Dr Pepper Snapple Group Management Discusses Q2 2012 Results - Earnings Call Transcript

Dr Pepper Snapple Group (DPS)

Q2 2012 Earnings Call

July 26, 2012 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

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

Bryan D. Spillane - BofA Merrill Lynch, Research Division

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

Brett Cooper - Consumer Edge Research, LLC

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

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Kaumil S. Gajrawala - UBS Investment Bank, Research Division

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

William Schmitz - Deutsche Bank AG, Research Division

Damian Witkowski - Gabelli & Company, Inc.

Presentation

Operator

Good morning, and welcome to Dr Pepper Snapple Group's Second Quarter 2012 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 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 the cautionary statements and disclaimers contained in the Safe Harbor statement in this morning's earnings press release and our SEC filings. Our actual performance can 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, Caroline, and good morning, everyone. As you may have seen in this morning's press release, we once again delivered results in line with our long-term strategy. Our brands continue to perform well in the quarter, despite an unstable macro-environment. We grew both volume and dollar share in CSDs, outperforming the industry. We made solid progress against our goals to increase distribution on availability, and we continue to invest behind our wealth of brands, ensuring that we always bring value to our consumers and our customers.

For the quarter, bottler case sales declined 1% on 4 percentage points of price/mix, as we continue to experience volume declines in our Hawaiian Punch and Mott's brands as we had expected. CSD volumes were flat for the quarter. Our flagship Dr Pepper brand grew 1%, led by Dr Pepper TEN, which we launched nationally in Q4 and our Dr Pepper Fountain business also continue to grow.

Our Core 5 brands grew 1% in the quarter, even though we were lapping the successful launch of Sun Drop a year ago. As expected, both Hawaiian Punch and Mott's declined on a larger relative price increases that were implemented in mid-2011. While Hawaiian Punch declined double digits, Mott's declined 2% this quarter, a sequential improvement from the first quarter. Snapple volume grew 1% as we lap 8% growth in the prior year, fueled by a limited time offering product. We have made solid gains against our distribution of availability goals for this brand, and since it's launch in the first quarter, our Diet Half 'n Half has become one of our top 5 selling SKUs. Our 64-ounce take-home packets continues to perform well, while providing value for our consumers. The balance of our portfolio decreased 1% with a high single-digit decline in Crush, partially offset by strength in our Clamato business resulting from our Hispanic marketing efforts.

Moving to our financial results, on a currency-neutral basis, our net sales increased 4% for the quarter, primarily reflecting 4 points of price and mix. Segment operating profit increased 3% for the quarter, with sales growth and productivity improvements more than offset by higher packaging and ingredient cost. Plant field operating cost increases, higher-margin investment of $9 million to support the long-term health of our brands and an $8 million pre-separation related capital lease adjustment.

Reported earnings per share were $0.83 for the quarter versus $0.77 in the prior year. Core earnings per share, which exclude the impact of mark-to-market losses in both years and several other items affecting comparability in the current year were $0.85 for the quarter versus $0.78 in the prior year.

As I've said many times, increasing the per capita consumption of our brands to increase awareness and availability remains DPS' single largest opportunity I am thrilled with the progress we've made through the first half of 2012. We've increased the availability of our core CSDs, Snapple and Mott's juice SKUs in both grocery and convenience. In grocery, we gain 0.5 point of ACV distribution across our core CSDs. While Snapple and Mott's juice are up 6 and 2 percentage points, respectively. We've also made great progress in convenience where the space is much more limited and harder to win. With ACV gains of almost 7 points of Snapple and over 0.5 point in our core CSDs. In Fountain, we're expanding single-serve availability and creating new sampling occasions with 18,000 net new valves across both local and national counts, including wins in [indiscernible], Jersey Mike's, Firehouse Subs and SUBWAY. We're penetrating low per capita markets, combining local media with strong retail activation. Our Dr Pepper coastal program targets markets such as Seattle, Baltimore and New York. Year-to-date, our display tie-in rates in this markets have increased by 3 percentage points, and we will also increase our average number of items.

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