Net sales fell 2.2% Y-o-Y to $3.25 billion, missing average estimates of $3.28 billion
Beverage major Dr Pepper Snapple Group Inc. (NYSE: DPS) announced its Q3 FY16 financial results on October 27th, 2016.
The Plano, Texas-based company operates as a brand owner, manufacturer, and distributor of non-alcoholic beverages in the United States, Mexico, and Canada. The company operates through three segments: Beverage Concentrates, Packaged Beverages, and Latin America Beverages. It offers flavored carbonated soft drinks (CSDs) and non-carbonated beverages (NCBs), including ready-to-drink teas, juices, juice drinks, water, and mixers, as well as manufactures and sells Mott’s apple sauces. The company sells its flavored CSD products primarily under the Dr Pepper, Canada Dry, 7UP, A&W, Crush, Sunkist soda, Schweppes, Squirt, and RC Cola brands; and NCB products primarily under the Hawaiian Punch, Snapple, Mott’s, and Clamato brands. It serves bottlers, distributors, and retailers. Read more about Dr. Pepper Snapple’s financial results below.
Q3 FY16 financial highlights
During Q3 FY16, Dr. Pepper Snapple’s revenue grew 3% to $1.68 billion, up from $1.63 billion in the year-ago period, on favorable product and package mix, and beating estimates of $1.65 billion. During the reporting quarter, net sales of $1.68 billion grew 1% in terms of sales volumes and higher pricing. Net sales growth was impacted by 1% due to unfavorable foreign currency translation. Reported segment operating profit (SOP) grew 3%, or $12 million, on net sales growth, lower logistics costs, and ongoing productivity improvements. These positives were partially offset by a $16 million increase in planned marketing investments and increases in certain other expenses.
During Q3 FY16, Dr. Pepper Snapple’s reported income from operations jumped to $373 million from $337 million in the prior year period, and included $9 million in unrealized commodity mark-to-market gains and a $5 million non-cash gain on the step-acquisition of its joint venture Aguafiel business in Mexico. Core income from operations grew 5% to $364 million, and represented 21.7% of net sales compared to 21.3% in the prior year period.
In all, Dr. Pepper Snapple’s reported Q3 FY16 net income increased to $240 million, or $1.29 per share, from $202 million, or $1.05 per share, for the same period last year. Reported EPS of $1.29 included a $0.09 tax gain. Core EPS grew 8% to $1.17, compared to $1.08 in the prior year period. Profits were continued to be led by its NCB segment, which grew 16% thanks to brands like Bai, FIJI water, and Aguafiel. Those gains, and a 5% increase in Clamato volumes, offset decreases in Hawaiian Punch and Mott’s.
Bottler case sales (BCS) volume: During Q3 FY16, Dr. Pepper Snapple’s BCS volume grew 2%, with CSDs increasing 2%, and NCBs remaining flat. By geography, U.S. and Canada volumes rose 1%, and Mexico and the Caribbean volumes grew 4% during the reporting quarter.
Among CSDs, Dr Pepper BCS volume grew 1% driven by growth in both fountain foodservice and bottle-can businesses. Core 4 brands grew 2%, as a mid-single-digit increase in Canada Dry and a low-single-digit increase in Sunkist were partially offset by low-single-digit decreases in A&W and 7UP. Squirt increased 7% during the reporting quarter on strong growth in both the U.S. and Mexico, while Schweppes grew 9%, Crush grew 4%, and Peñafiel grew 1%. Fountain foodservice volumes inched up 2% in the quarter.
Among NCBs, BCS volume in the water category grew 16% on strong growth in Bai brands, FIJI, and Aguafiel. Clamato grew 5%, while Snapple remained flat. Hawaiian Punch fell 6% due to reduced promotional activity and higher pricing for single-serve packages, and Mott’s fell 6% during Q3 FY16 as sauce growth was offset by juice decreases.
Beverage Concentrates: This segment’s Q3 FY16 net sales grew 5% on concentrate price increases, favorable product mix and a 1% increase in concentrate shipments. SOP was flat, as net sales growth was offset by a $10 million increase in marketing investments.
Packaged Beverages: This segment’s Q3 FY16 net sales grew 4% on favorable product and package mix, lower discounts driven by a favorable trade accrual adjustment and higher pricing. SOP jumped 7% on net sales growth, lower logistics costs, and ongoing productivity improvements. These increases were partially offset by a $6 million increase in planned marketing investments and increases in certain other operating expenses.
Latin America Beverages: This segment’s Q3 FY16 net sales grew 5% on higher net pricing and a 4% increase in sales volume. SOP was 4% lower as the segment incurred $3 million of higher U.S. dollar denominated input costs. The aforementioned foreign currency transaction cost taken together with increases in certain other operating expenses collectively more than offset net sales growth and ongoing productivity improvements.
Corporate and other items: During Q3 FY16, corporate costs totaled $64 million, which included $9 million in unrealized commodity mark-to-market gains. Other income increased $5 million in the quarter as a result of a non-cash gain on the step-acquisition of its joint venture Aguafiel business in Mexico. Net interest expense grew $4 million driven by higher debt balances and the refinancing of certain debt in the prior year.
Cash flow: On a year-to-date basis, the company generated $683 million of cash from operating activities compared to $723 million in the prior year period. Capital spending totaled $110 million compared to $71 million in the prior year period.
Share buyback: Dr Pepper Snapple returned $748 million to shareholders in the form of stock repurchases ($460 million) and dividends ($288 million) during the reporting quarter.
In talks to buy Bai Brands LLC: Dr Pepper Snapple is in talks to acquire Bai Brands LLC, as reported by Reuters on October 27th, 2016. The company has not made any major acquisitions since being spun out of confectionary company Cadbury Schweppes in 2008, but is now looking at organic growth as a means to diversify its product portfolio. Dr Pepper, which only had a distribution agreement with the Princeton, New Jersey-based Bai for its health drinks, purchased a $15 million minority stake in April 2015. Taking this route from investment to acquisition is becoming increasingly popular among major manufacturers, which may be able to lock in a better price for the acquisition later on.
Bai, which means “pure” in Chinese, uses plant-based sweeteners and natural ingredients with antioxidants from coffee fruit and white tea in its health drinks. It was founded in 2009 by Ben Weiss, who still owns a majority of the company. Bai is one of Dr Pepper Snapple’s “Allied Brands,” which are healthy drink companies that it distributes through its network, the others including Fiji Water and Vita Coco.
Unlike some of its rivals, Dr Pepper Snapple has traditionally not upgraded its small equity investments into acquisitions. In 2007, one of Dr Pepper Snapple’s minority investments, vitaminwater-maker Glaceau, was acquired by The Coca-Cola Company (NYSE: KO) for $4.1 billion. Dr Pepper Snapple may be willing to value Bai at more than $1.5 billion, and the potential acquisition could make it more competitive against its larger global counterparts and by continuing to diversify its non-soda alternatives. Rival PepsiCo Inc. (NYSE: PEP) is also diversifying its Naked and Pure Leaf Tea brands as part of its overall game plan to emerge as a healthy food and beverage company. Moreover, the potential acquisition also makes sense for Dr Pepper Snapple, since its strong domestic sales protect the company from the currency exchange struggles faced by its other rivals.
Guidance for full year FY16 and beyond
For the full year FY16, Dr Pepper expects to post $4.32 to $4.40 in adjusted EPS compared to its earlier view of between $4.27 and $4.35. The company is now forecasting reported net sales growth of 2% and core EPS to be in the $4.32 to $4.40 range. Collectively, foreign currency translation and transaction are expected to continue to negatively impact net sales by approximately 1% and core EPS growth by approximately 3%. The company continues to expect packaging and ingredient costs to decrease COGS by approximately 1% on a constant volume/mix basis.
Dr Pepper Snapple continues to anticipate capital spending to be approximately 3% of net sales and expects to repurchase $650 million to $700 million of its common stock during the year.
Dr Pepper Snapple’s stock ended the day at $88.55, gaining 0.97%, at the close on Tuesday, November 8th, 2016, having vacillated between an intraday high of $88.89 and a low of $87.47 during the session. The stock’s trading volume was at 835,344 for the day. The Company’s market cap was at $16.34 billion as of Tuesday’s close.