Dr Pepper Snapple Group Earnings Call Insights: TEN Platform and Support from Independent Retailers

Dr Pepper Snapple Group, Inc. (NYSE:DPS) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

TEN Platform

Judy Hong – Goldman Sachs: So, I guess I just wanted to get that a little bit more color in terms of the marketing spending increase behind the TEN platform in 2013, so is the excess of $30 million incremental to what you are kind of spending on your other brands or is there some shift in terms of your spending? Then, I guess sort of the broader question, as I think about the product, you clearly talked about this being a long-term platform that needs some time to build. So just curious how you sort of think about the phasing of this marketing spending and why you feel so confident that spending this sort of step-up in spending in 2013 is the right strategy for the platform?

Larry D. Young – President and CEO: The $30 million is incremental Judy. I mean we’re getting behind this. I mean everybody is probably event seeing today some of the headlines from those CSPI. I mean these threats against our industry are not going to go away. We are not going to sit back and let it bring our volume downs and affect. We’re behind this. The $30 million like I said earlier will be across local, national, radio. It will be on the social networks, we will have a lot of outdoor, a lot of in-home. We’re going to go after aggressively stay behind it and it will phase pretty well through the year. You will see the media start. You will see the media start probably around in March, first part of March. You are going to have a lot of higher spend in the first half and then as it rolls out, and we get the execution, if we need to spend more, we’ll be looking at it and staying behind it, because we are truly committed to it.

Martin M. Ellen – CFO: Judy let me add one more fact, and I tried to emphasize it in my script that is that our commitment goes to the extent of creating in essence an operating loss on these brands in 2013, that’s what I said. And as I said, we’re prepared, we’re so serious about this that we’re prepared to – as I said slow the trajectory in what maybe what have been high-single digit EPS growth in 2013 to about 5.5% if you use the midpoint of our range.

Judy Hong – Goldman Sachs: I understand the math, I am just curious, is this sort of a one-time rebasing of your marketing spending or if these issues persist, you know do you sort of need this kind of an ongoing multi-year investment that limit your earnings growth to kind of this mid-single digit in 2013?

Martin M. Ellen – CFO: Right now we see it as a one year event. Now we’re going to have to see how the brands performed in the marketplace, but this is clearly a one-time step up. We would not expect to continue to do this at least right now beyond 2103.

Support from Independent Retailers

Steve Powers – Sanford C. Bernstein: Building on the TEN question. Obviously, it’s an interesting innovation, but the platform represents a good number of new SKUs and adds complexity to the supply chain. You’ll probably have to displace a number of new products – number of existing products on the store shelf. So, how confident are you – what gives you that confidence that the TEN products will find support from independent bottlers and retailers?

Larry D. Young – President and CEO: Steve, I think the biggest thing that’s helping us with this the stores that we have put out so far, we’ve win and we’ve got incremental space, it’s one of the requirements. Our consumers have been asking for something better-for-you, our customers have been asking for, we’ve come in with something, we’ve taken it into them. They are looking at the results. I can just tell you some of the results we’ve seen early some of the first ones out of (indiscernible) we had a large convenience chain and a large grocery chain go first and they are looking at the first four weeks that they are in. 71% of TEN sales are incremental to the LRB category, 91% of the TEN sales were incremental to the CSD category. When you take numbers like this back out to your bottling partners and our guys in the field and other customers, it’s not that hard of a sale. I have been in the trade a lot the last few weeks and I will tell what I am very, very pleased with the execution that I have seen in our team and our bottling partners have been able to execute out there. So, it tells us whenever I get reports like this back from major retailers that we’ve got something here that very excited about. I mean we’re not getting rid any of our products. We are not doing that. I mean our supply chain is very nimble of the things we’ve been able to do with RCI, you have been on a couple of projects. These guys can produce anything when the customer need it and we ship it.

Steve Powers – Sanford C. Bernstein: Now, I was thinking more on the display, so I just figured – I don’t see retailers giving more aisle space to CSDs, so as you are having new SKUs in size, they’ve got to be coming from somewhere?

Larry D. Young – President and CEO: Well, it comes from some places. Yeah, I mean, we’ve been very fortunate that where we’ve been tested in, we’ve not lost any of our space. There has been maybe a little become out private label. One other things that not only just ours, but working – speaking for the industry, we’re going in a lot of them saying we think there needs to be an incremental space for everybody in the industry that has a better-for-you product. I mean we were able to do it with waters and teas and all these other items that people thought in the beginning would come out of our CSDs, they didn’t, and I think that’s where we all have to go and say let’s get a section that’s better-for-you.

Steve Powers – Sanford C. Bernstein: One other thing on pricing, is there a difference between the pricing strategy you are employing on concentrate with your bottling partners versus the pricing, do you expect to see at the wholesale level because we’ve heard a number of rumblings of discontent regarding some of the concentrate price increases that you’ve pushed through early this year ahead of perceived wholesale prices. Just wondering to get your perspective on that and whether or not you felt it was at all risk?

Larry D. Young – President and CEO: I don’t think you’ll ever find a bottler in the world that won’t rumble if you raise 0.5%, but that’s kind of given. I have not heard that much and we have nothing to do with how our bottlers set pricing. So, I like the good thing for us, we don’t have that much problem as that we can pretty well show to our bottlers and to everybody that buys products from us whatever we increase it we put it back into marketing. We put it back into activation. We are not sitting here and just putting in the bank.

Steve Powers – Sanford C. Bernstein: And then one last, I guess, may be housekeeping thing. Marty, in the commodity outlook I didn’t hear you mention apple juice concentrate. Those prices have come down pretty considerably in the last couple months. So, what’s your outlook there, what impact does it have and the extent you are going to benefit from that deflation. Does it show up in margin or is it dealt back in price on the shelf?

Martin M. Ellen – CFO: You are right. Apple juice concentrate has come down recently. I have seen prices under $8 a gallon, at least couple of weeks ago. I’ll tell you and we have bought some at lower prices, that’s in our guidance going into ’13 and looks like we got about half of our juice concentrate already purchased so to the extent prices soften we can take some advantage, but not complete advantage. There are no plans right now to deal any of that back in price.

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