improving trends we're seeing in consumer spending and in the economy generally and by the momentum of our brands and business. We accomplished a lot in 2010, from the opening of our regional center in Victorville, Calif., to the new licensing agreements with PepsiCo and Coca-Cola, to increased availability of our products in take-home, immediate consumption and fountain. With key foundational investments now behind us, we are focused on building our people capabilities and delivering even greater customer value through our developing Rapid Continuous Improvement initiative. This, combined with strong innovation, the national launch of Sun Drop and continued marketplace investments, gives me great confidence in our ability to grow and enhance the returns of this business in 2011 and beyond."

Net sales and SOP in the tables and commentary below are presented on a currency neutral basis.  For a reconciliation of non-GAAP to GAAP measures see pages A-5 and A-6 accompanying this release.

BCS Volume

For the quarter, BCS volume increased 1% with carbonated soft drinks (CSDs) growing 2% while non-carbonated beverages (NCBs) were flat.  

In CSDs, Dr Pepper volume increased 3%. "Core 4" brands – 7UP, Sunkist soda, A&W and Canada Dry – declined 1%. Crush grew double digits and Canada Dry grew high-single digits while A&W and 7UP declined low-single digits. Sunkist soda and Penafiel declined high-single digits. Fountain foodservice volume increased 7% on increased Dr Pepper availability and a return to restaurant traffic growth.

In NCBs, Hawaiian Punch volume grew 3% and Snapple grew 4%. Mott's declined 6% as it lapped 23% growth in the prior year.

By geography, U.S. and Canada volume increased 2% while volume declined 2% in Mexico and the Caribbean.

For the year, BCS volume increased 2%. CSD volume grew 2% and NCBs grew 3%. Dr Pepper volume increased 3% and our "Core 4" brands declined 1%. Crush and Canada Dry grew double digits. Sunkist soda declined high-single digits, 7UP declined mid-single digits and A&W declined low-single digits. Fountain foodservice volume increased 5% on increased Dr Pepper availability. Hawaiian Punch volume grew 6%, Snapple grew 10% and Mott's grew 3%. By geography, U.S. and Canada volume increased 2% and Mexico and Caribbean volume also increased 2%.  

Across all measured channels through December, as reported by The Nielsen Company, the company grew U.S. CSD dollar share by 0.4 percentage points and flavored CSD dollar share by 0.2 percentage points.

Sales volume

For the quarter, sales volume increased 1%. Branded sales volume grew 1% while contract manufacturing declined 7%. For the year, sales volume was flat. Branded sales volume grew 1% while contract manufacturing declined 23%, as the company continued to de-emphasize this business.

Beverage Concentrates

Net sales for the quarter increased 14% reflecting flat volume, lapping 8% volume growth in the prior year, concentrate pricing taken earlier in the year and favorable discount timing. Revenue recognized under the PepsiCo and Coca-Cola licensing agreements added 6 percentage points to net sales growth. SOP increased 9% reflecting net sales growth partially offset by increased marketplace investments.

Packaged Beverages

Net sales for the quarter were up 1%. Low-single digit volume growth in CSDs, mid-single digit growth in Snapple and double digit growth in Hawaiian Punch were partially offset by a mid-single digit decline in Mott's, a high-single digit decline in contract manufacturing and the continued impact of negative product mix. SOP decreased 6% as net sales growth and ongoing supply chain productivity benefits were more than offset by higher packaging, ingredient and transportation costs and a $9 million increase in LIFO-related inventory provisions.

Latin America Beverages

Net sales for the quarter increased 1% reflecting 2% volume growth. SOP declined 31% as net sales growth was more than offset by higher packaging, ingredient and transportation costs, higher marketing investments and increased costs related to company-owned route expansion and IT infrastructure upgrades.

Corporate and other items

For the quarter, corporate costs totaled $67 million including an $8 million gain on the termination of coverage in certain U.S. post-retirement medical plans, a $3 million gain on unrealized commodity-related mark-to-market partially offset by $3 million of fees related to the Coca-Cola licensing agreements. Corporate costs in 2009 were $76 million, including $6 million of unrealized commodity-related mark-to-market gains.

For the year, unrealized commodity-related mark-to-market gains were $1 million versus $18 million in the prior year. Productivity office investments recorded in the segments, as well as corporate, were $30 million versus $29 million in the prior year.  

Net interest expense decreased $51 million during the quarter reflecting lower net debt and lower interest rates and the absence of $30 million of deferred financing fees expensed in the prior year.

In December 2010, the company repurchased $476 million principal amount of its 6.82% 2018 notes. As a result, it recorded a $100 million loss on extinguishment of debt including a tender offer premium of $96 million.

For the quarter, the effective tax rate was 24.8%. Excluding the loss related to the 2018 notes tender offer, non-taxable separation-related items recorded as other income and indemnified by Kraft and certain deferred tax adjustments, the effective tax rate was 35.6%. For the year, the effective tax rate was 35.8%.

Cash flow

For the year, the company generated $2.5 billion of cash from operating activities including one-time proceeds of $900 million from PepsiCo and $715 million from Coca-Cola. Capital spending totaled $246 million. The company repaid $881 million of its debt obligations and returned $1.3 billion to shareholders in the form of stock repurchases ($1.1 billion) and dividends ($194 million).

2011 full year guidance

The company expects full year reported net sales to increase 3% to 5% 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 6% and 7%, on a constant volume/mix basis.

The company expects its tax rate to be approximately 35%, including an $18 million benefit related to the PepsiCo and Coca-Cola transactions.  

Having completed key foundational investments, the company now expects capital spending to be approximately 4.5% of net sales.

Impact of the PepsiCo licensing agreements

On Feb. 26, 2010, the company completed its licensing agreements with PepsiCo. Under these agreements, PepsiCo began distributing Dr Pepper, Crush and Schweppes in the U.S. territories where these brands were previously distributed by The Pepsi Bottling Group, Inc. (PBG) and PepsiAmericas, Inc. (PAS). The same applies to Dr Pepper, Crush, Schweppes, Vernors and Sussex in Canada, and Squirt and Canada Dry in Mexico. These agreements have an initial term of 20 years, with 20-year renewal periods, and require PepsiCo to meet certain performance conditions.

Additionally, effective April 19, 2010, in certain U.S. territories where it has a manufacturing and distribution footprint, the company began selling certain owned and licensed brands, including Sunkist soda, Squirt, Vernors and Hawaiian Punch, that were previously distributed by PBG and PAS.

The one-time cash payment of $900 million, received Feb. 26, 2010, was recorded as deferred revenue and is being recognized as net sales over 25 years. The company recognized $9 million of revenue in the fourth quarter and $30 million for the year.

Impact of the Coca-Cola Company licensing agreements

On Oct. 4, 2010, the company completed its licensing agreements with Coca-Cola. Under the new agreements, KO 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. KO will distribute Canada Dry, C'Plus and Schweppes 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 Jan. 7, 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 on Oct. 4, 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 fourth quarter and year.

Definitions

Bottler case sales (BCS) volume: Sales of finished beverages, in equivalent 288 fluid ounce cases, sold by the company and its bottling partners to retailers and independent distributors and excludes contract manufacturing volume. Volume for products sold by the company and its bottling partners is reported on a monthly basis, with the fourth quarter comprising October, November and December.

Sales volume: Sales of concentrates and finished beverages, in equivalent 288 fluid ounce cases, shipped by the company to its bottlers, retailers and independent distributors and includes contract manufacturing volume.

Pricing refers to the impact of list price changes.

Forward-looking statements

This release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, in particular, statements about future events, future financial performance including earnings estimates, plans, strategies, expectations, prospects, competitive environment, regulation, and cost and availability of raw materials. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words "may," "will," "expect," "anticipate," "believe," "estimate," "plan," "intend" or the negative of these terms or similar expressions. These forward-looking statements have been based on our current views with respect to future events and financial performance. Our actual financial performance could differ materially from those projected in the forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections, and our financial performance may be better or worse than anticipated. Given these uncertainties, you should not put undue reliance on any forward-looking statements. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010, and our other filings with the Securities and Exchange Commission. Forward-looking statements represent our estimates and assumptions only as of the date that they were made. We do not undertake any duty to update the forward-looking statements, and the estimates and assumptions associated with them, after the date of this release, except to the extent required by applicable securities laws.

Conference Call

At 10 a.m. (CST) today, the company will host a conference call with investors to discuss fourth quarter and full year 2010 results and the outlook for 2011. The conference call and slide presentation will be accessible live through DPS's website at http://www.drpeppersnapple.com and will be archived for replay for a period of 14 days.

In discussing financial results and guidance, the company may refer to certain non-GAAP measures. Reconciliations of any such non-GAAP measures to the most directly comparable financial measures in accordance with GAAP can be found on page A-5 and A-6 accompanying this release and under "Financial Press Releases" on the company's website at http://www.drpeppersnapple.com in the "Investors" section.

About Dr Pepper Snapple Group

Dr Pepper Snapple Group, Inc. (NYSE: DPS) is the leading producer of flavored beverages in North America and the Caribbean. Our success is fueled by more than 50 brands that are synonymous with refreshment, fun and flavor. We have 6 of the top 10 non-cola soft drinks, and 9 of our 12 leading brands are No. 1 in their flavor categories. In addition to our flagship Dr Pepper and Snapple brands, our portfolio includes Sunkist soda, 7UP, A&W, Canada Dry, Crush, Mott's, Squirt, Hawaiian Punch, Penafiel, Clamato, Schweppes, Venom Energy, Rose's and Mr & Mrs T mixers. To learn more about our iconic brands and Plano, Texas-based company, please visit www.drpeppersnapple.com.

SOURCE Dr Pepper Snapple Group, Inc.