Keurig Dr Pepper Inc (KDP) 2014 Q3 法說會逐字稿

Good morning and welcome to Dr. Pepper Snapple Group's third quarter 2014 earnings conference call. Your lines have been placed on listen-only until the question-and-answer session. Today's call is being recorded and includes a slide presentation which can be accessed at www.DrPepperSnapple.com. The call and slides will also be available for replay and download after the call has ended.

(Operator Instructions)

It is now my pleasure to introduce Heather Catelotti, Vice President, Investor Relations. Heather, you may begin.

Thank you, Jackie, and good morning, everyone. Before we begin, I would like to direct your attention to the Safe Harbor statement, and remind you that this conference call contains forward-looking statements, including statements concerning our future financial and operational performance. These forward-looking statements should also be considered in connection with cautionary statements and disclaimers contained in the Safe Harbor statement in this morning's earnings press release and our SEC filings. Our actual performance could differ materially from 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 provides 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.

Thank you, Heather. Good morning, everyone. Continuing our strong performance for the first half of the year, our teams posted yet another quarter of solid results in what continues to be an extremely challenged environment. I'm proud of our people for remaining focused on building our brands, executing with excellence in the marketplace, and driving improvement across the organization with RCI. And as you have read in this morning's press release, we have raised our full-year EPS guidance range to $3.56 to $3.62, and now expect full-year EPS to be up 11% to 13%.

For the quarter, bottler-case sales increased 1% with SCDs and non-carbs each increasing 1%. Positive price mix also drove 1%. Brand Dr. Pepper declined 2% in the quarter, primarily driven by continued declines in our diet products. Our core four brands grew 3% in the quarter led by continued strong growth in Canada Dry which grew 8%, Sunkist increased 1% in the quarter and both 7UP and A&W were flat. Hawaiian Punch declined 2%, Snapple increased 2% in the quarter with Snapple Premium up mid-single digits, offsetting losses on our value line which we have strategically de-emphasized.

Mott's decreased 1% in the quarter on declines in sauce. Penafiel increased 25% as we continue to see strong performance in our mineral water business and successful innovation that we launched in the third quarter of last year. All other brands increased by 1% in the quarter, led by Schweppes, which experienced a high single-digit increase reflecting growth in our sparkling waters and positive ginger ale category trends. Clamato grew 7% in the quarter, and our water category increased 3% on new distribution agreements with Bai 5 and Sparkling Fruit2O, and continued strong growth in Vita Coco.

On a year-to-date basis, bottler-case sales were flat on 2 points of positive mix in price. Dr. Pepper bottler-case sales declined 2%, and our core four brands increased 2% year-to-date. Hawaiian Punch declined 8%, while Snapple was flat. Mott's decreased 1% and Penafiel increased 23%. All other brands were flat year-to-date.

On a currency neutral basis, net sales increased 3% in the quarter on favorable segment mix, product and package mix, and net pricing primarily driven by price increases taken to cover the sugar tax in Mexico. Core operating income increased 6% on favorable cost of sales trends and ongoing productivity improvements that were partially offset by higher performance-based incentive compensation costs, higher transportation costs, and increased manufacturing costs.

Core EPS increased 11% in the quarter. Year-to-date, currency neutral net sales increased 2%. Core income from operations increased 14%. And core EPS has increased 23%. As we finish out the year, I think you will agree we have strong plans in place to continue our momentum by engaging our targeted consumers and giving our retail and bottling partners activity they can get excited about.

The 2014 college football season is off to an exciting start and we have kicked off a multi-year partnership with ESPN. Dr. Pepper is the first official college football championship partner and the presenting sponsor of the new National Championship trophy. We'll deliver over 2 billion media impressions across both traditional and digital media platforms, across all of ESPN's properties ensuring that we're always on.

And we're continuing with our Dr. Pepper tuition give-away, giving away $100,000 in tuition to the winner of each throw at the championship games. We have recently debuted a new Diet Dr. Pepper media spot celebrating the great taste of Diet Dr. Pepper, and as Halloween approaches we're partnering with Mars, driving incremental points of interruption throughout retail on our core four brands.

We know music is a passion point for Hispanics, so we are sponsoring the 15th annual Latin Grammys in November, where we will sponsor street parties in key Hispanic markets and offer consumers a chance to win a trip to attend the show in Las Vegas. We'll light up the holiday mixer season with incremental points of interruption and retail activation behind 7UP, Canada Dry, and Schweppes. And we'll have new holiday-themed point of sale and merchandising to drive additional activity behind our Snapple brand.

Speaking of Snapple, we're excited about our upcoming launch of Snapple Straight Up Teas in early 2015. As consumer preferences in the tea category continue to evolve, we know that our new line of unflavored teas will be a hit with consumers. And as we previously communicated, we continue to test our naturally sweetened versions of Dr. Pepper, 7UP, and Canada Dry, which are only 60 calories per 12-ounce can and sweetened with real sugar and the latest generation of Stevia blends. Based on our test results, we'll be expanding the brands next year, into additional regional markets.

Now, let me turn the call over to Marty to work you through further information on our financial results and our full-year guidance.

Thanks, Larry, and good morning, everyone. For the quarter, reported net sales increased 3% on favorable segment mix, product and package mix, and net pricing driven primarily by the price increase in Mexico to cover the sugar tax. Sales volumes were flat in the quarter.

Reported gross margins were up 50 basis points, increasing from 57.9% last year to 58.4% this year. Lower commodity costs, inclusive of the year-over-year unfavorable $7 million LIFO comparison, increased gross margins by 140 basis points. RCI productivity and other cost improvements further increased gross margins by 70 basis points. Segment mix and product and package mix collectively reduced gross margins by 90 basis points. Furthermore, certain promotional activity in the quarter reduced gross margins by another 20 basis points.

The net impact of the Mexican sugar tax reduced gross margins by 40 basis points as our pricing, as always intended, was only to cover the tax. Within manufacturing costs we expensed about $5 million of individual small spare parts -- individual small dollar spare parts, so as to lower non-value administrative cost. This reduced gross margins by 30 basis points.

Changes in certain commodity prices at the end of the quarter caused us to record a $2 million unrealized mark-to-market loss on commodity hedges with a $6 million loss recorded in SG&A, and a $4 million gain recorded in cost of goods sold. This compares to a $1 million unrealized mark-to-market gain last year, all recorded in SG&A. This favorable mark-to-market comparison within cost of goods sold increased reported gross margins by 20 basis points.

For the quarter, SG&A excluding depreciation, increased by $18 million, driven by $7 million of higher performance-based incentive compensation costs, $7 million of planned higher transportation costs, an unfavorable comparison to a $6 million credit to a legal provision in the prior year, and the unrealized mark-to-market comparison I just mentioned. Similar to last year, we recorded certain unplanned health and wellness and risk insurance favorable cost true-ups in the quarter. And, as a reminder, last year's SG&A included $7 million in costs associated with certain restructuring actions.

Depreciation and amortization was flat at $28 million in the quarter. Core operating income was $318 million compared to $300 million last year, up 6%. Core operating margin of 20.1% of net sales was up 70 basis points from 19.4% last year. Below the operating line, net interest expense was $27 million, $2 million below last year. Our reported effective tax rate for the quarter was 34%, lower than the 35.5% previously expected as we received a one-time tax benefit.

Moving on to cash flow. Cash from operating activities for the nine months was $769 million, up significantly from $616 million, and capital spending was $103 million, compared to $111 million last year. Reported free cash flow was $666 million, compared to $505 million last year. Total distributions to our shareholders year-to-date were $513 million, with $276 million in shares repurchased, and $237 million in dividends.

Before I move on to guidance, let me give a quick update on how we continue to drive value with RCI through our lean tracks. Our commitment to building an everlasting RCI culture at Dr. Pepper is continuing to drive significant improvements across many areas of our business. I know many of you still believe RCI is a cost reduction process. So let me provide a few examples of using the tools and framework of RCI to create growth.

Using our RCI cap, or problem solving process, on a key account customer basis, including one customer's involvement in this process, we've added incremental points of distribution across our single serve juice portfolio resulting in 50 basis points of dollar share growth in the single serve multi-pack juice segment. Additionally, in using a similar process we've closed thousands of distribution voids on our Snapple Premium business across several key markets, achieving high single-digit sales growth in each of those markets, measured after the changes were implemented. And we work with one of our major distribution partners to improve Dr. Pepper display tie-in rates in a major metro area that included the adoption of standard work routines for account managers and merchandisers who are handling our products.

With regard to productivity, our inventory reductions have enabled us to eliminate approximately 700,000 square feet of warehouse space in 2014, all of which has been monetized. Our reductions in driver checkout times are allowing us to run more routes per week, and our many other RCI productivity improvements are enabling us to significantly offset the headwinds of general cost inflation.

Now, moving on to 2014 full-year guidance. As you saw in this morning's release, we have now raised our core EPS guidance to a range of $3.56 to $3.62 on a full-year net sales increase of about 1%. As a reminder, our core fourth quarter EPS of $0.97 last year was quite strong, as we recorded a $14 million LIFO benefit in cost of goods sold and $9 million in health and wellness cost true-ups, both of which are nonrecurring in this year's fourth quarter. These items added about $0.08 to last year's EPS.

For the year, we now expect sales volumes to be closer to flat with CSDs roughly flat based on strong core four and Penafiel performance. We expect our non-carb portfolio to decline low single digits driven by Hawaiian Punch. Year-to-date, concentrate shipment volumes have trended ahead of bottler-case sales sell through. Therefore, we do expect an inventory correction in the fourth quarter in the beverage concentrate segment. As a reminder, Dr. Pepper is the largest brand in this segment and its bottler-case sales have declined 2% year-to-date.

As we communicated previously, we expect packaging and ingredients deflation for the full year. This is now expected to reduce total cost of goods, inclusive of the year-over-year LIFO comparison, by approximately 2.5% on a constant volume mix basis driven by better-than-expected sweetener and PET costs. However, we expect approximately 1% cost of goods inflation in the fourth quarter which included a $14 million LIFO credit. After considering all of these items, 2014 gross margins should be slightly better than last year for the full year, but down year-on-year in the fourth quarter.

Higher transportation costs are now expected to add about $20 million of expense in 2014 with about $5 million of the increase being recorded in the fourth quarter. We have also identified some additional brand building opportunities to invest behind in the fourth quarter which we expect to increase marketing costs by $7 million compared to last year. And, finally, within SG&A, we also expect an increase of approximately $2 million in American Beverage Association fees in the fourth quarter.

We continue to expect foreign exchange translation to lower net sales by approximately 50 basis points for the full year and reduce core EPS by $0.01 in the fourth quarter. Below segment profit net interest expense will now be around 4.3% on our $2.5 billion of debt, and our full-year core tax rate is now expected to be approximately 35%.

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. 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. Our 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 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. We're committed to providing consumers with options to address their evolving needs and lifestyles. RCI continues to drive meaningful improvements in the organization, and importantly, we remain committed to returning excess free cash flow to our shareholders over time. Operator, we are ready for our first question.

Thank you.

(Operator Instructions)

Our first question is coming from Bonnie Herzog with Wells Fargo.

Can you hear me?

Yes, Bonnie, good morning.

Good morning. So, I guess my first question is, I'm still trying to understand how you are thinking about your business from a top-line perspective over the long term, given the continued pressures for not only your company, but certainly the industry in general? And then how you're going to balance this pressure with the higher fixed cost ratio? Marty, I know you touched on this a little in terms of your RCI efforts, which have been very strong. But is there something else that gives you confidence to be able to balance this over the long term? And thinking about your business model, the soft top line growth, is that truly sustainable?

The short answer, Bonnie, is it sustainable, yes. Let's go back and take it from the top and I will remind everybody, nothing has changed in our long-term view. Remember, we said with respect to CSDs we can be flattish in CSDs as a total category and then roll non-carbs in at low to mid single digit growth rates. Recently, Hawaiian Punch has been the Achilles heel to that, but remember when we grow Clamato, when we grow Mott's, the profit contribution, the mix effect of that is a really strong positive, so that drives a lot of profitability. But in terms of those categories, those are sort of the top-line dynamics before we talk about whatever pricing we overlay on there, in addition to the annual concentrate price increase.

So that gives us that low single digit top line, which is admittedly below the 3% to 5% we talked 2 years ago, and that's been off the table for a long time. RCI has a long runway. I try to give you folks as much anecdotes as I can, but it is creating enormous opportunity.

In terms of improvement, and I'm not sure where your question goes to fixed costs, we've actually acknowledged that some parts of our business need a structural change and we've done some of this in smaller markets. But we clearly don't have the scale in volume to apply all of the tools of our RCI and get improvements. We've actually gone to third party distribution partners in a handful of markets that have -- those have worked really well for us.

So, we'll do those where we can and where we think it makes sense, but there is just a lot of cost opportunity. And when we overlay a couple percent on the top line, get some incremental margin expansion through productivity efforts, drive that down to an increase at the operating line greater than that top line increase, a little bit of below the line leverage, and we get a nice mid-ish single digit earnings growth number that when you tack on share repurchases and you tack on dividend yield, we think gives that 10-ish low double digits shareholder return, which is all we aspire to do. And we think our plans are aligned with that.

All right. Thank you. That was helpful. Appreciate it.

Our next question comes from the line of Amit Sharma with BMO Capital Markets.

Hi. Good morning, everyone.

Good morning.

Larry, just wanted to focus on what you just said. You finished your comment with high single, low double digit shareholder return. Given that earnings growth is going to be touching low double digits for this year and very high single digits last year as well, and RCI continues to be really strong. Are you prepared to be a little more positive about earnings growth for next year? Can you get to the high single digit earnings growth, or internally is the view changing that perhaps we can start to be a little bit more positive about driving earnings flow through the system, as well?

This is Marty. Let me handle that question. Remind everybody for the last two years we have had a lot of earnings growth driven by cost of goods to favorable trends and nobody would predict that to continue, so everything I just said assumes a more level cost of goods environment, but you can't -- these have been extraordinarily good years driven by lots of favorability. I applaud our procurement people. I think we have done a wonderful job against what we read about others in our space, in terms of our cost trends, but we can't -- nobody would predict that to continue.

By the way, the good news for us has been I would say that that earnings improvement has been a combination of not only the cost of goods improvement, but the fact that the marketplace pricing has allowed that to sustain and not get competed away, and maybe that's because our trends are so much more favorable that others seem to say theirs are. So, you have to take that off the table and move to a more normal state. Nothing has changed in terms of our excitement about business at all. We've enjoyed the last two years of cost of goods favorability.

Great. And then, Larry, if I just may ask one more on pricing that Marty alluded to. Clearly, very clear pricing discipline from the industry, and if you listen to the other two bigger players, they have talked about packaging as a driver of that mix, as well. How far along are you in terms of bringing that mix component of price mix into sales growth line?

Yes, we're involved in it now, and you got to remember with my partners out there, 40% of our total is in the packages they have, so we're very familiar with which ones work and which ones don't and what we have in ours. You'll see us continue to innovate and package. I believe that packaging innovation is as strong as brand innovation and LTOs on keeping excitement and something new out there in the category, so we're up to speed on it and we'll continue to increase it.

Great. Thank you very much.

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

Good morning, Bill.

A couple of questions. So, how much do you think is left in RCI? And is there a way to sort of disaggregate what is pure cost saves versus revenue synergies? Because I think one of the more interesting things is, a lot of it is driven incremental revenue. And then maybe if there is an opportunity to sort of Cascade some of the stuff, which has been mostly cost of goods sold focused to the G&A line? Because I know you are a smaller company, but if you benchmark pure corporate overhead to some of your peers, it's a little bit high: a couple hundred basis points.

Okay. Let me extend -- let me just dismiss the last piece. I don't think you can compare unallocated corporate costs across companies, because you got to know what is in corporate and what is in the segment. So, that's a comparison that's even hard for us to do.

In terms of RCI, look, there is -- when I say unlimited opportunity, of course it's not unlimited but do we -- is there a limitation that we think we're facing right now, the answer is no. If I talked to you a few years ago and told you that even absent commodities the improvements driven solely by RCI were achievable, I think many of you would have challenged that. We beat the estimate, the first three-year estimate we originally put out there.

The things we're doing across the organization that are actually affecting costs, there is still a whole robust group of projects. I just wanted to call out this morning to remind people that you can actually use a lot of these tools to help create some elements of growth and that we are as much focused on the blocking and tackling that comes from doing those kinds of programs as we are on shear productivity.

Productivity only follows and cost reduction only follows from getting rid of waste, and so it never really becomes a direct focus. I called out this morning the benefits of lower inventories, shedding unnecessary warehouse space which reduces the footprint cost. It has reduced break shrink cost, obsolescence cost, inventories are turning faster, so there is lot of attendant improvements, and most important -- most importantly my comment about how important that is for us to beat back what's otherwise going to be externally, external pressures on inflation and costs, and that is going to become our motto. We're going to fray those as best we can with improvements so we can see our top line benefits actually flow through to increased profitability.

Great. That's super helpful. And just on the re-franchising, it seems like it is hitting an inflection at Coke. Do you have any data on who is more productive like a pure Coke-owned bottler versus independent affiliate bottle with Coke? Kind of how these changes are made. Will it be status quo or do you think it will be a change to the business? How does the transition work, et cetera?

I don't have any of that, Bill, and we don't track that, so I wouldn't be able to answer that for you.

Okay. That's helpful. And then one last quick one. The sparkling water trends have been amazing, obviously. I know it's a relatively small category. Do you think that is a trend or is it a fad, and how could that be a considerable material component of your business in, I don't know, three to five years?

I think it's a trend and you see us with it, our Penafiel, with Schweppes and with Canada Dry. We're putting a lot of programs on it for this year and next, and we believe it is here to stay.

Great. Thank you very much.

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

Thank you. Good morning, everyone.

Good morning, Judy.

Marty, I just wanted to go back to the commodity outlook, and if we think about the fourth quarter swing to inflation, if I take out the LIFO impact it, does still seem like you're implying a little bit of less benefit in the fourth quarter just excluding the LIFO benefit, but still somewhat deflationary in that context. So maybe just clarification on the swing from third quarter to the fourth quarter. And then as you think about 2015, how much coverage do you have in place now? And given where the sweetener prices are today, oil prices, et cetera, can you give us any color just in terms of how you are thinking of 2015 commodity outlook?

Judy, I think you have it right for the fourth quarter. I can't say it any differently, so I think you boxed it right, particularly considering the LIFO benefit last year. And so, that will be what it is going to be. Because, of course, for the balance of this year we are more or less 100% locked at this point.

For 2015, we'll comment more on 2015 when we have our February call. I can tell you that across the key hedgable commodities, I would tell you we are anywhere from 30% to 70%. It varies across. For some of the more important ones, I will tell you that -- in a month from now, I can tell you particularly with some of these will even be more hedged because our calendar of activities would say we'd be higher a month or so from now. But we're where we're comfortable being.

Obviously, the recent activity in the oil markets should be good for PET; better than previously. And we're doing some things right now in PET to deal with that. So we'll have to see where we land. I'll give you more -- I'll have a better view of this in February, but we feel comfortable where we're hedged. We feel like we have good management over the commodities that at this point are not so well hedged. But that's no different than any other year.

Okay. Got it. Okay. And then just on your marketing spending, Marty, I think you said it is going up in the fourth quarter by $7 million. For full year I imagine that you're still looking at the percent of sales in terms of marketing to be down similar to what you have indicated before. Is that correct?

Yes, I think if my numbers are correct when you add the additional $7 million and if you want to think about it as a percent of sales, it will be 7.6%. Maybe we were at 7.5%. Yes, down from 8.1% last year, but I'll say it again, we have told everybody, we never expected to stay at that level. We don't think we need to be at that level. And the $2 million we're spend -- the $7 million we're spending of the $0.02 is simply because, look, we've got some plans that we moved forward a little bit in the calendar for 2015 and we're going to start spending behind them.

Okay. Got it. And then, Larry, if I can just follow up on your Dr. Pepper trend, and clearly the diet category continues to be one where there is still some pressure there. But what are some of the actions that you're taking on maybe beyond the natural sweetened innovation. But just really the core product of Dr. Pepper as itself on the diet side of the business, what are you really trying to show some improvement on that trend?

Definitely trying to reverse the trend, and in my prepared remarks I mentioned we came out of the new campaign for diet Dr. Pepper that's driving the great taste of diet Dr. Pepper, and so that media will be hitting. And also with Pepper, football, the college football coming on board and the coverage we have out there, we feel very bullish for the fourth quarter on what we can do with Pepper and going forward into 2015.

Okay. Thank you.

Our next question comes from the line of [Vivian Aizer] with Cowen.

Hello.

Good morning.

I wanted to follow up on Judy's questions on diet. Larry, can you just offer an update of your view of the diet category? Has the decline stabilized? Are they re-accelerating? There are some divergent trends that I'm seeing in the various Nielsen outlet data releases, so I was hoping to get some all outlet color from you on that, please.

I think it's very similar to what you're seeing there on the declines. Like we mentioned before, we stay very concerned about it. When you have something out there that is declining at 7%, that can bring the others down. So, that's why we're putting the new media campaigns together, also continuing our push behind our Ten products. Our Ten products, we continue to get new distribution with them. And I think sometimes it helps on having a product out there with 10 calories that doesn't say diet on it, and so we're covering all of the angles there. And, like you said, you know about our naturally sweetened, but that is 60 calories.

So we'll continue to keep our media on the diet, especially diet: especially diet Dr. Pepper. We'll continue to push Ten. And then another big piece for all of us is educating the consumer that there is nothing wrong with these diet products. There is nothing wrong with aspartame. It's one of the tested food ingredients there are. So, we've all got a lot of work to do, but it's also going to give us upside when we find the silver bullet.

That sounds great. In terms of the expanded test for your natural 60-calorie offering that you commented on in early 2015, can you dimensionalize the expansion? Would it be notable, will we see it or is it still really discrete offerings really targeted trying to get more learnings out of the marketplace?

Well, right now we're tested in a market that we control where we have the three brands together in Texas, Chicago, and Des Moines. And what we're going to do on this, we really want to understand the consumer and the customer. We're not going to be in no big hurry. We want to understand where does it need to be. Who is the consumer? Where does packaging, pricing need to be?

We're going to test different formats. And when it starts to spread out, I mean it will be on how the results come in. Of course if it's just stellar, you'll see us go big time, but right now we're just doing a wait and see. We want all of the information. We want the data, and then we will make our decisions from that.

Sounds perfectly reasonable. My last one is on Penafiel, which has clearly been just a home run with your new innovations on that brand. Can you speak to the opportunity of expanding geographic distribution for Penafiel, specifically bringing it to the United States?

Absolutely. We're looking at in our Hispanic programs for the US brands we're bringing in the Penafiel from Mexico. So far, it's just starting right now but we're very excited about the results we're seeing to date. And we will expand that as we go across our -- we have very targeted Hispanic markets that we work in and we are starting to get some real learnings from bringing the Penafiel in from Mexico.

Terrific. Thanks very much.

Our next question comes from the line of Steve powers with UBS.

Hey, good morning.

Good morning, Steve.

A few more brand-specific questions if I may, and then one more on cash. First, going back to Dr. Pepper. In response to Judy's question, Larry, your plans to get momentum going again seem tied to media. So is that right? Specifically, do you feel your share of voices where it should be on that brand, or is there another issue that you're contending with?

Our brand health scores are fantastic. We couldn't be happier where they're at. But it's not just media, Steve. The media doesn't work unless have you flawless retail execution out there. And so, we'll continue to strive for excellence in our merchandising and having the points of interruption, incremental points of interruption, so it's going to be a combination of basic blocking and tackling that the DSD business is all about.

So, is that a an acceleration? That's not a distributor criticism, is it? Is it different, you're seeing different performances in the Coke versus Pepsi versus your own system, or is that just a --?

Not at all. Like I said before, they're both fabulous partners and their results are very, very similar.

Okay. And then on Snapple, can you talk just a little bit more about the strategic de-emphasis of the value line and is that more of a temporary or cyclical decision, or are you backing away from that value emphasis that was really put in place just a few years ago?

Yes, when we went out with it, we told everybody it was strategic, that it would be in certain markets, in the heartland it wouldn't be as heavy there. It was going be in some CMG, but it was never anything that we were looking at that we were going to do long term and take a focus off of premium.

Snapple is a premium product. That's where we keep. That's where we put all of our focus. And so, it's just like some of the value teas got down to where it was the cheap bottled water, and as we've always said from the time we went public, we pursue profitable brands and channels and packages, and so it worked for us. It got us in some markets especially in the Midwest we were not in before. Now we have the premium in and that's where we're seeing our growth coming from, from the premium Snapple products.

Great. So Straight Up, is that further premium or is that just lateral?

Straight Up will be unflavored. Most of the Snapple tea is flavored tea -- flavored teas and juices. This will be a straight up tea. Kind of goes back, we had it years ago, Steve, when we had the super premium line, but we're going to put it right in with our premium teas.

Okay, great. And then just one last question on free cash flow usage and the dividend specifically, Marty. I think the dividend was up only about 8% this year versus what is now going to be 12% EPS growth in the mid point of your guidance, which implies an actual drop in the payout ratio which I think repeatedly that your intention is to grow that metric. So, I know it's a Board decision, but should we be expecting some kind of catch up on that in 2015, based on at least what you'll be recommending to the board?

You'll hear us talk about that in February, but nothing has changed, Steve. Like we always said, if we had a leaning or tendency between dividends and share repurchase, we'd lean heavier into the dividend. We do try to collect a lot of shareholder feedback. You can imagine that people are somewhat divided on this topic, depending who you talk to and their view of things but, yes, I still think that's a true statement.

Great. Thank you so much.

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

Thanks. Good morning.

Good morning, Mark.

A couple of questions for you on the non-carb portfolio, and building a bit on what Steve was asking. To what extend do you think we really are an inflection in your ability to take share, at least have improving share performance in non-carbs, which went from negative to positive in the quarter? And then I have a followup there.

I think earlier in one of the questions or maybe in his remarks Marty mentioned that if you look at our non-carbs, most of the market decline is driven by Hawaiian Punch, just one brand. We've been very vocal with everyone and up front that it's a lot of volume, but it is not a lot of profit.

And you can tell by this quarter it was only down 2%, so it's starting to flatten out a little bit, and our other brands continue to grow and take share, so we're very happy with that. Mott's as a whole was down a little bit but that was driven by sauce. The juice is still doing well. So, we feel very bullish that we can continue on our non-carbs.

Do you think this is an inflection in the total non-carb value performance? It's not just a one-off quarter. You think this is the beginning of an improved trend?

Yes.

And then from a profitability standpoint, when you think about GP dollars per case, putting aside percentage margins, is it correct to think that that inflection is a net positive to your overall GP per case?

Okay, Mark, it's Marty. Let me -- so, when you talk non-carbs, let me throw some other products in there, too. It's probably not as -- there's a lot of margin in Clamato, a lot of margin in the Mott's line, lesser so in the Hawaiian Punch. But also as we expand in some of the newer age categories, Vita Coco by Fruit2O, the profit contribution dollar terms is good. But remember we don't bottle these products, we don't manufacture these products, we have to purchase them as finished goods. If we just look at the gross profit line, you would see, probably, a lower level of gross margin, but we like the profit on those cases.

Got it. But at the GP line, the absolute dollars on a per case basis are lower. I get the incrementality, but at the GP line the dollars per case are lower.

Let me clarify again, Mark, because I said this in my prepared remarks. When I talked about the negative impact of mix, just the gross profit margin, the percentage margin, this is what I was partially referring to, that we're selling more of these allied brands, they are purchased products, and the gross profit percentage is lower than you can say -- what else sort of the corporate average, but absolute dollars per case, because these are higher dollar cases, is very good profit for us.

Got it. So in fact from a dollar perspective it's higher.

Right.

Got it. Great, Thanks.

Our next question comes from the line of John Faucher with JPMorgan.

Yes. Thanks. I did want to follow up a little bit on the non-carb piece, which is, if we look at the volume performance of Coke and Pepsi in the most recent quarter, it seems as though their 100% juice portfolios have gotten hit harder on some pricing. And do you guys have any brand switching information? As volume comes out of those categories, do you know where it's going? And is that benefiting let's say some of your 100% juice products or your juice drink portfolio or any of the rest of your non-carb businesses? So any idea where that volume is sourcing from, or are you just seeing greater share performance within those non-carb categories?

It's a combination of both, John. I think we're getting a lot more on our execution out there, better execution with the juices, but we do know for a fact that you go back and trend as orange juice prices, as the concentrate and the commodity would go up, it seems like the first place that people go to is apple. So there is some benefit there, but we haven't seen enough of it right now to be able to dimensionalize that for you.

Okay. Great. Thank you very much.

Our next question comes from the line of Kevin Grundy with Jefferies.

Good morning.

Good morning.

I wanted to start, Larry, with sort of your view on the profit pool in North America CSDs. And it's an interesting year because it seems like Coke has finally gotten some religion on price. It seems like they took some incremental pricing earlier than usual this year as well, usually go around Super Bowl time.

So, I'm just curious if you are more optimistic now on the -- on your outlook for profitability and maybe even profit growth given this dynamic here, and how you sort of weigh this with the implications of volumes being down, at least broadly in the category. You have done modestly better historically. How you sort of weigh this given the elasticity and given the volume declines?

Right. You hit it right on the head. The price is good. It's been good. It has been disciplined now for what, three years, three plus, so that's very positive. But we're still going to put a tremendous amount of focus on the volume side of it. Getting the right execution. Getting the CSDs back to where we're not having the declines, which I think we're starting to see some progress, we're seeing our sugar products grow.

As I mentioned earlier, we're going to put a tremendous amount of time on diets. How do we correct the diet? How do we turn around that 7% decline that could make the CSD category look healthy again if we can figure that one out.

Larry, just one more for me, if you don't mind. How exactly do you -- is the hope that you execute on the diet strategy? Coke is meeting with investors recently. They're going after the heavier consumers within that which probably drives some 85% of consumption within diets. Can you peel back the onion a bit and is this going to be efforts through the ABA? Is this going to be targeted marketing at your higher frequency consumers? Maybe just a little bit more detail there would be helpful. Thank you.

All of the above.

Kevin, this is Marty, too. You'll see some increased marketing efforts directed at diet, as opposed to the trademark. And admittedly -- I'm going to admit that in each of our own businesses we could probably find areas where we haven't executed as well as we could have on diet, and it's understandable from a field, a market perspective where even some of our own people have pulled back on some diet display activity because the brand is down, and of course you got to be careful that becomes a self-fulfilling prophecy.

We are not perfect at anything, okay? And we hope you never believe we are. So, we ourselves are looking at areas where we maybe haven't executed as well in the diet. That has changed, okay, recently. So, yes, more advertising directed at the proposition of the brand and even in our own system a little better execution.

Thanks, guys. Good luck.

Thank you.

Our next question comes from the line of Robert Ottenstein with ISI Group.

Thank you very much. I was just wondering if you could go into a little bit more detail on the Ten platform. A year ago you talked about spending $30 million in 2013, talked about another significant investment this year. Perhaps you can give us a little bit more sense on how much you're investing this year and plans for next year. And also last year you mentioned about 51% of the sales came from outside of the category, and so you were very happy about that in terms of it being additive. Where does that stand now, please?

Yes, it's still over 40%, people we brought back to the category, so that encourages us very much that we're on the right track there. As far as -- I'll let Marty walk through this here in a moment, but Marty and I were just looking at some of the numbers and you see how well our core brands are doing. I really feel we're getting quite a halo effect across all of these brands, with our Ten, with our regular, with our diets. So the brands are doing very well in that category, and you will see us continue to put a strong focus on Ten.

A lot more of the Ten now is going to be not as much of maybe the media piece as execution. We're continuing to get new availability. Counts that last year wouldn't given us incremental space are now giving it to us and I'll just re-emphasize again, I've told everybody, these brands are not made overnight. Understanding the consumer and the trends and the changes take time, and we will stay after it and keep that Ten product out there in front of them.

And, Robert, it's Marty. In terms of the marketing, we haven't finished our -- nailed down our complete marketing budget yet, but what's interesting, and many of you probably saw this in the advertising for the Ten brand, we made a change and you may have seen it when you watch ads on TV. And this was a marketing return on investment learning and we applied it so we're going to actually get better results for less money, which is at the end of those ads you see us flash -- if it's a 7Up, you see us flash the other Ten.

This was actually -- that was not just something we thought would be a good idea, it actually came out of some halo effect to the other Tens. When we made that change, which the data would say we would get the same benefit. (Technical difficulties) to spend less but get the same effectiveness, so that's actually a great learning from MRI. We haven't set the actual dollars yet.

As Larry said, it's execution. There will be dollars around sampling and other activities, because the data is still compelling. If we get trial, we get good repeat, we got data that says we're bringing consumers in, so that's not going to stop it. What is important is we don't necessarily have to spend an absolute significant amount of increased money in marketing to get there.

What about the marketing spending this year as opposed to last year?

Well, it was in the $25 million to $30 million range.

Okay. So it's comparable.

Comparable, yes.

Okay. And then just as a followup. You have talked in the past about some very interesting micro-marketing programs in which you take specific brand and really channeling it through social media to particular demographics. Can you give us any update on those efforts and the kind of results that you're seeing, and whether this is something that you are going to continue and expand?

Yes, it's still early but you can tell by the numbers. We've had some real success with 7Up, especially in the Hispanic millennials. We're seeing 7Up up 1% and that is some of the things we are doing there. We're trying to integrate the digital into all of our branding and marketing plans out there. And, as I said, still early but everything we are seeing right now is telling us we're on the right track.

So should we expect that additional programs next year?

Yes.

Terrific. Thank you.

Our next question comes from the line of [Olie Debosch] with Bernstein.

Hello. So I first wanted to get a better sense of the volume growth gap between concentrates and finished goods. It's been there for a little while. It's clearly pretty prevalent this time around. I'm just trying to get a sense of whether it's a nothing because it's a true-up on timing in concentrates, or is it that concentrates, obviously, is much more diet-focused probably with the diet Dr. Pepper. Is it NCBs that are getting the bigger part of packaged beverages, and so that's looking a lot better? Is it that your Coke and Pepsi partners are not focused enough on the concentrate piece of the business? So why is that gap there so prevalent this quarter?

Well, Olie, it is Marty, so it's been there.

Yes.

And we have to think about, okay, end market sales versus what we're shipping. For example, if I just drilled down to just the Dr. Pepper brand and we talk about BCS being down a couple points, our actual shipment volume of Dr. Pepper concentrate year to date nine months over nine months is only down a half a point. So, we have to sit here and say, okay, is there a buildup of concentrate inventory in the system? It could be an indication of that.

There could be other reasons why there's a difference, but for the most part we have to be realistic and say, okay, if the end market pull through is down, too, and we're not there, for our planning purposes, we want to be realistic and assume at some point those have to come in line, not exactly in line, and therefore that could predict lower shipments of concentrate in the fourth quarter. Plus whatever other dynamic goes on in the fourth quarter, which would have happened a year ago anyway in terms of bottler behavior, what they want to buy, do they want to buy ahead of the price increase which hasn't been announced yet or not. We haven't seen much of that in the past, whether they want to more diligently manage their year-end inventories down and postpone some purchasing and push it into January?

But even if the order slowdown occurs because there is some inventory correction, as I call that? Yes, I mean ultimately that would be timing in the sense that that would yield a much lower level of concentrate shipments in the fourth quarter, but nowhere anywhere near where the BCS trends would tell us. And then we could expect to be back on those trends in the first quarter.

So I apologize, I was probably unclear. I'm not asking that question, which I think -- I understand, I think. I'm asking on the two different businesses that you have, the beverage concentrate business and the packaged beverage business. So you have this quarter it was negative three volumes, beverage concentrate plus two volumes packaged beverages.

There I would say if you're just try looking and trying to isolate Q3, I'll tell you the beverage concentrate business is obviously heavily dominated to Dr. Pepper and packaged beverages is not so. And while Larry talked about Dr. Pepper, and he mentioned a few things, when we look at what happened just in Q3, there are a lot of timing issues and events.

That's what I'm trying to get at. I'm trying to understand that.

Let me give them to you, okay? So, for example, everybody knows one of our partners ran a big promotion in the quarter last year that helped our volume last year. We're lapping that this year. Larry talked about football with some major retailers. I won't name them but they are pretty significant. Last year, we had football activity starting a little earlier in September. For planning purposes this year, those got pushed back to October. So we still got the same energy behind football, but we were able to capture some of that in last year's quarter, and we're lapping that, too. So, probably those were not small occurrences.

Okay. So more timing than the diet part of Dr. Pepper really pushing it down or NCB getting much better?

It's more timing, yes.

Lots of program activities from a year ago that had a negative lapping effect this year.

Okay. Cool. On Hawaiian Tropics specifically, I'm sorry, Hawaiian Punch specifically, how much is the improvement lapping the shelf space losses you had last year at a major retailer? And so that's the benefit and this is kind of a steady state we should expect kind of negative, or is it actual kind of comp stores shelf space stable that things are getting better?

We're looking at basically it's going to flatten out. Probably not going to see the growth we used to see before. I mean the shelf, as far as shelf space that doesn't concern us as much as getting the activity out of the end caps and in the display activity.

Okay.

We feel very confident with it.

So, planning out there. And then the last question, and it draws a little bit on Marty what you said earlier tying two things together. As you close your eyes and think forward, in the current company structure do you have a sense of what the ultimate operating margins could be for the Company? Because you've obviously done a very good job at pushing those at RCI and other things? So, what's the ultimate in this current structure?

And then given what you said a second ago, a little while ago now, about in pockets delegating some of the bottling operations to other third parties, do you ever think about doing that on a bigger scale and actually becoming a fully concentrate company and having your bottling businesses effectively be separate, like what you're hearing from Coke? Is that something that you think is a next phase of structure or not really? So two questions in there.

We're very pleased with how we are sitting right now. You heard me say before, we are 40% company-owned, 40% third party, 10% fountain food service, 10% warehouse direct and we feel that is a very good split for us.

Olie, in terms of the first part of the question, margin structure of the Company, I don't have a number where we would reach our limit. The only thing you have to think about, and everybody knows this, that to the extent mix changes across the segment, concentrates has got higher margins than packaged beverages, and to the extent we get more growth in packaged beverages, the overall carpet margin could come down. But the dollars of profit would be greater.

Okay. Thanks very much for the help.

Ladies and gentlemen, we have reached our allotted time for questions and now would like to turn the floor back over to Larry Young for any additional or closing remarks.

All right. I want to thank everybody for joining us today on the call and for your continued interest and investment in Dr. Pepper Snapple Group.

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