Dr. Pepper Snapple Group (DPS) reported results for the second quarter of fiscal 2009, with earnings (excluding restructuring, transaction and separation related costs) of 62 cents per share, which was 10 cents above the Zacks Consensus Estimate.

Earnings were also up 3 cents year-over-year. Profits were driven by continued improvement in the Liquid Refreshment Beverage category.

Net sales for the quarter declined 4.1% year-over-year to $1.5 billion, driven by an unfavorable shift in product mix and the termination of the glaceau and Hansen U.S. brand distribution agreements, partially offset by the benefits of expanded distribution of Crush and overall price increases. Volume in the bottler case sales (BCS) increased 4% due to a 4% increase in carbonated soft drink (CSD) and a 3% increase in non-carbonated soft drink (non-CSD) categories.

CSD volume benefited from the expanded distribution of Crush as well as a 4% increase in Dr. Pepper volume. Fountain/foodservice volume declined less than 1%, despite a 2% decline in quick service restaurant (QSR) foot traffic. The company’s four core brands (7UP, Sunkist, A&W and Canada Dry) posted a 2% decline year-over-year.

Non-CSD’s volumes grew primarily due to an 18% growth in Hawaiian Punch and an 8% growth in Mott’s, which were partially offset by a 15% decline in Snapple.

Segment wise, net sales in Beverage Concentrates grew 6% primarily due to the expanded distribution of Crush. Further, price increases were partially offset by higher fountain/foodservice contractual discounts and increased marketplace spending.

Packaged Beverages posted revenue growth of 3%, driven by volume growth and strong pricing actions across CSDs, Snapple and Mott’s. This was partially offset by negative product mix. Net sales in the Latin America Beverages segment grew 3% attributable to favorable channel mix and the impact of company-owned route expansion, partially offset by declines in Squirt.

Overall gross margins increased 468 basis points (bps) to 59.8% versus 55.1% in the comparable prior-year quarter. The increase was driven by benefits from pricing and expansion of the Crush distribution agreement which fully offset the adverse impact of higher commodity costs. The operating margin also expanded 264 bps to 20.1% from 17.4% in the prior-year quarter.

For the first six months of 2009, the company generated $371 million of cash from operating activities, reflecting a 33.5% increase. This is primarily due to efficient working capital management, especially receivables that contributed $12 million. Year-to-date capital expenditures totaled $134 million.

A moderation in the input cost environment is noted, which is expected to reduce packaging and ingredients costs by 3% for the year. Packaging and ingredients make up approximately 60% of the total cost. Favorable trends are also being observed in high fructose corn syrup, PET, glass and paper costs, which are expected to improve margins further. 

Therefore, in the light of a moderating cost environment, management raised its guidance for fiscal 2010. Annual earnings are now expected in the range of $1.88 to $1.96 per share, reflecting an 18 cents rise over the previous guidance. Net sales growth is reiterated in the 2%-4% range. CSD and value juice strength are expected to continue and Snapple is expected to improve sequentially.

Capital expenditure for the year is expected to be at 5% of net sales. The company also plans to repay $475 million of debt in fiscal 2009, reflecting a $75 million increase form the previous guidance.
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