TEXT-S&P revises Dr Pepper Snapple Group outlook to positive

Fri Oct 26, 2012 11:24am EDT

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Overview
     -- We expect U.S.-based Dr Pepper Snapple Group Inc. (DPS) to continue to 
generate strong cash flow in the next one to two years despite lingering weak 
macroeconomic conditions in the U.S.
     -- We are affirming our ratings on DPS, including the 'BBB' long-term 
corporate credit rating.
     -- We are revising our outlook on DPS to positive from stable, reflecting 
our opinion that DPS will be able to sustain its current credit measures, 
including leverage below 2.5x and funds from operations to total debt near 
30%, which could lead us to upgrade the company.
 
Rating Action
On Oct. 26, 2012, Standard & Poor's Ratings Services affirmed its ratings on 
Plano, Texas-based Dr Pepper Snapple Group Inc. (DPS), including the
'BBB' long-term corporate credit and 'A-2' short-term, corporate credit and 
commercial paper ratings. At the same time, we revised the outlook to positive 
from stable. 

Rationale
The positive outlook reflects our opinion that DPS has the ability to sustain 
its credit measures, including leverage (as measured by total debt to EBITDA) 
less than 2.5x and funds from operations (FFO) to total debt near 30% or more. 
These ratios are within the indicative ratio ranges for an "intermediate" 
financial risk profile, including leverage in the range of 2x-3x and the 
low-end of the range for FFO to total debt ratio of 30%-45%. We believe the 
FFO to total debt ratio will remain on the low-end of the indicative ratio 
range because of the company's geographic concentration in the U.S., which has 
higher corporate tax rates than most other countries. 

The ratings on DPS reflect our assessment of the company's business risk 
profile as "satisfactory" and financial risk profile as "intermediate." Key 
credit factors in our assessment include DPS' position as the third-largest 
soft drink company in North America, good brand recognition, share position 
and cash flow generation, yet relatively narrow business and geographic focus, 
with the majority of its footprint in the mature and low-growth nonalcoholic 
beverage markets of North America. The company has a moderate financial 
policy, adequate liquidity, and key credit measures that we believe will 
remain consistent with indicative ratios for an intermediate financial risk 
profile.

DPS is a leading integrated-brand owner, bottler, and distributor of 
nonalcoholic beverages in the U.S., Canada, Mexico, and the Caribbean. 
Although the company has a diverse portfolio of flavored (non-cola) carbonated 
soft drinks (CSD) and noncarbonated soft drinks (non-CSD; including 
ready-to-drink teas, juices, juice drinks, and mixers), we believe CSDs 
continue to account for a significant portion of DPS' volume. In 2011, U.S. 
sales represented 89% of total net sales. The brand portfolio includes 
well-known CSD brands such as Dr Pepper, 7UP, Sunkist soda, A&W, Canada Dry, 
Schweppes, Squirt, and Penafiel; non-CSD brands such as Snapple, Mott's, 
Hawaiian Punch, Clamato, Mr. & Mrs. T, Margaritaville, and Rose's; as well as 
regional and smaller niche brands. 

The company has limited CSD brand rights outside of North America, so 
international growth potential is limited, but DPS has strong shares for some 
of its brands, including Dr Pepper's leading U.S. market position in the 
flavored CSD category. However, DPS remains a distant No. 3 in the U.S., with 
about a 17% share in CSD (according to Beverage Digest), far behind 
financially stronger No. 1 Coca-Cola Co. (Coke; AA-/Stable/A-1+) with an 
approximate 42% share and No. 2 PepsiCo Inc. (A/Stable/A-1) with about 29% of 
the CSD market. Thus, we believe DPS lacks the marketing economies of scale 
that its key U.S. competitors enjoy. In 2011, DPS bottled and/or distributed 
about 46% of its product volume sold in the U.S. We believe long-term 
distribution agreements executed during 2010 with Coke and PepsiCo, as well as 
expanded presence in fountains at quick-serve restaurants, combined with 
expected continued investments in DPS' brands, should support modest volume 
growth during the next few years despite lingering weak macroeconomic 
conditions in North America, and volatile commodity costs. 

For the quarter ended Sept. 30, 2012, DPS' net sales were flat as favorable 
product mix and price increases were offset by lower volume and unfavorable 
foreign currency exchange rates compared with the same period in 2011. 
However, DPS' adjusted EBITDA margin strengthened about 300 basis points (bp) 
during this timeframe as the company realized cost savings from ongoing 
productivity initiatives and favorable mark-to-market gains, which more than 
offset higher commodity costs and selling, general, and administrative 
expenses, including increased marketing expenses. For the 12 months ended 
Sept. 30, 2012, we estimate the ratio of total debt to EBITDA was about 2.3x, 
which remained on the stronger end of the indicative ratio leverage range of 
2x-3x for an intermediate financial risk profile. The ratio of FFO to total 
debt (adjusted for tax-related payments pertaining to the 2010 license fees 
and paid in 2012) was about 30%, which is at the low end of the 30%-45% 
indicative range for an intermediate financial profile.

We expect DPS' credit ratios to remain near current levels by the end of 2012 
into 2013. Our 2012 forecast assumptions that support this include:
     -- Net sales growth of about 2% driven by higher pricing and favorable 
mix, partially offset by continued somewhat lower volume;
     -- Adjusted EBITDA margin to be flat to down about 30 bps as compared 
with 2011 due to expected soft volume as higher commodity costs should be 
largely offset by cost savings from its productivity initiatives;
     -- Capital expenditures will be less than 4% of net sales; and 
     -- We expect dividends and share repurchases will be funded out of 
discretionary cash flows or excess cash.

Importantly, we believe management will continue to implement financial 
policies that will allow DPS to maintain its existing financial profile and 
credit ratios near current levels during the outlook period. 

Liquidity
We believe DPS has "adequate" liquidity (as defined in our criteria) and 
sources of cash are likely to be in excess of uses for the next 12 months. Our 
view of the company's liquidity profile incorporates the following 
expectations:
     -- We expect liquidity sources (including cash, discretionary cash flow, 
and significant availability under its $500 million revolving credit facility) 
will exceed uses by 1.2x or more over the next 12 months. 
     -- We expect liquidity sources will continue to exceed uses, even if 
EBITDA were to decline by 15%, and without breaching the company's financial 
covenant test, as it currently has more than sufficient cushion. 
     -- We believe DPS has solid relationships with its banks and a generally 
satisfactory standing in the credit markets. 
     -- It is our opinion that the company's relatively stable cash flow 
characteristics will continue, despite a very competitive operating 
environment. DPS has generated average normalized discretionary cash flow 
(after dividends and capital expenditures) of $500 million during the past few 
years. Our liquidity assessment assumes that near- to intermediate-term debt 
maturities, including $450 million due December 2012 and $250 million due May 
2013, will be refinanced.

Outlook
The positive rating outlook reflects the likelihood that we could raise the 
ratings if DPS can sustain its current credit measures, including leverage 
below 2.5x and FFO to total debt near 30%, despite lingering weak 
macroeconomic conditions and higher commodity costs. We believe this could 
occur if the company meets our aforementioned baseline forecast while debt 
levels remain near current levels. 

Alternatively, we could revise the outlook to stable if DPS were to engage in 
more shareholder-friendly initiatives, including debt-financed share 
repurchases, resulting in higher debt balances and FFO to total debt 
approaching 25% or below. We believe this could occur if the company's 
adjusted debt levels increased by about $500 million from 2011 level, all 
other assumptions remaining constant.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 
     -- Key Credit Factors: Criteria For Rating The Global Branded Nondurable 
Consumer Products Industry, April 28, 2011 
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 

Ratings List
Ratings affirmed; Outlook Revised
                            To                 From
Dr Pepper Snapple Group Inc.
 Corporate credit rating    BBB/Positive/A-2   BBB/Stable/A-2

Ratings Affirmed
Dr Pepper Snapple Group Inc.
 Commercial paper           A-2
 Senior unsecured           BBB

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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