Keurig Dr Pepper Inc (KDP) 2013 Q4 法說會逐字稿

Good morning, and welcome to Dr. Pepper Snapple Group's fourth-quarter and full-year 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 wilt 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, Brandy and good morning, everyone.

Before we begin, I would like to direct your attention to the Safe Harbor statement and remind that you this conference call contains forward-looking statements, including statements concerning our future financial and operational performance. These forward-looking statements should also be considered in connection with cautionary statements and disclaimers contained in the Safe Harbor statement in this morning's earnings press release and our SEC filings. Our actual performance could differ materially from these statements, and we undertake no duty to update these forward-looking statements.

During this call, we may reference certain non-GAAP financial measures that reflect the way we evaluate the business, and which we believe provide useful information for investors. Reconciliations of those non-GAAP measures to GAAP can be found in our earnings press release and on the 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. Good morning, everyone.

It is no secret that 2013 was a challenging year. We're up against the toughest CSD category headwinds I've seen in my career. And, yet our teams remained focused on delivering against our strategy. I'm proud of what we were able to accomplish.

First, we launched our core 4 and RC10 platform nationally, providing regular CSD consumers with an option to enjoy the taste and mouth feel of a regular CSD but with only 10 calories per 12-ounce can. We launched Snapple regular Half 'n Half lemonade iced tea on the heels of our successful diet Half 'n Half launch in 2012.

We brought Hawaiian Punch to the morning occasion with Aloha Morning, giving both moms and kids something to get excited about. The same great Hawaiian Punch taste with 40% less sugar. And, we continue to expand our reach into the segments leveraging our allied brands. In the coconut water category, we grew Vita Coco volume 37%.

We continue to connect and engage with our consumers through innovative and powerful marketing programs, including our well-known and loved Dr Pepper college football tuition program, and with our strong brand equity scores, we know these programs resonate with our consumers.

From an execution standpoint, we continued to gain distribution and availability of our key brands across key packages with Snapple increasing 3 points in grocery and almost 2 points in convenient and gas. And, Mott's increasing over 3 points in grocery. Our CSDs gained space in convenient and gas, despite the category headwinds.

We gained over 43,000 new fountain valves, providing thousands of additional sampling opportunities and brand impressions for the Dr Pepper trademark. RCI continues to be the foundation on which the organization operates, gaining more and more momentum every year. I'm pleased to say that, after three years, we exceeded our initial financial target with $169 million in annualized cash productivity.

But, as you have heard us say, RCI never ends. It is simply the way we do business.

We returned all of our free cash flow to our shareholders, totaling $702 million in 2013. And, as further commitment to our shareholders, last week, we announced an increase to our quarterly dividend of 7.9%.

Moving on to results, for the quarter, bottler case sales declined 2% on 3 points of positive price and mix. Dr. Pepper declined 1%, and our core 4 brands declined 4%, as we continue to face strong category headwinds. Hawaiian Punch declined 8%, while Snapple grew 3%. Mott's and all other brands were flat.

For the year, bottler case sales declined 2% on 3 points of price mix. Our flagship, Dr Pepper, declined 2% for the year, and our core 4 brands, which include our TEN products, declined 1%. Both outperforming the overall CSD category.

Hawaiian Punch declined 9% on lower promotional activity, and overall weakness in the juice drink category. Snapple grew 2% for the year, and Mott's grew 3%, as we continued to close distribution gaps across both juice and sauce. All other brands declined 1% for the year.

On a currency-neutral basis, net sales declined 1% in the quarter. Core operating income increased $30 million, or 10%, and core EPS increased 18%. For the year, currency-neutral net sales were flat. Core income from operations, increased $40 million, or 4%, and core EPS increased $0.28 per share, or 10%.

Our TEN products are important and strategic priority for us. And, we will continue to invest behind them in 2014. We believe this is one of the important components of innovation in CSDs to bring regular consumers who either left the category or cut back on their consumption back to the category and to the brands that they know and love.

Our first year results are encouraging. A recent Nielsen home scan study shows that 52% of TEN's purchases are incremental to the CSD category, proving that we are bringing back lapsed consumer occasions.

The repeat rates on the platform are strong, nearly 3 times higher than trial rates, telling us that, once a consumer tries the product, they will come back for more. Based on these learnings, we will focus our 2014 efforts on consumer education and awareness to drive trial of products and our new media campaign does just that.

We have teamed up with Chelsea Handler for our anti-solution campaign, telling consumers to not give up what they love, and drink TEN. Chelsea is being featured on packaging, in-store displays, merchandising, and our digital campaign. We will continue to drive sampling with a national FSI and other valuable offers.

Now, let me spend a few moments talking about our 2014 priorities and plans. Our fundamental strategy hasn't changed. We will continue to build our brands and execute with excellence in the marketplace. All underpinned by the principles of RCI.

I just said we are committed to the TEN platform, and we will continue to drive it in 2014. We're launching some exciting new innovation on several of our key brands, ensuring that we are providing consumers with options to support a balanced lifestyle. And, our sweetener development has successfully progressed to the point of enabling us to test all naturally sweetened 60-calorie versions of some of our brands in 2014. And, as we continue to develop and execute consumer programming, we are sharpening our marketing return on investment capabilities, ensuring we optimize every dollar we spend and actively shifting dollars from low-return vehicles into higher return vehicles.

Execution is key in this business, and we will continue to strive for excellence through our third-party bottling partners and our own DSD, gaining incremental displays and points of interruption, while ensuring that we always have the right product, in the right package, at the right price, in every channel.

Winning with the Hispanic consumer is critical. With our strong flavor portfolio and our dedicated Hispanic sales and marketing team that are focused not only on national program, but also on local activation and programming and strategic markets, we are poised to win. From an RCI standpoint, goal deployment is in place across the organization, ensuring alignment and focus on our key initiatives. We're also investing in our strong performing leaders, training them to become stewards of RCI throughout the business.

We've got a great starting lineup of programming for 2014. Dr Pepper returns to the ACMAs, showcasing Diet Dr Pepper and Rascal Flats. We will give away a VIP experience and private concert with the band and free music downloads on our 20-ounce bottles. Our popular, one-of-a-kind campaign features one-of-a kind individuals like Grammy award winners, Macklemore and Ryan Lewis, and recording artist, Romeo Santos.

7Up is teaming up with project 7, an organization that makes and sells every day items and whose sales helped fund seven areas of need around the world. Millennial consumers can make every bottle count by redeeming under the cap codes on 20-ounce bottles to choose which area need receives the benefit.

And, 7Up is not stopping there. We're also teaming up with seven electronic dance music DJs to make the brand synonymous with EDM culture. We with have a new media campaign with on-site activation and sampling at key festivals in the strategic markets.

We are leveraging two of our largest trademarks, Canada Dry and Schweppes, to capitalize on the growth in carbonated water category. We're expanding Canada Dry sparkling seltzer waters into new markets, as well as launching a new peach mango flavor, and we will launch a line of Schweppes sparkling waters nationwide.

Moms and kids will love the new Mott's juice drink line, in three bold flavors like wild grape surge. The line is made with real fruit juice, has 40% less sugar, and no artificial sweeteners, and we're adding new consumer-preferred flavors to our successful line of snack-and-go applesauce pouches.

Snapple apple is one of the brand's most popular single serve flavors, and this year we will expand into a take-home packaging. We will also add new flavors to the current 64-ounce take-home package.

Consumers have told us they want a less sweet tea. So, we're testing Snapple straight up tea across several markets. Straight up tea has a true tea taste and is made from all natural black tea with a touch of real sugar and only 40 calories per serving.

And, we will continue to leverage our allied brands, gaining entry into emerging and growing categories, with vita coco and Bai, an all-natural juice made from coffee fruit. I'm confident these programs in place, we can drive the business in 2014.

Now, let me turn the call over to Marty, to walk you through some of the financial results and our 2014 guidance.

Thanks, Larry. Good morning, everyone.

For the fourth quarter, reported net sales declined 1%, in line with our previous guidance, resulting in net sales that were flat for the full year. Sales volume declines of about 3.5% in the quarter, and an unfavorable trade comparison to the prior year, were partially offset by almost 2 points of package and product mix and just over 1 point of pricing.

Reported gross margins were up 100 basis points in the quarter, increasing from 59.2% last year to 60.2% this year. Price mix increased gross margin by approximately 80 basis points, but was offset by lower volumes and an unfavorable trade comparison to the prior year.

Based on our year-end inventory balances, which included a higher volume of apples, but at significantly lower prices than last year, we recorded a $14 million LIFO inventory benefit in the quarter. This compares to an $11 million LIFO inventory charge in the prior year, improving year-over-year gross margin comparisons by 170 basis points. This simply means that with respect to apples, we benefited this year by lapping the higher cost for apples a year ago, as apple prices are now at normal historical prices.

Changes in certain commodity prices at the end of the quarter caused us to record a $3 million unrealized mark-to-market loss on commodity hedges, with approximately $4 million recorded in cost of goods, offset by a $1 million gain reported in SG&A. This compares to a $1 million unrealized mark-to-market loss a year ago, which was all recorded in SG&A. The net effect of these items reduced reported gross margins by approximately 30 basis points.

Higher input costs, primarily PET and packaging materials, combined with certain higher manufacturing costs, reduced year-over-year gross margins by 80 basis points. However, solid RCI productivity improvements enabled us to offset about 40 basis points of this decline.

SG&A for the quarter, excluding depreciation, decreased by $28 million. The unrealized mark-to-market comparison I just mentioned, reduced SG&A by $2 million. And, as we highlighted on our third-quarter call, marketing spend declined as expected by $9 million, due to this year's phasing, resulting in full-year marketing spend of $5 million, or a little over 1%. We also benefited from lower people-related costs, including favorable health and wellness cost trends.

As you saw in our earnings press release, in the quarter, we recorded a $56 million noncash charge related to our intent to withdraw from a multi-employer pension plan. This was excluded from core earnings. The paydown of this liability is expected to occur over approximately 36 years at annual amounts similar with existing funding for this plan.

Depreciation and amortization expense was flat in the quarter at $29 million. Reported operating income for the quarter was $264 million, compared to $292 million last year.

Core operating income of $323 million, as shown in the reconciliation tables in the press release, was up 10% from $293 million in the prior year, with the core operating margin up 240 basis points to 22.1%. For the full year, core operating income of $1.123 billion, representing 18.7% of sales, was up almost 4% from last year's 1.083 billion, which represented 18.1% of sales.

Below the operating line, net interest expense for the quarter was $28 million, $2 million below last year. Our effective tax rate for the quarter was 34.2%, and our core income tax rate was 34.8%. This brings our full-year, core income tax rate to 35.3%.

Moving on to cash flow. For the year, cash from operating activities was $866 million, and capital spending continued to decline to $179 million. This brings full-year reported free cash flow to $687 million, or 105% of 2013 core net income of $655 million. For the year, total distributions to our shareholders were $702 million with $400 million in share repurchases and $302 million in dividends.

Our actual year-end outstanding shares have declined below 200 million, or 198 million to be more precise. Since the 2010 inception of our share repurchase program, we have repurchased about 62.5 million shares at an average price of $38.86. As Larry mentioned, we remain very committed to returning excess cash to our shareholders over time, as we further demonstrated last week, with our announcement of a 7.9% increase to our quarterly dividend.

Now, moving on to 2014 full-year guidance. As we enter the year, the CSD category continues to face significant headwinds, with ongoing consumer health and wellness concerns, particularly around artificial sweeteners, as well as sugar content, and we expect this trend to continue in the near term. We will remain focused on driving our important innovation platforms, including further advances in our sweetener capabilities, to build our brands by providing consumers with a variety of great-tasting products to support their balanced lifestyles, drive execution excellence in the marketplace, and continue to develop broad organizational RCI capabilities, which we expect will deliver further financial improvements.

Based on the plans we now have in place, we believe our 2014 net sales will be flat to up approximately 1%. With 80% of our volume facing CSD category headwind and the impact of the one peso per liter sugar tax on our business in Mexico, total Company sales volume is expected to decline over 1 point, with growth in our non-carb portfolio and allied brands partially offsetting these declines. On a total Company basis, we expect combined price and mix to be up just over 2%.

We have raised prices in Mexico, as a result of the sugar tax, and expect this will contribute approximately 65 basis points of this positive pricing impact. Our January 1 concentrate price increase will drive another 40 basis points of growth, and the remainder will be mix, from growth in our higher-priced, non-carb, and allied brands.

Moving on to cost of goods sold. Considering our hedged positions and current market prices for our unhedged positions, we expect packaging and ingredients deflation, primarily from lower sweetener and apple costs. This is expected to reduce total cost of goods, inclusive of LIFO, by approximately 1.5% on a constant volume mix basis.

Separately, the impact of the Mexico sugar tax, which is levied based on manufactured volume, will increase total cost of goods by approximately 2%. For modeling purposes, remember that growth from our non-carb portfolio will also increase cost of goods dollars. We currently believe that the net effect of all of these factors should result in 2014 gross margins consistent with those achieved in 2013.

We're seeing some upward pressure on transportation costs, which is expected to add approximately $17 million to our cost base in 2014. We're expecting an increase of approximately 10%, or $12 million, in health and welfare costs, due to medical cost inflation and fees we will pay under the Affordable Care Act. General inflation in our field labor costs will also increase total people-related costs by approximately 2% or about $20 million. RCI productivity benefit will help offset a portion of these increases.

We're continuing to enhance our marking return on investment capability, and we're working harder than ever to ensure that we are getting the best return we can. We are shifting marketing dollars across media platforms, from traditional to digital, and focusing more programs and tie-ins with retail activation. In addition, spending across our TEN platform will continue to be approximately $30 million.

As a result, we expect marketing spend to be approximately 7.5% of net sales in 2014. Though this is lower than our marketing spend rate in 2013, it is still a very healthy investment level for the business.

Now, moving below segment operating profit, our net interest expense will be around 4.4% on our $2.5 billion of debt, and our full-year core tax rate is expected to be approximately 35.5%. We expect capital spending to be approximately 3% of net sales, and we expect to repurchase approximately $375 million to $400 million of our common stock in 2014, subject to market conditions. Considering all of these items, we expect full-year core earnings per share to be in the $3.38 to $3.46 range.

Before I turn the call back over to Larry, let me highlight a couple of phasing items that will help you update your models. First, the packaging and ingredients deflation will be skewed toward the first three quarters of the year. Second, the transportation costs increases will be spread fairly evenly across the year. Third, people cost inflation, including the health and wellness increases, will be more pronounced in the third and fourth quarters.

And finally, remember that we are no longer recording other income associated with our former tax indemnity agreement with Mondelez, so you will need to remove these from your models.

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. We continue to execute our strategy in a very challenging environment, ensuring that we build our brands while executing with excellence in the marketplace. We have been and will continue to launch new innovation that offers consumers options to help them lead balanced lifestyles.

We remain focused on managing the business prudently for the long term, as reflected in our full-year results. We will continue to invest in our brands and our people, while ensuring we optimize every dollar we spend.

RCI is the foundation of our business. And, it will continue to drive improvements and provide financial flexibility. And 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 from JPMorgan.

One quick question, a housekeeping question, which is on where Corporate came in for the quarter? You have the segment operating profit numbers that I'm assuming we have to make adjustments for the pension charge. That would be the first question.

And then, secondly, you can talk about sort of the underlying pricing dynamic in the North American CSD category? [Koch] has actually talked about it maybe getting a little bit better in the first half of the year, but what are you expecting and building in as we get closer to the summer selling season? Thanks.

Good morning, this is Marty. Let me take care of the housekeeping on the numbers. The $56 million noncash pension charge in the segment table is actually included in packaged beverages. Not in Corporate.

Great. Thank you.

John, on pricing, we think the pricing for the year is going to be still reasonable. We saw a little activity towards the end of the year for the holidays. But, so far this year, it is looking good. I think everybody will be looking at what we can do by market opportunistically, but we're not planning a lot of pricing in our plan. And, we think where the prices are at now, we can do quite well with that.

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

Hi, good morning.

Good morning, Bryan.

Just a couple of questions regarding the outlook. I think, and Marty -- just want to make sure I'm understanding, we're building a bridge for operating income for 2014. Just backing into some of the other items you have given in terms of the guidance, operating income will be up somewhere in the 5% or 6% range. And, with revenues flat to plus 1%, gross margins flat, it means the SG&A leverage is going to drive, I guess, about 4 points of that. And so, we look at that SG&A leverage, how much of it is just the marketing expense coming down, and how much of it is mix or RCI [saving]? I'm just trying to get a better understanding of what the drivers are of that and how visible that is? How variable that might be?

Bryan, I think you have it. As we've guided, flat to up 1% on the top line. Constant gross margins, as a result of the pluses and minuses that I went through in my script. We're really pleased with our SG&A productivity. This year, we measured about $16 million in year-over-year operating income improvement as a result of RCI initiatives. And, we're expecting, as I said, in my remarks, notwithstanding some of the inflationary items -- whether they be health care, whether they be transportation costs, we are going to beat back a big chunk of those with planned RCI improvements.

So, SG&A is going to be a big contributor. As I said in my remarks, we are going to spend 7.5% of net sales on marketing. A little lower than this year. But, if you look back historically, in the range where we have been, and I will repeat what I said to many of you as I have traveled. That our learnings from our MROI developing capabilities is giving us some insight into where we should spend money and where we shouldn't spend money, and we're really comfortable with it.

We're funding, as Larry said, all of the important initiatives next year, including our rolling out some test products that we think will be squarely within the cross-hairs of what consumers are going to be looking at for naturally sweetened beverages and reduced calories. And, that's where we settled on the marketing budget for next year.

Okay. Thanks for that, that clarity. And just, Larry, maybe if you could just give us maybe a first impression -- any first impressions you've seen in terms of how consumers have responded in Mexico to the higher prices? And, how the market has -- or, how the industry has dealt with it? If you can give any color at all in terms of how that has gone so far, that would be helpful.

Really, Bryan, it is still so early with it just coming out, and a lot of it has got some carry-over and it is not completely across the market. We are seeing it -- there is an impact. But, the size of it, I would be afraid to even try and dimensionalize that right now.

You said that consumers might have bought ahead of the increase? Like there was any pantry loading?

We didn't notice it in December. Our trends stayed pretty steady through December.

Okay, thank you.

You're welcome.

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

Thanks, good morning.

Good morning, Judy.

So, it is really admirable that you're doing really well on the cost side and growing profit in the context of a challenged volume situation. I guess my question is, just really thinking about the industry and your business over time, what can we really look forward to, to get volume growth again? And, I guess, in the context of the marketing spending coming down -- and I hear you, you really want to find the right opportunity to spend money. But, just really want to understand how you are thinking about the growth opportunity for some of your core brands? I think the industry is challenged, but just beyond that, can you do more to really accelerate top line growth?

Well, rest assured, Judy, we never stop looking at that. As I said in my prepared remarks, we expect the headwinds to continue in 2014. I love how the year has started so far. The weather has been so wonderful. It kind of ties right into the soft drink business. But, I'm bullish on how we have started the year even with the weather. We will never stop looking at ways to grow. But, we want to make sure that all of that growth is profitable.

As I mentioned, we are going to be testing in select markets across the US here in the not too long a time, a 60-calorie, natural-sweetened CSD in some of our top brands, and we feel good about that. Also, TEN, we're still getting new distribution of TEN. We just got some new authorizations on the West Coast, and so we're still bullish on that and we will continue to spend behind it.

As far as the marketing front, we're not concerned at all at where the dollars are coming in. We don't really worry that much what the dollars are. It is what we get in relevance and activation, and we're finding that we've got programs that are working better for us. As Marty mentioned, we're going to continue to spend $30 million on TEN, and we think we have every one of our brands where we can continue to build and grow them and get down the road and get past some of these headwinds.

Okay. And, Larry, I just wanted to get your thoughts on the announcement between Coke and Green Mountain, the partnership that they have announced. Whether you think that, that could potentially help the category? Bringing some excitement into the category? You've got a Snapple brand in the [Carrick] system. Is there some opportunity to expand your brand offering with the likes of Green Mountain? And then, just in terms of the potential impact on that, could have on your bottlers?

I think it was a great move for Coke and Green Mountain both. News to the category is always good. I think we all have a lot of work to do on how do we do this as partners with our bottlers. They're got franchises out there that my job is to make sure that we protect their equity, and we've also got to look at it and make sure we are doing the right things for the future on growth. We might have to do some things different.

So, we look at all of these things. Like with the K-cup, and now we've got Amazon coming out and Walmart.com, and there are changes to our industry. It is a different way of going to market than we have had before. And, I think all of us in the industry are sitting down, figuring out how do we do this the right way where it is a win-win for everybody.

Okay. Thank you.

You're welcome.

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

Good morning. Quick question. In 2013, you -- [responded] your pricing to your bottlers by 3.5% or so. It appears that you reduced discounts by another 150 basis points, increased marketing by $5 million. And, it seems that retail prices for CSDs are up a fraction, about 0.3 %. Given that we on the outside don't have all of the information, it would be great to hear any insights you have on this relationship as it seems for 2014 is setting up for something similar? And, just trying to get an understanding of how sustainable this is as a source of growth for you in the coming years?

It is Marty. I will deal with some of that. I'm not sure I can connect all of the dots there for you. I'm not sure I recognize all of the numbers have you there either. So, I will tell you, our concentrate price increases, net-net of funding, we paid bottlers in money that we put aside for our bottlers to fund various programs. In 2013, it is probably the 2%, but we maybe netted a little less. That is going to be where the number lands in 2014. And, I will only tell you, concentrate cost is a pretty small portion of the total package cost even to our bottlers.

Okay. My understanding is that your beverage concentrate business price mix was up 5%?

Yes.

And so, if you had 2% on the net, right? Is the other 3 points reduced discounts? Or, how do you get -- can you bridge the 5% for me?

There is a factor in our beverage concentrate business this year that actually relates to our fountain business. It has nothing to do with our bottle and cans business. We have increasingly -- and to our advantage are producing more fountain syrup in our system and taking some of that away from some of our bottlers. The syrup price per case or revenue per case is higher than simply selling the concentrate to them to make the syrup with.

So, we have been shifting some more fountain business in-house. It raises the revenues. It is good profit. It also raises the transportation costs, and now we are shipping syrup, but still good margin. It is not a factor we have talked much about this year, but it has a little bit of an impact on the beverage concentrate numbers.

Okay. That's great. Thank you.

Your next question comes from the line of Ali Dibadj of Sanford Bernstein.

Hi, how are you?

Good.

I wanted to focus in on first on the beverage concentrate margins. It makes sense that the pension prepayment withdrawal, I guess, is in there. My understanding, whether they would be ongoing benefits? And, if you endeavor to strip that out for us, can you talk a little bit about the RCI impact on that business unit in particular? Sorry, in packaged beverages? On that piece of the business, in particular? Especially from the opportunity within the DSD system that you have?

It is Marty. I will take it. You mentioned beverage concentrate, but you corrected to packaged beverages. I want everybody to understand that on a reported basis, the pension charge, the $56 million -- on a segment basis, its impact is beverages. Of course, we have taken it out on a core basis, but we don't provide core reconciliations by segment. So, that's out. I want to make sure everybody understands the pension liability as I said in my prepared remarks. From a cash funding point of view, which is what's really important here for us. The next 36 years, we will be making contributions to this plan more or less in line with what we have been paying. So, no impact there.

In terms of package beverages, you asked about -- RCI, of course, has had probably the biggest impact of packaged beverages. It has had a big impact in Mexico as well. We have made a lot of great progress in 2013. I have talked before about Lean tracks in warehousing and delivery and selling. And the better part of the roughly $16 million of year-over-year cost improvement we've had this year has been in -- that I quoted earlier as describable to RCI has been in packaged beverages. So, it has helped them quite a bit.

That's helpful. And so, if you try to piece that together with the volume delevers that you're getting, is there any way to quantify and really desegregate the volume deleverage that you're seeing given the volumes in that segment in particular? And, how you're offsetting that with RCI. It sounds like you are to a certain extent. But, how much are you offsetting?

Ali, here is what I would tell you about the economics of packaged beverages. As you think about it, first and foremost, in terms of declines in volume in CSDs, which of course hits them in terms of cost absorption. Where they are actually and where we are actually making improvement, besides just productivity through RCI, is mix shift in our non-carb portfolio. So, whether you are talking about Vita Coco -- Larry mentioned, it's up 37%. Our recent announcements on products like Bai and Fruit2O. All of these allied brands, as we call them, that are becoming very important in our portfolio. That have reasonably good growth prospects, particularly in the near term as we see it, is actually helping packaged beverages quite a bit.

Don't forget, too, that one of their 800-pound gorilla products is Hawaiian Punch. Now, we have talked a lot about Hawaiian Punch in the past. It hurts their top line when volumes are down but does not have such a meaningful impact on the operating profit line. So, you see the volume decline. You don't see it on the operating profit line. The SCSDs are down, but we claw back with non-carb product. By the way -- Mott's, we shouldn't forget Mott's did well again this year, both in sauce and in juice. These products shift the margin up in PB reasonably importantly.

Okay. And then, last question is what would Core 4 plus RC be in terms of volume growth without TEN? I guess, how does that -- what does that suggest about you're still 3% to 5% long-term, top line target that frankly I'm not sure anybody believes, and I'm wondering whether you still do, too? So, two questions there. One, just the TEN and then one long term, thanks.

They would have been down -- the Core 4 would have been down greater, but I think still above the industry. That's one of the reasons we're staying so focused on it, is that we see that we're bringing people back to the category that had left CSDs and then getting greater CSD occasions. So, yes, they would have been down more, but I think still above what we would have seen in the category.

Ali, it's Marty. Look, I took the 3% to 5% off the table last year at some time. Clearly, because, look, the environment as everybody on this call knows, is different today than it was three or four years ago. We understand better what is happening with consumer on the health and wellness front. Everybody sees how the CSD category has performed. We talked last year a lot about particularly the big reductions in diets, which was a relatively new factor versus two years ago. And the consumer. What is happening to the consumer's discretionary income, whether it is higher taxes, whether it could be impact of food stamp reduction. So, the world -- the world has changed, but we believe what we are going to demonstrate is that even on lower volumes we can make more money.

Look forward to it. Hope the industry learns as well. Thanks.

Thank you.

Your next question is from the line of Amit Sharma of BMO Capital.

Hi. Good morning, everyone.

Good morning.

Larry, you talked about artificial sweetener -- not artificial -- the natural sweeteners, and you're starting to bring it to the consumer. Can you point us a little bit more color in terms of what's the platform that you're using for that? What kind of incremental marketing spend we are looking behind that product? And, what is the internal expectation?

We are not going to give a whole lot because for competitive reasons, but we have worked -- our R&D team has put together a proprietary blend with Stevia and sugar that we have been very pleased with. One thing that we have been working on a while, but we will not sacrifice the taste of our brands. And, this will be a very limited test in certain markets that we will go out and the biggest thing for this is to get the consumer insights.

We're working with some national retail partners so that we can both look at the data. We hear what people are telling us -- they want natural. But, we want to see if they buy the natural. And, where should we put the natural? So, it is going to be a test that we're excited about, but I want to emphasize it is a test for -- we will decide later what type of a rollout we will do on it.

And, expectation is that this will stay within the Dr. Pepper bottling system? Not go to your bottling partners?

Right now, just doing the test, it is within our system, and then when we get the data points, that's when we share with our bottlers. We have talked to some of them already. They are very excited about it. I think everyone is excited about finding something natural. And, we want to be able to share the facts with them on what it does in these markets.

Got it. And, one more. Your private label competitor on the juice side indicated that they will probably be spending a little bit more in the juice category, and you talked about applesauce being one of the tailwind commodities. Is there expectation that you will also spend a little bit more to get volumes going in that segment?

We're happy with what our volume is doing right now. We have got plans in place that we put together last year, and we will stay with those. We have also got innovation coming in with our new lineup of Mott's fruit flavors. We have got more Mott's pouches coming out with different flavors. So, we're very happy where we're at in the category right now.

Thank you.

The next question comes from the line of Bill Schmitz of Deutsche Bank.

Hi, good morning.

Good morning.

Hey, also speaking to your private label competitor's call, everyone has been lamenting the capacity situation in the US. So, do you think there is room for a broader restructuring, depending how you look at your global manufacturing footprint? And, obviously, to the previous question, you talked about the 3% to 5% no longer being realistic. So, is there room incrementally for maybe a bigger, broader restructuring on the cost of goods sold side?

Well, look, as industry volumes go down, of course that is going to yield excess capacity, and everybody is going to have to decide how they want to deal with that. Some of our RCI is getting at this. But, it is going to be an industry issue for everybody, depending upon what they're making in those plants. Obviously, we see the Nielsen data. We're not really in the private label business to any degree. And, obviously, those volumes have taken a much, much greater hit than branded volumes. So, of course, it is going to put pressure on manufacturing capacity and what to do with that capacity.

Sorry -- go ahead.

There is a tradeoff in business and manufacturing, too, which is you can look at your footprint of manufacturing plants on the one hand, decide whether you need them all or not. But, on the other hand you have to deal with transportation. You've still got to get the product to the customer, and fuel prices today are a lot higher they were than 30 years ago when a lot of this manufacturing footprint was constructed.

Got you. It makes total sense. Just in terms of the advertising spending, going back to historical levels. Where is the money going to be spent now? I know you said you are going to mix a lot -- move a lot of stuff from conventional to digital. But, do you still think the coastal strategy is on hold, and then maybe where are you going to put the brand support besides TEN?

Bill, I think we talked in the last quarter, the quarter before, about some reductions in the coastal programs. Not because we don't think there is opportunity there, but we just couldn't see -- get the activation that would have made the spend most effective. And, there has been a lot of that in our -- a lot of those kinds of adjustments in our total marketing plans.

As I said, TEN, we're still investing in. Larry talked about it. It is early. It is important. So, we have made the adjustments we think are the right adjustments to make given what is happening in this environment and making sure that they are really aligned with what our field teams are doing in terms of execution at retail.

Got you. And then, how agile is that spending? So as things do come in a little better -- obviously, the weather comps are pretty undemanding. Will you let that flow to the bottom line? Or, will you take some of the incremental savings and put it back into the marketing line?

I have said this to everybody. We spend on that which gives us a return and what we think we should do, and it is not a function of spending top line -- unexpected top line margin dollars just to spend. I don't think anybody thinks anybody would do that anyway, but -- .

You would be surprised. (laughter)

But, in somewhat an independent decision with us, it first and foremost, is driven by the analysis and data we're presented with on the project.

Great. Thanks very much.

You're welcome.

Your next question comes from the line of Bonnie Herzog of Wells Fargo.

Good morning.

Good morning, Bonnie.

I was hoping you could give a little more color on your beverage concentrate business. Typically, this business -- it has outperformed your packaged beverage business, but this quarter, your volume was down quite a bit. So, could you drill down a little more on what some of the main drivers of this were? And then, really how we should think about this business going forward?

Bonnie, it is Marty. Good morning. I will take this initially. I would tell you their volumes were a little weaker in December than we thought, and we will see what happens in January, whether or not certain bottlers decide either not to buy concentrate before year-end or not. We have reason to believe some bottlers wanted to keep their inventory levels lower. And, I will also tell you, if you think about beverage concentrates versus packaged beverages, don't forget beverage concentrates is pretty much all reliant on CSDs. So, they don't -- [we're versus] as I just said, packaged beverages is starting to put more emphasis upon having greater success in the non-carbs.

And, of course, within beverage concentrates, it is reliant very much so on brand Dr. Pepper itself. So, like I said, December was a little lighter than we thought. I know we have also made a change in the concentrate. We have got something now called the high-yield concentrate. It is a more effective package to ship because it has less water in it, and I think some bottlers waited for us to put that product out and buy it in January instead of December.

So, just to clarify, you're already seeing this business improve from December?

I'm saying we see signs in January that maybe some purchases that would have otherwise happened in December may have happened in the first half of January.

Okay. Thank you.

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

Good morning. This is Jesse Reinherz in for Mark. Just a quick follow-up to Bill's question. Given the pressure we have seen on the CSD volumes and the excess capacity you mentioned, have you ever explored getting into the private label business? Or, perhaps seeking out additional co-packing arrangements? Or, is it just really going to be business as usual going forward? Thank you.

We have always done a little bit of contract pack. You see that in our numbers. We do it very opportunistically. We do it where we have capacity. We make sure that we're in the right shipping lanes. Because as Marty mentioned earlier, transportation gets very expensive on that. But, as far as wanting to get into it, that's not what we do. We build in enhanced leading brands, and we will continue to do that.

Okay, great. Thanks a lot.

Your final question this morning comes from the line of Michael Steib with Credit Suisse.

Good morning. I have just a follow-up question on the SG&A line in the quarter. I think you mentioned that of the $28 million reduction, some $9 million was due to phasing of marketing spend. My question is, what is the remainder -- where is the remainder coming from? Are these RCI savings? And, are these going to be carried forward into the next year? Thank you.

Michael, it is a combination, we said. We had some favorability in health and wellness costs, but I will also tell you that all of the RCI initiatives that are being deployed, particularly in our DSD business, all of that is showing up as productivity improvement in SG&A.

Okay. Great. Thank you very much.

Well, thanks again, for joining us on the call today and for your continued interest and investment in Dr. Pepper Snapple.

Thank you. This concludes today's fourth-quarter 2013 earnings call. You may now disconnect.