Keurig Dr Pepper Inc (KDP) 2015 Q1 法說會逐字稿

Good morning and welcome to Dr Pepper Snapple Group's first quarter 2015 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, Maria, 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 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. We're off to a strong start in 2015 amidst continued challenges in the CSD category, particularly on Diets. We delivered against our key priorities of building our brands with relevant marketing programs and consumer driven innovation and executing with excellence at the point-of-sale.

We grew both dollar and volume share in CSDs in Nielsen measured markets, and outperformed the category. We expanded distribution and availability across our tea and juice portfolios, and RCI continues to gain traction across the organization and drive top-line and bottom-line growth.

For the quarter, bottler case sales increased 3% with almost 1.5 points of positive mix and price. Bottler case sales of CSDs increased 3% and non-carbs increased 5% in the quarter. We did have some volume upside as the Easter holiday shifted into the first quarter this year, versus second quarter a year ago.

Brand Dr Pepper declined 1% in the quarter on continued declines in Diet. Our core four brands grew 4% in the quarter as a 13% increase in Canada Dry was partially offset by low single-digit declines in Sunkist soda and 7UP. Schweppes increased 8% on growth in sparkling waters and ginger ale. And Squirt increased 15%. Penafiel grew 20% on distribution gains, while Crush declined 3%. All other CSD bands were flat in the quarter.

In non-carbs, Snapple increased 5% with high single-digit growth in premium, partially offset by continued declines in value as we have strategically deemphasized this line. Hawaiian Punch increased 7% with strong results on our recently launched pouch, and some promotional activity on our base business. Mott's declined 1% in the quarter, while Clamato grew 20%. Our water category increased 9% on strong growth in Fiji, Bai5, and Vita Coco. All other non-carb brands were flat in the quarter.

On a currency neutral basis, net sales increased 5% in the quarter on a 2% increase in shipment volumes, and 3 percentage points of favorable segment mix and the favorable product mix I just mentioned. Segment operating profit grew 10% in the quarter on a currency neutral basis. Core operating income increased $23 million or 9% on net sales growth, ongoing productivity improvements and lower first-quarter marketing investments given this year's phasing. Core DPS also increased 9% in the quarter.

As I shared on our last earnings call, we kicked off 2015 with an exciting marketing calendar. Our successful partnership with ESPN wrapped up in January with the first ever college football playoffs. We brought Penafiel, Mexico's number one mineral water, to the US, and both 7UP and Snapple got new facelifts that speak directly to our target consumers.

Our naturally sweetened CSDs have rolled out in three key markets with only 60 calories per 12-ounce can, and sweetened with stevia and sugar, we're continuing to provide consumers with choices for their evolving needs. We'll continue to test how these products perform across the markets.

We also launched Snapple Straight Up Tea, an unflavored tea in a new 18.5-ounce PET packaging, and also launched Hawaiian Punch pouches. We'll continue the momentum through the spring as Dr Pepper teams up with one-of-a-kind super heroes, The Avengers, to drive retail activation and incremental points of interruption. And we're sponsoring Spike's new Lip Synch Battle, one of the highest rated new shows on cable.

We'll continue our new media campaign around Diet Dr Pepper featuring rock star Lil' Sweet, and highlighting the sweet taste of Diet Dr Pepper. And I hope you had a chance to see Texas' own centenarian, Elizabeth Sullivan, who turned 104 in March, and believes the only doctor she needs is Dr Pepper. Her story garnered over 177 million impressions in just a few days alone.

7UP will step up its connection with EDM this summer, partnering with world renowned DJs Tiesto and Martin Garrix, to bring a unique music collaboration and limited edition 7UP cans to consumers. The music collaboration will air as part of our national TV campaign and the artist designed cans are part of a sweepstake where consumers can win a VIP weekend in Las Vegas to meet both the DJs. And knowing that soccer is a passion point for Hispanics, 7UP will be on air during the Gold Cup offering consumers a once-in-a-lifetime game experience with star athletes Tim Howard and Hector Herrera.

Every day people and celebrities from New York will share why they love Snapple with the rest of America through our Born in New York #loveSnapple. And to celebrate our American heritage this summer we will offer a seasonal tea called Lady LiberTea, a refreshing combination of black tea, raspberry, white peach and blueberry flavors. Mott's is partnering the upcoming Minions movie to connect with shopper mom and her kids, and will once again partner with Box Tops for Education as kids head back to school in the fall.

As you can see, we've got strong program plans in place to engage with our target consumers and shopper mom and that our retail and bottling partners can get excited about and activate behind.

Now let me turn the call over to Marty to walk you through our financial results and our 2015 guidance.

Thanks, Larry, and good morning, everyone.

For the quarter, reported net sales increased 4%. Sales volumes increased 2%. Having sold proportionately more finished goods cases than concentrate cases, which we define as segment mix, favorably impacted year-over-year net sales by 1.5%, while product mix increased net sales over 1%. And, as we expected, this net sales growth was partially offset by 1 percentage point of unfavorable foreign currency.

Reported gross margins declined 190 basis points in the quarter, decreasing from 60.4% last year to 58.5% this year. Product mix, driven primarily by continued growth in our allied water brands, and the segment mix I just mentioned, collectively reduced gross margins by 120 basis points. Productivity benefits including those from Rapid Continuous Improvement increased gross margins by 50 basis points in the quarter, and positive net pricing increased gross margins by another 10 basis points.

Changes in certain commodity prices at the end of the quarter resulted in a $1 million unrealized mark to market loss on commodity hedges with a $2 million loss in cost of goods sold and a $1 million gain in SG&A. This compares to a $12 million unrealized mark to market gain a year ago, all recorded in cost of goods sold. The net effect of these mark to market comparisons decreased reported gross margins by approximately 100 basis points. And finally, foreign currency reduced gross margins in the quarter by 30 basis points.

Moving down the P&L, SG&A for the quarter, excluding depreciation, decreased by $2 million on $6 million of favorable foreign currency translation, a $4 million planned reduction in marketing investments due to year-over-year phasing, and the unrealized mark to market gain I just mentioned. All other SG&A increased by just under 2%.

Depreciation and amortization expense declined $2 million in the quarter. Reported operating income was $270 million, up 4% compared to $260 million last year. Core operating income of $271 million, representing 18.7% of net sales, was up 100 basis points from 17.7% last year.

Below the operating line, net interest expense increased by $2 million in the quarter, principally driven by our decision to transition our fleet from primarily operating leases to capital leases. Our effective tax rate for the quarter was 35.7%, compared to 34.3% last year. Last year's lower rate included a $2 million deferred tax benefit as a result of a New York State tax law change.

Moving on to cash flow. Cash from operating activities was $101 million, down $28 million compared to last year, driven primarily by timing of customer incentive payments. Capital spending was $20 million compared to $37 million last year. Total distributions to our shareholders were $214 million with $135 million in shares repurchased and $79 million in dividends paid.

Before I update you on 2015 guidance, let me provide you with a quick update on RCI. Building on the success of our 2014 lean tracks, we've implemented five new tracks this year, led by a new set of senior and mid-level leaders as a way of further developing lean capabilities across the organization. The tracks will target waste elimination in areas such as nonworking marketing spend, ingredients and the customer deductions collection process as well as help drive growth across our Canada Dry brand and through our tell sell channel.

These tracks are already achieving solid results, and let me provide a few examples. We've improved yield on fruit juices and sauces in one of our manufacturing facilities by over $1 million. We've eliminated rework and rush hours in one area of our marketing creative process, resulting in over a $1 million reduction in agency spending.

In Houston, we've closed 10% of Canada Dry 2-liter voids following one Kaizen event. And in the Plains region, as a result of our tell sell track, we've increased distribution points on several allied brands by double digits. These are just a few examples that should again help to reinforce the breadth and scope of Rapid Continuous Improvement at DPS. And while individually they may seem small in magnitude we are experiencing wins like these across the organization which collectively have and will drive a meaningful impact.

Now, moving on to 2015 full-year guidance. As you saw in this morning's press release, we continue to believe our 2015 net sales will be up approximately 1% net of a foreign currency headwind of now just about 1.5%. This foreign-currency headwind has ticked up a bit from our prior guidance of about 1%.

While our first-quarter volume performance was very good, our full-year expectations are still affected by existing and expected overall category trends. And while we are cautiously optimistic about the CSD category, Diets specifically still remain under pressure. Therefore, with 80% of our volume in CSDs, this causes us to believe that total Company sales volume for the full-year will be slightly up with CSD declines offset by growth in our non-carb portfolio and allied brands.

On a total Company basis we continue to 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 from expected growth in our higher-priced non-carb and allied brands. Foreign currency is now expected to be just about a 1.5 point headwind on net sales, and about a 3% headwind on operating income and EPS, which we previously guided to as a 2% headwind.

To give you some further insight, and as I mentioned on last quarter's call, we went into the year planning the Mexican peso at MXN14.60 to $1, and we are now planning the peso at MXN15.00 for the balance of the year. We also went into the year planning the Canadian dollar at CAD1.02 to $1, and we're now planning on CAD1.25 for the balance of the year.

Moving on to cost of goods sold, we continue to expect packaging and ingredients deflation, primarily from lower PET and apple juice concentrate. This is expected to reduce total cost of goods sold by approximately 1% on a constant volume mix basis.

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, as I said last quarter, capacity shortages in the transportation industry are expected to result in about $15 million of higher cost in 2015, even in light of lower fuel costs. We continue to expect an increase of approximately $20 million in health and welfare and other insurance costs, compared to the more favorable trends we experienced in 2014. We also continue to expect general inflation in our field labor costs, which 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 expect marketing spending to be approximately 7.6% of net sales in 2015, as we continue to hone our return on investment capabilities.

Now, moving below segment operating profit, our net interest expense will be around 4.5% on our current debt structure of about $2.5 billion. Our full-year core tax rate is expected to be approximately 35.5%, and we continue to 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 of these items, we continue to expect full-year core earnings-per-share to be in the $3.80 to $3.88 range, inclusive of the 3% or $0.12 per share foreign-currency headwind I 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, as Larry already mentioned, the Easter holiday shifted into the first quarter this year versus second quarter last year. We estimate this drove approximately 1 point of volume in the first quarter. Second, the packaging and ingredients deflation will be more pronounced in the back half of the year. Third, the health and welfare and other insurance increases will be significantly weighted towards the back half, though second-quarter will experience some increase. Fourth, marketing expenses are expected to increase by over $6 million in the second quarter based on program timing.

With that all said, 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 for the year remain the same and we will continue to drive awareness and relevance of our brands, innovate to meet consumers' changing needs and execute with excellence in the marketplace. Rapid Continuous Improvement continues to drive growth and productivity across the business and we've got a long runway ahead of us. And importantly, we remain committed to returning excess free cash to our shareholders over time.

Operator, we're ready for our first question.

Thank you. (Operator Instructions) Mark Swartzberg, Stifel Financial.

Thanks, good morning, guys. I just had two questions, Marty, on RCI and one is some clarification, the Canada Dry comments you made seem to pertain not only to the opportunity for improved profitability there, but the opportunity for improved share there, so could you speak to that? And then also in RCI, DSD seems to be an opportunity for some savings over the longer-term, so when you look at your DSD network today can you speak to the opportunity there?

Mark, good morning. Well, first of all, we've always said that Rapid Continuous Improvement extends to all aspects of the business and that includes sales and opportunities to find growth. In past years we've done lots of activities in Mexico, for example, that has had some beneficial impact on their top-line growth over the years.

Canada Dry closing voids, that's a project akin to what we did last year with closing voids with Snapple in a number of markets. And in those markets where we did that last year across the US, after we implemented the changes, which had a lot to do with just discipline around SKU management on the shelf, and understanding what was really moving and what wasn't -- a lot of blocking and tackling -- we were growing double digits in every one of those markets.

Canada Dry is going to be the same which is our way of saying there's opportunities everywhere and that includes opportunities to grow the top-line market by market. I think more than anything our approach is we don't fly at 50,000 feet. We can't see the ground from 50,000 feet, but when we get down there, market by market, store by store, we find these opportunities. And we have a process, a disciplined process, an analytic process through the tools of RCI to get after it.

Great. Great. Helpful.

Let me, on the second part, look, everybody knows that when you think about cost, of course most of the Company's cost is within the DSD system, so of course there's opportunity and I think you should take away from what we've been doing that we are sort of working at it everywhere, but in a controlled manner, so there's lots of opportunity.

I can't quantify, not because I don't want to, because I'm not sure I actually know how much opportunity there is and so we just let it come to our results. I think important for all of you out there to determine whether we are being successful or not with RCI is to watch our cost and margin performance over time and make your own judgments.

Yes, great. Okay, thanks, Marty.

Bill Schmitz, Deutsche Bank.

Hi, and good morning.

Morning, Bill.

A couple questions. The first is I think this is your record margin on a segment basis in the concentrate business, so was that due to the Easter shift and more volume? Or has something fundamentally changed with the way that business is run that maybe carries those elevated margins forward? And then I have a follow-up.

As we said, we, like the rest of the industry, took our price increase in concentrate on January 1, like everybody did; there was nothing unusual about that. They had a little bit lower marketing in the quarter, so some of the lower marketing referred to hit that segment. That's going to be timing.

And we had some good fountain performance both in terms of volume and some pricing in fountain. So between some nice top-line results in terms of pricing and revenue recognition and some good cost performance, margins were pretty good.

Great, thanks. And then how do you guys view M&A now? I know you took a small stake in Bai5, which you typically do with some of the allied brands, but it sounds like litigation's getting resolved with one of the big tea companies. I would just love to hear your perspective on maybe if anything's changed on the M&A front because you guys have kind of stepped aside for the last three or four years.

I don't think anything has really changed. It's not been within our focus to do any large M&A, transformative M&A. What you saw us do in Bai is an extension of what we would do in other allied brand partnerships. And it was really to solidify our partnership.

We obviously think they have some good things going on in their brand and we like their innovation pipeline and we're happy to be their largest distributor, and really partner, and be able to collaborate on things. So we made a small investment taking some equity as we would like to have in all of these partnerships.

Got you. Thanks very much. Appreciate the time.

Amit Sharma, BMO Capital Markets.

Hi, good morning, everyone.

Good morning.

Marty, just a follow-up to Bill's question, the concentrate pricing it looks like way ahead of where we see measured channel pricing is. Should we expect it to draw down as we move through the quarters?

No, the concentrate pricing will stick all year, that's why we said 40 basis points of our overall 200 basis points of price/mix should hold, which it has done last year and has done historically. So, no real change in trend there over the year.

Got it. And then, overall, pricing at the shelf continues to be very rational for the CSD business, and the other two large companies talked about maintaining that. Are you seeing anything in the marketplace that makes you think that's going to change over time?

Not at all. As you said, it's very rational, very disciplined, and the way we look at it, we told you last call that we don't really bake a lot of pricing into our DSD business, but we take pricing where we can opportunistically.

One last thing. Smaller packages certainly one of the reasons or driver of mix -- favorable mix here, how are you positioned in that segment? Do you need to spend some more capital to build capabilities there?

No, we have the capability and we play in a lot of those packages with our partners, especially with Dr Pepper, so we know which packages perform the best. But we have a broad lineup of different size packs and the smaller pack does help in some formats and some channels.

Great, thank you.

John Faucher, JPMorgan.

Thank you. Two separate questions here. First off, you guys talked about some of the phasing and marketing spending. Is that a sales curve issue, and if so, how did the Easter shift impact that? So if you could just give us maybe a little bit more detail on the phasing of marketing spending over the course of the year.

And then I did want to ask a little bit about the convenience and gas channel in terms of trends there and also package mix within there. We've generally seeing stronger scanner data. Are you seeing a combination of both take-home and single-serve improving in that channel? Or what's happening there? Thanks.

I'll handle the marketing question and Larry and I can decide who wants to talk about C&G. We can both talk about it. To remind everybody we do not account for marketing on a sales curve basis, okay? So it's programmatically accounted for. It's as incurred, which means when things happen, when ads run, costs get expensed, so it's really programmatic.

So it's really about timing of programs, which is influenced -- therefore timing is influenced by when we're going to activate things, right? So we make sure that we've got activation, distribution when it comes to advertising before we run it, so that's why we're always in this sort of situation of having to explain whether marketing is seemingly a lot higher or lower in any comparable period because it's not really done on a sales curve basis.

And on the C&G we're seeing -- we're very optimistic what we're seeing in the C&G channel. I think when you look at it, John, I mean gas prices are basically 40% lower than they were a year ago.

That equates to about $1000 a household, and the way we like to look at it, that's 600 20-ounce so we want to get all of those we can. But, if you look at the measured channels, if you look at our totals, our total business in C&G is actually better than what we're showing in measured channel because of the amount we have out there. So, we think it's going to continue to grow and be an upside for us.

Got it. And if you look at it on a brand by brand basis is there any sort of indication in terms of the brand SKU where you've seen the improvement in terms of does it tend to be lower income consumers who are -- have a little extra cash or is it more general across the business?

I think it's general across the business. It may lean just a little more to the middle and middle-lower.

Okay, great. Thank you very much.

Thanks, John.

Bonnie Herzog, Wells Fargo.

Good morning.

Morning, Bonnie.

I have a question on your Dr Pepper brand. It continues to remain pretty weak in terms of volume and share. And Larry, you did mention several initiatives, but, realistically, when do you anticipate these trends to reverse?

And then, should we view the strength of some of your other brands like Snapple, Penafiel and of course your allied brands, as a greater priority for you based on your increased promotional activity and package innovation behind some of them? I guess I'm trying to get a sense of your priorities as it relates to your allocation of resources and investments.

Well, Dr Pepper will always be a priority for me. It is in the name. And we're pleased with the improvement we've seen in Dr Pepper. If you take the Diet out, our brand's okay.

Diet is our challenge right now, but our Diet was actually down less than the category Diet, so we've got to solve for that. And you've seen the programs, I mentioned in my prepared remarks that we're doing a lot of things with Lil' Sweet and the sweet taste of Dr Pepper and we're doing a lot of things more in the field on execution and getting the product out there. So we're very positive on it. We think we're going to be in great shape there.

A lot of it was just some of the first quarter timing on that being down 1%, but all the down 1% was Diet. And as far as the core four, we're thrilled with how our core four is doing, again a challenge on the Diets there, but we're getting great execution, we're getting more availability and it's doing very well in all formats of the business.

Okay, thanks for that. And, Larry, could you just quickly update us on the tests you have been running on naturally sweetened CSDs? Maybe share some of the key findings with us, and what your long-term plans are for naturally sweetened CSDs? Thank you.

Absolutely. We've just rolled it out so it's still very early days for us to look at it out there. We're getting in some of the regional grocery chains. You can find it in some of the markets like an H-E-B, Jewel, Hy-Vee. They all have a little different time when they are going to be cut in, but right now it's still pretty early.

We have four months of sampling set up, as I mentioned earlier, we're going to do a lot of this together with not only our consumer but our customer to make sure were doing it the right way in the right place. And as we get those results in we'll be sure and make sure we share with everyone, but right now it's very, very early days.

All right, thank you.

Kevin Grundy, Jefferies.

Thanks, good morning, guys.

Hi, Kevin.

Marty, first on the EPS guidance. You decided to maintain it, so FX a bit worse, commodities probably better, maybe pricing elasticity perhaps not as dire because now you're looking for volumes to be up slightly. I think it was flat previously. And maybe a little better in fountain. Can you help us frame some of the moving parts and ascertain if there's any sort of conservatism in the guidance at this point?

Kevin, so I think we did a little better than expected in the first quarter as we said. There's 1 point of volume and probably $0.01 of EPS due to the holiday shift. Maybe there was a $0.015 of marketing in the first quarter. It's $4 million. Obviously, that's all phasing. We're still going to stick to our original marketing spend plan for the year, which is about 7.6% of net sales.

And as I said on the call, part of this is, look we can't ignore category trends long-term and expect our brands to be somewhat influenced by those trends, so there's some of that in our forward thinking. And we have to look at Mexico and Penafiel, which has just exploding down there and try not to get ahead of ourself in terms of expectations for that brand, particularly in Mexico. So a little uptick in FX as I said in my prepared remarks.

COGS is the same. We went into the year with about a 1% favorability and that is not a new factor for us. The factors I mentioned I think are the primary factors for us being comfortable, very comfortable within the range that we've given you.

Okay, that's helpful. And a quick one if I may for Larry? Just an update on Diets. A credit to you and your team. You guys are clicking -- or hitting on all cylinders I should say pretty much across the portfolio and geographies with the exception of Diets, which of course is not unique to you guys.

Any signs of improvement or encouragement that you're seeing there that would suggest you're going to see a turn in trends? That's it for me, thank you.

Not really, Kevin. It kind of goes back and forth like I said. Our Diets for Dr Pepper were down [5%]. It's a little better than what it was, but we're seeing some of our core four greater than what they were, so it kind of moves back-and-forth.

We think we have the right plans in place in marketing, but the biggest piece we're going to go after is making sure we have the execution out there, the availability we want with the marketing for those Diets to be top of mind and, with our execution, make sure they're close at hand.

Great, congrats on the quarter, guys.

Thank you.

Ali Dibadj, Bernstein.

Hey, guys just a few things. One is get a little bit more detail on the working capital (technical difficulty) the use of cash this quarter a little bit outsize. Marty you mentioned customer incentive payments. Love to know what that is, where that flows through and kind of how we should expect that going forward.

Well, it's -- so the timing of customer payments, the size of the customer payments, that's the settling up of trade payments that we owe customers based on 2014 activity. I didn't say my remarks -- I happen to look again this morning -- just simply the payment of our incentive compensation in February this year based on 2014 results was probably a $10 million increased cash outflow against -- versus year ago I should say. So nothing unusual there whatsoever.

Okay, okay. Then it might be linked, it might not be, so I don't mean to make the link, but when you look at packaged beverages, obviously the really good growth in volumes there, 4%, and then you also say part of that is driven by promotional activity as well.

So how linked is that do you think going forward? Can you give us some more detail about that driver for the packaged beverage business? Or whether you think that's sustainable without even promoting it heavily.

So within package beverages, of course you have the combination of our traditional DSD business and our warehouse direct business and warehouse direct brands, and while we talked about Hawaiian Punch being up, we did that with some promotional activity.

The other thing I should mention, as Larry mentioned, we did, in our innovation, we think we've got a great new package there, the pouch, the single-serve pouch package. Moms really like that.

We lost money on that in the quarter and I want to be clear with everybody that we made a choice. We don't have the manufacturing capability to make that package. We can put it in.

We've chosen to build the market position first and make sure that we've not only got distribution but sustained distribution and velocity. And then we will spend our shareholders' capital to take the cost down. And that hurt them a little bit in the quarter, but that was a conscious decision we made to build the brand before making too much investment in that package I should say.

So, actually warehouse direct had a tough mix quarter because unlike other quarters when I've talked about HP being down and it being good for the bottom line, they actually had a little bit of the reverse. And so that was actually a little bit -- notwithstanding their great results, it was actually a little bit of a drag for them.

Okay, that totally makes sense given the context from previous calls as well. And last thing, more broadly, clearly the pricing here is looking pretty rational. You have both commented on it being rational and the volume elasticity I think to a lot of people's surprise isn't as bad. Right? The pricing elasticity?

So what are your observations, if you have any, about what is going on from an elasticity perspective? And is it sustainable going forward? I think everyone is saying the pricing is going to be sustainably rational, but do you think this elasticity level, which is really almost meaningless, is going to be sustainable as well?

I think the big thing we're all seeing is that this pricing has been rational and stable for now three years; going on three years. People are becoming more accustomed to the pricing. I don't think it is as much of a shock that it was when everybody had to start moving with the commodities.

So, is it sustainable? That's something we're all going to have to wait and see. I think that we've mentioned several times we're cautiously optimistic, and the big thing for us is that we've just got to continue to execute in the marketplace and make sure we have the availability.

Okay, thanks very much for the insights.

Thank you.

Judy Hong, Goldman Sachs.

Thank you, good morning.

Good morning, Judy.

Good morning.

Larry, maybe just a follow-up to Ali's questions about the price/mix outlook and the context of what you're seeing from an industry perspective. I guess we hear you just in terms of the price/mix -- the pricing environment in CSD has been rational. Your portfolio is obviously less skewed to the colas where the promotional activity has come down and pricing has improved. So, just wondering how that interaction plays out when you see better pricing in colas, how does the impact your broader CSD pricing decisions?

And then, when you think about your 2% price/mix guidance, how much are you embedding the potential risk of some of that volume elasticity potentially getting worse? You're hearing a little bit more from the retailers trying to increase promotions to drive traffic. Just wondering how much of an upside could there be as it relates to your price/mix guidance.

Yes. I think what we have to look there, Judy, especially if you take Dr Pepper, almost 80% of it is displayed and sold with the colas. So the price is going to be the same there on display and on promotion.

On flavors, we price our flavored CSDs with the market, and we've seen some activity in flavored CSDs. And we make sure that we stay competitive and have our pricing there with it, so we don't have that huge cola base that even though it's declined is still 40%-plus, and so I think our pricing is good. We're happy where it's at. We will stay competitive in flavors and most of our Dr Pepper goes through the cola system.

Okay. And if you can reconcile that with price/mix outlook for this year at 2% really driven mostly by the concentrate pricing as well as mix, so really limited kind of rate or promotional discounts on the broader packaged beverage business. Can you just help us reconcile those two comments?

Judy, it's Marty. I think Larry touched on this earlier. So the concentrate price increase is worth 40 bps. That's -- we feel pretty solid about that.

Everything else is for the most part mix, which is no different than we went into the year planning. As Larry said earlier, we will take price where we see the opportunities in the marketplace and to remain competitive, but we don't bank on it in our financial forecasts. And the intersection of that pricing assumption and volume, as I said earlier, we've sort of taken a view of volumes as category trend being an important factor in thinking about where these volumes might go. So we like that intersection.

Got it, okay. And then my last question is just on Penafiel. Obviously you're lapping some of the big growth from that brand, but the growth continues to be pretty impressive.

So is there any way to help us out in terms of how much runway is left in terms of distribution gains? What are you sort of expecting that brand to do for the next couple of years? Just remind us how big that business is within your LatAm portfolio as well.

Judy, it's obviously a very large brand for our portfolio down there. Two big wins for the brand both last year, innovation in the brand and then our securing distribution in the largest convenience store chain in Mexico. I think you all know who that is. And of course really I think probably this is the last quarter of the strong double digit gains in the brand because we're going to be lapping a lot of that.

Got it. Okay, thank you.

It's important. Don't forget Penafiel where -- remember we think about Mexico we think about the sugar tax, we remind ourselves that we have a mineral water business down there in this brand, and so that positions our portfolio maybe differently than others and probably in a better place.

Yes, got it. Okay. Thank you.

Steve Powers, UBS.

Hello, guys, good morning.

Morning, Steve.

So another few questions if I could on beverage concentrate pricing, just to get underneath. Look, as was mentioned, it was very solid at 4%, which I think is about, Marty, 2 points ahead of the actual rate increase you took January 1. So just a first question just to clarify. When you say that pricing should stick over the year, I'm assuming you're talking about the 2% rate and not the 4% all-in number we saw in Q1, right?

Absolutely. The other part of those 4 points is timing on discounts and the way we accrue and fund trade to our bottlers.

Okay, great. And then stepping back, given that -- can you maybe talk about the general pricing strategy in that segment just in terms of how it flows through quarter to quarter? Because as I look over the last -- call it four years -- we've seen you take an average of about 2.5 points of price in beverage concentrates. Average annual price increase. Which is strong in itself, but the Q1 pricing trends was almost a full point stronger than that heading into this quarter.

So I was surprised to see another 4% quarter, especially given that Dr Pepper seemed relatively weak which I'd think would drive negative mix. I know there are calendar discounting dynamics at play earlier in the year, but I'd think those would normalize over time. Can you help me get underneath the drivers of Q1 and how you expect that to trend, not only over the balance of 2015, but then as we think longer-term about the cadence as well? Thanks.

Steve, in the first quarter you've got the underlying price increase of 2%; you've got the timing of discounts which added some to get to the 4%; plus in our fountain business had some reasonably good pricing as well. We don't talk a lot about the fountain business. The volume was up a little bit, the pricing was good.

So here is what I would tell you. I would take the timing impact out of Q1, think about an underlying 2%, underlying concentrate price increase, and form your own point of view on what will happen with fountain over the balance of the year.

We've done okay in fountain. We've had low single-digit growth over many periods in the past. Like I said, we've got some pricing. Pricing in that business is subject to contracts and the way we contract with fountain customers around pricing and/or price protection and how pricing works, so it's a customer by customer sort of negotiation. But you are right that the larger increase you saw in Q1, there's a timing component to that.

Okay. Any, I don't know -- would you be willing to offer up any just rule of thumb in terms of the price premium per case on fountain versus a general case of concentrate?

No.

Okay. Tried. Thought I'd try. Thank you.

You're welcome, Steve.

Robert Ottenstein, Evercore ISI.

Thank you very much. A couple of questions. One, could you give us an update on the TEN platform? Where that stands, what you're seeing in the market and whether that's picking up momentum again?

And then second, on the freight issue, if I remember, this is the second year in a row that it has been a problem, and I'm wondering to what extent you can address it by reengineering some of the system one way or the other so it stops being a drag. Thank you.

I'll answer the TEN and I'll let Marty handle the transportation. We're still very supportive of our TEN platform in the trade and our execution. As I mentioned earlier, we've got our natural products out there so we'll be watching what they do as they roll out and what type of an impact they'll have on TEN, which one the consumer really wants, where they want to play. And then we'll make our decisions on that going forward. So we're probably looking at more of a better feel of that in the third trimester of this year.

Robert, on really your question on the physical footprint, we did a lot of work on this a number of years ago, closed some plants after the spinoff from Cadbury, set up our supply chain, our network of plants and warehouses and including our warehouse direct warehouses at the time where we thought it was optimized.

The issue right now in transportation is everything that's happening in the regulatory front as it relates to rules surrounding drivers, the hours they can drive, the actual -- some of the physical aspects that can either qualify them or disqualify them to drive an over the road tractor.

This is -- some say some of this may abate with the lower activity in the oil patch maybe freeing up some drivers to service the industry, but that's been the factor. I don't know right now the solution for us would be necessarily to do any material changes or spend any material amounts of capital right now to somehow change the system.

So there is basically not that much you can do on that front is what I'm hearing?

Look, most of our -- the higher cost is influencing how we think about our footprint as we march our way through Rapid Continuous Improvement. We're obviously closing more facilities than we're opening, and so when we think about eliminating a distribution site, now we have to think about -- one of the things we have to think about is where is the product going to come from, is there going to be offsetting transportation cost at current transportation rates, and what are the implications to making that decision or not? So it influences everything we think about as we make these decisions, but I don't think it's causing us to rethink any major change in our footprint.

Great, thank you very much.

Ladies and gentlemen we have reached the allotted time for questions today. I would like to thank everyone for joining today's call. This concludes today's call and you may now disconnect.