Keurig Dr Pepper Inc (KDP) 2014 Q1 法說會逐字稿

Good morning and welcome to Dr. Pepper Snapple Group's first-quarter 2014 earnings conference call. Your lines have been placed on listen-only mode until after 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, Lori, 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 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 in which we believe provide useful information for investors. Reconciliations of those non-GAAP measures to GAAP, can be found in our earnings press release and on the Investor's 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 call over to Larry.

Thanks, Carolyn, and good morning, everyone. We are very encouraged by our start in 2014. The teams, once again, executed our strategy in the face of continued headwinds against CSD's, both in North America and Mexico. We continue to build our brands, bring innovation excitement to our consumers and customers, while driving continued productivity throughout the business.

For the quarter, bottler case sales declined 1% on 2 points of positive price and mix. With CSD's declining 1% and non-carbs declining 2%. Our flagship Dr Pepper declined 4%, while our Core 4 brands were flat in the quarter. Canada Dry increased 4%, cycling an 8% increase in the prior year. And 7UP was flat in the quarter on increased shipments sales into the Caribbean. This was offset by a mid single- and low single-digit decline on Sunkist and A&W, respectively.

Hawaiian Punch declined 8% on category headwinds and increased competitive activity, while Snapple grew 2%. Our Mott's business declined 1%, cycling 11% growth in the prior year, with our lower applesauce sales partially offsetting growth in our juice business. All other brands increased 1% for the quarter, driven by strong double-digit growth in Penafiel and Schweppes, partially offset by a high single-digit decline in Squirt, as a result of the Mexican sugar tax.

On a currency neutral basis, net sales increased 2% in the quarter on 1% shipment volume growth, driven primarily by concentrate timing, favorable product and package mix, and net pricing of 2% that was partially offset by unfavorable segment mix. Core operating income increased $44 million or 22% on net sales growth, lower cost of goods, and ongoing productivity improvement. Core EPS increased 40% in the quarter.

As I shared in our last earning call, we kicked off 2014 with an exciting marketing calendar. Dr Pepper continued one-of-a-kind messaging featuring Macklemore and Michelle Phan in our anti-resolution campaign with Chelsea Handler, created quite the buzz. Overall, our first-quarter advertising generated almost $2 billion targeted impressions. And through our continued focus on marketing return on investment, we grew [GRPs] by 30% in the quarter, with media spend up only 10%.

We're bringing refreshment and fun to consumers summer parties with our limited time offer, Dr Pepper Vanilla Float. And this years Dr Pepper is teaming up with Latino artist, Romeo Santos, to sponsor the PJ Awards, the number one rated Hispanic youth award program. We'll sponsor a local VIP tour in target Hispanic markets and have a consumer sweepstakes where consumers can text to win a trip to the live event.

We're very excited about ESPN's recent announcement that Dr Pepper is the first official college football championship partner and presenting sponsor of the new National Championship Trophy. College football is the number two watched sport in the US and is heavily skewed to our target coke consumer. Thanks our partnership, Dr Pepper will now be represented from August through January, with relevant football content.

Dr Pepper TEN found its match with FX networks, Archer, the manliest spy in history. Through our new branded entertainment partnership, Dr Pepper TEN is giving one winner the chance to experience a once-in-a-lifetime animated walk on role on the show.

We're engaging the millennial consumer with the 7UPs Project 7 program, allowing consumers to influence where donations are distributed. We'll also be launching a limited time offer, Tropical 7UP, in 16-ounce cans, along with Lemon-Lime and Cherry. 7UP has partnered with seven electronic dance music DJs, including Tiesto, to make the brand synonymous with EDM culture. We'll have on-site activation at key EDM festivals and on premise EDM sampling packages.

We remain committed to giving consumers options for their changing needs and lifestyle. We're currently testing naturally sweetened versions of Dr Pepper, 7UP, and Canada Dry in a few key markets with select retailers. We recently launched our new Mott's juice drink with 40% less sugar and no artificial sweeteners. We've expanded our Mott's pouch line to include several new flavors, giving moms another great solution for on-the-go snacking. And new Vita Coco Lemonade brings consumers into the Vita Coco franchise with mainstream flavor.

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

Thanks, Larry. Good morning, everyone. For the quarter, reported net sales increased 1%, slightly ahead of our expectations. Sales volume increased 1% on higher concentrate shipments, following lower shipments in the fourth quarter of last year.

Package and product mix combined with net pricing, including the impact of the price increase in Mexico to cover the sugar tax, increased net sales by 2 points or roughly 1 point each. This was partially offset by 1 point of unfavorable segment mix at the net sales line, due to a higher proportion of concentrate case sales and 1 point of negative foreign currency. Reported gross margins were up 320 basis points in the quarter, increasing from 57.2% last year to 60.4% this year.

Changes in certain commodity prices at the end of the quarter caused us to record a $12 million unrealized mark-to-market gain on commodity hedges, all in cost to goods. This compares to a $7 million unrealized mark-to-market loss a year ago, with approximately $6 million recorded in cost to goods and $1 million reported in SG&A. The net effect of these items increased reported gross margins by approximately 130 basis points.

Lower input costs, primarily sweeteners and apples, combined with an unfavorable year-over-year LIFO comparison, increased gross margins by 150 basis points. Strong productivity benefits, mainly from RCI, further increased gross margins by 80 basis points in the quarter, while product and package mix reduced gross margins by 40 basis points. The net impact of the Mexican sugar tax further reduced gross margins by 40 basis points, as it will all year, as our pricing is intended to cover only the tax. This was fully offset by favorable concentrate timing.

For the quarter, SG&A, excluding depreciation, decreased by $9 million. And as we highlighted in our full-year guidance back in February, marketing spend declined $7 million, notwithstanding an increase in media spend in the quarter. As we're leveraging our developing marketing return on investment capabilities to ensure we're getting the best returns we can.

Higher transportation costs from our third-party carriers, which was partially driven by tighter than expected system capacity, were fully offset by reductions in certain other operating costs, lower field related costs resulting from the small restructuring activity we took last July, and the unrealized mark-to-market comparison I mentioned earlier. Depreciation and amortization expense was flat at $29 million. Reported operating income was $260 million, compared to $197 million last year. Core operating margin of 17.7% of core net sales, was up almost 300 basis points from 14.8% in the prior year.

Below the operating line, net interest expense was $25 million, $9 million below last year, reflecting the repayment of senior unsecured notes in May of last year, an additional interest rate swaps entered into in December of last year, and favorable adjustments to certain existing interest rate swaps. Our effective tax rate for the quarter was 34.3%, which is below our guidance for the year, as we recorded a $2 million deferred tax benefit as a result of a New York State law change, which occurred in the first quarter.

Moving onto cash flow. Cash from operating activities was $129 million, up $52 million. And capital spending was $37 million, compared to $46 million last year. Reported free cash flow was $92 million, compared to $31 million in the prior year. Total distributions to our shareholder were $135 million, with $60 million in shares repurchased during the quarter and $75 million in dividends. In addition to this, we prepaid $90 million under a VWAP for shares we will receive at the end of April.

Before I update you on our 2014 guidance, let me provide you with a quick update on RCI. RCI is thriving at DPS. We've just entered the fourth year of our continuous improvement journey, with strong momentum and energy across the entire organization. And internally we know the runway is endless. As RCI continues to mature, we're leveraging employee led change to improve productivity and to drive growth.

For 2014, we've created lean leadership tracks, led by senior members of the DPS team and supported by RCI experts with the goal of achieving breakthrough results, while creating a set of lean leaders that we believe are unparalleled in our industry. These tracks are already achieving great results. Let me just list a few examples. By eliminating excess inventory and double handling just this year, we've already reduced our warehouse footprints by nearly 0.5 million square feet or about 3%.

In the Columbus market, the team closed 20% of voids on Snapple Premium, achieving almost 12% volume growth on this brand in the month of March. And against our DSD delivery track in San Diego, we reduced driver check-in and checkout times by over 50%. Enabling us to reduce the number of routes needed by 11%, without any impact on customer deliveries. And these are just a few examples. We're confident that RCI will continue to create increasing flexibility and productivity, while enhancing value for our customers, suppliers, employees, and shareholders over the long-term.

Now moving onto 2014 full-year guidance. As you saw in this morning's earnings press release, we continue to believe that net sales will be flat to up 1% for the year. And full year core earnings per share in the $3.38 to $3.46 range, unchanged from our prior guidance. Consistent with our first quarter performance, we expect combined price and mix to be up just over 2%.

As a reminder, the higher pricing in Mexico as a result of the sugar tax, will contribute approximately 60 basis points of this positive pricing. And the January 1 concentrate price increase will drive another 40 basis points of growth. We continue to accept volume to decline over 1 point, with growth in our non-carb portfolio and allied brands, partially offsetting continued expected declines in CSD's.

Based on our current view of foreign currency, we now expect foreign exchange translation to unfavorably impact net sales and operating profit, by approximately 50 basis points each, for the full year. As we communicated previously, considering our hedge positions and current market prices for our unhedged positions, we expect packaging and ingredients deflation. This is excepted to reduce total cost of goods, inclusive of the year-over-year LIFO comparison, by approximately 2% on a constant volume mix basis.

Separately and based on our latest projections, we expect the Mexico sugar tax, which is recorded in cost of goods sold, to increase total cost of goods dollars by approximately 1.6%. The net of all of these items should result in full year 2014 gross margins, flat to slightly better than last year.

Consistent with our previous expectations, higher transportation costs are expected to add $17 million to our cost base in 2014. People related costs are expected to increase roughly $30 million for the year, reflecting both general inflation in our field labor cost and higher health and welfare costs. And we continue to expect marketing spend to be approximately 7.5% of net sales.

Below segment operating profit, 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%. In terms of cash flow, capital spending will be approximately 3% of net sales. And we are on track to repurchase approximately $375 million to $400 million of our common stock in 2014, subject to market conditions.

For your modeling purposes, let me highlight a couple of items that impact quarterly phasing. First, as a reminder, the trade expense associated with the higher concentrate sales we experienced in the first quarter, will be recognized across the second and third quarters, as our third-party bottlers sell through the finished products. Second, packaging and ingredients deflation will be skewed toward the first three quarters of the year with an expected, more difficult comparison in the fourth quarter.

Third, the transportation cost increases will be spread fairly evenly across the year. And, finally, people cost inflation, including the health and wellness increases, will be more pronounced in the third and fourth quarters, as we cycle the benefits of last year's restructuring activity, combined with lapping certain favorable health and wellness cost true ups last year.

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

Thanks, Marty. Before we open the line for questions, let me leave you with these thoughts. Our 2014 priorities remain unchanged. We will continue to execute our strategy in a challenging environment, ensuring that we build our brands, while executing with excellence in the marketplace and driving productivity throughout the business.

We're committed to providing consumers with options to address their evolving needs and lifestyles. We remain focused on managing the business prudently for the long-term. And will continue to invest in our brands and our people, while ensuring we optimize every dollar we spend. RCI is the permanent foundation of our business, and it continues to drive meaningful improvements. And importantly, we remain committed to returning excess free cash to our shareholders overtime.

Operator, we're ready for our first question.

Thank you.

(Operator Instructions)

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

Hey, good morning.

Good morning, Brian.

Just a couple of just housekeeping things and then just one question related to Mexico. Marty, I think I missed on gross margins for the first quarter, what was it excluding the mark-to-market?

Excluding mark-to-market, up 190 basis points.

Okay. And then as we're looking at the gross margin progression over the balance of the year, and also I guess revenue for the balance of the year, will second quarter have a negative effect on concentrate, meaning you shipped ahead of bottler case sales in 1Q. Will the reversal happening to 2Q, or is that more second half?

Look, we ship more concentrate in the first quarter, which we were hopeful would happen coming out of the fourth quarter. We talked to many of you about that.

As I said in my prepared remarks, from a revenue perspective the trade we pay the bottlers, that comes off the revenue line, larger portion of that will get paid in the second quarter as they turn through the inventory.

Otherwise, if you look at the impact of the concentrate shipments in Q1 that we think came out of Q4, and sort of put those back in the fourth quarter, our concentrate business was probably down otherwise pro forma 1% to 1.5%. So in line with trends.

April should be a good month comparably because the Easter holiday this year is in April and it occurred in March of last year. So we should have some good comps there. We've got reasonably good activity planned for the concentrate business well into the second quarter.

Beyond that, and then we'll be in the midst of the summer selling season, and we'll have a good checkpoint with all of you when we get on our call the third week in July.

Okay. And then just the last one in Mexico. Could you just talk a little bit about -- it was certainly better than we were modeling, and just maybe separate the CSD business versus maybe your non-CSD business.

Or maybe a better way to think about it is, the part of your business that was impacted by the tax increase and the part that wasn't. And how each one of those performed. It seems to me that maybe the part that's not tax impacted, maybe performed better than we were all thinking.

Yes, and it did. So by going into the year and sort of not having much visibility to what would happen, we built our expectation on that portion of our portfolio that was subject and is subject to the tax, it'd down in 8% to 10% range, with commensurate price increase on those products.

Those products are about 75% of our portfolio total mix in Mexico. And those products were down in the 8% to 10% range. Our price increase was 9%, so we more or less offset it.

The good trade for us is Penafiel. Penafiel is a big brand for us down there, and it has a line of mineral waters. They're not sugared, of course, so they're not subject to the tax. We had really strong growth in the mineral water category with Penafiel. And that really helped us.

We've also had some really good innovation under the Penafiel brand, in a product called Lemonade and Orangeade. Those drove quite a bit of growth for us.

So yes, the sugared products were impacted somewhat as expected. The price increase was sort of as expected. And for us, at least, looks like about a one-to-one trade. Offsetting that was favorability in mineral water, favorability in Clamato, and other products.

The innovation improvement from some of the Penafiel innovation is lapping these products that we introduced later last year. So those products will have a more difficult comparison as we move through the year. But we are really pleased with our performance in Mexico this quarter and in fact, over the last few years.

Thanks, Marty.

Your next question comes from the John Faucher of JP Morgan.

Thank you. Marty, I wanted to follow-up a little bit on Bryan's question, which if I look at the roughly 180, 190 basis points, excluding mark-to-market this quarter. As I look at the gross margin over the balance of the year, to get to your sort of flat to slightly up gross margin guidance, that implies a pretty big deceleration with gross margin down nicely over the balance of the year.

And you talked a little bit about Q4. How much of that is the reversing the leverage on the concentrate? It seems like RCI delivered some nice productivity in the quarter. Is that not sustainable?

I guess I'm just having a hard time getting to your gross margin guidance. So any further color there would be greatly appreciated.

Sure, John, no problem. Well first of all the RCI productivity, that is sustainable. We're not concerned the least bit about that.

There is a deceleration over the quarters, particularly when we look out to the fourth quarter. Truthfully we had about $14 million of unpredicted upside ourself in the first quarter in a handful of categories, including PET and HFCS and juice concentrate and a little bit in glass.

So as we look out balance of the year based on where we're hedged and not hedged for some of those, we're taking a conservative view right now in terms of holding our guidance, to deflation down to 2%. Possible we could come in a little bit better than that, but right now we're not guiding to do better than that.

Okay. That's great. And then, Larry, I want to follow-up a little bit. We heard something from Coke and Pepsi both about maybe the retail pricing environment not really matching up with what the concentrate companies or the bottling arms have been able to put through in terms pricing at the wholesale level.

So can you talk a little bit about the discrepancies we've see between some of the reported pricing numbers and some of the scanner data and how you see that playing out over the balance of the year? Thanks.

Yes. I think what we've seen a little bit more of here lately, or we're seeing, is especially in Q1 with the weather, there was some activity out there I think trying to drive some traffic. I think also we were seeing some of the retailers that had went back to like a couple years ago and doing a little investing themselves to drive some traffic, but overall what we're seeing on pricing continues to be very rational and very disciplined.

Great. Thank you very much.

Let me just add to Larry's comment too just as you all try to look at scanner data, Nielsen data against our reported data, be reminded about 50% or so of our price mix, mostly due to concentrate pricing, syrup pricing and fountain and some of our water brands, about 50% of our price mix you'll never pick up in Nielsen.

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

Hi. Good morning. Given that you're expecting more growth to come from the non-carb side of the business, can you talk a little bit more, number 1, about Hawaiian Punch?

It just seems like that business is sort of dying. Maybe not such a slow death, but it seems to not grow no matter what you do. Are you kind of giving up there, or what's your strategy on Hawaiian Punch?

And then same thing with Snapple. On Snapple specifically, it sounds like you've done a fair amount on innovation, but can you talk about your advertising strategy specifically with respect to the key category?

Because I know you are pulling down advertising across the board, but is it more or less [in tea], because that business looks like it maybe has more potential for growth than just about anything else in the portfolio. Thanks.

Yes, so I'll start with Hawaiian Punch. We're not giving up. We'll never give up on Hawaiian Punch. It's had some struggles out there on growth, but also it's a huge brand. There's a lot of volume there that we wouldn't give up on.

I think another thing too, Wendy, is that when you look at it, there's a lot more competition out there now. I mean for a long, long time I mean Hawaiian Punch was pretty well the player in that --I like to refer to as a sweet, cheap treat. We're seeing a lot more. We were seeing Tang out there now, Kool-Aid out there, Private Label, Tampico. There's just a lot more playing there in that part of the aisle.

So we're looking at it. We're not doing anything silly with it. We're not doing anything with pricing. We think it's starting to level off a little bit. It's not as bad as it was. So we're seeing some improvement on what we've got going with Walmart, our largest customer on that. And so probably won't be back to growth levels it used to be, but it'll continue to be profitable for us.

I think on the Snapple, you won't see us cut anything back on Snapple. Our Snapple brand, we have a tremendous amount of programs on it, not only with the innovation that's coming out, but also different marketing. Again, we're following our return on market investment on where it is best to spend.

We're seeing a lot of upside with Snapple on digital. And so we're going to play that very strong. The digital plays very well with our, Under the Cap, that Snapple's famous for. So we're very bullish on Snapple. We've got a lot of great plans, and that's one that we'll stay behind for the long term.

And is Snapple a business that you're still focused on expanding geographically the distribution? Because I know it's real strong in some parts of the country, but not so much in others.

Exactly. In my prepared remarks, we were talking about how we even used RCI sales and growth. I think so many times people look at continuous improvement as strictly productivity and cost cutting. I mean we look at it and say we're going at -- the last plank in ours is we do all of this for growth.

In Columbus, we went in there, I told you the numbers on how we grew Snapple. That heartland's where we are kind of weaker on the Snapple part, the middle of the Midwest. And the results that we had in there were just phenomenal.

So we will continue to go after the Midwest. Both of our coasts are very, very strong with the Snapple, so we're going to focus on the Midwest. And then also we're still working on what we're doing with the markets we've got over in Hong Kong and Singapore.

We've recently hired a new RSM that will be running Singapore. And he'll be looking for an RSM in Hong Kong. We're going to start getting that staffed up.

We've got meetings with a lot of different distributors over there. So we're hoping to see some good results. A good building in 2014 and start to see some results in 2015 from our Asian business.

And you're still doing the Snapple K-Cups for Green Mountain? Is that right?

Yes, we are.

And how's that business doing?

We're very, very pleased with it. And the nice thing we're seeing is not a lot of cannibalization. And so it looks like we're picking up new users.

That's terrific. Okay, thanks so much.

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

Hey, guys.

Good morning.

Wanted to -- I mean it sounds like it was a better quarter than you guys anticipated. Certainly a better quarter than us in the market anticipated. And I still don't understand to answer the question, what's driving the conservatism going forward.

So whether it be taxes that seem sustainable, whether it top line a little bit better. It seems at least to a certain extent, except for maybe in concentrate, sustainable. Certainly on gross margins. I'm struggling to understand why, especially there, you're being a little more conservative.

I'll start and let Marty kind of go into the details. But I think if you look at it, everybody will agree that the visibility is still next to zero with these headwinds we're facing. We knew when we built our plan, we don't do anything by the quarter here.

We operate long-term. We build annual plans and five-year plans. And so we see that we're pretty well on track for what we thought was going to be out there.

Marty listed some of the one offs that don't reoccur, and so we're pretty bullish on that. Our numbers are solid, our plans are solid. And I'll let Marty kind of walk through some details if he has any extras.

Of course, I have extras. Alright let me -- couple to come back and then I'll handle gross margin in a second.

But if you dissect Q1 the way we've dissected it, on an EPS basis, I would tell you that about $0.04 of upside came from the additional concentrate volume in the quarter. I would say $0.03 came from COGS improvement over and above our expectation.

About $0.01 of the -- a $0.01 per share equivalent on the interest expense reduction, I would say was sort of one-off in the quarter. The rest came, as I said, from lower interest rates on shorter-term debt. And about a $0.01 in tax rate from the New York law change. So there's about $0.09 in there that came as upside. Surprised us.

As I said to John, in terms of our cost to goods deflation expectation we're holding [it to], it's never been spread evenly. It was always internally in our view skewed to the first half, so there is deceleration. We're not completely hedged, although we're fairly well hedged across the key items, say 75% or more.

But remember, when those hedges were layered in, everybody knew corn was really low a year ago in the summertime. We didn't lock up all of our corn then. So even in our hedged portfolio, it's layered in at much different prices and in some period higher prices than we experience in Q1.

So when we look at our data, we're comfortable holding our guidance at down 2%.

And on the $0.09, I was surprised [to you] why is that not even being carried forward?

Well, look as Larry said, look at the concentrate. It's uncertainty. Right now it's simply our view of, let's look at our macro world. Nobody saw the headwinds in the CSD category, so we're being cautious there.

Mexico, as pleased as we are with Mexico's performance in the first quarter, we don't think that story on the category has completely played out. Many of the price increases were taken later even in January.

We don't even have a full quarter worth of data yet, so we're still cautious about Mexico. We're cautious about this CSD category.

You could say we're cautiously optimistic, but nevertheless cautious. So when we think about our all-in earnings expectations for the year and put that altogether, at least as of the first quarter, which is very early in the year, we've held our guidance which is, of course, is a range.

Okay. So just switching gears a little bit. The concentrate pricing of five versus the package price was a negative one. Can you talk a little bit about that gap? And how we should think about that going forward related to the CSD pricing environment, CSD environment you're describing earlier, versus the package beverage environment?

So going into the year, our assumption which we shared with all of you on pricing, I'll say like packages across the core of our PB portfolio, we've made no assumption on any price increase for the year. So we held pricing flat in our expectations. And so far that appears to be playing out when you strip out the impact in mix. A like-for-like product, more or less the same

So at least three months into the year, we seem to be right on our expectation. And as Larry said, pricing is rational, has been rational, and that's a good thing.

Yes, the concentrate pricing always goes in January 1. Nothing odd about this year's. And with respect to pricing, as I said, Mexico is a big pricing story as the incremental pricing for the sugar tax. And nothing is really changed in our expectations there on pricing assumptions.

And it's not -- I'm sorry. This is my last one. Is it not at all related and if you could comment a little bit about the Dr Pepper flagship DP negative 4% volume. So that's not related to the concentrate pricing? And if it isn't, can you talk a little bit about why that's down 4%? Thanks.

Let me dissect that 4% a little, because it is our flagship brand. When we look at those numbers, I would tell you the minus 4% in our best estimation comes in terms of probably 1 point for the holiday shift.

And really, this quarter a point or so from lower fountain business. Dr Pepper is the predominant brand, the only brand on the fountain side. Fountain occasions for CSD as reported by QSR data are down, so that's not surprising.

It appears though internally for us, the big part of the shift there is more of that loss at the larger national accounts, while we're still getting good growth in local accounts. And so for us, that's a good profit trade-off. So the remaining 2% is sort of ascribed to the category.

The weather had a huge impact, especially January and February. We're seeing much better March, especially with fountain food service. We had a lot of QSRs that were shut down in the snow and ice, so we feel like that we're back on the right track.

Okay. Thanks guys.

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

Thanks. Morning, guys. Couple of questions here. First on the SG&A. Can you talk a little bit more about the $8 million decline?

Trying to get a sense how much of that is a symptom of RCI in this continued focus on cost discipline, kind of structural in nature? And how much, if any, is time related? Perhaps you're putting some more marketing into the summer months then you have in the past.

And then I had a couple of unrelated questions.

Hi, Mark. Good morning. Marketing was down year over year, in total $7 million, notwithstanding the higher media spend that Larry talked about. That's probably the biggest driver, which means that any inflation in wages, for example, and healthcare, we were able to beat back with just good cost discipline and RCI improvements. It's a pretty simple, it's a fairly simple story.

Fair enough. And you're still thinking a $30 million-year on year decline in marketing this year?

Yes. We haven't changed our marketing expectation. Plans are in place. It'll be $30 million down in dollars and roughly 7.5% in net sales.

And I know it's dynamic, but as you think about what sounds like some COGS flex and everyone would hope for some revenue upside from a category perspective.

As you think about kind of that dynamic, and it plays out in your favor as you move through kind of the peak months, do you have a bias towards kind of reducing that amount of cut? Perhaps putting some more money back into -- have a lower level of decline in marketing?

Or is the bias to drop money to the bottom line? How are you thinking about what seems to be -- it's early, but a favorable start to the year.

Mark, I'd tell you what we have always said about flexing marketing, which is simply that we're spending an inordinate amount of time on marketing return on investment. Making sure that everything we're putting our money at, we can try to predict a fairly good outcome.

And as we've always said, we're spending everything that we want to spend right now based on expected returns. We've talked about shifts we've made based on [MRY] learnings. Media, just traditional media, national media, we've done a lot of work recently on improving the effectiveness.

Larry talked about significant higher GRP's and impressions and really a target to consumers, not a broad base of consumers. Cuts in areas at the local level that were just giving us very poor returns. So every time we sit down and review the results, we internally make some adjustments based on those outcomes.

So it's really not -- it really doesn't enter into our thinking around, well, take some upside here and spend it over here. Because if we thought we could spend and get return, we'd already be doing it.

Got it. That's great. That's really great.

Topic change. Single-serve cold, obviously, a lot of incremental industry focused there. Can you just share with us how you're thinking about your own posture there? What I mean is, one could argue that you should actively kind of make a stand with one platform or another here ahead of kind of the greater availability of different options out there.

Or one could argue that you should take a more kind of a wait and see approach and see what's validated kind of more at the consumer level, considering it's at this stage. There's relatively a small amount of single-serve cold that's actually sold out there and bought by consumers. So can you just talk a little bit about how you're thinking about your optionality as these platforms are obviously going to become more and more of an emphasis and more available to consumers?

So you're talking about the K-cups?

Well, I'm talking about the cold. To be specific Keurig Cold is going to be out there. It's coming. Obviously, Sodastream is out there and available. But there's a number of platforms that are either in the marketplace today or are going to be in the marketplace over the next 12 months to 18 months, on the cold side.

And you were there with the Snapple product in the Keurig hot machine and, of course, you can turn into ice tea. But there's optionality for you all with your carbonated products.

And certainly your non-carbonated products to be kind of making a stand here either with the Keurig platform or the Sodastream platform or some other platform as this emphasis on cold products becomes more -- becomes increased. And I'm just wondering how you're thinking about your position in that.

Oh, yes. We look at it constantly, Mark. I mean everyone of them that are out there. They've been in and seen us. We've looked at them. I mean, we were one of the first to go in with Keurig, with the Snapple. As I said, it was very successful.

But we don't spend as much of our time on that as we do staying with our strategy on our cold drink up and down the street. We still have a tremendous amount of distribution and availability opportunities out there.

As these new platforms come along, you can rest assured, we'll be right there with them. We'll be looking at it, seeing if it makes sense for our brands, for our partners.

But I think, I think they may be farther away than what you're even thinking on 15 months, 18 months. I mean that's something that especially with us, we will never put any one of our brands in any platform that doesn't have the taste and the profile that people are used to. And so we look at them, but we're also very fixed on they have to be perfect.

That's great. Great. Final question. Just capital return. Larry, you made the comment, and the data and the behavior certainly supports this, that you remain committed to returning a good bit of cash to shareholders. You are now below 2 times EBITDA leverage.

As you think about -- and maybe this is for you, Marty, but as you think about kind of that commitment, do you think maybe there's an opportunity to have a leverage target in excess of 2 times? Or making it even clearer what your level of commitment is to kind of deliver even further on those practices you've had to date.

I'll let start and let Marty finish up on that. But I think from what we can see, our shareholder base is very pleased with how we have ours allocated.

Our Board, they love having this problem every meeting on what are they are going to do with the money, which way does it go. And so we're happy where we're at right now, but I'll let Marty kind of give you detail on that.

Mark, we think our debt is comfortably where it should be. Don't forget too, on a pro forma basis, which is the way we look at it and we put off balance sheet [at least] it's back on the balance sheet for example. Pro forma basis, our leverage is much higher. And we're cognizant of that. Not that it's uncomfortable and then not that it couldn't be higher except that we think we're at the right leverage ratio.

Got it, great. Thank you guys.

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

Good morning, guys. A couple questions. The first would be on pricing, US. There's been some discussion that there may be incremental pricing taken by your competition over the balance of the year. Just wondering what, I guess, your willingness would be to follow that pricing, where you are as a bottler, if that actually comes through, given the weakness in the category?

Then I have a separate question.

So like we said, we didn't plan any pricing for this year. And we've heard the same things you have, but we haven't seen anything on pricing. We look at it across our geographic territories. We look at it on what the consumer and the customer can take. And we make our decisions more off of that.

I think the pricing environment, as I said earlier, is still very rational. I don't know if it was -- if the pricing was to go up, absolutely, we would follow if we felt it was the right thing for our customer and our consumer.

Okay, great. And a follow-up. I think, if I heard you correctly in the prepared remarks, you said media was up, marketing was down. Is that the relationship we should expect to see for this full year?

Not necessarily at that level. So there is some phasing in there, but not necessarily at that level.

Okay, perfect. Thank you.

Let me go back to Larry's point on pricing just for a moment. Because the market is very competitive and pricing is really a market based decision. However, from our point of view, our assumption is flat pricing.

You look at our cost projection trends, I think we're the only one of our main competitors that's actually projecting COGS deflation. We've got our other costs well under control and coming down.

So actually when you look at it from an internal point of view, we're under no pressure to do anything with pricing from a profitability point of view. If others are in a different position, one of our choices will always be to take advantage of that.

Perfect. Thanks guys.

Your next question comes from the line of Steve Powers of UBS.

Hey, guys. I guess following on the pricing theme. Maybe it's more of a philosophical question, but why is kind of flat wholesale pricing on like-for-like SKUs rational in a market that's, I think by most peoples observation, would be characterized as sub-optimally profitable? I guess the question really is, is the elasticity really that severe on the bottom line impact that a bit more incremental pricing wouldn't be beneficial to everybody?

Steve, you just hit it, you answered your own question. I mean we look at this all the time. We run our elasticity models all the time.

And what we're always trying to do is find the optimal point at which we maximize our profits, meaning the volume price trade [up]. We do this all the time. I'm sure others do it as well.

So it's not about the price point, per se, not moving, whether that's rational, it's about the net impact of what a pricing movement would do to the overall business.

Okay. All right. I'll leave it there. I guess on the volume side, negative 1 CSD volumes in the quarter, maybe negative 2 if you strip out Mexico. I mean, is it fair to say that's a little better than you would've expected coming in the quarter?

I think, Larry, when we last spoke, you were looking at kind of category growth rates of a negative 3% run rate being kind of the foreseeable CAGR going forward. So are you -- how do you view the first quarter? Are you more optimistic than you were in early March? Or do you hold out a lot of reservation that we might slip back more negative than we're running at now?

The biggest piece, we've got to go back and remember the timing of the concentrate shipments for the total. For the year, we've basically planned -- we looked at CSDs being around to 2%, 1.82%.

Which if we take all of the adjustments, the weather, the shipments and everything, we were pretty close. We were right on where we thought we would be.

No one knows the exact impact of the weather, but I mean everybody knows January, February were tough. It was tough. So we think we're on track with that. We think that the volume will comeback. The pricing environment, everybody's not had the pressure on the COGS and commodities.

And I think the big thing now is instead of just pricing -- when I say pricing is rational, I mean you still have to look and say, what is the activity? The promotional activity, that's going on? The pricing is set, but then what kind of --where do you get the right activity?

And I think right now another one that makes it tough reading some of the Nielsen's, [been a four week] is that we went back to the old days of where most of our sales are in the first 10 days of the month. And that tells you that economy is still tough out there. And the consumer is very price conscious. So any pricing at this time, I think, would really stand out.

That seems to make it less likely that you would follow. If I put those comments together on pricing, it seems less likely that you would follow an industry price increase then given all, given your internal cost profile, given your view of the consumer. Is that a fair read?

I've never not followed. Sometimes even lead.

Thanks, guys.

Your next question comes from the line of Caroline Levy of CLSA.

Good morning, everyone.

Good morning, Caroline.

Congratulations on this quarter. It's amazing. I'm just struggling to understand, if I look at the almost 5% price mix in concentrate, how much of that might have been driven by the timing of shipments? And similarly, on the volume growth within concentrate, can you help me with that?

Yes, Caroline, it's Marty. Good morning.

Good morning.

It's related to the shipment increase. As I said in my prepared remarks, not only did we have the volume but the rate per case, if you will, on each of those concentrate cases is much higher than our, what I'll call our net rate debt of trade spent. Because we have to deal back the agreed funding back to the bottlers, but only, we only accrue that when we get the data that reflects the product was actually sold into retail. And that'll lag.

You said $0.04 a share or so from that, but within the price mix and volume, can you help us -- because it sounds like it's going to come out of the second quarter.

Right. And if I said $0.04, I put in that $0.04, both the impact of the volume itself and, if you will, the delayed impact of the discounts, is all in the $0.04.

Okay. And again, getting back to this issue of not raising the full year guidance. It really sounds like it's only the $0.04 that really maybe should not go into a higher full year number. If all else were equal with our estimates.

Not necessarily. I've called out a couple of other things in the quarter like the higher than expected deflation in COGS.

What I mean is that doesn't reverse. It's not going to come back to bite you. It's just all else should stay the same from our estimates, I think.

Well let's see what happens for concentrate shipments in the fourth quarter of December, right? Because that's always an unpredictable number for us even going into the fourth quarter in terms of what bottlers buy before the end of the year.

After the end of the year, whether it's a decision made on buying ahead of a price increase, whether it's a decision made on how they want to end the year on their inventories. And last year, of course, December was really weak.

Right, right. Okay. And then similarly within the price mix in Latin America, I know you said you took a 9% increase or so to cover the sugared part of the portfolio. But within that 15%, how much of the price mix do you think we can say is sustainable through the year of that increase?

The sugar tax increase so far we expect to maintain itself. There's nothing to indicate that, that would change. And again, we're only pricing through the tax, we're not creating margin on the tax. All other pricing in Mexico was otherwise low.

But you got 15% price mix, so some of that was mix?

Well, absolutely.

Absolutely. Especially with that tax, Caroline, you'll -- it stands out much more on the 2-liter and 3-liter packages, so we saw much more activity on the 0.6.

Right. So it sounds like you're massively advantaged by having water, number 1, and the innovation on water. But it actually sounds like price mix should be very good for the balance of the year, [in that spot].

As Larry said, there's a good package trade down to the smaller bottle sizes from the large multi-liter bottle sizes. And you're right, I mean Penafiel is -- the mineral water category for Penafiel is a good upside to price.

But the carbonated portfolio -- Squirt's our biggest carbonated brand. I mean that was down, not surprising to us, double-digits. Part of that's in our system, part of that's in other bottler systems. So there are still some challenges inside that portfolio.

Got it, no that make sense. Just finally, I wanted to ask about risk of sugar taxes coming to the US and how you're monitoring that? Because we think state and local governments here will watching what happens in Mexico.

And it volume goes down on sugared beverages, they could argue that, that's good for obesity, et cetera, et cetera. What are you doing about that, proactively?

Well, we've stayed very involved in, not only nationally, but every state, local municipalities. With the American Beverage Association. Rodger and Jim both, our two Presidents, are on the Board. Randy Downing our Head of Government Affairs, we're constantly monitoring each one of them. We have -- we're very well-funded.

I think we've been, knock on wood, very successful on all of them that have come up. Again, it's one that we're always cautious on. But we feel we're in a very, very good position to protect us from anything that would harm our industry.

Thank you. Thanks so much.

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

Thanks. Good morning, everyone.

Good morning, Judy.

So just wanted to go back to the Dr Pepper brand performance. And understand that obviously there's some timing issues here, but the brand was lapping pretty easy comps, 3%. And if I look back, in our numbers, the brand really hasn't grown for I think the past eight quarters or so. I'm just really trying to understand why you shouldn't be more concerned about the brand itself.

If you could speak to the core health of the brand, maybe stripping out the TEN performance. And then in addition to that, in some of the test markets where you've launched natural sweetened products, can you just give us a little more details around what you've learned? And how much is that incremental to the brand itself as opposed to maybe getting more cannibalization?

Judy, our brand and health scores on Dr Pepper are just continue to increase. I don't ever like to see the product -- the brand to be down. But whenever I look at it and understand the conditions of what drove it, what programs we have in place to bring it back, and what we're doing with the marketing programs, with TEN.

We've got a lot of great programs going together on TEN, as I mentioned. We're going on FX, and got some activity there. We've had some great meetings with our bottling partners, with the activity that's just kind of started in March on TEN. We've got a lot of things happening with Dr Pepper.

The numbers were light coming in, but I can show you where the majority of that was January and February, which was just tremendously impacted by weather and tremendously impacted by the QSR being down in our fountain food service. So we always watch it very closely, but when we look at our brand health scores, we look at the activity we have in place, we're very comfortable with it.

We also have some LPOs coming out that'll be starting here before long, that I mentioned earlier. With our Vanilla Dr Pepper, that we're very, very bullish on. Our bottlers are excited about it. So we're looking forward to that.

And then on the naturals, with them just launching, Judy it's just way, way too early. We just got them out the end of March, first of April. We're doing this very laser-like. We have specific retailers, in specific geographic territories. We will be going in, and they were all set direct, we will be going in and getting the information from that customer and from the consumer.

We want to really understand it completely before we really start making any decisions to get any bigger or to expand. And when we have that, we'll share with you just as soon as we get all that information in.

And just to follow up on that, is that going through the Coke and Pepsi bottlers, the natural sweetener products?

No, the test, we sent the test out direct as a test.

Okay. Are you following kind of a similar strategy with the TEN where you would only go into the retailer if they're going to give you the incremental space, as opposed to getting the existing product out?

That's the information we're finding from the test. We want to know where should it be, should it be in the normal CSD section? Should it be in the natural food? Should it be stand alone display? Should it be stackers? That's what we're doing right now.

We have it in different places. We're seeing where the best results were. And so we've made no decisions on how we will do this until we get the data back in that tells us where it was most successful.

Got it. Okay. Thank you.

We have reached the allotted time for questions and answers. I will now return the call to management for any additional or closing remarks.

Alright. I want to thank everybody for joining us today on the call. And for your continued interest and investment in the Dr Pepper Snapple Group. Thank you very much.

Thank you for participating in Dr Pepper Snapple Group's first quarter 2014 earnings conference call. You may now disconnect.