Dr Pepper Snapple Group Inc. (DPS) reported first-quarter 2011 earnings of 50 cents per share, compared with 40 cents in the year-ago period. Quarterly earnings also topped the Zacks Consensus Estimate of 46 cents.
During the quarter, Dr Pepper's net sales grew 7.0% year over year to $1,331.0 million, surpassing the Zacks Consensus Estimate of $1,308.0 million. The year-on-year growth was mainly attributable to higher sales volume, low single-digit price increases, favorable foreign currency translations and revenues from the PepsiCo Inc. (PEP) and The Coca-Cola Company (KO) licenses.
On February 26, 2010, Dr Pepper signed a licensing deal with PepsiCo under which the latter will distribute Dr Pepper, Crush and Schweppes brands in the U.S. Dr Pepper received $900 million in cash from PepsiCo, which is being recorded as net sales, proportionally over a period of 25 years. In this context, the company accredited $9 million of revenue in the first quarter, which represents an increase of $6 million from the prior-year period.
The company also signed an agreement with The Coca-Cola Company on October 4, 2010, which grants Coca-Cola the distribution rights for Dr Pepper in the U.S. and Canada Dry in the North East U.S. for a one-time payment of $715 million.
The 20-year deal (with a provision for 20-year renewals) is part of Coca-Cola's acquisition of the North American bottling operations of Coca-Cola Enterprises (CCE - Analyst Report). The proceeds from the deal are recorded as deferred revenue over a period of 25 years. The company accredited $7 million of revenue in the first quarter of fiscal 2011.
Dr Pepper's net sales from Beverage Concentrates grew 6.0% to $255.0 million during the quarter, primarily driven by higher pricing and PepsiCo and Coca-Cola revenues, partially offset by unfavorable discount timing and a negative impact from repatriated brands. Segment operating profit grew 5.0% to $155.0 million due to sales growth partially offset by increased marketing investment.
In the Packaged Beverages segment, net sales increased by 6.0% to $985.0 million, attributable to volume growth and low single-digit price increases. Brands repatriated under the PepsiCo and Coca-Cola licensing agreements also positively impacted sales growth.
Segment operating profit nevertheless declined 6.0% to $109.0 million, as net sales growth and benefits from supply chain productivity were offset by increases in packaging, ingredient and transportation costs and higher marketing investments.
Dr Pepper's net sales from Latin America Beverages increased 10.0% to $91.0 million, mainly stemming from higher sales volume growth and low single-digit price increases. Segment operating profit however plunged 13% to $7.0 million manifesting higher packaging, ingredient and transportation costs and IT infrastructure upgrades that offset the positive impact from net sales growth.
Balance Sheet and Cash Flow
Dr Pepper ended the quarter with cash and cash equivalents of $657.0 million and a long-term debt of $2,182 million, compared with a cash balance of $315.0 million and long-term debt of $1,687 million in the year-ago quarter.
During the reported quarter, the company generated $51.0 million of cash from operations. The company bought back $100.0 million worth of shares, paid $56.0 million in the form of dividends and made a capital expenditure of $54.0 million.
For, 2011 the company expects capital expenditure to be approximately 4.5% of net sales.
Outlook and Zacks Consensus
Moving forward, Dr Pepper guided its full-year 2011 adjusted earnings in the range of $2.70 to $2.78 per share on a 3% to 5% growth in net sales. The current Zacks Consensus Estimate for fiscal 2011 is $2.74 per share, which lies at the middle of the guidance range.
Dr Pepper currently has a Zacks #3 Rank, implying a short-term Hold rating on the stock. Besides, we maintain a long-term Neutral recommendation on the stock.