Keurig Dr Pepper Inc (KDP) 2013 Q2 法說會逐字稿

Good morning and welcome to Dr. Pepper Snapple Group's second-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, Paula and good morning, everyone. Before we begin, I would like to direct your attention to the Safe Harbor Statements and remind you that this Conference Call contains certain forward-looking statements, including statements concerning our future financial and operational performance. These forward-looking statements should also be considered in connection with cautionary statements and disclaimers contained in the Safe Harbor Statement in this morning's earnings press release and our SEC filings. Our actual performance could differ materially from these statements and we undertake no duty to update these forward-looking statements.

During this call we may reference certain non-GAAP financial measures that reflect the way we evaluate the business and which we believe provide useful information for investors. Reconciliations of those non-GAAP measures to GAAP can be found in our earnings Press Release and on the Investors Page at www.DrPepperSnapple.com. This mornings 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. It should come as no surprise to anyone that this was a challenging quarter. The headwinds facing the CSD category continued. Consumers remain cautious and the US saw some of the coldest and wettest weather in recent years. However, against that back drop, our teams continued to execute our strategy and we gained both volume and dollar share in the CSD category.

For the quarter, modern case sales declined 3% on 2 points of price and mix. Dr. Pepper declined 4% and our core brands including our TEN platform, while performing much better than the category, still declined by 1%. Hawaiian Punch declined 7% on lower promotional activity and overall category declines. Mott's grew by 2% and Snapple gained 4% on our recently launched regular Half and Half and Snap Tea products. All other brands declined by 3%.

On a year-to-date basis, bottler case sales declined 3% on 3 points of price and mix. Dr. Pepper declined 4% and our Core 4 brands were flat. Hawaiian Punch declined 10% and Mott's grew by 6% as we continue to gain distribution and availability across both our juice and sauce portfolios. Snapple grew 1%. All other brands declined by 3%. On a currency neutral basis, net sales declined 1% for the quarter as favorable price mix and foreign currency were more than offset by volume declines.

Segment operating profit decreased 3% on the net sales decline as well as higher commodity costs driven primarily by apples, a $9 million increase in marketing and a pre-spend related unclaimed property audit settlement of $4.4 million. Decline was partially offset by year-over-year LIFO benefit of $11 million. Ongoing productivity improvements and a favorable comparison associated with an $8 million depreciation adjustment recorded last year. Core EPS was $0.84 for the quarter versus $0.85 in the prior period, a 1% decrease.

As we finished the first half of the year, I thought I would share a quick update on how we're progressing against our key priorities. You've heard me say it many times, but increasing distribution and availability of our key brands and packages continues to be the single largest opportunity for DPS. And I'm pleased with the progress we've made so far this year, particularly given the challenging environment. We've held space in both grocery and convenience on core CSDs across key packages. Snapple continues to gain traction growing an ACV by 1 point in grocery and 2 points in convenience, and Mott's showed a strong gain of just over 3 points in grocery helping to fuel growth on this brand.

We're expanding single serve availability and creating new sampling occasions with over 15,000 net new fountain valves across both local and national accounts. We know consumers love our brands and our equity scores reflect just that. We continue to see gains in both brand relevance and brand strength scores across the portfolio, reaffirming that our marketing programs are reaching our target consumers and building brand loyalty, and from a rapid continuous improvement standpoint, we've now identified $142 million in annualized cash productivity savings and our teams are as energized as ever.

They're insuring we're not only sustaining our current progress but also continue to build momentum and drive breakthrough change as we focus on specific core activities within DSD business such as warehousing, delivery, and merchandising. It's certainly no secret that the CSD industry is up against tremendous headwinds and consumers are looking for low calorie alternatives to regular CSDs, without sacrificing taste, and while we're all working toward a zero calorie all natural sweetener, we must give consumers a solution today and that's why we created the TEN platform.

The national rollout of TEN is well under way. We've achieved 76% ACV in grocery across our key packages and we'll continue to build distribution and availability based on retailer planogram resets. We've been strict about not putting TEN in accounts where they haven't given us incremental shelf space and that strategy is working for us and we expect TEN to be in full distribution by the end of summer. Our media campaign, which lets consumers know they can get both great taste and only 10 calories, will continue to air through the summer creating almost 0.5 billion impressions. We're also engaging consumers online through Facebook and Twitter and our consumer generated online videos have generated millions of impressions for TEN.

We've sampled in only 14 key markets and still have 21 markets left to go and have handed out almost a 0.5 million cans of TEN. We're getting positive feedback on both the product and the messaging from consumers and early trial and repeat rates are meeting our internal targets. More importantly, based on Nielsen home scan research, we know that 51% of TEN's purchases are incremental to the CSD category, meaning that we are achieving our goal of bringing lapsed and new users into the category. We are really pleased with these early results.

As I look to our summer and third trimester marketing plans, I'm confident that we will continue to engage our core consumers and build awareness, while providing exciting activation programs for our bottling and retail partners. Dr. Pepper and the Core 5 are firing up the grills and tying in with retailers' summer thematics driving additional displays and points of interruption in the stores. Snapple is once again front and center on Americas Got Talent, the number one rated summer show. Judges cups feature Snapple and our Half and Half, and Win Nothing Instantly commercials are airing during the commercial breaks.

Soccer is a major passion point for Hispanic consumers, so 7-Up is sponsoring the 2013 Gold Cup. We'll have 7-Up branding on all official Gold Cup material and we'll have an exclusive media buy on Univision during the tournament. For over 20 years Dr. Pepper has been synonymous with college football and this year we'll continue the tradition integrating our One of One campaign. We'll give away over $1 million in tuition awards this year, America gets to participate by choosing the students who will compete at each championship game.

Our Core 5 brands are also getting in on the football action, partnering with MillerCoors and Mission Foods to build a national football program that will deliver bundled solutions for shopper's game day needs. And as the kids go back-to-school, our Mott's lunch box solutions program will help mom prepare healthy lunches for her kids that includes Mott's juice boxes and Snack and Go sauce pouches. The program features national media, national FSI, and pallet displays around Mott's. A& W will lead our Core 5 Halloween program featuring a national partnership with Mars and color changing 8-ounce cans, and these are a few of the great things we have planned.

I'll end by saying we're operating in a difficult environment with limited visibility but I remain confident in our strategy and in our teams ability to execute it. With that, let me 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 decreased a little less than 1% and we're below our earlier expectations. With unseasonably wet conditions and cooler temperatures across much of the US, sales volumes declined 4%. This was partially offset by net pricing and mix of about 1 point each and just under 1 point of favorable foreign currency. Reported gross margins increased slightly to 58% this year from 57.7% last year. Net pricing and ongoing RCI productivity benefits each increased gross margins by 50 basis points.

Based on our current view of inflation and year-end inventory balances we recorded a $10 million LIFO inventory benefit in the quarter. This compares to a $1 million LIFO inventory charge in the prior year furthering the year-over-year improvement in gross margins by about 70 basis points. Higher input costs primarily apples and corn on a constant volume mix basis increased cost of goods by about 2% and reduced year-over-year gross margins by about 80 basis points while certain mix factors -- including growth from the TEN platform promotional activity in our package beverages segment, reduced gross margins by about 50 basis points.

SG&A, excluding depreciation and amortization increased by $20 million for the quarter primarily due to higher marketing investments of $9 million, a pre-2008 unclaimed property audit settlement of $4 million, unfavorable currency translation and the accelerated recognition of $2 million of pension costs. Below the operating line, depreciation and amortization expense decreased by $6 million in the quarter as we cycled the $8 million pre-separation lease adjustment recorded last year. Reported operating income decreased by $15 million or 5% from 18.5% of net sales last year to 17.7% of net sales this year. Net interest expense was flat to last year at $30 million.

Other income net was $41 million in the quarter. This includes a non-cash $38 million charge related to a Canadian tax law change. This change required us to revalue downward both a balance sheet asset and liability with the credit recorded as other income and the charge recorded as income tax expense. The net effect was a $12 million non-cash reduction of net earnings. For the quarter, our reported tax rate was 48%, including the Canadian tax law change that increased our effective rate by 12.3 percentage points. Our prior year effective rate was 34.3%, including a $4 million Canadian deferred tax benefit which we recorded last year.

Moving to cash flow. Cash from operating activities for the six months was $276 million and capital spending was $61 million. Reported free cash flow was $215 million compared to $401 million per year after adjusting last year for the taxes paid on the Coke and Pepsi licensing agreements. Receivables grew as a result of one less collection day in June of this year and payables decreased based on timing of payments. And on a FIFO inventory basis raw materials increased by $8 million primarily driven by the higher price we paid for apples and a favorable forward buy we did of resin from Mexico. For the six months, total distributions to shareholders were $274 million with $126 million in share repurchases and $148 million in dividends.

Before I review our guidance for the full year, let me provide a brief update on RCI. As Larry said, momentum continues to build as we focus on the core activities within our DSD business including delivery, merchandising, and warehousing. We are making great progress and let me give you a few examples. On our delivery RCI track, in our Los Angeles branch, we found that our delivery drivers were spending 20% of their day in the branch instead of out in the field, using Lean setup reduction tools, the team reduced delivery driver check in and check out times by 30 minutes per driver and using cost to serve analysis, the team improved stop frequencies by 12%.

On the warehousing RCI track, our Irving team developed a dock scheduling solution to plan dock forklift labor 24 hours in advance, freeing up almost 13,000 man hours. We have similar examples across all of our DSD business units and I am very encouraged by these initial RCI track results. With $142 million of annualized cash productivity already identified, I am confident that RCI will create increasing flexibility and productivity for the business over the long term, there by contributing significantly to further financial improvements.

Now moving on to full year guidance. As I said earlier, net sales for the second quarter did come in below our previous expectations. And as Larry said, although forward visibility is somewhat limited, we remain focused on executing our strategy to deliver profitable volume while investing prudently in our brands for the long term. Considering where we stand year-to-date and our balance of year view, we now expect net sales growth of about 2%. As you saw in this mornings press release, we are maintaining our core EPS guidance range of $3.04 to $3.12 but with several changes to our assumptions.

Consistent with our year-to-date performance, we continue to expect pricing and mix to be up 2% to 2.5% for the full year. From a modeling perspective, the balance of year will be more heavily weighted towards mix as we cycled the majority of the Mott's applesauce pricing actions taken during the third quarter of last year. We do not expect the CSD category headwinds to lessen and with 80% of our volume in this category, we now expect total sales volume to be down around 1% for the full year. Also as a reminder, volume comparisons are easier in the third quarter as our total system sales volume declined 3% last year and volume down 6% in packaged beverages as a result of higher sauce pricing and 2011 CSD promotional activity that we chose not to repeat in the quarter last year.

With greater visibility into apple and corn crops and our overall commodity basket, we now expect packaging and ingredients to increase cost of goods sold by about 1.5% on a constant volume mix basis. Since we now believe our fourth quarter purchases of apples will be at more seasonal historic price levels, we now expect to lower our full year LIFO inventory provision by approximately $30 million or another $15 million balance of year. As Larry said we're very pleased with the early results on our national rollout of Core 4 and RC TEN and we remain committed to investing in excess of $30 million behind this critical launch.

And for your models, we've spent almost $23 million through June as we've previously said this would be skewed into the first half. We expect our full year core tax rate, which excludes the impact of the Canadian tax law change, to be about 37%. And with continued productivity benefits from RCI, capital spending is now expected to be approximately 3% of net sales down from 3.5%. We also remain committed to repurchase approximately $375 million to $400 million of our Common Stock in 2013 subject to market conditions. 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. With increasing category headwinds, it's imperative that we reinvigorate the CSD category and bring lapsed and new consumers back to the products they know and love. As the launch of TEN progresses we're confident that we're doing just that by giving consumers the great taste and full mouth feel of a regular CSD but with only 10 calories.

We continue to execute against our focus strategy in a very challenging environment insuring that we build our brands and execute with excellence in the marketplace. We remain focused on driving profitable growth and delivering value to our consumers while continuing to invest wisely behind our well loved brands for the long term. RCI is becoming the foundation of how the organization operates on a daily basis and is delivering solid financial improvements. And finally, we remain committed to returning excess free cash to our shareholders over time. Operator, we'll take our first question.

Thank you.

(Operator Instructions)

Our first question comes from John Faucher of JP Morgan.

Thanks.

You talked about how you don't expect headwinds to lessen for the CSD category over the balance of the year. Could you talk about how you're viewing that in the context of weather versus obesity trends versus what we've seen previously in terms of people doing category switching? And are you implying from that standpoint that all those headwinds continue into the back half of the year and the current trends continue? And then also on top of that, can you talk a little bit more about the buildup of distribution of TEN -- do you feel like you're still getting it where you need to be? And will there be some offset from additional distribution in the back half of the year? Thanks.

Sure, yes -- John, I think the biggest point is, I don't know if we really are at a point where we can say what the weather was. The entire first half was pretty rough. We're pretty excited about what we're seeing in July. The weather has improved and we've got a good start for July going right now.

When I talk about the headwinds, I look at what we keep getting hit with -- obesity, different municipalities that are trying to ban different sized drinks or certain packages or sugared brands -- and then also we stay very concerned with the decline in diets. Our diets, you know, continue to perform below what we see in the category -- not just ours; I'm talking about the entire category. And so those are some things we look at.

And one of the main reasons that we went after being so aggressive with the TEN -- people want better for you but the diets are going down. Is that the sweeteners -- what is it? That's what we're trying to find; but with the TEN, I think we've been able to answer part of that. The TEN, as I mentioned earlier -- we're ahead of where we thought we would be on ACV. I think the number is 76%.

We'll have full distribution by the end of the Summer, and that's mainly driven by what we're doing with the planograms with the customers that were late coming in. And I think all the numbers we're seeing -- I don't think, I know -- all of the numbers we're seeing is ahead of where we thought we would be. Our trial and our repeat are at the numbers of the high end we wanted to see hit. So we still feel pretty confident that will help us. But the biggest piece is going to be that part of the weather, but I'm encouraged it's 100-some degrees in Texas and they are drinking soft drinks.

Okay. Thank you.

Your next question comes from Bonnie Herzog from Wells Fargo.

Good morning. I just have a little bit of a follow-on question.

Certainly CSDs continue to face pressure and you don't expect this to improve near term. So given, as you mentioned, 80% of your portfolio is SKU'd in CSDs, how are you thinking about changing the makeup of your portfolio? Has this become an increased priority for you -- to grow your non-carb business maybe faster either organically or via acquisitions? I guess I'd like to hear how you're thinking about this over the next few years?

Yes, I think we would look at most of it as growing organically. Never say never on acquiring something, but we look at them -- some of them just have such ridiculous multiples that we're not really going to do that.

With 58 brands we have a lot in there we can start doing some programs with that you'll see coming in the back half of the year with some bundling. But being 80% CSD, we will continue a very strong focus on CSDs. We've already spent $23 million in TEN and we're starting to see the benefits come from it. We're seeing 51% of the people buying it had left CSDs or not been a user before, so we'll stay very focused on being a part of improving the CSD category.

I wish I could wave a magic wand and change overnight. It doesn't. It takes time to change people's consumption habits. But I feel very bullish that we've got the programs right now that can; and our R & D teams, as everyone else in the industry, is working aggressively to come up with a natural sweetener.

Okay, thank you.

And then, in terms of your capital spending as a percentage of sales -- its been trending lower over the last few years, so what have been the key drivers behind this? And then should we expect this trend to continue?

I think Number 1 is RCI, and I'll let Marty answer the rest of it.

Well, Larry answered it, Bonnie -- remember also, when we spun out of Cadbury, there were some initial investment programs -- IT, information technology to replace the infrastructure that we were losing from Cadbury. And that's winding down as we speak. Handhelds related to our delivery, and all that technology investment is down. Our cold drink investment, which was an aggressive program -- as Larry said before, we more or less had no presence with vendors and coolers coming out of Cadbury; that was a five year view on our part.

But lots of RCI activity around effectiveness of those assets that we're finding increasingly opportunities to replace existing assets and curtail the purchase of new assets. Lots of RCI work in warehousing. Obviously, with less inventory we don't need to spend capital on warehouses, nor do we necessarily have to spend capital on racking warehouses and other in-warehouse capital items, because we reduced level of inventory.

Our first half trends are running really below the 3% I talked about and we'll stick with 3% now. But I think we're comfortable that the business can survive just fine at that level or possibly in the future even lower.

That's helpful. And one last quick question if I may.

What percentage of the 76% of the ACV in grocery does your TEN now represent? Did you mention that, Larry?

The TEN is the 76%.

Oh, okay. Because in the first quarter I think you mentioned TEN was headed -- achieved a certain percentage of that 76%.

Oh, no. I think what I mentioned in the first quarter, we were running the TEN of the total core trademark was a little over 7%.

Okay, so it's increasing?

And that's increased a little bit again.

Okay, thank you so much.

You're welcome.

Your next question comes from Steve Powers of Bernstein.

Hey guys, thanks. I know you plan to spend $30 million incremental on TEN marketing this year. Just first question to clarify -- I thought that was supposed to be fully incremental to last year's base, such that overall marketing would be up roughly $30 million plus year-over-year. First -- is that still right?

I think, Steve, we had about total $25 million up, not $30 million.

$25 million up total, okay. So in the first half, you spent essentially incremental $11 million, with $23 million go into TEN. So as you look towards the back half I think that implies roughly $10 million more on TEN, and about the same amount on other stuff. Could you just give us a sense for where that spending will occur? And to some extent the split Q3 versus Q4?

I'll give you some color on it. So you've got the numbers more or less correct in terms of balance of year spend. And again, you're probably upwards of $10 million, maybe a little less on TEN. Larry talked about all these innovations and activities we've got marketing dollars behind, so we fully intend to spend those.

I will tell you, though -- against that, I think we're doing a much better job now looking at our marketing effectiveness. I'm pleased by some of the internal data that we've recently seen from some people outside that are helping us with those and finding other ways to actually maybe reduce marketing so I'll give you some anecdotes. You know, the couponing -- traditional couponing -- we're finding today that digital couponing is becoming much more effective and that will probably cause us to maybe reduce our production costs of traditional paper coupons, for example.

We will always do, as we look every quarter at what's happening in various local markets where we have specific strategies -- I'm just going to tell you we're always going to look at that, and if it doesn't make sense to us mostly from a timing point of view whether it's our market or our bottler markets in terms of execution and retail -- we've done this in the past and we want to make sure everything is well integrated. So we've got lots of great innovation we've got spend behind, but I'm here to tell you we are always going to look at those numbers hard and make sure that we're getting everything we can out of them, particularly in this environment.

Okay, that's great.

And then this also may be a bit technical, probably for Marty -- but on the Q1 call, I think you said that you didn't anticipate any LIFO reserve adjustments being either positive or negative on the year. I think it was $7 million in positive in Q1 but mutual was the outlook for the year. Now we've got another $11 million flowing through this quarter and incremental $30 million positive on the full year. And perhaps just a bit of an accounting refresher -- but what's changed, what's driven the revised outlook? And is it fair to assume that benefits EPS by about $0.09 or $0.10 versus the Q1 outlook?

Okay, Steve I'm not going to give you an accounting lecture. But of course the simple method LIFO expenses the dollars of inflation before the actual expense associated with the physical products. And the big factor here were apples last year. So, in essence, last year we took a LIFO charge; we actually expensed the doubling of the price of apples -- if you think about long before we ever sold any Mott's apple sauce that had those apples in them. But that's just the way the accounting works.

The reason we had no point of view coming off Q1 is because this is a crop. Last year's problem was the result of a May freeze, and therefore the price went up. And so coming off Q1 it was too early to make a call on what might happen to the price of these commodities. So now that we're midway through the year we're beyond any possibility of a freeze in the apple orchard. (inaudible) We're pretty confident that when we now do our seasonal buy of apples coming up here soon, that they are going to be more or less half the price they were last year, and that means the inflation is going to be way down and under LIFO that means we're going to, in essence, recapture some of that we expensed last year.

Is there any double accounting between your 1.5% commodity cost COGS outlook and this LIFO dynamics? Or are those two separate issues in what you're guiding?

Separate.

Okay. And then, just lastly, I guess more strategically -- you guys have said in the past you've been looking at different opportunities, especially in some of the smaller markets where maybe you could run distribution differently, whether either optimized through RCI or partnered with other forms of distributors, more structurally changing the way you go to market. Any progress there you could share? Thanks.

Yes, we've had some down in the Southeast part of the United States where we've looked at some of our markets that didn't quite have the scale because of some changes in the Coke and Pepsi system. In some of the markets we use beer distributors. Roger has a team that stays focused on what we referred to as the tail markets, and we've seen tremendous improvement in those. We also use RCI down there on those markets on how can we go to market more effectively. And we've seen some real benefits from that, too, Steve.

Thanks a lot.

Your next question comes from Caroline Levy of CLSA.

Good morning.

Good morning, Caroline.

So just want to ask you about the environment. It's sort of interesting, because I believe Coke, Pepsi, and you have all said your shares are stable to up in CSDs. And I don't know if you have any data that could back up your commentary. Did I get that right that your share, you thought, was up a bit?

Right, on Nielsen our share's up. All from Nielsen. -- volume share and dollar share.

So what is your actual share level at this point?

The total share level is -- let me see what -- the total for all of our brands? Or are you looking for something?

CSDs. I was just thinking about CSDs.

They are somewhere around 21%.

So might the difference just be fountain? Or is somebody not accurate here?

No there's no fountain in there, but your private label is really going down big.

Oh, I see. Okay well that's--

People are going much more for the branded products.

That's very interesting. And why do you think that is happening despite price increases? Are those higher?

Well, I think with what all of us spend, and the awareness, and just quality products.

So that's good news. And have you seen the weather -- with the change in weather, have you seen the traction take hold in your categories again?

The July is starting off encouraging. We finally got some warm weather.

That's good news.

It's three weeks in, and we don't know how much of the softness was the consumer and how much was the weather. But you know, we should be able to update you on that on the third quarter where we see it at.

Thank you. And what has been the retailer's response to the disappointing volume in the first half of the year? Have they pushed back on you on shelf space at all? Or are they trying to allocate more shelf space to different products?

We've been able to hold all of our shelf space on our core products plus incremental shelf space for TEN. I think if I would say that I've seen anything out there, the retailers were starting to margin up and I think they looked at it and said, with us margining up, our volumes are down and we're starting to see retailers bring that margin down a little bit, kind of reinvesting.

If we go back and look at the past before we all got so rational on pricing and disciplined, a lot of these retailers would use them as loss leaders. They would invest in the ads. But I think everybody kind of found that was just doing a stock up and didn't sell any more; and so right now, I think we're going to start seeing if there's better pricing out there it will be a retailer that is bringing down the margin at certain times. They've kind of margined up. I don't think you're going to see any -- I'll go back to very disciplined pricing, very rational. You can see that in the Nielsens, I don't know why any of us would change that.

Just lastly -- if you could go back to TEN, and just repeat, because I think you did talk about this -- but what you know about trial repeat, how this looks versus other product introductions. Just a compare and contrast on this.

We always set our internal targets. We don't ever share those, but we set out internal targets by brands we've seen that have been successful, ours and others. When you look at what we're doing on trial, we're exceeding our expectations. You look at repeat -- it's slightly above where we set our targets, so we're very pleased with that. Our ACV is at 76%. That's considerably above where we thought it would be and we feel we'll have full distribution by Labor Day.

Thanks so much.

Your next question comes from Judy Hong of Goldman Sachs.

Thank you. Good morning everyone.

Good morning, Judy.

So I guess my question is really on the Dr Pepper brand. Just the volume performance -- obviously the category challenges have been there, but it's just how are you assessing the brand performance over the last few quarters where you've seen the brand declining in volume? Maybe talk about DP TEN versus the core Dr Pepper brand performance, and whether you think the spending allocation, the investment that you're making on the other core TEN platform has taken some focus or investments away from the Dr Pepper brand itself? And just going forward, how are you thinking about the growth prospects for that brand?

Absolutely. We're still very pleased. We're not happy that Dr Pepper is down, but when you look at the category where its performing, we're still pleased with that. We've got Dr Pepper TEN -- that is completely separate marketing; it's incremental to what we do on Dr Pepper. I think you'll see in the second half a lot more activity out there. We have a very strong third trimester for football with lots of activity; this time we will tie TEN in with it.

We've just got back from all of our bottling partners with lots of incremental activity for Dr Pepper TEN and our brand health scores -- as we get them in, we constantly look at that, Judy, whenever we see softness we want to make sure that it is category, not our brand. We have gained on every one of the scores on our brand, so we still feel very confident.

I think you're going to also see some improvement in fountain food service. We just picked up the balance of the Wendy's accounts for Dr Pepper and have a hunting permit to get Diet Dr Pepper in them. So I'm excited about the back half. Not real thrilled with the first half but there's a lot of factors that kind of lean towards that. But what I can see in the plans we have in place, we're excited about what we can do in the back half.

And the alignment with your bottling partners on the Dr Pepper TEN product -- has that been better? And what changes have you made?

It's very good, yes. We're working together. We've got programs across all of our [Peso], our independent system -- they're very supportive of it. We've got programs in place and all of us want to see a better back half and hopefully don't have the cool and wet weather we had before.

Okay. And then, Marty -- just on the commodities side -- obviously, the outlook has gotten a bit more favorable. If you look at corn prices in some of the agricultural complex, potentially we could see further decline in those commodities. Can you just share your perspective on the outlook maybe for end of this year into 2014? Are you starting to layer in more hedges to take advantage of maybe a more favorable pricing? And to the extent this more benign commodity environment continues, do you still think that the pricing environment will continue to be rational on the beverage category?

Judy, on the commodity front I'll tell you we have some of our commodities were fairly well hedged through the balance of this year. And at this point, I won't quote numbers, but we've got some hedging out into next year already. With respect to the balance of this year, I would say -- and the reduction from 2% to 1.5% -- you should all think about that as really a Q4 factor, rather, with Q3 still being up about 2%. And then we're expecting right now a pretty benign year-over-year comparison -- sort of flattish in Q4.

We haven't changed our practices or view of how we think about the hedging, so we're not fully hedged on a roll forward basis, but we are fairly well hedged. We more recently tend to look at corn as a more seasonal buy. That was a change we made a year or so ago and that benefited us. We don't see any pressure coming from the commodity front as far out as we can see.

Okay. Just lastly, on your Free Cash Flow guidance -- I'm not sure if you updated it, but I think the last time the guidance was around $675 million to $700 million; you know, would see CapEx coming down. Would it be appropriate to think that Free Cash Flow guidance is also coming up? And whether that perhaps changes how you're thinking about capital allocation in terms of buyback and dividends?

I think, Judy, you're more or less still where we are in terms of Free Cash Flow generation. If you think about wherever your net earnings number is your starting point -- yes, reduced capital spending will improve that. Also I'll tell you that in the first half numbers, which were a little weaker, there's some timing of tax payments and we're going to lose a little bit of some tax cash flow. No impact on our accounting results, just because of things like bonus depreciation changing the law the beginning of the year, its been reduced, and we were taking full advantage of that.

But I'm still comfortable with where your number is, and no it hasn't changed our allocation. We're still committed to the $375 million to $400 million in share repurchases and we have plenty of cash to do that.

It looks like the first half run rate is actually a little bit bigger than the full year guidance on the buyback.

Back half will be stronger on share repurchases.

Okay; got it; thank you.

Your next question comes from Bill Schmitz of Deutsche Bank.

Good morning.

Good morning.

Could you just talk about what the offset is to the changes in LIFO benefit? Because it sounds like commodities are relatively benign relative to the old guidance. So is it volume softness -- or what keeps your guidance the same, given the benefit from the LIFO change?

Well, okay, so the benefit of the LIFO change is roughly $0.10, so in reality it's a softer top line environment. And in essence, right now in the near term the LIFO benefit is compensating for that.

That's what I thought. But it's just the top line. Everything else seems pretty much similar. Is that fair?

Everything else is in line with our expectations.

Okay, great. And then most of my other questions have been answered, but does the re-franchising of the Coke system -- I know it's still early days -- how does that impact your business? And do you think it's going to be a net benefit or a net detriment? Or how do you think about that?

No, I think with the bottlers, they've talked about, they are all very good partners of ours. CCR is a very good partner. I think it will be pretty much business as usual.

Got you. And could it help you in some of the places where you're underrepresented, like Florida and the Southeast, for example?

If you look at the bottlers they've talked about, they all are Dr Pepper bottlers. And to my previous point, CCR has done a great job; they are great bottlers, great executers, and I'm very pleased with the bottlers are thinking about giving them to that are equally as good.

Got you. Well, I appreciate all your time guys, thank you.

Absolutely.

Your next question comes from Mark Swartzberg of Stifel Nicolaus.

Hey, good morning gentlemen.

Hey, Mark.

Question for you, Larry or Marty. More on the category than Dr Pepper per se, and I'm really focusing on the carbonated component of the larger LRB. What is your thinking about the long term? Obviously the quarter was difficult for everyone, but these are not new issues. And you have the advantage of not having cola, and yet your non-colas are not doing as well as you would like. And you can tease out some weather and some more temporary factors, but do you think that it's right to think the category even can get back to zero? How are you thinking about carbonated in both a cola and non-cola from a longer-term perspective?

Mark, I'll start and Larry may inject some of his own comments. I think it's a great question, because we're all sort of wrapped up in what's happening currently in the marketplace and whatever we all think the impact of the various factors are, be it health and wellness, be it the consumer/economy. You know, we went back and looked, and all of you that have Nielsen have all of this data. We actually went back and looked at both volume and retail dollar prices paid for colas and non-colas going back to 2010, because I think that was the earliest period that was restated for Walmart in the Nielsen. It's very interesting -- if you look at -- these are trailing 12 months or full-year numbers. So for calendar '10, cola volumes as reported by Nielsen -- all channels were down 10.2%. Non-colas were down 5.4%, so they were still down -- again, both being impacted by whether it was pricing that was going on during this time frame, consumer, changes in behavior, attitudes -- would not have presumably mattered for cola versus non-cola.

If you look at dollars spent at retail over that same time frame, colas declined 1.7%. Non-colas were actually up 2.3%. And this is 12 months '10 versus 12 months ended June 15 this year, the latest Nielsen period. So you know, it still looks like a negative trend where recent data you'd say would still say there's still some downward slope here. But that is, I think, still a strong statement over recent past about the strength of the non-cola sector of the total category.

Right. So you're in a better place than Coke or Pepsi simply because of how the portfolio is situated and the way you've been managing it. And yet you know there's still not numbers that anyone would applaud. So what, in your opinion -- because you're making capital spending decisions, you're making marketing spend decisions, you're making decisions that are far beyond the next six months -- how is your thinking about even just the non-cola component potential? How is it different than it was a year ago, three years ago? I mean this has been going on for awhile.

I think again we'll take the 2010 base that Marty had there. And Mark, we're looking at so many things we would be on this call until dinner time. But I think one is, you've seen what we've done with TEN. We see we're bringing in people that have left the category or had never even been in the category -- 51% of the sales are people that had left or not been in. That's very encouraging to us and we'll stay behind that to keep that going.

As I mentioned earlier, the work all of us are doing on a natural sweetener -- people love carbonated soft drinks. They love the bubbles. They love the flavor. But they have concerns about artificial sweetener, so we're not oblivious to that. We're working on that every day and I think we all are. That will be something that helps.

Another one, we're spending an awful lot of time on what our packaging is. What is the right price point? We're all out there running these 4454. Well, that point of sale has a large dollar ring there that I think could be a stop sign. So do we need to price differently without bringing price down, but it's by packaging, it's by channel? We're spending a lot of time there. So it's a large combination of items we're putting together, and like I've told you and several before -- you'll always see me with a very strong focus on carbonated soft drinks, not only because it's 78%-79% of our mix, but my blood is carbonated. And I truly believe we can turn this around and make this thing work.

That's great. And if I could just close that topic -- simply does it -- you take all that you just said, is it fair to say that your view -- your multi-year view -- is lower today than it was a few years ago? Are we still -- I presume we're in a negative territory for the larger CSD space. And then you're in a comparatively better but still negative territory from the non-cola component.

Yes, I'd be very wrong if I told you that I didn't think that it was going to be lighter on the CSD. You know, especially probably going into 2014. But we're still not taking our numbers down. We're going to outperform the category with the visibility I mentioned earlier that it's tough to see right now. Our major goal is that we look at it and say we will outperform the category and we build our plans around protecting our margins.

And I think we're going to have a lot more upside in our non-carbs, as Marty mentioned. We're lapping now. The pricing and everything we had to take with Mott's. We're seeing better activity with Walmart right now with our Hawaiian Punch. The Hawaiian Punch has always been a big brand for Walmart, big brand for us; and we're both looking at it saying we need to fix some things there. So I think we're going to see more growth, more focus on growth in the non-carbs and a dedicated approach to profitable volume in CSDs.

That's great. Thank you, gentlemen.

This concludes this mornings Q & A session. I'd now like to turn the call back over to Management for any additional or closing remarks.

All right -- well, I want to thank everyone for joining the call today and for your continued interest and investment in Dr Pepper Snapple Group. Thank you very much.

Thank you, ladies and gentlemen. This concludes this mornings conference. You may now disconnect.