Keurig Dr Pepper Inc (KDP) 2015 Q4 法說會逐字稿

Good morning, and welcome to Dr Pepper Snapple Group's fourth-quarter and full-year 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 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'll open the call for your questions. With that I'll turn the call over to Larry.

Thanks, Heather, and good morning, everyone. I'll start off this morning by saying, I'm proud of our teams for the strong performance they delivered. We remained focused on our priorities and delivered tremendous top- and bottom-line results. We grew both dollar and volume share in CSDs and shelf-stable juice.

We executed a strong year-long calendar of consumer relevant programming and launched several new products to meet consumers' evolving needs, such as our Snapple Straight Up Tea and Hawaiian Punch in pouch packaging. We also added new flavors to our sparkling water lineup, and brought Penafiel into several Hispanic markets in the US.

From a distribution and availability standpoint, we held ACV for CSDs in grocery, and grew distribution of sparkling waters in that channel. We also grew ACV for Snapple Premium by about 1 point in both grocery and convenience. And, in grocery, we grew distribution of Mott's single-serve juice just over 3 points.

Our fountain team added over 42,000 new valves across local and national accounts, expanding single-serve availability and creating new sampling occasions for our brands. And, finally, our improving RCI capabilities across the organization are driving improvements in growth and productivity. This past year, we introduced an RCI management framework we call DPS In Action, starting with visual management across the Company, and we'll build upon this framework in 2016.

Turning to the quarter, bottler case sales increased 1% on 3 points of positive mix and price. CSD case sells were flat and non-carbs increased 4% in the quarter. Brand Dr Pepper decreased 2%. About half of this decline was driven by fountain food service in the quarter, as we lapped a fountain limited time offering in one of our larger accounts a year ago. We also continued to experience declines in diet for the quarter.

Our Core 4 brands also decreased 2% in the quarter, as a mid-single-digit increase in Canada Dry was more than offset by a high-single-digit decrease in 7UP, a mid-single-digit decrease in Sunkist, and a low-single-digit decrease in A&W.

For the full year, Dr Pepper declined just under 1%, and our Core 4 brands were flat, reflecting better-than-category performance across our key CSD brands. Crush grew 4% in the quarter and Schweppes increased 7% on distribution gains in sparkling waters and growth in the ginger ale category. Squirt increased 3% and Penafiel grew 10% on increased promotional activity and distribution gains. All other CSDs declined 1% in the quarter.

In non-carbs, Snapple increased 4% on distribution gains and the launch of our Straight Up Tea line. Hawaiian Punch increased 3% and Mott's grew 2% in the quarter. Clamato increased 5% on distribution gains and increased promotional activity. And our water category grew 21% on strong growth in Bai brands, FIJI, and our Aguafiel brand in Mexico. All other non-carb brands declined 5% in the quarter.

As we move into 2016, our strategy of building brands, executing with excellence, and continuing to embed RCI and lean management across the organization remains the same. This year, we'll unlock growth in our portfolio through focused communications, and relevant product and packaging innovation across our priority brands that consumers have told us we can win with. And we'll continue to use our improving marketing return on investment capabilities to provide better effectiveness on every dollar we spend.

Execution is critical in this business. We will continue to work with our bottling partners to ensure priority brand execution on Brand Dr Pepper. At our own DSD network, we'll continue to focus on execution excellence, and driving distribution and availability across key brands and SKUs, with added focus on high-margin channels like convenience and on-premise.

Our strategy of partnering with select allied brand partners is contributing to our growth, and these partnerships are a great supplement to our own in-house innovation. These brands allow us to leverage our large-scale distribution network and participate in growth-emerging categories where we don't currently have a brand presence.

And, finally, we'll continue to evolve RCI into our daily management process. We'll further integrate goal deployment and visual management across the business, and we will continue to develop lean capabilities and bench drink through our developing leader program, all to ensure we continue to build the best operating team in the industry.

As I just said, building our brands is a key component of our strategy, and we've got great some plans in 2016 to drive excitement with our consumers, retail, and bottling partners. Dr Pepper returns to the big screen in March, partnering with this year's blockbuster superhero movie, Batman Versus Superman, driving activation at all our top retailers. We'll also bring back superstar, Lil' Sweet, in our new media campaign, continuing to highlight the great taste and sweet taste of Diet Dr Pepper.

This summer, Dr Pepper's Pick Your Pepper will give millennials a unique way to express their individuality with 150 one-of-a-kind labels to choose from. And, in the fall, the brand will once again dominate college football. We'll feature several periods of holiday-themed activity throughout the year across our core-four brands, and we'll take advantage of the growing ginger ale and cherry segments, with incremental media and retail activity behind Canada Dry, Cherry Dr Pepper, and Cherry 7UP. We're also rolling out 7.5 ounce slim cans across our Core 4 portfolio in our Company-owned DSD network, to participate in the growth of this consumer-preferred package.

Snapple will continue to deliver new news to the category with two new seasonal LTOs planned for later in the year. And Straight Up Tea is getting a facelift with new graphics and two new varieties of green and herbal teas. Mott's is partnering with Universal Pictures for the Secret Life of Pets, and will feature packaging with characters from the movie. And Clamato will share recipes for mixing occasions on social media throughout the year, as we take advantage of this brand's strong mixture heritage.

I'm sure you'll agree, we've got a full calendar of activity planned for the year. Now let me turn the call over to Marty to walk you through our financial results and our 2016 guidance.

Thank you, Larry. I'd like to begin with a high-level financial summary, starting with the fourth quarter. Sales volume was flat, with reported net sales up 2%. Currency-neutral net sales were up 4%.

Core operating income was up 13%. And core operating margin stood at 21.3%, up 200 basis points. Core EPS was up 14% in the quarter. Excluding foreign currency translation, core operating income was up 15% and core EPS was up 16%.

For the year, sales volumes were up 1%, with reported net sales up 3%. Currency-neutral net sales were up 5%. Core operating income was up 9%, yielding an operating margin of 20.9%, up 120 basis points from last year.

Core EPS, for the year, was up 10%. Excluding foreign currency translation, core operating income was up 11% and core EPS was up 12% for the year. And without foreign currency transaction, these year-over-year growth rates would be even higher. All in all, some very good results for the quarter and the year.

Now let me provide some further details on the quarter. Contributing to our currency-neutral net sales increase of 4% were favorable product, package, and segment mix, along with increased price realization. Net sales also benefited from lower discounts, primarily in our fountain food service business, as we lapped a higher trade accrual recorded last year.

Reported gross margins increased 120 basis points in the quarter, increasing from 59.3% last year to 60.5% this year, of which 20 basis points was driven by the favorable effect of unrealized mark-to-market commodity changes. Lower commodity costs increased gross margins by 150 basis points in the quarter. And continued strong productivity benefits, including those from rapid continuous improvement, increased gross margins by another 60 basis points.

The impact of net pricing in the quarter increased gross margins by 50 basis points, and decreases in other manufacturing costs increased gross margins by 10 basis points. Product, package, and segment mix reduced gross margins by 110 basis points. And, finally, foreign currency reduced gross margins in the quarter by 60 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, decreased by $24 million on a favorable unrealized commodity mark-to-market effect of $21 million, and a favorable comparison to a $14 million pension charge recorded last year. Foreign currency translation also reduced reported SG&A expense by $9 million. These decreases were partially offset by increases in certain operating expenses -- increased management incentive compensation and an increase in marketing investments.

Depreciation and amortization declined $3 million in the quarter, reflecting recent trends in our capital spending efficiencies. We also recorded a $7 million impairment charge on our Garden Cocktail brand, which is included in other operating expense. Garden Cocktail is a vegetable juice sold in Canada. It's a fairly small-volume brand that we continue to sell but, given recent decline in category trends, an impairment was indicated.

Below the operating line, net interest expense increased $5 million in the quarter as we borrowed in November to refinance a $500 million debt maturity in January. And our reported effective tax rate was 36.4%, compared to 34.8% last year.

Moving on to cash flow, cash from operating activities was $991 million, down $31 million compared to last year. Capital spending was in line with our guidance, at $179 million, compared to $170 million last year, resulting in another strong year of free cash flow conversion. Total distributions to our shareholders were $876 million, with $521 million in shares repurchased, and $355 million in dividends paid.

Before I move into 2016 guidance, let me give a quick update on RCI and our lean-track performance. Our 2015 lean tracks were able to achieve significant results. Let me briefly provide just a few examples, and then talk about our tracks for 2016.

As a result of our Snapple void closure track, we closed over 17,000 voids on our Snapple brand across our west business unit, adding to increased sales of the brand. In one of our back-office productivity tracks, we've reduced customer deductions by 13% across all of national and regional accounts, which has contributed to higher deductions collections. And our south Texas region grew Canada Dry volumes by 15% this year, as a result of our Canada Dry void closure growth track. Again, those are a few examples of the broad array of RCI activities we have going on in the business.

As we move into 2016, we have a new set of lean tracks that are currently underway and focused on driving a balance of both top-line growth and productivity. From a growth perspective, we'll have separate tracks dedicated to closing voids on smaller packages on Brand Dr Pepper and improving distribution and availability on several of our allied brands. We also have a track specifically dedicated to driving 7UP share growth. We'll continue to drive productivity across the business, with tracks focused on reducing DSD driver turnover rates and reducing additional nonworking costs within media, so that we can reinvest those dollars back into supporting the business. And, of course, we'll continue to develop and embed lean capabilities throughout the organization.

While the business improvements we've achieved have been important, I can add that more than 7,000 Kaizen certificates have been earned by our people participating in these improvement projects. And they have been proudly signed by Larry, myself, and others. This may, in fact, be our most important achievement.

Now, moving on to 2016 full-year guidance, we are expecting reported net sales to be up approximately 1%, inclusive of a foreign currency translation headwind of about 2%, and earnings per share to be in the $4.20 to $4.30 range, inclusive of an $0.18 headwind from both foreign currency translation and transaction combined. I'll talk about our underlying foreign currency exchange rate assumptions in a moment.

Removing the year-over-year non-comparability caused by exchange rates, this guidance is in line, or actually slightly better, than our longer-term expectations of low-single-digit net sales growth and mid-single-digit operating profit growth, reflecting an expectation of continued strength in our underlying business. Roughly 80% of our volumes are exposed to the CSD category, which continues to face headwinds -- particularly in diets -- and we expect this trend to continue in 2016. That said, however, we have continued to outperform the CSD category, and we expect that trend to continue this year as well.

We also have pricing opportunity across several of our warehouse-direct brands that will temper our non-carb volumes in 2016, but are expected to improve our profitability. And, in Mexico, we have made a business decision to terminate a distribution agreement on our Aguafiel 10-liter business, which will also have a negative impact on our non-carb volumes, but will modestly help our bottom line. This volume reduction is expected to reduce total Company volumes by just under 1/2 a point.

Given these assumptions, we expect total Company sales volume to be about flat, with CSDs up slightly and non-carbs down slightly, again with non-carbs driven by pricing actions and the termination of the Aguafiel 10-liter business. It's important to highlight that we still expect continued growth from other non-carb brands such as Snapple, Clamato, and our allied brand portfolio. On a total Company basis, we expect combined price and mix to be up about 2.5%. Our January 1 concentrate price increase will drive about 40 basis points of this increase.

Price increases on several of our warehouse-direct brands will drive another 30 basis points of pricing, and the remainder will come from mix as a result of stronger growth from smaller CSD packages and brands such as Snapple, Clamato, and our allied brand portfolio. And as I just mentioned, we are expecting foreign currency to negatively impact our results in 2016. To give you some further insight and to help you with your modeling, the Mexican peso averaged MXN15.87 to the US dollar in our 2015 results and we're now planning on MXN18.67 for 2016, an increase of almost 18%. The Canadian dollar is also trending almost 15% higher than we experienced in 2015, with our current expectation at CAD1.47 to the US dollar.

Moving on to cost of goods. Given our hedged positions and current market prices for our unhedged positions, we expect packaging and ingredients to be about flat on a constant volume mix basis. This expectation includes deflation on certain commodities such as aluminum and PET. However, also assumes offsetting inflation in corn, driven by the price of coal products and higher tolling fees.

For modeling purposes, remember that growth from some of our non-carb portfolio and allied brands, which are higher-dollar revenue cases, will also increase the dollar value of cost of goods. And also remember that cost of goods is negatively impacted by foreign currency transaction, as I mentioned a moment ago. Collectively, all the factors I've mentioned above should result in roughly similar gross margins in 2016.

Moving to SG&A, 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 2015. Furthermore, general inflation and our field labor costs will also increase total operating expenses by approximately $20 million. That said, and as we were able to achieve this year, RCI productivity benefits will help offset a portion of these increases. We expect marketing spend to be about 7.5% of net sales in 2016 and, while we expect favorability from lower fuel costs in 2016, we will also experience rate increases from our third-party carriers.

Now, moving below segment operating profit, net interest expense will be around 4.5% on our $2.9 billion of debt, which implies an increase of approximately $14 million, driven primarily by our recent debt issuances and refinancing. 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 $650 million to $700 million of our common stock in 2016, subject to market conditions.

Let me highlight a couple of phasing items that will help you update your models. First, given the strengthening of the US dollar over the course of 2015, our foreign currency headwind will be more pronounced in the first half of the year. Second, as I mentioned earlier, we will be terminating a distribution agreement on our 10-liter Aguafiel business in Mexico, which will go into effect on April 1.

Third, while we expect commodities to be about flat on a constant volume mix basis for the full year, we do expect deflation in the first half of the year. Fourth, we expect a reduction in marketing investment in the first quarter of the year, based on timing of several of our media campaigns. And, finally, we expect the uptick in interest expense to be heavily weighted towards the first half of the year.

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

Thanks, Marty. Before we open the line for questions, let me leave you with a few brief thoughts. The fundamentals of our business remain strong. We're focused on unlocking growth across our priority brands through integrated and aligned communication and execution and relevant innovation.

RCI continues to permeate the organization and drive meaningful improvement in growth and productivity throughout the business. And importantly, we remain committed to returning excess free cash to our shareholders over time. And as you saw last week, we raised our dividend by just over 10% as a further commitment to that strategy.

Operator, we're ready for our first question.

Thank you.

(Operator instructions)

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

First a housekeeping question, then two broader questions. Housekeeping question is price mix in the quarter came in much higher. I think you mentioned you're lapping some reversal reserves in the prior year, or booking reserves, I'm sorry. I just want to understand that a bit better. Was it potentially mis-modeling from our side or was there a reversal of reserves in the quarter? If you could comment on that, that would be helpful.

For housekeeping purposes, you hit on it. We did record a higher trade accrual last year in the fourth quarter in our concentrate segment. Probably in the neighborhood of $8 million or $9 million and that probably accounts for most of the difference.

Okay. That's helpful. Marty, just sticking with gross margins I guess for a moment, in 2016 and then beyond, is it your hope that unfavorable product and segment mix given higher growth that you're getting there, particularly on the non-carbs and allied, can be offset with RCI and productivity?

Let me step to the gross margins and lets think about where they could go. Of course we expect better margins from smaller package mix. Allied brands, lets be careful on allied brands, as we've reminded everybody, at the gross margin line they're a little smaller because we buy the finished goods from third parties. But the operating line there pretty good because we don't do all the selling and we don't do all the marketing. So the operating profit flow-through is pretty good on Allied Brands.

Segment mix will always be a function, particularly of concentrate versus finished goods, with of course concentrate margins being much higher, I think those are the -- and then of course whatever happens in pricing, which in here, in CSDs, we don't plan for any. Not that it doesn't happen, but we take that out of our expectation to make sure that we otherwise focus on driving the operating plan with respect to those things that we can control, and we don't unilaterally control CSD pricing in the marketplace.

Those are the factors you need to consider in modeling gross margins and of course RCI. Productivity benefits have been strong. Whether from RCI, whether from other things going on in supply chain, particularly around packaging and packaging engineering. But we expect continued strong productivity results in gross margins as well.

Okay. Thank you. One more for me. Larry, you had a great year. I think it was your strongest year from a volume growth perspective since 2011 if I'm not mistaken. Can you talk a bit about where you're seeing the distribution gains by geography and by channel and where you think you're gaining market share? And if you care to comment on what you think the runway is for that brand? That's it for me. Thanks.

We've said all along we have a long runway on our distribution and availability. I mentioned in my prepared remarks and I think Marty's mentioned it too, RCI has shown us growth also. We were able to close distribution voids on Snapple. 17,000 I believe was the number on it. So you're seeing a lot of that coming from convenient and gas up and down the street, a lot of channels that are not measured by Nielson, that kind of make the numbers look a little different. I will say our runway continues to be long.

Very good. Thank you.

Our next question comes from the line of Ali Dibadj with Bernstein.

Hey, guys. Couple things. One is on packaged beverages. Clearly that's been driving a lot of your growth and again quite successful, especially this water is generally 21% growing. Is that what you're assuming going forward as well for 2016? How big of a driver will packaged beverages growth be and how much really from the allied brands? I think Marty last quarter you said allied brands were close to half of the growth in the packaged beverages business. Want to understand the trajectory going forward as well as what it was in the quarter.

It's clearly, the allied brands which are principally in our water category whether they be BODYARMOR et cetera, Fiji which had another great year, are becoming increasingly important which seems logical, right? They are capturing growth in those parts of the marketplace that are growing. They probably this year if I remember my numbers, I think shifted our total mix somewhere around 1 point for the whole company, which again is small but it's on a pretty big number. They're a very important part of our strategy.

We've done well with CSDs. The packaged beverages team, our GSD team. Pretty good results overall in CSDs. You'll at least see some of that in the Nielsons. So we continue to drive execution on CSDs.

We like where our portfolio is positioned in flavors. All of you know this. Flavors continue to outperform colas. That is the foundation of the house, but I'd tell you the building upon that foundation is happening in growth areas that we're participating in, in maybe a little different way than others by partnering with allied brand owners.

Is it more than half of your packaged beverage growth then, is that this quarter as well and what we should expect going forward?

It's a meaningful portion. So I think you're heading in the right direction. And we've got a lot of runway with those because they're not all completely rolled out at this point. Just in terms of D&A across the country.

I think you guys have picked up on some really interesting brands. In that context, I understand, or starting to understand more and more about the margin impact on you guys versus operating. How does it affect the bottlers' margins? Do they care when they're distributing it for you or is this all in your system? Then from an investor's perspective, how should we think about you guys as you're relying more and more on not your brands? More and more on distribution of others' brands and particularly in the risk we saw with others where it could go away from your distribution system. So a little bit more help thinking through would be useful.

Ali, let me take the latter part of that question, really which is a question of strategy. In terms of opening up our distribution system to third-party or non-own brand. It's a conscious decision we made. We look at our distribution platform and the coverage that we have as being a strategic asset.

And recognizing that unlikely that we on our own through our own development would ever create the breakthrough, we'll call them breakthrough innovation brands that some of these allied brands have become or look like they may become. You're right to hit on the risk, that probably not if but when these entrepreneurs decide to exit, could there be some risk that somebody else steps in and acquires them and removes the distribution from us? The answer of course is yes.

So it's a choice we've made to participate in growing in emerging categories, recognizing that down the road that risk is there, and some may end up going away at some point but others are coming in all the time. And unlikely they'll all go away at the same time. So maybe we'll see that portfolio shift as those things happen.

There are many potential acquirers of these businesses that are in fact, would still need our distribution. There are a couple that may not. But there are others that will.

And sorry, the bottle economics, go back to that one, do they care?

On our bottlers, a lot of them carry a lot of the different allied brands. We don't really go out and push the allied brand ourselves to them. They watch what we do. They really help us on some of the bigger ones to get the full footprint and they're very excited about it. They're seeing the same growth that we do. It lets them play in categories that they were not in.

Thanks very much.

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

Hi, guys. Good morning. It seems like you're squirreling away a ton of cash in the balance sheet, it looks like there was a timing difference between the refinance of the old debt and the new debt. It's almost like $1 billion. I'm just wondering if that was purposeful and if there's going to be some different use of proceeds going forward?

So last year in November we actually raised $750 million, which you see included in that $900 million number on the ending balance sheet. $500 million of it was 10-year maturity, targeted to retire the $500 million debt maturity that matured in January. So that was just timing. And you should note that we did $250 million, so we actually took our aggregate debt up by $250 million. We took advantage at what was then in our view very attractive 30-year financing rates.

In essence creating what some would say a strip of surrogate-like equity very patient capital, public debt, no covenants really. And very attractive rates that were then apparent. And in essence you're seeing that additional $250 million going to share repurchase. That's why our repurchase guidance is $650 million to $700 million, higher than our roughly $500 million run rate if you will.

Okay. Great. Then sort of a cryptic question, but if given the choice, would you manage the business for sales maximization or gross margin? Obviously you can toggle it given the trade-off between the allied brands and some of your own brands. In a perfect world, what do you lean towards and can you kind of control that?

Two important things in the business. There is importance in maintaining and growing a certain share position, because that's important to retailers. It goes to our ability to maintain our brands on the shelf, but once we get through that it's not about volume, it's about profit. Get the share position that puts us in good stead and our ability to grow at retail, then from there our strategies are drive profitability.

Okay. But my question was sort of like, growing at retail, you're growing at retail much faster than some of the allied brands. Goes back to the question from last call. At what point do allied brands become too big as a percent of overall mix? Because obviously it's pretty gross margin dilutive. I know you said it's sort of agnostic on the operating line.

Yes, but in reality though, it's operating profit accretive. Focused on the gross margin. If those brands grow to be tremendously big, wonderful, because we will do great.

Okay. That's totally fair. How long do you think the runway is in sparkling water and ginger ale and how big are they now as a percentage of sales?

I don't have the exact percentage of sales we have in here. If you look at what we're doing especially with Schweppes, just on the Canada Dry growth that we've had across the market and ginger ale, now Schweppes is starting to go across the country where we really didn't have Schweppes ginger ale on our bottlers system, and our bottlers are behind it because they want to have a part of that ginger ale growth.

The runway just on distribution and availabilities long. And then the increasing - people are looking at ginger ale, Bill, as better for you. They're looking at it as an alternative. It's just got a lot of things working for it now that make it very prominent. It continues to grow.

Great. Thanks. How about on the sparkling water side?

Same with the sparkling water. Sparkling water is a tiny piece of our business but it's got some really great growth and we continue to see more distribution of that brand also.

Great. Thank you guys very much.

Our next question comes from the line of Nik Modi with RBC Capital Market.

Just a simple question quickly. So you talked about the allied brands being operating profit accretive. Could you give a little bit more color on actually how much they're contributing to your profit growth over the past year or so and just how much they'll contribute going forward. Thank you.

I wish I could but we don't want to give too many of those details. We're trying to help guide you through your growth algorithms and your profit algorithms. They are contributing an important part of both the growth and profitability in the packaged beverage segment, but we just haven't been granular and don't want to at this point in terms of those specifics.

Okay. Thank you.

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

Thanks. Good morning. On brand Dr Pepper, the past few quarters you guys have been at least from my perspective more confident in that trademark, in the trends there, including on the diet side. And especially Q4 heading in to the heart of college football season, through that lens that negative 2% volume number looks a bit disappointing, even acknowledging the promotion that you were cycling. Your perspective on that would be great. Do you agree with that, is it modestly disappointing? How do you think about that trademark hitting into and through 2016?

We still look at it, Steve, we're outperforming the category. We'll always have lots of programs behind Dr Pepper. College football is phenomenal. Part of college football came in to Q3 and Q4, the way it laid out there. We had tremendous upside in the first half of the college football. We still had growth for the total program.

But as we factored in the diets and we had the fountain large promotional activity and new availability on fountain a year ago, we're still very pleased with where Dr Pepper is at and where our plans are for taking it in 2016. You heard some of the programs we had out there with it. Our bottlers are committed, excited about the brand. It continues to be a big contributor for them. So we're very pleased.

Okay. And I guess a question if I could on the cash return strategy, maybe the answer isn't better than your response to Bill's earlier question. But you talked in the past about striking a balance between the dividend increase and share buybacks and I appreciate you doing both in 2016, but the 10% dividend increase really doesn't move the needle too much on your payout ratio which is still below peers. And it seems out of balance with the essentially 30% increase in buybacks at the midpoint. In terms of striking that balance, when the multiple in your stock is essentially at all time high level. Can you give us some insight in to your thinking there in terms of what you recommend to the Board? Maybe the answer is that $250 million debt finance step-up is one time and it rolls back off. How do we think about you striking a balance between what right now seems like an in-balanced strategy for 2016?

Okay, Steve, thanks. It's Marty. How's Boca, by the way, is it good? Are you down there?

It's sunny. Yes.

Larry and I miss you. We miss you, but we don't get invited.

You're welcome to come.

The $250 million, that is one-time. So the in-balance as you call it, between more share repurchases in 2016 simply the one-time $250 million, otherwise expect to see our distributions come out of free cash flow and not through incremental borrowings to lever up to distribute.

The roughly 50/50 balance between share repurchases and dividends is where we've been. I know I've communicated to many of you that if we were going to lean one way or the other, probably we would go more heavily into the dividend. And maybe one day we will. As we go and talk to shareholders, most of them are satisfied with this so we didn't see the need to do anything much different. We simply, as you said raised it, on an equivalent basis with this year's EPS growth rate that kept the payout ratio more or less the same.

Okay. One more thing. I don't want to belabor the point too much. But going back to Ali's question on the allied brands, do you think we should treat all profit dollars the same when looking and valuing your overall business? Or is there inherently more risk attached to those brands that you yourselves do not own? It seemed from your prior answer that maybe the answer is yes. Just wanted to give you a chance to expand on that.

Here's what I'd tell you. I understand the nature of that question. I'll tell you that the other day I was looking down the opportunities of people that were at some stage of discussion with. There are 25 companies at least on that list. So there's a lot happening in the beverage base.

All of you see it when you go in to stores. You see what's on the shelf. You see these niche products. So I said earlier, maybe we'll lose some at some point.

But we'll also gain and so the question is, what's the best position for us in our view to capture LRB growth but not CSD growth, LRB growth, both through better execution on our core, which is what we're showing each and every period. Larry talked about a few of the accomplishments. There's opportunity there in our core and then capturing these growing categories by partnering with people that have a lot of passion, energy, credibility, financing associated with them. I would tell you that the allied brand portfolio might be different 10 years from now in terms of what's in there than in today, but I guarantee it will be a lot bigger.

Okay. Okay. Thanks a lot. Appreciate it.

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

Thanks. Hi, everyone. A couple of questions, just in terms of the price mix outlook for 2016, it sounds like you're embedding both the concentrate price increases and a little bit of the rate increases in the warehouse. I know at the start of last year you were a little bit cautious on maybe taking some rate increases. Can you just talk about how you feel about the ability to take pricing and how much of the focus on the smaller pack sizes do you think that will contribute to the mix component of that in 2016?

Judy, good morning. It's Marty. The concentrate price increase is already in effect and that's work spread across the entire company 40 basis points. The warehouse direct pricing actions I referred to, those are already been communicated to customers and those are already in effect. And as I said earlier, we've made no assumption on any absolute pricing in CSD. To the extent that, that happens in the marketplace, as we've done in the past, we will take advantage. That would be up side to us.

Package mix continues to shift. We too are shifting to smaller cans in our own system. Larry mentioned that. We're rolling that out now.

We've got the capability in a few of our plants with some more of our plants coming up. The remaining part of our network where we're going to do this coming up through the first half of the year, primarily, and that will -- we haven't disclosed on a package mix basis what that's worth. Allied brands of course, just because they're higher revenue cases, as you model your top lines, of course those are going to be positive in terms of rate per case. But I want to be clear, the pricing assumptions that we have embedded, the absolutely pricing is already in place.

Got it. And on the FX side, can you remind us of your transaction exposure there? It sounds like 2016 may be a little bit more of a transaction headwind than I think what we are modeling.

The $0.18 is worth about $47 million, $48 million on a before tax basis. You're going to have about $28 million of that I believe is going to be transaction, and $19 million translation. Okay? At the operating line. At the operating income line.

And what exposure just in terms of transaction?

So transaction, the key exposures are when you go to Canada and you look at our WD business, whether it's Hawaiian Punch, Clamato, et cetera, all those products are manufactured in the United States. So we have a currency transaction risk there between the sourcing currency and the selling currency. The big transaction exposure for Mexico -- as you know, the industry in Mexico is predominantly a bottle business, not a can business. And the price of resin, which is oil denominated, is US dollar priced.

Got it. Then lastly on commodities, how much are you hedged at this point in terms of 2016 exposure?

Right now we're roughly three-quarters covered. And if you were to look at it rolling out you'd find lots of coverage in Q1, about 90% by the time you get out to the fourth quarter, as we said today we're down to 30%. So we have open opportunities later in the year.

Got it. Thank you.

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

Good morning, Marty, Larry. How are you guys?

Good

Two questions. One is on 7UP which isn't the most obvious choice from where I sit for getting this lean track focus, in the sense that it seems to have some velocity issues. I know you've struggled to try to reposition the brand. Could you talk a little bit about the health of a brand from a consumer standpoint, and then why in fact it is getting this kind of relative focus in terms of filling those distribution voids.

Absolutely. To your point on the velocity, that's the main reason we're doing it. As we go across our organization, especially Rodger's packaged beverage on the DSD side, it's the biggest brand a lot of the guys have. It's their lead brand.

The category, the lemon lime category has struggled somewhat, but we've got the organization as a whole looking at us saying, let's get behind our brand. Let's figure out what we're doing right, what we're doing wrong and let's get a lean track in place. The name's on our buildings in a lot of these locations, and we want to see that brand grow on it. We've got some of our top people, some of our veterans that have been around for a long time that love that brand and we're going to grow it and figure out what we're going to do for the long-term.

But where I'm coming from, and it's great to hear the focus, but where I'm coming from is there's a pull issue there. Part of the pull I appreciate is a function of seeing it become more visible to folks as they walk in and out of the store. But there seems to still be a more fundamental issue with the brand. Can you talk about what your research actually says about the health of the brand, and for that matter how important is simply added facing is to the health of the brand?

That will be part of the entire program. You're exactly right. We've got to figure out the pull. The guys on the field will solve for the push. We're going to get it in the backdoor now what are we going to do it to get it out the front door?

The equity is great, but I think we can improve it. You're exactly right. Rodger's team will get it in the back door and in this track, and Jim's team is going to figure out how to get it out the front door.

Okay. And shifting to fountain, I believe that's weakened as the year has progressed. There was this promotion you were lapping. Can you give us an update on conditions in the fountain component of your business and your outlook for fountains?

The fountain -- we lapped the large one-time, we had a lot of activity that was going on out there that we have to go against. As we look at it, we're seeing the traffic in QSR is up about 1%, so we're watching that. We're still very bullish on it. 42,000 new valves. The guys have a goal the same this year, especially getting more diet out there.

So it helps us with the diet and with our Sweet program on Diet Dr Pepper. The fountain team has delivered great results. Sometimes when you get these big hits you've got to lap them. We didn't think it was that bad of a hit for us.

Fair enough. That's all I got. Thanks, Larry.

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

Thanks. A quick follow up on the question about 7UP. Is 7UP getting hit because of this move to -- are you seeing a direct response for the sparkling waters replacing it given maybe what was perceived as a healthier halo surrounding some of the lemon lime category, or do you have any information on switching? And finally, some thoughts on diets, you seen any stabilization of the trend here and do you still think Diet Pepper operates a little bit in its own or where you can avoid some of the negatives you're seeing more on the cola side?

For years we've always noticed that lemon lime seems to be the last spot where the CSD player switches over. And so we're looking at that saying how do we -- let's get more in there, keep them in there once we get them in. The sparkling waters are very big on, especially the flavored that are similar to it. We're going to get a lot of findings from that as we do the lean track. The guys doing the work in the street, we just think there's things out there that we haven't picked up on that we've got to be very focused on and get this brand back where it's got a growth potential again.

On the diets, you heard me in my prepared remarks, we've got -- we're coming back with Lil Sweet again. And we've got a great campaign there. We're seeing -- we're performing better than the category, but I think we're going to continue to see some headwinds there for diets. But our plan is stay focused on them, make people understand they have a great taste, they want a great taste, and that they're safe. We'll continue to go down that line and there will be some headwinds but we're very happy that we're outperforming the category there.

Okay. Great. Thank you.

Our final question comes from the line of Robert Ottenstein with Evercore ISI.

Great. Thank you very much. On RCI, I'm getting the sense that you may be shifting the mix a little bit to projects that are more top line focused than bottom line focused. Is that correct and does that suggest that perhaps you've got more runway in terms of top line focus projects at this point? And related to that in terms of your pipeline of projects for 2016, how does that compare to prior years?

Rob, clearly recently we've probably done more growth type projects but really that's part of the evolution of lean. You always start. Lean is embedded in supply chain. It grew out of Toyota and supply chain, and so it makes sense to apply the tools and those of you that were around us back five years ago, you heard us talk about warehouse direct and supply chain and warehouses and lowering inventory levels, et cetera. This is really just a natural evolution.

We want balance, of course. We want to work on projects that contribute to growth and strength in our brands and that's obvious. It's not -- we don't have a targeted mix with respect -- remember, we don't, we actually, we don't even use the word productivity much around here actually. We talk about waste elimination. We don't really focus -- your question goes to how we're focusing on eliminating cost really on the productivity side, and all we do is worry about what are customers paying us to do, where's the value add and the value stream, and get rid of everything else.

I think the tracks are also a balance of involvement of the organization, so we want our field people, our sales management people, we want them involved in improvement activities. It's just another improvement activity. This organization is about total engagement. Nobody sits on the sidelines, nobody watches, nobody is outside the process. And I think that also goes to making sure that our field teams are working on things that are important to them, and of course what's important to them are sales activities.

Great. Then just some housekeeping items. Could you give us through the quarter and the year, Dr Pepper regular and diet in terms of the volume change? And for Penafiel, how would you split the growth between US and Mexico, please?

Of course Penafiel is still principally Mexico. We're rolling it out with success in Hispanic markets in the US, but its double-digit growth is principally Mexico. And remind everybody that we continue to have great innovation around that brand. Our flavored Penafiel waters continue to do really well in Mexico. Your question on what, Dr Pepper?

How much was Penafiel up in the US, and where are you in terms of rolling it out?

Last quarter, it's very early in terms of raw. This goes to, we had Penafiel in the market previously. It was sort of US made. That was probably not the best strategy in terms of authenticity for the brand for its consumers.

More recently we're now bringing it up from Mexico and you're seeing lots of other products in this space coming up. It's still small. So that's a lot of opportunity.

Let me go to Dr Pepper if that's okay. I think you then want to know percent changes on Dr Pepper as we measure bottler case sales. So through-put cases. The brand, regular Dr Pepper, I'll round it to down 1% but it was actually even less than that. Fourth quarter and on a bottler case of diet was down 4.5%. If you look at Nielsen data you'll see other diets down 6%, 7%, 8%.

Terrific. Thank you very much.

Thanks for joining the call today and for your continued interest and investment in Dr Pepper Snapple.

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