Keurig Dr Pepper Inc (KDP) 2014 Q4 法說會逐字稿

Good morning, and welcome to Dr Pepper Snapple Group's fourth-quarter and full-year 2014 earnings conference call.

(Operator Instructions)

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 a 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, Laurie, 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 provide useful information for investors. Reconciliations of those non-GAAP measures to GAAP can be found in our earnings press release and on the investors page at www.drpeppersnapple.com.

This morning's prepared remarks will be made by Larry Young, President and CEO, and Marty Ellen, our CFO. Following our prepared remarks, we will open the call for your questions. With that, let me turn the call over to Larry.

Thanks, Heather, and good morning, everyone. I'll start off this morning by saying I am proud of our strong performance in 2014. We continued to operate in a competitive environment with continuing headwinds against CSDs, particularly Diets. And yet our teams remained focused on our strategy and delivered solid results against our key priorities.

We continue to connect and engage with our consumers through innovative and powerful marketing programs, including our Dr Pepper College Football and 7UP EDM programs, and with our strong brand equity scores across all our brands, we know these programs resonate with consumers. We delivered innovation that gives consumers options to help them live a balanced lifestyle, with the national launches of Canada Dry and Schweppes sparkling waters, and our introduction, on a test basis, of naturally sweetened CSDs. And then our TEN platform continues to bring lapsed occasions back into CSDs.

From an execution standpoint, we maintained distribution in grocery on key brands and packages across CSDs and Snapple and grew distribution across sparkling water portfolio. Mott's increased ACV by 1 point in multi-serve juice and 7 points in single-serve juice, highlighting the power of our RCI lean tracks to drive growth.

In convenience, we grew distribution on Snapple 16-ounce premium glass by 1.5 points, held space in CSD, and grew distribution across our sparkling water brands. We also continued to increase fountain coverage, adding just under 42,000 new fountain valves, providing consumers with thousands of additional sampling opportunities.

RCI is becoming the way we do business, and our lean tracks in 2014 helped us to drive growth and productivity across the business. To name a few examples, we worked collectively with our bottling partners to improve display tie-in rates on Dr Pepper, increased distribution on single-serve juice, and streamlined our driver check-in and checkout process.

Finally, we returned $717 million to our shareholders through dividends and share repurchases. And as you saw last week, we raised our dividend by just over 17% as a further commitment to returning cash to our shareholders over time.

Moving on to results, for the quarter, bottler case sales increased 2% on just about 1.5 points of positive mix and price. CSDs grew 2% and non-carbs increased 1%. Brand Dr Pepper was flat in the quarter, performing better than the overall CSD category, and our Core 4 brands grew 3% in the quarter, driven primarily by continued strong growth in Canada Dry.

Schweppes increased 10% on growth of sparkling waters and Ginger Ale, and Penafiel grew 17% on successful innovation launched in 2013. Squirt was flat, while Crush declined 6%, and all other brands declined 2% in the quarter.

In non-carbs, Snapple increased 4% with mid-single digit growth in premium, partially offset by continued declines in value, as we've strategically deemphasized this line. Clamato grew 9%, and our water category increased 5% on new distribution of Bai 5 and Sparkling Fruit2O, and continued strong growth in Fiji and Vita Coco. Hawaiian Punch declined 4%, and Mott's decreased 2% on declines in sauce. All other brands grew 1% in the quarter.

On a full-year basis, bottler case sales increased 1% on 2 percentage points of positive mix in price. CSDs grew 1%, while non-carbs decreased 1%. Dr Pepper declined 2%, driven primarily by continued declines in Diet. Our Core 4 brands increased 2% and Schweppes grew 10% for the year. Penafiel increased 21%, and both Crush and Squirt declined 1%, although the brands declined 4% for the year.

In non-carbs, Hawaiian Punch declined 7% and Mott's decreased 1%. Snapple increased 1% for the year, while Clamato grew 7% and our water category grew 3%. All other brands declined 1% for the year.

On a currency-neutral basis, net sales increased 4% in the quarter on sales volume growth of 2% and favorable product, package, and segment mix. Given some of the benefits we recorded in the fourth quarter last year, as expected, core operating income decreased 10% and core EPS declined 9% for the quarter. For the year, currency-neutral net sales increased 3%, core income from operations increased 7%, and core EPS increased 14%.

Looking forward into 2015, our strategy and priorities remain the same. We will continue to build our brands, execute with excellence in the marketplace, and further drive RCI as a core behavior. We'll continue to engage with consumers through relevant programming and provide them with innovative products and package formats to meet their evolving lifestyle needs.

This year we're expanding the test of naturally sweetened CSDs to three key regional markets and launching Snapple Straight Up Tea, a new line of unsweetened and slightly sweetened teas in 18.5 ounce PET bottles. We are also expanding distribution on our glass bottle CSDs and launching Hawaiian Punch in a pouch format, giving mom an on-the-go option for the fruit drink her kids love.

We'll continue to leverage margining return on investment to ensure we are maximizing our investment returns and continue our R&D efforts on sweetener development. Execution is critical in this business, so we will continue to work closely with our bottling partners to ensure priority brand execution, focus on flawless execution in our DSD network, and expand into new and emerging channels like online and at home.

Our allied brand partnerships allow us to participate in adjacent and growing categories, and we continue to expect strong growth from these brands. We are excited to bring the number one mineral water brand in Mexico to the US, this year, with the launch of Penafiel. Importantly, RCI will continue to underpin our business operations, and we'll continue to develop lean capabilities across the organization.

As I look across our plans for the year, I think you'll agree we have a strong program calendar that will drive excitement with our consumers and with our retail and bottling customers. January marked the end of our first college football season with our new ESPN partnership, with the first-ever college football playoffs presentation of the Dr Pepper National Championship Trophy and America's introduction to Larry Culpepper, we're definitely calling it a successful season.

Stay tuned for our new national media campaign celebrating the great taste of Diet Dr Pepper, and we'll team up with a one-of-a-kind Avengers in the spring to drive shopper excitement and incremental points of interruption in the stores. We're giving 7UP a facelift with new graphics that speak directly to the Hispanic Millennial consumer.

And, we're gearing up for our second year with EDM, once again partnering with the world's top DJ, Tiesto, and others across seven EDM festivals to drive engagement with our target customers and drive local retail activation. We also know that soccer and music are major passion points with Hispanics, so we're teaming up with star athletes like Tim Howard and Hector Herrada to celebrate the Summer of Soccer and sponsoring the 16th annual Latin Grammys, offering consumers a chance to win a trip to the show and an exclusive 7UP concert.

We know America loves New York and New York loves Snapple. Our Born in New York campaign highlights real people and celebrities from New York who will share their love and passion for the brand with the rest of America. And we're pairing Mott's with the hilarious Minions of the Despicable Me series to connect with shopper mom and her kids and continue our Box Tops for Education program this fall.

Now, let me tell turn the call over to Marty to walk you through further information on our financial results and our full-year 2015 guidance.

Thanks, Larry, and good morning, everyone.

For the quarter, reported net sales increased 3%, volume increased 2%, favorable product and package mix increased just about 1.5% and segment mix contributed about 0.5%. This net sales growth was partially offset by 1 percentage point of unfavorable foreign currency translation. Core EPS were $0.88 in the quarter, inclusive of a $0.02 foreign currency headwind, and $0.03 in incremental marketing investments above what we communicated on our last call.

Moving down the P&L, as expected, reported gross margins decreased 90 basis points in the quarter from 60.2% last year to 59.3% this year due to a number of factors. Product, package, and segment mix, collectively, reduced gross margins by 60 basis points.

Net pricing, excluding the Mexican sugar tax, reduced gross margins by 30 basis points. This includes a higher-than-normal fourth quarter trade accrual in our beverage concentrate segment. The net impact of the Mexican sugar tax reduced gross margins by 35 basis points, as we priced the tax increase through with no margin.

Foreign currency reduced gross margins in the quarter by 30 basis points. RCI productivity and other cost improvements were able to offset some of these decreases, thereby increasing gross margins by 75 basis points. Commodity cost improvements allowed us to lap the $14 million LIFO credit last year, so the net effect had no impact on year-over-year gross margin comparisons.

Changes in certain commodity prices at the end of the quarter caused us to record a $23 million unrealized mark-to-market loss on commodity hedges, with a $4 million loss recorded in cost of goods, and a $19 million loss recorded in SG&A. This compares to a $3 million unrealized mark-to-market loss last year, with a $4 million loss recorded in cost of goods sold, partially offset by $1 million gain recorded in SG&A. These unrealized mark-to-market effects also had no impact on year-over-year gross margin comparisons.

SG&A increased by $80 million in the quarter, including expected health and welfare costs and performance-based incentive compensation, which collectively increased SG&A by $18 million in the quarter. The unrealized mark-to-market comparison I just mentioned increased SG&A by $20 million year over year, and marketing investments increased by $16 million. This marketing increase is higher than the $7 million increase previously communicated last quarter, as we invested more heavily in media and college football retail activation.

This year's fourth quarter also includes a $14 million charge due to the settlement of certain pension obligations. This charge is excluded from core earnings. Remember that in last year's fourth quarter, we recorded a $56 million non-cash charge related to our withdrawal from a multi-employer pension plan, which was also excluded from core earnings. Depreciation and amortization was flat at $29 million.

Core operating income was $291 million compared to $323 million last year, a decline of 10%. Core operating margin was 19.3% of net sales in the quarter compared to 22.1% in the prior year. Again, these comparisons are in line with our planned expectations, given the approximate $22 million of benefits in last year's fourth quarter, due to both LIFO and health and welfare insurance reserve reductions that were not expected to recur.

For the full year, core operating income of $1.2 billion was up 7% from last year, and represented 19.7% of sales, up 100 basis points compared to 18.7% last year. Net interest expense was flat at $28 million in the quarter. Our reported effective tax rate for the quarter was 34.8%.

Moving on to cash flow, cash from operating activities for the year was just over $1 billion, up $156 million. Capital spending was $170 million, representing just under 3% of net sales, compared to $179 million last year. Reported free cash flow was $852 million compared to $687 million last year, an increase of 24%. Free cash flow conversion was strong at 121% of reported net income.

Total distributions to our shareholders for the year were $717 million, with $400 million in share repurchases, and $317 million in dividends. And, as Larry mentioned, we remain very committed to returning cash to our shareholders. Last week, we announced a 17.1% increase to our quarterly dividend.

Before I move into 2015 guidance, let me give an update on how RCI continues to penetrate the organization, and drives growth and productivity throughout the business, and share some of our successes since our journey began. To date, we've held over 500 Kaizen improvement projects across the Company, involving over 4,500 of our people, and we've realized over $200 million of annualized cash productivity.

Looking back on just 2014, our lean tracks have allowed us to exit 14 warehouses and make even further reductions in DSD inventory levels while improving out of stocks. Our lean tracks have also allowed us to reduce driver check-in and checkout times anywhere from 30% to almost 50%, allowing us to improve route productivity across the country. One of these events was held in Des Moines, in November, and included a few investors so they could experience our RCI process directly.

As Larry mentioned earlier, we partnered with some of our bottling customers in Kaizen events that have allowed us to increase our Dr Pepper display tie-in rates by double digits in certain markets, and use the tools of RCI to close thousands of voids across our Snapple portfolio, and gain significant points of distribution across our single-serve juice portfolio. These are important examples of using the tools and processes of RCI to improve execution and drive growth.

Now, moving onto 2015 full-year guidance, the CSD category continues to face tough headwinds, particularly Diets, and we expect this trend to continue. We will also have some challenges as a result of the strengthening US dollar on our businesses in Mexico and Canada.

Against this backdrop, we believe our 2015 net sales will be up approximately 1%, net of a foreign currency headwind of 1%. With 80% of our volume in CSDs, total company sales volume is expected to be flat, with CSDs down slightly, offset by growth in our non-carb portfolio and allied brands.

On a total company basis, we expect combined price and mix to be up about 2%. Our January 1 concentrate price increase will drive about 40 basis points of this increase, and the remainder will come as a result of growth in our higher-priced non-carb and allied brands.

As I said, currency is expected to be about a 1% headwind on net sales and about a 2% headwind on operating income and EPS. To give you some further insight, the Mexican peso averaged MXN13.31 to $1 in our 2014 results, and we are now planning on MXN14.60 for 2015, an increase of almost 10%. The Canadian dollar is also trending almost 10% higher than what we experienced in 2014 with our current expectation at CAD1.20 to $1.

Moving on to cost of goods, given our hedge positions and current market prices for our unhedged positions, we expect packaging and ingredients deflation, primarily from lower PET and apple juice concentrate. This is expected to reduce total cost of goods by approximately 1% on a constant volume mix basis. LIFO will not have a material impact in 2015.

For modeling purposes, remember that growth from our non-carb portfolio and allied brands, which are higher-dollar revenue cases, will also increase the dollar value of cost of goods. Taken together, these factors should result in a slight increase in gross margins for the year.

Moving to SG&A, while fuel prices are down, capacity shortages in the transportation industry are expected to result in about $15 million of higher cost in 2015. And though fuel prices have declined fairly significantly in recent months, we were already largely hedged on fuel for 2015.

We're expecting an increase of approximately $20 million in health and welfare and other insurance costs, compared to the more favorable trends we experienced in 2014. Furthermore, general inflation in our field labor costs will also increase total operating expenses by approximately $20 million. That said, RCI productivity benefits will help offset a portion of these increases.

We continue to enhance our marketing return on investment capabilities to ensure we are maximizing our return. We expect marketing spend to be approximately 7.6% of net sales in 2015, a very healthy rate for our business.

Now, moving below segment operating profit, our net interest expense will be around 4.6% on our $2.5 billion of debt, which implies an increase of about $6 million. Approximately half of this increase is due to transitioning our fleet to more capital leases, and we will see an offsetting improvement in operating income.

Our full-year core tax rate is expected to be approximately 35.5%, and we expect capital spending to be approximately 3% of net sales. We expect to repurchase approximately $500 million to $550 million of our common stock in 2015, subject to market conditions. Considering all these items, we expect full-year core earnings per share to be in $3.80 to $3.88 range, inclusive of the 2% or $0.08 per share foreign currency headwind I already mentioned.

Before I turn the call back over to Larry, let me highlight a couple of phasing items that will help you update your models. First, the packaging and ingredients deflation, and the transportation and general inflation increases I just mentioned, will be spread fairly evenly across the year. Second, the health and welfare and other insurance increases will be significantly weighted toward the back half, particularly the third quarter.

And finally, I will also remind everyone that we experienced very strong concentrate shipments in the first quarter of last year, as we launched a new high-yield Dr Pepper concentrate. This drove approximately five million cases of increased shipments in the first quarter of last year, which we will not experience again this year.

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

Thanks, Marty.

Before we open the lines for your questions, let me leave you with these thoughts. Our priorities remain the same. We will continue to execute our strategy in a competitive environment ensuring that we drive awareness and relevance of our brands, continue to innovate to meet consumers evolving needs, and execute flawlessly at the point of sale.

RCI is helping to drive growth and productivity across the business. And importantly, we remain committed to returning excess free cash flow to our shareholders over time. Operator, we are ready for our first question.

(Operator Instructions)

Ali Dibadj, Bernstein.

Hey, guys, thanks. So I want to ask about pricing. It does seem -- and I understand the accruals on this quarter -- but it does seem that you're lagging still your peers in North America on CSDs. And I want to get a better understanding of why, or are there things we're missing in the mechanics of how you're reporting it? And how long does that last, do you think, versus your competitors?

Well, I think if you look at especially the fourth quarter, we had quite a bit more activity than what we had in the previous year. And then our package mix also is making a difference in it. But I think if you look at the pricing, everyone is pretty well got the same pricing out there; it's just some have more smaller packages.

But your pricing is lower than your peers, is what I'm trying to get at. I guess your change in pricing is lower than your peers, while everybody seems to be trying to be rational and bring the prices up more. It doesn't seem like you're -- seeing as much from you guys, and are you saying that's mostly -- you think it's mostly mix difference?

(multiple speakers) in mix. Believe me, we take price anywhere we can.

Okay, so, it's a mostly mix -- package mix difference, you think?

Correct.

And, Ali, it's Marty, I'll add in the fourth quarter. There's no question -- Larry said we had more activity. College football drove a lot of activity around brand Dr Pepper; big Walmart program related to college football. I would think that was good activity for it -- that program was a great program for us.

As Larry said, it's not absolute pricing; it's mix. And we know others are reporting some higher price mix from some of their smaller packages, which we are not completely in.

Okay, great.

And then, on operating margins, you broke it down somewhat in terms of what the increase was, but I think there's still -- sorry, on SG&A part of operating margins, I apologize. On the SG&A part, you broke it down in terms of what some of the gap was versus last year. Can you talk about how we should think about that rolling forward?

So, Ali, let's go back. You're talking about SG&A in the fourth quarter, up $80 million, and I ran through a litany of things, including the mark-to-mark adjustment of $20 million, et cetera. Let's forget mark-to-market, because we take that out of core; that will be whatever it's going to be.

Probably the largest single operating factors to think about this year in SG&A -- and let's talk about all of SG&A for this year. Instead of compensation -- performance-based incentive compensation for our hundreds of people, managers, et cetera, that are part of the plan, drove about $12 million in the fourth quarter, and it was $25 million of the year. So, that's simply spend related to better performance. That will go up or down with performance, and that was a fairly big factor.

We've always said logistics, transportation, which, for next year, I said is going to be up $15 million. It's unfortunate we can't take advantage of the current fuel price drop. But as I said, we were largely hedged on fuel going into next year. Truthfully, if we believe that we are going to see a new normal in the cost of oil and fuel prices for the time being, then we'll lap that later in 2015. As with hedging, timing is everything. I commented on some other cost increase, inflationary cost increases --

Advertising?

We'll beat those back with some RCI. And as I said, [A&M] marketing, 7.6% of net sales.

Okay. And then -- okay, that's helpful.

Last question is: Penafiel, bringing that to the US, interesting idea. Can you talk a little bit about the prospects you see there, and perhaps the competition as well? Thanks.

Like we've told you before with our Hispanic strategy, we have found, as we go out in the market, a lot of us think we have packages and brands they want. But the Hispanic consumer is very savvy, and they want to see something from Mexico. Marty and I were in the trade a while back where we had some of our products in our regular US packaging, and the owner of the chain of Hispanic supermarkets told us they were fakes and that the consumer knew it.

Where we've brought the Penafiel from Mexico in, the success has been tremendous. We're looking forward to bringing this in, especially into our Hispanic markets where we have our focus points. And it's still early, but I think you're going to see some great results from these.

Bryan Spillane, Bank of America Merrill Lynch.

Hey, good morning.

Good morning, Bryan.

Just two questions: One, Marty, as we look out into 2015 on commodity cost, could you give us some sense for how much of -- I know you've spoken about fuel -- but just how much of it is fixed versus what may float around with movements, especially in oil prices, and how it affects packaging?

Yes, Brian, if I look across the basket of key inputs, whether you're talking about aluminum or PET or apples in concentrate and corn, et cetera, I would say we're at least 50% or more hedged. Fuel is up in the [70%s]. So, my comment this morning, we'll be down [1%], given these hedge positions, plus where the markets currently are. So, we still have some flexibility in there, and this is probably consistent with where we've been for the most part at the beginning of each year; this is not really very different.

All right, thanks. And then just one question, and this may be difficult to answer, but just related to the college football programming and the success, it sounds like it was more successful than maybe you were even anticipating at the beginning. The fact that the national championship game is so far away from the end of the season gives you a really long period of time to merchandise against that. Were you able to actually stay very active merchandising against that through that whole window? Or did it sort of really just build up closer to the playoff and to the game itself?

Bryan, I think you're correct, I think it surprised all of us how successful it was. We knew it would be successful. I cannot begin to explain how our consumer, our customer, and our bottlers get behind this. We were actually late, in our opinion, getting in to get the activity because of the amount of time it took in all the negotiations, getting -- it's the first year of a championship.

So, this year we are very bullish because we have the schedule already laid out where we're starting much earlier, and have the displays locked up, with the retailers asking us to bring it back into them earlier. So, we're pretty excited about it.

Is that part of the reason why you spent more money than you thought in the fourth quarter? Was it just related to: Hey, this is going to be big or better -- (multiple speakers)

Like I said, it was a little late getting started, so we need to spend a little more against it to get the pickup and the bang out of it.

Okay, great. Thank you.

Caroline Levy, CLSA.

Thank you so much, good morning.

Good morning, Caroline.

Couple of quick ones: The price mix, if you just did the US only, if you took out Mexico, could you give that to us, or just give us North America?

It was probably somewhere between 0.5% and 1%.

Thank you. And the outlook for Mexico -- it's been such a spectacular market for you over the past year. Does the difficult comparison mean you're looking for a pullback, or do you think you can keep growing off that new base?

We're going to grow, Caroline. They've done a great job really growing right through the headwind of the sugar tax, even though, with that approximate 10% increase in Mexico to cover that, a lot of our core sugared beverages did take a hit, and that wasn't unexpected; roughly the degree of the increase. But the innovation and the sales efforts down there, and the expanded -- we have white space down there, and we showed that this year with the largest c-store chain down in Mexico. So, they have great innovation; they're expanding distribution; they have runway. They have runway.

Because in Mexico, I think both Coke and Pepsi didn't have their best quarters down there. People are saying that consumer is very soft. But do you think you can continue to buck the trends because of your operating strategies down there and your -- the white space?

The simple answer is yes, and we proved it.

Great, that's fantastic.

And then, just getting to TEN: You talked about bringing lapsed users back into the category. It would be really helpful if you could elaborate on what you've learned about TEN, and if maybe you really think this could be a big growth year for TEN?

I think, if you look at it, Caroline, whenever I talk about bringing lapsed users back, not only bringing them that have left CSDs, and let's say from our research we are showing a lot of them went to fruit juices, to sports drinks. Now with the TEN, they're coming back to CSDs. And so, we still remain very, very committed to the TEN platform. Our guys are doing some great execution out there.

You know, it helps us also on diets, because it doesn't mention diet on there, and so it doesn't seem to be affected as much. But, you've heard me say before, it takes a long time to build a brand. We told everybody in the beginning, whenever we first come out with Dr Pepper TEN three years ago, that we were going to stay committed to it and continue to build it. All the results we're looking at tell us we're still on the right track.

Thank you. And, Marty, one for you: RCI continues to astound. Initially you thought it was more of a cash flow, working capital kind of thing, but it certainly seems to be helping margins. Are there some things you can elaborate on, as where you see the big opportunities in 2015 and 2016?

Caroline, there are opportunities everywhere. Everywhere we look, there's opportunity. And as we say around here: If we didn't have opportunity, we'd be in trouble.

And I don't say it facetiously; I mean, I rattled off a few examples this year. We've got a whole slate of Lean Tracks for 2015. We probably captured $20 million to $25 million of pure P&L cost improvement last year, which is probably what we've done in the couple years before that.

It's just permeating the way we think, the way we do business. That's really important. That's -- when we can see the entire Organization be that as its culture, we'll know we're successful.

But there's still opportunity -- I can tell you right now, we're still doing Lean Tracks on inventories and warehousing and all of the logistics sides of whether our warehouse direct business, our DSD business, lots of other activities related to top-line opportunities, which all go to execution. And the most astounding thing is our bottling partners who, when they go through the process with us, they're pretty enamored by the process itself themselves.

And in many cases, that's Coke and Pepsi, right?

We could include them, yes.

Well, thank you; thanks very much.

Bonnie Herzog, Wells Fargo.

Sorry, I was on mute, I apologize, good morning.

Good morning, Bonnie.

Hi. I have a quick follow-up on Ali's question. Given Coke's strong push to realign package architecture, with their strong focus on premium and smaller packs, which certainly seems to be driving a lot of the price mix for Coke, I'd be curious if you have plans, then, to shift your mix to the smaller, premium packs, and focus more on package innovation?

Sure, I mean, we constantly look at package innovation, Bonnie. We do a lot of it by geographic territories. And with Coke and Pepsi, where we have Dr Pepper with them, we participate in those packages. So, we know how they perform, and where we should have them.

You'll see some of the smaller packages with our innovation coming out; not only package innovation, but some of our new brand innovation, and items that we have lined up for the year. So, we look at it very closely and we -- as I mentioned earlier, we take advantage of any price we can, but we also want to make sure that we have the package lineup that the consumer wants out there. And we feel pretty happy with what we're seeing right now with our lineup.

Okay. And then, I was hoping you could just drill down a little bit more on the strong packaged beverage top-line growth that you saw in the quarter. Maybe specifically drill down on the allied brands, and they're certainly contributing to your Business -- any more color on some of those brands would be helpful.

I will take the first piece, and let Marty walk you through a drill down on it. But what's really encouraging us, Bonnie, is that we are seeing some great growth in our regular sugared brands. They're coming back. And as I'd mentioned in the earlier call, I think we're seeing the diets aren't fixed, but the diets are not declining as rapidly as they were.

And then the other big piece that I look at is what we've been able to do in convenience and gas. Up and down the street, getting that product out there, that one bottle at a time, and it's just been very impressive for us on the growth side.

Bonnie, in terms -- if we look at packaged beverages, their key growth drivers in terms of categories are the allied brands, and more specifically the water category. So, when we define the water category, we're, of course, not talking really about Deja Blue or bulk packaged water; we're really talking about brands like Vita Coco, brands like Bai, brands like Fiji, okay? Those brands are up strong double digits.

One of those brands -- some of those are small, and the growth rates are really high. But even some of the more established names I just mentioned are up very, very strong. That's an indication of our ability to leverage our distribution system for these newer-age, on-trend products that we're open to creating opportunities with those brand-owner partners. That's been a big benefit.

As Larry said, you know, the Achilles heel in CSDs continues to be diet. We're all seeing better performance in our regulars. The challenge will be for everybody to improve diets, whether in our case it's by TEN; whether, as Larry mentioned, our conclusion that probably a little more marketing investment directed at diet, more directly instead of the overall brand trademark. We'll do some of that in 2015.

But we're really pleased with what we've been able to do in packaged beverages in terms of managing the mix and finding the growth opportunities. And then, by the way, in all this, as I mentioned in my remarks, is the blocking and tackling of closing Snapple [voids], and doing all the executional things that we really try to focus on, to sell every bottle we can. And it's so far worked pretty well for packaged beverages.

That's helpful. And then, even just based on your comments, Marty, I assume it's fair to assume that you guys will continue to pursue futured partners in terms of allied brands and other businesses that you called out?

What I'd tell you is, you have to manage that. There is an element of managing products and SKUs, which we're very mindful of. So, we want to do this carefully, which means make our choices carefully. But I would bet that every new product that is invented, that needs distribution in beverages, comes through the front door of this Company, at some point, for us to look at.

Okay. Thank you.

(Operator Instructions)

Judy Hong, Goldman Sachs.

Thank you, good morning.

Good morning, Judy.

Good morning, Judy.

I guess I just wanted to get a little bit more context for 2015 guidance, Marty. So, if I look at, just qualitatively, the environment, it seems like there are more tailwinds than headwinds. You got US macros that's getting better, commodities are pretty benign, CSD pricing is pretty rational. It doesn't seem like your guidance, even if you exclude the FX impact, fully reflects that. Can you maybe talk about some of the potential headwinds, or what keeps you, in terms of having more robust profit growth outlook in 2015, is my first question.

Okay. Judy, let me run down for everybody -- let's just make sure we are all grounded on what's sort of underlying the guidance we gave this morning. As we said, CSDs, we still expect them to be down somewhat, with our non-carb portfolio up, say, low- to mid-single digits. We do have a 2% concentrate price increase roughly; that's the industry price increase built in across the whole Company. It's 40 basis points of the roughly 200 basis points of price mix.

Look, whether it's a tailwind or not, we do not and we've never really in the last few years planned any raw pricing in packaged beverages. We'll take, as Larry said, what the market will allow us to. We are all competitive. And one of the reasons we don't actually build pricing in is just from a management point of view, we don't want the higher revenue dollars to take our focus off rigorously managing cost. And it's competitive; and we need to respond to the market.

FX will be down 1% on the top line; down 2% in terms of the income and EPS and a little commodity deflation. There will be some inflation though, right? We're going to have some operating increases; we're going to have to lap some insurance costs, which are not small -- $20 million -- and $15 million in transportation. When you package it all up, you sort of get the range we've given you -- and we'll see how the year pans out. I mean, we've laid out every key modeling assumption for you, and we'll see how the year pans out.

Just clarification, Marty: The incentive comps in 2014, do we just keep that in the base for 2015?

Well, look, probably not completely, right? Because this is, sort of, above what we would call target performance. We'd love to do it each and every year for all of you and for all of our people. But, yes, wouldn't necessarily want it at that level.

That's why it's up $25 million, full year, against last year. Last year wasn't a bad year for us, but this was a better year, the way we compensate people. So, that number would come down a little.

Okay. And then, just quick one, Larry: Recently you signed the partnership with Keurig Green Mountain ahead of the Cold launch. Wanted to just get your view of the opportunity there.

And as I think about the arrangement, it sounds like you're doing it more in the fountain side, and the bottlers don't have the participation at this point. Would that change over time? And what are some of the milestones that you're going to be watching to really understand the opportunity in that segment?

It's still very early, Judy, but we don't know how big it's going to be. But we know that it could be a very, very important channel, so we want to make sure we are there.

You're correct on the agreement, how we have it set up as a fountain agreement. But we never have surprises for our partners or anything, and we are all looking at it, and seeing how it works. And if it does get big, how do we all share in it? None of that's been done yet, but I think we've always had a great reputation with our partners that we do what's fair. And I think all of us are interested in seeing what it will do.

I think it could be a big piece into another one that we're all watching close on eCommerce. But those two could tie very closely together, so we all want to understand that, and know where it's going to go, but most importantly, make sure that our brands are there.

Got it. Helpful, thank you.

Steve Powers, UBS.

Thanks. Good morning, guys.

I guess, as you look back on 2014, could you try to build a bridge from your original outlook to your final results? Because clearly the year played out materially better than you had originally anticipated. I think it's basically 7% better at the midpoint, if I'm not mistaken.

And I'm wondering if you could outline the key drivers with the benefit of hindsight there? Because I think you saw better -- in retrospect -- better volumes and pricing in the US; better performance in Mexico; you had incremental commodity tailwinds, I believe; maybe the favorable beverage concentrate versus packaged beverage mix shift there.

You may have renegotiated some supplier agreements mid-year, et cetera. So, I'm not entirely sure how to quantify those things, and versus your original expectations. And kind of like Judy, I'm just trying to discern what portion of 2014 strength might be expected to continue versus be more of an element of just timing, as I digest your 2015 guidance.

You know, Steve, but for the numbers, I couldn't have answered your question any better than you just did. (laughter) Serious. So, I'm not going to share all those. Commodities -- you talk about top line, better than expected.

Commodity improvement over and above what we thought going into the year -- fairly large factor there. But otherwise -- you hit on Mexico. Remember, we went into the year saying we didn't know about the sugar tax, and we just have to take a wait-and-see, and I think everybody took that position. And we did a lot better, clearly; so, kudos to that team.

But no, I think you hit on all of it. What happened in 2014 is all interesting, but in terms of our guidance for -- I think the way I would think about it is you'll all come to your own point of view on the top line. We've told you what we're thinking and how we're thinking. And when it comes to cost of goods, yes, we'll have a little deflation against 2014, so let's forget where we were or how we got to 2014 versus 2013. Looks like we'll have a little bit of upside there, and we'll have some inflation, insurance cost and transportation, as I said.

And long term, by the way, in terms of just cost, if oil stays where it is for a while, we'll get some benefit. And oh, by the way, if oil stays where it is and gas prices stay where they are, we haven't talked about the consumer, and lots of CPG companies are trying to figure out what's going to happen with consumer spending. We know it can't be bad. We are seeing some positive data points; it may be positive. That should lay out 2015. But you have all the elements of the bridge in 2014.

Okay. You mentioned, I think, that you weren't expecting -- you didn't embed rates into your assumptions on the finished product side for 2015. That was probably true in 2014, too. Did you get rate in 2014, and how big a factor was that?

It wasn't a huge factor for us. It wasn't a huge factor for us. Most of ours came in the form of mix. And as Larry commented, particularly in the fourth quarter, we had this sort of back-half fourth-quarter added activity around Dr Pepper, which performed very well. That came with some promotional activity with it, of course.

Yes.

And as I mentioned, too, Steve, what we're seeing in convenient and gas is kind of a channel shift, which will shift mix also. I think the guidance we gave as we looked at it was -- with all the statistics and everything we could look at, we were very confident with it.

I think everybody's seen the first Nielsen; we're happy with January. I think everybody looked at Nielsen and you can see that we did pretty well in January. And if things improve, we'll certainly keep everybody updated.

All right, great. Thanks, guys.

Bill Schmitz, Deutsche Bank.

Hi, good morning.

Good morning, Bill.

Hey, a couple things. The first one is: Your leverage ratio since 2008 has been cut in half. So, I think on my math it's like 1.5 turns of net debt to EBITDA. So, are you just -- keep letting that come down as cash flow continues to accelerate? Or are there maybe plans to more optimize the capital structure? And I have a follow-up, please.

Well, Bill, we're down some. I mean, obviously we took a lot of debt out at post-spin when we were much more highly levered, and now we're roughly 2 times EBITDA, give or take. We have no plans to materially change that.

Our guidance for next year on share repurchase is $500 million to $550 million, along with our higher dividend commitment, all comes out of operating cash flow next year. And we have no near-term plans to change the capital structure.

Okay, thanks. And then, it seems that you have more and more flexibility in the P&L. And I know when times were a little harder, you backed off from things like the [coastal] strategy. Now it seems like Coke is committed to increasing its share of voice. The question is: Will you spend, not dollar for dollar, but percent/percent to maintain share of voice, and would you ever maybe revisit some of the stuff that you were doing on the growth front, now that there's actually more money sloshing around it seems?

We look at that every day, Bill. And, just kind of referring to the coastal, I mean we still keep a very strong focus on the coastal strategy, but we're doing it much more local than national and broad, how we were advertising before. We pick a market and we identify what we need to do there and we stay on it.

I think as far as sales and marketing, there's probably no one in this Organization that would tell you that if they needed the money and there was a return, that they wouldn't get it. I mean, we don't go in and say no because of the P&L. I mean, we look at what we've got to do, how we grow it, and what's the return.

Okay, got you. I know you guided to the advertising ratio for the year, but will that change as the competitive dynamics change? Because it does feel like folks are a little bit more emboldened now; elasticity has broken down in a good way, in terms of pricing and volume response.

Unless something would change from what we're looking at with our programs and our percent of sales we have, that's what we can execute flawlessly right now, and that's the main thing we look at. Can it be executed? And we're very happy where we're at.

Okay, great. Thanks so much, guys, I appreciate it.

Thanks, Bill.

Kevin Grundy, Jefferies.

Hey, good morning, guys.

I wanted to come back to brand Dr Pepper. So, it was down 2% this year, and you're cycling down 2% last year. And I wanted to get a sense if you're comfortable with the level of brand investment there? I know we're flat in the quarter, so that was better sequentially, which is a good thing. So, if you kind of touch on that, do you feel like you have the right marketing strategy in place? Are the additional dollars going to Diet Dr Pepper, in addition to the TEN platform?

And then, Larry, too, I guess just to sort of reconcile your comments -- and I appreciate, you know, you're sort of the eternal optimist, which is great. The TEN platform, at least Dr Pepper, is down mid-teens on a volume basis, so is it a sense where the bottlers are kind of giving up on this? The low-cal or mid-cal historically has not had a lot of success, where the consumer either goes for full-cal or to no-cal. I know there's a lot there, but really around Dr Pepper, the brand itself, and what you're doing here to sort of target some of these lapsed consumers. Thank you.

Like you said, you can see where fourth quarter came back stronger, definitely showed that our college football programming worked. We have a lot of great programming set up for the year, as I mentioned, starting with Diet Dr Pepper. Most of our declines are in the diet. You can look at the latest Nielsen; I mean, the Dr Pepper's coming back. Diet is still an issue; we're going to solve for that.

And as far as TEN, we've had a lot of meeting with our bottlers; they're seeing the importance of TEN. We have a lot of programs for 2015 on the Dr Pepper TEN. And then we look at the TEN in the core as some of the benefits to us growing our Core 4 on the packaged beverage side. We'll stay very committed to it. It's not out there, like you said, growing through the roof, but it's doing what we expected to do, and it's helping us to bring people back into the category, even if it wasn't in the TEN after they come back in.

Okay. Could I have one follow-up, if you don't mind? Marty, on the pay-out ratio, now up to 50%, is that the right place to be you think for the Company with respect to the recent dividend increase?

Kevin, the short answer is yes. And as we talk to shareholders, I don't get a lot of feedback against that mix. We did say that we would, and we've always said, and I believe our Board continues to believe this, that, if we had to lean one way or the other, it would be more dividend and less repurchase. The 17% drew the pay-out ratio up modestly, a small amount -- 17% increase in dividend, 14% increase in core EPS. I would say that would be our tendency or our leaning over time.

Okay, very good. Thanks for the time, and congratulations on a good year.

Thank you.

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

Thank you for participating in Dr Pepper Snapple Group's fourth-quarter and full-year 2014 earnings conference call. You may now disconnect.