Dr Pepper Snapple Group Reports Third Quarter Results

dr-pepper-snapple-groupPLANO, Texas — Dr Pepper Snapple Group, Inc. (NYSE: DPS) reported third quarter 2014 EPS of $0.96 compared to $1.01 in the prior year period. Core EPS were $0.98, up 11%, compared to $0.88 in the prior year. Year-to-date, the company reported earnings of $2.79 per diluted share compared to $2.28 per share in the prior year period. Core EPS were $2.77, up 23%, compared to $2.25 in the prior year period.

For the quarter, reported net sales increased 3% driven by favorable segment mix, product and package mix and net pricing. Reported segment operating profit (SOP) increased 4%, or $15 million, on favorable commodity costs and ongoing productivity improvements that were partially offset by higher transportation and manufacturing costs. SOP was also negatively impacted by an unfavorable year-over-year LIFO comparison of $7 million and an unfavorable comparison to a $6 million adjustment to a legal provision in the prior year.

Reported income from operations for the quarter was $316 million, which includes a $2 million unrealized commodity mark-to-market loss. Reported income from operations was $300 million in the prior year period, which included a $1 million unrealized commodity mark-to-market gain. Core income from operations was $318 million, up 6% compared to the prior year period.

Year-to-date, reported net sales increased 2%, and reported income from operations was $924 million, including $10 million of unrealized commodity mark-to-market gains. Reported income from operations was $782 million in the prior year period, which included $13 million of unrealized commodity mark-to-market losses. Core income from operations was $914 million, up 14% compared to the prior year period.

DPS President and CEO Larry Young said, “Our teams posted yet another quarter of solid performance in what continues to be an extremely challenged environment. We remained focused on our strategy of building our brands with consumers and executing with excellence in the marketplace.”

Young continued, “Rapid Continuous Improvement (RCI) has become the foundation of our business, and it continues to yield improvements across the organization.”

EPS reconciliationThird QuarterYear-to-Date
20142013PercentChange20142013PercentChange
Reported EPS$0.96$1.01(5)$2.79$2.2822
Unrealized commodity mark-to-market
net loss/(gain)0.01(0.03)0.04
Items affecting comparability
– Separation related0.01(0.13)0.01(0.07)
– Litigation provision(0.02)(0.02)
– Workforce reduction costs0.020.02
———————–—–——
Core EPS$0.98$0.8811$2.77$2.2523
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
Third
Quarter
YTDThird
Quarter
YTD
BCS Volume11
Sales Volume11
Net Sales3232
SOP410511
BCS – bottler case sales

BCS Volume

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

In CSDs, Peñafiel volume increased 25% on product innovation. Our Core 4 brands increased 3% driven primarily by a high-single-digit increase in Canada Dry. Sunkist soda increased low-single-digits, while 7UP and A&W were both flat in the quarter. Schweppes increased 8% and Dr Pepper volume declined 2%, driven primarily by declines in our diet products. Fountain foodservice volume grew 1% for the quarter.

In NCBs, Clamato volume increased 7%, and our water category grew 3% for the quarter. Snapple grew 2% for the quarter, driven primarily by mid-single-digit growth in Snapple Premium, which was partially offset by our de-emphasis on our value products. Hawaiian Punch volume decreased 2% in the period, and Mott’s declined 1% on lower sauce volumes.

By geography, U.S. and Canada volume was flat, and Mexico and the Caribbean volume increased 10%.

Sales Volume

Sales volumes were flat for the quarter, and up 1% for the year-to-date.

2014 Segment results
(Percent Change)
As Reported
Third QuarterYear-to-Date
Sales
Volume
Net
Sales
SOPSales
Volume
Net
Sales
SOP
Beverage Concentrates(3)(1)15
Packaged Beverages227114
Latin America Beverages10192961731
Total341210
2014 Segment results
(Percent Change)
Currency Neutral
Third QuarterYear-to-Date
Sales
Volume
Net
Sales
SOPSales
Volume
Net
Sales
SOP
Beverage Concentrates(3)(1)16
Packaged Beverages2281115
Latin America Beverages10213862144
Total351211

Beverage Concentrates

Net sales for the quarter decreased 1% as concentrate price increases taken earlier in the year were more than offset by a 3% decline in concentrate shipments. SOP for the quarter was flat as the decline in net sales and increases in certain operating costs were offset by planned reductions in marketing investments of $2 million and favorable cost of goods trends.

Packaged Beverages

Net sales for the quarter increased 2% on higher sales volume. Favorable product and package mix was offset by increased promotional activity in the quarter. SOP increased 8% as a result of favorable cost of goods trends and ongoing productivity improvements, which were partially offset by an unfavorable comparison to a $6 million adjustment to a legal provision in the prior year and increased manufacturing and logistics costs in the current year.

Latin America Beverages

Net sales for the quarter increased 21% on a 10% increase in volume driven primarily by Peñafiel innovation, higher pricing associated with the pass-through of the sugar tax in Mexico and favorable mix. SOP increased 38% as net sales growth and ongoing productivity improvements were partially offset by increases in logistics and operating costs.

Corporate and Other Items

For the quarter, corporate costs totaled $76 million, which includes a $2 million unrealized commodity mark-to-market loss and higher incentive compensation costs. Corporate costs in the prior year period were $75 million, including a $1 million unrealized commodity mark-to-market gain and a $7 million restructuring charge.

Net interest expense declined $2 million compared to the prior year period.

For the quarter, the reported effective tax rate was 34.0%. The reported effective tax rate for the prior year period was 231.8% as the completion of an IRS audit increased our effective tax rate by 195.5%.

Cash Flow

Year-to-date, the company generated $769 million of cash from operating activities compared to $616 million in the prior year. Capital spending totaled $103 million compared to $111 million in the prior year period. The company returned $513 million to shareholders in the form of stock repurchases ($276 million) and dividends ($237 million).

2014 Full-Year Guidance

The company now expects full-year reported net sales to be up approximately 1% and expects core EPS to be in the $3.56 to $3.62 range.

Packaging and ingredient costs, including LIFO impacts, are now expected to decrease COGS by 2.5% on a constant volume/mix basis.

The company now expects its core tax rate to be approximately 35.0%.

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 third quarter comprising July, August and September.

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 financial measures are determined utilizing reported financial numbers adjusted for the unrealized mark-to-market impact of commodity derivatives and certain items that are excluded for comparison to prior year periods.

Core metrics are determined based on the core financial measures.

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 third 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 Nine Months Ended September 30, 2014 and 2013
(Unaudited, in millions, except per share data)
For theFor the
Three Months EndedNine Months Ended
September 30,September 30,
2014201320142013
Net sales$1,583$1,543$4,612$4,534
Cost of sales6586501,8771,916
Gross profit9258932,7352,618
Selling, general and administrative expenses5815631,7271,745
Depreciation and amortization28288686
Other operating (income) expense, net2(2)5
Income from operations316300924782
Interest expense27298094
Interest income(1)(1)
Other expense, net44282384
Income (loss) before provision (benefit) for income taxes and equity in earnings of unconsolidated subsidiaries285(157)843305
Provision (benefit) for income taxes97(364)291(162)
Income before equity in earnings of unconsolidated subsidiaries188207552467
Equity in earnings of unconsolidated subsidiaries, net of tax11
Net income$188$207$553$468
Earnings per common share:
Basic$0.97$1.02$2.81$2.29
Diluted0.961.012.792.28
Weighted average common shares outstanding:
Basic194.8203.3196.4204.0
Diluted196.2204.7197.8205.5
Cash dividends declared per common share$0.41$0.38$1.23$1.14
A-1
DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2014 and December 31, 2013
(Unaudited, in millions, except share and per share data)
September 30,December 31,
20142013
Assets
Current assets:
Cash and cash equivalents$266$153
Accounts receivable:
Trade, net546564
Other6358
Inventories191200
Deferred tax assets5766
Prepaid expenses and other current assets11878
Total current assets1,2411,119
Property, plant and equipment, net1,1081,173
Investments in unconsolidated subsidiaries1515
Goodwill2,9872,988
Other intangible assets, net2,6882,694
Other non-current assets145127
Non-current deferred tax assets7785
Total assets$8,261$8,201
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$319$271
Deferred revenue6465
Short-term borrowings and current portion of long-term obligations266
Income taxes payable2533
Other current liabilities614595
Total current liabilities1,0241,030
Long-term obligations2,5392,508
Non-current deferred tax liabilities784755
Non-current deferred revenue1,2681,318
Other non-current liabilities283313
Total liabilities5,8985,924
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, 194,473,910 and 197,979,971 shares issued and outstanding for 2014 and 2013, respectively22
Additional paid-in capital758970
Retained earnings1,7021,393
Accumulated other comprehensive loss(99)(88)
Total stockholders’ equity2,3632,277
Total liabilities and stockholders’ equity$8,261$8,201
A-2
DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2014 and 2013
(Unaudited, in millions)
For the
Nine Months Ended
September 30,
20142013
Operating activities:
Net income$553$468
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense148146
Amortization expense2628
Amortization of deferred revenue(48)(49)
Employee stock-based compensation expense3528
Deferred income taxes33147
Other, net(20)16
Changes in assets and liabilities, net of effects of acquisition:
Trade accounts receivable1521
Other accounts receivable(6)(6)
Inventories81
Other current and non-current assets(49)436
Other current and non-current liabilities24(601)
Trade accounts payable49(1)
Income taxes payable1(18)
Net cash provided by operating activities769616
Investing activities:
Acquisition of business(10)
Purchase of property, plant and equipment(103)(111)
Purchase of intangible assets(1)(5)
Proceeds from disposals of property, plant and equipment71
Other, net(3)(3)
Net cash used in investing activities(100)(128)
Financing activities:
Repayment of senior unsecured notes(250)
Repayment of commercial paper(65)
Repurchase of shares of common stock(276)(243)
Cash paid for shares not yet received(20)
Dividends paid(237)(225)
Tax withholdings related to net share settlements of certain stock awards(16)(13)
Proceeds from stock options exercised3213
Excess tax benefit on stock-based compensation96
Net cash used in financing activities(553)(732)
Cash and cash equivalents — net change from:
Operating, investing and financing activities116(244)
Effect of exchange rate changes on cash and cash equivalents(3)(3)
Cash and cash equivalents at beginning of year153366
Cash and cash equivalents at end of period$266$119
A-3
DR PEPPER SNAPPLE GROUP, INC.
OPERATIONS BY OPERATING SEGMENT
For the Three and Nine Months Ended September 30, 2014 and 2013
(Unaudited, in millions)
For the Three Months Ended
September 30,
For the Nine Months Ended
September 30,
2014201320142013
Segment Results – Net sales
Beverage Concentrates$306$309$914$908
Packaged Beverages1,1341,1143,2943,280
Latin America Beverages143120404346
Net sales$1,583$1,543$4,612$4,534
For the Three Months Ended
September 30,
For the Nine Months Ended
September 30,
2014201320142013
Segment Results – SOP
Beverage Concentrates$200$201$588$560
Packaged Beverages170159478418
Latin America Beverages22175945
Total SOP3923771,1251,023
Unallocated corporate costs7675203236
Other operating expense (income), net2(2)5
Income from operations316300924782
Interest expense, net27297993
Other expense, net44282384
Income (loss) before provision (benefit) for income taxes and equity in earnings of unconsolidated subsidiaries$285$(157)$843$305
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 nine months ended September 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. The certain item excluded for the three and nine months ended September 30, 2014, are separation-related charges. The certain items excluded for the three and nine months ended September 30, 2013 are (i) separation-related charges, primarily the completion of the IRS audit, a separation-related foreign deferred tax charge and the associated impacts under the Tax Indemnity Agreement with Mondelēz, (ii) adjustment to previously disclosed legal provision and (iii) restructuring charges.

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 September 30, 2014
BeveragePackagedLatinAmerica
Percent changeConcentratesBeveragesBeveragesTotal
Reported net sales(1)%2%19%3%
Impact of foreign currency%%2%%
Net sales, as adjusted to currency neutral(1)%2%21%3%
For the Three Months Ended September 30, 2014
BeveragePackagedLatinAmerica
Percent changeConcentratesBeveragesBeveragesTotal
Reported SOP%7%29%4%
Impact of foreign currency%1%9%1%
SOP, as adjusted to currency neutral%8%38%5%
For the Nine Months Ended September 30, 2014
BeveragePackagedLatinAmerica
Percent changeConcentratesBeveragesBeveragesTotal
Reported net sales1%%17%2%
Impact of foreign currency%1%4%%
Net sales, as adjusted to currency neutral1%1%21%2%
For the Nine Months Ended September 30, 2014
BeveragePackagedLatinAmerica
Percent changeConcentratesBeveragesBeveragesTotal
Reported SOP5%14%31%10%
Impact of foreign currency1%1%13%1%
SOP, as adjusted to currency neutral6%15%44%11%
RECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES TO FREE CASH FLOW
(Unaudited, in millions)
For the
Nine Months Ended
September 30,
20142013Change
Net cash provided by operating activities$769$616$153
Purchase of property, plant and equipment(103)(111)
Free Cash Flow$666$505$161
A-6
RECONCILIATION OF NET INCOME TO CORE EARNINGS
(Unaudited, in millions, except per share data)
For the Three Months Ended September 30, 2014
ReportedMark to
Market
Separation
Related
Total
Adjustments
Core
Net sales$1,583$$$$1,583
Cost of sales65844662
Gross profit925(4)(4)921
Selling, general and administrative expenses581(6)(6)575
Depreciation and amortization2828
Other operating (income) expense, net
Income from operations31622318
Interest expense2727
Interest income
Other expense, net4(4)(4)
Income (loss) before provision (benefit) for income taxes and equity in earnings of unconsolidated subsidiaries285246291
Provision (benefit) for income taxes97123100
Income before equity in earnings of unconsolidated subsidiaries188123191
Equity in earnings of unconsolidated subsidiaries, net of tax
Net income$188$1$2$3$191
Diluted earnings per common share$0.96$0.01$0.01$0.02$0.98
Effective tax rate34.0%34.4%
Operating margin20.0%20.1%
A-7
RECONCILIATION OF NET INCOME TO CORE EARNINGS – (Continued)
(Unaudited, in millions, except per share data)
For the Three Months Ended September 30, 2013
ReportedMark to
Market
Separation
Related
Litigation
Provision
Workforce
Reduction
Costs
Total
Adjustments
Core
Net sales$1,543$$$$$$1,543
Cost of sales650650
Gross profit893893
Selling, general and administrative expenses56316(7)563
Depreciation and amortization2828
Other operating (income) expense, net22
Income from operations300(1)(6)7300
Interest expense2929
Interest income
Other expense, net428(430)(430)(2)
Income (loss) before provision (benefit) for income taxes and equity in earnings of unconsolidated subsidiaries(157)(1)430(6)7430273
Provision (benefit) for income taxes(364)457(2)245793
Income before equity in earnings of unconsolidated subsidiaries207(1)(27)(4)5(27)180
Equity in earnings of unconsolidated subsidiaries, net of tax
Net income$207$(1)$(27)$(4)$5$(27)$180
Diluted earnings per common share$1.01$$(0.13)$(0.02)$0.02$(0.13)$0.88
Effective tax rate231.8%34.1%
Operating margin19.4%19.4%
A-8
RECONCILIATION OF NET INCOME TO CORE EARNINGS – (Continued)
(Unaudited, in millions, except per share data)
For the Nine Months Ended September 30, 2014
ReportedMark to
Market
Separation
Related
Total
Adjustments
Core
Net sales$4,612$$$$4,612
Cost of sales1,87715151,892
Gross profit2,735(15)(15)2,720
Selling, general and administrative expenses1,727(5)(5)1,722
Depreciation and amortization8686
Other operating (income) expense, net(2)(2)
Income from operations924(10)(10)914
Interest expense8080
Interest income(1)(1)
Other expense, net2(4)(4)(2)
Income (loss) before provision (benefit) for income taxes and equity in earnings of unconsolidated subsidiaries843(10)4(6)837
Provision (benefit) for income taxes291(3)2(1)290
Income before equity in earnings of unconsolidated subsidiaries552(7)2(5)547
Equity in earnings of unconsolidated subsidiaries, net of tax11
Net income$553$(7)$2$(5)$548
Diluted earnings per common share$2.79$(0.03)$0.01$(0.02)$2.77
Effective tax rate34.5%34.6%
Operating margin20.0%19.8%
A-9
RECONCILIATION OF NET INCOME TO CORE EARNINGS – (Continued)
(Unaudited, in millions, except per share data)
For the Nine Months Ended September 30, 2013
ReportedMark to
Market
Separation
Related
Litigation
Provision
Workforce
Reduction
Costs
Total
Adjustments
Core
Net sales$4,534$$$$$$4,534
Cost of sales1,916(11)(11)1,905
Gross profit2,61811112,629
Selling, general and administrative expenses1,745(2)(4)6(7)(7)1,738
Depreciation and amortization8686
Other operating (income) expense, net55
Income from operations782134(6)718800
Interest expense9494
Interest income(1)(1)
Other expense, net384(392)(392)(8)
Income (loss) before provision (benefit) for income taxes and equity in earnings of unconsolidated subsidiaries30513396(6)7410715
Provision (benefit) for income taxes(162)5411(2)2416254
Income before equity in earnings of unconsolidated subsidiaries4678(15)(4)5(6)461
Equity in earnings of unconsolidated subsidiaries, net of tax11
Net income$468$8$(15)$(4)$5$(6)$462
Diluted earnings per common share$2.28$0.04$(0.07)$(0.02)$0.02$(0.03)$2.25
Effective tax rate(53.1)%35.5%
Operating margin17.2%17.6%
A-10