Keurig Dr Pepper Inc (KDP) 2015 Q3 法說會逐字稿

Good morning, and welcome to Dr Pepper Snapple Group's third-quarter 2015 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 replay and download after the call has ended.

(Operator instructions)

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

Thank you, Jackie, and good morning, everyone. Before we begin, I would like to direct your attention to the Safe Harbor statement and remind you that this conference call contains forward-looking statements, including statements concerning our future financial and operational performance. These future 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. As you saw in this morning's release, we once again posted another quarter of strong results in a continuously-challenged environment. Our Teams remained focus on our key priorities. We're driving better execution in the marketplace and continued engagement with our consumers through relevant and innovative programming. Our continuous improving capabilities surrounding marketing return on investment, trade promotional effectiveness, and the organization-wide depth and breadth of our CI initiatives are contributing significantly to our growth and improvements in productivity.

For the quarter, bottler case sales increased 2% on 3 points of positive mix and price. CSD case sales increased 2%, and non-carbs increased 4% in the quarter. Brand Dr Pepper was flat in the quarter. We achieved strong volume growth in our fountain business. Regular Dr Pepper increased 2% in the quarter, while Diet Dr Pepper declined 4% in the quarter, which reflects better than overall diet category performance.

Our Core 4 brands were flat in the quarter, as an 8% increase in Canada Dry was offset by mid-single-digit declines in 7UP and Sunkist soda, and a low-single-digit decline in A&W. Crush was flat in the quarter, and Schweppes increased 11% on growth of sparkling waters and ginger ale. Squirt increased 5% and Penafiel grew 14% on increased promotional activity and distribution gains. All other CSD brands declined 1% in the quarter.

In non-carbs, Snapple increased 5%, primarily on product innovation. Hawaiian Punch decrease 1%, and Mott's was flat in the quarter. Clamato grew 15% on distribution gains, and our water category increased 16% on a strong growth in Bai5 and Fiji. All other non-carb brands declined 3% in the quarter.

On a year-to-date basis, bottler case sales increased 2% on 3 percentage points of positive mix and price. CSDs grew 2%, while non-carbs increased 4%. Dr Pepper was flat year to date, and our Core 4 brands increased 1%, as a 9% increase in Canada Dry was partially offset by mid-single-digit declines in 7UP and Sunkist soda and a low-single-digit decrease in A&W. Crush declined 2%, and Schweppes grew 9% year to date. Squirt increased 8%, and Penafiel increased 15%, while all other brands declined 1% year to date.

In non-carbs, Snapple grew by 7%, primarily on growth form innovation. Hawaiian Punch increased to 2%, and Mott's declined 3% year to date. Clamato grew 14%, and our water category grew 11% on strong growth in Bai5 and Fiji. All other brands declined 2% year to date.

We are pleased with our results this quarter. Adjusting for foreign currency translation, net sales increased 5% in the quarter on a 3% increase in shipment volumes and favorable price, product, and package mix. These increases were partially offset by customer funding and our fountain foodservice business. Segment operating profit grew 10% in the quarter on a currency neutral basis.

Core operating income increased 9% on net sales growth, lower commodity cost, and ongoing productivity improvements that were partially offset by higher operating expenses. Adjusting for foreign currency translation, core operating income grew 12%. And finally, core EPS also increased 12% in the quarter on a currency neutral basis.

There's no question that our consumer-relevant programming has contributed to our strong results to date, and we're keeping that momentum going as we finish out the year. It's the most exciting time of the year for brand Dr Pepper. College football season has kicked off once again, and we've kicked off year two of our partnership with ESPN and in the College Football Playoffs. We'll generate close to 2.6 billion impressions across both traditional and digital media platforms, ensuring that we're always on.

We're rolling out custom football and playoff packaging and merchandising. And we've partnered with our largest retail and bottling customers to drive incremental retail activation. And yes, we brought back Larry Culpepper in several new spots this season. In short, Dr Pepper will dominate college football.

We'll also continue the Dr. Pepper Tuition Giveaway program this year, adding to the over $7 million we've given away since 2008. We've already received several hundred thousand votes so far for contestants, and we've partnered with Jimmy Kimmel to create a digital series of webisodes that chronicle the journeys of contestants as they prepare for the life throws.

Halloween is right around the corner, and this year, our seasonal Core 4 Monster cans are returning with a new look. We're daring kids to make their Monsters come to life by using an app on their phone or tablet. 7UP has once again partnered with the Latin GRAMMYs to celebrate Hispanic's passion for music, giving consumers a chance to win a trip into the biggest night in Latin music. And just in time for the holidays, Canada Dry, Schweppes, and 7UP will give shopper mom a reason to celebrate with recipes and tips for easy entertaining, and will drive incremental points of interruption at retail with holiday-themed merchandising across all these brands.

Finally we will continue to deliver excitement and variety with our new seasonal Snapple Fall Spice tea, a refreshing black tea with a hint of orange, cranberry, and spice flavors inspired by the season.

I'm sure you'll agree that we're keeping the momentum going. Now let me turn the call over to Marty to walk you through our financial results and 2015 guidance.

Thanks, Larry, and good morning, everyone. For the quarter, reported net sales increased 3% on a 3% increase in sales volume and 3 percentage points of combined product and package mix and price realization. Partially offsetting this net sales growth was a higher level of customer funding in our fountain business, which reduced net sales growth by 1%. Net sales growth was also partially offset by 2 percentage points of unfavorable foreign currency translation as we had previously expected.

Reported gross margins increased about 30 basis points in the quarter, increasing from 58.4% last year to 58.7% this year, notwithstanding 70 basis points of headwind from year-over-year mark-to-market impacts on commodity hedges. Lower commodity costs, driven primarily by packaging, increased gross margins by 100 basis points in the quarter and continued strong productivity benefits, including those from RCI, increased gross margins by another 60 basis points. Other manufacturing costs showed improvement of 30 basis points as we adopted a lean accounting practice last year of expensing all small spare parts, resulting in $5 million of additional expense last year.

Product mix, driven primarily by continued growth in our allied water brands, which we purchase as finished goods, reduced gross margins by about 45 basis points. And finally, foreign currency reduced gross margins in the quarter by 40 basis points, as Mexico sources certain inputs in US dollars and finished products sold in Canada are sourced from the US.

For the quarter, SG&A, excluding depreciation, increased by $11 million on increases in operating expenses driven by higher volumes and expected inflation. We also experienced an unfavorable comparison to certain health and wellness and risk insurance true-ups in the prior year. All other SG&A increased by just over 1%. And finally, foreign currency translation reduced reported SG&A expenses by $13 million.

Depreciation and amortization declined $2 million in the quarter, reflecting our recent trends in capital spending efficiencies. Reported operating income was $337 million in the quarter, compared to $316 million last year. Core operating income of $347 million was up 9% year over year and represented 21.3% of net sales, up 120 basis points from 20.1% last year.

Adjusting for foreign currency translation, core operating income was up 12% for the quarter and 10% year to date. Below the operating line, net interest expense increased $1 million in the quarter, and our reported effective tax rate was 34.4%, compared to 34% last year.

Now, moving on to cash flow. Cash from operating activities was $723 million, down $46 million compared to last year, caused primarily by timing of working capital. Capital spending was $71 million, compared to $103 million last year, but we do expect higher levels of capital spending in the fourth quarter principally related to packaging line additions to support growth in Mexico and the US.

We believe we will be able to fund all necessary growth investments within our annual CapEx target of 3% of sales owing to the capital efficiencies gained through RCI. Total distributions to our shareholders were $668 million, with $404 million in shares repurchased and $264 million in dividends paid.

Before I move on to guidance, let me give a quick update on RCI and our lean tracks. Recall that our lean tracks are specific areas of focus that are led by Senior Operating Managers or Lean Leaders. These tracks are continuing to achieve solid results, and a let me provide a few examples.

We've continued to improve on driver check-in and checkout times, and this productivity improvement has taken 60 delivery trucks off the road to date with no reductions in sales, deliveries, or customer service. Our Canada Dry growth track has driven strong results, with 53% growth on smaller packages just in the southeast region alone. We've continued to close Dr Pepper display tie-in rates by using the tools of RCI with our bottling partners. As an example, we've seen a 19% increase in one of our larger New York markets.

We've reduced off-invoice deductions by almost 30% in our mid-central region as a result of our accounts receivable lean track. And we're seeing double-digit distribution increases on high-margin brands through our tell-sell lean track in several markets across the country. Those are just a few results from some of our lean tracks.

We have so much more activity happening across the entire organization. As one example, our supply chain recently utilized the tools of RCI to improve its sourcing footprint, which will reduce over 1,000 truckloads of internal distribution transfers a year. As we've said before, we utilize the tools of RCI across the business on a daily basis, and we continue to see wins in many different areas. And while we're proud of what the organization has accomplished in the last four years, we still have a tremendous amount of opportunity ahead of us.

Now, moving on to 2015 full-year guidance. Today, we have raised our full-year core EPS guidance to a range of $3.92 to $3.98, up about 1.5%. As a reminder, core EPS last year was $3.65.

We now believe our 2015 net sales growth will be approximately 2%, net of a foreign currency translation headwind of approximately 2%. Based on strong year-to-date performance, we now expect total Company sales volume for the full year to be up about 1 point, with CSDs flat and growth coming from our non-carb portfolio. I will remind you that this CSD expectation is above current Nielsen measured market trends.

We expect combined price and mix to be about 3%. Concentrate pricing is driving about 40 basis points of this increase, and the remainder will primarily come from expected growth in our higher-priced non-carb and allied brands.

As we've previously communicated, foreign currency is expected to be about a 2-point headwind on net sales, and inclusive of foreign currency transaction exposure, just over a 4% headwind on operating income and just over a 4.5% headwind on EPS. Our estimates of foreign currency impacts assume the Mexican peso at [17] and the Canadian dollar at 1.34, both to the US dollar for the balance of the year.

Moving on to cost of goods. We continue to expect packaging and ingredients deflation, primarily from lower PET, aluminum, and apple juice concentrate. We now expect this deflation to reduce total cost of goods by approximately 2% 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. Though we are still experiencing the higher cost effects of capacity shortages in the transportation industry, recent RCI improvements have reduced our expected transportation exposure to about $5 million for the full year, down $5 million from our previous guidance. We continue to expect inflation in our operating expenses and an increase in health and welfare and risk insurance expenses of approximately $30 million collectively. We also continue to expect marketing spending to be approximately 7.6% of net sales in 2015, which implies an increase in the fourth quarter driven by incremental year-over-year college football activity.

Now, moving below segment offering profit, our net interest expense will now be around 4.4% on our current debt structure of about $2.6 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, again, with a heavier spending level in the fourth quarter. We expect to repurchase approximately $500 million to $550 million of our common stock in 2015, subject to market conditions. With that said, let me turn the call back over to Larry.

Thanks, Marty. Before we open the lines for questions, let me leave you with a few brief thoughts. We continue to remain focused on our key priorities, ensuring that we build our brands while executing with excellence in the marketplace and driving productivity throughout the business.

RCI continues to permeate the organization and drive tangible benefits. It will provide us with a strong foundation for sustainable improvements. 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)

Steve Powers, UBS.

Hey, good morning. So it's great to see you hanging in the 3% to 5% top-line range that you used to target. But I did want to dig into the drivers there a little bit.

If I look over the last year to 18 months, we've definitely seen improvements spread pretty much across the board volumetrically, and the pricing environment has definitely been supportive, which is great. But as you called out in part, disproportionate amount of the improved growth has come really from better distribution of Penafiel and distribution on your portfolio of newer allied brands like Bai. I just wanted your thoughts on the sustainability of that part of the equation versus your traditional core.

The sustainability there, Steve, is -- a lot of these new allied brands, we've got a lot of runway left for distribution availability. We've got parts of the country that were still just rolling out into right now. So we feel very good on that.

Then as you can see by the Nielson numbers, our core business just continues to improve. We came in with Dr Pepper flat where we were down below, and our diets are outperforming the industry. We feel very bullish.

And what about Penafiel in Mexico? What inning are you there versus having full distribution?

I think we've pretty much got the distribution levels in Mexico where they need to be. We're seeing a lot of competition come out after us right now because of the tremendous amount of success there. We are not real concerned about it because we also know that our Penafiel is a true mineral water, and what we're seeing is some minerals added and different things. So it's making our guys be on their game, but they're pretty good fighters down there.

Okay. And then Marty, just a few cleanups if I could. On the CapEx guidance, the Q4 investment that you called out on the packaging line additions, just how significant will they be. Should we read that 3% of sales guidance as a solid 3%, or is it closer to like 2.5%?

No, Steve. This year I would say bring it up closer to 3%. Some of these investments I talked about, particularly the line investments for both Mexico and the US, there will be expenditures next year for those as well. So you should plan around the $170-million level, roughly 3%. That's where we're heading.

Okay. Great. Thanks. And then just on taxes, the 35.5% expectation for the full year, are there specific reasons why you think Q4 will come in higher than where you've been running year to date?

No, there's nothing specific in there.

Okay. Thank you.

(Multiple speakers) -- our normalized rate.

Thanks a lot.

Vivian Azor, Cowen.

Hi, good morning.

Good morning.

I was curious if you could comment a little bit more on some of the incremental funding behind fountain you referenced during the prepared remarks please?

Yes, Vivian, it's Marty. We make funding payments to fountain customers for various reasons. Sometimes it's simply based on volume. Sometimes it's based on marketing programs. That's a big part of it. Sometimes it's reimbursement for equipment.

We took an adjustment in the third quarter. We trued up some funding payments, truthfully, probably $6 million or $7 million in round numbers. Probably hit the third quarter, that truthfully, we probably should have taken up in the first two quarters of the year.

Terrific. That's great. I will leave it at one question. Thank you very much.

Caroline Levy, CLSA.

Thank you so much. Good morning. Just wondering on that true up where that would have been in the income statement. Did affect price mix in the beverage concentrate?

It's a net revenue adjustment. So yes, it reduced revenues. That's why we called it out as a special --

Would it explain the price mix being down in the third quarter in concentrate?

Sure. Of course. As I said, Caroline, just take $6 million or $7 million back to the revenue line.

That's exactly where it sits. Okay. And it's not going to continue into next quarter by the sounds of things.

No.

Great. I'm intrigued by Bai. I'm drinking one as we speak, actually. I'm just wondering if you can share with us what the plans are and economically how you benefit. When you give us volume numbers in packaged beverages, does it include all of the Bai volume? Exactly how does it flow through your income statement.

It flows through the packaged beverages. It goes through Rodger's DSD business and it's a -- I'm glad you're drinking one there because it's a great product. And the way it works for us, we are basically a distribution arm. They're using our distribution muscle, and we take the product out, and we make a margin on it, and we're very pleased with it.

Is it -- definitively it's margin negative in terms of the mix, though. If you sell -- if your volume, when you report volume of 2% in packaged beverages for the quarter, does that include the allied brands volume?

Yes. Caroline, it's Marty. As we've said, we sell this product. We do not manufacture the product. So we buy the product as finished goods. And that's why they at the gross margin line intended to carry lower gross margin because they have somebody else's manufacturing profit in there. But at the operating line, they're pretty good contributors to our operating profitability.

That's great. And if you look the portfolio of your investments, what do you think the biggest opportunities are? And then while you're at that, if you don't mind, the last thing, just commenting on the Penafiel. My understanding is you brought some version of that into the United States as well.

That is correct. Caroline, let me talk about the allied brands because they are becoming an important part. We've said this to a lot of people. We look to these kinds of companies to actually contribute very much so to our innovation.

And we take the view that probably the next level of breakthrough innovation may not come from inside the Company but will come from passionate entrepreneurs who see the opportunities as we all see them in terms of where the consumer is going but can have an environment that can nurture and breed these kinds of brands from really nothing into something over time. Of course, they need a distribution partner, and that's where we come in. Our distribution system is an enormously important asset.

We choose these partners very carefully, not just about the brand or what we like about the product, but the strategy, the management, their financial ability to actually perform as the brand owner and to market the brand and actually to have -- to sell in the brands at, say, national account levels to get the authorization so we can go in and stock the stores and put up the displays and do all we do.

It's a very important partnership. We select them carefully, and it is making a difference. It's our way of saying, in our effort to try to go to where the consumer is going, not resist, go to where the consumer is going, we look to partner with organizations like this.

Thanks so much.

Bill Schmitz, Deutsche Bank

Good morning.

Good morning, Bill.

What percentage of your bottle can volume in the US is in small cans, and what do you think that could become over the next two or three years?

If you're defining small cans like 8 ounces, (multiple speakers), it's really small today. It's going to grow. We all see it. We know that's where the consumer is going. That's why some of this capital I mentioned is going into that capability. We anticipate it's going to be up the good growth package.

Okay. You don't want to commit to what the percentage is now?

It's a small, very.

Got you. And I know it's a little bit of a longer-term question, but is there anything you could do with some of your distribution and bottling assets, like, as Coke does their refranchising. Have you thought about maybe parting ways with some of them as this whole landscape changes?

No. Really, we haven't, Bill. We're very pleased with how our system, our route to markets work. We've mentioned before we've had some tail markets that we've given over to some beer distributors, but we look at it constantly, but at the time right now, we are very pleased with how our distribution is laid out.

Okay. Great. Just one last one. Was there a big delta in growth between in the C stores and the other channels in the quarter? Because I think a lot of other people were talking about it, and I know that Nielsen data for this C store data doesn't pick up the broader universe maybe like it should.

Not a big difference, but you're right. One of our sweet spots is the local C-store business, and you're right much of that is not picked up in Nielsen.

Okay. Great. Thanks very much.

Judy Hong, Goldman Sachs.

Thank you. Good morning.

Good morning.

A couple of follow-up questions. In terms of -- when you think about your sales volume guidance now being up a little bit better than what you've been forecasting year to date, it seems like a lot of that is the positive trends that you're seeing in some of the distribution gains and in allied brands and Penafiel and so forth. If you can help us understand, where do you think the upside was in terms of your sales volume guidance?

And then when you take a step back and look at the industry as a whole, it seems like you've seen an improvement across a lot of these non-carb categories, whether it's bottled water or ready-to-drink tea, so maybe just in terms of what you think is it really driving more of the broad-based category growth improvement in the last six months or so.

I think the biggest one you got to look at, Judy, is the Dr Pepper. We've got the Dr Pepper back up to flat. We've got our Diet Dr Pepper that is outperforming the category. We're having closing distribution and availability voids out there. We've great allied partners. So it's a combination of several different factors in there that are all hitting perfect for us right now.

Judy, it's Marty. Let me add, with respect to our thoughts on sales guidance, and particularly the CSD component where we've said even at breakeven volume, we're still better than category trends, and by the way, to date, we've done better than that.

We look at the key elements of that portfolio. Steve mentioned a few the brands. When you think about Dr Pepper is unique, and Dr Pepper is really responding really well to our marketing campaign, and its outperforming the category.

Penafiel is in a good place as a mineral water. Mexico being up 8%. A big driver was Penafiel, and I will tell you that two-thirds of that growth is velocity, not distribution. So it's moving off the shelf. That's really a strong sign for the brand. And we've not nearly penetrated that opportunity anywhere at all. We're scratching the surface in US on that brand.

And then, of course, you move to ginger ale. Hot category. Sparkling waters. We've got the two strongest brands there in Canada Dry and Schweppes.

We haven't said this on a long time, but back to the old flavor versus cola debate or view is, let's not forget, we've always thought we've had an advantaged portfolio. I think at least for now and for the foreseeable future, it's positioned us well.

Okay. And then a quick follow up. On the marketing spend guidance, Marty, it's at 7.6% of net sales. I know it hasn't changed year to date, but in terms of looking at some of those activities that's worked versus maybe some of the activities that may not be getting the returns that you'd expected, are there any major changes that you're making, or is it similar to what we've been seeing from your perspective?

I'll give you a few [counts]. First of all, yes, 7.6% of total sales. I'll remind you, though, that as allied brands become a bigger part of our sales -- they're not huge today, but they are huge part of the growth -- we don't market those. Those brand owners market those. So if we looked at a percent to our own brand sales, it would probably be about 8%. I just want to remind people as we go forward that all the marketing doesn't come out of our marketing spending.

With respect to marketing vehicles, I think was the second part of your question, and our MROI activities. I'm not going into a lot of to detail. If I were to go down the list of the types of things that we focus on, and we've talked about some of these as we try to get more and more effective. Length of time of our TV spots, what works better? Prime versus cable channels. Word is radio and out of home and really local marketing fit in to our brands, and if it's different across our brands.

Social media, what's a better platform? Twitter or Facebook? Paid search? What terms worked the best for us for paid search or not?

That's just off-the-top-of-my-head list of things that I know we review when we go through this all in an effort to take money away from things that are not working. We really focus on that. And our marketing budget is staying relatively flat as a percent of sales. We think it's working for us.

Yes. Got it. Thank you.

Ali Dibadj, Bernstein.

Wanted to dig a little bit more in packaged beverages. So clearly, 6% was strong, and we're all focused on that. Can you disaggregate that in terms of how much of that 6% was from the suite of allied brands in particular, and you mentioned, obviously, 2% volume there. Of the rest of it, how much was rate versus how much was just mix, i.e., the product was higher priced.

Well, Ali. I will give you -- the price realization, probably about 1 point. So everything else was mix on that price-mix factor. And look, the allied brands, they are small. They're a reasonable factor on growth. They're not the largest factor though. They're really not the largest factor. We've not quoted a specific size of those brands are what they constitute to us in total, but they're an important factor, but they're not the largest factor.

But you said a second ago that they are a large part of the growth so --

Yes, the Penafiel, but they're nowhere near what a Penafiel contributes or the Canada Dry contributes. (Multiple speakers) -- relative to those.

Yes, because it's a small base basically, you're saying.

Yes.

So then from a long-term perspective, as these things grow, what can a Bai or another one of these allied brands get from your DSD that it can't get from other distributors, like a Coke or a Pepsi system? And how much ownership do you have of some of these brands so that it protects you from losses like you've had in the past of allied brands going to other distribution systems?

That's the biggest one right there is going into a Coke or Pepsi system. You don't really ever see any go in that they don't buy. A lot of these young entrepreneurs aren't really ready to sell their business, and they want to see them built.

They look at it -- it would be better to hear it from them, but they think it's a home run when they get into our system because we've got guys that are the scrappy out there on the street. We are used to working with a lot of smaller brands and how to fight for space and where to merchandise it.

So the only other option is really to go through some beer distributors, which become very disjointed and dysfunctional on trying to do a national program. They can go with us, and we can a Target, a Kroger, or Walmart and pretty well have guaranteed distribution across the country. So I think that's the big difference for us.

So you position yourself more incubation with some ownership --

Distribution muscle is the big piece, though. Distribution doesn't come free.

So early stage. Thanks very much.

Bill Marshall, Barclays.

Thank you. Good morning. I just wanted to add, building off of the distribution comments from earlier. Obviously, you have exposure from a distribution perspective to both the red, blue system and your own system as well. So as we see these divergent paths being taken with Coke going pretty aggressively down the refranchising road, I'm just curious if you've seen any deviation in how your business is performed in those different channels recently?

No. We really haven't. You got to remember, on the Coke system where they're going back and refranchising, those are our bottlers that we've worked with for a long time. So it's just been a nice, smooth transition, and they're great bottlers, and we're pleased with the moves they've made.

Great. And then just one follow-up. We've talked a lot about some of these non-carb brands that have been doing very well, Penafiel, but how about on Clamato? It seems like that brand is doing extremely well. I wonder if you could parse out how it's doing both in North America versus Mexico, and what opportunity you see on that brand. I believe it's a very profitable brand if I'm not mistaken.

Yes. And it's hitting in Canada. It's a strong brand in Canada, strong brand in North America, and strong brand in Mexico. Our businesses are about, I'm going to say probably looking at it one-third, one-third, one-third if you go across Canada, US, and Mexico.

Great. Thank you very much.

Kevin Grundy, Jefferies.

Thanks. Good morning, guys.

Good morning, Kevin.

So Larry, my question is on CSD pricing and the runway for it. So Coke made an interesting point yesterday on a conference call that they saw less opportunity to take pricing in their CSD business in Europe over time relative to the US given the starting price point there.

So setting aside the price rationality question, because it seems like the big players in the industry are certainly committed to it, including you guys. The question is, given the high availability of substitutes, how do you think about price gaps and the availability to take pricing over time? When do you potentially start pushing price gaps to levels where you would be concerned that consumers begin to leave the category at a faster rate?

We look at that constantly. Like I've said before, we take pricing opportunistically, and a lot of that is on different regions and everything like that. We look at the majority of this on having package innovation, different packaging. Marty talked about the cans we are coming out with. Making sure that we have the choices and options out there for the consumer.

Pricing has been great. Marty and I have been in the market pretty heavy the last couple of weeks. We are seeing great -- our customers are telling us the consumer is feeling good. We're seeing the Nielson numbers. We've got some improvement. Our numbers are coming up. So I think pricing is great. We will take pricing where we can, but we don't build a lot of our plan on putting pricing in.

Thanks for that. And then Marty, on commodities, I'm not sure if you can comment at all looking out to next year, but if commodities stay where they are right now, taking a look at aluminum and oil and so forth, and spot rates hold, and your guess is as good as mine what happens there, it seems like you would have some favorability looking out to next year? Can you comment on your commodity outlook at this point?

No. We'll reserve comments until we give specific guidance in February. But I'd remind you, we do hedge, so we've locked in some prices already for next year. But I'll give you more commentary in February.

Okay. Very good. Thank you.

Robert Ottenstein, Evercore ISI.

Great. Two questions. One -- look, another terrific quarter. Congratulations.

What do you guys worry about at this point just looking at the business over the next one to two years? And then just second, maybe a little bit of color in terms of what's not actually working at 7UP.

Well I can't think of too many things I worry about. I think the biggest thing we watch is making sure that -- I want to make sure that we constantly understand the consumer. If I can understand that consumer and can have the packages and the products at the place they want them at the occasion and the time, I don't think you could have anything -- a better plan or situation than that. Then the second half of the question, I will let Marty handle.

Brand 7UP was the second part, and look, it's been a challenge. Don't forget, in the Core 4, you've seen this in the past with us -- we manage that somewhat as a portfolio. Remember a few years ago, we went after Sun Drop, and it took the lead, and we had to make some trade-offs. And Canada Dry is part of that. I'm not suggesting Canada Dry is cannibalizing 7UP, but look, it's still a portfolio.

No question 7UP is opportunity. We see that all as opportunity. It's not performed where we wanted it to. It's not performed to the level relative to the investment we put behind it, but that's what we've got to figure out. But I would point out that in the carb portfolio, that's our biggest challenge right now. It's our biggest challenge.

Terrific. Thank you very much.

Mark Swartzberg, Stifel Nicolas.

Thanks. Good morning, guys. Firstly, on -- when I see these Penafiel numbers, the Squirt number, could you just speak broadly about how your portfolio pairs up versus Hispanics and their influence on culture here in North America? You seem to be very well-positioned in relatively early innings of exploiting that opportunity, and it reminds me of you comments a moment ago about colas versus flavors. Could you elaborate on that?

If you look and our -- especially for the US, a lot of our Squirt and Penafiel volume that we report is down in Mexico. But if you look at what we do up here with Hispanic markets, we over index. And we've got the Clamato, the Squirt. We are bringing to Penafiel into our Hispanic markets.

We have found through our deep studies of our strategy on Hispanic is that we've got to be in the right channels and word of market. It's not like going into a normal Kroger or supermarket and shopping just in the beverage aisle. You've got to know where to have those products. And a lot of times, you may be stacking them over by 25 pound bags of beans and rice and things like that.

But again, I go back to what I said while ago. If we understand our consumer and what our consumer wants and where they're shopping, that's how we can go in and over index on these brands. And you're exactly right. It's flavors. They love flavors. Squirt, Penafiel, Clamato. It just gives us a tremendous opportunity and advantage in the Hispanic markets in North America.

And building on that, this allied emphasis increasing, is that the focus to the extent you see white space, or do you think you're still interested in acquisitions that are suited to where you're not addressing a consumer need?

Mark, it's Marty. Let me just quote something on the Hispanic question or brands, which we think we've got a great portfolio, and we'll tell you, we haven't done the best job. We've had a Hispanic strategy. What we're going to do, we're going to do a much better job in terms of that channel and understanding what we need to do with our portfolio. We've been doing some things, but I think we all admit there's much more runway for opportunity for us.

In terms of the allied brands, I think all we're trying to communicate and have communicated recently to various people is, Larry said it, we focus on understanding the consumer. We spent a lot of time this year interviewing some 35,000 consumers on their last beverage occasion and what drove them emotionally and functionally so we can try to understand where all of our brands play. And there's white space on what we call that demand map, and that white space can be filled, and much of it more likely will be filled maybe by us partnering with other people than trying to invent a new brand. It's hard to nurture that inside a larger company.

And so far that's work for us. We're not unwilling to do that, but we've got to make our choices very carefully. We can't do everything. So choice and priority becomes really important.

That's great. And then if I could, I supposed it's more technical, but Snapple is having a very good year, mid single digits, high single digits growth. Larry, Marty, is that kind of growth sustainable? In the past, we've seen it drop down to low single digit, then have a year like we're having this year. Is that a sustainable number? And if it's not, how do you think about alternatives to fill that -- any weakness we might see from here in terms of other non-carbs picking up the slack, so to speak, if Snapple is not able to sustain this kind of growth?

We think it's sustainable. We truly do. It's going to be a combination of our innovation plus our strategy with our Straight Up Teas that will play much stronger in the Midwest, out of the Snapple heartland. Our Straight Up Tea has basically been launched.

There's a lot of opportunity there. We will continue the innovation that we have with like just this fall, we're coming out with our fall Snapple with the spice and everything, and it's being very well received. So we feel it's very, very sustainable.

That's great. Okay. Thank you.

John Faucher, JPMorgan.

Hi. Just wanted to follow up, you talked a little bit about the diet portfolio performing better, and then Marty, you talked about all this consumer work you're doing. Is there something -- have you been able to figure out what it is about Pepper from a diet standpoint that keeps it so separate from colas? I assume it's just a more loyal consumer base, et cetera. Is there any specific learning you have about that in terms of whether or not people feel differently about aspartame in Diet Dr Pepper versus maybe what's going on with Diet Coke or Diet Pepsi?

We started marketing our Diet Dr Pepper. We didn't just sit back. We went out with the Lil' Sweet and come out with great taste, and we just wanted to get the message back out there. If you want something sweet and something with great taste. And when we did our return on market investment, it was one of the greatest returns that we've seen by going out there and getting that message back out to the people.

In the past we were doing the trademark. We were letting an umbrella fall over everything. And so we just turned it around and went directly after the diet, and it's really paid off for us very well, John.

Excellent. Thank you.

I would now like to turn the conference back over to Larry Young for any additional or closing remarks.

Okay. Thank you very much for joining the call today and for your continued interest and investment in Dr Pepper Snapple Group. Goodbye.

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