Keurig Dr Pepper Inc (KDP) 2012 Q1 法說會逐字稿

Good morning and welcome to Dr Pepper Snapple Group's first quarter 2012 earnings conference call. Your lines have been placed on listen only until the question-and-answer session. Today's call is being recorded and includes a slide presentation which can be accessed at www.drpeppersnapple.com. The call and slides will also be available for replay and download after the call has ended. (Operator Instructions) It is not my pleasure to introduce Carolyn Ross, Vice President, Investor Relations. Carolyn, you may begin.

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.

As I'm sure you saw on this morning's earnings press release, our results for the first quarter came in consistent with our expectations. Our brands continue to perform well in the marketplace this quarter, despite the fact that our pricing is up across both our CSD and Juice portfolios. We grew both volume and dollar share in our CSD and Tea categories, and outperformed the industry. Our teams continue to make our brands top-of-mind and close-at-hand for consumers. With the traction building on RCI everyday, I am confident that we will achieve our expectations for the year.

For the quarter, bottler case sales were flat on 4 points of price mix, lapping 1% growth in the prior year. CSDs grew 2%, led by our flagship Dr Pepper, which also grew 2% driven primarily by Dr Pepper Ten which we launched nationally in Q4 2011, and continued growth in our fountain business. Our core five which, are our core four plus Sun Drop, grew 3% in the quarter, fueled by the continued strength of Canada Dry and mid single-digit increases in A&W and Sunkist. 7UP grew 1%. These increases were partially offset by a double-digit decline in Sun Drop, as we cycled the national launch in the first quarter of 2011. Together with Crush, these brands grew 1% for the quarter.

As expected, both Hawaiian Punch and Mott's declined double-digits on larger relative price increases that were implemented in mid 2011. We would expect these trends for Hawaiian Punch and a Mott's to continue in the second quarter. Once again, Snapple continued its momentum, posting a 5% increase, while lapping 10% growth in the prior year. I am proud to say that Snapple continued to outperform the category, while providing value to our consumers with new flavor and package innovation. Our other brands increased 5%, fueled by growth in our Hispanic portfolio including Penafiel, Clamato and Squirt from our CSD value strategy in 2-liters and 20-ounce on brands such as RC Cola, Tahitian Treat, Cactus Cooler and the Nehi. We also saw growth in our allied brands most significantly Vita Coco and Neuro.

On a currency neutral basis our net sales increased 3% for the quarter, reflecting 4 points of price mix, partially offset by lower branded sales volume and a reclassification of certain customer transportation the allowances from SG&A expenses. Segment operating profit decreased 3% for the quarter, with sales growth and productivity improvements more than offset by $31 million of higher packaging and ingredient cost, other operating costs, inflation and higher market investments of $8 million. Reported earnings per share were $0.48 for the quarter, a 4% decline versus prior year.

As I look to our plans for the second trimester, I am confident that our activation line up and new products will engage our target consumers and increase awareness of our brands. Once again, Dr Pepper is teaming up with the hottest movie of the summer, The Avengers. Just like Dr Pepper, The Avengers are all one of a kind. We are running a national co-branded TV and radio campaign, reaching over 90 million of our target consumers. We'll have promotional packaging and collectible cans for take-home consumption, coupled with an Xbox program for immediate consumption.

Guy Fieri, the celebrity face of summer grilling is partnering with Dr Pepper to give consumers his owned exclusive cooking tips and recipes featuring Dr Pepper as a key ingredient. Consumers will also have an opportunity to win a live grilling experience with Guy himself. We're engaging the Hispanic consumer by a sponsoring PJ Awards, the number one Hispanic youth awards show for the third consecutive year. We're offering our consumers a chance to win a trip to Miami to attend a private Pitbull concert, and we will also give them an opportunity to attend private PJ VIP parties, where they could meet and greet artists from the awards show.

7UP will be integrated into the hit show Survivor. Our Message in a Bottle, in-store merchandising and display activity will feature our entire core five brand portfolio. Sunkist will partner with USA Dream Team to headline our core five summer basketball program. We'll offer promotional packaging and collectible cans featuring former Olympians, fully supported with national media. Our core five 20-ounce Facebook credits program is on fire. Driving growth in our immediate consumption business, and now several of our brand pages have over 1 million Facebook fans, so we are extending this program throughout the summer.

And we're not stopping there. We brought news to the Tea category with our national launch of Snapple Diet Half 'n Half Lemonade Iced Tea. Now we're bringing more news to the category with our launch of Snapple lightly sweetened teas. Snapple will also partner with America's Got Talent, on and under-the-cap program that will give consumers a chance to win a VIP trip to see the Talent finale. Americas Got Talent is the number one show during the summer selling season, and Snapple will get over 855 million media impressions throughout the season. With that, let me turn the call over to Marty to walk you through some of our below-the-line items and our thoughts on our second quarter.

Before I cover corporate and other financial items, I would like to briefly review the major items impacting our gross margins, which declined 180 basis points in the quarter. Consistent with the guidance we provided on our fourth quarter call, the largest portion of our packaging and ingredients inflation was expected to occur in the first quarter. Net of pricing, this reduced gross margin by 140 basis points. Other manufacturing cost increases, including higher depreciation, reduced gross margin by another 50 basis points.

Changes in certain commodity prices at the end of the quarter caused us to record $6 million of unrealized mark-to-market gains on commodity hedges, approximately $5 million of which is in cost of goods, and the rest in SG&A. This compares to a $2 million unrealized mark-to-market gain last year, all recorded in SG&A. This favorable comparison improved gross margins by about 30 basis points. As a reminder, unrealized mark-to-market gains or losses on commodity derivatives are included in corporate expenses and will be included in segment results when the contract's settled. Additionally as you saw in this morning's press release, we are now excluding these impacts from our core EPS results and our full-year EPS guidance is now stated on this basis.

Now, moving below the line items. Corporate costs were $65 million for the quarter, compared to $67 million last year. Without mark-to-market impacts in both years, corporate costs were $71 million compared to $69 million last year. Net interest expense was $32 million, $6 million above last year, as we refinanced a low-floating rate debt last November. Our effective tax rate for the quarter was 37.4% and in line with our full-year expectations, now that we have lapped the one-time benefit in 2011 from the Coke and Pepsi agreement. Cash from operating activities was a use of cash of $325 million, after paying $508 million of taxes on the Pepsi and Coke licensing agreements. As a reminder, we'll make a $23 million tax payment related to the Pepsi and Coke agreement in the second quarter.

Capital spending in the quarter was $51 million. We returned $153 million to our shareholders, with $85 million in share repurchases and $68 million in dividends. Our February 8, we raised our quarterly dividend 6.3% to $0.34 per share, from $0.32 per share. We repurchased 2.2 million shares in the first quarter, and now have 211.8 million shares outstanding.

Now, in the beginning of its second year, rapid continuous improvement or RCI, as we call it, continues to gain momentum across our entire organization. I continue to be very encouraged by the progress we've made to developing sustainable continuous improvement mindset at Dr Pepper. As you have heard me say, RCI is not a cost reduction program. Rather, RCI is about creating a sustainable business model of continuous improvement. Underpinned by a mindset of relentless focus on providing value to our customers and consumers and eliminating everything else. The result is, of course, improvement in cash flow and earnings over time. Since we began our efforts in February of last year, we've engaged more than 1,900 of our people in 156 Kaizen improvement events, and identified $77 million of annualized cash productivity.

Our RCI efforts are focused on improving safety, quality, delivery, productivity, and growth, and we are achieving results against each of these planks. We are emphasizing the importance of safety and making Dr Pepper a safer workplace, with the identification and implementation of 350 improvements. We're improving quality and delivery for our customers by providing fresher product and reducing out-of-stocks, all while taking seven days out of inventories. Inventories on a FIFO basis, when compared to March of last year, are down $29 million. We are beginning to realize cost savings from the closer of eight warehouses, and reductions in outside storage, totaling over 1.2 million less square feet of space. Fewer miles are being driven transporting product between locations. And we are driving growth with more time spent in the selling process.

Year one was about getting the organization engaged, and we had some great wins our Warehouse Direct and LAB businesses, as well is in a number of other areas including marketing, innovation, and certain administrative functions. This year, we are focusing much more of our RCI resources on our DSD the business, and we're kicking it off with 5S workplace Kaizen events across each of our DSD facilities. For those of you who are unfamiliar with the five S's of lean, they are Sort, Set in order, Shine, Standardize, and Sustain, and are founded on the principle that a well organized workplace increases and improves both productivity and safety.

We completed our DSD pilot in Miami earlier this month, and we just completed a 5S event in our Plano R&D facility last week. The improvements we've identified thus far combined with the enthusiasm of our senior leadership and employees, who will be working on 150 improvement projects in 2012, gives me confidence that we will achieve our goal of at least $150 million of cash productivity over the first three years of this endless journey. Moving on to 2012 full year guidance, as you saw in today's press release, we continue to believe that we can achieve net sales growth near the low end of our 3% to 5% long-term range and full year core earnings per share in the $2.90 to $2.98 range. Despite high gas prices we are pleased to see some early signs of improvement in the macroeconomic environment in the US, with sequential improvement in QSR traffic and immediate consumption trends.

Against this backdrop, we continue to expect net pricing to be up about 2% to 2.5% for the full year, with about 0.5 point of volume increase. Consistent with our last update, considering our hedged positions and current market prices for our unhedged positions, we expect packaging and ingredients to increase total cost of goods sold by 2% to 3% on a constant volume mix basis. While our outlook for commodities remains unchanged, if current trends hold, we could see this outlook improve in the latter part of the year, and we will provide an update on our next earnings call.

We continue to expect certain higher costs affecting transportation, both in terms of fuel cost for our Company-owned fleet, as well as higher lane rates from our common carriers. This is expected to increase SG&A by $13 million in 2012, of which $3 million occurred in the first quarter. Our net interest expense will be around 4.5% on our $2.7 billion of debt, an increase of $11 million over last year. Finally, we continue to expect our full-year tax rate to be approximately 37%. In terms of cash flow, capital spending is expected to be approximately 4% of net sales, and we remain on track to repurchase approximately $350 million to $375 million of our common stock in 2012 subject to market conditions.

For modeling purposes, let me highlight a couple of things that will impact quarterly phasing. As occurred in the first quarter, Mott's and Hawaiian Punch volumes will continue to be challenged through the second quarter as these brands cycle price increases taken in the second half of 2011. Contract volume should grow at rates similar to this quarter, as a result of growth in the energy category. We expect commodities to be up slightly on a constant volume mix basis compared to Q2 last year, with the comparisons improving in the second half of this year. Finally, as a reminder, Q2 was our highest quarter of marketing spend in 2011, and we can expect it to be up slightly in 2012. Hopefully, these points of clarification are helpful to you. With that, let me turn the call back to Larry.

Before we open the lines for questions, let me leave you with these thoughts. We are executing our focused strategies, and it's continuing to pay dividends, with share gains in both CSDs and Teas. We're committed to always delivering value to our customers and ensuring we're investing wisely in this business for long-term, sustainable growth. With strong leadership engagement and enthusiasm across the organization, we're winning with RCI and delivering results for our customers and in our financial performance. Finally, we remain committed to returning excess cash to our shareholders with a view of providing very attractive shareholder returns. Operator, we're ready for our first question.

Thank you. (Operator Instructions) Steve Powers, Sanford Bernstein.

As you said in your opening remarks, commodities and transportation costs were tough in the quarter. Elasticity was severe on the non-carb side. But on the other hand weather was good, I think there might have been an extra selling day with the leap year, and you under-spent your target the budget on advertising again. I think the key question that this quarter has raised is whether you can consistently deliver external expectations on both volume and EPS at the same time. Last quarter earnings were a bit better than expected, but volume's lighter. This quarter volumes were better, at least on the CSD side, yet earnings came in a bit light. And a appreciate the extra expectations may well have been higher than your own internal forecasts, but especially in the context of RCI, should we not expect DPS to be able to deliver on both metrics more consistently? And what lies ahead to give you confidence that you can over the balance of 2012 and beyond?

Okay Steve, good summation. Let me take it from the top. First of all, this quarter was not a surprise in terms of, probably, the biggest factor affecting the bottom-line, which was commodities. And therefore, had the effect that we thought it would have. I've given guidance on my overall view of commodity inflation for the balance of the year with a little footnote that says we'll take a look at current trends which our favorable, and tell you what that means next quarter. I mean, I also add just to help all of you model this year, as long as we're talking about gross margins, for the full-year, our expectation is we will be at last year's full-year rate of gross margin or even slightly higher. Even though we are down this quarter, you can think about that trend for the balance of the year.

In terms of volume, the weather did what it did and we are not going to quantify, nor can we the effect of the weather. I think we should take great comfort in the performance of our CSDs, whether or not withstanding, core five grew, yes Sun Drop declined but remember, we're lapping the introduction a year ago. We pointed the volume declined, but if you think about a product introduction you think about promotional pricing. If all of you look at your own Nielsens and look at Sun Drop and you look at Q1 this year versus last year, you'll see price mix up 20%. So again, lapping promotional activity.

Mott's and Hawaiian Punch, as expected, we took some fairly large price increases last year. Everybody knows juice concentrate for Mott's was our Achilles' heel last year to a significant degree in commodity inflation. It doubled last year going into this year and it also had increased. And it's one of the areas that we are seeing softening in. We'll see how that translates into our activities around Mott's for the balance of this year. Again, Q2 we expect that to happen. But if we look at where we are with those brands and our major customers, we feel really good about how those brands can perform in the second half.

The marketing spend, I tell everybody we continue to tell everybody up $8 million, maybe we are $2 million shy. We continue to equate, overly equate, in our view, the effectiveness of the spend versus the total spend, we are drawing conclusions on effectiveness of total spend. We could talk ad nauseam about what we are doing in social media, what technology is doing to the cohorts that buy many of these brands, is what the spend rate is to get effectiveness and if you look at GRP's, they're up like 63%, 64%, as a measure of are people getting the message around our brand. RCI, I continue to be thrilled by it.

And, yes, we measured $77 million cash productivity the balance sheet components just jump out at you. Cash flow this quarter, if you take out the tax payments, were significantly better than last year in the first quarter. We probably have $5 million, best I can measure, of year-over-year cost improvement from RCI. And I believe if we did nothing else, and just implemented what we've identified already, we can probably add another $10 million to $15 million to that balance of year. So, I don't know if I have missed any of the areas you've identified, but taken together, we feel pretty good about balance of this year.

Okay, I guess I hear that and I hear the excitement but I also see the results, not just this quarter but last couple of years, and acknowledging the environment. But it's been hard to grow both the top line and the bottom line thus far for DPS and I'm just trying to get a sense of what's going to change. It sounds like the answer, to some extent, is commodities. And maybe that's the wrong read, but what's your answer. As I look at the commodity outlook that you've got and maybe getting a little bit better. Is that insurance policy or potential upside?

It should be upside. I think, Steve, this question comes up a lot in this phase about profitability over time, and you go back to 2009 when the industry picked up a lot of commodity relief coming out of 2008, and so that was favorable. And that lifted earnings for everybody as you recall, it didn't get competed away. And then we saw the increase in commodities and everybody took price, and everybody knows the category is elastic and everybody anticipated that it would result in a decline in volumes. And the pricing environment's been rational and if we get some relief on commodities, we'd expect that to go to the bottom line.

If you look at it, we'll be four years old next month. And a lot of the prior year was a lot of our foundation spending. And I think we're really starting to see the benefits from the investments we've made. We've increased marketing over $100 million. We will spend what where we can get results on our brands and what we spend. So, we're very confident, we feel very good about this year and I'm just thrilled to death with our CSD numbers for first quarter.

On the CSD point, Larry, just building on that, and Dr Pepper Ten. Any commentary on what that contributed in the quarter would be great. But it looks to us, at least like grocery ACV for Dr Pepper Ten on the base 2-liter and 12 pack cans, the main SKUs, only about 60% with single-serve 20-ounce PET only about 30%, essentially the same level that was in the months immediately following launch. First, how do those numbers compare with a cold drink channel? And more generally, is distribution Dr Pepper Ten where you want it to be? Can it be broadened from today's rate, etc.

Yes, I don't know where your numbers come from, Steve. We've got grocery ACV at 93%, convenience and gas were right at 60%, our trial rate is at 10% and way above the target we set for it. Our repeat rate is right where we planned it to be. We've got a lot of strong brand impressions out there with it. I would say on Dr Pepper Ten, it is doing exactly doing, actually doing more than what we had planned, and we're very happy with it. And the test we are running on the core five 10 is exceeding our expectations, so we're very happy with it.

Okay, my numbers are Nielsen and maybe that I'm looking at all-track channel ACV for those SKUs and maybe just citing groceries, is that a possibility.

I've got grocery at 93%, convenience and 59%.

Okay, thanks.

John Faucher, JPMorgan.

I just wanted to follow up on the CSD piece. You guys talked a little bit about the timing of concentrate shipments. And I guess there was a little bit of a load in the fourth quarter, but it's difficult to see how that played out given some of the repatriation, etc. If I look at the CSD volumes, up a couple hundred basis points, concentrate shipment volumes down 300, that's a pretty wide gap. Can you talk with us about how that will progress over time? And how much the lost concentrate volume contributed to the gross margin decline. And I guess going forward in terms of looking at the second quarter, with Mott's and Hawaiian Punch down, it seems like that should have had a positive gross margin mix impact. Did we see that in the first quarter? And should we model that in for the second quarter? Thanks.

Okay, John, the movements around these items in gross margin is your question. So let's go back to concentrate volumes. As happens every year, we do get bottlers that buy ahead of the pricing increase. If we try to think about it, that's always going to happen so we're always going to have a little bit of a gap between BCS and shipments when you go into Q1 every year. If I had to put a number on what I think the impact was between Q4 and Q1 on volume, it could be upwards of 1% in terms of the impact in the volume.

Now last year in the fourth quarter, while they concentrate segment may have benefited from that in terms of volume over the prior year. Last year, as you know, we were continuing to lap the Coke deal and the loss of those concentrate cases to the concentrate segment, the brands that came back into our distribution business. Mix, the Hawaiian Punch, the size of those brands themselves on mix itself, and the margins not so great, I don't think it's a surprise Hawaiian Punch, for example, it's not a very high NSV dollar case. It's impacts on revenues are probably less than they are on volume of course. Probably another factor of mix, which you didn't raise, the contract business, so we need to pay attention to some of the product we make for others. Everybody knows we do do some manufacturing for some of the energy companies. That category's has been growing.

Our view of just the impact of the higher volumes in contract on a year-over-year basis, reduce gross margins by between 30 and 40 basis points. That's a factor that probably didn't get modeled that the level all of you tend to run numbers at. I will leave that with you, because that business is expected to continue to grow as best we see into Q2. I think I've covered most of what I can cover.

Okay, again, you talked a little bit about the annual increases and you said that happens every year. I guess I am trying to figure out what was different this year, aside from the repatriation because that still doesn't get me to as big of a gap between concentrate and volumes as you guys showed in the quarter.

When I said it had maybe a 1% shipment volume impact in Q1 is, our best, you're trying to look at prior year trends associated with the purchase of concentrate price before the year-ago price increase and capture, what we think, the incremental purchases by our bottling partners. That's how it's measured, but we're always going to have some activity.

Okay, great, thanks.

Brett Cooper, Consumer Edge Research E-letter

I was wondering if you guys could give us a time frame as to when you'll make a decision on rolling out the other ten products nationally.

We haven't come up with a time yet. We're still running the test in four or five markets. Right now, if we had results like we saw in Dr Pepper Ten we can always pull it forward. But right now we're looking at it being more of a 2013.

Thanks.

Judy Hong, Goldman Sachs

First, just clarification. On your comment that you gained share in CSD, was it a retail metric? Or is it a bottler case sales metric?

It is on Nielsen.

On Nielsen, okay. Just in terms of the gross margin outlook. Marty, you've talked about ending the year for the full-year margins being flattish versus last year. Which obviously implies a pretty nice improvement as you get into the back half of the year. It seems like we have to rely on pricing staying positive to see the benefit of commodity relief. Maybe just talk about the competitive environment and your thought on at both the consumer level and at the competitive level where the industry can actually hold onto the pricing that we have seen so far.

I will take a part of this, and Larry may want to make some comments from an industry perspective. Our pricing guidance for the balance of the year to be 2% to 2.5% for the full-year, for the most part is simply rollover pricing from last year. So it's not really based on anymore upward pricing actions. So, we don't have to do anything. We just have to sustain that.

And of course, on our margin guidance, and again, not a lot of people want to talk about any mark-to-market impact in both years, last year we had a fairly dramatic mark-to-market loss. Up, flat to maybe up slightly for the full-year speaks to the enormous amount of inflation in Q1. I said inflation up slightly, I think everybody should know that most of the increase we said was going to be in Q1. And the environment continues to tell us that our expectations should hold. But, as I said, we may get even a little more upside from here but I won't say anything about that until next quarter.

Judy, also on the -- What we are seeing out in the trade makes us continue to be more optimistic. I mean we're seeing more confidence in the consumer out there. Our C&G traffic continues to grow. Our volume is up in the convenience and gas. We're seeing amount of trips up, we're seeing be spend up, QSR is up, so we're very optimistic on how we are seeing these trends improve with unemployment in March coming in better. Seeing the overall number of trips in supermarket, convenience and gas, QSR growing in mid single-digit numbers are very encouraging to us. When we see the pricing and the promotional activity in the trade, again, I will sound like a broken record, it is very disciplined, it is very rational and I think we've all learned some lessons from what pricing will really drive.

Okay, Larry, just going back to commodity, is there a way you can just give us dollar amount in Q1? Just the commodity impact in Q1?

Yes, it was $31 million.

$31 million

$31 million, okay. Thank you.

Bill Schmitz, Deutsche Bank.

On the SG&A line, if I take out the advertising spend, it looks like SG&A year-over-year on the consolidated numbers actually came down. And I was a little bit surprised, because I think there's quite a bit of transportation inflation as well. So, I guess, the first question is that $31 million commodity impact you reference, is that just cost of excelled inflation? Or did that include some of the diesel and transportation? And more granularly, how does that SG&A number, ex advertising, trend for the year? Because it seems pretty solid in terms of taking costs out.

First of all, the $31 million of commodity inflation is not in SG&A, that's all in cost of goods. In terms of cost headwinds in transportation for fuel, for example, this is where our early RCI activity beat that back. Most of that savings I said occurred in the quarter, was in transportation. So even though fuel was up $3 million, we were able to more than offset it with savings. And I will remind you we're still looking at fuel to be up, but we're also continuing to anticipate we'll get some good RCI savings. So, we feel comfortable about the SG&A line. You like to take marketing out because it will move around quarter-to-quarter. We would like our SG&A cost performance

Got you. What's driving that though? So it's $8 million of advertising, $3 million of fuel inflation. So effectively you take $11 million out of the $553 million? Then you're down like 2% or 3% on an SG&A with inflation.

Don't forget, a point of clarification, don't forget that this reclassification of certain customer allowances this year is now reflected in sales, of the reduction of sales. And last year, that was included in SG&A. About $6.5 million for the quarter. So affected the trend you are looking at and, of course, it also, on the net sales line, reduced our dollar sales growth number by 0.5.

Okay, got you. In terms of advertising support, year two on Sun Drop, I think there was quite a bit of stepped up spending last year against the brand. Is that going to be redeployed? Or do think there is still a strategy that continue to grow off of that base from last year?

No, we will continue to grow on that. And you've got to remember, too, our agreement with MTV on that is most of the marketing is done by MTV. And they do all the promotional, the marketing, and what we do on PAC. So we will continue to push on Sun Drop, very happy with the results. Like Marty mentioned earlier, we've seen a decrease in volume, but if you look at the dollar price mix, we are up 20%. It's right where we would like to see it and continue to build off of it.

How sticky has distribution been? Have there been any losses on the distribution side?

Not at all.

Sounds great. Thanks very much, guys.

Mark Swartzberg, Stifel Nicolaus.

I want to talk a little more, if we could, about the carbonated performance, nice improvement there in the quarter both on the fourth quarter and on last year. You talked about share. What you think happened in the category. How do think the category performed versus a year ago, or versus recent quarters.

The category was still a weak mark, I think everybody can see that, but I see it improving. It's a little spotty right now, how it moves up and down by a four week period, but I think it's encouraging to see where its moving to. I think if we can start, what I mentioned earlier, what we are seeing in convenient and gas, more traffic, we're seeing our single-serve grow, we're seeing our convenient gas business grow. And soon it should be getting to where the 2-liter and 12-pack, which are still little soft in large-format. But if those trips into those stores keep picking up, we should see those starting to come back. I think that's one of the things that makes me optimistic about where we will see CSDs go the rest of year.

Got it. And I'm trying to understand a little bit more of what is driving the share improvement you've had here in the quarter. You've called out the brand Dr Pepper and a couple of your other large brands. As we try to think about what's going on underneath the hood, so to speak, and Dr Pepper Ten is a component here. Can you talk a little but more about what is going on to drive this improvement in these carbonated brands? And to be honest, one of the things on the I am especially interested in is the role of the company owned 2-liter and 20-ounce promotions. I think those are $0.99 or $1.00 starting this year. To what extent that's a material contributor to the pickup here.

I think one of the things we look at as we break it down is, if we go across all of our ten platform's, we are seeing a great percent of total trademark across all six of them, including Dr Pepper. As we pull them out, we're still seeing the core business grow. That tell us we've got a lot of strength there. I think points number two, Mark, would be we really got some superior retail execution going out there. We're really focusing on points of interruption, especially in large-format. And as Marty mentioned, we are just now getting into DSD with RCI. And we're going to be freeing up more time for our people to be out there selling. Another one is all the investments we've made in marketing. As we increased that over the last three years, over $100 million, we're starting to see it pay dividends for us. We've got good marketing working. We went from national to local marketing. That local marketing is helping us in low per-cap markets where we are really driving some growth. We're just saying all of the things we put together in our strategy, the changes we have made, starting to pay dividends for us.

And can you speak a little more to the world, I don't even know if it's significant but you got this company-owned 2-liter and 20-ounce less prominent brands. Are they a big contributor to this pickup in volume overall?

You know, it is small but it is positive for us. And some of our locations it's a big increase. We're seeing that the value strategy with the pre-priced 2-liters are really working well for us. Like I mentioned in my prepared remarks brands RC, Nehi, Cactus Cooler, Tahitian Treat. They're working well. A lot of those brands are very regional so they will have a larger impact on volume in a regional setting. But it's marginal when you roll it up into the total company.

Got it. I may have missed this, but do give us a price mix number for your bottler case sales, either on carbonated or total portfolio basis at the bottler case level?

No.

Got it. Is it positive? Can you give us that?

Yes.

You can give us that or it is positive?

It is positive.

It is positive. Fair enough.

Bryan Spillane, Bank of America.

One point of clarification and a question. First the clarification, on the marketing spend. $8 million in the first quarter, and I think your planning on $10 million to $12 million originally. Is your marketing just re-phased or the total full-year marketing budget still the same and you are going to spend it in different parts of the year? Or have you found more productivity on the marketing line? Bryan, it is Marty.

The answer is full-year expectation is to be up about $10 million. Don't forget that when we get to Q4, we're going to lap the $10 million we spent a year ago on the Dr Pepper Ten launch. Unless we decide to do something else, that's not in our plans right now, that will be a favorable comparison for us, just in terms of spend, because we are going to lap that $10 million.

Okay, all right, thanks. And then on cash flow. If I look at cash from operations and I pull out the tax payment, cash from operations is up north of, or it came in north of $150 million for the quarter. Am I looking at that right?

You might be. I look at it a little differently. If you just take all the tax payments out, so just take taxes out, sort of neutralize the taxes in both years. This year was the Coke and Pepsi, that wasn't a unique payment. But if you take timing of tax payments out in both years, you should be up about $96 million, as I recall these numbers. And $73 million of that $96 million came from working capital improvement.

It's a pretty significant increase in improvement in working capital and cash flow. Is there anything specific, as we trend that out over the balance of the year, is that a trend?

Look on RCI, as I told all of you that I've talked to about RCI and LEAN the early implementations of LEAN, it's mostly about cash flow because a lot of different manufacturing companies it's about inventories. We're operating with higher service levels to our customers, $29 million in less inventory, that $29 million is 6.6 million cases across our PB and LAB businesses. And you've got to compare to March because, of course, the business is seasonal. Obviously, that's a big cash flow contributor. I think we will continue to take -- If your modeling, I presume we'll model on days in inventory or inventory turnover. We took seven or so days out. We would expect that number to continue to grow. So, our internal expectations are that we will turn inventories even faster as we move through the year. And that's going to be a big contributor. On the operating line and of course capital spending below the operating line which, as we said this morning, is 4%. Came in a little lower this year than a year ago. And when you free up 1.2 million square feet of warehouse space, that says something of what your future capital needs may or may not be when it comes to things like warehouses, for example. So, we expect improving cash flow. That in our expectations.

To be clear, the effect that we've seen so far, what we have seen in the first quarter is really just the work that you have done on the warehouse side. We are not even seeing the effect of what you're doing on your DSD business, is that correct?

Correct. When we look at our CIs, as I said my prepared remarks, most of last year was spent in our Warehouse Direct business here and across our entire LAB business, principally on the Mexican part of that segment, nobody has commented on LAB, but you see it continues to, over time, improve top line and bottom line. And we would attribute RCI and just the passion of the team in Mexico in terms of what they have done in all aspects. We really haven't done much in DSD. This is where we are devoting quite a bit of effort in taking our learnings from the other parts of the business to DSD. And DSD is where most of the cost is, of course. And we're just getting started.

Okay, great. Thank you.

Bonnie Herzog, Wells Fargo

This is Brendan Metrano in for Bonnie. Marty, you mentioned that gross margins would most likely be at least flat year-over-year. How should we think about the operating leverage, the SG&A line and why wouldn't operating margins be up year-over-year? And could you maybe talk about some of the factors that would go into that and the sequencing?

I haven't said anything about what could happen to operating margins. We expect to get some positive leverage. You guys could look at the SG&A performance. But to think about the marketing, if you're looking, full-year marketing would be up $10 million. We are going to have to deal with higher fuel, as I said, and hopefully we will get some type of savings identified. We very likely should and could get leverage.

Okay. Thank you.

Darren Mohsenian, Morgan Stanley.

Larry, on gas and convenience, you've actually touched on this a couple times, but I was hoping you could discuss in more detail how sustainable you think the improving trends were from Q1. It sounds like you be view it as more sustainable consumer rebound is something that was more weather driven. And also wanted to check on gas and convenience trends so far in April, and how that compares versus Q1.

We are seeing the same going forward as we come out of Q1. I think sometimes as people talk about the weather, everybody mentioned all the tornadoes we have had everywhere across the entire Midwest, that have really just been devastating. That kind of affects our progress too, but we were still able to grow even through that, were we have some locations where we completely lost the entire trade in some of them. I don't put a lot of time on weather. I tease my guys when they give me a weather report, if I wanted weather reports I would have weather man instead of sales guys. I think we have done well there. We're starting also to see gas prices come down a little bit, not where we want them, but they have kind of leveled off. They're coming down some. I think when I'm out in the trade and with our customers, we didn't really see that much of an impact when the gas to get to $4.00. The consumer was still positive, and we saw traffic increases. If you remember back in '08 when that happened, they didn't go in the account, in to the store. They filled up at the pump and left. We're seeing and traffic increase, we are seeing the ring increase, and it's very positive. Then we look at some of the things we're doing to help drive that. What we have been able to do on Facebook with our 20-ounce program. That has been tremendously successful. That's why I said in my prepared remarks, we will continue that through the summer to keep driving that very profitable channel and very profitable package.

Okay, that is helpful. And then it seems like the demand elasticity remains very high on the non-carb side of the portfolio, despite pricing being in place for a few quarters now. It sounds like you're not expecting much improvement in Q2. I just want to get your thoughts around when you would expect to see demand elasticity moderate on the non-carb side.

I think, from our last call, we told everybody we took our pricing mid-year last year so we knew that our WD business would be a challenge through the first half of the year. In our plans we see it turning around in the second half. And, after Marty mentioned a moment ago too, we saw at the beginning of the year another increase in apple juice concentrate on top of the doubling in cost last year. But now we're starting to see it come down a little bit, so that could be a very positive factor for us. I think whenever you look at the apple juice, it is just not Mott's, I mean it affected the entire category. Everybody had to take pricing on that. And I think we will see much better results in the back half and it'll build all the way through the back half of the year.

Okay, thanks.

Damion Witkowski, Gabelli & Company.

Question. With nice CSD growth in the quarter, what is driving that? Is it your lower per cap states? Or higher per cap states? Or is there no difference?

I think it's a combination of everything, Damion. I mean we're showing great results in low per cap, great results in our Hispanic strategy. Our regional and local working programs, where we are going out doing very specific, account specific marketing instead of just a national across the top line, is paying off for us. Ten is doing a great job for us, and again I've got to go back to our teams on just improving retail execution. Getting the points of interruptions out in the accounts, and then staying very focused on our single-serve growth.

Okay. Then if you look at Hawaiian Punch and Mott's business, and obviously you've had that double digit pricing that you took last year, so you are lapping that. And you just made a comment that everyone in the industry is taking pricing. Are people just are trading out of the category? Or are you losing shares through private labelling?

It's not as much share. I think we've lost some out of the category, I think everybody has. I think we're starting to see them come back in. I am very excited about the programs and some of the innovation I see we have for the back half of the year. A lot of that innovation is going to be more into packaging and how we go out and get our retail execution. We're going to have a lot of pallet displays going out. We've come up with a lot of different ways to pack out, to get the point of interruptions in our juice the same as we do with our CSD. I really like the plans that I've seen our WD business, led by Aly Noormohamed, for the back half of the year.

And then cold equipment pricing. Did I miss it or how many (multiple speakers)?

I didn't mention it, but we're still on track, yes.

All right. Marty, your interest expense for the full-year comment. You say that's going to be up $11 million year-over-year? So the majority of that is we already had $6 million behind? Okay. And then remind man natural gas. How big of an impact does that have? I mean prices just coming down?

It's not a huge impact.

Okay. All right, thank you.

Carolyn Levy, CLSA

I'm just going back to Juice. Do you think that this price dislocation could have alienated customers that have been gone to something else? What are they drinking instead? That is my first question.

You know, I think what we are seeing as our loyal consumer, the mom, is going to buy Mott's no matter what. But I think some that were more in as switchers as we call them, I think have went to other juice. We're seeing a pickup more in juice drinks and instead of 100% juice. But I think as we watched what happened in the first quarter, the forecast we have for Q2, what we're seeing in the trade, I really feel that we're getting them back.

Okay. There is a lot of new activity from Coke and Pepsi and other juice drinks. I'm just wondering if that is going to affect it longer-term.

I think a lot of people experiment and try them. But Mott's is designed for the 100% for mom. Moms are our consumer there and we don't see moms switching that much.

Okay. Also, I don't want to belabor, this and maybe we have to take it off-line, but I still don't truly understand the 2% CSD volume growth, and the 3% shipment decline in beverage concentrate. I haven't been able to -- Even if there is -0.1 from re-class, and one point from timing, I'm still not where we need to be.

Okay Caroline, if you picked up my other comments about thinking through the impact of the concentrate business, Q4 versus Q1, the re-class today is a financial item and has nothing to do with volumes of course and (technical difficulties) $6.5 million between coming out of net sales of this year and the offset in SG&A. So that just a dollar comparison factor. (technical difficulties) carbs down and identify (technical difficulties)

So it's the non-carbs down 7% that's driving the shipments down 3% largely?

If you look at our shipment volume (technical difficulties) down 1% in total case volume. And of course, those brands are --

I'm actually just look at beverage concentrate, which I thought was really largely CSD.

Carolyn can help you off-line, but the non-carbs are not in the CSDs.

Yes.

Okay.

And then just lastly, Larry, you are sounding quite optimistic about the consumer and C&G and all of that stuff. In other words is April looking as good as or better than March?

We are just seeing a -- We don't see that much change. I mean we've been watching, Carolyn, for like the last three months just steady, gradual increases there. We don't see that changing. We see slight uptick and it just kind of works each month, which is what is making us feel encouraged. We're not seeing any dips in their.

Thank you very much.

All right thank you and I would like to thank everybody for joining us on the call today. And for your continued interest in Dr Pepper Snapple Group. Thank you.

Thank you this concludes today's conference call.