Dr. Pepper Snapple Q4 Earnings Call Transcript

123jump.com Staff
13 Apr, 2009
New York City

The beverages maker quarterly net sales decreased 0.9% to $1.38 billion. Net loss was $621 million on a $696 million goodwill write-down. The company lost $2.44 a share compared to earnings of 54 cents a year-ago quarter and estimates net sales to decline 2% to 4% for fiscal 2009.

Dr. Pepper Snapple Group, Inc. ((DPS))
Q4 2008 Earnings Call Transcript
March 26, 2009 11:00 a.m. ET

Executives

Aly Noormohamed – Senior Vice President, Finance & Investor Relations
Larry D. Young - President, Chief Executive Officer & Director
John O. Stewart – Chief Financial Officer & Executive Vice President

Analysts

Judy Hong - Goldman Sachs & Co.
Mark Swartzberg - Stifel Nicolaus & Co.
John Faucher - JPMorgan
Andrew Kieley - Deutsche Bank
Damian Witkowski - Gabelli & Co.

Presentation

Operator

Good morning, and welcome to Dr. Pepper Snapple Group''s fourth quarter 2008 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. In order to ask a question or make a comment, please press “*” followed by “1” on your touchtone phone at any time. You may remove yourself from the queue by pressing the “#” key.

It is now my pleasure to introduce Mr. Aly Noormohamed, Senior Vice President, Finance and Investor Relations. Sir, you may begin.

Aly Noormohamed

Thank you, Julianne, 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 filings. 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 which we believe provide useful information for investors. Reconciliations of those non-GAAP measures to GAAP can be found in our earnings press release and on the Investor Relations page at www.drpeppersnapple.com.

This morning''s prepared remarks will be made by Larry Young, Dr. Pepper Snapple Group''s President and CEO, and John Stewart, our CFO. Following our prepared remarks, we will open the call up for your questions. With that, let me turn the call over to Larry.

Larry D. Young

Thanks, Aly, and good morning, everyone. Thank you for joining us today for our fourth quarter earnings call. As a new public company, not only do we have the privilege of filing our first ever 10-K and Annual Report, but as a spinoff from a British company we are also performing our first year in close as a stand-alone company under US GAAP.

Since our last call in November, macroeconomic and market conditions have worsened dramatically. Even though the majority of Americans are still working, the fear factor that has gripped the nation is having a significant impact on consumer psychology. We are seeing consumers conserve cash at even greater levels and we are seeing them hit the reset button on how and where they shop. With the shift to at home consumption, the ability to share with family, as well as quality, product satisfaction and price are all redefining affordability. As you saw in our press release this morning, the trends we highlighted during our third quarter earnings call continued into the fourth quarter and are continuing into 2009.

Premium priced beverages; foreign currency and a slowdown in Mexico have created and continue to create significant headwinds for our business. At the same time as consumers seek value and go back to what''s tried and tested, we are seeing strength in our CSDs and value-priced juices. Despite the recent economic turmoil, the North American beverage market remains very attractive and over time we believe it will return to growth. CSDs, teas and shelf-stable juices and drinks generate over $100 billion in retail sales across the US, Canada and Mexico, and DPS has less than a 15% share today. Our advantage portfolio of leading flavored CSDs, branded juices, premium teas and mixers, where we are number one in each, combined with stepped-up brand investments and cost control, give us confidence that we can grow our share and emerge from this period stronger and even more relevant.

Our strategic imperatives are unchanged. We will build and enhance our leading brands, pursue probable channels, packages and categories through our winning and single serve and allied brand initiatives. We will leverage our integrated business model and rather than debate which system or model is better, we will recommit to ours and make it the best it can be. We will strengthen our route to market and improve our operating efficiencies to a continuous improvement mindset.

Our strategic imperatives are supported by a talented leadership team with over 200 years of collective food and beverage experience. It''s this experience combined with a strong portfolio with room to grow that gives me confidence that our business can deliver 3% to 5% net sales growth and high single digit EPS growth over time. As we look to the future with confidence, we are making critical investments today that support our focus strategic imperatives. We are investing in our core brands to increase awareness, grow distribution and provide consumers with reasons to keep coming back. We are moving full steam ahead with Victorville, our fifth and final platform plant and rolling out incremental coolers and vendors as part of our five-year, 175,000 drink equipment strategy. We are increasing our single serve and fountain/foodservice presence to ensure our brands are always within arm''s reach of our consumer and we are strengthening our route to market with new technology solutions on our company-owned side and improving our focus on the third party side.

I think I''m safe in saying that 2008 was probably the single worst year in recent history to go public. However, I am extremely proud of what we have accomplished in our first year as a public company. We raised $3.9 billion of debt and completed our separation from Cadbury in May of 2008. We successfully located our R&D facility to Plano, Texas, facilitating even greater sales and marketing and R&D alignment. We delivered $60 million of savings from the October 2007 restructuring actions and managed input cost inflation to the 6% beginning of the year guidance we gave you. Our business generated $709 million of cash, enabling $395 million of debt repayment. In CSDs we grew dollars share in 36 of the 52 Nielsen tracked markets, taking our full-year measured channel dollar share to 19.7%, up 20 basis points. In shelf-stable juices, juice drinks and vegetable juices, we''ve become the number one branded juice manufacturer by volume and grew dollar share in 45 of the 52 Nielsen tracked markets with dollar share up 40 basis points for the year. We were named Progressive Grocer’s Best in Class Category Captain for the third time in four years and named Wal-Mart''s fourth quarter Supplier of the Year for CSDs and teas. In the inaugural Product of the Year Awards Canada Dry Green Tea Ginger Ale was named Best Beverage of the year and Mott''s for Tots was named Best Kids Nutrition.

As you look at our results on a truly comparable basis, I think you will agree that the business performed very well with the fourth quarter and full-year net sales as adjusted up 3% and 4% respectively. Segment operating profit as adjusted was up 4% for the quarter, despite a two-point drag from foreign currency. We were successful in managing price and mix to offset $170 million of commodity and fuel cost inflation. Our supply chain teams continue to drive operating efficiency with operating equipment effectiveness up 3.7 points for the year. As a result, full-year segment operating profit as adjusted was flat.

Drilling down in the quarter a little more, we saw our CSDs decline less than 1% in volume terms at a time when the LRB category was down around 2% to 3%. Trademark Dr. Pepper grew 0.5% and our Core 4 brands were flat. We continue to gain traction in fountain/foodservice and with above plant installs, we delivered 2% growth in the quarter. On the noncarbonated side, weakness in our premium beverages accelerated with Snapple declining 17%. Appealing to consumers'' desires for an affordable treat, Hawaiian Punch grew 19%. Mott''s trends were in line with our expectations as we took pricing in October to cover higher input costs.

Let me take a moment to point out some items in the quarter that were a little different from our expectations. First, foreign currency headwinds and the overlap of Snapple Antioxidant Water launched in 2007 had a greater than expected impact on our top line, resulting in net sales below the 1% growth we discussed during our November call. Second, we benefited from about $6 million of operating profit in the quarter as our third party bottlers purchased more than the usual amount of concentrate ahead of the January price increase, as well as to prebuild inventory for the national launch of Crush. Additionally, fuel costs came in $6 million better than expected. Offsetting this $12 million benefit was $9 million of deferred and other tax charges.

As we start 2009, our base year, our teams are executing against very clear objectives, Dr. Pepper, Core 4, Snapple, Mott''s and now Crush are our key focused brands and resources are being allocated accordingly. As consumers reset their expectations, we believe our portfolio is well placed to provide fun, affordable treats every day. Our focus brands remain underdeveloped and thus exploring the white space provides us with opportunities for growth. Our innovation pipeline is robust. Indeed, it''s as strong as I''ve ever seen. We have developed new product offerings around our focus brands that build on our flavor, fun and functional expertise. Additionally, we are innovating around packages and taking brands like Crush to more consumers.

In tough times like these, it''s imperative for brand owners like us to dial up our communications with our consumers, to build loyalty and to position the company for long-term success. We are doing this in two ways. First, on an absolute basis, we are increasing our marketing budgets in 2009. Second, media deflation across local, network and online is allowing us to get more marketing bang for our buck. In some cases we are getting more placements and in others we are getting better placements, both of which result in greater reach.

Central to our expansion strategy is a strong and healthy route to market. We know DSD provides retailers with critical advantages such as cash flow, management and lower in-store service costs, so we are continuing to invest in our company-owned distribution assets.

We are halfway through our hand-held deployment and our first sites go live on our upgraded SAP 6.0 platform at the beginning of April. In Mexico, we have added 210 routes in Monterrey and (inaudible) to Mexico and have started work on blueprinting a DSD and ERP IT solution.

Our single serve expansion continues to gain momentum. Even though 2009 isn''t the official launch year of our cold drink strategy, our team''s got a headstart and placed 10,000 incremental assets in 2008. Year to date we are ahead of schedule and we are looking at ways to get more of our planned 35,000 assets in the market ahead of our peak summer season. We are also on track with our fountain installs and gain share reflects consumer design for flavor and the best tasting diet.

Our 2009 innovation is strong and focuses on flavor, fun and functionality. In CSDs we kicked off the year with Cherry 7UP AOX which builds on all natural and functional trends we saw in 2008. We are taking Sunkist Lemonade national and earlier this month Dr. Pepper Cherry hit store shelves. Dr. Pepper Cherry targets our light user and provides them with amazingly smooth experience. Also hitting the shelves is our new and improved A&W Root Beer made with real aged vanilla. And coming in May is Diet Canada Dry Green Tea Ginger Ale that builds on the huge success of regular that we launched in 2008.

Following the 2008 launch of Venom Energy in Black Mamba and Mojave Rattler, we extended the lineup with two four-pack offerings and two new flavors, mango and fruit punch, as they are known on the street, Killer Taipan and Death Adder. This brings the Venom SKU count to six and together with High Drive gives us a compelling energy lineup that we can take to our retailers.

In teas, we are on track with the Snapple Premium Restage and we are adding a black tea with lemon to our mainstream or value tea lineup. Rounding out our innovation for the first half, we reformulated our Mott''s apple juice to include 120% of your daily vitamin C needs in every serving.

In terms of package innovation, we are testing 16-ounce $0.99 pep, 16-ounce $0.99 cans and eight and 18-pack cans through our third party bottling partners as well as our company-owned DSD. In Mexico we are rightsizing Aguafiel packaging and also looking at returnable glass options.

Our innovation is not just limited to product and package. We are also innovating around distribution. Crush is a perfect example of taking a well-known brand and leveraging a strong and healthy third party route to market to deliver growth. We are extremely pleased with the support our bottling partners have provided. Execution has been flawless and with its breadth of flavors, Crush is providing consumers with value and variety in a name that they trust. There is still plenty of work ahead for us, but the early read is very encouraging. It''s in its first period, Crush in its expanded market become the number two orange CSD in major channels behind Sunkist.

We know consumers still have money in their pockets, but they are becoming much more selective in their purchasing decisions. Maintaining the health of our brands through incremental marketing investments and leveraging the spend we have is critical, especially in times like these. To support DPS great lineup of innovation, we are rolling out an equally impressive lineup of media programs, focused squarely on the fun and functionality of the products themselves. We kicked off the season with 7UP Cherry AOX, national TV, online, print and in-store merchandising are coming together to allow consumers to cherry pick their antioxidants.

For the first time in seven years A&W Root Beer hits the airwaves with high scoring spots that communicate premium ingredients made with real aged vanilla. Gene Simmons, aka, Dr. Love, becomes the third doctor in our ""Trust Me, I''m a Doctor"" campaign, and on March 30th Dr. Love will introduce the legions of Dr. Pepper fans to Dr. Pepper with a kiss of cherry. Supported in the Premium Restage, Snapple returned to the airwaves with its ""Better Stuff"" campaign. We expect this campaign to reclaim Snapple''s best stuff on earth heritage and provide a halo to the entire Snapple portfolio. Mott''s will be on the air for the first time in 10 years. Marcia Cross of ""Desperate Housewives"" fame as a new mom will focus on the healthy credentials of Mott''s juices and sauces. On air and online is only part of the solution. We are also partnering with our retailers on product assortment, ensuring the focus on value, using coupons and point of sale merchandising to differentiate our products and providing the high quality category management expertise they expect.

A tougher economic climate, retrenching consumers and FX headwinds necessitate an increased focus on cost containment. Continuous improvement is a way of life at DPS but 2009 will be CI plus. We have established a productivity office to invest in initiatives that will provide the savings necessary to fuel our growth over time. We expect year one net investment in the $20 million to $30 million range as we invest ahead of the benefits curve.

With that, let me turn the call over to John to walk you through the fourth quarter below the line items and our outlook for 2009.

John O. Stewart

Thanks, Larry, and good morning, everyone. Before I comment on the quarter and full year, let me take a moment to provide some background on our net sales and cost of sales restatement. In designing our new segment reporting structures, we discovered that certain transactions which were set up when DPSU bottling group was a co-packer for CSAB were still being recorded for third party sales. Subsequent to the acquisition in 2006 these transactions should have been eliminated. These adjustments hit net sales and cost of sales for 2006, ''07 and ''08, but have no impact on total company gross profit, operating profit, net income, cash flows or the balance sheet.

Below the line there are three areas I''d like to talk about. First, deteriorating macroeconomic and market conditions in the fourth quarter resulted in the impairment of certain goodwill and intangible assets. The carrying value of the Snapple brand intangible was reduced by $278 million and the carrying value of bottling group goodwill, brand franchise rights, bottler agreements and distributor rights were reduced by $761 million. It''s important to note here that these impairments have no impact on our financial covenants contained in our debt agreements. Second, restructuring charges for the quarter were $26 million, bringing the full year charge to $57 million versus the $43 million I shared with you last November. Our year-end actuarial report highlighted an incremental $16 million in pension expenses related to lump sum payments in connection with the October 2007 restructuring actions. Third, I can safely say that no other team at DPS has worked harder than our new tax group to clean up our inherited tax positions. The fourth quarter was no exception. As part of the year-end review, we identified an additional $6 million in deferred tax charges which, when combined with unfavorable territory mix, negatively impacted our underlying tax rate.

For the quarter, Cadbury indemnified tax charges and separation-related charges increased $12 million and $5 million respectively. Combined, these tax charges were $11 million higher than our November call. The majority of this increase was the result of a new tax election made by Cadbury in December 2008. We generated $709 million of cash from operating activities in 2008. Inventory improvements principally reflected our continued focus on working capital management as well as the absence of higher value Hansen products at the year-end. The expected use of cash and payables reflected a concerted effort to bring DPS into compliance with payment terms for our key suppliers.

Our capital spending for the year was $304 million in line with our 5% guidance. Our free cash was almost entirely directed towards debt paydown. Of the $395 million in principal, we paid in 2008, $230 million related to prepayments for 2009 and 2010 obligations. As we look ahead, forecast visibility continues to be a challenge. Our plans reflect current market conditions, yet they provide us the flexibility to act quickly if things change.

On a reported basis, net sales are expected to be down 2% to 4%. When we adjust for the loss of Hansen product distribution, approximately four percentage points, and the impact of FX, approximately two percentage points, we expect comparable currency neutral net sales growth between 2% and 4%. This is slightly below our long-term targets as weakness in premium products has a disproportionate impact on our net sales growth. Our net sales growth also reflects modest price and mix improvements in the low single digit range. Given the extent of consumer pullback, we expect to reinvest some of this pricing to support increased consumer communications as well as brand specific initiatives. Our focus remains bring people into the stores versus discount the products.

Since last fall we are seeing a very rational pricing environment and we expect this to continue throughout the year. We expect to record a one-time pretax gain of $51 million or $0.12 per share related to the Hansen termination payments covering both the US and Mexico. Excluding this item, we expect earnings per share in the $1.59 to $1.67 range. This assumes the absence of $48 million of operating profit related to the loss of Hansen product distribution in the US and Mexico and lower Hansen co-packing activity; fuel savings in the $35 million range which we plan to reinvest to support productivity and marketing initiatives; and $25 million of both higher stand-alone general and administrative costs and year two of our stock-based compensation costs; a blended all in interest rate on our $3.5 billion of debt of approximately 6.6%, and $25 million of lower interest income due to the absence of related party receivables that existed until our separation in May 2008.

FX at today''s spot rates will reduce EPS by approximately $0.12 per share. With the majority of Canadian COGS and over 40% of Mexico COGS denominated in US dollars, transaction and translation impact us almost equally. FX is also impacting our tax rate. The negative territory mix we saw in the fourth quarter 2008 will continue into 2009, causing a modest increase in our underlying tax rate, including $16 million of Cadbury indemnified tax charges, we expect our 2009 tax rate to be 39% to 40%.

As a reminder, we record indemnity income to offset indemnified tax charges. When combined these two items have no impact on net income. However, it does cause our reported tax rate to be higher than our underlying tax rate. In terms of phasing, comparisons will be harder in the first half versus the second half. In addition to the items I just mentioned, we are also accelerating marketing spend into the first half to match our innovation calendar. Finally, please note that the first quarter faces the toughest net interest expense comparison plus the shift of Easter into the second quarter.

We''ve had lots of questions on how commodities are benefiting us in 2009 so let me take a second to walk you through our cost structure. Packaging and ingredients make up about 60% of cost of goods sold and comprise nine key buckets of spend which, in order of size are; one, cans and ends; two, bottles and caps; three, sweeteners; four, glass; five, fruit concentrates; six, corrugate and paperboard; seven, flavors, colors and acidulants; eight, labels and film; and finally, all other. In dollars spent terms, about half of this group of nine is going down in price, while the other half is either flat or going up in price. Taken as a basket of all nine, packaging and ingredients are expected to have almost no net impact on COGS inflation. At this point we have substantial cover in place for aluminum and good cover in apple juice concentrate and high fructose corn syrup. Where it makes sense we are taking more cover opportunistically.

We continue to expect strong cash from operations and we continue to pursue working capital improvements. Given falling asset prices we expect to contribute $43 million towards a pension and post retirement benefit plan to achieve a projected 90% funded level. The pension impacts of the P&L is expected to be minimal. We also continue to expect to spend 5% of net sales on CapEx to support our growth initiatives. With free cash flow going towards debt paydown, we expect to retire at least $400 million of debt in 2009, and since we have already met our 2009 principal obligations in 2008, we will essentially be prepaying our 2010 and first quarter 2011 obligations.

Effective with our first quarter 2009, which we expect to report to you in seven weeks on May the 13th, we will change our reporting to three segments. This follows on from the organizational changes we announced last September and we believe it will provide greater clarity and transparency into the economic drivers of our business.

Our beverage concentrates segment will be a pure play concentrate business with sales to third-party bottlers. Our packaged beverage business will comprise our company-owned DSD business and our through the warehouse business. The major change you will see here is the concentrate used to produce finished product will be recorded at cost versus at an arm''s length price. This will enable you to see the true economic value of this packaged beverages business. Our third segment will be named Latin America beverages, and it recognizes the potential future opportunity we have to leverage Mexico as a platform for southward expansion one inch at a time. We will also redefine our key profit measure to segment operating profit and we will redo our cost allocations to ensure they are directly related to that segment.

Shared service, IT, and back office costs as well as R&D facilities and stand-alone corporate costs will now be housed centrally in a much expanded corporate way. And to augur with building your models, we will file supplemental information presenting 2008 by quarter and full-year 2007 and 2006 in the new segment format by the end of April. With that, let me turn the call back to Larry.

Larry D. Young

Thanks, John. Before we open the lines for questions, let me leave you with a few thoughts. The CSD, tea and shelf-stable juice categories are large and attractive and DPS has significant room to grow. We are committed to our long-term strategy and are investing for the future. Our portfolio of leading flavored CSDs and value-priced juices provide consumers with affordable treats every day. We are investing behind our brands and taking advantage of media deflation to reach more consumers. This will ensure we emerge from this period stronger and even more relevant. 2009 is our base year and we are off to a solid start. While FX premium priced beverages and enhanced waters present headwinds, our CSDs, value-priced juices and Crush are performing very well. Operator, we are ready to take our first question.

Question-and-Answer Session

Operator

Thank you. Once again, in order to ask a question or make a comment, please press “*” followed by “1” on your touchtone phone. Our first question is coming from the line of Judy Hong with Goldman Sachs.

Judy Hong - Goldman Sachs & Co.

Thanks. Good morning, everyone.

Larry D. Young

Good morning, Judy.

Judy Hong - Goldman Sachs & Co.

Larry, can you comment on the recent CSD trends that you''re seeing? It sounds like the category is doing a little bit better, the Nielsen data shows that you guys are gaining market share a bit more. Can you just comment on whether that trend has continued into the latter part of the quarter and maybe some of the factors that may be driving that improvement?

Larry D. Young

Yes. I think, Judy, our latest Nielsen is not out yet but you are exactly right on the Nielsen. As I mentioned in my presentation, I think under tough economic times, people go back to what is true, tried and tested, and we have a little weakness in the premium. We are seeing where we are picking it up with the CSDs.

Judy Hong - Goldman Sachs & Co.

Okay. And then in your 2009 sales guidance of 2% to 4% underlying constant currency, maybe you can help us better understand volume and sort of the price mix components as well as the CSD versus non-carb outlook.

John O. Stewart

Judy, it''s John. Volume within that guidance is broadly flat to down 1%. I think we should see Crush, CSD and value juice growth offset by the overall category declines and the premium beverage pressure that we have talked about. We are looking at low single digit price mix. As I mentioned earlier, flat packaging and ingredient cost inflation and the non-carbs are going to be obviously boosted by what''s going on in Hawaiian Punch, but there will be continued weakness in Snapple until we see the effects of the restage starting to kick in, in the latter part of the year.

Judy Hong - Goldman Sachs & Co.

Okay. And then, John, just in terms of the margin outlook for 2009, it sounds like commodity sort of flattish but you get the negative transactional exposure, and then you''ve got some of the productivity investments that you''re making ahead of the productivity savings. Is that kind of how we should think about the margin outlook?

John O. Stewart

I think that''s exactly the way to look at it. A couple of other points that I didn''t cover in my previous answer. Obviously, as winning in single serve are cooler expansion starts to benefit us again more weighted towards the latter part of the year, that is clearly highly accretive to operating profit and that will lead to margin expansion. We expect net-net our productivity investments to be offset by the fuel save, so look for that to be a net neutral. And then, of course, below the line we are going to get interest expense leverage. If you take the $3.5 billion at 6.6%, it''s clearly a lesser interest charge next year than this year. And expect more benefit towards the latter half of the year than the first half of the year.

Judy Hong - Goldman Sachs & Co.

Okay. Thank you.

Operator

Our next question is coming from Mark Swartzberg with Stifel Nicolaus.

Mark Swartzberg - Stifel Nicolaus & Co.

Thanks, Larry, hey, John.

John O. Stewart

Hi, Mark.

Larry D. Young

Hi, Mark.

Mark Swartzberg - Stifel Nicolaus & Co.

A couple of questions about the cold channel and specifically Dr. Pepper, firstly following on Judy''s line of enquiry, can you just break out for your bottling business how the cold channel performed in the fourth quarter versus prior periods and then how specifically that channel is performing here year to date? And then more specifically on Dr. Pepper, can you talk to us a little bit more about distribution point gains you expect specifically for that brand, not only from this -- these cooler placements, but to what extent, if any, you expect to see distribution points gain from other bottlers than the ones you own?

Larry D. Young

Yes. I think on the cold drink, of course, with our company owned on the expansion of our single serve initiative and as you heard in my presentation, our Dr. Pepper was up 1/2% and our Core was flat, so, there''s still some weakness out there but we are seeing it improve. I think we are seeing people realizing the value we have. One of the things that we have said all along is that we don''t believe the way to get the people in and to keep them there is heavy discounting, but showing the value and promotions, so we are pleased what we are seeing in our cold drink. Our teams on the cold drink placement are way ahead of schedule. We are getting them into a lot of great places we weren''t before like the workplace where you have got a lot of captive audiences. There were CSDs there but not the flavor choices that we have.

On Dr. Pepper, the expansion, the biggest thing their market we are looking at is really a focus on our coastal programs and our Hispanic markets and we have been very pleased with what we have seen there. Exact numbers for ''08, I don''t have here, but it''s one of the things we can look at and maybe cover a little more in our first quarter and kind of give everybody an update on that.

Mark Swartzberg - Stifel Nicolaus & Co.

And is it fair to think about Dr. Pepper, I mean the main action there is with these incremental coolers. Is there any opportunity to see sort of a Crush effect if you will where you get --

Larry D. Young

I would say it''s not as much the coolers for the Dr. Pepper. You have to remember, a tremendous amount of Dr. Pepper goes through our bottling partners that have the cool drink equipment out there. Whenever you look at what we are doing with Cherry, Cherry Dr. Pepper, our consumer insight showed us the light user thought Dr. Pepper was a little strong so we went in and we came out with a cherry that makes it smoother, and what we got back for consumer testing was just unbelievable, so that''s one of them that you''ll see driving it. Another is our fountain foodservice, our teams are out there, we want to have that Dr. Pepper available everywhere that people go and especially Diet Dr. Pepper, because if they are drinking it when they are having their favorite meal, when they go to the grocery store they are going to buy it there also.

Mark Swartzberg - Stifel Nicolaus & Co.

Great. Thanks, Larry.

Larry D. Young

Welcome.

Operator

Our next question is coming from John Faucher with JPMorgan.

John Faucher – JPMorgan

Yes. Thank you. Good morning. Quick question on the bottling writeoff. We have seen CC take similar writeoffs over the past couple of years in terms of acquisitions made a while ago. Can you talk about sort of where these writeoffs are coming from? Is this from recently acquired bottlers, legacy bottlers and as you look at this, does it give you any thought, as you look at sort of the future, the value of these bottlers in terms of your balance between warehouse and bottling going forward? Thanks.

John O. Stewart

John, yes. The writeoffs that we took today, we impaired just over $1 billion of our $6.7 billion, so $5.7 billion remaining. The writeoffs that we took, the BG goodwill of $180 million and the BG distribution rights of $581 million, when we had, as we do our annual impairment reviews, last year obviously under Cadbury we looked at the brands and distribution rights as one asset.

We have obviously watched what''s gone on in the marketplace and we took the view as a stand-alone company that those distribution rights should stand on their own merits, and when we took into account obviously the impact of increasing discount rates through the year and we did this year''s impairment test, we realized that the distribution rights in the bottling group would fail and would therefore have to be impaired.

What I can tell you is we have impaired 100% of those BG distribution rights and 100% of the BG goodwill, so there''s no more impairment in the future there and in essence the BG business now in the old segment format is representing the fair value of the fixed assets and inventory. The new segments -- when we moved to the new segment structure, that will show you the real value of company manufacturing as you see the real profit stream at a full margin level that comes through the new packaged beverage segment. And I''d just add on the Snapple brand, we tested all our brand intangibles, the vast majority of the remaining $5.7 billion represents goodwill and intangibles in our CSD business, those brands are healthy and there is a comfortable level of headroom in the test. On the Snapple brand, clearly, we need our restage to go as we planned and we are optimistic that we have got the right number here and we won''t have to take a future impairment if we can deliver the plan we have set out to deliver.

John Faucher – JPMorgan

Okay. I apologize I''m going to ask one quick follow-up here because I''m not sure whether I missed it or whether you just didn''t answer. Did you say sort of whether this was sort of recent acquisitions or previous acquisitions or does it not really matter?

John O. Stewart

It''s the previous acquisitions that were done in 2006 and 2007.

John Faucher – JPMorgan

Okay. So the more recent ones. Okay, cool. Thank you.

Operator

Our next question is coming from the line of Andrew Kieley with Deutsche Bank.

Andrew Kieley - Deutsche Bank

Hi, good morning, everyone.

John O. Stewart

Hi there.

Larry D. Young

Good morning.

Andrew Kieley - Deutsche Bank

First I was wondering, John or Larry, the impact of the CSD inventory build, if you could quantify what the impact was on volume growth there or profits? And do you think that the concentrate margin was very high this quarter, do you think that is – that level is sustainable over the next year?

John O. Stewart

I''ll take it, Andrew. The $6 million was the benefit from the buy-in. Both the price increase and the Crush inventory build, together that was $6 million. Clearly our concentrate margin is going to be relatively static over time, albeit that you would expect as fountain foodservice becomes a bigger piece of our business, that that will have a dilutive impact, but annual price increases will help to offset that.

Andrew Kieley - Deutsche Bank

Okay. And then secondly, Larry, I wanted to ask, you spoke about the impact of deteriorating economic conditions in the category overall. Are you seeing any change in consumer behavior as we move into 2009 specifically in take home, either in purchase frequency or price elasticity?

Larry D. Young

No. I think if we look at the Nielsen''s again as we come out of ''09 -- or out of fourth quarter end ''09, we are seeing a little more, not quite as serious in the CSD category on the declines. Again, I think people are going back to their CSDs or that we lose from the premium. I think our programs that we have put together for our retailer partners and worked with our third-party bottlers on how do we drive traffic, how do we get people into the category and keep them in the category, are starting to really pay off for us.

Andrew Kieley - Deutsche Bank

Okay. One last question just on Snapple. You sort of flagged weakness in the first half. Is it still your expectation that we see the volume start to stabilize in the second half of the year?

Larry D. Young

Yes, I think you''re going to see the benefits in the second half. We start our media later on, our value tea is really starting to take some legs out there and we are really pushing the value of it so that we can -- we go in there with the three-tier strategy of our super premiums, our restage of the premium and then the value tea that we will stack deep and sell them cheap.

Andrew Kieley - Deutsche Bank

All right. Thank you.

Operator

Our next question is coming from the line of Damian Witkowski with Gabelli & Co.

Damian Witkowski - Gabelli & Co.

Hi, guys. John, if I could just go back on your statement of the commodities cost. I know you said you''re going to take the fuel savings that you''re -- and reinvest it back in the business, but you also said if you look at the packaging costs which are 60% of your total cost of goods sold, taken in different buckets it''s about flat for the year. I just want to clarify that that''s flat because you already have a diverse hedging in place and so that if these commodities stay at these levels, you actually would have a gross margin benefit in 2010.

John O. Stewart

Damian, that''s -- we haven''t commented about 2010 yet but, yes, you''re right, we are starting to take some cover in 2010 in areas like natural gas and aluminum and clearly at these sort of prices we will look to extend that cover in 2010.

Damian Witkowski - Gabelli & Co.

Okay.

John O. Stewart

The guidance was 2009 related.

Damian Witkowski - Gabelli & Co.

No, no. I just wanted --

John O. Stewart

And we obviously layered on these hedges as I have said in the Q3 call. We started to put hedges on -- in the fall, and so we have some hedges that are at a higher price and therefore you will start to see the benefit of today''s lower prices, obviously benefiting more of the second half than the first half.

Damian Witkowski - Gabelli & Co.

Okay. Thanks, John. And if I could follow up on what''s happening, you haven''t really commented on Wal-Mart at all and they are doing a lot in terms of all their categories and moving more towards private label, and I don''t think that''s really happening on the CSD side for them, but I would imagine there''s actually some opportunity for you to grab a bigger share of that going forward with the RC brand. Any comments on that?

Larry D. Young

No. Our RC and Diet Rite brands are doing very well in Wal-Mart. You''re exactly right, Damian. I mean, Wal-Mart and everybody out there, when the consumer is looking for value, you''re going to see more of store brands, but with our flavor lineup, I think that really benefits us as it brings people into that beverage aisle, and so we are very pleased with what we are seeing right now. Wal-Mart is a fabulous customer.

Damian Witkowski - Gabelli & Co.

Yes. Has your shelf space increased at Wal-Mart versus a year ago or is it about the same?

Larry D. Young

Oh, it''s -- I would say it''s about the same as whenever we first did the RC Diet Rite program.

Damian Witkowski - Gabelli & Co.

And just quickly on energy, any updates there? Is it still -- I know it''s -- is it still growing or --

Larry D. Young

You''re talking about the Venom?

Damian Witkowski - Gabelli & Co.

Yes, Venom and High Drive.

Larry D. Young

We are just very pleased with Venom. You''re right. It''s still being rolled out. We got to remember when we had Rockstar and we had Monster, it took years to build those, a bottle at a time, but we have got the Venom going again. It''s one of those where every week we are seeing more distribution. The teams are out getting a lot of local regional tie-ins with it, and we are very pleased with the growth but it''s a very, very small base.

Damian Witkowski - Gabelli & Co.

So, I mean, out here in northeast, I don''t see it on the shelves. I mean, realistically I guess it''s going to be at least six to nine months before I do, I guess.

Larry D. Young

Yes. I think if you look at it, our distribution right now is at about 25% for convenience and about 36% for grocery. So, the heaviest right now is going to be the southwest down here, which were our largest Energy markets to begin with and we are just kind of moving out that way. I know we were just up in the northeast and the guys are getting ready to take it out, our distributors are taking it. But we have got markets. I''ll give you some examples. Des Moines is at a 95% ACV, Houston, 93%, Dallas 92%. So it''s really -- our top markets, we''re really getting it out there to make up for what we lost.

Damian Witkowski - Gabelli & Co.

Okay. So it''s 45% availability. What''s the availability of the Snapple -- the plastic Snapple currently? The less expensive Snapple product.

Larry D. Young

Our value tea. Yes. Our value tea, it''s north of 20%.

Damian Witkowski - Gabelli & Co.

Okay. So it''s -- okay. All right. Thank you.

Operator

Once again, ladies and gentlemen, in order to ask a question, please press “*” followed by “1” on your touchtone phone. Our next question is coming from the line of Mark Swartzberg with Stifel Nicolaus.

Mark Swartzberg - Stifel Nicolaus & Co.

Yes. Hey again, guys. John, on the IT platform, I was hoping you could give us a little bit more color on top of your prepared remarks on how that is going. You mentioned you''re halfway into that. And then include in there, if you could, management of execution risk, transition risk with this move to the new SAP system, which sometimes goes very smoothly for companies, but obviously history has shown that others have not had good first start with that.

John O. Stewart

Sure. Let me take SAP first. We are actually not doing a new SAP platform. It''s an upgraded SAP platform, so we are going from two four series instances of SAP in two different regions to one standardized 6.0 instance. We actually trialed down in Mississippi the 6.0 instance about six weeks ago in a very small market and it went pretty smoothly. So we have got contingency plans in place, obviously, we have got the go/no go decisions over the course of the next week to 10 days. These things are always a push up to the wire, they are never easy, but we feel very good about both our contingency plans and the execution plans for the changes ahead.

The other key piece of IT enablement is the hand-held technology. This is an area where frankly we are well behind our competition. We knew this when we acquired the former Bottling Group assets, and we committed to launch the program to bring us up to the industry standard here. We are halfway through the hand-held upgrade roll-out. That also is going very, very smoothly and we -- while we have had some small issues, nothing that we haven''t been able to deal with promptly and resolve and move on. So I feel as guardedly optimistic as I can ahead of a big initiative like this. You always want to get past day one, which is about a week away for us.

Mark Swartzberg - Stifel Nicolaus & Co.

Excellent. Thank you, John.

Larry D. Young

Well, if there are no more questions, I''d like to thank you for your time and your interest in Dr. Pepper Snapple Group. Thank you.

Operator

Thank you all for participating in today''s Dr. Pepper Snapple Group''s fourth quarter 2008 earnings conference call. You may now disconnect.