Keurig Dr Pepper Inc (KDP) 2013 Q1 法說會逐字稿

Good morning, and welcome to Dr Pepper Snapple Group's first-quarter 2013 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 press release, and our SEC filings. Our actual performance could differ materially from those 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 release, and on the investors 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. We are pleased with our performance in the quarter, as our teams remain focused in executing our strategy, despite macroeconomic challenges, unseasonably cool weather across the country, and continued criticism of sugar-sweetened beverages. For the quarter, bottler case sales declined 2%, on 3 percentage points of price and mix. Dr Pepper declined 3%, with declines across the base business, and Dr Pepper TEN, as we continue to cycle inventory builds from the national launch. It should come as no surprise that our Dr Pepper performance was negatively impacted by calendar shifts from our larger bottling partners. While we continue to gain new availabilities in fountain, softening trends in the restaurant industry more than offset those gains. Our core four brands were flat for the quarter, on the launch of our TEN products, and I will speak more about TEN in a moment.

Hawaiian Punch decreased 14%, primarily due to his performance at one national retailer, and Mott's posted strong growth of 11% as we continued to gain distribution across key packages in both the juice and sauce categories. Snapple declined 2%, cycling 5% growth from a year ago, on price increases and lower promotional activity associated with the national launch of diet Half 'n Half last year. While I don't like talking about the weather, the severe cold this winter in the Northeast, Snapple's heartland, definitely had an impact on this brand. All other brands decreased 2% for the quarter, led by a mid-single decline in Crush, and double-digit decline in Sundrop.

On a currency-neutral basis, net sales increased 1% for the quarter, reflecting 3 percentage points of price mix, partially offset by lower volumes. Segment operating profit increased 7% for the quarter, as revenue growth, ongoing productivity improvements from RCI, and a favorable adjustment to our LIFO inventory provision of $7 million were partially offset by planned increases in commodities, primarily from apples and our labor and benefit costs. Core EPS was $0.53 for the quarter versus $0.46 in the prior year, a 15% increase.

As consumers are becoming increasingly more aware of caloric intake and are looking to make healthier choices for themselves and their families, there's no question they are drinking fewer CSDs. That's why we created the TEN platform, giving consumers the opportunity to enjoy the same great taste and full mouth feel of a regular CSD with a lot less calories. In fact, they can drink an entire 12 pack of TEN and consume less calories than in one regular 12-ounce can. Now that's something to get excited about.

The national rollout of our core four and RC TEN is well underway. With ACV currently at 65% of grocery, we've secured incremental space in the majority of our accounts and will continue to gain distribution over the next several months, based on each retailer's planogram resets. While it is still very early, I'm pleased to say it's performing in line with our expectations. Where we currently have distribution, these products are approximately 10% of the core trademark's total sales, and they've been highly incremental to the CSD category, meaning that we are achieving our goal of bringing lapsed consumers back to the category.

Our marketing support behind this launch is heating up too. The national TV spot, which plays to both male and female consumers, began airing mid-March, and will continue through the summer, letting consumers know that they can get both with TEN. We have also had lots of buzz through social media, with consumer-created videos available on Facebook, Twitter, and YouTube. My personal favorite shows a guy who spent about 20 seconds prepping for a workout, then runs for only three seconds to work off the TEN calories.

I hope you all saw Olympic Gold Medal-winning gymnast McKayla Maroney in February at Penn Station, renamed TEN station for the day. She handed out hundreds of samples of TEN to consumers, and said that she finally found something that impressed her, with our TEN products. She also did a media blitz around TEN, with coverage on Fox & Friends, CNN Starting Point, and many others, garnering over 300 million impressions. Like I said last quarter, it's critical that we get this product into consumers' hands. Our lifestyle sampling program has already hit more than 10 markets with more to come, giving out thousands of free cans, and the consumer feedback have all been extremely positive. We will continue to be patient with this launch, because we know consumption habits take time to change, and we have proven that TEN can bring consumers back to the category.

Of course, TEN isn't all we have to be excited about. We are teaming up with RedBox to give consumers free movie rentals when they purchase take-home packages or single-serve bottles of Dr Pepper, and we will be firing up the grills the summer with one-of-a-kind point-of-sale and merchandising kits to drive additional points of interruption in key retailers. Speaking of grilling, our core five friends are partnering with Coleman to bring a full package of summertime solutions to consumers and retailers. The core five Summer Fun program will tie in with retailer thematics, driving additional displays and points of interruption in the store. For the fourth year in a row, we're sponsoring the PJ awards, the number-one rated Hispanic youth award program. Pitbull will once again be our partner, headlining both a new TV campaign and a Dr Pepper private concert. We will also sponsor a new Mimix promotion where participants can compete for the opportunity to perform at the private concert.

Soccer is a major passion for Hispanic consumers, so 7UP is sponsoring the 2013 Gold Cup, a premier international tournament or 12 national teams from the Caribbean, North and Central America compete. In 2011, this tournament drew more than 600,000 fans with 10.8 million total viewers on Univision. This year, Fox Soccer Channel and Fox Sports are joining in and will broadcast all 25 matches in English for the first time in Gold Cup history. 7UP will have branding on all official Gold Cup material, and has an exclusive media buy on Univision during the tournament.

Crush is giving away a money can't buy VIP experience with teen sensation Cody Simpson, and our new advertising on the Sundrop goes head-to-head with the competition, letting consumers know that while Mountain Dew is good, Sundrop is surprisingly good. Wake up and say aloha out with Hawaiian Punch Aloha Morning, a delicious new breakfast offering that contains 40% less sugar than other leading juice drinks. Snapple is bringing back a nostalgic under the cap promotion, Win Nothing Instantly, where consumers can win nothing such as no grocery bills, or no rent, and will provide value to our consumers and retailers with the launch of cold-fill Snap Tea in a gallon take-home package and 16-ounce single-serve cans.

That's not all. We know the value of collaborating with strong partners, so we have teamed up with 7-11 to develop an exclusive limited-time Snapple line, directly targeting millennial consumers. Our Snapple Lemon Daze will include three thirst-quenching flavors, regular, pink, and mango lemonade, and features never-seen-before graphics. These products will have storefront presence and merchandising throughout the summer. I'm sure you'll agree that we have some great activity lined up for the summer. Now let me turn the call over to Marty to walk you through some of our below-the-line items, and our thoughts on the balance of the year.

Thanks, Larry. Good morning, everyone. Reported net sales for the quarter were up 1%, with price and mix up just over 1 point each, and 0.5 points from favorable discounts in both our beverage concentrates and packaged beverages segments. This was partially offset by a 2-point decline in sales volumes. Reported gross margins were up slightly, increasing from 57.1% last year to 57.2% this year. There are a number of moving parts here, so let me review them for you.

First, the net pricing factors I just mentioned increase gross margins by approximately 80 basis points. Second, higher input costs, primarily related to apples and corn, reduced year over year gross margins by 50 basis points, but this increase was offset by ongoing RCI productivity benefits. We also recorded a LIFO inventory benefit of $7 million in the quarter, based on our current view of inflation and year-end inventory balances. This drove a 50 basis point improvement in the gross margin comparison, as there was no LIFO reserve movement last year. Furthermore, product mix reduced gross margins by approximately 40 basis points.

Finally, changes in certain commodity prices at the end of the quarter caused us to record a $7 million unrealized mark-to-market loss, with $6 million in cost of goods and $1 million in SG&A. This compares to a $6 million unrealized mark-to-market gain last year, with approximately $5 million in cost of goods, and $1 million in SG&A. This unfavorable comparison reduced gross margins by approximately 80 basis points. SG&A, excluding depreciation and amortization, increased by $10 million for the quarter, on planned increases in field labor costs, higher marketing investments of $2 million, and the unfavorable mark-to-market comparison I just mentioned.

Moving below the operating line, depreciation and amortization expense for the quarter declined by $3 million, and reported operating income increased by 3% from $192 million, representing 14.1% of net sales, to $197 million, or 14.3% of net sales this year. Removing the impact of mark-to-market gains and losses in both years, core operating income increased by 10% or $18 million, and represented 14.8% of net sales, up 110 basis points from 13.7% last year. Net interest expense was $34 million or $2 million above last year. Our effective tax rate for the quarter was 36.1% versus 37.4% in the prior year, as we benefited from various tax credits.

Moving on to cash flow. Cash from operating activities was $60 million, and capital spending was $29 million. Free cash flow was $31 million compared to $132 million in the prior year, after adjusting for the taxes paid on the Coke and Pepsi licensing agreements. Receivables grew as a result of fewer collection days in March of this year, and on a FIFO inventory basis, apples and resin increased raw materials by $18 million, compared to the same period last year. For the quarter, total distributions to shareholders were $171 million, with $101 million in share repurchases, and $70 million in dividends.

Before I update you on our 2013 guidance, let me provide you with a quick update on RCI. We have now just begun the third year of our continuous improvement journey, and I couldn't be more pleased with the level of engagement and enthusiasm from our people. To date, we have had over 3,000 people participate in 255 Kaizen events, and through these events we have learned that breakthrough change is possible, and that can be done rapidly and sustainably. As I mentioned in February, the next phase of our journey includes two approaches, goal deployment and lean leadership track management. Essentially, we're focused on driving breakthrough business results, while also developing our business leaders to become lean champions.

We have identified track leaders from across the business to focus on the core activities within DSD, warehousing, delivery, merchandising, cold drink, and certain field marketing activities. These track leaders will leverage lean tools to discover and replicate wins across the business, where they can be adapted to local operations. We have already kicked off the initial DSD track Kaizens, and they will continue to run through the second quarter, with replication events starting mid-June. And with $127 million of cash productivity already achieved, I remain confident that we will achieve at least $150 million of cash productivity by the end of this third year of our journey.

Moving onto 2013 full-year guidance, as you saw in this morning's press release, we continue to believe we can achieve net sales growth of approximately 3% for the year with full-year core earnings per share in the $3.04 to $3.12 range. Consistent with our first-quarter performance, we expect combined price and mix to be up about 2% to 2.5% from the full year, with a larger portion resulting from mix. Remember, the majority of core four and RC TEN volume will be finished product sales through our packaged beverages segment, contributing to higher reported net selling price per case. Sales volume is expected to be about 0.5 point, led by core four TEN, and growth in our non-carb portfolio for Mott's, Snapple, and our allied brands. As we communicated previously, considering our hedged positions and current market prices for our unhedged positions, we expect packaging and ingredients to increase total cost of goods by approximately 2% on a constant volume mix basis.

Our core earnings guidance does not include an assumption for LIFO reserve adjustments, positive or negative. We continue to expect higher field labor costs, including health and welfare, to increase our costs by $25 million and higher lane rates from our common carriers, as well as certain regulatory changes in Mexico, to increase our transportation base by $6 million for the year. As Larry said, our national rollout of core four and RC TEN is well underway, and we remain committed to investing in excess of $30 million incrementally, to support this critical launch. Net interest expense will be around 4.4% on our $2.7 billion of debt, and we now expect our full-year tax rate to be slightly below 37%, including the credits we recognized in the first quarter. In terms of cash flow, capital spending is expected to be approximately 3.5% of net sales, and we remain on track to repurchase approximately $375 million to $400 million of our common stock this year, subject to market conditions.

For modeling purposes, let me highlight a couple of items that will impact quarterly phasing. First, marketing investments will be heavily weighted to the second quarter. Second, as a reminder, revenue benefited from 1 point of discount favorability in the second quarter of 2012, that we do not expect to recur this year. Finally, as I said last quarter, the transportation and field sales cost inflation will be evenly spread throughout the year. With that, let me turn the call back over to Larry.

Thanks, Marty. Before we open the lines for questions, let me leave you with these thoughts. You've heard me say it many times now, but it's absolutely critical we reinvigorate the CSD category, and bring consumers back to the products that they know and love, and we're doing that with our TEN platform, giving them the great taste and full mouth feel of a regular CSD, but with only 10 calories. We continue to execute against our focused strategy, ensuring that we close distribution on availability gaps, making our products top of mind and close at hand for our consumers. We remain focused on driving probable growth and delivering value to our consumers, while continuing to invest wisely behind our well-loved brands for the long-term. RCI continues to gain traction throughout the organization, building a long-term sustainable operating platform that will continue to deliver tangible financial results. Finally, we remain committed to returning excess free cash to our shareholders over time.

Operator, we are ready for our first question.

(Operator Instructions)

Our first question is coming from John Faucher with JPMorgan.

I think at the beginning, when you are talking about TEN, you talked about 65% ACV. Can you talk about what it is, on a brand-by-brand basis, how much success you are getting in terms of getting all brands in there. You talked about incremental shelf space, how you are doing that. And then, is this something you expect to continue to build over the next couple quarters, or what's the level where you think this can max out? And what percentage of those accounts do you think you will get, all four plus potentially RC in as well?

Yes, where they are at right now, John, they are taking all the brands. That's part of the performance we are looking for, the incremental space, plus taking all of them, so it's been working very successfully. As I mentioned, it's going to build more, especially through the second quarter, as stores are doing their planogram resets. We've got a lot of accounts right now that are giving us an incremental end cap until they can reset the shelf.

As I mentioned, where we have it, the accounts that we been able to get it in, we are showing that the TEN is 10% of the trademark, so we are very pleased with that. I think one of the surprises that I look at and have had a pleasant surprise is how well RC TEN has been doing. We don't ever do much with it, but it's been very successful working on the TEN platform. When you go across them, they are all performing, basically, equally out there.

Okay. And I guess in terms of looking at getting all four of those on an end cap together, in some markets you are going to have Dr Pepper TEN going through a Coke or Pepsi bottler with maybe the other products going through your system. What are the executional hurdles as you try to put all of those -- put all the brands in place together when you're going through different systems?

We've got a lot of accounts right now where we have been able to -- whether it's Coke or Pepsi, put the Dr. Pepper TEN on with our TEN platform. It has worked very well. We have one regional chain that is even -- we have put them all together. The Dr Pepper TEN and even Pepsi Next, they are with it too, kind of coming up with a better-for-you platform. Our retailers are working with us, we are working with them, and we are working with our partners. That's why I say it's going to be a long -- it's a journey. It's not just something we go out there and turn the lights on overnight, getting those consumption habits to change, but so far, we are very bullish on what we have seen being able to happen and how excited the retailer is about it.

Okay, great. Thanks.

Your next question comes from the line of Wendy Nicholson with Citi Research.

Could you talk about the stills part of the portfolio, because it just seems that Hawaiian Punch has been so weak for so long, and I just wonder if there's any hope in a recovery there, and even though Mott's looked better this quarter, again, that's been more of a problem maybe than a strength. And then on Snapple, as well, I know you are repositioning the value end there. Can you talk about when we ought to see that turn positive in terms of year-over-year growth as well? Thanks.

I think we will see -- again, as I mentioned, Snapple really got hit the hardest by the weather. The Northeast is our heartland up there. That's where we have our heavy sales. We look at the Snapple coming back -- with the stuff I showed you for the summer, the activity that we have in place for Snapple is very heavy focused on Q2, and so we will get that activity out there. We will get the media, the promotions that we have going, which will carry us very well into the summer and third quarter.

On Hawaiian Punch, we are still sticking to our guns on the pricing. We put it out there. It has suffered on volume. I think we will see that probably start lapping toward the end of the second and first of the third quarter. It's hurt us on volume, Wendy, but I will tell you, on the margins and the profitability, you've always heard us say we pursue profitable volume, and we just had to take some pricing, and we've stuck to our guns. It's hurting for a little bit, but it's going to pay off.

Okay. And then just following up on the price-mix guidance you gave for the year, Marty, going back, trying to sort of drill down on what the topline growth is going to look like for the overall company in the second quarter, so we manage expectations, is price mix specifically for the second quarter, given all of the marketing spending? I know you said advertising was going to be weighted there. What about promotional spending? Is that still going to be up strongly in the second quarter?

Yes, Wendy, it will be.

Okay. Thank you.

Your next question comes from the line of Bryan Spillane with Bank of America Merrill Lynch.

Two questions, related to the revenue build. One, can you explain a little bit more, or give a little more color just on what the discount favorability was, and then I guess connected to that, is that -- I guess we should look at that is something that reverses later in the year? Just trying to understand what that was, and kind of how to think about that over the next couple of quarters.

Yes, the item relates to how we record trade or what others might call funding to bottlers. We don't record that when we ship the cases to them or the concentrate to them. We record it when they sell it through and report it back as bottler case sales. So depending upon the comparison of shipments to bottler case sales in any period, you could have more or less trade. This year in the quarter, for example, if you think about the calendar for a moment, we had Easter.

It was like the beginning of April, may have been April 1, as I recall, we were shipping a lot of holiday concentrate to our bottling partners in the back half of March. Obviously, that product didn't sell through. So we would not have accrued that trade. That helped Q1, but it's timing, it will come back and in essence, we'll accrue in the second quarter. Just think about it as timing throughout the year.

Okay. You've got a full year plan for what you think volume will be and what the spending is related to that. With the mismatch in the first quarter, but it should even out as we go through the balance of the year.

That's correct.

And then just a second question, just in terms of -- the slotting fees or the costs that you are spending to attain a distribution on TEN, is that being accrued evenly across the year? Is it tied to when you get the activity? I'm just trying to understand how much of a factor that was in terms of driving cost in the first quarter, and I guess it sounds like maybe there would be even more in the second quarter, just given how much more extra distribution we are expecting.

From an accounting point, to the extent we are paying slotting, we would do it as we incur it. We don't spread it throughout the year.

Okay. And so that should be a bigger, more expense again in the second quarter, to the extent that you are paying it.

It will be just like our marketing. The marketing load is all heavy towards the second quarter, more availability, and it'll go second quarter and a little bit into the third.

Okay, great. Thank you.

Your next question comes from the line of Steve Powers with Bernstein.

On TEN, going back to distribution, and I think you've alluded to it, but the list of the partners on your TEN website at this point is still pretty selective. You still seem to be missing clearly WalMart, Target. I believe there's at least partial distribution of those outlets at this point, and the gains are ramping up, as we talked about. What inning would you say you were exiting Q1 on distribution, and what inning do you expect to be exiting Q2, just to get a sense of the magnitude of the Q2 ramp?

I think we are right now in the third inning. It will probably be in the third quarter before we achieve our goal.

Okay. And Q3, essentially, full distribution in terms of --

Q3 will be -- what we are seeing, Steve, is a lot of them that would not give incremental space, and that we wouldn't put the product in are coming back now saying, if we give you a permanent end cap, so we've agreed to do a permanent end cap in some of those, and that's when we know the timing of when those sets will be in, so that's why I say it will be up into the third quarter before some of those are in.

Okay, great. And I know you were lapping inventory builds in Q1, but just to confirm, do you expect DP TEN volume to finish up for the year, and if so, roughly by how much?

I think we can get it, basically, flat to a little bit up. We have just a huge build out there with the displays and everything. I think we are getting a nice halo affect from the core TEN.

Great. And then, lastly, early in the quarter you reacquired distribution rights on Snapple and some other non-carbonated beverages in Asia. Also acquired distribution rights across California, Idaho, Nevada, etcetera. Those are obviously small deals. In the context of past comments, past discussion, you didn't need to expand outside of your current geographies, and you didn't need to add geographic footprint distribution to drive growth. Can you help frame those transactions, what made them attractive now, and whether or not you foresee more actions in that direction, as you look ahead?

I tell you what, I will cover the California piece and let Marty cover the Asia-Pacific. You have heard me say before, we have -- the only time we really bolt any of these franchises on is when it gets down to a situation of either succession planning or estate planning. We had a great bottler out there that decided he wanted to get out of the business, and it just made sense. We surrounded it. We were able to shut down the production facility. We will be able to service our customers, I think, a lot faster with having one voice, and so we do a lot of those bolt-ons. To your point, they're very small. That's why we picked that one up. I will let Marty go into Asia Pacific.

Steve, Kraft, or really now, Mondelez, had the distribution rights from Cadbury for Snapple and actually a number of other brands, including CSD brands. They didn't want to keep it. They had done nothing with it. I think they had five total distributors throughout the region and really only two of them were selling much of anything, and maybe just slightly in excess of 100,000 cases of Snapple. One distributor being in Singapore, one being in Hong Kong. Actually, the Snapple brand, years and years and years ago, was actually represented in the region, and sold reasonably well in a few places, and it was pulled out of the market, years and years and years ago.

Our attitude was, look, they really don't want it, if you study our financial statements carefully enough and the cash flow statement carefully enough, you could probably tell what we paid for it, which is very small, for the opportunity to build out what will look like a third-party distribution system. There's no plans here to spend capital, to build plants or warehouses, to invest in our own footprint, but rather to put together a network of distributors. The product will continue to be made, initially I'm referring to Snapple, in the US. It's quite expensive to transport it to Asia, but we will decide if we need co-packing there or not. We are in the early stages. We have a handful of people here that I have taken on the management of it, and they are building and developing plans. I said when we put out the announcement not to expect anything material in terms of financial outcomes this year, but as we develop it and have a sense for what that could mean to us, we will communicate it.

Great. Thank you.

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

A few questions. Firstly, Larry, here in the US, could you speak specifically to the filing channel and what you think you are seeing unfold from a larger category perspective, and the performance of your brand in that channel, and how you are looking at that channel, looking out?

Yes, if you look at the latest month, and I think you've heard me say it before, Mark, we really watch it closely. It's a good indicator for us, but our March flash was showing that QSR traffic was down about 1%. You can kind of see that with how our fountain performance was for the quarter. A lot of the -- some of the big ones that are reported that are publicly traded, gave the numbers down 1, 1, 2. It shows very much what we are seeing in March. It affected us, but we outperformed the category as a whole, if you look in QSR. I'm thinking it was going to possibly get a little stronger. We are cautiously optimistic about it. You've heard some of the plans from some of the major chains on how they are kind of changing some of the strategies, and we hope it will be a significant part of helping them turn that around.

And when you look at that channel and maybe C-stores, when you look at the trends from across different channels, what do you think they are telling you about either the consumer, generally, or the consumer vis-a-vis the products, the fizzy and the noncarbonated products that you and others are selling?

I think the tough part for Q1, Mark, makes it a little harder to look at from the trends we've been watching was the weather that we had in the first quarter. If you look at the softness, I would probably give two-thirds of that softness to weather, and the other one-third to the consumer and the economy. Our convenience stores trends are still looking pretty good. We are still showing some favorability there. And then we are pretty bullish about the gas prices coming down. I don't know about up in the Northeast, but they are dropping pretty quick here. So I think that's going to give us an uplift there.

That's great, that's great. And then, Marty, I guess two questions. One is really a follow-on to Steve. Can you speak a little bit more about your attitude toward the Snapple brand, other brands in Europe where I think there might be an opportunity eventually to change distribution there. Press a little bit, or flesh out a little bit further really to Steve's question about what this might signal from a larger attitude to growth outside the US, not only for Snapple and your noncarbonated brands but for those brands where it is still acquirable on the carbonated side. Just on the productivity, can you give us some sense when we will get a view of productivity opportunities beyond the 150 you target by the end of this year?

Yes, okay, Mark. Let me finish my thoughts. I think you are right, that Steve started to ask. First of all, as I said in the Mondelez transaction, we actually did not -- we are not interested in the carbonated brands. I think we'd be foolish to believe that we were going to start building a carbonated soft drink business in some of these places. But the non-carbs, Snapple, for example, ready to drink tea, across the countries of Asia that we now have the rights to is something like 2.6 billion case market. I think everybody knows ready to drink tea in most parts of the world is a good LRB category, and Snapple fits right in there well. So it's an opportunity.

Mott's, Hawaiian Punch, for the most part, all of our non-carbs, we do have the rights to. We could do something with them, and it's very possible that with a couple of those brands, we will add them along with Snapple, and take them to distributors as a portfolio, because we think those brands might be able to gain some traction there, too. Look, we would love to have this opportunity. We want to have the opportunity to grow internationally if we can, of course.

On the carbonated side, as everybody knows, we are pretty much landlocked between the US, Canada, and Mexico because of the actions Cadbury took back in the 1990s. To the extent that we can take Snapple to markets internationally, whether it's in Asia or maybe down the road in other markets, yes, there could be an opportunity there, but I think it's too early for us to certainly try to size that. But at some point, it might be meaningful for us. To be a good add-on to our business. But not in carbonated. I wouldn't expect us to do anything in carbonated.

Productivity improvements, RCI, It's a little early. You can tell I am encouraged. We had some pretty good results this quarter. Some of the P&L productivity flowing through from many of the supply chain related projects that we worked on throughout last year, and some of those benefits now we're starting to see on the P&L side. Larry and I and others have been present through a number of these early Kaizen events in DSD. We are quite thrilled, actually, by some of the early return.

Larry and I will be speaking to some employees later this morning, and I'm going to share an update on RCI with them and I'll talk about a few data points that for us are really important, but I can't size them completely for you in terms of guidance, but just some of the things we done in the merchandising function in Houston and Irving, that in the case of Houston, for example, in the first quarter, their actual merchandising spend is down 9%. When you look at their volume, it's an improvement of $0.18 per case. Irving has got some similar benefits. The teams think maybe this could be worth $1.5 million to $2 million for them. Just in these two branches. So there's just lots of opportunity. It's too early for me to put the next level target out there, and so I'm going to at least for this quarter defer on that.

Fair enough. Great. Thank you.

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

Another question on TEN, and on the platform, and I think trying to square your commentary with the results. Looks like you got quite a bit of distribution, getting up to 65% distribution. You talk about it being incremental, but I'm looking at the overall volumes of core four being still flat. Can you help me understand a little bit the dynamic between the two?

Well, flat on the core four is pretty good for what the category is. You can tell we outperformed there on it. Like I said, if you take our total trademark, it's about 10% is what we are running. 10 products, or 10% of the trademark. And we are seeing that build. We are excited about that.

The teams have done an excellent job on getting the execution out there. You have to get out and execute. What I like is that we stood behind, that we are not putting it in if we don't get incremental space. So we probably could have been above 65 if we had not stuck to that. We are seeing people come back in. Like right now, with Safeway at 100% distribution, we've got display rates sitting out there at 70% and the TEN sales are incremental to the entire LRB category, not just CSDs. It's hard to talk about the success and show success when you got a category that's down. We think we are going to see most of the category, in my opinion, for the quarter, as I mentioned a moment ago was weather related. I think we are going to see that kind of comeback.

Okay, yes. It seems like the idea of launching new products and committing to only distributing them if you have incremental shelf space is something that's becoming maybe not more the norm but something that is a big focus. I know Red Bull is doing that with their flavors. Do you think we are going into a period of time where we could have FD proliferation even in CSDs and everybody scrambles for shelf space and can't just really do it based on their sales, as a percentage of what their sales would be in the category, there needs to be something different or something new?

Well, I think -- our customers and our partners out there are always asking us for innovation. We bring the innovation. It would be kind of silly for us to just take our own space with innovation. Then we're cannibalizing our own products, this way we can really tell. We can give you exactly what we are losing on core, whether it's regular or diet, to TEN. So I think on SKU proliferation, everybody's getting pretty good at category management. You got to have X number of days of turns, or you're not going to be in that space. It's not what we sell them on. It's what they tell us.

Understood. Thank you very much.

Your next question comes from the line of Kevin Grundy with Morgan Stanley.

Two questions for you. First, on your top line growth guidance for the year, is it fair to say you are feeling modestly less optimistic on the 3% growth? I say that within the context of the first quarter on the CSD side was obviously rough for the industry for a number of reasons, weather and higher gas prices, etcetera. On the non-carb side, Marty, I think last call, I think you were hoping for low- to mid-single digit growth on that portion of your portfolio. Given the rough first quarter where bottler case sales were down 4%, that would probably suggest you have to do mid-single digit growth for the balance of the year, which would seem like a challenge. I was just curious to get your thoughts if you think that seems like a fair assessment?

Kevin, here's how I dissect this. Let's yield to non-carbs. Larry commented on Hawaiian Punch, and yes, I thought we'd see better performance, as of this point, we haven't. He said we are standing in there with our position on the brand and its affected the volume as you've all seen. He also said, we are looking for profitable growth and that's not one of our highest margin brands. Doesn't do as much damage on the bottom line, so we don't get as concerned about what it's doing on the top line, although it's a key factor. It's the largest volume, and case size, the largest volume brand in the non-carbs, and that's why it gets this attention.

Not worried about Snapple. Our Northeast distributors took a pretty big hit in the first quarter. The brand performed pretty well in most of the other parts of the country. Clearly, they said they couldn't get the product out and consumers are out. We are not going to worry about Snapple at all. It's well-positioned. We've got a lot of activity for that. So the non-carb piece, we are pretty confident we can get that back.

Mott's performed well, we expect that to continue. Actually, that's part of our optimism in terms of why we think we could still get to the 3%. And then on the carb side, of course, as Larry said, this is the critical period through the end of the reset period. We are pretty pleased with the sell-through that we are seeing in the Nielsen data. Many of you can see that data. I saw the March data. It was clipping along at actually a pace that we were very happy with. Yes, a lot of that could be trial. Too early to talk about repeat, but we are very encouraged.

Okay, great. One other question I had was on shelf space and distribution. First, on DP TEN, the syndicated data I'm looking at suggests that you've lost several points since you launched nationally. I was curious if that was the same sort of data that you are looking at, and if so, if you could elaborate that. Second, on an unrelated topic, but kind of more broadly, Larry, I'd like to get your thoughts. There's been more discussion as of late about CSDs losing shelf space to higher-growth categories like craft beer and energy drinks. Are you seeing that? Are you hearing more of that from your bottlers and retailers, etcetera? Thanks.

On the TEN, you are correct. We've lost some points on that, but we also have programs in place to pick that back up. We just got through having meetings with both our large partners, and we've got great plans in place. As I mentioned a moment ago, I think we are getting a halo effect from the core TEN out there, especially where we can merchandise them together, and kind of build strength there together, which we have no problem at all doing that.

As far as shelf space losing to energy or craft beers, they are in a different part of the store. They are in a different aisle. We haven't seen really any issues with that. You might see some of it in smaller convenience stores that don't have much space, but I think if we all kind of look at -- I know the numbers I look at show that even energy is slowing down a little bit. I don't know if that's really a problem that we've run into out here.

Okay. Thanks.

Your next question comes from the line of Bill Schmidt with Deutsche Bank.

A couple things. First, on TEN, looking forward five years, do you have any sort of targets for what you think is a percentage of total carbonated soft drink portfolio? And then maybe what you think about the rumblings about a new sweetener and how flexible the sweetener components are in TEN to change them when something new and different comes out.

Well, I will start with the sweetener. We are always looking at the different sweeteners, but I don't think it would have any impact on our TEN. Not saying that we wouldn't come out with something else on the road, but TEN is a platform that we designed to make sure that we have the mouth feel of a regular CSD and its full bodied. We have no intention of changing the TEN, but we never stop looking at different sweeteners. The sweetener technology and the chase for that holy grail is ongoing. It just keeps going, and all of us are out there working on it and trying to see what we can come up with. I think all the research that we did, we found that what we came up with TEN is probably going to affect more people out there that are looking for that great taste with less caloric intake. Take the first part of the question, Marty?

The first part of the question, we have sort of a five-year goal for what TEN could be? We think it could be big, but no, we haven't stated any specific numbers.

Got you. And then I was just sort of playing with the puts and takes. I know you don't like to give quarterly guidance, but are earnings going to be down in the second quarter based on everything you've sort of said in your prepared comments and then maybe how April is looking so far?

Like you said, we don't give quarterly guidance.

How about April? How are April trends so far?

We have no comment on April.

All right. Thanks.

Your final question this morning comes from the line of Brett Cooper with Consumer Edge Research.

Just a question, I guess clarification. When you are talking about price mix, you said that it benefited 50 basis points and that you are lapping 100 basis point benefit from a year ago. Does that mean that sort of reported price mix will trail underlying by 50 or 100 basis points, all else equal in the second quarter?

Here's what I would think about your pricing as you laid out. The pure pricing that we talked about this year, which includes the concentrate price increase January 1, which spread over the entire revenue base, not just the concentrate revenue base, is worth about 0.5 point. Some other prices we took a year ago in Mott's, and actually sauce, I should say. Sauce was a real success story for us because we went ahead and bit the bullet on the higher price for the apples and raised price. In so doing, we couldn't cover the full cost last year but we got good customer commitments for space, and that's helping us out. That's a full year. That's going to be an even flow.

So the pricing itself is sort of even. The mix will start to pick up because of the shift to the core 10, which are DSD cases. You'll figure out how to model that in your own model. The lapping of the trade adjustment is really mostly a Q2 factor. That will hurt the comparison really only in Q2.

Okay. What was marketing in the quarter, and how do we think about it for the second quarter? If I recall correctly, when you initially talked about sort of the incremental $30 million -- if memory serves, I thought you talked about that being more weighted to the first half.

That's correct. Let me go through that. We actually talked about spending $30 million incrementally on TEN. I tell you, we actually spend a little more than $10 million in the first quarter. Total marketing was only up $2 million, and that's because we were lapping from a year ago the launch of Snapple Diet Half 'n Half. Actually marketing spend last year in the first quarter was a little heavy, so the comparison was only up $2 million, but we did spend the $10 million, and we are still committed to expecting the full $30 million. For your purposes, I would assume that the better part of that remainder all falls in the second quarter. The second quarter was a little lighter -- I guess wasn't lighter than the first quarter, but it's going to be -- Q2 market is going to be up quite substantially.

Just to be clear, the non-marketing of the $30 million piece should be flat to up for the year, is that correct?

I'm sorry, the non-marketing?

You are spending $30 million incrementally in the TEN platform. Obviously, you are saying that sort of the non-TEN was down $8 million-year over year in the first quarter. How should we think about the bucket that is the non-TEN incremental?

Okay. When you think about the phasing of our marketing programs, okay, you've got a big piece of TEN in the second quarter. We just said earlier we've got Snapple regular Half 'n Half rolling in the second quarter. We've got marketing spend. All of that is going to contribute to pretty heavy spend in Q2. The rest would be, I would guess, call it flat. We will update you next quarter with color. And we are not changing our full-year marketing numbers. All we are talking about here is timing.

Just want to make sure you get the numbers right. Thank you.

Thank you. That was our final question. I will turn the floor back over to Larry for any closing remarks.

All right. I want to thank everybody for joining the call today, and especially for your continued interest and investment in Dr Pepper Snapple. Thank you.

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