Dr Pepper Snapple Group, Inc. Reports Improved Fourth Quarter Earnings

Dr Pepper Snapple Group, Inc. 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 percent 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 percent reflecting sales volume growth, positive pricing and deferred revenue recognized under the PepsiCo, Inc. (PepsiCo) and The Coca-Cola Co. (Coca-Cola) licensing agreements. Reported segment operating profit (SOP) increased 3 percent 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 percent. Excluding the loss on the early retirements of a portion of the 6.82 percent 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 percent, 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 in a prepared statement, "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."

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

In CSDs, Dr Pepper volume increased 3 percent. "Core 4" brands – 7UP, Sunkist soda, A&W and Canada Dry – declined 1 percent. 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 percent on increased Dr Pepper availability and a return to restaurant traffic growth.

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

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

For the year, BCS volume increased 2 percent. CSD volume grew 2 percent and NCBs grew 3 percent. Dr Pepper volume increased 3 percent and our "Core 4" brands declined 1 percent. 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 percent on increased Dr Pepper availability. Hawaiian Punch volume grew 6 percent, Snapple grew 10 percent and Mott's grew 3 percent. By geography, U.S. and Canada volume increased 2 percent and Mexico and Caribbean volume also increased 2 percent.

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

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

Net sales for the quarter increased 14 percent reflecting flat volume, lapping 8 percent 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 percent reflecting net sales growth partially offset by increased marketplace investments.

Net sales for the quarter were up 1 percent. 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 percent 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.

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 Co. 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.

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