Dr Pepper Snapple Group, Inc (DPS)

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Dr Pepper Snapple Group, Inc. (DPS)

Q2 2010 Earnings Call Transcript

July 29, 2010 11:00 am ET

Executives

Aly Noormohamed – SVP, IR

Larry Young – President and CEO

Marty Ellen – CFO

Analysts

Judy Hong – Goldman Sachs

Caroline Levy – CLSA

Kaumil Gajrawala – UBS

Mark Swartzberg – Stifel Nicolaus

Christine Farkas – Bank of America

Andrew Kieley – Deutsche Bank

Damian Witkowski – Gabelli & Company

Presentation

Operator

Good morning, and welcome to Dr Pepper Snapple Group's second 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, Paula, and good morning, everyone. Before we begin, I would like to direct your attention to the Safe Harbor statement 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 statement in this morning 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 the call, we may reference to 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. As many of you know, on June 7 we announced an agreement with the Coca-Cola Company on how we will handle the distribution of our brands currently licensed to Coca-Cola Enterprises. I would like to begin today by highlighting a few key elements of the agreements.

Upon completion of their acquisition, DPS will receive a one-time upfront payment of $715 million before taxes, fees and other expenses. Consistent with our Pepsi deal, these agreements will have an initial term of 20 years with 20-year renewal periods, and will require Coke to meet certain performance conditions. We will record the upfront payment as deferred revenue and recognize it over a 25-year life.

In the US, Coke will distribute Dr Pepper across all markets and Canada Dry in Northeast markets where both these brands are currently being distributed by CCE. In Canada, distribution remains unchanged. Coke will also Dr Pepper and Diet Dr Pepper on its revolutionary Freestyle fountain dispenser, and will offer Dr Pepper and Diet Dr Pepper at local fountain accounts currently services by CCE.

Additionally, in US territories where we have our own manufacturing and distribution footprint, we repatriate certain brands. In total, this transfer will result in the repatriation of approximately 16 million cases back to DPS. Combined with the cases from the Pepsi system, approximately 25 million cases are expected to come back into our system. This adds 8 points of growth to our packaged beverage CSD business, and will provide much needed scale and efficiencies in key packaged beverage markets.

The consolidation of these brands under PB will also enable us to focus our efforts on growing volume and distribution while driving greater returns on local marketing efforts. We view these agreements with Coke as yet another positive step for our company and our brands. We are already seeing the benefits from our new agreements with PepsiCo. In Q2, this business was up 6% driven by increased distribution, and flawless execution of both Dr Pepper and Crush.

Before I recap our second quarter results, let me share some of the great wins we have had in brand activation during the quarter. We invested an incremental $12 million or 11% over the prior year with key activities such as Dr Pepper Iron Man promotion, new advertising supporting the launch of Sunkist Solar Fusion. We continued to drive investments in (inaudible) with GRPs up over 50%. It is worth noting that with no sweet higher levels of retailer-led price promotion, our teams have aggressively shifted activities from the second quarter into the third quarter to maximize our marketing returns.

Snapple's integration into this season’s final board challenge on the highly rated Celebrity Apprentice created more than 100 million impressions, and drove strong retailer execution resulting in increased brand awareness and accelerated growth. The two Celebrity Apprentice and Sprite [ph] flavors were a hit. Bret Michaels Diet Trop-a-Rocka was our number three selling six-pack followed by Holly Robinson Peete’s all natural Compassionberry at number 4. In fact these two flavors are contributing almost 2 percentage points of Snapple’s year-to-date growth, and they are selling so well that we just scheduled our third production run of Trop-a-Rocka.

Grade activation drove 53% ACV and grocery for each of the Celebrity Apprentice flavors. Household penetration also increased. With 60% of the sales incremental to the trademark, Trop-a-Rocka also grew the tea category as 24% of the households buying it were new to the category. These great flavors are not only bringing excitement to the Snapple trademark but they are driving awareness for each of the Celebrity’s charities, the American Diabetes Association, and the HollyRod Foundation.

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