Dr Pepper Misses EPS, Revs In Line

Zacks

Dr Pepper Snapple Group Inc. (DPS) reported first quarter adjusted earnings (excluding mark-to-market gains) of 46 cents per share, down 8% from the year-ago earnings of 50 cents per share. Top-line growth was offset by margin declines to cause the earnings downfall. The company’s quarterly earnings also missed the Zacks Consensus Estimate of 48 cents per share.

During the quarter, Dr Pepper's net sales grew 2% (3% excluding impact of foreign exchange) year over year to $1.36 billion. A benefit of 4% from price/mix was offset by a decline of 1% in volumes in the quarter. Net sales were in line with the Zacks Consensus Estimate of $1.36 billion.

Quarter in Detail

Dr Pepper Snapple Group Inc. manufactures and distributes a varied product range of flavored carbonated soft drinks (CSDs) and non-carbonated beverages (NCBs). Dr Pepper owns some well-established CSD brands such as Dr Pepper soft drink, 7UP, Canada Dry, Schweppes ginger ale, Peñafiel mineral water, Royal Crown Cola and many more. Popular NCB brands include Snapple tea, Hawaiin Punch, Mott’s apple juice and sauce, Aquafiel mineral water, Clamato tomato juice and others.

Dr Pepper’s sales volume is measured in two ways: 1) sales volume and 2) bottler case sales (BCS) volume. Sales volume represents units of concentrates and finished beverages sold to bottlers, retailers and distributors and bottler case sales includes sales of packaged beverages by the company and its bottlers to retailers and independent distributors.

In the quarter, BCS volume was flat, which included a 2% growth in CSD’s and a 7% decline in NCBs. In CSD, Dr Pepper soft drink was up 2%. Volume growth for Canada Dry, A&W Sunkist soda and 7UP was offset by declines for Sun Drop and Crush.

Among the NCBs, growth in Snapple and Clamato was offset by volume declines for Hawaiian Punch and Mott’s.

Sales volume, as discussed before was down 1% in the quarter.

The company reported consolidated adjusted operating income of $186 million in the first quarter, down 7% over the prior-year period as revenue growth was offset by higher input and marketing costs. Reported operating income (including mark to market gains) was down 4% over the prior year quarter.

Segment Details

Beverage Concentrates: The division is engaged in the manufacturing and selling of beverage concentrates in the US and Canada which is used primarily to produce CSDs. Dr Pepper's net sales from Beverage Concentrates were flat year over year to $254 million in the first quarter, as 4% benefit from increased pricing was offset by volume declines (3%) and higher discounts. Segment operating profit was down 10% to $140 million due to increased marketing and ingredient costs.

Packaged Beverages: The division manufactures and distributes finished packaged beverages (both CSDs and NCBs) and other products, including own brands, third party brands and private label beverages in the US and Canada. In the Packaged Beverages segment, net sales increased by 3% to $1.02 billion, attributable to price increases and favorable mix. The segment witnessed a volume gain of 1%. Segment operating profit increased 3% to $111 million as revenue growth was offset by commodity headwinds.

Latin America Beverages: The division includes manufacturing and distribution of carbonated mineral water, flavored CSD, bottled water and vegetable juice in Mexico and the Caribbean. Dr Pepper's net sales from Latin America Beverages increased 6% to $91 million, mainly stemming from sales volume growth of 4% and favorable product mix. Segment operating profit surged 60% to $8 million primarily benefiting from sales growth, better operating leverage and foreign exchange tailwinds which made up for the higher packaging and ingredient costs.

We would like to remind investors that the company’s revenues and operating profits were down sequentially for almost all segments.

Balance Sheet and Cash Flow

Dr Pepper ended the first quarter with cash and cash equivalents of $192 million and long-term debt of $2.25 billion compared with a cash balance of $701 million and long-term debt of $2.26 billion at the end of the fourth quarter of 2011.

In the quarter, the company bought back $85 million worth of shares, paid $68 million in the form of dividends and made capital expenditures of $51 million.

Outlook

Dr Pepper maintained its full-year 2012 earnings and sales guidance provided at the fourth quarter conference call. Full-year 2012 adjusted earnings is expected to be in the range of $2.90 to $2.98 per share benefiting from share repurchases.

The company expects its full-year sales growth rate to come in at the lower end of its long-term forecast of 3% to 5%. The company projects cost of goods sold to increase by 2%–3% due to higher packaging and ingredient costs.

Full-year tax rate is expected to be about 37%. For 2012, the company expects capital expenditure to be nearly 4.0% of net sales.

Our Recommendation

We currently have a Neutral recommendation on Dr Pepper Snapple. The stock carries a Zacks #3 Rank in the near term (Hold rating).

Overall, we are encouraged by Dr Pepper’s strong position in the flavored CSD market. Moreover, the company’s Rapid Continuous Improvement (RCI) program is also resulting in cost savings and improved cash flows. The company’s priority brand licensing agreements with PepsiCo, Inc. (PEP) and The Coca Cola Company (KO) boost sales of the branded products forming part of the agreement.

However, the weak volumes, lack of exposure outside the US, a difficult macroeconomic environment and rising input costs keep us on the sidelines.

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