Dr Pepper Snapple Group Reports Q2 2014 Results

dr-pepper-snapple-groupPLANO, Texas — Dr Pepper Snapple Group, Inc. (NYSE: DPS) reported second quarter 2014 EPS of $1.06 compared to $0.76 in the prior year period. Core EPS were $1.06, up 26%, compared to $0.84 in the prior year. Year-to-date, the company reported earnings of $1.84 per diluted share compared to $1.27 per share in the prior year period. Core EPS were $1.80, up 31%, compared to $1.37 in the prior year period.

For the quarter, reported net sales increased 1% as a sales volume increase, favorable product and package mix and pricing were partially offset by higher discounts and 1 percentage point of unfavorable foreign currency. Reported segment operating profit (SOP) increased 13%, or $47 million, due to higher net sales, favorable cost of goods trends, planned lower marketing investments of $18 million and ongoing productivity improvements.

Reported income from operations for the quarter was $348 million. Reported income from operations was $285 million in the prior year period, including $7 million of unrealized commodity mark-to-market losses. Core income from operations was $348 million, up 18% compared to the prior year period.

Year-to-date, reported net sales increased 1% and reported income from operations was $608 million, including $12 million of unrealized commodity mark-to-market gains. Reported income from operations was $482 million in the prior year period, including $14 million of unrealized commodity mark-to-market losses. Core income from operations was $596 million, up 19% compared to the prior year period.

DPS President and CEO Larry Young said, “As I look back on the first half of the year, there’s no question that we’ve posted strong results in a tough environment. Our teams remained focused on executing our strategy, and we’ve made good progress against our key priorities. We’re gaining distribution and availability across our key brands and packages while increasing our presence in single-serve and building our brands with innovative and targeted marketing programs.”

Young continued, “Rapid Continuous Improvement (RCI) continues to drive meaningful results, and I applaud our employees for their enthusiasm, engagement and results. I’m confident our teams will continue to execute against our plans and that we will deliver on our increased commitments for the year.”

EPS reconciliationSecond QuarterYear-to-Date
20142013PercentChange20142013PercentChange
Reported EPS$1.06$0.7639$1.84$1.2745
Unrealized commodity mark-to-market
net loss/(gain)
0.02(0.04)0.04
Items affecting comparability
– Separation related
0.060.06
———————–————
Core EPS$1.06$0.8426$1.80$1.3731

EPS – earnings per share

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 through A-10 accompanying this release.

Summary of 2014 results(Percent change)As ReportedCurrency Neutral
Second
Quarter
YTDSecond
Quarter
YTD
BCS Volume11
Sales Volume1111
Net Sales1122
SOP13131315

BCS – bottler case sales

BCS Volume

For the quarter, BCS volume increased 1% with carbonated soft drinks (CSDs) increasing 2% and non-carbonated beverages (NCBs) declining 4%.

In CSDs, Dr Pepper volume decreased 1%. Our Core 4 brands increased 2% driven primarily by a high-single-digit increase in Canada Dry, which was partially offset by a low-single-digit decrease in A&W. Sunkist soda and 7UP were flat in the period. Both Peñafiel and Schweppes grew double digits. Fountain foodservice volume grew 2% in the period.

In NCBs, Hawaiian Punch volume declined 12%. Snapple declined 3%, primarily driven by our de-emphasis on our value products. Snapple Premium increased low-single-digits, and Mott’s was flat in the period.

By geography, U.S. and Canada volume was flat, and Mexico and the Caribbean volume increased 6%.

Sales Volume

For the quarter and year-to-date, sales volume increased 1%.

2014 Segment results (Percent Change)As Reported
Second QuarterYear-to-Date
Sales
Volume
Net
Sales
SOPSales
Volume
Net
Sales
SOP
Beverage Concentrates(3)4128
Packaged Beverages112219
Latin America Beverages6183351532
Total11131113
2014 Segment results (Percent Change)Currency Neutral
Second QuarterYear-to-Date
Sales
Volume
Net
Sales
SOPSales
Volume
Net
Sales
SOP
Beverage Concentrates(2)5129
Packaged Beverages112219
Latin America Beverages6244152148
Total12131215

Beverage Concentrates

Net sales for the quarter decreased 2% as concentrate price increases taken earlier in the year were more than offset by higher discounts. SOP increased 5% as lower sales were more than offset by planned lower marketing investments of $17 million.

Packaged Beverages

Net sales for the quarter increased 1% on favorable product mix and an increase in contract volume, which was partially offset by declines in branded volumes. SOP increased 22% on favorable cost of goods trends and ongoing productivity improvements.

Latin America Beverages

Net sales for the quarter increased 24% reflecting higher retail pricing associated with the pass-through of the sugar tax in Mexico, favorable mix and a 6% volume increase driven primarily by innovation on Peñafiel. SOP increased 41% as net sales growth, favorable commodity costs and ongoing productivity improvements were partially offset by increases in certain operating expenses and transportation costs.

Corporate and Other Items

For the quarter, corporate costs totaled $70 million. Corporate costs in the prior year period were $81 million, including a $7 million unrealized commodity mark-to-market loss and a $2 million charge for the accelerated recognition of certain pension costs.

Net interest expense declined $3 million compared to the prior year period.

For the quarter, the reported effective tax rate was 35.1%. The effective tax rate in the prior year period was 48.0%, including the impact of a non-cash Canadian tax law change that increased our effective tax rate by 12.3%.

Cash Flow

Year-to-date, the company generated $438 million of cash from operating activities compared to $295 million in the prior year. Capital spending totaled $71 million compared to $80 million in the prior year period. The company returned $363 million to shareholders in the form of stock repurchases ($206 million) and dividends ($157 million).

2014 Full-Year Guidance

The company continues to expect full-year reported net sales to be flat to up 1%. The company is raising its guidance and now expects Core EPS to be in the $3.43 to $3.51 range.

Packaging and ingredient costs, including LIFO impacts, are expected to decrease COGS by 2% on a constant volume/mix basis.

The company expects its core tax rate to be approximately 35.5%.

The company continues to expect capital spending to be approximately 3% of net sales.

The company expects to repurchase $375 million to $400 million of its common stock.

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 second quarter comprising April, May and June.

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.

Unrealized mark-to-market: We recognize the change in the fair value of open commodity derivative positions between periods in corporate unallocated expenses, as these instruments do not qualify for hedge accounting treatment. As the underlying commodity is delivered, the realized gains and losses are subsequently reflected in the segment results.

EPS represents diluted earnings per share.

Core tax rate is defined as the effective tax rate on Core Earnings.

Core income from operations is defined as income from operations adjusted for the unrealized mark-to-market impact of commodity derivatives and certain items that are excluded for comparison to prior year periods.

Core operating margin is defined as the core income from operations divided by core net sales.

Core Earnings is defined as net income adjusted for the unrealized mark-to-market impact of commodity derivatives and certain items that are excluded for comparison to prior year periods.

Core EPS represents Core Earnings per share.

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, 2013, 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. (CDT) today, the company will host a conference call with investors to discuss second quarter results and the outlook for 2014. 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 pages A-5 through A-10 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 (NYSE: DPS) is a 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 13 of our 14 leading brands are No. 1 or No. 2 in their flavor categories. In addition to our flagship Dr Pepper and Snapple brands, our portfolio includes 7UP, A&W, Canada Dry, Clamato, Crush, Hawaiian Punch, Mott’s, Mr & Mrs T mixers, Peñafiel, Rose’s, Schweppes, Squirt and Sunkist soda. To learn more about our iconic brands and Plano, Texas-based company, please visit www.DrPepperSnapple.com. For our latest news and updates, follow us atwww.Facebook.com/DrPepperSnapple or www.Twitter.com/DrPepperSnapple.

DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Six Months Ended June 30, 2014 and 2013
(Unaudited, in millions, except per share data)
For theFor the
Three Months EndedSix Months Ended
June 30,June 30,
2014201320142013
Net sales$1,631$1,611$3,029$2,991
Cost of sales6656761,2191,266
Gross profit9669351,8101,725
Selling, general and administrative expenses5926191,1461,182
Depreciation and amortization29295858
Other operating (income) expense, net(3)2(2)3
Income from operations348285608482
Interest expense27315365
Interest income(1)(1)(1)
Other income, net(1)(41)(2)(44)
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries322296558462
Provision for income taxes113142194202
Income before equity in earnings of unconsolidated subsidiaries209154364260
Equity in earnings of unconsolidated subsidiaries, net of tax1111
Net income$210$155$365$261
Earnings per common share:
Basic$1.07$0.76$1.85$1.28
Diluted1.060.761.841.27
Weighted average common shares outstanding:
Basic196.6204.1197.3204.4
Diluted197.8205.5198.6206.0
Cash dividends declared per common share$0.41$0.38$0.82$0.76
A- 1
DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 2014 and December 31, 2013
(Unaudited, in millions, except share and per share data)
June 30,December 31,
20142013
Assets
Current assets:
Cash and cash equivalents$135$153
Accounts receivable:
Trade, net589564
Other5358
Inventories213200
Deferred tax assets6566
Prepaid expenses and other current assets13478
Total current assets1,1891,119
Property, plant and equipment, net1,1221,173
Investments in unconsolidated subsidiaries1515
Goodwill2,9882,988
Other intangible assets, net2,6932,694
Other non-current assets137127
Non-current deferred tax assets8285
Total assets$8,226$8,201
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$313$271
Deferred revenue6565
Short-term borrowings and current portion of long-term obligations7266
Income taxes payable5433
Other current liabilities559595
Total current liabilities1,0631,030
Long-term obligations2,5372,508
Non-current deferred tax liabilities776755
Non-current deferred revenue1,2861,318
Other non-current liabilities295313
Total liabilities5,9575,924
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value, 15,000,000 shares authorized, no shares issued
Common stock, $0.01 par value, 800,000,000 shares authorized, 195,528,740 and 197,979,971 shares issued and outstanding for 2014 and 2013, respectively22
Additional paid-in capital808970
Prepaid forward repurchase of common stock(50)
Retained earnings1,5941,393
Accumulated other comprehensive loss(85)(88)
Total stockholders’ equity2,2692,277
Total liabilities and stockholders’ equity$8,226$8,201
A- 2
DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2014 and 2013
(Unaudited, in millions)
For the
Six Months Ended
June 30,
20142013
Operating activities:
Net income$365$261
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense9997
Amortization expense1818
Amortization of deferred revenue(32)(32)
Employee stock-based compensation expense2219
Deferred income taxes2262
Other, net(23)16
Changes in assets and liabilities, net of effects of acquisition:
Trade accounts receivable(25)(73)
Other accounts receivable5(6)
Inventories(13)(25)
Other current and non-current assets(53)(17)
Other current and non-current liabilities(24)(77)
Trade accounts payable4832
Income taxes payable2920
Net cash provided by operating activities438295
Investing activities:
Acquisition of business(10)
Purchase of property, plant and equipment(71)(80)
Purchase of intangible assets(1)(5)
Proceeds from disposals of property, plant and equipment71
Other, net(3)
Net cash used in investing activities(68)(94)
Financing activities:
Repayment of senior unsecured notes(250)
Net issuance of commercial paper568
Repurchase of shares of common stock(206)(126)
Cash paid for shares not yet received(50)
Dividends paid(157)(148)
Tax withholdings related to net share settlements of certain stock awards(16)(12)
Proceeds from stock options exercised2812
Excess tax benefit on stock-based compensation86
Other, net(1)
Net cash used in financing activities(388)(451)
Cash and cash equivalents — net change from:
Operating, investing and financing activities(18)(250)
Effect of exchange rate changes on cash and cash equivalents(3)
Cash and cash equivalents at beginning of year153366
Cash and cash equivalents at end of period$135$113
A- 3
DR PEPPER SNAPPLE GROUP, INC.
OPERATIONS BY OPERATING SEGMENT
For the Three and Six Months Ended June 30, 2014 and 2013
(Unaudited, in millions)
For the Three Months Ended
June 30,
For the Six Months Ended
June 30,
2014201320142013
Segment Results – Net sales
Beverage Concentrates$327$336$608$599
Packaged Beverages1,1541,1482,1602,166
Latin America Beverages150127261226
Net sales$1,631$1,611$3,029$2,991
For the Three Months Ended
June 30,
For the Six Months Ended
June 30,
2014201320142013
Segment Results – SOP
Beverage Concentrates$214$205$388$359
Packaged Beverages177145308259
Latin America Beverages24183728
Total SOP415368733646
Unallocated corporate costs7081127161
Other operating expense, net(3)2(2)3
Income from operations348285608482
Interest expense, net27305264
Other income, net (1) (41)(2)(44)
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries$322$296$558$462
A- 4

DR PEPPER SNAPPLE GROUP, INC.
RECONCILIATION OF GAAP AND NON-GAAP INFORMATION
(Unaudited)

The company reports its financial results in accordance with U.S. GAAP. However, management believes that certain non-GAAP measures, that reflect the way management evaluates the business, may provide investors with additional information regarding the company’s results, trends and ongoing performance on a comparable basis. Specifically, investors should consider the following with respect to our quarterly results:

Net sales and Segment Operating Profit, as adjusted to currency neutral: Net sales and Segment Operating Profit are on a currency neutral basis.

Free Cash Flow: Free cash flow is defined as net cash provided by operating activities adjusted for capital spending and certain items excluded for comparison to prior year periods. For the six months ended June 30, 2014 and 2013, there were no certain items excluded for comparison to prior year periods.

Core Earnings: Core Earnings is defined as net income adjusted for the unrealized mark-to-market impact of commodity derivatives and certain items that are excluded for comparison to prior year periods. For the three and six months ended June 30, 2014, there were no certain items excluded for comparison to prior year periods. The certain items excluded for the three and six months ended June 30, 2013, are separation-related charges, primarily a separation-related foreign deferred tax charge and the associated impact under the Tax Indemnity Agreement with Mondelēz.

The tables on the following pages provide these reconciliations.

A- 5

 
RECONCILIATION OF NET SALES AND SOP
AS REPORTED TO AS ADJUSTED TO CURRENCY NEUTRAL
(Unaudited)
For the Three Months Ended June 30, 2014
BeveragePackagedLatinAmerica
Percent changeConcentratesBeveragesBeveragesTotal
Reported net sales(3)%1%18%1%
Impact of foreign currency1%%6%1%
Net sales, as adjusted to currency neutral(2)%1%24%2%
For the Three Months Ended June 30, 2014
BeveragePackagedLatinAmerica
Percent changeConcentratesBeveragesBeveragesTotal
Reported SOP4%22%33%13%
Impact of foreign currency1%%8%%
SOP, as adjusted to currency neutral5%22%41%13%
For the Six Months Ended June 30, 2014
BeveragePackagedLatinAmerica
Percent changeConcentratesBeveragesBeveragesTotal
Reported net sales2%%15%1%
Impact of foreign currency%%6%1%
Net sales, as adjusted to currency neutral2%%21%2%
For the Six Months Ended June 30, 2014
BeveragePackagedLatinAmerica
Percent changeConcentratesBeveragesBeveragesTotal
Reported SOP8%19%32%13%
Impact of foreign currency1%%16%2%
SOP, as adjusted to currency neutral9%19%48%15%
RECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES TO FREE CASH FLOW
(Unaudited, in millions)
For the
Six Months Ended
June 30,
20142013Change
Net cash provided by operating activities$438$295$143
Purchase of property, plant and equipment(71)(80)
Free Cash Flow$367$215$152
A- 6
RECONCILIATION OF NET INCOME TO CORE EARNINGS
(Unaudited, in millions, except per share data)
For the Three Months Ended June 30, 2014
ReportedMark to MarketCore
Net sales$1,631$$1,631
Cost of sales665(1)664
Gross profit9661967
Selling, general and administrative expenses5921593
Depreciation and amortization2929
Other operating (income) expense, net(3)(3)
Income from operations348348
Interest expense2727
Interest income
Other income, net(1)(1)
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries322322
Provision for income taxes113113
Income before equity in earnings of unconsolidated subsidiaries209209
Equity in earnings of unconsolidated subsidiaries, net of tax11
Net income$210$$210
Earnings per common share:
Diluted$1.06$$1.06
Effective tax rate35.1%35.1%
Operating margin21.3%21.3%
A- 7
RECONCILIATION OF NET INCOME TO CORE EARNINGS – (Continued)
(Unaudited, in millions, except per share data)
For the Three Months Ended June 30, 2013
ReportedMark to
Market
Separation
Related
Total
Adjustments
Core
Net sales$1,611$$$$1,611
Cost of sales676(5)(5)671
Gross profit93555940
Selling, general and administrative expenses619(2)(4)(6)613
Depreciation and amortization2929
Other operating (income) expense, net22
Income from operations2857411296
Interest expense3131
Interest income(1)(1)
Other income, net(41)3838(3)
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries2967(34)(27)269
Provision for income taxes1422(46)(44)98
Income before equity in earnings of unconsolidated subsidiaries15451217171
Equity in earnings of unconsolidated subsidiaries, net of tax11
Net income$155$5$12$17$172
Earnings per common share:
Diluted$0.76$0.02$0.06$0.08$0.84
Effective tax rate48.0%36.4%
Operating margin17.7%18.4%
A- 8
RECONCILIATION OF NET INCOME TO CORE EARNINGS – (Continued)
(Unaudited, in millions, except per share data)
For the Six Months Ended June 30, 2014
ReportedMark to MarketCore
Net sales$3,029$$3,029
Cost of sales1,219111,230
Gross profit1,810(11)1,799
Selling, general and administrative expenses1,14611,147
Depreciation and amortization5858
Other operating (income) expense, net(2)(2)
Income from operations608(12)596
Interest expense5353
Interest income(1)(1)
Other income, net(2)(2)
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries558(12)546
Provision for income taxes194(4)190
Income before equity in earnings of unconsolidated subsidiaries364(8)356
Equity in earnings of unconsolidated subsidiaries, net of tax11
Net income$365$(8)$357
Earnings per common share:
Diluted$1.84$(0.04)$1.80
Effective tax rate34.8%34.8%
Operating margin20.1%19.7%
A- 9
RECONCILIATION OF NET INCOME TO CORE EARNINGS – (Continued)
(Unaudited, in millions, except per share data)
For the Six Months Ended June 30, 2013
ReportedMark to
Market
Separation
Related
Total
Adjustments
Core
Net sales$2,991$$$$2,991
Cost of sales1,266(11)(11)1,255
Gross profit1,72511111,736
Selling, general and administrative expenses1,182(3)(4)(7)1,175
Depreciation and amortization5858
Other operating (income) expense, net33
Income from operations48214418500
Interest expense6565
Interest income(1)(1)
Other income, net(44)3838(6)
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries46214(34)(20)442
Provision for income taxes2025(46)(41)161
Income before equity in earnings of unconsolidated subsidiaries26091221281
Equity in earnings of unconsolidated subsidiaries, net of tax11
Net income$261$9$12$21$282
Earnings per common share:
Diluted$1.27$0.04$0.06$0.10$1.37
Effective tax rate43.7%36.4%
Operating margin16.1%16.7%
A- 10