Keurig Dr Pepper Inc (KDP) 2011 Q2 法說會逐字稿

Good morning and welcome to Dr Pepper Snapple Group's second quarter 2011 earnings conference call. (Operator Instructions) Today's call is being recorded and includes a slide presentation which can be accessed at www.drpeppersnapple.com. The call and slides will also be available for replay and download after the call has ended. (Operator Instructions)

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

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 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 that reflect the way we evaluate the business and which we believe provide useful information for investors. Reconciliations of those non-GAAP measures to GAAP can be found in our earnings press release and on the Investor Relations page at www.drpeppersnapple.com.

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

Thanks, Aly, and good morning everyone. As we highlighted in earlier calls, Q2 was expected to be our most challenging quarter of the year. Compounding an already tough volume comparison, double-digit cogs inflation and incremental pricing actions, April was weaker than expected and the consumer continued to reflect uncertainty. Against this very challenging backdrop, our portfolio of leading consumer preferred brands posted solid results. In fact, we outperformed the category in CSDs, teas, and juices.

I remain concerned about the US economy, unemployment trends and the impact this is having on the overall spending patterns. For the quarter and year to date, bottler case sales were flat lapping 3% growth in the prior year. Dr Pepper volume declined 3%, lapping 3% growth as retailer-led price-offs last year were not repeated.

I am once again pleased to report that Dr Pepper fountain volume grew 5% on new distribution gains. Combined, our core 4, Sun Drop and Crush brands grew 1%. Canada Dry growth remained on trend, up double digits, and Sun Drop continued to gain distribution adding 2 million incremental cases. Snapple was up 8% as we continued to gain distribution in both 6-pack glass and 64-ounce PET. Hawaiian Punch volume was flat as a high single digit price increase took effect June 1, 2011. We're also seeing a greater mix shift towards the 10-ounce package. As expected, Mott's declined 10% as we took double-digit price increases earlier in the year to fully cover apple juice concentrate inflation.

For the quarter, currency neutral net sales grew 3% on flat volume. Price mix added 2 points to growth while deferred revenue recognition and repatriated cases under the Coke license agreement added a point to growth. Segment operating profit on a currency neutral basis declined 5%, or $19 million, as we incurred almost $70 million of input and transportation cost inflation in the quarter. Market investment in Q2 were up only $4 million as we shifted approximately $10 million to the third quarter to support key innovation planks and to remind consumers of the value of our brands. As we highlighted during our first quarter call, we have opportunities to invest incrementally in our brands and we now expect full year marketing to be up $25 million to $30 million.

For the quarter, diluted earnings per share grew 4% to $0.77. This was better than our flattish expectations due to the shift of marketing investments. Increasing awareness and availability of our brands is a key focus for us, and I'm thrilled with the progress we're making in 2011. We've increased the availability of our core CSD, tea, and juice SKUs in both grocery and convenience. In grocery, for example, Dr Pepper ACV distribution is up a point while Snapple and Canada Dry are up 3 points and 4 points respectively. We make great progress in cold drink with 14,000 net new placements so far this year. In fountain, we're tracking right along with our plans for both key and local accounts with net new installs of 12,000 valves.

We've increased consumer communications on our core brands and supported key innovation planks such as Sun Drop, Mott's for Tots, and Mott's Medleys. Dr Pepper's tie-in with Thor resulted in over 1 billion [media] impressions and Snapple's integration in The Amazing Race generated over 400 million impressions. We're penetrating low per capita markets by shifting dollars from national media to local, and making sure local media is supported by strong retail activation.

Moving on to innovation, we're seeing strong trial and repeat in our new products. Lapse users are returning, new users are experimenting and heavy marketing support is providing a halo in the base business. Since its national launch in January, Sun Drop has grown by almost 90% adding 5 million incremental cases. This brand now has a 4 share of the highly competitive citrus CSD category, up almost 2 share points. Grocery ACV distribution is at 90% and convenience is at 55%. We're kicking off strong balance of the year activity with a back to school promotion including college campus sampling, interactive social programming, and an on-line sweepstakes.

AC distribution of Hawaiian Punch 10-ounce is now at 70%. We've sold over 3 million cases of this convenient on-the-go package. We've added new users to the franchise, and at almost twice the profit per unit our retailers are making a nice turn as well.

In Snapple, our 64-ounce PET offering is driving half the trademark's growth year to date. With grocery ACV now 38%, we still have plenty of runway ahead of us. We also believe retailers are using Snapple to help them drive profitable growth in the tea category.

As we all know, bringing back CSD occasions is a huge opportunity, and we believe Dr Pepper 10 can do this. In DP10 test market, not only did we see strong overall trademark growth, but more importantly regular and Diet Dr Pepper both grew. With purchase intent, velocity, and repeat rates in the test markets exceeding our expectations, we're ready to take this product national. Our media plan kicks off on 10/10/11, and we will leverage our great association with college football to drive huge consumer awareness and trial. The launch will also be supported by strong retailer activation, trial packaging, targeted coupons, and innovative merchandising and displays.

With that let me turn the call over to Marty to walk you through some of our below the line items and 2011 guidance.

Thanks, Larry, and good morning, everyone. Let me echo Larry's comments. While we are very pleased by the resilience of our brands in what we highlighted would be our most challenging quarter, we are somewhat concerned about the health of the consumer when the lower income side appears to be more cautious about their spending. That said, we believe our balance of the year initiatives will still allow us to achieve our expected results which I will discuss in a few moments.

Now, moving on to below the line items, corporate costs were $81 million for the quarter, essentially flat to last year. This included $7 million of unrealized marked to market losses as we unwound gains from the portfolio of favorable hedge contracts. For the remainder of the year, we would expect corporate costs, including marked to market losses to be around $80 million a quarter in line with our beginning of the year guidance. Net interest expense was $28 million. Again, flat to last year and a good run rate for the balance of the year. Our effective tax rate for the quarter was 35% in line with our full-year guidance, and included $6 million of Pepsi and Coke-related tax benefits. Due to the timing of certain items, the tax rate in Q3 will be about 100 basis points higher than our expected full year rate.

Moving on to cash flow, year to date cash from operating activities was $256 million. This includes $37 million of cash taxes paid on the Pepsi and Coke licensing agreements. Capital spending was $104 million compared to $114 million last year. We continue to focus on working capital and CapEx management and are delivering better than expected results from rapid continuous improvement. We remain well ahead of our cash conversion cycle improvement goals and expect to be 5 days better on average for the year. This should enable to us have free cash flow for the year ahead of our beginning of the year expectations. We remain committed to returning free cash flow to our shareholders.

On May 18, 2011, our Board of Directors raised our quarterly dividend 28% to $0.32. We view this as an initial step towards being able to consistently raise our dividend over time. Through June of this year, total distributions to our shareholders were $436 million. $325 million in share repurchases and $111 million in dividends.

For the year, we continue to expect net sales to grow in the 3% to 5% range, even though volume trends may be softer than we previously expected, as we now expect balance of the year pricing in the 3% range, which, combined with the almost 2 points of pricing in the first half gives us about 2.5 points of price for the year, 50 basis points higher than our beginning of the year expectations. Also included in our net sales guidance is about 2 points of benefit from the Pepsi and Coke licensing agreements and foreign currency, which is up slightly from our earlier expectations. Full year earnings per share are still expected to be in the $2.70 to $2.78 range. Our assumptions around input and transportation costs inflation remain unchanged from our last update. Again, at forward prices for our unhedged positions, we continue to expect packaging and ingredients to increase total cost of goods by 7% to 9% on a constant volume mix basis.

Also consistent with our last update, transportation costs included in SG&A are expected to be up approximately $35 million. As we highlighted during our first quarter call, we have opportunities to invest incrementally in our brands to support innovation and ensure we remain top of mind with our consumers. This is particularly important now given rising prices and increased consumer purchasing pressure. For the year, we now expect marketing investments to be up $25 million to $30 million. With the facing adjustments we made in Q2, marketing spend is now more evenly spread over the full year. For your modeling purposes, however, you should expect to see about a $10 million increase year-over-year in the third quarter.

Our EPS guidance also assumes a full-year tax rate of approximately 35% which includes an $18 million one-time benefit related to the Pepsi and Coke licensing transactions. As I said earlier, you should expect to see a step-up in the tax rate in Q3 and then a step down in Q4 again due to the timing of certain tax items. In terms of cash flow, capital spending is projected to be approximately 4.5% of net sales. I am encouraged by the progress we're making in RCI and therefore would expect to see further productivity in this number over time. Finally, we remain on track to repurchase approximately $400 million to $500 million of our common stock in 2011 subject to market conditions.

As I indicated earlier, we continue to make excellent progress behind our developing RCI capabilities. We are seeing greater activity and engagement across the organization and this is delivering better than expected results. Through June, we have completed 46 projects and almost 700 of our employees are now licensed to [Kaisan]. In terms of milestones we achieved our very first super Kaizan at our Aspers, Pennsylvania plant running 4 events simultaneously. We were very fortunate to have had some of you join us for this event and experience firsthand the engagement and enthusiasm of the cross-functional teams and their ability to make breakthrough changes. At the start of the event we estimated cash savings of $2.3 million. By the end of the week we were at $5.8 million in cash savings with a very long list of new ideas. We have also had tremendous participation by our Mexico team in using RCI to focus on improvements in sales, supply chain, and back office.

With a number of great wins behind us, I have asked the RCI team to focus on 3 things in the near term. First, ensure the improvements we have achieved so far are sustaining themselves. Second, begin replicating these achievements across different locations and ensuring consistency of process. And third, increase the use of visual management tools to ensure alignment of goals within every team and every part of the business. As I have said before, we're still in the very early stages of this journey but I'm extremely pleased with, and proud of our achievements so far. We're using RCI to improve in every aspect of its 5 platforms; safety, quality, delivery, productivity and growth. And we believe we're well on our way to achieving at least $150 million of cash productivity benefits through 2013.

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

Thanks, Marty. Before we open the lines for questions, let me leave you with these thoughts. Our teams remain committed to executing our focused strategy, ensuring our products are close at hand and top of mind. We're seeing this in terms of solid distribution gains, positive immediate consumption trends, increased levels of local consumer communications, improved brand activation, and above category trends in CSDs, teas, and juices. Over time we expect to cover higher input costs with pricing and productivity, but not completely this year. We do so within a eye to always deliver value to our customers and ensuring we're investing wisely in this business for the long term, sustainable growth. Finally we're winning with RCI, with increasing levels of activity and engagement leading to better than expected results.

Operator, we're ready for our first question.

Thank you. (Operator Instructions) Our first question comes from Christine Farkas with Bank of America Merrill Lynch.

Thank you very much, good morning. Marty I had a question for you regarding the productivity program. Your press releases does -- they do show us what you're seeing on a quarter to quarter basis and that number is slowing a little bit, $6 million year to date versus $17 million in the first half of last year. I'm wondering if you can help with us with how that's going, what your year-end targets are, if those changed at all? And then a follow-up question on taxes paid for Pepsi and Coke payments. Is that coming through evenly through this year versus a big lump sum payment in the first part of 2012? Thanks.

Christine, thanks, good morning. Yes, the numbers you're quoting relate to productivity office expenditures which are actually a piece of, but not the larger piece, of what's happening in RCI. As I said, I think I'm a little bullish on my comments this morning which is a little uncharacteristic of me sometimes because I've seen what this organization has done in such a short period of time. And so -- and I know a few people, some of our investors, 1 analyst actually went out to the plant and had their own observations, and that was really just 1 project of the many we've had. So we're firing on all cylinders, I'm confident that we'll get at least $150 million. We haven't really called out specifically RCI productivity benefits directly in terms of cash flow, or cost savings, but, again, my comment about where we are in days of inventory, if you even look at this quarter, we're down 3 days on a comparable basis with last June, that's $18 million of cash. That means a lot to us, it means a lot to the organization, and we're just, we're just at the scratching the surface, really, in some of these areas. So over time, I'll try to share more with you and give you a better sense of where you can actually see in the financials the results, because we see a lot of good indicators inside, but you can't see them necessarily on the outside, just looking at what we publish.

With tax payments, let me -- there's a -- we, we had said this year that we would have about $53 million to $55 million, as I recall, for the full year, and as I said, $37 million has already been paid so that leaves $18 million in the second half. The large payment, the majority of the payment is about $535 million, and that's a Q1, 2012 payment.

Okay, that's helpful. And Larry just a broad question for you, or two-parter. Why did you decide to defer some marketing spend into the second half? And then broadly, why are you or why do you see more comfortable with price coming in a bit stronger in the second half? Thanks.

I think the biggest reason for the shift was a lot of our national went to a local media shift and we're trying to tie more with our local activation on retail, and so it made a lot of sense for us to move that especially with some more activity coming from Sun Drop and then also the launch of DP10. Then on pricing, pricing has continued to be very rational. I think everybody's heard that everybody's moving in the second half. So with that pricing move you have to have more marketing to keep that brand top of mind and our retail team is keeping it close at hand so that we continue to show the value to that consumer.

Great, that's helpful, thank you.

Your next question comes from the line of Caroline Levy with CLSA.

Good morning everybody.

Good morning.

Just want to clarify a couple of things. Well, first of all, how has July started off from a sales perspective?

Well, you know, it's pretty warm out there. (laughter)

I know, that's what I was thinking. I know that it could all fall apart in September, but I'm assuming this is pretty damn good for CSDs.

Well, I mean you look at Q2, Caroline, I think everybody knows that April was pretty tough in Q2. I think a lot of companies are saying they didn't see an Easter this year, so I think we've got our challenges out there, but so far, we're in line.

Okay, and then you didn't give -- you gave some hints about the third quarter needing to come down because it sounds like $10 million more in marketing spend than you had originally thought and a higher tax rate. So can you help us understand, for the third quarter, just what sort of growth outlook we should have for earnings?

We don't give quarterly guidance, but I think you hit on the two important things for purposes of your modeling, which is the marketing spend of $10 million will be in Q3, the incremental, and the tax rate will be higher.

And higher tax rate, like 37 -- last year you were 37.7% in the third quarter.

I said in my prepared remarks 100 basis points over the full year rate.

Okay, fine. Good. And then if I could just understand, for the full year, is the 35 -- is the $25,million or so increase a number that relates to marketing and advertising? What's included in this, both the $10 million shift that you talked about and the, I think, $20 million to $25 million increase full year?

The answer is yes, the marketing spend includes advertising, and if you look at the larger program, you'd be looking at Sun Drop, Dr Pepper, and our sponsorship of college football, and now the Dr Pepper 10 national launch in the fall.

Okay. And then also if you could clarify Dr Pepper volume. Did the number you release include the fountain growth?

Yes, did it.

So it was down 3% with fountain up 4% or 5%?

Down 2%. And most of that, Caroline, was lapping the retail activity of a year ago when we had 24 packs out there for anywhere from $3.88 to $5.00, which was not repeated this year.

So it seems like that was really about the comp, and then Dr Pep-- I think you lost some shares this quarter overall which we just haven't seen in a long time. Would you expect that to reverse?

I haven't seen any share loss on our CSDs. And no, I -- well definitely you are going to see the Dr Pepper volume change, because we won't be lapping those ridiculously low prices of last year. And Dr Pepper 10 is going to help also tremendously.

And the launch is October 2011 for Dr Pepper 10.

Right.

Okay, thank you so much.

Your next question comes from the line of Judy Hong with Goldman Sachs.

Thanks, good morning.

Good morning Judy.

Larry, just in terms of your volume outlook you sound a little bit more cautious just generally about the consumer outlook here. So I guess as the industry is taking more pricing in the back half, how are you thinking about the price elasticity? And on the pricing side, what's the risk that, as we deal with the tough consumer environment, that even though you guys are taking list price increases, the retailers and perhaps manufacturers have to give back more in terms of promo spending?

Yes, we've not seen that yet. Our pricing has been able to be pretty stable, and, as more pricing comes in to affect this month, and I think you will see most of that impact probably in August, that's one of the reasons we've shifted some of the mark so that we can continue to show value, and, you know, keep, keep our brands top of mind out there at all times. I say that I'm cautious. It's not gotten into -- the consumer has not gotten any worse, they've just not improved like we thought they would. You guys have heard me to say before, we continue to serve them bad news for breakfast every day.

Okay. And then just on the clarification on the marketing spending. So the $25 million to $30 million increase for the full year, that compares to the $10 million to $15 million that you called out last quarter?

That's correct.

That's correct.

Okay, so I guess the question is really, I mean, your guidance for earnings haven't really changed even though potential marketing spending is higher than what you thought before. So are there any positive offsets in terms of how you're getting to the full year guidance that's still intact, even though marketing spending is now going up more?

Yes, Judy, again, so our top line guidance has a couple of moving parts that are important, a little more pricing a little less volume, but that gives us a little more margin contribution to fund the higher marketing.

Okay. And then, Larry, just in terms of Sun Drop, does the ACV progression that you're seeing, maybe if you can talk about take-home versus convenience, because certainly it seems like take-home you've got a pretty good distribution out there, but C-stores you're probably still lagging a little bit. Can you talk about the pace of progression, particularly on C-stores from an ACV perspective in the next 6 months or so?

Exactly, yes, we're, Judy, we're very happy with the performance we've seen so far. Our convenience ACV right now is at 55%, and we're seeing that continue to grow. We've got great programs in the back half. Our partner with MTV, we've got some more activity going there. So we feel very confident with the Sun Drop in the back half of the year.

Okay, thank you.

Your next question comes from the line of Jeff Farmer with Jefferies.

Good morning, everyone.

Good morning.

There's been a lot of discussion about last summer's promotional environment. Can you just remind me how that activity progressed over the summer for your brands?

Yes, it basically broke before Labor Day, and it had an effect on Q2 and Q3. I think the biggest effect was on Q2. But we had activity out there with 24-packs that were running anywhere from -- it started off at $5.00, got all the way down to $3.88 a 24-pack. If you look at what's out there today, we're basically selling 12-packs for that price or higher.

Okay, that's helpful. And then, you did touch on this, but just on Dr Pepper 10, if you use some of your other recent brand extensions, I guess I would point to Dr Pepper Cherry as a benchmark, how does Dr Pepper 10 compare in the test marks in terms of some of the volume numbers you're seeing?

It's, like I mentioned in my prepared comments, we're just, we're beating every expectation we said on it. It is -- we've still got Dr Pepper and Diet Dr Pepper growing. Dr Pepper Cherry is still staying very viable out there, and just from the test results we're seeing stronger results than what we saw with Dr Pepper Cherry in the beginning.

Okay. And the just finally from me, just on Snapple, you talked about in this the past, but with some of that mix volume going to the 64-ounce container, what type of impact might that have on margins?

It shouldn't. It's basically going to be neutral.

Okay. Alright, thank you very much.

Your next question comes there line of Steve Powers with Bernstein.

Yes, hello. Maybe we could just go back to pricing for a moment. First, a clarification. Does the 3-point price mix benefit over the balance of the year is that inclusive of mix benefits as you repatriate the brands from the Coke system? And then just more specifically, what kind of elasticity are you expecting on those price increases in the second half? It looks like your full year volume guidance is now kind of implied to be flat to negative, which implies pretty good drop-off in the second half despite the easier comps and the Dr Pepper innovation. So, is that math right and what are your assumptions there?

Steve, it's Marty. Number one, no, our 3% price does not include any impact of the transfer cases. And I would say our current volume expectation, you said negative, we would say maybe 0% to 1%, which is a little softer than we previously had. Again, as a result of our view of the elastic impact, the higher pricing in the back half will have.

Okay. Can you help me bridge that with the 3% to 5% total top line, top line guidance, if you're looking at pre-pricing, flat to neutral volume, benefits from FX, plus the repatriated brands, how does that not add up to 5%-plus?

Well, okay, but 3% to 5%, so full year. So when you bake all the pricing in first half, second half you're really like at 2.5%. Yes, FX has recently become a tailwind for us, so we're getting a little benefit there. The totality of the Coke and Pepsi deals, both the revenue amortization and in this case the higher top line from the repatriated cases into our system is about 1.5 points. Those are the, those are the major factors.

Okay. Maybe shifting gathers a bit, you talked about fountain food service again being positive, which is, which is great. Can you give us essential the performance trends you're seeing and or expect to see as the pricing goes into effect in the other channels, convenience versus groceries versus mass versus dollar, and or any comments you might have on reasonable differences? Are you still seeing better performance in lower per cap market versus the higher per cap markets, or is that performance gap start to narrow, or even reverse?

Our low per caps are still doing well. We've had a very focused strategy in there and it's being executed very good. You look across the channels, let's start with convenience. If you look at overall traffic and dollar spend and convenience is growing. However, some, in some markets, the CSDs are lagging a little bit on the improvement. We're watching QSR traffic come up with a higher dollar spend and so the different trends we're watching there are encouraging, but not exactly where we thought they would be at this time. We thought they would be more improvement. A large format, we have lots of activity going in large format. As I mentioned earlier, pricing has continued to stay very rational. We've got a lot of tie-ins this summer with movies, we've got our core 4 tied with Captain America, Dr Pepper is with Thor, you saw the impressions we got on that. So we're doing a lot of things in the large format to show value can be delivered in more ways than price off.

Okay. Lastly, I guess, the core 4 ex Canada Dry, 7Up I guess specifically, the reactions you saw some of the activity you had in the quarter versus your expectations coming in, and do you still have the optimism you had a quarter ago in terms of the improvement in 7Up specifically, and then, and then kind of your outlook for when Sunkist and A&W might turn the corner as well?

Yes. No, we look at our core 4 as a total and it's up 1% so we're just very, very happy with that. 7UP, we're still very bullish on 7UP. We mentioned earlier kind of what we've been seeing with Canada Dry. That runway is long there also. With the summer coming up, Q3, I think we're going see our core 4 still doing well because some of the hot activity a year ago, our core four wasn't involved in. So we're happy with that.

Sunkist, we've got lots of plans behind Sunkist. We've got great expectations for it. It's brand we believe in, and we've got the bottling system behind it and some activity we are going to see through the summer that's going to give us some dividends.

Thanks a lot.

Your next question comes from the line of Kaumil Gajrawala with UBS.

Hi guys. Couple questions on cash return, if I could follow up on some of the commentary. First, it looks like year-to-date you've purchased about 325 million shares. The guidance, of course is 400 million shares to 500 million shares. That implies at minimum you're likely trending to be at the high end, but Marty do you see any flexibility for increasing that amount?

We have authority by our Board to do more than this. So, yes, we can, should we so choose.

Okay, and then on the dividend increase you mentioned it's the first step to potential increases over time. Can we maybe imply that those increases would be ahead of earnings growth given your cash flow profile?

Well, I think clearly our cash flow generation will probably be a larger consideration than simply the earnings growth over time. We need sustainable cash flow improvement, of course, to fund the dividend, but clearly early on now, you're right, we have more cash flow capacity. We're almost, on a dollar basis, we can, we're simply self-funding future increases out of shares we're buying back. We did buy back 5.7 million shares in the quarter. We are down to about 217 million shares outstanding presently. And as we continue to buy back shares the total dollar commitment to the dividend, it gets offset by any raises in the dividend. I think what we're trying to communicate is we understand that many of our shareholders view the yield as a strong component of total return. And, and we're cognizant of that and we want to try to raise it over time to, to provide them with a requisite level of return consistent with our business, the peer groups we're in, and some other data points. And yes we have the ability to do so.

Got it. Is there a target payout or anything, or is it too early?

Not at this point.

Not at this point?

Maybe one day we will. We'll express that as a policy but I think it's too early.

Got it. And then, if I could ask, we spend a lot of time in 2010 talking about Crush but you haven't mentioned it at all. Can you maybe talk about how Crush obviously has got some tough lapse, how that's doing, and then also the dynamic between, between Sunkist and Crush?

Yes, we're still very pleased with the Crush performance. We've got, again, activity in the third quarter with retail. Retail active execution on Crush, so very pleased with it. To your point, it had some unbelievable comps to come against. Whenever you compare with it Sun Drop -- I mean, with Sunkist, we knew that we were going to have some cannibalization on Sunkist and actually it wasn't as high as we thought it would be, but you have to look at the overall category. With Crush and Sun Drop -- or Sunkist both in there, we have really expanded that category. And if you look at the Crush right now, up 21% last year for the first half and basically flat now, so it's kind of hard to not like numbers like that.

Got it. Thank you very much.

Your next question comes from the line of Mark Swartzberg with Stifel Nicolaus.

Thanks. Good morning, guys.

Good morning.

I guess starting with the pricing environment, Larry, you've been very consistent describing it as rational. There's obviously been some debate about that over the last week or so. Would you -- how would you compare kind of what you're seeing in July to what you saw at the beginning of the summer in the first half? Any change in -- obviously you're going for more pricing, but would you describe the environment as more disciplined or pretty similar to where it was in first half?

I think it's pretty similar, is what I'd have to say, Mark. I think we'll see it more disciplined as some of the pricing comes -- takes hold at the end of July, first of August. Seeing a lot more with packaging, not just 12-packs or 24-packs stacked out there. Seeing activity 2 liters and half liter PET, different size can packages which I think is very good for us and good for the industry and the category that we get more choices out there. So I think the pricing is going to be rational. You look at what we're seeing with commodities, it has to be. And I think the biggest challenge for everybody is delivering that value to the consumer.

Great. And then a few questions on brand, Larry. Snapple, Sun Drop, and Dr Pepper. Can you talk a little but about your outlook for Snapple? Sequentially, pretty similar to the first quarter, but a much easier compare. How are you feeling about the condition of that brand and the outlook for growth there?

No, we're looking at Snapple discontinues. The premium, since we converted to 6-pack, we're looking at that as continuing to grow. We're seeing household penetration, we're seeing more activity in retailers, we're getting more space. So we're just very, very pleased with what we're seeing on Snapple, and I expect to the come close again to double-digit growth this year.

Great. And then I might have missed it, but on Sun Drop what are you seeing on the repeat side of things? How are you feeling about how that's playing out?

Very good. Very good. That's why I said we've got more activity coming into place for the back half. It's one of those things where you take a brand that was very regional, take it national. One of the most important things is stay behind the retail execution, get it top of mind, close at hand, and have patience.

Great. And then Dr Pepper in the state of Texas it's had some problems. I think it's declining. And DP10 should help, but could you talk about the brand in that particular state what you think is going on to what extent it's a larger consumer issue, to what extent you think it's a brand issue? Speak to the performance there?

Well, to your point, it's one of our largest markets. I don't think, as I talked with the guys out here, I don't think we really have any concerns. I think some of it is just timing. When you look at what happened last year with some of the pricing, there was tremendous volume rolled through Texas so we've got to kind of lap those numbers. At this point we really don't have a concern on that, Mark.

Great. Okay, thanks, Larry.

Your next question comes from the line of John Faucher with JP Morgan.

Thank you. Just want to follow up on a couple questions on pricing and then related to guidance, because as you talked about sort of funding the extra marketing spending in the back half of the year, you talked about more pricing, and I guess is that more pricing than you had built in your last guidance? Because the marketing spending is up from the last guidance, but the pricing -- again, so are you seeing the ability to take more pricing in the market now than you would have thought 3 months ago? Because again, that's kind of not necessarily what I think the rest of us are feeling like here. Thanks.

John, it's Marty. Our answer is yes, and that's what I said in my remarks. It was probably an incremental 0.5 point or so in the back half. I think we last said 2.5 points, and now we're looking at -- when we look across our portfolio, both the CSD's and the non-carbs, and put it together, we see a number of about 3 points.

Okay. And so in that incremental improvement then, and I apologize if I missed it before, that's -- it sounds like you may be indicating that's mostly coming on the non-carb side.

Those are a little bit larger.

Okay, great, thank you very much.

Your next question comes from the line of Ann Gurkin with Davenport.

Good morning.

Good morning.

Wanted to talk about the consumer a little more. Do you think there is a growing risk of the consumer switching to tap water from any beverage choice? I was kind of curious of your opinion on that trend.

As we kind of watch the economy and the unemployment levels, there's always going to be an impact on the consumer. In the past, they've traded down to CSDs, value juices, and you're right, tap water. But traffic overall is looking up. I think we just have to stay very focused, as I said a moment ago, of showing that we can deliver value without just strictly price off.

Okay. Secondly, any thoughts on how we should think about costs in 2012 versus 2011?

Hi, it's Marty. With respect to -- I assume you mean commodity costs.

Right.

So for balance of this year we've got pretty good visibility, 3 months to 6 months out. Clearly less so into 2012. We'll be putting on some more 2012 cover here probably over the next couple of months. So feel pretty good about the next 3 months to 6 months, and that's why we're staying with our 7% to 9% 2011 increase. But it's really too early to share too many details yet for 2012.

Okay. Great. Thank you.

Next question comes from the line of Damian Witkowski with Gabelli.

Hi, good morning.

Morning, Damian.

Good morning. I just want to go back, Larry, on your comment on the consumer, and, you've said before that it's not necessarily that the consumer isn't getting worse it's just that they're not getting better as you hoped. I think this was kind of addressed, but I just want to make sure I understood that. Is it the fact that you simply look out there and say, well, a gallon of gasoline is up over $1.00 versus a year ago, and unemployment is still above 9%? Is that would gives you pause, or is it something that you're actually seeing cracks somewhere in your channels that, that give you the more cautious tone on the consumer?

Well, you know, we didn't see as much decline with gas going up compared to what it did in 2008, Damian.

Okay.

So it's not as much that as just that we laid out our plans, we thought we would see more improvement than what we did. As everybody can tell, I think in the entire industry, none of us thought commodities would hit us where they did so that kind of -- there were wrenches in the gears there that I think we've done a great job of managing through. So the consumer will always be top of mind for me. As I mentioned, they haven't got worse, but I just thought it would be a little better by now. And I think we still have room for improvement.

Okay. Fair enough. And then just Mexico, you had a great first half in terms of volume, help from currency, but the operating income still kind of is lagging. I'm just trying to figure out if this is a -- if 2011 is sort of a transition year for Mexico and we should look at it going up in terms of operating margins going forward, or is this a structural change and we're looking at depressed operating margins there for, for the foreseeable future? And then sort of any changes in the distribution thinking there? Pepsi just announced something. Just curious if you have any thoughts.

You know, I'll let Marty kind of go through some points on this for you. But you're right, this is a -- we turned Mexico over to reporting in to Jim Johnson, our President. We're re-looking how we go to market. It's a restructure, a rebuild year, and remain very bullish on Mexico. We've just got to get it set up right, and I keep up with what other people have done in Mexico, but that really doesn't change how I look at our strategy. And I'll let Marty kind of hit some of the points we're doing down there.

Well, you know, the good news in Mexico got just completely swallowed up by inflation. In fact, if you just look at the margins for, for that segment, almost 700 basis points of decline in the quarter due to mostly commodities in the 500 basis point range and almost 200 basis points in fuel. Which really, you know, just completely smothered about 200 basis points of gain they would have had in the margin from all the good things, including the increases in some of their key brands, [Pen] FDL up 6%, Clamato was up 29%, Squirt was up 10%, in a difficult environment. They actually -- but for the cost increase that they could not control, they actually did very well in our judgment of the quarter.

Is Mexico an actual cash flow drain, Marty, on your cash flows?

No, actually, just the opposite. We were actually surprised. The combination of some of the things I said, including -- I can't tell you how much RCI they've done. They've done a lot, and as a result, they actually showed us a little more cash in the quarter than I actually thought they could generate.

Okay. And then lastly, Marty, I think you said you have now 217 million basic shares outstanding. That's as of when?

As of today.

Today, okay.

You'll see that on the number on the face of the 10-Q when we file it.

Okay. Great, thank you.

Your next question comes from the line of Brett Cooper with Consumer Edge Research.

Good morning, guys.

Good morning.

Two questions. First of all, on Dr Pepper food service, you guys mentioned the distribution gains certainly got you some benefit, but can you break out what was distribution versus existing valve?

You mean break out --

The growth. So you had 4% growth. What contributed from distribution or existing valve?

Let me see if I can find it. I think about -- on the distribution side, it was probably about 70% of that growth, and then the rest was same-store growth.

And then just to continue on the pricing side of it, I think in your last call you indicated that juice -- or, I'm sorry, non-carbs were giving you about 150 pricing points of pricing for the overall Company? So that would imply that your CSD pricing in the second half was going to be up in the 2% range. Is that right?

That's right. I don't recall if we broke it down last quarter, but for CSDs, yes, about 2% for balance.

Okay, great, thank you.

Your next question comes from the line of Andrew Keely with Deutsche Bank.

Hi, good morning.

Good morning.

I was wondering if could you just quickly -- is the second half pricing on CSD already in place nationally? And then, Larry, for the second half with that pricing, it looks like you're staying flexible on the promotional reinvestment, but you know if passing the pricing through proves more challenging than you're expecting, I guess, philosophically which way will you lean in terms of pricing versus growing your volume and your market share objectives?

Well, that's -- you have to look at the total mix whenever you make those type of decisions. Everything we're seeing right now tells us that, our strategy is right on, the pricing that we've got put out for the summer, we haven't had that much push-back from our customers. I think a lot of that is due to the promotional activity we're putting out there that's besides price-off. But we have absolutely no intention of backing away from our pricing. I think we've got to get our pricing at the right levels with the input costs we have, and then that just makes it that much more solid for us in 2012.

Okay. And then on the -- on brand Dr Pepper, across the 3 bottling systems, was there any meaningful difference in volume performance?

No, very similar.

Okay.

Very similar, especially lapping the activity that was last year.

Okay. And then lastly, the Company stayed very disciplined with an organic strategy, but when you look at the growth in categories that you're not in, like vitamin waters and sports and energy, how do you, how do you think about the possibility of participating there versus the cost of getting in those categories. Is that priority at all right now?

Like I said before, we've got such a runway with the brands we have right now, a long runway ahead of us, we're going stay focused there. We never stop looking at them, but one of the key points of our strategy is that we pursue profitable volume channels and categories. And so as I look at all of them, you take some categories that are growing tremendously right now, you've got to look and say is there profit there also? Is that the kind of volume that's sustainable?

So we want to stay very focused on what we have right now. We constantly look at others. We do a lot of things with some allied brands that we distribute so that we can see where the growths are, and we have a lot of different categories that we use up and down the street because it's profitable in those channels.

Okay, thanks, appreciate that.

And your final question comes from Steve Powers with Bernstein.

Thanks for the follow-up. Just wanted to go back to the comments you had made around the dynamics that allows you to keep, keep full-year EPS guidance despite the higher inflation you're dealing with, the weaker volumes, and the -- and now the incremental marketing. You mentioned, obviously, the incremental pricing you've been able to take, but that doesn't seem like it's enough. So I'm wondering just how much productivity has helped you? Waiting for you to quantify that. And obviously you've got formal productivity office initiatives, you've got the RCI. So, you know, the cumulative effect of those, you can quantify that. And also maybe help us, how much is kind of structural savings versus things you may be doing to get yourself through this year that may have to come back for the business on an ongoing basis?

Okay, Steve, look, we'll, we'll get a -- I'll get a little more granular with you. Okay? You talk about manufacturing productivity. Probably in this quarter, I'm going to guess in terms of margin we probably picked up, I don't know, maybe 50 basis points of overall productivity. Some of that we would have done without RCI. Some of it includes RCI. Obviously we expect that to improve. You were on project. I think you know there's some trajectory here.

Yes.

And, and so we know we've got some benefits coming in there. That helps us continue to stay within our range of guidance.

Okay. Any sense for just how -- to go back to your bullish tone earlier on the call, Marty, how much ahead of your run rate is? 50 basis points, it's good, you know, but what were you expecting and any sense for how big the deal can get over time?

I read your report. You're even more bullish than I am. (laughter) Look, I say this a lot. I don't think we really know completely. And that I think is the beauty. Everybody I have encountered on this journey myself has always done better than they originally thought. And my comments today simply go to, we set a goal, we've put a financial goal out there over a long enough period to allow us to really get ingrained in this, and I've only been looking for results now for 6 months, even a little less than 6 months, I think in terms of when we really got started in the first quarter. And what I see so far tells me we're getting more done sooner and, and that's what makes me bullish.

Nothing we're doing is short-term, believe me. We're not interested in that. We're not interested in doing things short term for the next 3 months or the quarter. We, truthfully, we don't worry about. That there's no reason for us to worry about that, get too focused with that. What we're doing is making changes that have to be sustainable, which is why -- as I said in my remarks -- the RCI team right now is going back, double backing everything we've done. Are the changes sustainable? Are the processes documented? Do people know what they're doing? Are they working as we in fact architected them to work during the Kaizan? It's very, very, very important. Otherwise, none of this stuff will sustain itself. And, and that's critical. So we probably have some upside in our numbers balance a year that help maybe close the gap on some of your math.

Thanks for that. Very helpful.

All right. Okay, well I want to thank everybody for joining us on the call today and for your continued interest in the Dr Pepper Snapple Group. Thank you.

Thank you. This concludes today's conference call. You may now disconnect.