Keurig Dr Pepper Inc (KDP) 2009 Q2 法說會逐字稿

Good morning and welcome to Dr Pepper Snapple Group second quarter 2009 earnings call. Your lines have been placed on listen-only until the question and answer session. Today's call is being recorded. It 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 and Investor Relations.

Thank you, Paula. 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 press release and our SEC files. Our actual performance could differ materially, and we undertake no duty to update these forward-looking statement.

During these calls we may reference non-GAAP measures 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 Snapples Group, President and CEO, and John Stewart, our CFO. Following our prepared remarks, we will open the call for your questions. With that, let me turn the call over to Larry.

Thanks, Aly, and good morning, everyone. I'm sure many of you have questions regarding what impact the acquisition of the two Pepsi bottlers may or may not have for our business. What transaction clearly shows is strategic importance and growth potential of the North American beverage market. In this context, DPS's existing advantages are clear. We're the undisputed leader in flavored CSDs, the number one juice and juice drink manufacturer by volume and number one in premium teas.

We have broad and flexible route to markets that we believe strike a good balance between Company-owned DSD and our bottling partners. Our journey to integrate a fully integrated packaged beverage did not start a week ago. It started in ernest in October 2007. After 20 months of hard work, our integration is nearing completion. With the leading brand portfolio and distribution flexibility, we believe we are well positioned to exploit the significant per capita development opportunities that are out there. Single serve availability, award winning innovation, and 360-degree consumer communications will ensure our brands are top of mind and always close at hand. Our Crush cost mind-set will also ensure we manage the leanest and most efficient operating model possible.

As I have said before, our guiding principal is to always do what's best for our brands, our customers, our consumers, and ultimately you, our stockholders. We're reviewing a number of possible strategic options that build on our already strong growth prospects. As I'm sure you'll appreciate, discussions with customers or potential customers are something best handled in private. Therefore, it would be premature and certainly inappropriate for us to further comment on this transaction for the time being. We'll come back to you with more news when we have something to share.

Now, turning to our second quarter. I am pleased to report strong results across all our segments. This continues the momentum we've established in the first quarter. We're seeing greater economic stability with LRB trends improving sequentially. Against this backdrop consumers are still seeking out flavored CSDs and value offerings and we expect this trend to continue. Our flexible routes to market have allowed us to effectively navigate a challenging macro economic. Our CSD and value juices continue to perform well and pricing remains rational. For both the quarter and the year to date, and on an adjusted basis, volume grew 4%. Net sales grew 3% and 4% respectively. Segment operating profit as adjusted was up 16% for the quarter, and 17% year to date. CSD volume grew 4% in the quarter. Dr Pepper volume grew 4% led by cherry, which we reformulated to target the light user. Crush more than doubled in volume, adding three points to overall CSD growth on expanded distribution. We also benefited from the shift of Easter into the second quarter as well as strong support for our 4th of July promotions. Our CSD volume growth was partially offset by continued destocking at certain bottlers in Mexico, especially with Squirt.

In the quarter our fountain volume was down less than 1% at a time when QSR traffic was down 2%. Year to date, our fountain volume was up 1%. This reflects the continuing shift to flavors which now account for 53% of all regular CSD fountain servings. Adding to the win at McDonalds, we recently announced expansion of diet Dr Pepper to all 2200 Jack in the Box restaurants. We expect to complete this roll out by the end of 2009. We are targeting to have regular Dr Pepper in 100% of McDonald's and diet Dr. Pepper in 50% of McDonald's by the end of 2010.

Weakness in the premium price beverages continued as consumers migrated to value offerings. While Snapple declined double-digit in the quarter, we are encouraged by the improvements we're seeing in the trend. The new six-pack premium offering and our national media campaign are clearly having a positive impact. In Mexico, our team continues to offset a weak economy with new distribution. Crush flavor and package innovation and most recently the launch of our Venom energy drink. Moving to net sales. We continued to benefit from price increases taken early in the year reflecting the strength of our brands.

As in the first quarter, volume and price increases were offset by the negative mix from higher sales of Hawaiian Punch and CSD concentrates, as well as lower sales of Snapple. Segment operating profit as adjusted grew a healthy 16% driven by significantly lower packaging, ingredient and fuel costs, and continued cost control focus. This was partially offset by selective brand and marketplace investments. In the quarter, our supply chain team once again demonstrated operating excellence with service levels up two points, operating equipment affecting us, our manufacturing efficiency measure up four points and obsolescence down 20%. As our product gained broad distribution, we're also realizing greater returns on our consumer communication efforts and new product launches. Feedback from our customers and consumers tell us that we're on the right track. We're benefiting from lower advertising rates and combined with incremental investments, our GRPs are up strong double digits. Dr Pepper is blanketing the light user with the diet user sampling, targeted couponing on pack and under- the-cap promotions and incremental media featuring our latest Doctor, Dr Dre. In June Dr Pepper teamed up with Electronic Arts to bring gaming fans access to exclusive premium, downloadable content in 2010 through codes found under more than 500 specially marked Dr Pepper packages. And for the 10th year in a row, Dr Pepper was the official co-sponsor of the Teen Choice 2009, which aired this past Monday on Fox. 7UP continues to perform well relative to the category. Year to date volume is up 1%, while we estimate the category to be down mid-single digits.

We're seeing growth in two areas. First, Cherry 7UP with antioxidants is bringing consumers back to CSDs. Half of its volumes is being sourced from noncarbonates, while the other half is coming from non DPS CSDs. Second, our continued focus on Hispanic programming is driving two points of share growth in our Hispanic track markets. We recently launched a campaign that celebrates the flavorful moments experienced through a natural way of life. In July, we launched our Up to Us campaign asking consumers to help us conserve over three million pounds of plastic using our new environmentally friendly 2-litter eco-bottle. With up to 40% post consumer recycle material,this is one of the several initiatives we have underway to reduce our environmental impact. You will hear more about these efforts in the coming months.

Canada Dry took the top spot for beverages at that the Canadian Grand Prix New Products Award with its Green Tea Gingerale product. For the first time in eight years, we turned to the US airwaves for support of the new product with new graphics calling out its made with real ginger credentials. Our Snapple premium six-pack continues to gain momentum. ACV distribution hits 68% in the latest four week period with markets like Des Moines, Denver, Chicago, and Seattle at over 90% ACV. Snapple value tea hit 51% ACV distribution. Now, ahead of our target range for the year. On June 10th, we celebrated National Iced Tea Day with a full-page ad in the USA today offering consumers the opportunity to try a bottle of Snapple for free. To drive additional premium trial and display, we are adding Try Me Free mail-in rebates in September. For a limited time only, we will introduce a mint inspired tea under the slogan, Make A Mint Tea, that will offer consumers the opportunity to win free rent. Venom energy's partnership with Andretti-Green racing is providing great visibility to the brand and having launched in 2007, Venom still continues to post strong volume growth with grocery ACV now at 56%.

In keeping with our grass roots efforts to build Venom one bottle at a time, we've also gathered an unprecedented team of professional athletes there Joe Johnson in Atlanta to Patrick Willis in San Francisco to promote the brand in their local marks. We'll continue to be category management choice at several of our large accounts and most recently were honored by 7-Eleven as Vendor Of The Year for the second year running. This award recognize the strength of our partnership, the value of our brands, and our commitment to customer service. The integration of our Company-owned DSD operations is nearing completion and is already delivering results. Moving to one common sales, supply chain and back-office platform has provided much needed standardization and productivity. Since the integration began, our business has generated over $100 million in annualized savings. Our SAP 6.0 upgrade is progressing to plan. A combination of a successful pilot, extensive cut-over planning and very active business engagement has allowed us to complete our southwest, west, and northeast regions with no loss of business continuity. We're about 80% through the rollout with our central and southeast regions scheduled for deployment in Q4 2009 and Q1 2010.

Our handheld rollout is almost three-quarters complete and is delivering improved sales and route analytics, better fleet utilization, greater sales efficiency, and improved customer service. We're also on schedule with our Victorville facility. A key plank in our five regional centers strategy. We continue to expect the first line to be operational during the first quarter of 2010. We're also very proud to say that Victorville will be LEED-certified. With a solid foundation in place, we're now leveraging this business to drive profitable growth. Through July, we've placed 23,000 cold drink units in line with our SF placement plan.

This week, we announced expanded distribution, a high drive energy drinks and added energy chews into the mix. Since taking a stake in high drive enery, we have been pleased with the support for and the performance of this brand. We're continuously refining our distribution network to drive the absolute lowest delivered cost and we are leveraging our productivity office to accelerate cost savings initiatives. Finally, our new segment reporting makes it much easier to see our progress and over time we expect to see further improvement in operating performance on a constant product mix basis. With that, let me turn the call over to John to to walk you through some of our financial highlights and our 2009 guidance update in more detail.

Thanks, Larry. Let me start by addressing our unallocated corporate costs. In line with our beginning of the year guidance and for the quarter, we incurred higher stand-alone costs to establish corporate functions as well as increased stock-based compensation expense. Additionally, as we've taken longer cover against certain commodities, we have increased our exposure to unrealized mark to market gains and losses. In the second quarter, we recorded a mark to market gain of $8 million. We've also started to incur expenses that are being funded by our productivity office. While we're still in the ramp-up mode, we are starting to see some savings being generated. A good example is our recent entry into a five-year IT outsourcing agreement with HCL Technologies, which provides application support and maintenance, and user computing, as well as integrated service desk and network management.

Additionally, HCL offers us deep SAP capabilities, an area of particular importance to us. We're also building on our existing back office outsourcing agreement. In June, our order entry process for concentrates and warehouse products went live. Our billings to cash projects which will drive both savings and improved cash flow is underway and scheduled to go live this fall. On accounts payable side, we just kicked off a new invoicing project which should allow to us improve payment processes and reduce costs per transaction. By closely monitoring our service level agreements, we're delivering our exceeding our established productivity goals.

Our tax rate for the quarter was 130 basis points below our full year expected tax rate. This was driven by timing of certain tax planning initiatives. Year to date, cash provided from operating activities increased $93 million to $371 million, compared to the year-ago period. A continued focus on trade working capital, particularly in receivables, drove a $12 million improvement in the year to date period. Net capital spending was $134 million and is tracking in line with our full-year guidance of 5% of net sales. Through June, we made optional principal repayments of $280 million that cover all but $12 million of our 2010 obligations.

As Larry mentioned earlier, we're seeing an input cost environment that is substantially better than our beginning of the year expectations. In fact, we now expect packaging and ingredients to reduce cogs by 3% for the year. As a reminder, packaging and ingredients make up roughly 60% of our total cogs basket. In order of dollar spend magnitude, this basket comprises cans and ends, bottles and caps, sweeteners, glass, apple and other fruit concentrates, corrugate and paperboard, flavors, colors, labels and film and all other. We're seeing favorability across the entire basket, especially in HFCS, PET, glass, and paper. This reflects not just the sequential improvement in the underlying prices for these components, but also lower negotiated rates for tolling and other conversion fees.

Moving on to guidance, on a currency neutral basis and excluding the loss of product distribution, we continue to expect net sales growth to grow 2 to 4%. This range is unchanged from our previous guidance. We expect CSD and value juice trends to continue and Snapple to improve sequentially. As a reminder, we will be lapping the concentrate buy-in in the fourth quarter 2008, as well as strong double-digit growth in Hawaiian punch in the second half of 2008. We now expect earnings per share excluding certain items to be in the $1.88 to $1.96 range. This represents an increase of $0.18 from our previous guidance and principally reflects the lesser input cost environment with packaging and ingredient cost now expected to reduce total cogs by 3% for the full year. We expect our tax rate to be approximately 38% as we benefit from favorable tax planning initiatives and higher profit leverage. As a reminder, tax rate includes $20 million of items indemnified by Cadbury.

We continue to seek out growth in productivity investments to support the long-term health of our brands and drive further cost efficiencies. Our incremental media weight is second half loaded and will spotlight Dr Pepper, diet Dr Pepper, 7UP, Canada Dry, and Snapple. In terms of cash, our priorities remain unchanged. We continue to expect strong cash from operations, and we continue to focus on working capital improvements. Our CapEx target remains at 5% of net sales. Given the continued strength in our business and consistent with the $0.29 increase in EPS compared with our beginning of the year guidance, we now expect to repay $75 million more in optional principal payments bringing our full-year debt repayment to at least $475 million. With that, let he me turn the call back to Larry.

Thanks, John. Before we open the lines for questions, let me leave with you a few thoughts. We're executing against our focused strategy. Our packaged beverages integration is nearing completion and is already delivering results. We remain confident DPS's ability to seize the substantial growth opportunities in North America, both in the near term and the long term. It's this confidence that supports our increase in EPS guidance and our forecast of optional debt repayments.

As I said at the beginning of the call, the acquisition of the two Pepsi bottlers clearly shows the strategic importance and growth potential of the North American beverage market. We are reviewing a number of possible strategic options, and therefore, it would be inappropriate for us to answer any questions on this topic at this time. Operator, we are ready for our first question.

Thank you. (Operator Instructions). Our first question comes from Camile [Joshwala] from UBS.

Hey, guys. Good afternoon. First question, if you can give us an update or progress report on the cooler rollouts and then within that context, how your cold drink business is doing and how you see it doing towards the end of the year.

Yes. This is Larry. Like I said, we're on track with what we had planned. We've placed 23,000. We're still seeing great opportunities out there. Of course, you always do in the beginning when you first start something like this.

I will say, I think for everyone still challenging out there on the single drink volume, but we're starting to feel much more positive and seeing an uptick, but we're very happy with the cold drink placement, but in the existing account we're still looking for more opportunities for driving traffic, promotional activities to drive that volume.

No fundamental changes in the channel?

No.

Okay. Thank you.

Okay.

Next question comes from Judy Hong of Goldman Sachs.

Thanks, good morning. John, in the last call, I think you talked about how market spending was going to be skewed more in the second quarter, and it sounds like on this call you're saying is it's more second half weighted. Was there a bit of a timing shift in terms of the marketing spending from second quarter to third quarter or second half?

No, Judy, no real shift. We indicated somewhere in the tens of millions, I'd say mid teens millions more that would have shifted from Q3 of 2008 into Q2 of 2009. We have seen that in this quarter, but remember, it is split between net sales, some of it is coupon expense and some of it is marketing. Would we're talking about here what we're really flagging here is incremental media weight. We are seeing the benefits from commodities dropping through, we're not letting 100% of that drop through. We're going to spend incrementally in the back half, and I would guide you that that spend will be more to Q4 than Q3. So expect to the hit more in Q4 with a big focus as I called out on Dr. Pepper, Canada Dry, Snapple and the like.

Larry, wonder if you could give us some perspective on how you think pricing and promotional environment will unfold in the second half in the back, especially as now your competitors are also going to benefit from more beneficial commodity environment.

Judy, pricing continues to remain rational. We're seeing more promotion instead of just price off, which I thinks to kind of help to drive excitement and traffic into the aisle. If you look at the latest Nielsen was up 4.4 points, and 4th of July activity was much more buy gifts instead of just heavy discounting. I don't see anything out there to tell me that's going to change. I think it's going to stay rational. I think promotional activity could heat up, but again, that's what this business is all about.

Do you have a view in terms of what long-term LRB category growth rate would be?

Yes. I think if we look it at the LRB, we're looking at probably somewhere in the flat to one.

Okay. Larry, I know you said you don't want to give too much details about what might happen to your brands that are with the Pepsi system, but is there any way in sort of a general sense what the options might be in a sense, sort of the pros and cons of those options?

We've just really got into it right now, and we don't see a lot of cons, but as our team works on it, looks at the different options, just emphasize that what we look at is the strength of our brand and what's right for our customer, consumer, and shareholder. That's the decisions we'll make.

And from a timing perspective would the decision be made after the deal closes, or would some decision be reached -- is it possible for a decision to be reached before that time?

I don't have any idea when their deal is closing, but he we'll just see when we get -- when all our facts come in.

Thanks.

Your next question comes from Mark Swartzberg with Stifel Nicolaus.

Thanks, good afternoon, or good morning, everyone.

Hi, Mark.

Larry, I was hoping to get a little more granularity, if you can, on recent trends, both for you and for the category here in the US more broadly. Can you give us an idea of how you think the category performed on an all channel basis over 4th of July and then over the last five weeks or so, from a category and DPS perspective?

I think we've all recognized that CSDs are definitely benefiting from the current economic climate. I think what we've seen in the first half and continuing now into the second, I don't think it's going to change a whole lot. I think we're seeing our retailers allocate a lot more space to CSDs, and they're also using private label to attract consumers. We really expect this trend to continue into 2010.

Sounds like not a lot of trend change, if you will, in the start of the second has half?

No.

John, as we think about 2010 from a packaging and ingredients perspective, you've adopted this more favorable view for 09, 3% off of cogs with the year on year savings on those inputs. If we assume they stay where they are for the next 12 months, is it correct to think that that 3% number goes to a 4 or 5% negative number in 2010, or is that too optimistic?

I think, Mark, that is too optimistic. It's too early for us to be giving guidance on 2010 at this stage, but clearly we've benefited. At relative 3%, we benefited significantly. That obvious means we won't benefit as much in 2010 on a relative basis. As we look at it at the moment, we' probably today looking at a closer to flat environment, maybe to modestly down, but that's compared with a negative three base.

Fair enough. That's great. That's helpful. Thank you, guys.

(Operator Instructions) Your next question comes from Damian Witkowski of Gabelli & Company.

Just wanted to dig in on the success of Dr Pepper Cherry. Any way of telling if you're sourcing new consumers to the Dr Pepper category, or is it just more frequent use by your existing consumers?

What we're seeing is he we're bringing new people into the category, and it's our light user. If you remember, Damian, when we first started looking at it we found that some people thought that Dr Pepper was a little strong. So we smoothed it out with the taste of cherry, and we are just thrilled to death with the results. Los Angeles is our -- right now our number one market. So it's working very well on our strategy to hit the coast. To hit the lower developed markets, so that we start growing those per caps across the United States.

Speaking of geography, are you seeing strength pretty much across the board, or different regions doing better than stores in US?

Pretty much across the board. We've had some -- I think everybody in the category has had some weather through this summer. So you can see some regions that were affected a little bit by that, but we're seeing pretty well consistent performance.

On pricing, you've talked about a rational environment, but is there a different a difference amongst key categories?

You might see a little more in the value teas. But I think if you watch what's happening with teas, most of the growth there is in the prepriced 24 ounce cans and the gallons. Again, people driving to the value equation. But we're very happy with what we're seeing in the relaunch of Snapple premium. We're very pleased.

I'm sorry, I know you said this but do I have this right? The ACV for the Snapple mainstream is up to 68%? Is that right?

Mainstream was 51%. The other one was six-pack premium.

Thanks.

Okay.

The next question comes from Andrew Kieley of Deutsche Bank.

Was wondering, 4% or so growth of brand Dr Pepper, was most of that from cherry, or are there other factors?

Most of it was driven by cherry, yes.

Okay. And I think early in the year, for your total CSD volume, you guys have talked about sort of 1% growth. How do you think about that today given how you've done in the first half?

If you look at our numbers right now with Crush being three points, we're still very solid on our CSD growth being flat up to one.

Okay.

Thats Crush.

Okay. And then John I wanted to ask you, could you talk a little bit more about the timing of commodity cost coverage that you have? How far it extends into 2010? Then maybe where most of the variability is for you at this point?

Most of the variability is in the ones that we can't log. So the PET would be the best example, where we are only out two to three months out. We have barring PET for the most part, 2009 is covered. We've taken the advantage or the opportunity in recent weeks and months to extend into 2010 and that is in the areas like aluminum, and corn, and gases is where we've moved forward into 2010. We can't give you a percentage on that yet. Look for an update when we get to give you more specific 2010 guidance in the fall.

Okay. And then are you able to give, on the McDonald's rollout, can you give us a sense of what kind of progress you achieved this quarter and maybe are you able to put profit perimeters around that for the year?

I think there's a couple of factors with the McDonald's rollout. One is, where we're straight replacement of Pibb into existing valves, that is going to be relatively straight forward. That should mostly be accomplish by the end of this year. That's probably 2500 outlets. For the other outlets where Dr Pepper is brand new, we are going to have to coordinate with McDonald's as they go through their beverage strategy rollout. They want to disturb the stores really only once, and we want to make sure that we are hooked up with them as they roll out frapes, as they finalize coffee, so that will cause the McDonald's rollout to go all the way through 2010, and that was why we called out it will be the end of 2010 before that's complete, and at this stage, you know, there wouldn't be a significant impact to 2009. We'll call out more of the 2010 impact when we get to that stage of guidance.

okay. And then my last question for Larry, I know you can't talk a lot about the Pepsi situation, but just, I guess, structurally, they talk about a lot of the focus on cost savings. I was wondering, are there any comparisons you could draw for opportunities for you in your system in terms of cost savings and infrastructure rationalization, all those kinds of things going forward?

Well, you know, like I said earlier, we started in 2007, and we're about complete with our integration. So we have -- at DPS we have a never ending mind-set of continuous improvement and operating efficiencies. So with a crush cost mentality and constantly into the lean six sigma continuous improvement, we're always looking for more, but we've captured the majority of ours the last couple years.

Thanks a lot.

Your next question is from Judy hong of Goldman Sachs.

Thanks. Hi again. John, in the beverage concentrate business, you cited the higher fountain food service contractual discount that dragged the pricing in the quarter. Can you explain what that is and quantify how much that is and is this something that's more of on time in nature, or as you have these fountain contracts that you likely to see this continuing going forward?

Judy, it's an ongoing feature. As you know, it's a very challenging environment. It's the least profitable of the concentrate businesses. If I take the McDonald's example, you should think of continues more as paid sampling for bottle and can than a true margin expander. It's a feature that's going to be with us for some time.

Do you have quantification of what magnitude the drag would be?

Magnitude? Probably less than $10 million at a profit level.

Okay. Thank you.

Your final question this morning comes from Mark Swartzberg of Stifel Nicolaus.

Hi, again, guys. Snapple, I might have missed it, but earlier this year you were talking about expecting to see that brand actually post growth by the time ended from a volume perspective. Is that still your view?

Yes. Like I said, the trends we're seeing are very encouraging. As everybody knows, we had -- I think everybody in the premium category had a really tough fourth quarter. And so, we're very bullish on what we're seeing with our Snapple and like I said in our last call, and it kind of put us back a quarter, we still think we're going to get there.

Fair enough. Great. Thanks, Larry.

All right. Well, I want to thank everybody for joining us today, and especially for your continued interest in Dr Pepper Snapple Group. Thank you.

This concludes your conference. You may now disconnect. Thank you for your participation.