Keurig Dr Pepper Inc (KDP) 2016 Q1 法說會逐字稿

Good morning, and welcome to Dr Pepper Snapple Group's first-quarter 2016 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 will open the call for your questions.

With that, let me turn the call over to Larry

Thanks Heather, and good morning everyone. We had a solid start to the year, and as always, I'm proud of our teams for delivering against our strategy and key priorities. Our brands are strong, and we're consistently focused on driving improved execution in the marketplace. RCI continues to embed deeper into the organization, and deliver growth and productivity across the business. For the quarter, bottler case sales increased 2% on 4 points of positive mix and price. We were able to achieve growth across our portfolio in both CSDs and non-carbs, with both increasing by 2%.

Brand Dr Pepper increased 4%, reflecting growth in our fountain food service business. Over half of this growth was due to timing of sales to a large bottling customer that we had planned for in the second quarter. Our Core 4 brands decreased 3%, as growth in Canada Dry was more than offset by declines in 7UP, Sunkist Soda and A&W. Crush and Schwepps grew 6% and 10% respectively, on increased promotional activity at a large retailer. Squirt grew by 3% and Penafiel increased 5% in the quarter, while lapping 20% growth a year ago. All other CSDs decreased 1% in the quarter.

In non-carbs, Snapple increased 4% in the quarter, Hawaiian Punch decreased 7% as planned, driven by price increases on single serve packages, and Mott's decreased 4%, again as planned, on lower promotional activity and continued declines in the juice category. Clamato grew 10% in the quarter, primarily on increased promotional activity, and our water category grew by 22%. Aguafiel grew double digits, and continued strong contribution to growth were also driven by a number of our allied brands, including Bai and Fiji. All other non-carb brands decreased 2% in the quarter.

Our allied brands strategies is enabling us to quickly capture growth in emerging categories. I am pleased to announce two new recent partnerships. Core Hydration, a purified water rich with electrolytes and minerals, and High Brew, a cold brewed ready to drink coffee. We believe both products have strong market potential. Building our brands is a key component of our strategy, and our calendar for the summer is packed with programs that will engage and connect with our consumers, as well as drive excitement with our retail and bottling partners.

First, I hope you all saw recently that Beverage Digest reported that regular Dr Pepper is now the fourth largest CSD brands in the category, surpassing a large competitive flavor brand. It's a good reminder that we compete in flavored CSDs, not colas. And Nielsen data shows that flavors, over the past two, are up in retail dollars by almost 4%. That's an exciting win for the Dr Pepper brand, and our summer lineup of activity will keep the momentum going. Our Pick Your Pepper program will offer millennial consumers 150 one-of-a-kind labels on 20 ounce single serve bottles that will allow them to express their individuality.

We know that our Little Sweet campaign was a huge success for Diet Dr Pepper last year, so we've brought it back for an encore performance, highlighting the great sweet taste of Diet Dr Pepper. We're also driving a big push behind Cherry Dr Pepper, with a new media campaign inclusive of both traditional and digital media and activation elements at retail. We know that this product is an entry point into the brand, specifically with Hispanic consumers, so we're leveraging to bring new consumers into the franchise.

We're rolling out 7.5 ounce slim cans across our key CSD brands and our DSD network. As we know, this is a consumer preferred package. We'll get Schwepps Sparkling Waters into more consumers' hands with incremental trial activity, and we'll top off the summer with incremental media and activity behind Cherry 7UP. Mott's will feature characters from Universal's The Secret Life of Pets movie on several key products throughout the summer, and will drive incremental points of interruption with a new patriotic Snapple LTO.

We've also added two new flavors to our Straight Up Tea lineup, Honey Green and Herbal Roobios. And to spice up summer gatherings, Clamato will partner with an authentic Mexican beer as the original michelada mixer. I'm sure you'll agree we've got a great lineup for this summer. Now, turn me turn the call over to Marty to walk you through our financial results and our 2016 guidance.

Thank you Larry. Let me begin with a high-level financial summary of the quarter. Sales volume increased 1%, with reported net sales up 2%. Currency neutral net sales were up 4%. Core operating income was up 13%, and core operating margin was 20.6%, up 190 basis points. Core EPS was up 16% in the quarter. Excluding foreign currency translation, core operating income was up 14% and core EPS was up 17%. All in all, some good results for the quarter.

Now let me provide some further detail. Reported net sales increased 2% in the first quarter, on 3 points of favorable product and package mix, 1 percentage point of price realization, and a 1% increase in sales volumes. Reducing this net sales growth was just over 1.5 points of unfavorable foreign currency translation, and almost 1 point of unfavorable segment mix, as a result of our higher proportion this year of concentrate sales to finished goods case sales. Net sales was further reduced by just over 0.5 points, for higher discounts driven by accrual timing and our fountain food service business that will reverse in the third quarter of the year.

Reported gross margins increased 100 basis points in the quarter, increasing from 58.5% last year to 59.5% this year, of which 30 basis points was driven by the favorable effect of unrealized mark to market commodity changes. Lower commodity costs, primarily PET and aluminum, increased gross margins by 100 basis points in the quarter. And continued productivity benefits, including those from RCI, increased gross margins by another 40 basis points. The impact of positive net pricing in the quarter also increased gross margins by 40 basis points.

The effect of mix, mostly product, reduced gross margins by 70 basis points. And finally, foreign currency reduced gross margins in the quarter by 30 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 $6 million on a planned marketing reduction of $12 million, driven by timing of media and programming, favorable foreign currency translation and a reduction in transportation costs, driven by lower fuel costs. These decreases were partially offset by inflationary and certain other increases in operating expenses.

Furthermore, included in our core SG&A is a $4 million arbitration award associated with our Mexican joint venture. Specific to our LAB segment, this charge reduced their reported operating income growth by 24 percentage points. Depreciation and amortization declined $1 million in the quarter. Below the operating line, net interest expense increased $6 million in the quarter, primarily reflecting higher rates from our January debt refinancing and an overall higher debt balance. Our reported effective tax rate was 35.2%, compared to 35.7% last year.

Moving on to cash flow, cash from operating activities was $177 million, up $76 million compared to last year, primarily driven by timing of working capital and the increase in net income. Capital spending was $27 million, compared to $20 million last year. Total distributions to our shareholders were $269 million, with $179 million in shares repurchased and $90 million in dividends paid. Moving on to RCI, I'll give a brief update on the progress of a few of our lean tracks. But first, I would like to mention that last month, we were honored at the Lean and Six Sigma World Conference with its first ever Deployment of the Year Award, specifically recognizing the depth, breadth and scope of our RCI rollout across the Company.

This is tremendous recognition for us, though we always remind ourselves that RCI is a journey that never ends, and we continue to have a long runway of opportunity. From a growth standpoint, the Dr Pepper smaller packages growth lean track has closed over 1,100 distribution voids in a large retailer. And in the Plains region, our allied brand distribution and availability track netted almost a 9% increase in distribution of priority SKUs. These are great examples of engaging our partners in the value chain, and together using proven process improvement methods to drive even better levels of retail execution.

Our 7UP lean track is underway, and the team has done extensive analytic rigor on the brand, and they have gone to Gemba in some of our larger markets. We've got multiple Kaizens in key markets scheduled over the next couple of months, where we will identify and attack the root causes of the brand's recent performance in those markets. And we're seeing early wins on our productivity track for reducing both DSD driver turnover and nonworking media spend. Again, just a very few examples of the vast improvement initiatives taking place across our business every single day.

Now moving to 2016 guidance. We expect reported net sales to be up approximately 2%, inclusive of a foreign currency translation headwind of about 1%, which is down from our prior guidance of a 2% headwind. We also now expect EPS to be at the high end of our previously communicated range of $4.20 to $4.30. This is inclusive of about a 2.5 point headwind from both foreign currency translation and transaction combined, versus the 4% that we had originally expected. We continue to expect total Company sales volume to be about flat.

Given the category headwinds in CSDs, we expect CSDs to be about flat, while we expect non-carbs to be up slightly. Remember that our non-carb volume performance is being tempered this year by pricing actions taken across several of our warehouse direct brands and the possible termination of the Aguafiel 10 liter business in Mexico. We still expect continued growth from our 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 over 2.5%. Our January 1 concentrate price increase will drive about 40 basis points of this increase, and price increases on our warehouse direct brands will drive an additional 20 basis points.

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. Moving on to cost of goods. Given our hedged positions and current market prices for our unhedged positions, we now expect packaging and ingredients to be about 0.5% deflationary on a constant volume mix basis. This expectation still reflects deflation in commodities such as PET and aluminum, but also now reflects less of a headwind on corn than we originally expected, driven primarily by more favorable pricing of corn co-products, from which we derive our net price for corn.

For modeling purposes, remember that growth from some of our non-carb portfolio and allied brands 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 of the factors I've mentioned above should result in roughly similar gross margins in 2016. Moving to SG&A. 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 2015. We also still expect that general inflation and in field labor costs to increase operating expenses by approximately $20 million.

And while we still expect favorability from lower fuel costs in 2016, we will experience rate increases from our third-party carriers. That said, we still believe we will be able to achieve productivity benefits from RCI that will help offset a portion of these increases. Based on some recent favorable marketing return on investment results and incremental opportunities across our ales, sparkling waters and juice brands, we're spending about $5 million more in marketing than we initially expected. And as I mentioned a few moments ago, we recorded an unplanned arbitration award of $4 million related to our Mexican joint venture and the possible termination of the Aguafiel 10 liter business. As I also mentioned earlier, this charge is included in core results.

Now moving below segment operating profit, our 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 it still expected to be approximate 35.5%, and we continue to expect capital spending to be approximately 3% of net sales. We also continue to expect to repurchase approximately $650 million to $700 million of our common stock in 2016, subject to market conditions. Now 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 Larry mentioned earlier in his prepared remarks, over half of our growth in brand Dr Pepper in the first quarter was driven by timing of sales that were planned for in the second quarter. Third, we will be potentially terminating a distribution agreement on our 10 liter Aguafiel business in Mexico, which we have planned for in the second quarter.

Fourth, while we expect commodities to be about 0.5 points deflationary on a constant volume mix basis for the full year, the deflation will be more pronounced in the first half of the year. Fifth, based on timing of prior-year true-ups, the $20 million increase in health and welfare and other insurance costs will be heavily weighted in both the second and third quarters. And finally, while we expected a reduction in marketing investment in the first quarter, driven by media and programming shifts, we are expecting increased investment in both the second and third quarters.

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

Thanks, Marty. Before we open the lines for questions, let me leave you with a few brief though consistent thoughts. Our core business remains strong, and it's off to a good start. We're continuing to focus on unlocking growth in our priority brands through integrated communication and execution consumer driven innovation, while also selectively adding to our allied brand portfolio to capture fast-moving consumer trends.

We're continuing to embed RCI further into our culture, and we're seeing meaningful improvements in growth and productivity across the Company. And it also serves as a meaningful contribution to the successful execution of our strategy. 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)

Kevin Grundy Jefferies

Good morning guys.

Good morning Kevin.

First one for Marty, on the guidance. I just want to make sure I'm clear with the moving parts. So you moved to the higher end of the $4.20 to $4.30. That seems like it can be explained, really, by some weakness in US dollar. So Marty, is it just basically commodities a bit better, offset by the arbitration and higher levels of investment?

Yes, Kevin, just to ground everybody, I would say the new news relative to guidance today would be, commodities and foreign exchange both positive, in the $0.10 range combined. The arbitration award, of course, is new news. That's in our core results. That's going to cost us a little over $0.01. We are going to spend a little more on marketing. We would've done this anyway, based on some findings we had in those product categories, a couple cents.

So you could take away from this call there is some upside of $0.07 for the year. We're not changing our guidance. We like the performance in the first quarter. We like the execution. We like where our strategy is taking us, and so we are very pleased. And quite frankly, it's just too early in the year to think about changes at this point.

Okay, that's helpful. Just one more, if I may, for Larry, on the topic of excise tax risk here in the US. So Larry, the proposal in Philadelphia has gotten quite a bit of attention, and one of the leading presidential candidates has publicly supported it. So I know that Roger runs packaged beverages for you guys as a current share in the ABA. I was hoping to get some updated thoughts on this topic. And specifically, should investors be any more concerned about the potential for excise tax risk here at the federal level in the US? Thanks

Yes, no, I don't. These things go on and on. As you said, Roger is on the -- he's the Chair of the ABA Board, and Jim Johnston also sits on the Board in the Executive Committee. I think we've got a great plan out there across -- for federal and our states and cities. There's one coming up all the time. And the team's got a good handle on it, and it doesn't concern me that much.

Very good. Thank you. Good luck, guys.

Thank you, Kevin.

Amit Sharma, BMO Capital Markets.

Hi, good morning everyone

Good morning.

Marty, can you give us Dr Pepper volume, excluding the food service impact in the quarter? Just the bottles and cans volume, if you have that?

All we said on the call was, about half of the 4% BCS growth came from this timing of this large [balance shift]. So the brand was still up. BCS, again, bottler case sales, as we look at it, which is the reporting through all of our bottling partners, in terms of real throughput. Actually, regular was up 5.9%. Now again, that's going to be -- it's going to include the fountain. And on a BCS basis, diet was only down 2.1%. I think it was down -- it's going to show down, I think, further in the Nielsen that you all see. But our bottler case sales base is down, too, which is a step improvement.

All right. And then two quick ones for Larry. Larry, the first thing is -- you've talked about this in the past. But are you surprised by how sustainable pricing environment has been in North America? And as you look next 12 to 18 months, given your experience on the bottling side, do you feel like the change in the [reception] will have any impact on this environment?

No, I don't, and I'm very pleased with how the pricing is. I'm not surprised over it, because we've been able to go out and execute. We're doing much more, not just Dr Pepper/Snapple but the industry, with different packages. I think we're looking more at what the consumer is wanting. I think our retail partners have looked at it and decided that it's not always just the price off; there's a lot of other ways to deliver value to a customer. So I don't see any changes in the current pricing environment.

And then last one for me, Larry. If you look at your noncarbonated portfolio -- and there's some bright spots, but then you have (inaudible) [in Mott's], probably a little bit weaker than we would like it to be. We've seen some of your competitors clean up their ingredients a little bit, and that has helped. Have you considered cleaning up the ingredients in some of those portfolios, to see it that gets (multiple speakers)?

We've been doing that through the years with our Mott's, bringing the sugar down. We've probably taken Hawaiian Punch down several times. We've got the Hawaiian Punch for breakfast. So we've got a lot of different things we will always work on out there with it. And the biggest thing when you look at our volume, it was pricing that we planned on. We looked at it and we knew that we're going to have the volume down. But I think you can tell by our results it's been a pretty good trade-off.

Got it. Thank you very much.

Bill Marshall, Barclays.

Thank you, good morning.

Hey, Bill. Just looking at the fountain food service question from another angle, there's been a little bit of volatility, obviously, in there. How should we think about the run rate on this business to growth rate, going forward? And is there any other watch outs, as far as volatility, as we work through 2016?

Bill, it's Marty, good morning. As we've talked previously about fountain, we've done a pretty good job of growing our fountain penetration. I think you know where we are, in terms of our national account presence in fountain, which isn't always where you make your money in fountain. Just like in bottle and can is, we make money up and down the street, we make money in small local accounts. We've talked in the past, we've been running -- I'm not forecasting for this year, but I'm telling you our past history, as a result of that, has been low-single-digit growth in fountain case sales. And so we've done pretty well, actually

Okay, great. And then just one quick housekeeping follow-up. I know you mentioned the possible change in Aguafiel. I think in the past, you've called this as a 0.5 point impact on your consolidated volume for the full year, and I think you just repeated starting in the second quarter. Is that still a good number to think about?

Bill, it is, but I want to clarify what I said in my prepared remarks. We have not terminated the distribution yet, because it is related to and tied up in the ultimate resolution of what happens to our joint venture in Mexico, which produces this 10 liter water product. I'm telling you, it's not a very profitable product at all. But we can't stop distributing until we settle some other issues with the other party.

Okay, fair enough. Thank you very much. I appreciate it.

Judy Hong, Goldman Sachs.

Thank you, good morning.

Good morning Judy

First, just in terms of your decision to spend a little bit more marketing -- and I think you've talked about fountain a little bit here, but some of the discounting actions in that channel. Can you just broadly talk to us about, your decision seems like maybe a little bit more focused on volume and really trying to take opportunity of some of the growth opportunities out there? So is this a little bit of a change in strategy or a more tactical move on your part? And then the other question, just on concentrate segment and the price mix impact from the fountain volatility, can you just clarify that, as well?

Okay Judy -- yes, it's Marty. Let me just get rid of the concentrate question. As we said, our annual January 1 concentrate price increase on concentrate -- and syrup prices go up, as well -- we said it's about 40 basis points in pricing spread over all of our $6 billion plus in sales. So there's nothing new there. The timing issue in the first quarter with the shipment really had no impact on pricing, per se, it's simply with the quantity of syrup. And the accrual, it's a timing, as I said in my prepared remarks, we accrued a little more in the first quarter. It's going to come back in the third quarter. Let me shift over to marketing.

And again, it was really about specific opportunities in ales, sparkling waters and juices. There's going to be some specific emphasis on Mott's. But let me pull back and deal with this timing issue in the first quarter, as well. We'll get off the table. One of the things -- we talked last year, and we will continue to talk about, some of the updated strategy work we've been doing for our key brands. And I would tell you through that process, which took us all of last year, we came up with some different conclusions about communications and messaging for many -- for some of our brands that I would tell you were differ from some of our prior points of view.

So we took the input from initially what was 35,000 consumer surveys that I think got culled down to roughly 25,000 good surveys, about how they felt about our brands on a number of dimensions. And as a result, we're changing our communication messaging. And quite frankly, because we've decided to make some changes, it's taking a little more time than we originally -- not more time than we thought, because we planned for this. But the lighter spend in the first quarter was really a function of that new timeline for us to create the new creative. And so we planned for that.

We're going to still spend 7.5% of sales this year, like we always have. And as I said, on the incremental $5 million, these opportunities came up. Schwepps, that category is growing double digits, some insights on Mott's. And so I would call that evolution, not -- nothing -- evolution of our return on investment insights and process, to tell us where best to spend some money. In this case, we didn't just shift. We added $5 million.

Got it. Okay. And then just final clarification question. So the increased investments that you've taken in BodyArmor, sounds like maybe you're getting more territory, from a distribution standpoint. So maybe, is there a way to quantify how much that's adding to your allied brands growth? And are there other allied brands that, this year, you're getting more distribution that could be more meaningful, in terms of the growth outlook?

Okay, in terms of the additional investment in BodyArmor, there's no more distribution -- we had an opportunity to acquire some more equity. We've looked at how the brand is performing, and it's performing quite well. And we thought it was an opportunity to, again, expand our position, even though we're still, on a relative basis, small shareholder. But we just thought it was -- these small investments solidify our partnership with these entrepreneurs, and it's important. And so we decided to do it.

Judy, in terms of -- since you asked, in terms of expanded opportunities, as Larry said, we -- the pipeline is full of opportunities, as I said last time. We'll be entering a new category for us, on the distribution side, ready to drink coffee. It's a $2 billion category. There's a lot happening in that category. You'll see the High Brew brand. We're going to -- that's going to phase in. They have some existing distributors, some we can take over immediately, some over time. But we've begun the process. And of course. Core Hydration is getting traction. A lot happening, of course, in that category.

It's a somewhat crowded category, but some would said you can't have too few waters, given the growth in that category. And it should remind everybody here that this strategy enables us to move with the consumer quickly, quicker than we believe we could do on our own. And we think we're taking advantage of that.

Got it. Thank you very much.

Ali Dibadj, Bernstein.

Hey guys, just a couple questions, but really both around trying to disaggregate the drivers of your topline growth, to get a better sense of sustainability, which is all worth thinking about. The first one is, tying a few of the earlier questions together, if you exclude fountain -- which you've given us some idea about. But if you exclude fountain, what percentage of your topline growth this quarter was allied brands? Remember the past couple of quarters, it's been half or more of your growth coming from allied brands. Because what I'm just trying to get to is what your topline growth would have been this quarter -- I don't know how to call it -- the core bottle and can or true bottle and can, excluding fountain food service, excluding allied brands. Do you have a sense of that?

If you look at volume on the allied brands, you're probably just under half, okay, in the 40% range, in terms of contributed volume growth. And of course, in dollars, they're going to be even higher, because on a rate per case basis, they are higher than our core brand, with lots of good profitability. The --

Sorry, Marty, that includes the food service piece? Or that --

No, that's just --

Okay.

It's just the portfolio of allied brand.

Yes.

And the shift in -- and let me just -- maybe before I go on to fountain, that shouldn't be a surprise, right? The whole reason we embark on this strategy is to capture growth. So -- and given the fact that we're are still 80% CSDs and everybody knows what's happening in that category, even though we've outperform that, it should be no surprise that in that non-carb portfolio, the allied brands are contributing. And when we grow Clamato and Snapple alongside, which are two of our highest profitable case products, it should be also no surprise why we're getting the margin performance that we're getting. The -- Ali, the fountain order timing was probably worth $4 million or something, in terms of revenue.

Okay. Okay. And you understand the background of the question, as you guys know -- and I know you've talked about this, at least off-line is, a lot of investors are asking, if more than half of the growth topline-wise is allied brands, how much do I pay for a distribution model or a distributor, as opposed to a brand owner? I think that's the underlying question. Do you have any views on that? Obviously to allay people's fears? Or to just, look, this is something we should be doing, right? We should be pivoting with the consumer a lot more. Because that's the question, all right, is, how much to pay per distributor?

Ali, you guys can answer that question, the pipeline is full. We announced two more this morning. There's probably more than two dozen opportunities. So when I pull back, my answer to your question is, you said it, pivot with the consumer. We're not fighting the consumer, we're not trying to push back on the consumer, and throw our money and resources as an effort to try to do that. We're not going to try to make brands that consumers have said serve a certain purpose for them, and under the names of those brands, and try to change them and change the perception of them in the marketplace.

So of course, this is about innovating with a very, very fast-changing consumer. And while we are getting growth in some it these categories today, and that's really good, we'll see where the growth curves go. Some may fade over time, just because consumers change over time and they're changing quickly. So we play this without capital at risk, and we get to capture the growth quickly. And we've got a lot of people lined up to talk to us, because they see (technical difficulty) that we can create for them alongside us and both win. And we think it's a very good strategy. You can put your own numbers on it, but what we see is a great opportunity to leverage something that is not so easily replicate-able, which is 170 warehouses, 8,000 trucks, and a massively powerful distribution system.

And so on that, my last question is, 170 warehouses, 8,000 trucks. One of the stories, always, for your core brands has been distribution gains, right, so your frontier is in the US or in Canada. It's not going to rural India, right? So there's distribution potential gain. Can you give us an update on that? So just from an ACV perspective, excluding the newer allied brands, but just from an ACV perspective, where you are today, on average, for the core brand, as I call it? Not the Core 4, but just your core brands? And where you were, say, 5 years ago or 3 years ago? Just some metric to see the distribution gains story has happened for your legacy brands? Thanks

Ali, you're talking in the US, correct?

Yes, sorry, yes. I mean in the US. Your opportunity is distribution gains in the US still, yes.

And it's a great question, too. So you look at the Core 4, we may have been in the mid 60%s. We're well into the 70% or north range on distribution. Some of my -- I want to go back and remind everybody that there is still a lot of opportunity that we are capturing at the core. We recognize 7UP, 7UP is a challenge for us, but we're going to fix it.

But whether it was last year, closing Snapple voids, and we talked about the growth in closing Snapple voids, and just some o the RCI growth tracks that we've done, which allows us to improve what some would say is the blocking and tackling of the business, but do it better than anybody, shows that we can continue to grow our core brands. I think another one was Canada Dry, again, closing voids. We had a lean track on Canada Dry. So there's also -- there's a piece here that we think is very positive for us, in terms of our improving executional capabilities that are helping our core brands.

I think everybody sometimes takes for granted that everybody's execution is at the same level. We may not be the best. We're not declaring we're the best. But we are pleased with the improvements we are making, and that does help grow our core.

Okay, thanks for the time.

Bonnie Herzog Wells Fargo.

Good morning.

Morning.

I have a question on your 7.5 ounce slim can. Could you guys give us a little more color on what the real opportunity could be here? And then what you think a realistic penetration of small cans could be as a percentage of your total mix?

Right now, Bonnie, it is very small. And we're just getting them rolled out. I was in the trade last week down in Florida, lots of great response back from not only customers but consumers. It could be maybe 5%.

Eventually. And then how long do you think it will take to get to 5%, Larry?

[Lands with this] rolling it out. I would say we could be there probably -- it's probably 18 months to 2 years, to get that number.

Okay thanks for that. And then I have a question for Marty. In the past, you've talked about the opportunity in Mexico to significantly expand distribution beyond the concentrated pockets you're currently in. So could you discuss a little bit about the progress of that initiative? And then other opportunities beyond the Penafiel brand?

Yes and -- so Bonnie, yes, we do have distribution whitespace. We have closed some of it. As you probably know, we do use a lot of third-party distributors in what we otherwise do call a DSE model. So there's still opportunity there. We're trying to stay focused where we have strength and where our brands have done really well. [Those would do] around a number years ago, probably 4 or 5 years ago, we were probably more aggressively expanding and probably spending more money than we should have.

And I wouldn't say the strategy was working so well. So we reined it in a little bit. It's a little more targeted now; it's a little more strategic now. We're not in a rush. We want to capture market opportunities well, not hurriedly. As you know, the business there is doing real well. The Penafiel business has continued to do well. Some say, why did the brand only grow 5%? It grew 20% last year. And 5%, when we look around, looks still pretty good relative to the market down there.

As you know, we are building a new water plant. We announced that, I think, at the beginning of the year, end of last year, because we are simply out of capacity, and that's outside Mexico City. So all in all, our team in Mexico is doing really well. The business is performing extraordinarily well. As I said this morning, absent the JV settlement charge, their 6% top line would have driven 24% operating profit growth. We like that model a lot.

Okay, it makes a lot of sense. Thank you.

Steve Powers, UBS.

Great, thanks, good morning. Can we just clarify one more time on the volume? You guys under-shipped BCS volume, in terms of sales volume, even with the fountain pull forward. Is that -- so if that's right, could you just talk about how much you under-shipped the BCS volume, excluding the fountain pull forward? And does that reverse in Q2?

I think, Steve, the biggest -- the fountain pull forward, as you call it, the timing issue, it's probably the biggest factor that accounted for the difference between BCS being up 2% and shipping volume being up 1%. So we were more or less in line, absent that -- that was in both. That was in both. I'm sorry, that was in both. So we -- BCS simply outperformed.

Okay. So it's not a point. Okay that's fine, that's fair. And then in packaged beverage, is there a way to break apart that 5% realized price mix between what the CSD pricing run rate is, versus any kind of CSD mix benefit, versus the category mix attributable to non-carbs?

What I'll tell you in packaged beverages, in pricing, they got a little over about 1%, little over 1%, in actual (multiple speakers).

Rates?

Yes.

Yes, okay.

I'm talking about pricing, not mix.

Yes

Okay? And mix, which for them was -- a lot driven by allied, looks like it probably -- almost 4 points for them.

Okay. Okay. And then lastly, not to harp on 7UP, but you focused a good deal of energy and brand support on that last year. And there's a few of the clients that are accelerating isn't ideal. So just update us as to your thoughts there. Maybe it ties into the RCI initiative you have underway. But is that still a brand you think you can re-energize? Or is the -- are the category challenges in lemon lime just too significant? Thanks

Steve, I will respond, and Larry may add something. So yes, the RCI track is just getting going. We think we've got a really good team of people on this, and there are some very early, early observations, but too early to share. You make a good point. We have spent a considerable sum on that brand, and we're here to tell you that the messaging and communication and target for some past advertising we now know was not on point with the 7UP consumer. And as I said, I think to Judy's comment earlier, when I alluded to now having to change the messaging, which is impacting -- that impacted, at least, the timing of spend into the early part of this year. There is a brand that's a big part of it.

Okay. (multiple speakers)

The only thing I would add to that is, Marty said it's very early days. The lead we have for this RCI project is a 40 plus year veteran that has sold 7UP his entire career. And I think I get the most excited when I see the findings that are starting to collect, again very early. The team is excited. It is a great team of people. We've always told everybody that our change, and everything that happens with RCI, comes from our people. And we've got some things going out there that really encourage me on the brand.

Okay, thanks very much.

John Faucher JPMorgan.

Good morning, everyone. Wanted to just talk a little bit about the packaged beverages margins, and understanding maybe some of the mix pieces and spending movement that's going through there. Because if we look at the margin for packaged beverages, historically, Q1 has been a dramatically lower margin -- not dramatically, but let's say 150, 200 basis points than the full year margin.

If we look at it this year, you've obviously got a big bump up there. If we see even remotely close similar sequential improvement in the margin over the balance of the year, as we've seen in past years, that would imply just tremendous margin upside here. So can you talk a little bit about, specifically, the drivers there? Maybe some mix impacts, raw materials? And how we should see that going through the year? Thanks.

John, good morning. Its Marty. So let me help you -- guide you guys here. So when you look at the absolute level of first-quarter margins for packaged beverages, I think the one call-out I would give you that's worth [about] -- and you're talking, of course, about operating margins. Probably the -- their piece of the $12 million marketing benefit -- because we know that's climbing -- probably helped their operating margins by about 50 basis points. Okay?

So given their current mix, given current levels of input costs, even given current levels of foreign exchange, because we have -- our WD Canada business is part of the segment. So taking current levels in the first quarter, you get the margins you'd get, less, I would say, 50 basis points for the marketing shift. What we like about packaged beverages, and the reason that margins have ticked up the way they have, is that they're getting this extraordinary benefit from, really, first and foremost, mix.

And as I said earlier, they're benefiting from the allied brand. This is good business for us, and it's good business for our brand owners. And in our WD portfolio, the products that are growing are some of our best margin products, as you know. And by the way, I would say we will take growth in all of those brands and trade them all day long for -- whether it's decline in Hawaiian Punch, or for that matter, decline in 7UP. So enormous beneficial mix and then, of course, as I said earlier, they got 1 point of pricing. Net pricing environment seems to be pretty good. Year over year, commodities and fuel were pretty important to them.

Okay? And it drove probably about $18 million or so of year-over-year improvement. But nevertheless, those are the prices of commodities today. That is the price of fuel today, absent the fact that oil has gone up a little bit. And so therefore, the current margin structure, I say is, it looks to be where it is in Q1, absent one item that I call out is timing.

Got it. And then thinking about it -- so you've got us -- do we see a similar sequential improvement as we go through the year? Or has that mix shifted, let's say, seasonality of some these things. Is the seasonality of margins similar, from that standpoint, as it's been in the past?

John, of course, seasonality in the business, in terms of the impact of volume in the summer, would make the summer selling season better. We don't give specific, of course, guidance on margins by segment, by quarter, of course. But the normal sequential trends would hold.

Okay. Great. And do you expect some of those lower -- I apologize, this is the last question on this. Do you expect some of those larger margin items, Hawaiian Punch, what have you, as assuming their relative growth rates normalize a little bit here, that would be on top of the 50 basis points of timing? Maybe an additional drag, as we look out sequentially?

It could. And don't forget, in your sequential thinking, there was a few things I called out, for example -- commodities, for example, in terms of first-half timing. So -- but when you take those outside factors away and just look at the business model, the mix of the brands, and the impact that volumes have on leverage in season versus out of season, I think you had it right.

Okay. Awesome. Thanks so much.

Bill Schmitz, Deutsche Bank.

Can we just talk a little bit strategically about the allied brands? So like a couple of questions. When you make an equity investment, do you typically get a Board seat? And do you have any say in distribution and M&A, as those brands evolve? And then maybe a broader question, but you see the valuations at some of these early fast-growing brands get.

How difficult would it be for you guys to actually create some of these brands yourself, and then get all the economics? Like I understand that if you make the investments, you do it with the balance sheets rather than the P&L. And obviously, investors probably wouldn't like you funding these like money losers for a bunch of years. But I just love some broader insights on both those two topics.

All right, Bill. Look, first of all, the small equity positions we take carry no real governance rights, whether they be Board seats, managerial strategy, what have you. That's why we spend a lot of time with these management teams understanding their strategy, the opportunity that they see, does is square up with the opportunity we see? Are they credible? What have they done in the past? There's a whole checklist we go through.

And at some level, we want them to be able to fund the costs that they need to fund as the brand owner, and not come from us, for one reason. That if we had the fund these businesses early-stage, we would therefore have to buy them or acquire a majority position, which would cause the spirit of the company to go away. The ownership would leave. It would just become a nascent brand inside Dr Pepper that we would have to, in essence, grow from a very, very low base. That's why we're not doing these, because we don't -- there's no proven model. You may have one, but across this space, with our key competitors that demonstrates anybody's ability to really create a breakthrough brand, however you want to define that, a breakthrough brand, de novo.

And so this is -- the whole strategy is about capturing the passionate spirit of these people, and bring something to the party that they absolutely need and we need. And like I said, the pipeline is full of opportunities. I don't know how we could ever have had an innovation pipeline like we're seeing through the [eye of bread]. Would we have ever invented coconut water, for example, and had the success in Vita Coco? Would we ever have created a Bai and had the success of a Bai? If Larry had come to you and said -- and here, the example is BodyArmor and said, we are now going to compete in sports drinks.

You know that category, and you know it's a highly competitive category, and anybody would have said, you're crazy, and they would have had the right to say that. But here we come with a brand that we don't have capital at risk in any meaningful way. And yet we have a chance -- but that management team, which is a very credible management team, has -- we think they've got a point of difference. We think they've got a great strategy. They've got a great approach, from the product to the pricing to the positioning to how they're going to approach the channels.

This is the opportunity. And some may go over time, but I'm telling you, we are just full. We almost get to the point we decide how many of these things we can handle. And using RCI, we're deploying a lot of RCI to this, to help us create certain on-boarding processes or, as I mentioned one here, distribution availability, to help us even execute on these better.

Okay, no, that's really helpful. And then did you guys take a stab at how much weather impacted both the category and your results this quarter? It only stands out because I saw water was up 22%, and it seems like there are fairly similar trends across some of your competitors.

That's all -- again, the big part of our water category [up] is, many of these allied brands are in that category. And of course, we (inaudible) forget we've had Fiji, which we've had for a long time, that brand just continues, even at its premium positioning, just continues to do extraordinarily well.

Okay. So you don't think there was much of a goose from the favorable weather in the quarter?

No, not at all.

We haven't seen too much favorable weather here in Texas. We're flooded. (laughter)

All right. Thank you, guys. Have a good day.

Ladies and gentlemen, we have reach our allotted time for questions and answers. I would not like to turn the floor back over to Larry Young for any additional or closing remarks

All right. I'd like to thank everybody for joining the call today, and for your continued interest and investment in the Dr Pepper Snapple Group. Thank you.

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