Keurig Dr Pepper Inc (KDP) 2017 Q2 法說會逐字稿

Good morning, and welcome to Dr Pepper Snapple Group's Second Quarter 2017 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

Thanks, Laurie, 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 statements 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 the 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, I'll turn the call over to Larry.

Thanks, Heather. Good morning, everyone. I'll start by saying that I'm proud of our teams for delivering strong top line results this quarter, resulting from solid execution behind our focused consumer-centric strategy.

In our CSD portfolio, once again, we outperformed the category, growing both dollar and volume share in IRI-measured markets. We're investing behind our newest brand, Bai, and at greater levels than previously planned and are executing against the strategy we communicated back in April. Our results are encouraging, and I'll speak more about that in a moment.

Our Allied brand strategy continues to allow us to go where the consumer is going and drive both top line and bottom line growth for the business. All of this, while RCI continues to improve the operating platform in which we run the business.

For the quarter, bottler case sales increased 3% on just over 1.5 points of positive mix. Our CSDs grew 3% in a continued challenging environment and our noncarb brands increased by 5% in the quarter. Dr Pepper increased 2%, driven by regular Dr Pepper, which grew 2% in the quarter and Diet Dr Pepper, which grew 1%, again outperforming the diet category.

7UP grew 5% driven by growth in both the U.S. and the Caribbean. This marks the third consecutive quarter of growth for this brand in the U.S., following our RCI lean track last year and our new marketing campaign for this year.

Canada Dry grew 6% and Schweppes increased 4% on continued growth of the ginger ale and sparkling water categories. A&W was flat in the quarter.

Peñafiel increased 8% on strong performance in both mineral water and our -ades line. Squirt grew by 7% and all other CSDs decreased 1%.

In noncarbs, Snapple bottler case sales declined by 1% in the quarter, as strong shipments for promotional event at a large retailer are expected to sell through in the third quarter.

Mott's increased 2% on growth in sauce and Clamato grew 3%. Bai increased 118%, primarily on the acquired volume outside our system as well as on continued growth in our own DSD system, which grew by 37% in the quarter.

Our expectation for the full year is still for volume growth on the brand across all systems of about 40% to 50%, as we continue to gain new distribution and availability and drive trial activity in the marketplace.

Our growth Allied brands increased 45%, driven by continued strong growth across BODYARMOR, Core and FIJI, once again, demonstrating the continued success and importance of this strategy.

All other NCBs decline 4% in the quarter.

Our calendar for the back half of the year is packed with programs that will continue to unlock growth and leverage the power of our priority brands. Dr Pepper will be front and center again this year during the college football season. This program is right on strategy for the brands and continues to be more successful every year, and we're going to keep that momentum going and make it even bigger this year.

We're bringing back our college football celebrity, Larry Culpepper, and his tailgating RV as well as executing national media across TV, digital and social and driving strong activation at retail.

We will continue to communicate our new messaging on 7UP across all platforms, highlighting the versatility of the brand. As I mentioned earlier, the performance of this brand in the U.S. has improved in recent quarters, giving us early on confidence that we are on the right track with consumers.

And we've got some exciting news on Snapple. For the first time, we'll give consumers a new, more convenient single-serve option as we roll out our 16-ounce plastic bottle that looks and feels just like our iconic 16-ounce glass bottle, complete with a metal cap that pops.

Now let me talk about the recent performance of Bai, the opportunities for the brand, how we're executing our communicated strategy and driving sustainable growth for the long-term. On a year-to-date basis, retail sales of Bai are up almost 37% across IRI-measured channels, significantly outperforming both the category and its key competitors. We're seeing strong growth across multiple channel and importantly in the grocery and convenience channel.

ACV levels across base Bai flavors and Cocofusions have continued to improve across all channels, however, there is a great deal of opportunity in the convenience channel with current ACVs in the 50 range. Our current plans for the balance of the year for base and Cocofusions and this channels should accelerate growth.

We've got new authorizations to add over 7,000 new stores across several large national and regional convenience store chains, and that's just C stores. We've also got authorizations for new SKUs in a large-format accounts that will go in during the fall reset time frame and thousands of new cooler placements going in as well.

We're placing several hundred additional [fiber cap] displays across large-format in the balance of the year and also just this month, launched our second biosphere market in Southern California. We've seen growth of about 115% over the past year in specific retail change in the Dallas biosphere. So we're taking those learnings and expanding this innovative execution strategy into L.A. and Orange County.

And while Bubbles is also showing positive ACV gains, this brand still has tremendous distribution potential across all channels. As we've said, we're repositioning the brand from a price point, packaged and shelf set perspective, so as to capture share in sparkling water. We expect to see improved performance on Bubbles over the balance of this year and 2018.

We said in April that a pivotal piece of our strategy was not just about gaining new points of distribution but also about driving trial and getting the brand in the consumers' hands. Because we know of that's once they try it, they are likely to buy it again, as demonstrated by the brands strong repeat purchase rate.

We're currently running trial driving activity in the marketplace at an even greater level than we originally planned as trial rates continue to show improvement, and we want to maximize the opportunity through summer selling season. We will also continue to run some level of activity through the balance of the year.

We're also investing heavily in marketing to drive brand awareness as well as to drive trial, spending $20 million in the second quarter, as we had planned.

We recently received our first MROI analytics for Bai and have seen great response to our TV and social campaigns, so we will continue those through the balance of this year. We're expecting our heaviest market investment in the third quarter this year, capitalizing on these learnings.

Bai's ready-to-drink tea is performing well in certain accounts where it's been repositioned in the tea set gaining several share points in a short period of time. And our relaunch of antioxidant water is slated for the latter part of this year, driving some upside this year, but more so beginning in 2018. The entire organization and I could not be more excited about the future of this brand.

Now I'll turn the call over to Marty to walk you through the financials and our guidance.

Thanks, Larry, and good morning, everyone. Overall, second quarter results were in line with our expectations. Our base business results overachieved and we invested more heavily in Bai.

Reported net sales grew 6% on strong volume growth of 4%. Reported segment operating profit declined 1% in the quarter, primarily on heavy marketing investments behind Bai and higher marketing spend for our other priority brands.

Marketing spend on Bai was $20 million, and we've also increased marketing by $16 million on our other priority brands. Core operating income and core EPS were both flat in the quarter.

Now let me walk you through the details. Reported net sales increased 6% in the quarter, including the Bai acquisition, which accounted for just over 1 percentage point of our net sales growth.

Total Bai sales, including our DSD distribution, accounted for just over 2 percentage points of our net sales growth and now Bai represents about 4.5% of our total company revenues. This represents a meaningful and important positive shift in our portfolio.

Organic net sales grew as organic volumes were up over 3%. Product mix contributed just over 1.5 percentage points of growth. Net sales growth was partially offset by the loss of our remaining distribution of Rockstar in the quarter.

Reported gross margins decreased 50 basis points from 60.5% last year to 60% this year. The unfavorable impact of unrealized mark-to-market commodity changes decreased gross margins by 120 basis points. Excluding this, core gross margins increased by 70 basis points. The added margin from now owning the Bai brand increased gross margins by 125 basis points, while higher commodity costs and increases in certain manufacturing costs reduced gross margin by 40 basis points each.

Further improving gross margins in the quarter were continued productivity benefits, including those from RCI and lower discounts. These positive factors were partially offset by negative effects of foreign currency and unfavorable mix, mostly from continued Allied brand growth.

For the quarter, SG&A increased $93 million. The acquisition of Bai added $40 million, including $20 million in marketing and $1 million of transaction expenses.

SG&A also increased due to an unfavorable $18 million comparison of unrealized commodity mark-to-market activity and further increased on a $16 million increase in planned marketing behind our other priority brands. The remainder of the SG&A increase was mostly due to certain operating expenses and additional planned investment behind our DSD front-line workforce.

Depreciation and amortization increased $1 million in the quarter. Other income increased $1 million, which includes a $4 million gain from the termination of our distribution of Rockstar.

Reported income from operations declined by $39 million in the quarter, however, $37 million of this decline was due to an unfavorable comparison of unrealized mark-to-market activity. The impact of the Bai acquisition, including $3 million of acquisition and transaction expenses, contributed $10 million of this decline.

Below the operating line, net interest expense increased $11 million, mostly due to the higher debt balances associated with the Bai acquisition. We recognized the $49 million loss in the quarter on the early extinguishment of debt. Other income declined by $20 million, as last year included a $21 million gain on the settlement of a multi-employer pension plan withdrawal liability.

Our reported effective tax rate was 33.2% compared to 35.3% in the prior year period. This quarter's tax rate included a $6 million favorable tax planning benefit.

Moving onto cash flow. Cash from operating activities was $410 million, down $18 million compared to last year, primarily driven by timing of payables. Capital spending was $41 million compared to $68 million last year. Total distributions to our shareholders were $381 million, with $204 million in dividends paid and $177 million in shares repurchased.

Before I move on to guidance, I'd like to give a quick update on RCI. We've shared in the past about how we utilize the tools of lean not only to drive productivity across the business, but also to help drive top line growth. Whether it be closing voids across several of our priority brands, improving display execution or, as Larry just mentioned, the impressive improvements we've seen in our U.S. 7UP business over the past couple of quarters. Our 2017 Lean tracks are well underway, and I'll mention just a couple of wins that further demonstrate the application of Lean process improvements to drive sales.

As a result of our DSD display execution track, our Texoma region reached their highest display ACV in 5 years, representing a 61% improvement over the prior year by implementing single point selling training and developing account manager standard work.

And the Northern California region of a large retailer achieved a 50% display rate improvement across our Warehouse Direct business. There's a tremendous amount of RCI activity that happens across the business on a daily basis, so much so that we're going to increase our investment in RCI by actively seeking additional RCI resources to add to our strong bench of highly trained Lean and Six Sigma professionals. I'm proud of where we're at as a company only 6 years into our endless RCI journey.

Now moving to 2017 guidance. We're now expecting net sales growth of about 4.5%, as the recent weakening of the dollar is causing foreign currency translation to no longer have a material impact on net sales.

We continue to expect that about 2% of this net sales will come from our acquisition of Bai. Organic volume growth is still expected to be over 1% and the acquisition of Bai is still expected to contribute just under 1% of our total company volume growth.

There is just over 1.5% price mix embedded within our growth and about 50 basis points of this price mix is the impact of our beginning of the year concentrate price increase. Our expected revenue growth also reflects the recent loss of our distribution of the Rockstar brand on the West Coast.

Moving on to cost of goods. Given our hedged positions and current market prices for our unhedged positions, we continue to expect packaging and ingredients, excluding the acquired Bai business, to be inflationary by about 50 basis points on a constant volume mix basis. For your modeling purposes, remember that growth of our noncarb portfolio, including our Allied brands, will increase the dollar value of cost of goods and also remember that cost of goods sold is negatively impacted by foreign currency transactions.

Collectively, all the factors I've mentioned above, coupled with the added gross margin we realized now being the brand owner of Bai are expected to result in a full year gross margin increase of about 50 basis points.

Moving to SG&A, excluding our acquisition of Bai, we're still expecting an increase of approximately $30 million collectively in general cost increases and expense associated with investments made in our DSD front-line workforce.

We also continue to expect an increase of approximately $10 million to $15 million in health and welfare and risk insurance expenses. RCI productivity benefits will help offset a portion of these increases.

We expect marketing investment, excluding Bai, to be about 7.5% of net sales in line with historical trends.

Now moving below segment operating profit, our net interest expense is still expected to include an incremental $15 million associated with the debt to acquire Bai. In other income, we will be lapping a $5 million favorable noncash gain on our acquisition of our Aguafiel joint venture in Mexico in the third quarter of last year.

Other income for this year includes the $28 million gain on our equity on Bai that was reported in the first quarter and the $4 million gain on the termination of the Rockstar agreement that was reported this quarter.

Our full year core tax rate is still expected to be approximately 34%.

We continue to expect strong free cash flow in 2017 with stock repurchases of approximately $450 million to $500 million, subject to market conditions. We also continue to expect capital spending to be approximately 3% of net sales.

We continue to expect foreign currency to negatively impact our income from operations in 2017. The combined effect of both foreign currency translation and transaction is now expected to reduce core EPS by approximately $0.04 for the year, primarily driven by our assumption on the Mexican peso, which we have forecasted at MXN 19 to USD 1 for the balance of the year.

The impact of Bai on consolidated core EPS is now expected to be $0.07 dilutive, as we have further increased trial driving activity in the marketplace.

Taking all the above into account, we're still expecting core EPS in the $4.56 to $4.66 range.

Now let me provide some commentary to help you with your modeling for the third quarter, as certain year-over-year expense increases and lapping the gain I just mentioned, should be considered.

First, with respect to the acquired Bai business, the brand is still expected to ramp up over the balance of the year. And importantly, we are expecting our heaviest level of marketing investment level behind the brand in the third quarter. As a reminder, we spent $20 million in marketing this quarter. And second, we expect about $5 million of the health and welfare and risk insurance increase to occur in the third quarter.

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

Thanks, Marty. Before we open the lines for questions. Let me leave you with a few brief thoughts. We're focused on driving growth through our priority brand strategy and our business is strong. We're executing against our communicated strategy for Bai, gaining new points of distribution on availability, driving trial and investing significantly behind the brand to drive awareness.

Our early results are encouraging, and we are excited about the future of this brand.

Our Allied brand strategy is working and continues to drive meaningful growth for the company. RCI continues to drive both top line growth and productivity across the business. And most importantly, we remain committed to returning excess free cash to our shareholders over time.

Operator, we're ready for our first question.

(Operator Instructions) Your first question comes from the line of Vivien Azer of Cowen & Company.

So my 1 question has to do with Bai, please. You've clearly made a lot of headway in terms of locking in new distribution from a retail perspective. So can you just remind us, for the 40% to 50% growth outlook, how has kind of the underlying growth evolved in terms of the mix of velocity versus distribution gains?

Vivien, it's Marty. So it's a combination of the 2, I know we shared on the slide this morning where we are in terms of ACV and also where velocities have improved to through the year. So really, we're counting on both. The velocities is really, of course, a hugely encouraging number because that will entitle us to more space over time and of course, that is a huge factor. The other consideration for the brand balance here is both the improvement emphasis on Bubbles, which we're really just getting started because we've repositioned it. And then some of the other innovation, both water and tea. And we'll get some of that in the back half and depending upon retailer calendars, some of them may push to '18, but we've considered all of that in our guidance.

Your next question comes from the line of Mark Swartzberg from Stifel.

A lot of discussion about Bai, of course, I wonder if we could take a broader view, either a total carbonated view or a total portfolio view. And what I'm getting at is, it seems like you guys are bobbing and weaving better than some of your competition as Walmart price promotes and the Amazon does what they're doing. And so I'm not asking for a retailer specific set of trends, but can you give us a sense, again, whether it's for the total CSDs or for the total portfolio, how your channel performance is laying out for your portfolio, what the comparative strength is from channel to channel?

Yes, Mark, I think the biggest thing is, as you keep looking at how we go-to-market with our consumer-centric strategy, I mean our customers really like the data that we bring in. Where we have the brands at the right place, the right price points, the right occasions, so it's working very well for us across all of our channels. And the teams go in, we've got our sales stories are all in -- it's fact-based, it's all data, it's points they want to see that help them drive more people to their store. So it goes across all of our LRBs. I mean we've got the priority brands. We go in, that's the main thing we sell, priority brand and Bai, Bai is a priority brand now and our results are showing that it works.

Mark, let me add something as it probably head off another question from somebody else. It goes to execution and we don't underestimate execution. And any of you have been around us and talk about RCI, quality and delivery from the customer's perspective comes before productivity. We invested in our workforce. This industry has forever had too much turnover and too many open positions. And it leads to poor service. Every order in this company gets filled complete and on time. Shelves get merchandised properly so there are no out of stocks. Not that there aren't any, but we measure this stuff, we go after this stuff and this quarter was as much about investing in marketing and our brands as investing of the people that are out there executing and well I can't point to, we would hope, expect and believe that some of that effort and work is resulting in our top line performance.

That's great. And if I could follow-up on that topic. When you look at the absolute growth of, say, C stores versus say, club stores or large format, can you just give us some sense of the complexion of growth, what's performing best, what's slower?

Yes, I think as you look at it, as far as growth, Mark, not mentioning account specific, but Walmart is doing very well, growing well with Walmart. Convenience is always a strong, strong focus of ours. We continue to go after the convenience channel aggressively. We noticed it was a little lighter in the second quarter, the entire channel, but we still did well there. So I think that's kind of where we're driving most of it.

Your next question comes from the line of Laurent Grandet of Crédit Suisse.

Yes, I just want to have -- I mean if you can add some color to the -- I mean, all the niche marketing initiatives you are doing on Bai in term of driving the trial and also I mean moving, I mean, bottles into a different place in the store. So that's one. And two, if you don't mind in terms of numbers. You said you would spend about $100 million this year in additional marketing, $20 million on Core, $80 million on Bai. Right now, you spent $16 million on Core, $20 million on Bai additional. So are you still planning to maintaining $80 million for Bai for the balance of the year or rebalance between Core and Bai or just spend less?

It's Marty, let me take the marketing question here. So probably a little less on marketing but more in trade and that should be somewhat expected if you think about what we're trying to do short-term to drive trial, so you've been -- if you've been in your local -- your large-format stores, you've probably seen the 3 for $5 promotion. If you've been in your C stores, you've probably see 2 for $4 or a price point thereabout. Which is what we've decided, as Larry said, to just go after and particularly take advantage of the summer and spend our money, mostly our money, right, to do that so we could do it quickly and get the results we've gotten. So probably makes sense too to spend a little more and get the trial gourd particularly ACV because we want to have really strong ACV numbers as we do more national whole marketing. On the marketing side, as Larry said, we've got our first set of learnings from the analytics that we do to understand return and contributions from marketing. Larry touched on a few things that we're going to emphasize. Their heavy media calendar is picking back up, as I said, so more than a $20 million number in the third quarter, as I've said. So we think right now, we have a really good balance of both what we're doing in marketing and the vehicles that we're spending that money on in terms of effectiveness and then spending the trade dollars, which, of course, a trade dollars come out of net sales. Those are -- that's the way they're treated on their books, okay? So that puts a little pressure on that but that's just trial-driving activity. That will go away at some point here. We do have activity through the balance of the year and then we hope that you'll see the brand at some different everyday price point.

In terms of marketing spend, I mean you said you would spend more in Q3. Should we think about kind of a 70 to 30, I mean between Q3 and Q4?

The way I would think about modeling us is take my comments. You're going to have to think about that full year number from Bai, third quarter being more than 20 and I said, for the company without Bai, I said we should average something around 7.5 consistent with historical trend.

Our next question comes from the line of Robert Ottenstein of Evercore.

Just wondering if you could talk a little bit about the Allied brand pipeline. I think a year or so ago you mentioned that you were doing a couple of trials of potential new Allied brands, and I don't think we ever heard about that so I'd love to get your thoughts on that. And then second, what you're seeing in terms of the Hispanic consumer and there are some reports, Target talked about some weakness in that demographic. Wondering if you were seeing that also.

Yes, yes. I'll start off with the Hispanic. We've not -- with our brands that are so strong with the Hispanic community with -- you saw the growth we had in Peñafiel, the growth we had in Clamato, our flavored CSDs are all growing, so I think we're still doing very well there with the consumers there. The first part of the question?

I'll take that, Allied brand pipeline. There's a lot happening there. We probably, Robert, look at I don't know I've listed maybe 15, maybe 20 opportunities in all sorts of -- some of the spaces, lot happening and the regular coffee space we're there with High Brew, there are a lot of things happening. A lot of subcategories or subsegments within these larger segments are emerging on the basis of organic or natural, so you'll see -- there's an interesting view of may be around the energy category, in organic energy products or natural energy products. And so the question continues to be picking the right horses for us to ride. And as I've told many of you before, it's about making sure that our checklist gets fulfilled in terms of the management, strategy. We're aligned on the opportunity because we're not going to own these companies, and we're not going to be able to control a lot of the decisions, their access to capital, so we don't have to fund them so they can have the resources to act as the brand owner, which has a lot to do with not just in product, but selling and marketing. And we continue to look at them. We believe we continue to have capacity through our system to handle them, so we're not constrained on our side. But if we're going to put the effort in, we have to pick something that we think is going to work and work over the long-term. Some products come and go, and we just can't waste our time with those.

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

I just wanted to dig a little bit deeper on the nonmarketing expense increase in the quarter. Perhaps, you could walk us through how much of that was onetime in nature versus how much of it is trending upwards and expected to continue? And then finally, what, if anything, are you guys doing to bring those expenses back down?

Okay, Bonnie. I think I can do this simply for you. If you look at your A schedules in core SG&A, you'll see the quarter is up $74 million. The breakdown is really 3 numbers. We said $40 million, we brought over from Bai. That didn't exist last year, so that's the SG&A, which includes their $20 million of marketing, that's $40 million, $16 million, I said, is our increase in marketing and most of the balance, 3/4 of the balance, is increased investment in labor and our front-line workforce. So you're -- other than that there's a hand -- there's a few million dollars left over, which is I believe less than a 1% increase, so actually, we're pretty -- we're pretty happy with our SG&A performance. You just have to consider those pieces. We're really not comparable year-over-year because we acquired Bai, that's our biggest piece, and then of course, our increase in marketing. And the front-line labor investment, we actually started making last year in the second half, so a lot of the increase in that should go away back half of the year.

Your next question comes on the line of Steve Powers of UBS.

So just back to Bai. The results look good but obviously, there were a number of questions raised last quarter and you're pushing through a lot of change. And the departure intra-quarter of Ben Weiss seemed a bit of a surprise, at least from the outside. So can you just talk about how you're managing the transition to maintain momentum? I know you put Lain Hancock in charge, and I think Lain's great. So Lain, if you're listening, congrats. But I think Lain has spent most of his time in HR and supply chain roles. And this seems a very different assignment. So just maybe some of your perspective there because it's been a question I've received a couple of times since the announcement.

So you're correct. It is a very different assignment, but that's how we create general managers that can run every bit of the business. And we spend a lot of time here on how we develop leaders for the future and we put them in a lot of are different roles. And so I think, I can tell you that he's doing a great job but I think the people tell you there that he's doing a great job. We've still got Ken and most of the team there in place. The momentum is just continuing to build. As I've mentioned in my prepared remarks, we couldn't be more excited about what we're seeing for the future. Ben was a wonderful entrepreneur who created a tremendous brand, and I think we all knew it'd be tough for him being in a public company. I mean we've all seen it in the past. So we thank him for his contributions, and we're just thrilled to death with the way the team is under Lain and Ken.

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

So Marty, I guess I wanted to just clarify the full year guidance. I think a few items just kind of changed. You've got more favorable FX versus prior guidance. You've got a little bit more dilution on Bai. You've got higher sales growth forecast now. I mean it sort of puts out -- it kind of seems like your guidance, if I kind of take all the puts and takes, could actually be $0.05 or $0.10 higher than prior guidance. So I'm just wondering if I'm missing anything in terms of some of the adverse headwinds that you didn't specifically didn't call out that either the same or gotten worse versus prior guidance.

I think Judy, you have it. We're spending little more on Bai we discussed a minute ago. Some list improvement, lower effective FX. We are midway through the year. The guidance range is at $0.10 range and at this point, we didn't see any need to want to change our expectation. We'll see where we're at next quarter.

Your next question comes from the line of Amit Sharma of BMO Capital Markets.

This is Drew Levine for Amit. I just wanted to touch on the Latin America segment. Certainly better margin performance than we were expecting in terms of sales performance. Just wondering if you could comment on what's driving that and which countries specifically you're seeing some strength in?

This is -- LAB for us is predominantly Mexico and, as we said in our prepared remarks, Peñafiel, just up 8%. That is really their lead brand. I -- we look at that business down there, we look at the market down there and quite frankly, our team down there just continues to do 2 things really well: innovative and execute. And it's just that simple. They continue to outperform and Peñafiel this quarter, as I said, up 8%. And they've got some flavor innovation. They've introduced a coconut flavor that I think has now become if not 3, #4 Peñafiel flavor. And the consumer environment may have gotten a little better down there, but our growth, our performance is clearly market share gaining in Mexico. And then I wish I could point to something specific or something we discovered, some secret recipe. Probably if I did, I probably wouldn't tell you, but it's not. It's that they are just doing the basics of the business every single day better than they did it the day beforehand. We'd be remiss it if we didn't congratulate our team at this point for their performance.

Your next question comes from Ali Dibadj of Bernstein.

So 2 questions on Bai, one is just back to the level of reinvestment. Wanted to get a sense of how you're actually thinking about the ROI on it. Clearly, you're spending more on it than I think you probably anticipated when you were modeling the acquisition. Dilution has gone from $0.07 from $0.02. How do you think about the ROI? I know it's a very short time frame you're saying, look, the velocity is good, et cetera. But on an ongoing basis, what do you think the level of spend should be and how do you measure it? And then the second question I had on Bai was really, when you first took it on, you were very, very adamant about it's going to be run separately. It's going to keep it's entrepreneurial flavor, et cetera, et cetera, and clearly that was to I think mitigate the problems, you did see with Ben being in a public company as you said yourself. And of course, who leaves as a wealthy man from this entrepreneur -- entrepreneurial venture. But how does that, I guess, change the plan or messiness, for lack of a better word, impact you think your attractiveness to other potential entrepreneurs to join DPS as the nicer, better-to-work-with company? Has that halo disappeared a little bit? So ROI and then just the attractiveness going forward given some of those changes.

I'll let Marty handle the ROI. But as far as Bai, it is still -- in the beginning, we said Bai would be Bai and it is. It's being run separately. When you're publicly traded, there certain things that have to be in place, and so we've got those in place. We're still running out of Trenton, New Jersey. We'll continue to do that. They know now that they can come to us whenever they need things, different resources. And I've got a tremendous relationship with a bunch of these entrepreneurs that love us to death. But they also know that whenever it comes into something like -- it doesn't work, because a lot of our interpreters have already done it once before, with Fuze and Vitaminwater and different ones. So it's just a learning curve but they also know that the relationship with us is that we've got this tremendous distribution arm that we can go out there and we get them in places where they can't go anywhere else and have that kind of coverage. So it works both ways. It's partnership, it's a team effort, and we are not looking at any others we're picking up right now. But we never quit looking, so I think we've got good relationships with all of them.

Ali, your question about ROI is actually a very good one because Bai is a different brand than actually all of our other brands. Normally, when we would plan trade -- I'm going to address this from a trade ROI perspective as opposed to a marketing ROI perspective. When we normally think about planning trade with more mature brand, we're connecting the dots between an investment, our elasticity models in terms of the lift from say, of price reductions and connecting the dots to the extent that we didn't have to do some of that either to get the lift to create the velocity needed for the retailer, but in essence, it's a simple price, sort of volume trade off that's been modeled, we think, quite sophisticatedly. In the case of Bai, remember, we're not -- of course, we expect lift from trade and promo pricing, but the real return needs to come from improvement in trial, which will also show up as improvement in household penetration. We would probably ultimately look -- we know what the household penetration is. We would go to raise the household penetration. We've probably seen a couple of points of improvement so far in trial is measured, but we need -- we can get those data real-time. We need to use our services to go out and survey the consumers, do their panel work and come back to us for the data, which may or may not be available to all of you. I'm not sure, so -- but ultimately that's what we're going to be looking here very soon. This -- and that will be our ultimate measure of success in driving trial as opposed the way we look at trade on our traditional brand.

Our next question comes from the line of Peter Grom of JPMorgan.

I just wanted to ask you a quick question on Snapple. You mentioned in the press release that strong shipments from a promotional band are expected to sell through in the third quarter. So one, have you already seen this, started to see this sell-through occur? And I just want to get your thoughts on how should we think of the growth of the brand in the back half of the year.

Yes, we're already seeing the results for July, and so we are pleased with it. There's still a lot more to go. I think we've got our plans with the plastic bottle. We've got a lot of different things out there that we're going to be using with Snapple. The juice side of our Snapple is still doing very well. The juice continues to grow. So as we get going into the summer -- into the selling season, the resets, I mean we're going on with a very strong -- a key strategy with Snapples, our flavored teas, our Straight Up Teas and our Bai Supertea. So I think the trade is really embracing, seeing that we can come in and cover all angles of the tea category.

Your next question comes on the line of Lauren Lieberman of Barclays.

I think about the revenue this quarter. I mean was incredibly strong and sort of remarkably we haven't talked about that yet. So I think on 7UP, we're all well aware of the more specific actions you've taken in the last couple of months of running these advertising, repositioning and so on. But anything else that you think you'd want to kind of call out or something has changed, or you been doing something a bit differently that's really kind of kicked in? And then as we look at the back half of the year, I know you have a legacy of being conservative, but it feels like the net sales change was more about FX than about the better-than-expected organic this quarter. So is there anything we should keep in mind sequencing-wise, any kind of timing shift in the second half that hasn't been mentioned, yet?

Well, it's Marty, I'll take it. Larry can add if he so chooses. There's a lot of things. We'd like to think that all the effort and money we put into developing our strategy a couple of years ago, really going deep with the consumer and using that data to align our marketing campaign, 7UP being a great example. The focus that came from that by us making great choices, choices about what brands to focus on as a priority and what not to. And where to direct our resources and then the overlay execution, our focus on execution, our focus on the customer. Our portfolio, we like our portfolio. We've always said we have an advantaged portfolio and particularly in CSDs. Larry talked about the opportunity we see in tea and let's not leave out water. When you look at our Allied brand of Bai and what we've got happening there and the selling stories we're going to have from retailers there. So we put all that together and say, yes, I say we overachieved. We did not predict that level of top line, but we're really satisfied and encouraged, and we think it's a collection of those activities. There is business to be had. There is share to be gained. This may be -- in CSDs, I don't know if it's a zero sum game but we're going to -- that doesn't mean we can't gain share and work hard at it. And we're going to continue to do that.

Your next question comes from the line of Kevin Grundy of Jefferies.

Two questions. I'll ask them both concurrently. So the first one, just to sort of clean up the Bai question, Marty. So is it too early to say that the cost of growth will be higher for the brand? This was sort of asked earlier, but so is the nickel more dilutive but the growth outlook doesn't change, maybe there was some conservatism in that, maybe not. But how should we think about that dynamic, where it's more dilutive, you're spending more behind but seemingly the growth outlook hasn't change. But maybe that's not the case. Maybe the expectation is this long-term brand building and as you guys are singing about this is more of the '18 acceleration than the '17. So just to sort of tie the loop on that and some quantification would be great. And then Marty, you just touch on CSD, so you've done really nicely from a share perspective as has Coke and Pepsi continues to donate share. What are you seeing differently from them? I'm not sure how much you want to comment on your competition. I sort of understand that. Are you see anything differently from an execution perspective? Are you seeing share of voice move down? And they've started to talk a little bit about spending behind North America beverage. So if that's the case and indeed that does play out, do you have enough cushion in your guidance here to match from a spending perspective?

Kevin, appreciate your question. Let me talk about Bai. Bai, in terms of donating share, last time I looked, nobody's a charity, nobody is donating anything. We all go out every day and we work hard and they work hard too. Look, Bai investment, it's a great question, so the cost of growth. End of the year, we talk about upwards of $80 million in marketing, traditional sort of pull marketing, and we've come down a little bit, replace some of that was trade to drive short-term trial activity. Clearly, at the -- from a marketing point of view, the marketing for that brand, probably for a while, will stay elevated. It's a relative question. Relative to what? Well relative to 7.5% of sales, of course, because our brands are mature, our brands have high household penetration. They have enormous brand awareness and brand equity. We would nowhere need to do the same tactics, of course on our mature brands than we would on a -- on an evolving and more nascent brand. And we're not going to let this opportunity get away from us. We are not going to be shortsighted here. We have an opportunity to do something we haven't had the opportunity to do before. This brand has lots of opportunity, and we're going to go after it. But we're going to go after it with discipline. We're going to put money into what our data says works and pull money away from things that don't work. I'm not here saying therefore, that we're going to open up the spigot and spend all sorts of money into '18, but clearly, at some level, much higher than historically you would find us doing. The trade, which is not insignificant this year, that's short-term. That's going to drive trial. We'll get a lot of information from that. You will see the brand move back to -- from higher prepaid price points. So therefore, we won't be funding that margin to the retailer anymore. And then the innovation. And I think we're just getting started. I know we probably communicated earlier in the year that some of what would it earlier this year, and you have gone back and work on Bubbles and Larry touched on both the tea and the water. Probably really be more '18 growth platform than 2017. We're really excited about the opportunity to present our portfolio to retailers who are clearly looking to find more margin. And we've got higher price point, value-added brands for them that we think are going to create their really compelling story. So I -- near term, Bai yes, the cost of growth may come at a somewhat higher, but again, of course, we'd expect that. And did model it all initially? No. But we've had a lot of good learnings and I don't think the amount we're going to spend are going to be that material more so than we thought either. I lost the CSD question somewhere.

Well the CSD, what we're seeing out there. I think Marty touched on our competitors are very, very competitive. They run a great operation. I think we're very fortunate that we've got some of the right brands, some of the flavors that the consumers' looking for. We've mentioned that we invest in our brands, we invest in our people and that's what's delivering our results.

Your next question comes from the line of Bryan Spillane of Bank of America.

I just hand, one, related to Bai manufacturing. Marty, I think my understanding is that most of Bai is still copacked or produced by a third-party. So I guess, if you can clarify if that's true. And if so, over time, is there an opportunity to capture more of the profits, of the manufacturing profit by bringing more of that production in-house over time?

The answer, Brian, is yes. It is copacked. Yes, there is an opportunity. We do have a contractual relationship with a copacker who we're working with very closely. That contract will have upwards of 5 years to go. There are opportunities not just to bring the production in-house but also the logistics of moving production to other places geographically. All the Bai product now really get shipped from the East Coast, so their simple supply chain and logistics would say over time, we need to change the geographic footprint of the Bai supply chain, and we will be doing that, that there will be profit upside, not actually insignificant.

Your final question this morning comes from Pablo Zuanic of SIG.

I've got 2 questions. So first, tell me about your capacity to do further deals in terms of the Allied brand. I mean, it seems to me that if any of the 3 Allied brands came up for sale in the near term, based on my estimates evaluation, you will not be able to bid given what your balance sheet is. If you could comment on that. And the second one would be, going back to Bai, and it's a Marketing 101 question, but it seems to me that you're stretching the brand too much and that the Core business would suffer as a result. [You're being able to drink] tea into water into the sparkling water. I can't imagine Vita Coco or a Gold Peak or brands of that nature would be extendable as much. So if you can explain why Bai is extendable compared to other brands?

Okay, I'll take a stab at both of those. So Bai, the extendibility of Bai, I think, as we look at the brand halo from consumers, it sort of positions it not so much as just an enhanced water, but as this clean-label, better-for-you, pure beverage. We've done some research on those. It's got to be done in a certain way, though. If -- your question really goes to, for example, the reason you're seeing maybe tea not as penetrated as we would have thought 6 months ago because we want to make sure that if it's in the tea set, all of the things we're doing to increase brand awareness and equity through marketing will allow the brand to stand on its own there. As opposed to tea, for example, being simply viewed by the consumer as the flavor extension of the enhanced water because the consumer data would say that the demand space and the needs being satisfied in the enhanced water category, if you will, are going to be different, both in the -- in tea and within plain tea and flavored tea, there are even differences there. So there is sort of a method to our approach to this to make sure that the strength of the base and the strength of the marketing around the base can be haloed. Look with respect to our capacity to make acquisitions and what may or may not happen to these other Allied brands, we've said this, and I'll say it again. The -- there's risk in a strategy of opening up our distribution to go where the consumer is going quickly because we don't ultimately control what happens with these brands and who may own these brands. We have, under the right circumstances, we would look to possibly acquire something, but that's not our strategy. We're prepared. Look, we're prepared if necessary we may have to give 1 or more of this up over time. The pipeline is full. There are -- just go to any beverage industry tradeshow, and you will see football field rooms full of innovative ideas and people looking for distribution. We can't predict what the future would hold. It is a risk and no, we would not step up and acquire all these brands. I can probably say that with certainty.

All right well, thanks for joining the call today and for your continued interest and investment in Dr Pepper Snapple Group.

That does conclude the Dr Pepper Snapple Group's Second Quarter 2017 Earnings Conference Call. You may now disconnect your lines, and have a wonderful day.