Dr. Pepper Snapple Group, Inc. (DPS) - 23-Oct-2014

 
Corrected Transcript

23-Oct-2014

Dr. Pepper Snapple Group, Inc.                            (DPS)
Q3 2014 Earnings Call

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Dr. Pepper Snapple Group, Inc. (DPS)                                                                                                                                                            Corrected Transcript
Q3 2014 Earnings Call                                                                                                                                                                                                      23-Oct-2014

CORPORATE PARTICIPANTS
Heather Catelotti                                                                                                                  Marty Ellen
Vice President-Investor Relations                                                                                                  Chief Financial Officer

Larry D. Young
President, Chief Executive Officer & Director
......................................................................................................................................................................................................................................................

OTHER PARTICIPANTS
Bonnie L. Herzog                                                                                                                   Mark D. Swartzberg
Wells Fargo Securities LLC                                                                                                         Stifel, Nicolaus & Co., Inc.

Amit Sharma                                                                                                                        John A. Faucher
BMO Capital Markets (United States)                                                                                                J.P. Morgan Securities LLC

Bill G. Schmitz                                                                                                                    Kevin M. Grundy
Deutsche Bank Securities, Inc.                                                                                                     Jefferies LLC

Judy E. Hong                                                                                                                       Robert E. Ottenstein
Goldman Sachs & Co.                                                                                                                International Strategy & Investment Group LLC

Vivien Nicole Azer                                                                                                                 Ali Dibadj
Cowen & Co. LLC                                                                                                                    Sanford C. Bernstein & Co. LLC

Steve R. Powers
UBS Securities LLC

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Dr. Pepper Snapple Group, Inc. (DPS)                                                                                                                                                            Corrected Transcript
Q3 2014 Earnings Call                                                                                                                                                                                                      23-Oct-2014

MANAGEMENT DISCUSSION SECTION
Operator: Good morning and welcome to Dr Pepper Snapple Group's third quarter 2014 earnings conference
call. Your lines have been placed on listen only until the question-and-answer session.

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 Heather Catelotti, Vice President, Investor Relations. Heather, you may begin.
......................................................................................................................................................................................................................................................

Heather Catelotti
Vice President-Investor Relations
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 cautionary statements and disclaimers contained in the Safe Harbor
Statement in this morning's earnings press release and our SEC filing. 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's 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 questions.

With that, let me turn the call to Larry.
......................................................................................................................................................................................................................................................

Larry D. Young
President, Chief Executive Officer & Director
Thank you, Heather, and good morning, everyone. Continuing our strong performance for the first half of the
year, our teams posted yet another quarter of solid results in what continues to be an extremely challenged
environment. I'm proud of our people for remaining focused on building our brands, executing with excellence in
the marketplace, and driving improvement across the organization with RCI.

And as you read in this morning's press release, we've raised our full year EPS guidance range to $3.56 to $3.62
and now expect full year EPS to be up 11% to 13%. For the quarter, bottler case sales increased 1%, with CSDs and
non-carbs each increasing 1%. Positive price mix also drove 1%.

Brand Dr. Pepper declined 2% in the quarter, primarily driven by continued declines in our diet products. Our
Core 4 brands grew 3% in the quarter, led by continued strong growth in Canada Dry, which grew 8%. Sunkist
increased 1% in the quarter. And both 7UP and A&W were flat. Hawaiian Punch declined 2%. Snapple increased
2% in the quarter, with Snapple Premium up mid-single digits, offsetting losses on our value line, which we have

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Dr. Pepper Snapple Group, Inc. (DPS)                                                        Corrected Transcript
Q3 2014 Earnings Call                                                                                    23-Oct-2014

strategically de-emphasized. Mott's decreased 1% in the quarter on declines in sauce. Peñafiel increased 25%, as
we continue to see strong performance in our mineral water business and successful innovation that we launched
in the third quarter of last year.

All other brands increased by 1% in the quarter, led by Schweppes, which experienced a high single digit increase,
reflecting growth in our sparkling waters and positive ginger ale category trends. Clamato grew 7% in the quarter
and our water category increased 3% on new distribution agreements with Bai5 and Sparkling Fruit20 and
continued strong growth in Vita Coco.

On a year-to-date basis, bottler case sales were flat on two points of positive mix and price. Dr Pepper bottler case
sales declined 2% and our Core 4 brands increased 2% year-to-date. Hawaiian Punch declined 8%, while Snapple
was flat. Mott's decreased 1% and Peñafiel increased 23%. All other brands were flat year-to-date.

On a currency neutral basis, net sales increased 3% in the quarter on favorable segment mix, product and package
mix, and net pricing, primarily driven by price increases taken to cover the sugar tax in Mexico. Core operating
income increased 6% on favorable cost of sales trends and ongoing productivity improvements that were partially
offset by higher performance-based incentive compensation costs, higher transportation costs and increased
manufacturing costs. Core EPS increased 11% in the quarter. Year-to-date, currency neutral net sales increased
2%. Core income from operations increased 14% and core EPS has increased 23%.

As we finish out the year, I think you'll agree we have strong plans in place to continue our momentum by
engaging our targeted consumers and giving our retail and bottling partners' activity they can get excited about.
The 2014 college football season is off to an exciting start. And we've kicked off a multi-year partnership with
ESPN. Dr Pepper is the first Official College Football Championship partner and the presenting sponsor of the
[ph] Newton (6:07) National Championship Trophy. We'll deliver over 2 billion media impressions across both
traditional and digital media platforms across all of ESPN's properties, ensuring that we're always on.

And we're continuing with our Dr Pepper Tuition Giveaway, giving away $100,000 in tuition to the winner of each
throw at the championship games. We recently debuted a new Diet Dr Pepper media spot celebrating the great
taste of Diet Dr Pepper. And as Halloween approaches, we're partnering with Mars and driving incremental points
of interruption throughout retail on our Core 4 brands.

We know music is a passion point for Hispanics so we're sponsoring the 15th Annual Latin GRAMMYs in
November, where we'll sponsor street parties in key Hispanic markets and offer consumers a chance to win a trip
to attend the show in Las Vegas.

We'll light up the holiday mixer season with incremental points of interruption and retail activation behind 7UP,
Canada Dry and Schweppes. And we'll have new holiday-themed point-of-sale and merchandising to drive
additional activity behind our Snapple brand. Speaking of Snapple, we're excited about our upcoming launch of
Snapple Straight Up Teas in early 2015. As consumer preferences in the tea category continue to evolve, we know
that our new line of unflavored teas will be a hit with consumers.

And as we've previously communicated, we continue to test our naturally-sweetened versions of Dr Pepper, 7UP
and Canada Dry, which are only 60 calories per 12 ounce can and sweetened with real sugar and the latest
generation of Stevia blends. Based on our test results, we'll be expanding the brands next year into additional
regional markets.

Now, let me turn the call over to Marty to walk you through further information on our financial results and our
full year guidance.

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Dr. Pepper Snapple Group, Inc. (DPS)                                                      Corrected Transcript
Q3 2014 Earnings Call                                                                                 23-Oct-2014

Marty Ellen
Chief Financial Officer
Thanks, Larry. Good morning, everyone. For the quarter, reported net sales increased 3% on favorable segment
mix, product and package mix and net pricing, driven primarily by the price increase in Mexico to cover the sugar
tax. Sales volumes were flat in the quarter.

Reported gross margins were up 50 basis points, increasing from 57.9% last year to 58.4% this year. Lower
commodity costs, inclusive of the year-over-year unfavorable $7 million LIFO comparison, increased gross
margins by 140 basis points.

RCI productivity and other cost improvements further increased gross margins by 70 basis points. Segment mix
and product and package mix, collectively, reduced gross margins by 90 basis points. Furthermore, certain
promotional activity in the quarter reduced gross margins by another 20 basis points.

The net impact of the Mexican sugar tax reduced gross margins by 40 basis points, as our pricing, as always
intended, was only to cover the tax. Within manufacturing costs, we expensed about $5 million of individual small
spare parts – individual small dollar spare parts, so as to lower non-value administrative cost. This reduced gross
margins by 30 basis points.

Changes in certain commodity prices at the end of the quarter caused us to record a $2 million unrealized mark-
to-market loss on commodity hedges, with a $6 million loss recorded in SG&A and a $4 million gain recorded in
cost of goods sold. This compares to a $1 million unrealized mark-to-market gain last year, all recorded in SG&A.
This favorable mark-to-market comparison within cost of goods sold increased reported gross margins by 20 basis
points.

For the quarter, SG&A, excluding depreciation, increased by $18 million, driven by $7 million of higher
performance-based incentive compensation costs, $7 million of planned higher transportation costs, an
unfavorable comparison to a $6 million credit to a legal provision in the prior-year, and the unrealized mark-to-
market comparison I just mentioned.

Similar to last year, we recorded certain unplanned health and wellness and risk insurance favorable cost true-ups
in the quarter. And, as a reminder, last year's SG&A included $7 million of cost associated with certain
restructuring actions.

Depreciation and amortization was flat at $28 million in the quarter. Core operating income was $318 million
compared to $300 million last year, up 6%. Core operating margin of 20.1% of net sales was up 70 basis points
from 19.4% last year. Below the operating line, net interest expense was $27 million, $2 million below last year.
Our reported effective tax rate for the quarter was 34%, lower than the 35.5% previously expected as we received a
one-time tax benefit.

Moving onto cash flow, cash from operating activities for the nine months was $769 million, up significantly from
$616 million. And capital spending was $103 million compared to $111 million last year. Reported free cash flow
was $666 million compared to $505 million last year. Total distributions to our shareholders year-to-date were
$513 million, with $276 million in shares repurchased and $237 million in dividends.

Before I move onto guidance, let me give a quick update on how we continue to drive value with RCI through our
Lean tracks. Our commitment to building an everlasting RCI culture at Dr Pepper is continuing to drive

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Dr. Pepper Snapple Group, Inc. (DPS)                                                        Corrected Transcript
Q3 2014 Earnings Call                                                                                    23-Oct-2014

significant improvements across many areas of our business. I know many of you still believe RCI is a cost
reduction process. So let me provide a few examples of using the tools and framework of RCI to create growth.

Using our RCI cap, or problem-solving process, on a key account customer basis, including one customer's
involvement in this process, we've added incremental points of distribution across our single-serve juice portfolio,
resulting in 50 basis points of dollar share growth in the single-serve multi-pack juice segment.

Additionally, in using a similar process, we've closed thousands of distribution voids on our Snapple Premium
business across several key markets, achieving high single digit sales growth in each of those markets measured
after the changes were implemented. And we worked with one of our major distribution partners to improve Dr
Pepper display tie-in rates in a major metro area that included the adoption of standard work routines for account
managers and merchandisers who are handling our products.

With regard to productivity, our inventory reductions have enabled us to eliminate approximately 700,000 square
feet of warehouse space in 2014, all of which has been monetized. Our reductions in driver checkout times are
allowing us to run more routes per week and our many other RCI productivity improvements are enabling us to
significantly offset the headwinds of general cost inflation.

Now moving onto 2014 full year guidance, as you saw in this morning's release, we have now raised our core EPS
guidance to a range of $3.56 to $3.62 on a full year net sales increase of about 1%. As a reminder, our core fourth
quarter EPS of $0.97 last year was quite strong, as we recorded a $14 million LIFO benefit in cost of goods sold
and $9 million in health and wellness cost true-ups, both of which are non-recurring in this year's fourth quarter.
These items added about $0.08 to last year's EPS. For the year, we now expect sales volumes to be closer to flat,
with CSDs roughly flat based on strong Core 4 and Peñafiel performance. We expect our non-carb portfolio to
decline low single digits, driven by Hawaiian Punch.

Year-to-date, concentrate shipment volumes have trended ahead of bottler case sales sell-through; therefore, we
do expect an inventory correction in the fourth quarter in the beverage concentrate segment. As a reminder, Dr
Pepper is the largest brand in this segment and its bottler case sales have declined 2% year-to-date.

As we communicated previously, we expect packaging and ingredients deflation for the full year. This is now
expected to reduce total cost of goods, inclusive of the year-over-year LIFO comparison, by approximately 2.5% on
a constant volume mix basis, driven by better than expected sweetener and PET costs.

However, we expect approximately 1% cost of goods inflation in the fourth quarter, which included a $14 million
LIFO credit. After considering all of these items, 2014 gross margins should be slightly better than last year for the
full year, but down year-on-year in the fourth quarter. Higher transportation costs are now expected to add about
$20 million of expense in 2014, with about $5 million of the increase being recorded in the fourth quarter. We
have also identified some additional brand building opportunities to invest behind in the fourth quarter, which we
expect to increase marketing costs by $7 million compared to last year.

And finally, within SG&A, we also expect an increase of approximately $2 million in American Beverage
Association fees in the fourth quarter. We continue to expect foreign exchange translation to lower net sales by
approximately 50 basis points for the full year and reduce core EPS by $0.01 in the fourth quarter.

Below-segment operating profit net interest expense will now be around 4.3% on our $2.5 billion of debt. And our
full year core tax rate is now expected to be approximately 35%. In terms of cash flow, capital spending will be
approximately 3% of net sales and we are on track to repurchase approximately $375 million to $400 million of
our common stock in 2014, subject to market conditions.

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Dr. Pepper Snapple Group, Inc. (DPS)                                                                                                                                                            Corrected Transcript
Q3 2014 Earnings Call                                                                                                                                                                                                      23-Oct-2014

With that, let me turn the call back over to Larry.
......................................................................................................................................................................................................................................................

Larry D. Young
President, Chief Executive Officer & Director
Thanks, Marty. Before we open the lines for questions, let me leave you with these thoughts. Our priorities remain
unchanged. We will continue to execute our strategy in a challenging environment, ensuring that we build our
brands while executing with excellence in the marketplace and driving productivity throughout the business.

We remain focused on managing the business prudently for the long-term. And we'll continue to invest in our
brands and our people, while ensuring we optimize every dollar we spend. We're committed to providing
consumers with options to address their evolving needs and lifestyles. RCI continues to drive meaningful
improvements in the organization. And, importantly, we remain committed to returning excess free cash flow to
our shareholders over time.

Operator, we're ready for our first question.
......................................................................................................................................................................................................................................................

QUESTION AND ANSWER SECTION
Operator: Thank you. [Operator Instructions] Our first question is coming from Bonnie Herzog with Wells
Fargo.
......................................................................................................................................................................................................................................................

Bonnie L. Herzog
Wells Fargo Securities LLC                                                                                                                                                                                                                 Q
Can you guys hear me?
......................................................................................................................................................................................................................................................

Larry D. Young
President, Chief Executive Officer & Director                                                                                                                                                                                                A
Yeah, Bonnie, good morning.
......................................................................................................................................................................................................................................................

Marty Ellen
Chief Financial Officer                                                                                                                                                                                                                      A
Good morning, Bonnie.
......................................................................................................................................................................................................................................................

Bonnie L. Herzog
Wells Fargo Securities LLC                                                                                                                                                                                                                 Q
Good morning. So I guess my first question is I'm still trying to understand how you're thinking about your
business from a top-line perspective over the long-term, given the continued pressures for not only your company,
but certainly the industry in general, and then how you're going to balance this pressure with the higher fixed cost
ratio. Marty, I know you touched on this a little in terms of your RCI efforts, which have been very strong, but is
there something else that gives you confidence to be able to balance this over the long-term and, thinking about
your business model with soft top-line growth, is that truly sustainable?
......................................................................................................................................................................................................................................................

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Dr. Pepper Snapple Group, Inc. (DPS)                                                                                                                                                            Corrected Transcript
Q3 2014 Earnings Call                                                                                                                                                                                                      23-Oct-2014

Marty Ellen
Chief Financial Officer                                                                                                                                                                                                                      A
The short answer, Bonnie, is it sustainable? Yes. So let's go back and take it from the top. And I'll remind
everybody nothing's changed in our long-term view. Remember we said with respect to CSDs, we could be flattish
in CSDs as a total category and then roll non-carbs in at low to mid-single digit growth rates. You know, recently,
the Hawaiian Punch has been the Achilles heel to that, but remember that when we grow Clamato, when we grow
Mott's, the profit contribution, the mix effect of that, is a really strong positive, so that drives a lot of profitability.
But in terms of those categories, so those are sort of the top-line dynamics before we talk about whatever pricing
we overlay on there in addition to the annual concentrate price increase. So that sort of gives us that low single
digit top-line, which is admittedly below the 3% to 5% we talked two years ago and that's been off the table for a
long time.

RCI has a long runway. I try to give you folks as much anecdotes as I can, but it is creating enormous opportunity
in terms of improvement and I'm not sure where your question – your question goes to fixed costs. We've actually
acknowledged that some parts of our business need a structural change. And we've done some of this in smaller
markets where we clearly don't have the scale and volume to apply all the tools of RCI and get improvements.
We've actually gone to third-party distribution partners in a handful of markets that have – those have worked
really well for us. So we'll do those where we can and where we think it makes sense, but there's just a lot of cost
opportunity.

And when we overlay a couple percent of the top-line, get some incremental margin expansion through
productivity efforts, drive that down to an increase at the operating line greater than that top-line increase, a little
bit of below-the-line leverage, and we get a nice mid-ish-single digit earnings growth number that, when you tack
on share repurchases and you tack on dividend, you know, we think gives that 10-ish% low double-digit total
shareholder return, which is all we aspire to do. And we think our plans are aligned with that.
......................................................................................................................................................................................................................................................

Bonnie L. Herzog
Wells Fargo Securities LLC                                                                                                                                                                                                                 Q
All right. Thank you. That was helpful, appreciate it.
......................................................................................................................................................................................................................................................

Operator: Our next question comes from the line of Amit Sharma with BMO Capital Markets.
......................................................................................................................................................................................................................................................

Amit Sharma
BMO Capital Markets (United States)                                                                                                                                                                                                        Q
Hi. Good morning, everyone.
......................................................................................................................................................................................................................................................

Larry D. Young
President, Chief Executive Officer & Director                                                                                                                                                                                                A
Good morning.
......................................................................................................................................................................................................................................................

Marty Ellen
Chief Financial Officer                                                                                                                                                                                                                      A
Good morning.
......................................................................................................................................................................................................................................................

Amit Sharma
BMO Capital Markets (United States)                                                                                                                                                                                                        Q
                                                                                                                                                                                                                                                  8
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Dr. Pepper Snapple Group, Inc. (DPS)                                                                                                                                                            Corrected Transcript
Q3 2014 Earnings Call                                                                                                                                                                                                      23-Oct-2014

Larry, just wanted to focus on what you just said, you finished your comment with sort of like high single, low
double digit total shareholder return. Given that earnings growth is going to be touching low double digit for this
year and very high single digit for last year as well, and RCI continues to be pretty strong, are you prepared to be a
little bit more positive about earnings growth for next year? Can you get to the high single digit earnings growth?
Or internally, is the view changing that perhaps we can start to be a little bit more positive about driving earnings
growth through the system as well?
......................................................................................................................................................................................................................................................

Marty Ellen
Chief Financial Officer                                                                                                                                                                                                                      A
Amit, this is Marty. Let me handle that question. Remind everybody for the last two years, we've had a lot of
earnings growth driven by cost of goods favorable trends. And nobody would predict that to continue, so
everything I just said assumes a more level cost of goods environment. But you can't – these have been
extraordinarily good years driven by lots of favorability. I applaud our procurement people. I think we've done a
wonderful job against what we read about others in our space in terms of our cost trends. But we can't – nobody
would predict that to continue. By the way, the good news for us has been, I would say, that that earnings
improvement has been a combination of not only the cost of goods improvement, but the fact that the marketplace
pricing has allowed that to sustain and not get competed away and maybe that's because our trends are so much
more favorable than others seem to say theirs are.

So you have to take that off the table and move to a more normal state. Nothing's changed in terms of our
excitement about business at all. We've enjoyed the last two years of cost of goods favorability.
......................................................................................................................................................................................................................................................

Amit Sharma
BMO Capital Markets (United States)                                                                                                                                                                                                        Q
Great. And then, Larry, if I may just ask one more on pricing that Marty alluded to, clearly, very clear pricing
discipline from the industry and if you listen to the other two bigger players, they have talked about packaging as a
driver of that mix as well. How far along are you in terms of bringing that mix component of price mix into the
sales growth line?
......................................................................................................................................................................................................................................................

Larry D. Young
President, Chief Executive Officer & Director                                                                                                                                                                                                A
Yeah. We're involved in it now and you got to remember with my partners out there, you know, 40% of our total is
in the packages they have, so we're very familiar with which ones work and which ones don't and what we have in
ours. You'll see us continue to innovate in package. I believe that packaging innovation is as strong as brand
innovation and LTOs on keeping the excitement in something new out there in the category. So we're up to speed
on it and we'll continue to increase it.
......................................................................................................................................................................................................................................................

Amit Sharma
BMO Capital Markets (United States)                                                                                                                                                                                                        Q
Great. Thank you very much.
......................................................................................................................................................................................................................................................

Operator: Our next question comes from the line of Bill Schmitz with Deutsche Bank.
......................................................................................................................................................................................................................................................

Bill G. Schmitz
Deutsche Bank Securities, Inc.                                                                                                                                                                                                             Q
Morning.
......................................................................................................................................................................................................................................................

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Dr. Pepper Snapple Group, Inc. (DPS)                                                                                                                                                            Corrected Transcript
Q3 2014 Earnings Call                                                                                                                                                                                                      23-Oct-2014

Larry D. Young
President, Chief Executive Officer & Director                                                                                                                                                                                                A
Morning.
......................................................................................................................................................................................................................................................

Marty Ellen
Chief Financial Officer                                                                                                                                                                                                                      A
Morning, Bill.
......................................................................................................................................................................................................................................................

Bill G. Schmitz
Deutsche Bank Securities, Inc.                                                                                                                                                                                                             Q
A couple of questions. So how much do you think is left in RCI and is there a way to sort of disaggregate like what
is pure cost saves versus revenue synergies, because I think one of the more interesting things is like a lot of it has
driven incremental revenue? And then maybe if there's an opportunity to sort of cascade some of the stuff which
has been mostly cost of goods sold focused to the G&A line because I know you're a smaller company, but if you
benchmark your just pure corporate overhead with some of your peers, it's a little bit high, a couple of hundred
basis points.
......................................................................................................................................................................................................................................................

Marty Ellen
Chief Financial Officer                                                                                                                                                                                                                      A
Okay. Bill, Let me just dismiss the last piece. I don't think you can compare unallocated corporate costs across
companies because you got to know what's in corporate and what's in the segment, so that's a comparison that's
even hard for us to do. In terms of RCI, look, there is – when I say unlimited opportunity, of course it's not
unlimited, but is there a limitation that we think we're facing right now? The answer is no. If I had talked to you a
few years ago and told you that even absent commodities, the improvements driven solely by RCI were achievable,
I think many of you would've challenged that. We beat the estimate, the first three year estimate we originally put
out there.

The things we're doing across the organization that are actually affecting cost, there's still a whole robust group of
projects. I just wanted to call out this morning and remind people that you can actually use a lot of these tools to
help create some elements of growth and that we're as much focused on the blocking and tackling that comes from
doing those kinds of programs as we are on pure productivity. Productivity only follows and cost reduction only
follows from getting rid of waste and so it never really becomes direct focus. I called out this morning the benefits
of lower inventories, shedding unnecessary warehouse space which reduces the footprint cost. It has reduced
break shrink cost, obsolescence cost.

Inventories are turning faster, so there's lot of attendant improvements and most important, most importantly,
my comment about how important that is for us to beat back what's otherwise going to be external pressures on
inflation and costs. And that's going to become our motto. We're going to fray those as best we can with
improvements, so we can see our top-line benefits actually flow through to increased profitability.
......................................................................................................................................................................................................................................................

Bill G. Schmitz
Deutsche Bank Securities, Inc.                                                                                                                                                                                                             Q
Great. That's super helpful. And then, just on the refranchising, it seems like it's kind of hitting an inflection at
Coke. Do you have any data on who's more productive like a pure Coke owned bottler versus a independent
affiliate bottler of Coke, so kind of how these changes are made? Will it be status quo or do you think there will be
a change to the business? How does the transition work, et cetera?
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Dr. Pepper Snapple Group, Inc. (DPS)                                                                                                                                                            Corrected Transcript
Q3 2014 Earnings Call                                                                                                                                                                                                      23-Oct-2014

Larry D. Young
President, Chief Executive Officer & Director                                                                                                                                                                                                A
I don't have any of that, Bill, and we don't track that, so I wouldn't be able to answer that for you.
......................................................................................................................................................................................................................................................

Bill G. Schmitz
Deutsche Bank Securities, Inc.                                                                                                                                                                                                             Q
Okay. No, that's helpful. And just one last quick one, the sparkling water trends have been amazing obviously. I
mean I know it's a relatively small category. Do you think that's a trend or is it a fad and like how could that be a
considerable material component of your business in, I don't know, three to five years?
......................................................................................................................................................................................................................................................

Larry D. Young
President, Chief Executive Officer & Director                                                                                                                                                                                                A
I think it's a trend and you see us with it in our Peñafiel, with Schweppes and with Canada Dry. We're putting a lot
of programs together on it for this year and next. And we believe it's here to stay.
......................................................................................................................................................................................................................................................

Bill G. Schmitz
Deutsche Bank Securities, Inc.                                                                                                                                                                                                             Q
Great. Thank you, guys, very much.
......................................................................................................................................................................................................................................................

Operator: Our next question comes from the line of Judy Hong with Goldman Sachs.
......................................................................................................................................................................................................................................................

Judy E. Hong
Goldman Sachs & Co.                                                                                                                                                                                                                        Q
Thank you. Good morning, everyone.
......................................................................................................................................................................................................................................................

Larry D. Young
President, Chief Executive Officer & Director                                                                                                                                                                                                A
Morning, Judy.
......................................................................................................................................................................................................................................................

Judy E. Hong
Goldman Sachs & Co.                                                                                                                                                                                                                        Q
Marty, I just wanted to go back to the commodity outlook. And if we sort of think about the fourth quarter swing
to inflation, if I kind of just take out the LIFO impact, it does still seem like you're implying a little bit of less
benefit in the fourth quarter, just excluding the LIFO benefit, but still somewhat deflationary in that context, so
maybe just clarification on sort of the swing from third quarter and the fourth quarter. And then as you think
about 2015, how much coverage do you have in place now? And given where kind of the sweetener prices are
today, oil prices, et cetera, can you give us any color just in terms of how you're thinking about 2015 commodity
outlook?
......................................................................................................................................................................................................................................................

Marty Ellen
Chief Financial Officer                                                                                                                                                                                                                      A
Yeah, so, Judy, I think you have it right for the fourth quarter. I can't say it any differently. So I think you've boxed
it right, particularly considering the LIFO benefit last year. And so that'll be what it's going to be, because, of
course, for the balance of this year, we're more or less 100% locked at this point. For 2015, we'll comment more on
2015 when we have our February call. I can tell you that across the key hedgeable commodities, I would tell you,

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Dr. Pepper Snapple Group, Inc. (DPS)                                                                                                                                                            Corrected Transcript
Q3 2014 Earnings Call                                                                                                                                                                                                      23-Oct-2014

we're anywhere from 30% to 70%, it varies across. For some of the more important ones, I'll tell you that – in a
month from now, I can tell you, particularly with some of these, we'll even be more hedged, because our calendar,
our calendar of activities, would say we'd be higher a month or so from now. But we're where we're comfortable
being. Obviously, the recent activity in the oil markets should be good for PET, better than previously. And we're
doing some things right now in PET to deal with that.

So we'll have to see where we land. I'll give you more – I'll have a better view of this in February, but we feel
comfortable where we're hedged. We feel like we've got good management over the commodities that at this point
are not so well hedged, but that's no different than any other year.
......................................................................................................................................................................................................................................................

Judy E. Hong
Goldman Sachs & Co.                                                                                                                                                                                                                        Q
Okay. Got it. Okay. And then just on your marketing spending, so, Marty, I think you said it's going up in the
fourth quarter by $7 million. The full-year, I imagine that you're still looking at the percent of sales in terms of
marketing to be down similar to what you've indicated before. Is that correct?
......................................................................................................................................................................................................................................................

Marty Ellen
Chief Financial Officer                                                                                                                                                                                                                      A
Yeah, I think if my numbers are correct, when you add the additional $7 million, and if you want to think about it
as a percent to sales, it'll be 7.6%, maybe we were at 7.5%. Yes, down from 8.1% last year, but I will say it again,
we've told everybody we never expected to stay at that level. We don't think we need to be at that level. And the $7
million we're spending, or the $0.02, is simply because, look, we've got some plans that we've moved forward a
little bit in the calendar for 2015. And we're going to start spending behind them.
......................................................................................................................................................................................................................................................

Judy E. Hong
Goldman Sachs & Co.                                                                                                                                                                                                                        Q
Okay, got it.
......................................................................................................................................................................................................................................................

Marty Ellen
Chief Financial Officer                                                                                                                                                                                                                      A
So...
......................................................................................................................................................................................................................................................

Judy E. Hong
Goldman Sachs & Co.                                                                                                                                                                                                                        Q
Yes. And then, Larry, if I can just follow up on your Dr Pepper trend and, clearly, the diet category continues to be
one where there is still some pressure there. But what are some of the actions that you're taking on maybe beyond
the natural sweetened innovation, but just really the core product of Dr Pepper, as itself and the diet side of the
business, what are you really trying to show some improvement on that trend?
......................................................................................................................................................................................................................................................

Larry D. Young
President, Chief Executive Officer & Director                                                                                                                                                                                                A
We're definitely trying to reverse the trend. And in my prepared remarks, I mentioned we came out with a new
campaign for Diet Dr Pepper that's driving the great taste of Diet Dr Pepper. So that media will be hitting. And
also with Pepper, football, the college football coming on board and the coverage we have out there, we feel very
bullish for the fourth quarter on what we can do with Pepper and going forward into 2015.
......................................................................................................................................................................................................................................................

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1-877-FACTSET www.callstreet.com                                                                                                              Copyright © 2001-2014 FactSet CallStreet, LLC
Dr. Pepper Snapple Group, Inc. (DPS)                                                                                                                                                            Corrected Transcript
Q3 2014 Earnings Call                                                                                                                                                                                                      23-Oct-2014

Judy E. Hong
Goldman Sachs & Co.                                                                                                                                                                                                                        Q
Okay. Thank you.
......................................................................................................................................................................................................................................................

Operator: Our next question comes from the line of Vivien Azer with Cowen.
......................................................................................................................................................................................................................................................

Vivien Nicole Azer
Cowen & Co. LLC                                                                                                                                                                                                                            Q
Morning.
......................................................................................................................................................................................................................................................

Marty Ellen
Chief Financial Officer                                                                                                                                                                                                                      A
Morning
......................................................................................................................................................................................................................................................

Vivien Nicole Azer
Cowen & Co. LLC                                                                                                                                                                                                                            Q
So I wanted to follow up on Judy's questions on diet. Larry, can you just offer an update of your view of kind of the
diet category? Have the declines stabilized? Are they reaccelerating? I mean, there is some divergent trends that
I'm seeing in the various Nielsen outlet data releases, so I was hoping to get some all outlet color from you on that,
please.
......................................................................................................................................................................................................................................................

Larry D. Young
President, Chief Executive Officer & Director                                                                                                                                                                                                A
Yeah, I think it's very similar to what you're seeing there on the declines. You know like we've mentioned before,
we stay very concerned about it. I mean, when you have something out there that's declining at 7%, that can bring
the others down. So that's why we're putting the new media campaigns together, also continuing our push behind
our TEN products. Our TEN products, we continue to get new distribution with them. And I think sometimes it
helps on having a product out there with 10 calories that doesn't say diet on it. And so we're covering all the angles
there.

And, like you said, you know about our naturally sweetened, but that's 60 calories. So we'll continue to keep our
media on the diet, especially Diet Dr Pepper. We'll continue to push TEN.

And then another big piece for all of us is educating the consumer that there is nothing wrong with these diet
products. There is nothing wrong with aspartame. It's one of the most tested food ingredients there are. So we've
all got a lot of work to do, but it's also going to give us upside when we find the silver bullet.
......................................................................................................................................................................................................................................................

Vivien Nicole Azer
Cowen & Co. LLC                                                                                                                                                                                                                            Q
That sounds great. And in terms of the expanded test for your natural 60 calorie offering that you commented on
in early 2015, can you kind of dimensionalize kind of the expansion? Would it be notable? Will we see it or is it
still really kind of discrete offerings really targeted trying to get more learnings out of the marketplace?
......................................................................................................................................................................................................................................................

Larry D. Young
President, Chief Executive Officer & Director                                                                                                                                                                                                A
                                                                                                                                                                                                                                              13
1-877-FACTSET www.callstreet.com                                                                                                              Copyright © 2001-2014 FactSet CallStreet, LLC
Dr. Pepper Snapple Group, Inc. (DPS)                                                                                                                                                            Corrected Transcript
Q3 2014 Earnings Call                                                                                                                                                                                                      23-Oct-2014

So right now, we're testing it in a market that we control where we have the three brands together in Texas,
Chicago and Des Moines. And what we're going to do on this, we really want to understand the consumer and the
customer. We're not going to be in no big hurry. We want to understand where does it need to be, who is the
consumer, where does the packaging pricing need to be? We're going to test different formats. And if it starts to
spread out, I mean, it'll be on how the results come in. I mean, of course, if it's just stellar, you'll see us go big time,
but, right now, we're just doing a wait-and-see. We want all the information. We want the data and then we'll
make our decisions from that.
......................................................................................................................................................................................................................................................

Vivien Nicole Azer
Cowen & Co. LLC                                                                                                                                                                                                                            Q
Sounds perfectly reasonable. My last one is on Peñafiel, which has clearly been just a home run with your new
innovations on that brand. Can you speak to the opportunity of expanding geographic distribution for Peñafiel,
specifically bringing it into the United States?
......................................................................................................................................................................................................................................................

Larry D. Young
President, Chief Executive Officer & Director                                                                                                                                                                                                A
Yeah, absolutely. We're looking at – in our Hispanic programs for the U.S., we're bringing in the Peñafiel from
Mexico. So far, it's just starting right now, but we're very excited about the results we're seeing to-date. And we'll
expand that as we go across our – you know, we have very targeted Hispanic markets that we work in and we're
starting to get some real learnings from bringing the Peñafiel in from Mexico.
......................................................................................................................................................................................................................................................

Vivien Nicole Azer
Cowen & Co. LLC                                                                                                                                                                                                                            Q
Terrific. Thanks very much.
......................................................................................................................................................................................................................................................

Operator: Our next question comes from the line of Steve Powers with UBS.
......................................................................................................................................................................................................................................................

Steve R. Powers
UBS Securities LLC                                                                                                                                                                                                                         Q
Hey. Good morning, guys.
......................................................................................................................................................................................................................................................

Marty Ellen
Chief Financial Officer                                                                                                                                                                                                                      A
Morning, Steve.
......................................................................................................................................................................................................................................................

Steve R. Powers
UBS Securities LLC                                                                                                                                                                                                                         Q
I guess I have just a few more brand-specific questions, if I may, and then one more on cash. First, going back to
Dr Pepper, in response to Judy's question, Larry, your plans to get momentum going again seemed tied to media.
So is that right? And I guess specifically, do you feel your share of voice is where it should be on that brand or is
there another issue that you're contending with?
......................................................................................................................................................................................................................................................

Larry D. Young
President, Chief Executive Officer & Director                                                                                                                                                                                                A
Our brand health scores are fantastic on it. I mean, we couldn't be happier where they're at. But it's not just media,
Steve. The media doesn't work unless you have flawless retail execution out there. And so we'll continue to strive

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1-877-FACTSET www.callstreet.com                                                                                                              Copyright © 2001-2014 FactSet CallStreet, LLC
Dr. Pepper Snapple Group, Inc. (DPS)                                                                                                                                                            Corrected Transcript
Q3 2014 Earnings Call                                                                                                                                                                                                      23-Oct-2014

for excellence in our merchandising and having the points of interruption, incremental points of interruption. So
it's going to be a combination of basic blocking and tackling that the DSD business is all about.
......................................................................................................................................................................................................................................................

Steve R. Powers
UBS Securities LLC                                                                                                                                                                                                                         Q
So is that a sort of an acceleration? That's not a distributor criticism is it? It's not – is it different? Are you seeing
different performance in the Coke versus Pepsi versus your own system? Or is that just a...
......................................................................................................................................................................................................................................................

Larry D. Young
President, Chief Executive Officer & Director                                                                                                                                                                                                A
Not at all. Like I've said before, I mean, they're both fabulous partners and their results are very, very similar.
......................................................................................................................................................................................................................................................

Steve R. Powers
UBS Securities LLC                                                                                                                                                                                                                         Q
Okay. And then on Snapple, can you talk just a little bit more about the strategic de-emphasis of the value line?
And is that more of a temporary or a cyclical decision or are you backing away from that value emphasis that was
really put in place just a few years ago?
......................................................................................................................................................................................................................................................

Larry D. Young
President, Chief Executive Officer & Director                                                                                                                                                                                                A
Yeah. You know, when we went out with it, we told everybody it was strategic, that it would be in certain markets,
that in the heartland it wouldn't be as heavy there. It was going to be in some [ph] C&G, (38:20) but it was never
anything that we were looking at that we were going to do long-term and take a focus off of premium. Snapple is a
premium product. That's where we keep it. That's where we put all of our focus.

And so, it's just like with some of the value teas got down to where it was like the cheap bottled water. And as
we've always said from the time we went public, I mean, we pursue profitable brands and channels and packages.
And so it worked for us. It got us in some markets, especially in the Midwest we were not in before. Now, we have
the premium in and that's where we're seeing our growth coming from the premium Snapple products.
......................................................................................................................................................................................................................................................

Steve R. Powers
UBS Securities LLC                                                                                                                                                                                                                         Q
Great. So Straight Up, is that further premium or is that just lateral?
......................................................................................................................................................................................................................................................

Larry D. Young
President, Chief Executive Officer & Director                                                                                                                                                                                                A
Straight Up will be an unflavored – most of our – most of the Snapple tea is flavored tea and – flavored teas and
juices. This will be a straight up tea. It kind of goes back, we had it years ago, Steve, when we had the super
premium line, but we're going to put it right in with our premium teas.
......................................................................................................................................................................................................................................................

Steve R. Powers
UBS Securities LLC                                                                                                                                                                                                                         Q
Okay, great. And then, just one last question on free cash flow usage and the dividend specifically, Marty. I think
the dividend was up only about 8% this year versus what's now going to be 12% EPS growth or the midpoint of
your guidance, which implies an actual drop in the payout ratio, when I think you said repeatedly that your

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