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
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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. Read the rest of this transcript for free on seekingalpha.com