Keurig Dr Pepper Inc (KDP) 2012 Q2 法說會逐字稿

Good morning, and welcome to Dr. Pepper Snapple Group's Second 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 now my pleasure to introduce Carolyn Ross, Vice President, Investor Relations. Carolyn, 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 release times 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 the call, we may reference certain non-GAAP financial measures that reflect the way we evaluate the Business in 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, Carolyn and good morning, everyone.

As you may have seen in this morning's press release, we once again delivered results in line with our long-term strategy. Our brands continue to perform well in the quarter despite an unstable macro environment. We grew both volume and dollar share in CSDs outperforming the industry. We made solid progress against our goals to increase distribution and availability, and we continue to invest behind our well loved brand ensuring that we always bring value to our consumers and our customers.

For the quarter, dollar case sales declined 1% on four percentage points of price mix as we continue to experience volume declines in our Hawaiian Punch and Mott's brands as we had expected. CSD volumes were flat for the quarter.

Our flagship Dr Pepper brand grew 1% led by Dr Pepper 10 which we launched nationally in Q4, and our Dr Pepper fountain business also continued to grow. Our core five brands grew 1% in the quarter, even though we were lapping the successful launch of Sun Drop a year ago. As expected, both Hawaiian Punch and Mott's declined on a larger relative price increases that were implemented in mid-2011. While Hawaiian Punch decline double-digits, Mott's declined 2% this quarter, a sequential improvement from the first quarter.

Snapple volume grew 1% as we left 8% growth in the prior year fueled by a limited time offering product. We have made solid gains against our distribution availability goals for this brand. And since it's launch in the 1st quarter, our diet half-n-half has become one of our top five selling SKUs. Our 64 ounce take-home package continues to perform well while providing value for our consumers.

The balance of our portfolio decreased 1% with a high single-digit decline in Crush, partially offset by strength in our Clamato business resulting from our Hispanic marketing efforts.

Moving to our financial results. On a currency neutral basis, our net sales increased 4% for the quarter primarily reflecting four points of price and mix. Segment operating profit increased 3% for the quarter with sales growth and productivity improvements more than offset by higher packaging and ingredient cost, plan field operating cost increases, higher-margin investment of $9 million to support the long-term health of our brands and an $8 million pre-separation related capital lease adjustment.

Reported earnings per share were $0.83 for the quarter versus $0.77 in the prior year. Core earnings-per-share, which exclude the impact of mark-to-market losses in both years and several other items affecting comparability in the current year were $0.85 for the quarter versus $0.78 in the prior year.

As I've said many times, increasing the per capita consumption of our brands to increased awareness and availability remains DPS's single largest opportunity. And I am thrilled with the progress we've made through first half of 2012. We've increased the availability of our core CSDs, Snapple and Mott juice SKUs in both grocery and convenience.

In grocery, we gained 0.5 percentage point of ACB distribution across our core CSDs while Snapple and Mott's juice are up 6 percentage points and 2 percentage points, respectively. We've also made great progress in convenient, where the space is much more limited and harder to win. With ACB gains of almost 7 points in Snapple and over 0.5 point in our core CSDs.

In fountain, we are expanding single serve availability and creating new sampling occasions with 18,000 net new valve across both local and national accounts including wins in Wawa, Jersey Mike's, Firehouse Subs, and Subway. We are penetrating low per capital markets combining local media with strong retail activation. Our Dr Pepper coastal program targets markets such as Seattle, Baltimore and New York. Year-to-date, our display tie in rates in these markets have increased by 3 percentage points, and we will also increased our average number of items.

Our Snapple, middle of the country expansion markets, continue to outperform the rest of the country. With focused execution behind our innovation, year-to-date volume in these markets grew by 20% with per-caps almost up almost one serving. I'm extremely proud to see our people leading the charge to develop a sustainable continuous improvement mindset at EPS.

Since we began RCI 16 months ago, we have engaged more than 2,400 of our people in 160 kaizen improvement events and identified $94 million of annualized cash productivity initiatives which are being implemented. The runway here is long, and the journey is analyst. I firmly believe of RCI holds the incredible potential and can be a game changer for this business.

Moving on to marketing. We will engage our target consumers and increase the awareness of our brands with summer and third trimester activation plans that are stronger than ever. Guy Fieri, the celebrity face of summer grilling is firing up the grills and giving Dr Pepper consumers exclusive cooking tips and recipes featuring Dr Pepper as a key ingredient.

Sunkist and our core five brands have teamed up with USA Basketball to celebrate the 20th anniversary of the 1992 Olympic Dream Team. Collectible cans featuring members of the Dream Team, including NBA legends Magic Johnson and Larry Bird. And we are giving fans the chance to win a trip to Barcelona, the city where the team won the gold medal.

Dr Pepper's continuing its role as a major supporter of college football for the 17th year. We just kicked of our successful Dr Pepper tuition giveaway program which offers students a chance to win $2,500 in tuition each week by submitting videos on the Dr Pepper website or Facebook page. Throughout the football season, Dr Pepper will showcase contestants' stories at halftime to build excitement leading up to the championship game.

7UP is partnering with successful crossover artist, Enrique Iglesias and sponsoring the Latin Grammys, the Number 1 rated Hispanic awards show of the year. Consumers will have a chance to win a private performance with Enrique and tickets to the awards show in Las Vegas. Local activation will include Latin Grammy street parties and private session. And these are just a few of the great things we have planned.

With that, let turn the call over to Marty to provide further information on our financial results and our full-year guidance.

Thanks, Larry and good morning, everyone.

Reported net sales for the quarter were up 2%, included 4% of combined net pricing and mix, offset by currency translation and volume. Gross margins were 57.7% this year compared to 58.2% last year. Consistent with the comments we provided in our first-quarter call, packaging and ingredients remained inflationary, albeit at much lower levels than in the first quarter, reducing gross margins by about 80 basis points. This was partially offset by positive price mix which limited the gross-margin decline to about 50 basis points.

From a housekeeping perspective, we recorded $7 million of unrealized mark-to-market losses on commodity hedges with approximately $5 million included in cost of goods sold and the rest in SG&A. This had no impact on the year-over-year gross margin rate comparison as we recorded a similar loss in the second quarter of last year.

As a reminder, we are now excluding unrealized mark-to-market impacts from our core EPS results and our full-year EPS guidance is now stated on this basis. SG&A expenses for the quarter, excluding depreciation, increased only $1 million. And as a percentage of sales declined from 37.9% last year to 36.9% this year, we are very pleased with this cost performance given that marketing increased $9 million. And we incurred higher field operating costs.

Productivity gains, much of which is from RCI, provided some offset to these cost increases. Furthermore, currency reduced as SG&A expenses by $7 million. Depreciation expense increased this quarter by $8 million, $2 million of which is included in cost of goods due to a pre-separation related capital lease adjustment. This has been excluded from our core EPS.

Reported operating income of $300 million, which has been read used by the depreciation adjustment I just mentioned and $7 million of mark-to-market losses which were similar in amount to last year, represented 18.5% of sales this year compared to 18.3% last year.

Moving below the operating line. Net interest expense was $30 million, $2 million above last year as we refinanced low floating rate debt at the end of last year. Our effective tax rate for the quarter was 34.3% which is below our full-year guidance of 37%.

This includes a $4 million Canadian deferred tax benefit as a result of a recent tax law change in Canada. This benefit has been excluded from our core EPS. In the quarter, we also recorded benefits from the favorable settlement of some tax contingencies which were already considered in our full-year guidance.

For the six months, cash from operating activities was a use of $41 million as we paid $531 million of taxes on the Pepsi and Coke licensing agreements. Excluding the tax payments related to these licensing agreements in both years, cash from operating activities increased by $197 million.

Capital spending year-to-date was $89 million, and we returned to $293 million to our shareholders with $152 million in share repurchases and $141 million in dividends. Inventories in the end of this year's second quarter were $58 million lower than at the same time last year. And then a day's sales basis improved by eight days. This is the most visible and tangible evidence of the success of our supply chain related RCI initiatives.

With that as a segue, let me add a few comments related to RCI. In addition to reducing inventory by 8 days, we have also closed times closed 10 warehouses, significantly reduced miles traveled and implemented over 500 safety improvements. And very importantly, we've improved customer service levels. The progress we've made thus far gives me great confidence that we will achieve our goal of at least $150 million of cash productivity over the first three years. This year, we are focusing many of our RCI resources on our DSD business, whereas previously most of our efforts were focused on our warehouse direct business. We are making great early progress.

As Larry said, the organization is broadly engaged. We have a full calendar of improvement activities, and we are beginning to demonstrate meaningful financial results.

Moving on to 2012 full-year guidance. Despite a challenging macroeconomic environment, including an uncertain and somewhat unpredictable consumer, we continued 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. The pricing environment remains as rational as we have seen it in recent years. Against this backdrop, we continue to expect net pricing to be up about 2% to 2.5% for the full year, with volume up 0.5%.

As a reminder, we've now fully cycled the Mott's and Hawaiian Punch price increases that were taken in the second half of last year. So we do expect the volume comparisons to improve.

Let's talk commodities and cost of goods inflation for a moment. PET and two a lesser extent, aluminum and apple juice concentrate all have shown positive trends since last quarter. And while corn prices have recently spiked, we were already pretty well hedged for this year. And if it weren't for the spring freeze in the Northeast apple growing regions, I would have been guiding our cost of goods inflation assumption down to about 1.2% this year. But because of this condition in the apple market, we'll have to stay with guidance of about 2% at the low end of our previous 2% to 3% range.

Consistent with our prior communications, net interest expense will be around 4.5% on our $2.7 billion of debt. We expect our full-year tax rate to be approximately 37%. Capital spending is expected to be approximately 4% of net sales. And we remain committed to returning all excess cash to our shareholders in the form of dividends and share repurchases over time.

For modeling purposes, let me highlight a couple of things that will impact quarterly phasing. We expect commodities, excluding mark-to-market gains and losses, to be flat on a constant volume-mix basis compared to Q3 last year with higher cost in the fourth quarter related to apples.

And finally, with the strong activity Larry highlighted and heavier media rotations, marketing spend is expected to be up at least $10 million to $15 million in the third quarter, with lower spending in the fourth quarter as we will lap the national launch of Dr. Pepper 10. Hopefully, these points of clarification are helpful to you as you update your models.

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

Thanks, Marty. Before you the lines for questions, let me leave you with these thoughts. Our results through the second quarter once again demonstrate that our teams are executing against our focus strategy, and we're winning with distribution gains in key packages and channels. And we are driving trial with expanded fountain availability.

We remain committed to always delivering value to our consumers, while ensuring that we are investing wisely in this business and in our brands to drive long-term sustainable growth. We are winning with RCI with increasing levels of activity and engagement across our entire business and delivering results for our customers and improvements in our financial performance. And finally, we remain committed to returning excess cash to our shareholders over time with a view of providing very attractive shareholder returns.

Operator, we are ready for our first question.

(Operator Instructions)

Judy Hong, Goldman Sachs.

Larry, just in terms of the consumer environment, you talked about the uncertain and unpredictable consumer. So maybe if you can just give us your assessment of what you are seeing as you sit there today? Some of that channel mix dynamics that you are noticing. And then as you think about the volume outlook for the balance of the year -- the sequential improvement, how much of that is really just the non-core improving as you're lapping the pricing as opposed to CSDs for getting better?

Right, right. There is a lot of them there, Judy.

First with the consumer, we continue to be cautiously optimistic as we watch the US economy. But we are also -- a lot of the things we're hearing from others is that they are seeing it slow down. None of our trends are showing that. We are staying pretty steady in large format. We are seeing continued growth in small format, especially convenient and gas with our single serve and are fountain business. I would say we are staying cautiously optimistic on that.

As you look going forward on what we're doing with our volumes and everything, you are correct with the lapping the large price increases. We will be seeing better volume coming in from the non-carbs, especially Mott's that had the highest increase. And then we are seeing a lot more activity with Hawaiian Punch.

But we continue to see our CSDs will continue to come in because we will be cycling Dr Pepper 10. We've got a lot of good activity out there as we continue with our coastal and the center of the country Snapple programs. And the team just feels very enthusiastic about how we'll be able to continue this current track.

Okay, and then Marty just in terms of guidance. So commodities coming down to the low end of your prior guidance. The earnings guidance aren't changing. So is that just offset by marketing spending step up? How are you reconciling the different components as you think about guidance?

Well, okay, Judy. I think, unfortunately as I said with respect to -- let's take it piece by piece. No real change on the top line. Cost of goods actually would have been more favorable but for the unfortunate situation we had in terms of an apple freeze and the run in apple prices which of course affects Mott's apple juice.

We have taken up our view little bit on some expenses related to industry related issues because a lot of discussion, a lot of things happening and some of those cost that we have share with the rest of the industry participants. We've taken a up a little bit in our view of the balance of the year.

Full-year marketing could be upwards of $15 million for the year. And as I said in my remarks, with the phasing of that such that more so Q3 and then lapping Dr Pepper 10 last year with some favorability there. So I don't really think much has really changed. There is nothing in the results this quarter that tells us in our view of the forecast that we ought to make any changes to what is an $0.08 range.

Okay. And just following up on commodity. So if you think about 2013, is the apple juice concentrate pricing issue that flows into 2013 and how much are you covered on the other components for 2013 at this point?

Yes, okay. To be clear for everybody, the comment relevant to apples is not really a juice concentrate factor as it relates to a whole apple factor as it relates to the manufacturer of applesauce. And I think most of you know actually we procure most of our apple juice concentrate, like many people do, from other regions outside the US, most notably, China. So that is not a juice issue, that's an applesauce issue.

In terms -- let just talk a little bit about commodities. I covered off on where we were on corn this year, and so we are pretty good shape this year. It's a little early to talk about commodities for next year. I would say we have layered in already some hedging on some of the key items at not huge numbers but reasonable numbers at this stage in 2012.

Got it. Okay, thank you.

Bryan Spillane, BofA Merrill Lynch.

So just a point of clarification. I might have missed this in response to Judy's question, but your expectation for marketing and advertising for the year. Is it going -- because it was higher in the second quarter than we thought it would be? Is it going up for the year as well?

On a full year basis?

On a full-yea basis. Yes.

On a full-year basis I said mark will be up about $15 million.

Okay. $15 million. Got it. And then second question -- just more specifically to the consumer environment. Can you talk at all about how consumer behavior in the convenience store channel and how the convenience store channel has performed maybe more recently?

Yes. We are still -- as I just mentioned a moment ago -- we are cautiously optimistic with the consumer. We are still showing growth in our small format in convenience and gas. Our single-serve business is doing well in bottling, can, fountain. But our Snapple business is really expanding. We are getting a lot out with the Dr Pepper 10 and our 20-ounce programs that we have out there.

So we are cautiously optimistic there, but we are also aware of listening to other people talk about seeing weakness. We want to watch that closely and make sure that the consumer doesn't start listening to it also and believing it. But we feel we have plans in place to continue our momentum, and so we feel very comfortable where we are at right now.

Thank you.

John Faucher, JP Morgan Chase & Co.

In reading through the press release, we see the volume declines on Sundrop as we cycle the launch, and Crush is down year-over-year as well. And we are obviously a little bit further out from the launch on that.

As you look at Dr Pepper 10 lapping that launch period, what are the key things that you think you need to execute on to avoid having volumes down in the second year. Because that is obviously been a big drag on some of these growth brands that come in. You get some excitement. You get some decent volumes in the first year but you probably had a little bit tougher time sustaining that volume growth going forward.

That's a good question, John. I think our plans on Dr Pepper 10 are completely different than what we've done before. If you look at what we've been doing with the 10.

We have told everybody, you've got to be patient. It's something that we look at long-term, that we are going to stay behind it, build we are even testing more 10 products it to increase that platform. So we are looking at this one being a long-term. It is always tough to lap a launch because of just that initial pipeline fill. But to the plans we have in place on 10, that was very confident.

And then also our core five, I mean our entire portfolio is growing. We are seeing a 1% growth for the quarter. We're seeing a lot of activity behind Sunkist, we're going to continue that. We've got great plans with our partners on Crush.

So we feel like we've got a great third trimester program going there. And Sundrop is another one that we're going to be patient on it. We are going to stay behind. We've made some tweaks to it where we're going to get a little bit more involved with MTV. And we look forward to have it a sustainable program out there that will just have continued growth for us.

Okay, thank you.

Brett Cooper, Consumer Edge Research.

Couple of questions. First one on CSD pricing. Do you expect to take or see industry take price in the second half of this year?

I think we might see some pricing after Labor Day.

Okay. And then on your concentrate business. Year-to-date -- I think it if I have is right -- your pricing is up 100 basis to 150 basis points more than you took to bottlers. Can you just talk about what you are doing in reducing discounts and whether that is sustainable in the second half or should we expect that to reverse out?

I don't think that's -- First of all I think we've talked about our concentrate the price increase before, being a little higher than the numbers you quoted. And yes, out of that money of course we fund marketing and brand programs with our bottlers. And the effect on discounts is as much about programs we are either putting in place and adding to or adjustments we are making to existing programs. And sometimes we talk about this issue of discount (technical difficulties), simply not spending either everything we've targeted to spend or in some cases actually deciding we need to spend more.

Okay, thanks.

Steve Powers, Sanford C Bernstein.

Marty, maybe you have a credit to RCI. You ended the quarter with more cash than what I at least think might be operationally necessary long-term, maybe by about $150 million, $175 million or so. First off, is that a fair read on how much cash you need to maintain an operational buffer?

And the second -- at seeing the business continue to generate cash with a balance for the year, how do you expect that cash to be used, acknowledging higher cap ex probably in the second half? Should we expect and accelerated pace of buybacks? And I guess is there any chance of interim dividend raise?

Steve, I would say I think for cash flow modeling purposes -- whether we've said it or not, I think $100 million plus in terms of operating cash flow on your balance sheets is probably as good as any number. Yes, we are ahead, in terms of cash flow generation from our own view earlier in the year. I can't say enough about RCI, in terms of its improvement on the balance sheet.

I just draw a metric etch of that I looked at the other day. If you look at days in inventory is down eight days. I just want to cover this, Steve, and I'll get back to the cash deployment, but it is $58 million, it's eight days. If you go back and look at some periods long before we started RCI, long before last year and you looked at inventory turn for the Business and applied those turns without improvement to our financials today, our inventories would be a little bit more than $100 million higher today.

So I think -- I just log great productivity there. We're generating more cash than we anticipated earlier in the year. Our strategy remains the same.

Deployment of free cash flow will go into share repurchase and dividends over time. Our pace of repurchases was planned to be where we are. Right or wrong, we concluded that given the cash flow profile of the Company being somewhat back-half skewed versus first half and the need to have made the $531 million in tax payments and our election not to borrow, to buy back shares all resulted in us buying in dollar amounts fewer shares than if you prorated the $375 million evenly over the year.

Long-winded way of saying, yes, we anticipated ended up with more cash than we thought earlier. We are going to continue to deploy it. I have said we are sticking with the $375 million. I think that is a good number for you guys to model, with respect to our dividend. We have said earlier that we expect over time to be able to be a company that continues to raise its dividend and over time that investors can count on. It is a board matter that our Board takes up every year.

Okay. I guess on RCI, you again said it confident, the achievement of the $50 million target. Just on the inventory alone, it seems like you're more than majority of the way there. Maybe you said it, but can you quantify where you think you are against that target and how much the assess has been realized on the cash flow statement versus the income statement?

Well, Larry said and -- $94 million. I just gave you metric that if you dial back even further and applied simple inventory turns you could argue inventory is below and above that --. We are well more than halfway -- that is in our tailpipes now, 16 months in.

P&L a little more slowly, but let me just at this that our ability to hold our SG&A relatively flat in the face of marketing increases, some labor cost increases. I think it's pretty good results. And if peels the numbers back this quarter alone, probably RCI was I would say in the $4 million maybe upwards of $5 million range of actual cost improvement in one quarter year-over-year.

In essence, that is this time last year we were just getting started so there's nothing in that base number that we're lapping. I think the balance of this year could easily include another $12 million to $15 million. And I continue to say, Steve. And I give you credit. I think you are closer to this than other people and having experienced it, we are just getting started. We were just getting started.

Okay, great. Then just one last housekeeping. Branded sales volume in the quarter like BCS with a balance for the year, how should we think about those numbers running versus one another in the back half, basically in line or will it be some normalization?

Well, in terms of BCS, your question then really goes to volumes so let's go back to this again and to -- I think it was Brian's question earlier. Our model for this year, the low end, the 3% -- recall was sort of viewed as in more difficult environment than maybe other periods in a less than robust environment. Only 0 to 0.5 point is always counted on the CSDs and our CSDs are flat.

We acknowledge that Mott's, Hawaiian Punch, even Snapple -- not just those brands but those categories are the ones that have always had, in our view, more growth potential. And so we just have to get over the pricing and some of the retailer response to that we suffered last year. I'm not going to comment too much on how it lays out by quarter. But to have our CSDs where they are in this environment, we're pretty pleased about. And the other brands I just mentioned outside, we think have some reasonable growth potential for the balance of this year.

Okay. Because no reason to think that sales volume will lag -- branded sales volume will lag BCS in the second half to catch-up from what we see in the first half so far.

We will catch up. We've always been able to catch up.

Thanks.

Bonnie Herzog, Wells Fargo.

Just a question on Dr Pepper and DP10. How much did Dr Pepper 10 contribute to your brand Dr Pepper growth during the quarter and was that in line with your expectations?

And then also can you give us an update on the other 10 products in test markets? Can you talk about the breakdown of Dr Pepper brand bottle/can versus fountain during the quarter? I'm just trying to get an understanding of the underlying health of brand Dr Pepper.

Yes. If you look at our 10, we're still very happy with the performance of our Dr Pepper and our diet Dr Pepper. Everything on 10 has coming in at our expectations. Total trademark is coming in at the percent we had planned in that 5%, 6% of trademark.

Again like I mentioned earlier, it is one that we are going to do. It's a long-term strategy for us. We're going to continue to build it. But we are very pleased with the performance we are seeing in Dr Pepper and diet Dr Pepper. As far as the other 10 products, still a little early to really go into a lot of detail.

But we are very encouraged. We are seeing actually even stronger performance as a percentage of the Total trademark on the other 10's. And so, small test market out there, still early, but everything is very encouraging to us that we definitely do have something here with a platform on this 10 calorie product.

Breaking down the bottling/can and everything and the Dr Pepper 10. Our Dr Pepper 10 was, of the second quarter, probably about one million cases of our growth on Dr Pepper which kind of had Dr Pepper basically flat with some fountain food service continuing to grow low single digit.

Okay. That is helpful. Speaking of fountain, it was up nice -- up, 3%. How much of that was driven by incremental valves? Is this a good growth rate or run rate to expect for --?

Yes, I think if you look at, it is consistent with what we've been seeing the last quarters of about 50/50. The guys have about 1,800 incremental valves out there. So that is the incremental piece of it.

And then we are seeing increased VPOs out there, the volume per outlets are looking very good. So I'd look at as 50/50 as we go forward.

Okay. Just a final question on package beverages and your price mix in the quarter. I might have missed it for your package beverages business. Then how did the volume breakdown in quarter between your branded and then the contract manufacturing in terms of that?

The trade-off on the volume side between contract and branded, you're probably looking at contract up about 0.5 point and then branded being down maybe 1.5 point -- almost 1.5 point. Sorry, give me the rest of that question again?

Just the difference between the price mix for maybe each of those would be helpful.

Okay. I'll go through it to you again on a reported basis. In beverage concentrates, you're looking at price in mix of upwards of 5 and package beverages about 4.4, at LAB about 5. And the difference is volume on a reported basis. And then for [LAB] you'll have to deal FX.

Thank you.

Kaumil Gajrawala, UBS.

In the past you've sometimes given us some additional context on where the marketing dollars were going. We knew there was a launch of 7UP or a rollout of Dr Pepper 10. For some of the step up in marketing, are you willing to give some context on where you are allocating the funding?

I don't know specifically. Larry rattled off in his prepared remarks a number of initiatives. Clearly money is going behind Core 5. Of course, we always have money behind Dr Pepper and again it coming out --.

Especially with football.

Coming up football season and that is a very big activity for us as well as I would say Snapple.

Okay.

You're going to see more activity coming into the holiday season on 7up and Canada Dry. That is seasonal, we do that. So I don't -- nothing. I don't think unusual about where the money is being directed or to what activities it is being directed.

The money it ties with my remarks earlier with the Core 5 with our dream team, our continued focus on Snapple. And then this is the first time we will have Dr Pepper 10 in the football schedule, so there's little extra there.

Okay, guys. So I doesn't sound there is one brand this disproportionally covers?

No. Not all.

Okay, got it. The final thing on COGS so I can understand this apple sauce situation. Is this something that's temporary but you now what the numbers will look alike for the next six months or is this something that maybe is going to impact COGS a little bit further out?

It is always temporary on -- whenever you have a harvest that's been hit by an early freeze. So it will go away next year, but we have live with. It will hit us in fourth quarter and most of the first three quarters of next year. So we know the impact. Our team has been able to put the apples in place, and we also have our price increases already out to the market.

Okay, got it. And then with corn punching, have you -- I know you're covered for the bulk of this year, but how should we be thinking about SES pricing and such next year?

I think it is too early to comment. We will be closer to it when we get on the next call. I think we need to wait about three months.

Okay, got. Thanks guys.

Mark Swartzberg, Stifel Nicolaus.

A follow-up on Kaumil's question and then back to the top line. But is it fair to think that this -- it sounds like this apple issues is 3 point incremental headwind in the second half if you take that comment about 2% versus 1.2%. Is it fair to think that basically you are going to have an increase in commodities in the first half knowing what you know right now about how you're hedges roll off and just this 12-month headwind on the apple side?

Apples has nothing to do per se with hedging. You do the math on 80 basis points on cost of goods and you can box the impact of the higher apple prices. I don't want to lose people on this. It gets a little complicated -- in terms of phasing of the cost through cost of sales, it gets a little complicated because we are on the LIFO method.

If you think about it, we will buy these apples in the fall. Many of them will be in our inventory carried into next year. And so you'd say, well you paid more but why is it hitting your COGS this year, why not next year as you sell the finished applesauce? And the answer lies in LIFO which expenses inflation currently.

So we are going to pay more for apples even when we don't sell all the applesauce. We may have those costs -- likely to have those costs in our cost of sales this year. I tell you for your models to stick, we've obviously put all of his in our forecast. It is all baked into the 2%.

Fair enough. And I know you're not going to give us a guide on commodities next year, but we are all going to update for next year. Just sounds like knowing what we know today, you are going to have an increase in cost of the sales in the first half next year?

Yes. Mark, I can't comment now. We will have color on it for you -- much better color I think on the next call. It is too early for us to comment on that.

Okay, fair enough. Larry, on the top line actually a real positive when you look over the past year or two beyond the Dr Pepper, simply Canada Dry and Ginger Ale which is on trend consumer wise. Is there anything else in your portfolio whether it is root beer or otherwise you think is just an untapped opportunity that ties into this notion of indulgence and at the same time doing something that is better for you or at least perceived to be better for you -- something that could start to replicate the success you've had with Canada Dry?

I think the biggest thing, Mark, is we are going to stay focused on our Core 5, our spending on the Core 5. To your point, you go across the entire Core 5. I mean there is just very positive numbers that we are seeing Sunkist come back.

But whenever we get this 10 platform out there -- as I mentioned earlier -- Where we are testing it, we are seeing tremendous results. We're seeing a larger percent of the trademark than we saw in Dr Pepper 10 and our Core businesses growing. So we are going to stay very focused there. We are going to stay very focused on our Allied brands. We just continue to grow with VitaCoco, with Neuro and with our other partners out there with Big Red and with Hydrive that have some real nice numbers coming in.

Were are also excited on not just the brands but the channels. We continue to grow in CNG. Our strategy there is working.

If you look at the Q2 volumes from Nielsen, the category was up (sic - see press release 2.9) and we were up 4.4 on a year-to-date basis on volume. The categories is up 6.2, we're up 7.2. So all of our programs are working -- the brand, the package, the channel. They are just all coming together, and we are very excited about it.

That is great. Thank you, guys.

Bill Schmitz, Deutsche Bank.

Are you strategically wedded to the applesauce and the apple juice business? I'm just curious -- what it does to the broader portfolio? Because sometimes it seems like it is more of a nuisance than a help.

Mott's Brand is a great brand. And we think it's got a lot of legs.

It plays very strong in our better-for-you category.

So do you think there is real secular growth drivers for the brand going forward.

It has had some hiccups. We've worked through these, and I think we'll see it go back to more historic rates of growth. It has been a fabulous brand force for many years. With the problems we had with concentrate -- as an industry, not just Mott's, but whenever grows you get a COG that is 100% increase, that is devastating. We got through that.

The applesauce is something that we've dealt with before. It is always a matter of mother nature there, early in the spring. So we are going to work through this. If you look at a lot of the innovation we talk about. It's in our Mott's brand, our Mott's for Tots, I mean it is a brand that mom is so loyal to that we will continue our focus behind it. We will continue to spend behind it, and we're going to work in through bumps in the road right now.

Okay, fair enough. I probably saw the answer to this, but it seems like PepsiCo is getting a lot more active in the food service channel. When they get a new account do you automatically have to go in with them?

Nothing is automatic. But if it is a location that we have Dr Pepper in, we have a pretty good chance of getting in there. We work very good as partners, and they know what sells good, but there is nothing that is a given. Our national account sales teams work together, and if it makes sense we are there.

Great. Thank you very much.

Damian Witkowski, Gabelli & Company.

Just wanted to follow-up on pricing. I didn't understand exactly if all your pricing was already in the market and then if there is a increase in the second half. Would that be upside to what you're thinking right now or am I thinking about this wrong?

Damian, Marty on. In terms of our full-year pricing guidance, we don't need to take any further actions to achieve that full-year number.

Okay. So your comment about perhaps the CSD industry taking price in second half could be upside?

It could be.

Could be.

I want to step back. If you look at your categories and obviously your -- about 80% of your volume come from CSD's. It sounds to me like if you look at your 3% to 5% top line growth, even though you don't break it out between volume and price long term. But it sounds to me like probably the growth is going to come mostly from or at least the non-carbs portion of your portfolio is going to grow a lot faster. And I'm just wondering if that's the case -- A?

And B -- if you look at some of the faster growing non-carb category, energy, which I guess is carb. But I mean energy is one where you're participating to some extent with the growth in the industry. I'm not sure if you're looking at any other categories that you are not in that you feel like maybe five years from now you should be?

No. I'll kind of go back to the previous question. But on carbs, we've been consistent on this. With this tough economy right now, were looking at flat to 0.5% and then mid- to single-digit on our non-carbs. So you are correct.

As we get through the tough economic times right here, we will see probably carbs go to 0.5% to 1% and can see the non-carbs go a little stronger. And then on -- what else are looking at. We do play in energy, but we plan in it very strategically, very local. It is more up and down the street where we have a lot higher margin on the product that we are selling.

And then our Allied brands. We're out here with Vita Coco. We're seeing tremendous growth with Hydrive, with Neuro. And so we are planning those everyday.

We are looking everything that is out there seeing what could be the next category. We are a pretty good outlook for these new entrepreneurs to come into to get some distribution. So we've got team, Damian, that is a full-time team that looks at everything that is coming out and see if it makes sense. Strategically going into our portfolio and then for distribution.

Larry, I guess what spurred this question was thinking about Bolthouse and what is going on in the refrigerated juice category, and again it is a fairly small category balance, but let's say $5 billion - $6 million out of retail. Seems like it's growing -- it's not hypergrowth like energy, but if you look -- A. Have you looked at it and B. If you had, why not go after it with your own brand extending or maybe acquired a brand?

We have. We've looked at all of them, Damian -- and one was like a Bolthouse, an example. One of the things we look at is refrigerated. We don't operate in refrigerated. The cost for us to go in -- of shipping. Changing our entire footprint to have something that small a percent of our mix just doesn't make any sense. So we like to stay in our arena and fight within the ropes that we understand and we are good at.

That makes sense. Lastly, you guys have done a terrific job in a pretty tough environment since being spun out of Cadbury back in May of 2008, focusing on your core business and returning excess cash to shareholders through buybacks and dividends. And that I think if you look at the stock price, it is all in the chart and the outperformance is there.

But I'm wondering if you look at your portfolio now, do you think that being 80% CSD -- does it hide the potential future growth for non-CSD? Have you actually looked at perhaps spinning off the non-CSD portfolio and have it be a separate entity in whatever form?

We are very happy with our portfolio, Damian. Like I said, we are going to see more growth there. We have a lot of focus.

I think when you look at our CSDs, yes, we're almost 80%, but I think that what stands out for us is that 80% is flavors -- flavors are growing. That category is expanding so we feel we are really playing in a sweet spot right now.

If you look at what the population growth is going to come from, with the Hispanic being 50%. Their Number 1 CSDs are flavors. That is where we are going to play and see a lot of our long-term growth. I had a lot of people saying how you do you see the 3 to 5. Our team is very confident with our per cap consumption, our Hispanic, our coastal markets, our Snapple. Fixing those per caps is how we are going to continue to do it.

Okay. Thanks.

All right. Well I want to thank everybody for joining 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.