Keurig Dr Pepper Inc (KDP) 2016 Q3 法說會逐字稿

Good morning, and welcome to Dr Pepper Snapple Group's third-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, Maria, and good morning everyone. Before we begin, I would like to direct your attention to the Safe Harbor statement, and remind you that this conference call contains forward-looking statements, including statements concerning our future financial and operational performance.

These 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 Investor's 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, I'll turn the call over to Larry.

Thanks, Heather, and good morning, everyone. Our third-quarter results continue to demonstrate progress in our strategic initiatives. We stayed focused against our strategy of driving integrated communication and execution across our priority trademark brands, and it is driving good results. We continued to experience growth in the quarter from our Allied Brand partnerships, and we continue to build our culture of continuous improvement with meaningful results.

For the quarter, bottled case sales increased 2% on 3 points of positive mix and price. CSD volumes increased by 2% and non-carbs were flat. Brand Dr Pepper increased 1% in the quarter, as we experienced continued strong growth in our fountain foodservice business as well as growth in our bottled can business. Regular Dr Pepper continued to perform well, and Diet Dr Pepper continued to significantly outperform the diet category, growing by almost 1% in the quarter. Our Core 4 brands increased 2%, as 7% growth in Canada Dry and 1% growth in Sunkist were partially offset by a 2% decline in A&W and a 1% decline in 7UP.

Many of you know that we haven't had a lean track solely focused on 7UP, and we are encouraged by the results this past quarter. Crush and Schweppes grew 4% and 9%, respectively, and Squirt grew 7% on strong growth in both Mexico and the US. Penafiel grew 1% in the face of increased competition, particularly against our [age] line. All other CSDs decreased 3% in the quarter.

In non-carbs, Snapple was flat, cycling 5% growth a year ago. Hawaiian Punch decreased 6% in the quarter, on decreased promotional activity and single-serve price increases. And Mott's declined 6% as well, as category headwinds driving declines in juice more than offset growth from our sauce business.

Clamato grew 5% in the quarter, and our water category grew 16% on growth in our Allied Brand portfolio, particularly Bai and FIJI, and continued growth in Aguafiel. We chose to acquire our Aguafiel partnership interest in Mexico, rather than liquidate the venture, because we believe that on our own we can further improve the performance of the brand. All other non-carb brands decreased 9% in the quarter, almost entirely due to our exit of the Country Time business. This decline was partially offset by strong growth in BODYARMOR, another Allied Brand which is continuing to grow share in the sports-drink category.

Unlocking growth in our priority brands through strong communication continues to be critical to driving our business results. Our marketing calendar for the balance of the year, and the increased marketing investment in the third quarter, reflects just that. We're in the heart of college football season, and once again Dr Pepper is front and center. We've got heavy media across both TV and several digital platforms, and increased activation at retail year over year.

New this year, Larry Culpepper will be tailgating across the country in his own Dr Pepper van to bring the brand to countless football gatherings. In fact, Larry has become such a popular icon for the brand that we began selling Larry Culpepper Halloween costumes this year, and to no surprise they were sold out in a matter of weeks. We've even spotted a few being listed on eBay for $75 apiece. And in just two days, we'll be taking over student sections by seeding the Larry costumes across a multitude of college campuses during the games.

Also new this year, 7UP and Canada Dry will be on both TV and digital platforms during the holiday season, supporting our green bottle program. And Core 4 is bringing back Monster-themed mini cans for Halloween with an app that will bring the monsters to life on your smart device. We'll continue to drive retail activation against Schweppes Sparkling Waters, honing in on the mixture occasion for the holidays, and Snapple is reminding consumers to take a break from the election with TEAsicion, our red and blue fruit election-themed LTO.

I think you can see our marketing calendar ends this year very strong. Now, I'll turn the call over to Marty to walk you through our financial results and our updated guidance.

Thanks, Larry. Good morning, everyone. I'll start by providing a high-level financial summary for the quarter.

Sales volume increased 1%, with reported net sales up 3%. On a currency-neutral basis, net sales were up 4%. Core operating income was up 5% and core operating margin was 21.7%, up 40 basis points. Core EPS was up 8% in the quarter, and it was up 9% on a currency-neutral basis.

Now, let me provide some further details. The reported net sales increase included 2 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 a point of foreign currency translation.

Reported gross margins increased 60 basis points in the quarter, increasing from 58.7% last year to 59.3% this year. 70 basis points of this improvement was driven by the favorable comparison of unrealized mark-to-market commodity price changes. Positive net pricing, including a favorable trade spend adjustment in our packaged beverages segment, increased gross margins by 50 basis points. Lower commodity costs and continued productivity benefits, including those from RCI, as well as certain other input cost reductions, increased gross margins by 30 basis points each.

The impact of mix, mostly from our Allied Brands, as expected, reduced gross margins by 80 basis points, and inflationary increases in certain other manufacturing costs and increased depreciation decreased gross margins by 30 basis points. Finally, foreign currency reduced gross margins in the quarter by 20 basis points, principally as Mexico sources certain inputs in US dollars.

For the quarter, reported SG&A, excluding depreciation, rose by $11 million, after a $6 million foreign currency translation benefit. Marketing, as planned, increased $15 million, reflecting new priority brand creatives across several of our trademarks. While we did experience certain other inflationary cost increases, these were mostly offset by lower transportation costs, driven by lower fuel prices. Depreciation and amortization declined $2 million.

Other income increased by $5 million as a result of a non-cash gain on the step acquisition accounting of our Aguafiel joint venture in Mexico. We chose to acquire our partner's interest for $15 million, funded with cash in the joint venture. Below the operating line, net interest expense increased $4 million, primarily reflecting an overall higher debt balance, and higher rates from our fourth-quarter 2015 refinancing. Our reported effective tax rate was 29.7% in the quarter, and includes a $17 million gain associated with a legal entity restructuring. Our reported effective tax rate in the prior year was 34.4%.

Moving on to cash flow, cash from operating activities was $683 million, down $40 million compared to last year, primarily due to the $35 million payment of the multi-employer pension plan liability. Capital spending was $110 million, compared to $71 million last year. For the first nine months, total distributions to our shareholders were $748 million, with $460 million in shares repurchased and $288 million in dividends paid.

Before I move on to guidance, let me give a quick update on RCI. You've heard me mention many times that we not only utilize the tools and principles of RCI to drive productivity, but also to drive top-line growth. Our 2016 lean tracks reflect the balance of the two, and tackle several of our largest identified opportunities across the organization, and to date, we're seeing strong successes.

For example, our web sales team recently refined the void reporting process, and closed 98% of their execution voids across regular Dr Pepper smaller CSD packages. With regard to our Allied Brand portfolio, an SKU prioritization lean activity resulted in distribution and availability growth on priority SKUs by 42%. Our lean track focused on improving processes affecting our route delivery drivers drove a 17% reduction in turnover year on year during the summer selling season. And our lost-time injuries are down 32% year on year, showing a significant improvement in the most severe injuries, as a result of our relentless focus on safety and development of our safety playbooks.

As I mentioned last quarter, we've been very focused on improving the performance of 7UP, and have a separate lean track dedicated to the brand. While we are not declaring success, and still have a great deal of work to do on the brand, we are very encouraged by the recent improvement in trends. As you can see, we continue to engage our people across all five pillars of RCI: safety, quality, delivery, productivity, and growth.

Now, moving to our updated 2016 guidance. We continue to expect reported net sales to be up approximately 2%, inclusive of a foreign currency translation headwind of about 1%. Given our year-to-date performance, we are increasing our full-year core EPS guidance. We now expect core EPS to be in the range of $4.32 to $4.40. This is still inclusive of an expected 3% headwind from both foreign currency translation and transaction combined.

We continue to expect total Company sales volume to be about flat, with CSDs about flat and non-carbs up slightly. We also continue to expect combined price and mix to be up about 3%.

Moving on to cost of goods, we continue to expect packaging and ingredients to be about 1% deflationary on a constant volume mix basis, which has already been realized. 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 just mentioned should result in roughly similar gross margins for all of 2016.

Moving to SG&A, we now expect an increase of approximately $5 million in health and welfare, and other insurance costs, versus the $15 million that we had previously expected, and we have already experienced this increase. We also still expect general inflation in our field labor costs to increase operating expenses by approximately $20 million for the year. We also continue to invest in execution across our business, and are forecasting additional investment of about $3 million in our front-line employees in the fourth quarter.

That said, we believe we will be able to achieve productivity benefits from RCI that will help offset a portion of these increases. We continue to expect favorability from lower fuel costs. We continue to expect marketing to be about 7.5% of sales for the full year, which implies an increase in the fourth quarter.

Now, moving below segment operating profit, our net interest expense will be approximately $12 million higher, driven primarily by our fourth-quarter 2015 debt refinancing. Our full-year core tax rate is now expected to be approximately 35%, and we continue to expect capital spending to be approximately 3% of net sales, including the spending for our new plant in Mexico. We also continue to expect to repurchase approximately $650 million to $700 million of our common stock in 2016, subject to market conditions. 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 thoughts. We continue to drive strong results across the business. We're focused on driving aligned communication and execution across our priority brands, while also selectively adding to our Allied Brand portfolio in an effort to compete in fast-growing categories.

We're continuing to embed RCI further into our culture. 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)

Our first question comes from the line of Dara Mohsenian of Morgan Stanley.

Hey, good morning, guys.

Good morning.

Good morning, Dara.

So in the past, you guys have sounded fairly skeptical in regards to M&A and your ability to drive shareholder value through acquisitions, just given the high multiples in the industry. I was hoping you could just give us a bit of an update on your thoughts on M&A, if anything has changed in your thinking, particularly given we've seen a number of high-growth companies, both in your allied portfolio as well as outside, sustain success over time. So maybe that makes you a bit more comfortable with industry valuation levels. But I was just hoping for an update there. Thanks.

Dara, it's Marty. I'll make some comments and Larry can add any if he wants. So, obviously, this question goes to directly one of the things we've talked about in terms of risk in our allied brand portfolio is what happens when and if one of these brand owners decides to sell their brand. I think we're really comfortable with the strategy itself and the ability of us through Allied brand partners to move quickly with the consumer, to innovate quickly, and to do it in a way, at least at the front end, that requires little hard capital. It does require work to execute.

Clearly, we've always said that it's not about if. It's more about when the successful ones decide they want to do something with their companies. These are all start-ups. These are entrepreneurial-bred businesses. And our view is whatever we do, whatever we should do, it's going to be done in a disciplined way.

And you made mention, Dara, of something just now. Those that have been around awhile know that there are a handful of precedent transactions in this industry that I think we would all characterize having been done at very large multiples. Everyone can form their own conclusion. I think you know some of those brands, whether or not with hindsight those end up being successful or not.

But we want to be very disciplined. Those precedent transactions clearly drive many entrepreneurs to do exactly what they're doing, to be creative, to innovate, and we like that. And we're partnered with a number of them. And a number of these brands are showing some very early signs of success.

Now, we can't, and are not in control of what these brand owners decide what they want to do with their companies, when they want to do it, how they want to do it. I think, look, fair to say as a major distributor of these brands, we would be aware if something were happening. But, look, I mean, we also understand that whether or not the very high levels of early growth could be sustained over a long enough period of time obviously carries risk. Whether or not brands that start in a certain category can actually be extendable early in their life to other categories is challengeable.

And so, we're mindful of this, and we never forget about competition. You've seen plenty of examples in different categories. When others see somebody being successful, you draw competition. And we know we've seen explosions in categories. You can look to sparkling water, for example. Look where that is today versus where it was. Thankfully, the category is still growing strongly. So, we think about all these things carefully. We will never say never, but we're going to be careful and cautious.

Thanks. That's very helpful. And then, the second question is I was hoping you could just give us an update on the pricing environment for what you're seeing in the marketplace from a promotional and list pricing standpoint. And as we look going forward, if commodities do reinflate, do you think you'll be in a position to offset higher commodities with additional pricing, or is the current run rate more of a normalized level, even if commodities reinflate? And last, just can you touch on how hedged you are for inputs as you look out to 2017?

Thanks.

I'll take the first part of that. I think everybody has seen pricing has been very disciplined. We're not seeing anything out in the market that gives us any angst. It's very disciplined. It's very thought out how the promotions are being ran. I think promotional activity, of course, this time of year always steps up a little bit with the holidays. And I think where the pricing is today, if we saw any movement in commodities, I mean, we still have to look at it and say we go where the market is. We have to be competitive. And so, as we've always told you in the past, we don't always put a lot in there on pricing.

And on the part of the question that goes to hedging, we're in a similar position to where we've been in prior years for 2017 at this time of year. So we think we're in a good position going into 2017. We'll obviously give more color on that and cost of goods trends when we talk on our February call.

Okay. Thanks, guys.

You bet.

Our next question comes from the line of Laurent Grandet of Credit Suisse.

Good morning, everyone. Great quarter.

Thank you.

I'd like to understand a bit more about your full year guidance. You said it would be kind of a plus 2% and that for [us could traditionally] implies a 4Q about flat. It seems to be a bit low in our ebb. So could you give us a bit more color about your Quarter Four forecast?

Sure. Look, needless to say, we have all year run ahead of what we had been guiding. We've always been cautious, Laurent, about the category and everybody knows where CSDs are. Yes, we have performed better. And we're particularly pleased with the recent results for Dr Pepper and even more so, 7UP.

But oh, by the way, we also in the past had a lot of growth from our lead brand; I would call it our lead brand in Mexico, Penafiel. That's slowing down, not unexpected, from strong double-digit growth. So we tend to regress a little bit back closer to certain category trend, but I will acknowledge that we have overachieved against those for the first nine months of this year.

Okay. Thank you. And in the past quarters, you mentioned allied brands were representing about 50% of your growth. How much were they represented this last quarter? Could you give us more color on this?

It's about the same. It's about the same.

Okay. Well, thank you.

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

Yes, hi, good morning, everyone. Just two quick questions; one is just looking at the Canada Dry numbers, they've been on a tear. Just wanted to get some perspective on what you think is driving that, whether it be just consumer preferences or if there's something specific happening at retail.

And then, the second question is on Monster Mutant. I notice that it's showed up in some of the Dr Pepper Snapple Group shelf slots at a couple of retailers. And so, I just wanted to get your thoughts around that. Is that kind of part of the plan or this is something you're trying to combat, because I know there's some issues right now with spacing and Pepsi with that product. Thanks.

Yes, I'll answer on the Canada Dry. I'm probably not going to touch the second one there. But, on Canada Dry, if you look at it, the ginger ale category is doing fantastic. And so, we're the leader in that category. And we've put together a lot of new media. We've went through our return on margin investment. We know which way to advertise now, whether it's shorter television or more going towards the digital, and where to play in digital.

And then, of course, our consumer-centric strategy is telling us where that consumer is. And we're listening to the consumer. We want the occasion and we're there. We have the product there. So you're correct. It's on a tear and we expect it to continue that way.

Great. Thanks.

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

Thank you. Good morning.

Good morning.

So, Larry, I wanted to drill a little bit into your non-carb performance. Certainly, the CSD being up 2%, has been a positive trend. The non-carbs being flattish is in contrast to some of the other companies that have shown better non-carb growth.

So, can you just drill into sort of what's happening within your non-carb portfolio? And then, if you exclude allied brands, what would your non-carb growth have been? So thinking about the non-carb strategy?

Yes, I think, Judy, if you go back to my prepared remarks, it's all driven by Mott's and Hawaiian Punch. Mott's, the juice category, as a category, is facing headwinds there. So, we're not surprised with that. We had great growth with our softs, but not enough to overcome what we had on the juice decline.

Hawaiian Punch was a conscious decision. We took pricing. That category, too, has got some headwinds, but we took pricing in there, especially on our single-serve. And that drove it. You take those two out, and like Marty said earlier, our allied brands, again, were continuing to grow about the same as last quarter.

Snapple was flat this quarter, but it was against some activity we had last year. And we have some activity coming up now that I mentioned that's going to reverse that. So, it'll be coming back up. So those two are the only two that really drove that. So it wasn't a surprise to us. We consciously took the pricing on Hawaiian Punch. And hopefully, we see some improvement next quarter.

Okay, got it. And then, Marty, just a quick follow-up, so one is just the favorable trade accrual adjustment that you called out in Packaged Beverages. Can you quantify how much that helped the price mix?

Yes, it was in the range of - I think it was about a $5 million or so number. Not an uncommon adjustment for us, as we go back and true-up our trade spend estimates versus what actually came in, in terms of actual program costs. This happens from time-to-time. It was about $5 million.

Okay. And then, for the full-year guidance, so obviously, the sales and the cost of goods component don't seem to have changed. So, when you bridge from the prior earnings guidance to the current guidance, it seems like most of the drivers were really on healthcare costs coming in lower, maybe a little bit of a tax rate being more favorable.

And then, on the marketing side, it sounds like you're still kind of favorable year-to-date, the $19 million, I think, reduction in the first half and $16 million in the third quarter. So should we expect the fourth quarter to see another step up in terms of the marketing?

Well, first of all, Judy, in marketing, absolutely. The timing during the year, as I think you know and everybody knows, was all about us basically going back and redoing a lot of our trademark creative to align with all the work we did in the prior year on our consumer-centric strategy. We will have an increase in marketing for the year. It's going to be in the back half. You saw $15 million or so of it in this quarter. And you're going to see another increase in the fourth quarter. So, we like our marketing plans. We like what we're doing. And we think it's actually contributing quite a bit to our top-line improvement.

So, in terms of the guidance update, yes, there are some things this quarter that fell through. You'd mentioned a tax rate, by a tax rate driven by that gain on the joint venture; that was a non-taxable gain. That flowed through. I'll remind you also that earlier in the year, we settled an arbitration award that was awarded against us, also related to that joint venture. So, yes, we've flowed through a few of those things. And, otherwise, we're where we are.

Got it. Okay. Thank you.

Our next question comes from the line of Vivien Azer of Cowen & Company.

Hi. Good morning.

Good morning.

Good morning.

My first question has to do with diets; clearly, an exceptional result on Diet Dr Pepper. So I was hoping you could offer a little color on some of the activity in the quarter as well as your view of the diet category as a whole. Dare to dream, are the declines actually easing? Are we finding a floor here in terms of the diet consumer?

Thanks.

Yes, I think we've seen the decline in the category slow down a little bit. And I think some of that's been driven by what we've been doing. As we mentioned in the previous quarter, we continue to market, especially our Dr Pepper with Lil' Sweet. We've seen a great return on that. And you saw the numbers. I mean, we're up almost 1% for the third quarter. We also go out there and we talk about our execution. We make sure that as we try to keep our brands top-of-mind and the great taste of our diets, that they're also close at hand. So execution in the field has been good, so we're pleased with what we're seeing happen with our diets.

And just to follow-up on that, any insight in terms of kind of consumer sentiment around the category more broadly? Clearly, you guys are bucking the trend, but is there a broader read there?

You know, I wish I could read it. You know, there's so many choices out there today. I think that diet drinker has many, many more choices than they used to have. I think we're keeping ours top-of-mind, so that we're trying to keep them in there. We all know that the consumer is looking at a lot of different products right now, but I think as they switch around, they still want that great taste. Taste is still everything.

Totally fair. Thanks.

My second question for Marty, please, on unallocated corporate. That's been declining fairly meaningfully through the first three months of 2016. Should we see that normalize, or is this kind of a good new run rate, please? Thanks.

If you're looking at our reported results, then you're going to see the impact of mark-to-market gains and losses, and we did have a gain this year. So I'm guessing that's what you're looking at in the segment tables.

Yes, I apologize. That's probably right.

If you take that out, spending is flat. Spending is more or less flat.

Perfect. Thank you.

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

Guys, good morning.

Morning, Bill.

Hey, I know it's not fair, because we didn't give you a pass last quarter on the weather, but is there any way you can sort of dimensionalize how much the favorable weather impacted the results this quarter?

No. I can't think of any place that we've had weather that would be enough to make a change in a trend. It's been a little warmer. But whenever you get to certain parts of the country, when it gets warmer, they get concerned because there's no rain. They'd rather have the rain. They'd rather have the cooler weather, especially the Midwest.

So, we don't really pay that much attention to the weather, because there's nothing we can do about it. We still have to execute and deliver. I know Rodger. I've heard him tell his guys that he doesn't hire weathermen, that we get out there and do it no matter what the weather is. So I don't believe it was significant, Bill.

Okay. No, that's fair.

And then, can you just give me a little more color on the allied brand business, like why people choose you guys over the other options in the market and if there's any interesting new allied brands in the pipeline? And then, just lastly, you know, I think there's like change in control provisions, so if someone else did come in and buy, like a brand like Bai, I think like the sort of industry metric is you get two years of gross profit or something, if it changes distribution. Is that still the case?

I'll take the first part of that, Bill, then let Marty take it. I mean, you've heard us say before, we have a tremendous pipeline of allied brands that come to us that we can look at. And they have to fit certain criteria. Just remind you, if you look at, our total allied brands are only about 5% of our volume. There's several large players in there. I mean, it is not big volume, but it's 5% of our total. And we have an open system. I mean, our distribution system is open to brands that fit our strategy.

I don't know if the other people out there with route to markets in DSD allow that flexibility. So it makes it a natural for them to come to us, which is fantastic, because we can look and see what is the trend. We know what our consumers are looking for and so we can make sure we have the right customers that come in, or the right partners, on an allied brand.

Then, I'll let Marty take the rest of it.

And, Bill, we believe, from our own strategy and feedback from consumers, that many of our brands are not extendable from their current space. Dr Pepper is an indulgent occasion. Our consumers said, don't try to make Dr Pepper better-for-me, changing the formulation, changing the sweetener system. But yet consumers, at times, do want to have a better-for-you occasion. And look, that's where the growth is, and that's, as I said earlier, there's lots of incentive for start-ups and entrepreneurs to want to go there, to see the opportunity.

And when they come to us, I think I've shared with all of you, we have a pretty rigid checklist of requirements to pass through the gates here in terms of the brand, the strategy, how they see the consumer versus our consumer insight, the credibility of the management team, their access to capital. We do not want to fund these businesses early on, and yet they have to have the capital to do what the brand owner needs to do early on, particularly in sales and marketing.

And, look, I'll tell you the pipeline is pretty full. And many times, we talk about limiting how many we want to actually get serious with, just simply because we worry about our ability to execute too many in too short a timeframe. It's an interesting list of products that are in the energy space, and, obviously, the enhanced water space, maple syrup or something water, I'm not sure what that even is.

Don't look for anything soon coming out of us on that, but I know it's on the list somewhere. And you see all these brands. You'll see them from-time-to time in various places in the markets, particularly in New York. And so, we like this path. We like this path innovation.

Okay.

And, Marty, you brought up a really key point on making sure that we can execute what we do bring in. We work very, very closely with our allied partners. I mean, we feel like they're a part of the company. We work our plans together, to Marty's point. They're doing the marketing. We've got to do the execution. And so it has to be hand-in-hand. And so, we don't want to just take everything that comes in and let some things fall through the crack; pick out what we're going to do and then execute it with excellence.

Okay. And then, just the tail-end of that question was, I mean, the way you typically protect yourself, and I don't need specifics, but isn't it typically like the rule of thumb, you get a couple years of gross profit back if they break distribution, if they get a new buyer, is that a good assumption to use?

I'm not going to share specifically what we negotiate in these contracts, other than to say that, in our view, it's a reasonably strong payment to us to compensate us for the value that we help create.

Okay, totally fair. Thank you so much.

Our next question comes from the line of Caroline Levy of CLSA.

Thanks so much. I'm just following on the allied brands briefly. I assume you're the distribution partner just in the places where you company-own the bottling. Is that right?

That's correct.

And would you, in theory, if you were to lose one of your bigger brands, would you make a concerted effort to quickly replace that volume?

Absolutely.

Or is that not how you think about it. You would.

Absolutely. We've done it in the past. You know, this is not a new strategy for us. We've had allied brands for a long time. We've just refined it in the last few years. We've lost some major players, and we've built them back. We hate to lose them. But we also understand sometimes why they sell. And we're always involved. When they're for sale, as Marty said earlier, we know it. And we're their partner.

So we're always observing, but sometimes you lose them and then you have to go out and make it back. And I think we've been very successful at building back. We lost Rockstar. We lost Monster. We lost vitaminwater. We lost FUZE. And we continue to go. We keep building our allied brand portfolio.

Right. The retail climate right now, Larry, if you could just comment on what you're seeing with shelf space movement; one thing I'm wondering about is because the cola, diet colas, used to be much more vulnerable than other categories. Are you seeing opportunities for more shelf space from cola or diet cola, would you say?

No, we really haven't seen any of that. Even with the diets, of course, our competitors are - they're going to fight for their space, and they're going to have LTOs and innovation, other things they can put in there. So we're not really picking up any, but you know we're also not losing. So we're very happy with that. Everybody always wants more space, but it's very, very expensive real estate out there in a supermarket.

And in the foodservice, you're doing quite well, yet we're hearing restaurant traffic is down a lot. So do you think you're just gaining share, or it's not the restaurants you sell to? Do you think it's more like..

Well, we're getting new availability. We're gaining some share, and we're seeing QSRs up slightly, up about 1%, and so I think that helps some.

But our team does a fabulous job of going out there and getting new valves, getting more availability. As I mentioned earlier, I mean, that's one of the reasons our diets are doing well, and we're having a huge push on diet in the fountain. Because if we're out there doing marketing and we're top-of-mind, we have to have it close at hand. If you're going to be drinking it at work, at play and while you're dining, that's what you'll buy and take home with you.

Got it. And then, one for Marty, please, and then I'm done. The $5 million accrual reversal, does most of that go to the bottom line?

Yes. Yes. On a before-tax basis, Yes.

Okay. Thank you.

Thank you.

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

Hey, guys. I feel bad that our research may have created a monster here on allied brands, but let me go back to it a little bit, just if you can. You mentioned that success invites competition. You were mentioning that in the context of brands competing, but you clearly have been very successful with allied brands.

And I'm wondering, from a competition perspective on the distribution side, actually, so what makes you uniquely able to qualify to be the partner of choice versus a Coca-Cola or a Pepsi? Is it just your size is kind of the right size to be able to put some resources behind it, or that there's a disparate kind of patchwork of bottlers for Coca-Cola? Or how come you guys, you think you've been able to carve out this niche for now with the allied brands have you?

So, Ali, good morning. I think there's a lot to that. I think, first of all, we can't speak for the other two DSD companies and how they think about this or whether or not they even entertain the idea of meeting with these companies and doing what we do. And, honestly, Coke's in the midst of a major change in their distribution system, so that they won't own it. The Coca-Cola Company, at least, won't own it, doesn't mean they can't own brands and license brands out through their bottling system.

I think they come to us just simply because I think they know we're sort of open in that sense. We're saying out loud, look, our distribution system is an asset. We're willing to leverage it under the right circumstances with the right partners. You know, recognizing that there could always be the risks that we talked about earlier on this call. So, I think it's that simple. And, of course, we're smaller. I'd like to think we're easier to do business with.

You come in here with a good proposition, and you'll sit with Larry, myself and the other key leaders of this company. And we'll vet with you what this opportunity is exactly about. And so I think you get the right attention. I think you get fast feedback. And you know, look, we have pretty reasonable coverage, as well.

So it's not like we leave them with gaping holes, notwithstanding the fact that they're larger. Remember, they don't all completely own their own systems and there's still lots of -- with Pepsi and Coke and independent bottlers, that we all - on the independent side, we need certainly and we use them well to cover real estate for us. So I just think we're a good choice.

And I think our track record shows a lot of success. I mean, people look at it and say, look at the brands they've built. And I'm with Marty. I believe we're easier to work with. I mean, these guys have an open door to me, Rodger, and Marty. I mean, there's not a week goes by that we don't visit with them or see them. And they know if there's everything they ever need they can pick up the phone and call and they have one of us. So I like to think that they look at our track record, and also respect the way we operate, and how we run a business.

I will say, Ali, one more point, because you raised it on competition. From time-to-time, we do see brands come in here that would actually compete directly with allied brand partners and we're cautious there. We're reluctant there, because we are partners with these people. There's no legal reason why we can't.

We take the deal, we could simply be a distributor, and distribute everybody's product and take the view, let the best person win in the marketplace, if you will. But we like to partner with people and not work against them, work with them. We think that's the right thing to do.

It creates the right level of relationship. At the same time, it gives us confidence that there are competing opportunities in the marketplace. And I think to Caroline's question, yes, that would allow us to seek out others and replace lost opportunities, should they occur.

Thank you. I just have a few just real quick ones; one is just on this and back to this kind of creating a monster point, I apologize. But do you think we're spending, as investors and analysts, too much time on this allied brand stuff or is it appropriate, right, to be focused on this and view it as a risk, given it drives more than 50% of your top-line growth?

Ali, I got a hard enough time doing my job to tell you how to do your job.

Okay.

I think that's a judgment call.

Okay.

You guys decide how you want to focus on it, what you want to do. I think it is fair. And I respect and I know Larry, we respect whatever you guys, how you think about these issues. It's a fair area to inspect. And I leave it up to all of you.

Okay. Okay, two other quick ones; one is Penafiel continuing to slow. You've been saying this for a while. What lies ahead for it? Can you answer that?

Yes, so I think a couple factors. So I think year ago, we had great innovation. And that really drove the brand. I think year-ago quarter, it's probably 13% or 14% growth this time last year. So we're lapping a big number. And it has competition, okay, in the marketplace. Other people have seen what we've done with Penafiel in that sort of flavored sparkling water category in Mexico, and are putting products into the marketplace. So we're stepping up marketing in Mexico.

The brand is still performing well. I mean, it was low this quarter, but overall. So another example of what happens when others observe your success. But it's still a great brand, it's going to grow. We're confident about it. It's just not at the rate it did a year ago this quarter, which was very, very strong.

Okay. And then last question, I promise. Price mix continued to be rational. You mentioned that a couple of times. Everyone is kind of mentioning that. You guys had a slight disadvantage, I would argue, in terms of the pack size element, i.e. the mix element, as opposed to the rate element of price mix being rational. Where are you on that yourself? Do you have all of the pack sizes you want, number one, and how much further you think the industry overall can go? Thank you.

Well, we have the capability now. We're putting more capability and capacity in. We continue to look at it, again, with our consumer-centric strategy. What packages do they want and where do they want it? And that's where we'll make our decisions.

It's not as much what everybody else is doing. We want to know what does the consumer want and what are they buying. So we continue to put in more capacity. Where it ends up, I don't know. You go in these supermarkets and still the space is cans and two liter. That's the heavy load.

Okay. Thanks.

Our next question comes from the line of Bonnie Herzog of Wells Fargo.

Good morning.

Morning, Bonnie.

Morning, Bonnie.

Hi. I have a question on innovation. I guess I couldn't help but notice at this year's NACS show that a lot of your innovation seems to be focused on allied brands. And it seems there's less of a focus on major innovation behind your own portfolio than perhaps in prior years. So, I was hoping you could talk a little bit more broadly about this and how full your innovation pipeline is for your own brands versus your plans to rely more on the stepped up innovation on allied brands in the future.

Well, Bonnie, Larry even mentioned, I think, in his prepared remarks, innovation around Snapple. And so you know what? What you should see and are seeing from us, when it comes to the brands themselves, you'll see extensions, flavor extensions, things that allow the brand to play adjacently to where it is or extend it where it is, but not in a different consumer demand space.

Now, obviously, being at the Convenience show where, of course, the focus is on a lot of single bottle, this is where a lot of the allied brands have opportunities in single bottle, okay? Many of them, one reason they come to us is because that's a market channel that fits very well in terms of our ability to distribute versus other larger format channels, where they could take their brands into, in essence, a warehouse distribution model, okay?

But yes, everybody knows a single bottle in convenience is critically important. So, of course, you would see us with a heavy emphasis there at it's new versus our traditional brands. But our R&D team is actually growing by a few people next year. They're growing, they're spending.

Lots of work we continue to do on sweetener technology. That'll never stop because it's so important. We're just not trying to extend that innovation to take a brand and treat it, I guess, as a name and put it somewhere elsewhere where the consumer has said they don't want it. That's our view.

And our R&D team spends a tremendous amount of time with our allied partners. I mean, it's a benefit to our allied partners to have our R&D team here that can really help them with things where they're not having to outsource it, go to somebody and pay it, and we can move really quick. And you've heard everybody talk about the team, they're fantastic. I mean, they can get some really good things done. So, we'd rather stay, as Marty said, on the line extensions, the LTOs, like I mentioned in my prepared remarks. And we've got the R&D team loaded down there.

Okay, that's helpful. And then, Marty, you did bring up your sweetener technology. Is there any update that you can provide us with regarding that?

No. No.

Not right now?

Our team's working hard. We have no reason to believe, or evidence to show, that we're anywhere less than anybody else in the industry, either, on that.

All right. Thank you.

Our next question comes from the line of Stephen Powers of UBS Investment.

Great, thanks. Good morning.

Good morning, Steve.

Hey. So, Marty, going back to the full-year guidance commentary, I hear you on the desire to be prudent, but sales volumes, if anything, seem to be lagging BCS on the margin through the first nine months. And in CSDs specifically, looks like you're running closer probably to plus 2%, if my numbers are correct, versus, I think you guided sales volumes still flat for the year.

So is there something specific, beyond your general conservatism, to believe in the material kind of Q4 deceleration, just because it seems hard to get there based on the numbers that we see thus far in the year?

You know, Steve, look, as I said earlier, it's more about a little bit more regression to trends in the category than necessarily a bridge from where we've landed year-to-date September.

Okay. But do you see something that says that regression is going to happen, or it's just that you believe that you'll regress to the mean eventually?

We think it's a prudent forecasting view.

Okay. Okay. And then, a bigger picture question, I know you've been doing a lot of work on marketing ROI this past year. Is there any way you could, I don't know, maybe highlight one or two of the key learnings you've had there and what kind of impact you've seen as you've put new thinking to work in that regard?

Steve, off the top of my head, I mean, there's a litany of things in terms of length of TV spots and whether you really need 30 seconds versus 15 seconds. There's a lot of shifting happening across the media vehicles, a lot of things that we're learning about digital and social, which have very high returns. I think in the past, we've commented also about how maybe we shouldn't do as much local, radio, in some cases, or particularly out of home, which is billboards, for example, which have been traditional, but now we're challenging that traditional thinking.

Paid search, all that stuff, again, that happens on social media; how we think about Twitter versus Facebook, I think, and Instagram and other vehicles again. Well, finally, coupons. I keep forgetting the traditional on-pack coupons. A real challenge there as to whether that actually gives you any incrementally whatsoever or not. And, look, once a year, we go through our three biggest portfolios, of CSDs, teas and juice, and we try to incorporate and get better by incorporating the learnings. And we'll never stop.

Okay. I think that's helpful. Is there any way that you've devised to measure like the improvement in the rate of return on marketing investment, beyond just the aggregate quarter-to-quarter results? Is there anything more micro that you've been able to isolate to say that we are improving?

Well, look, if I could comment, based on our sales, certain our brand performance, you could argue, for example, Diet Dr Pepper, well outperforming the diet category and it was through our MRI work that we determined that a decision we made a couple years ago, I believe, to actually move our marketing dollars to the trademark level and take them off diet specifically was a mistake. And so, it showed up in the analytics. And so there's a direct example that.

Yes, that's a good one. All right.

That was a learning we had that we said, okay, let's make the shift.

Great. Thanks a lot, appreciate it.

Yes.

Your final question this morning comes from the line of Kevin Grundy of Jefferies and Company.

Hey, thanks for squeezing me in, guys. Good morning.

Good morning, Kevin.

I'll be brief. Marty, I apologize if you covered this. The price mix in the Concentrates segment was higher than we had modeled. Can you break that down by rate mix and probably reserves?

No, but the reason it was stronger is it's mix. And in concentrate, that's our way of saying better performance in fountain.

Okay. All right, good enough. And then, a broader question and, Marty, I know you generally tread lightly on these sorts of questions, but as we look at your business now and it's about a 24.5% or so EBITDA margin, can this be a 30% EBITDA margin business? It would seem like the low hanging fruit would be within your bottling system.

But you've also had tremendous improvement in Latin America. And that business is scaling and you're taking out cost there as well. In aggregate, for consolidated Dr Pepper Snapple, can this be a 30% EBITDA margin business? And, if so, what would be a reasonable timeframe? Thanks.

Oh, Kevin, you know that's a tough one. I mean, if we look back at what we have done and we're proud with the success we've had. But, we're in the early innings of RCI, and truthfully, if you'd asked me three, four years ago, would we be at 24%, or a 24.5%, whatever it is, today, I probably would have said, I don't know. And so I'll say again, I don't know.

But we think that the opportunities are fairly large, but we're not in a rush to get there, right? We're doing it through building a culture around improvement, engaging our people, and driving that in everything we do and making it, as we say around here, the way we work at Dr Pepper. And, yes, there is more opportunity, but I certainly can't quantify it.

Okay, very good. Thank you. Good luck.

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

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect and have a wonderful day.