Dr Pepper Snapple Group (DPS)

Q3 2011 Earnings Call

October 26, 2011 11:00 am ET

Executives

Carolyn Ross - Vice President of Investor Relations

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

Martin M. Ellen - Chief Financial Officer and Executive Vice President

Analysts

Carlos A. LaBoy - Crédit Suisse AG, Research Division

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Jeffrey D. Farmer - Jefferies & Company, Inc., Research Division

Dara W. Mohsenian - Morgan Stanley, Research Division

Brett Cooper - Consumer Edge Research, LLC

Kaumil S. Gajrawala - UBS Investment Bank, Research Division

Michael Lavery - CLSA Asia-Pacific Markets, Research Division

Wendy Nicholson - Citigroup Inc, Research Division

Damian Witkowski - Gabelli & Company, Inc.

Stephen Powers - Sanford C. Bernstein & Co., LLC., Research Division

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

John A. Faucher - JP Morgan Chase & Co, Research Division

Presentation

Operator

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Good morning, and welcome to Dr Pepper Snapple Group's Third 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 Carolyn Ross, Vice President, Investor Relations. Carolyn, you may begin.

Carolyn Ross

Thank you, Jackie and good morning, everyone. Before we begin, I would like 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 D. Young

Thanks, Carolyn, and good morning, everyone. Let me start by saying how pleased I am by our performance and accomplishments this quarter, notwithstanding the challenging economic environment and continued input cost inflation. The combination of price, mix and productivity is allowing us to partially offset these cost increases, while still providing value to our consumers and our retail partners. For the quarter, bottler case sales were down 1%, lapping 2% growth in the prior year. We once again posted industry-leading growth in CSDs with volume flat in the quarter. Year-to-date, bottler case sales were flat in line with our expectations, given the higher-than-normal levels of pricing. Dr Pepper volume was flat in the quarter, lapping 2% growth last year. Dr Pepper Fountain volume grew 4% on new distribution gains, and Dr Pepper TEN added almost 1 million cases. Combined, our Core 4, Sun Drop and Crush brands were flat. Canada Dry continued this trend of double-digit growth, while Sun Drop added 2 million incremental cases on continued distribution gains. Snapple was up 2%, lapping 10% growth in the prior year, with continued distribution gains in both 6-pack glass and 64-ounce PET. Our juice portfolio experienced larger relative price increases, particularly, Mott's, as the price of apple juice concentrate doubled this year.

With mid-single-digit pricing, Hawaiian Punch volume was down 10%, while Mott's declined 6% on double-digit pricing. Net sales for both brands increased in the quarter, with Mott's up 4%. Hawaiian Punch net sales increased 5% from the combination of pricing and increased single-serve package mix. While raising prices of these rates is never desirable, these results are consistent with our goal of achieving profitable volume growth.

For the quarter, currency neutral net sales grew 4%. Price mix added 3 points to growth, while deferred revenue recognition and repatriated cases under the Coke licensing agreement added a point to growth. Segment operating profit on a currency-neutral basis increased 7% or $21 million. Included in last year's results were $15 million of strike-related costs. Sales improvements, the benefit of price increases and productivity improvement from RCI were able to significantly offset the headwinds of cost inflation, which was almost $60 million in the quarter. Marketing investments in the quarter were lower than a year ago, but are up $13 million year-to-date. We expect further increases in the fourth quarter to support Dr Pepper TEN, 7UP and other initiatives, resulting in full-year marketing of $20 million to $25 million. For the quarter, diluted earnings per share grew 18% to $0.71.

Now moving on to innovation. I'm thrilled with the level of excitement and energy the national launch of Dr Pepper TEN is bringing to the Dr Pepper trademark. As I mentioned earlier, Dr Pepper TEN BCS volume was almost 1 million cases, with concentrate volume higher as our bottling partners build their inventories. And this was ahead of the national media launch. Our tongue-in-cheek, “It's Not for Women” media campaign is generating huge press coverage, online buzz and social activity with over 136 million impressions to date. We're seeing strong engagement with our target consumer, 25 to 34-year-old males with 4x the average number of posts and comments on Facebook and Twitter.

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