Tuesday, September 1, 2009

Dr Pepper Buyout?

At the risk of being a broken record, I'm going to mention Dr Pepper (DPS) again. In recent days, I've discussed with several like-minded investors that DPS may be an acquisition target. In lieu of paying up for a bottling deal with Dr Pepper, Pepsi (PEP) may just buy the company. Here are some excerpts from the August conference call that are just adding fuel to my fire.

Larry Young started the August conference call with the following:

I am sure many of you have questions regarding what impact the acquisition of the two Pepsi bottlers may or may not have for our business. What this transaction clearly shows is the strategic importance and growth potential of the North American beverage market. In this context, DPS’ existing advantages are clear. We are the undisputed leader in flavored CSD’s, the number one juice and juice drink manufacturer by volume and number on in premium teas We have broad and flexible route to markets that we believe strike a good balance between company-owned DSD and our bottling partners.

Our journey to create a fully integrated packaged beverage business did not start a week ago. It started in earnest in October 2007 and after 20 months of hard work our integration is nearing completion. With a leading brand portfolio and distribution flexibility we believe we are well positioned to exploit the significant per capita development opportunities that are out there. Single serve availability, award winning innovation and 360 degree consumer communications will ensure our brands are top of mind and always close at hand.

Our crush cost mindset will also ensure we manage the leanest and most efficient operating model possible. As I have said before, our guiding principle is to always do what is best for our brands, our customers, our consumers and ultimately you, our stockholders. We are reviewing a number of possible strategic options that build on our already strong growth prospects. As I am sure you will appreciate, discussions with customers or potential customers are something best handled in private.

The company is enjoying a cost tailwind:

We are seeing an input cost environment that is substantially better than our beginning of the year expectations. In fact, we now expect packaging and ingredients to reduce costs by 3% for the year. As a reminder, packaging and ingredients make up roughly 60% of our total cost basket. In order of dollar spend magnitude this basket comprises; cans and ends, bottles and caps, sweeteners, glass, apple and other fruit concentrates, corrugate and paperboard, flavors, colors and acidulates, labels and films and all others. We are seeing favorability across the entire basket especially in HFCS, PET, glass and paper. This reflects not just the sequential improvement in the underlying prices for these components but also lower negotiated rates for tolling and other conversion fees.

Here are some important components of cash flow:

In terms of cash, our priorities remain unchanged. We continue to expect strong cash from operations and we continue to focus on working capital improvement. Our CapEx target remains at 5% of net sales. Given the continued strength in our business and consistent with the $0.29 increase in EPS compared with our beginning of the year guidance, we now expect to repay $75 million more in optional principle payments bringing our full year debt repayment to at least $475 million.

Bottling is a MAJOR catalyst:

We remain confident in DPS’ ability to seize the substantial growth opportunities in North America both in the near-term and the long-term. It is this confidence that supports our increase in the EPS guidance and our forecast of optional debt repayment. As I said at the beginning of the call the acquisition of two Pepsi bottlers clearly shows the strategic importance and growth potential of the North American beverage market.

We are reviewing a number of possible strategic options and therefore it would be inappropriate for us to answer any questions on this topic at this time.

Dr. Pepper products are rolling into ALL McDonald’s... And look who the loser is!

A couple of factors with the McDonalds rollout. One is we are doing the straight replacement of Pibb into existing valves that is going to be relatively straight forward and should mostly be accomplished by the end of this year. That is probably 2,500 outlets. For the other outlets where Dr. Pepper is brand new we are going to have to coordinate with McDonalds as they go through their beverage strategy rollout as they want to disturb the stores really only once … So that will cause the McDonalds rollout to go all the way through 2010 … At this stage there wouldn’t be a significant impact to 2009.

Kaizen - constant improvement

We are about complete with our integration. We have at DPS a never ending mindset of continuous improvement in operating efficiency so with a fresh cost mentality and constantly into the Lean Six Sigma and continuous improvement. We are always looking for more but we captured the majority of ours the last couple of years.

How many different ways can a management telegraph that this snowball is running down a very long slope? I could have highlighted the whole transcript, but here is a link to it.

I've seen these kinds of statements before. Don't be surprised if DPS isn't independent for long.

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