Dr Pepper Snapple Group, Inc (DPS)

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Dr Pepper Snapple Group, Inc. (DPS)

Q3 2010 Earnings Call Transcript

October 27, 2010 11:00 am ET

Executives

Aly Noormohamed – SVP, IR

Larry Young – President and CEO

Marty Ellen – CFO

Analysts

Judy Hong – Goldman Sachs

Christine Farkas – Bank of America-Merrill Lynch

Kaumil Gajrawala – UBS

Caroline Levy – CLSA

John Faucher – J.P. Morgan

Mark Swartzberg – Stifel Nicolaus

Carlos Laboy – Credit Suisse

Ann Gurkin – Davenport

Andrew Kieley – Deutsche Bank

Damian Witkowski – Gabelli & Company

Presentation

Operator

Good morning and welcome to Dr Pepper Snapple Group’s third quarter 2010 earnings conference call. Your lines have been placed on listen-only until the question-and-answer session. Today’s call is being recorded, and includes a slide presentation, which can be accessed at www.drpeppersnapple.com. The call and slides will also be available for replay and download after the call has ended. (Operator instructions)

It is now my pleasure to introduce Mr. Aly Noormohamed, Senior Vice President, Finance. Sir, you may begin.

Aly Noormohamed

Thank you, Jackie, and good morning, everyone. Before we begin, I would like to direct your attention to the Safe Harbor statements and remind you that this conference call contains forward-looking statements, including statements concerning our future financial and operational performance.

These forward-looking statements should also be considered in connection with cautionary statements and disclaimers contained in the Safe Harbor statements in this morning’s earnings press release and our SEC filings. Our actual performance could differ materially from these statements, and we undertake no duty to update these forward-looking statements.

During this call, we may reference certain non-GAAP financial measures that reflect the way we evaluate the business, and which we believe provide useful information for investors. Reconciliations of those non-GAAP measures to GAAP can be found in our earnings press release and on the Investor Relations page at www.drpeppersnapple.com.

This morning’s prepared remarks will be made by Larry Young, Dr Pepper Snapple Group’s President and CEO; and Marty Ellen, our CFO. Following our prepared remarks, we will open the call for your questions.

With that, let me turn the call over to Larry.

Larry Young

Thanks Aly, and good morning, everyone. Before Marty and I cover our third quarter results and full year guidance, I would like to take a moment to update you on our recently completed licensee agreements with The Coca-Cola Company.

We are thrilled to have the distribution of a portion of our Dr. Pepper business secured in the Coke system. We believe this further secures and strengthens a long-term growth through this trademark. As I think about the new agreements with Coke, I see several benefits.

First, with initial term of 20 years, with 20-year renewal periods and more robust performance conditions, both sides are committed to invest and grow the business.

Second, we benefit from Coke’s strengthened Fountain. To build awareness for Dr. Pepper, we’re all creating millions of sampling occasions to access to local fountain accounts previously serviced by CCE and on Coke’s revolutionary Freestyle machine.

Third, staring early January, brands such as Squirt, Canada Dry, Schweppes and Cactus Cooler will be sold through our company-owned DSD business.

Let’s face it. These brands were low priority in the former CCE system, but 15 million cases in our system gives us significant operating scale and we believe allows us to find another crush.

As you may have seen in earlier press release, we’ve received the one-time payment from Coke totaling $715 million. In fourth quarter 2010 and similar to the accounting from Pepsi payment, we’ll begin recognizing deferred revenue on this amount over 25 years. We’ll also record approximately $3 million in fees and expenses related to this transaction.

Now turning to our results. I am very pleased with how well our brands performed in the quarter. BCS volume was up 2% cycling at 4% growth last year. We once again posted industry-leading growth against the backdrop of weak macros of fragile consumer and of changing LRB landscape.

In the quarter, Dr. Pepper grew 2%. Our Core four brands plus Crush grew 3%, Hawaiian Punch was up 7%, Snapple was up 10% and Mott’s grew 3%. These brands drive 75% of our volume and with improving LRB trends I believe we still have plenty of room to grow.

Contract manufacturing declined over 30% in the quarter as we continue to rationalize this part of our business in pursuit of more profitable growth.

To put this into context, contract manufacturing declines reduced overall volumes by two percentage point, net sales by one percentage point, but had no impact to segment operating profit. As a reminder, we will begin to cycle contract manufacturing declines in December.

On a year-to-date basis, BCS volume and branded shipments are much more in line as you’d expect.

Moving onto net sales, in the quarter there were three items I believe impacted our comparison to last year. First, our continued de-emphasis of our contract manufacturing business reduced net sales growth by one percentage point.

Second, as consumers continue to seek value, we continue to see more sales of non-cola CSDs and value juices and this is driving negative revenue mix. What’s important to know here is the bias towards value is lasting much longer than I think any of us expected. It’s certainly not getting worse, in fact, in some market it appears to be getting better.

Third, we continue to invest in promotional activity both with our bottlers and our company-owned systems to help stimulate traffic for our retailers. Examples in the quarter include two-liter CSD events and grocery and mass merch, Hawaiian Punch, one-gallon programs in grocery and dollar, Snapple Premium six-pack sampling promotions, more try me coupons and increased retailer support behind new 7Up.

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