Dr Pepper Snapple Group, Inc. Reports 7 Percent Net Sales Gain In First Quarter

Dr Pepper Snapple Group, Inc. reported first quarter 2011 diluted earnings of $0.50 per share compared to $0.35 per share in the prior year period. Excluding a separation-related foreign deferred tax charge, diluted earnings per share in the prior year period were $0.40.

For the quarter, reported net sales increased 7 percent, reflecting solid volume growth and low-single digit price increases. Revenue recognized under the PepsiCo, Inc. (PepsiCo) and The Coca-Cola Co. (Coca-Cola) licensing agreements and the favorable impact of repatriated brands added 3 percentage points to net sales growth. Reported segment operating profit (SOP) increased 1 percent reflecting net sales growth and ongoing supply chain productivity benefits partially offset by higher packaging, ingredient and transportation costs and a $14 million increase in marketing. Foreign currency added one percentage point to net sales and SOP growth. Reported income from operations for the quarter was $202 million compared to $187 million in the prior year period.

DPS President and CEO Larry Young said in a prepared statement, "We're off to a solid start in 2011. The foundational investments we've made to strengthen this business are paying off. Through rapid continuous improvement, or RCI, we're finding even more opportunities to free up resources to support growth. For the period, we increased distribution and availability, introduced exciting new products and expanded Sun Drop nationally. Despite a significant escalation in commodity and fuel costs, we continue to manage this business for the long term, balancing brand growth with pricing, mix and productivity. With solid plans in place and with continued wins in RCI, I am confident we'll deliver our commitments for the year."

For the quarter, BCS volume increased 1 percent with carbonated soft drinks (CSDs) and non-carbonated beverages (NCBs) both growing 1 percent.

In CSDs, Dr Pepper volume increased 1 percent. Canada Dry volume grew double digits and Sun Drop doubled, adding 3 million cases, following its national launch. 7UP declined mid-single digits. Crush declined high-single digits, cycling 22 percent growth in the prior year period. A&W declined mid-single digits and Sunkist soda declined double digits. Fountain foodservice volume grew 7 percent on increased Dr Pepper availability.

In NCBs, Hawaiian Punch volume grew 7 percent and Snapple grew 10 percent. Mott's volume declined 8 percent, cycling 14 percent growth in the prior year period.

By geography, U.S. and Canada volume was flat while volume grew 5 percent in Mexico and the Caribbean.

Year-to-date through March and across all measured channels, as reported by The Nielsen Company, U.S. CSD dollar share declined 0.1 percentage points.

Sales volume

For the quarter, sales volume increased 2 percent. Branded sales volume grew 2 percent and contract manufacturing increased 12 percent to support inventory build for a customer.

Net sales for the quarter increased 6 percent reflecting 2 percent comparable volume growth and a low-single digit concentrate price increase partially offset by unfavorable discount timing. Revenue recognized under the PepsiCo and Coca-Cola licensing agreements added 5 percentage points to net sales growth while the impact of repatriated brands reduced net sales growth by 3 percentage points. SOP increased 5 percent reflecting net sales growth partially offset by higher marketing investments.

Net sales for the quarter were up 6 percent reflecting volume growth and low-single digit price increases. Brands repatriated under the PepsiCo and Coca-Cola licensing agreements added 3 percentage points to net sales growth. SOP decreased 6 percent as net sales growth and ongoing supply chain productivity benefits were more than offset by higher packaging, ingredient and transportation costs and higher marketing investments.

For the quarter, corporate costs totaled $67 million, including higher industry association fees and stock-based compensation costs. Corporate costs in the prior year period were $77 million including $8 million of transaction costs related to the PepsiCo licensing agreements.

For the quarter, unrealized commodity-related mark-to-market gains were $2 million versus a $1 million loss in the prior year. Productivity office investments recorded in the segments, as well as corporate, were $4 million versus $9 million in the prior year.

Net interest expense decreased $7 million compared to the prior year reflecting lower interest rates.

For the quarter, the effective tax rate was 36.0 percent including a $3 million benefit related to the PepsiCo and Coca-Cola transactions.

For the quarter, the company generated $51 million of cash from operating activities. Capital spending totaled $54 million. The company returned $156 million to shareholders in the form of stock repurchases ($100 million) and dividends ($56 million).

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 now 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.

Finally, the company expects capital spending to be approximately 4.5 percent of net sales.

In February 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 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 in February 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 first quarter of 2011, an increase of $6 million compared to the prior year period.

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, 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 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 first quarter of 2011.

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 first quarter comprising January, February and March.

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.

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