Dr Pepper Snapple Group, Inc (DPS)

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Dr Pepper Snapple Group (DPS)

Q2 2011 Earnings Call

July 27, 2011 11:00 am ET

Executives

Aly Noormohamed - Senior Vice President of Investor Relations

Martin Ellen - Chief Financial Officer and Executive Vice President

Larry Young - Chief Executive Officer, President, Director, Member of Special Award Committee and Member of Capital Transaction Committee

Analysts

Judy Hong - Goldman Sachs Group Inc.

John Faucher - JP Morgan Chase & Co

Kaumil Gajrawala - UBS Investment Bank

Mark Swartzberg - Stifel, Nicolaus & Co., Inc.

Brett Cooper - Consumer Edge Research, LLC

Ann Gurkin - Davenport & Company, LLC

Christine Farkas - BofA Merrill Lynch

Stephen Powers - Sanford C. Bernstein & Co., Inc.

Jeffrey Farmer - Jefferies & Company, Inc.

Andrew Kieley - Deutsche Bank AG

Damian Witkowski - Gabelli & Company, Inc.

Caroline Levy - Credit Agricole Securities (USA) Inc.

Presentation

Operator

Good morning, and welcome to Dr Pepper Snapple Group's Second Quarter 2011 Earnings Conference Call. [Operator Instructions] 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 of 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 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'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. As we highlighted in earlier calls, Q2 is expected to be our most challenging quarter of the year, compounding an already very tough volume comparison, double-digit COGS inflation and incremental pricing actions. April was weaker than expected, and the consumer continued to reflect uncertainty.

Against this very challenging backdrop, our portfolio of leading consumer-preferred brands posted solid results. In fact, we outperformed the category in CSDs, teas and juices.

I remain concerned about the U.S. economy, unemployment trends and the impact this is having on the overall spending patterns. For the quarter and year-to-date, bottler case sales were flat, lapping 3% growth in the prior year. Dr Pepper volume declined 3%, lapping 3% growth as retailer-led price-offs last year were not repeated. I am once again pleased to report that Dr Pepper Fountain volume grew 5% on new distribution gains.

Combined, our Core 4, Sun Drop and CREST brands grew 1%. Canada Dry growth remained on trend, up double digits. And Sun Drop continued to gain distribution adding 2 million incremental cases. Snapple was up 8%, as we continued to gain distribution in both 6-pack glass and 64-ounce PET. Hawaiian Punch volume was flat, as a high single-digit price increase took effect June 1.

We're also seeing a greater mix shift towards the 10-ounce package. As expected, Mott's declined 10% as we took double-digit price increases early in the year to fully cover apple juice concentrate inflation.

For the quarter, currency-neutral net sales grew 3% on flat volume. Price mix added 2 points to growth, while deferred revenue recognition and repatriated cases under the Coke license agreement added a point to growth. Segment operating profit on a currency-neutral basis declined 5% or $19 million, as we incurred almost $70 million of input and transportation cost inflation in the quarter.

Margin investment in Q2 were up only $4 million, as we shifted approximately $10 million to the third quarter to support key innovation planks and to remind consumers of the value of our brands. As we highlighted during our first quarter call, we have opportunities to invest incrementally in our brands, and we now expect full-year marketing to be up $25 million to $30 million.

For the quarter, diluted earnings per share grew 4% to $0.77. This was better than our flattish expectations due to the shift of marketing investments. Increasing awareness and availability of our brands is a key focus for us, and I'm thrilled with the progress we're making in 2011.

We've increased the availability of our core CSD, tea and juice SKUs in both grocery and convenience. In grocery, for example, Dr Pepper ACV distribution is up 1 point, while Snapple and Canada Dry are up 3 and 4 points, respectively. We make great progress in cold drink with 14,000 net new placements, so far, this year. In Fountain, we're tracking right along in line with our plans for both key and local accounts, with net new installs up 12,000 valves.

We've increased consumer communications on our core brands and supported key innovation planks, such as Sun Drop, Mott's for Tots and Mott's Medleys. Dr Pepper's tie-in with Thor resulted in over 1 billion media impressions, and Snapple's integration in The Amazing Race generated over 400 million impressions.

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