23-Jul-2015 Dr. Pepper Snapple Group, Inc.filecache.drivetheweb.com/mr5ir_drpeppersnapplegroup_ir/654/... · Dr. Pepper Snapple Group, Inc. (DPS) Q2 2015 Earnings Call . Dr. Pepper

Corrected Transcript

1-877-FACTSET www.callstreet.com

Total Pages: 23 Copyright © 2001-2015 FactSet CallStreet, LLC

23-Jul-2015

Dr. Pepper Snapple Group, Inc. (DPS)

Q2 2015 Earnings Call

Dr. Pepper Snapple Group, Inc. (DPS) Q2 2015 Earnings Call

Corrected Transcript 23-Jul-2015


2 Copyright © 2001-2015 FactSet CallStreet, LLC

CORPORATE PARTICIPANTS

Heather Catelotti Vice President-Investor Relations

Larry D. Young President and Chief Executive Officer

Marty Ellen Chief Financial Officer

................................................................................................................................................................................................................................

OTHER PARTICIPANTS

Bryan D. Spillane Bank of America Merrill Lynch

John A. Faucher JPMorgan Securities LLC

William Schmitz Deutsche Bank Securities, Inc.

Judy E. Hong Goldman Sachs & Co.

Amit Sharma BMO Capital Markets (United States)

Vivien Nicole Azer Cowen & Co. LLC

Nik H. Modi RBC Capital Markets LLC

Dara W. Mohsenian Morgan Stanley & Co. LLC

Kevin Michael Grundy Jefferies LLC

Ali Dibadj Sanford C. Bernstein & Co. LLC

Mark D. Swartzberg Stifel, Nicolaus & Co., Inc.

Robert E. Ottenstein Evercore ISI Institutional Equities





MANAGEMENT DISCUSSION SECTION

Operator: Good morning, and welcome to Dr. Pepper Snapple Group's Second Quarter 2015 Earnings

Conference Call. Y our lines have been placed on a listen-only mode until the question-and-answer session.

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] We respectfully request a limit of one question per person.

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

Heather Catelotti Vice President-Investor Relations

Thank y ou, Maria and good morning, everyone. Before we begin, I would like to direct y our attention to the Safe

Harbor Statement and remind y ou that this conference call contains forward -looking statements, including

statements concerning our future financial and operational performance. These forward-looking statements

should also be considered in connection with cautionary statements and disclaimers contained in the Safe Harbor

Statement in this morning's earnings press release and our SEC filings. Our actual performance could di ffer

materially from these statements, and we undertake no duty to update these forward -looking statements.

During this call, we may reference certain non-GAAP financial measures that reflect the way we evaluate the

business and which we believe provide useful information for investors. Reconciliations of those non-GAAP

measures to GAAP can be found in our earnings press release and on the Investors page at

www.drpeppersnapple.com.

This morning's prepared remarks will be made by Larry Young, President and CEO, and Marty Ellen, our CFO.

Following our prepared remarks, we will open the call for y our questions.

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


Thanks, Heather, and good morning, everyone. A s you saw in this morning's press release, we've had a good start

to the y ear, and I am proud of what our teams have accomplished. We continued to deliver against our key

priorities, and we drove strong top-line and bottom-line growth in a highly competitive environment. We grew

both dollar and volume share in CSDs and shelf-stable juice and expanded or held distribution and availability

across our portfolio, and RCI continues to permeate our organization from bottom to top, delivering significant

benefits.

For the quarter, bottler case sales increased 1% on two points of positive mix and price. CSD case sales increased

1% and non-carbs increased 3% in the quarter. Brand Dr. Pepper increased 1% in the quarter, driven by strong

volume growth in our Fountain business, regular Dr. Pepper increased over 2% in the quarter, while Diet Dr.

Pepper declined 3% in the quarter, which represents a sequential improvement in the recent diet trend. Our Core





4 brands declined 1% in the quarter as a 7 % increase in Canada Dry was more than offset by mid-single-digit

declines in 7 UP, Sunkist and A&W. Schweppes increased 8% on growth of sparkling waters and ginger ale, and

Squirt increased 6%.

Peñafiel grew 12% on increased promotional activity and distribution gains, while Crush declined 4%. All other

CSD brands declined 1% in the quarter. In non-carbs, Snapple increased 11% primarily on product innovation,

Hawaiian Punch increased 2%, and Mott's declined 7% in the quarter, driven primarily by declines in juice.

Clamato grew 8% on increased promotional activity, and our water category increased 6% on strong growth in Bai

5, FIJI and Vita Coco. All other non-carb brands declined 3% in the quarter.

On a y ear-to-date basis, bottler case sales increased 2% on two percentage points of positive mix and price. CSDs

grew 2%, while non-carbs increased 4%. Dr. Pepper was flat y ear-to-date and our Core 4 brands increased 1%, as a

10% increase in Canada Dry was partially offset by mid-single-digit declines in 7 UP and Sunkist soda, and a low-

single-digit decrease in A&W. Crush declined 4% and Schweppes grew 8% y ear -to-date. Squirt increased 10% and

Peñafiel increased 15%, while other – all other brands declined 1% y ear-to-date. In non-carbs, Snapple grew by

8%, partially on growth from innovation, and Hawaiian Punch increased 4%. Mott's declined 4%, driven primarily

by declines in the juice. Clamato grew 13% and our water category grew 8% on strong growth in Bai 5, FIJI and

Vita Coco. All other brands declined 2% y ear-to-date.

Adjusting for foreign currency transaction – translation y ear-over-year, net sales increased 3% in the quarter and

an 1% increase in shipment volume and favorable product, package and segment mix. Segment operating profit

grew 7 % in the quarter on a currency-neutral basis. Core operating income increased 7% on net sales growth,

ongoing productivity improvements and lower commodity costs. And finally, core EPS increased 9% in the quarter

on a currency-neutral basis.

Now that we're halfway through the y ear, I thought I would share a quick update on how we're progressing against

our key priorities for 2015. Increasing distribution and availability of our key brands and packages continues to be

a sizable opportunity for us. Year-to-date, we've held distribution of CSDs and grew Snapple premium distribution

by nearly two points in grocery. We've also gained over one point of distribution across Snapple in convenience,

and we've increased distribution of Mott's single-serve juice over three points in grocery, which drove a 12 %

increase in single-serve volumes y ear-to-date. Our single-serve distribution gains are the result of an RCI lean

tracks, a great example of how RCI can help drive growth.

We've added over 17,000 new fountain valves across both local accounts and nationa l accounts, expanding single-

serve availability and creating new sampling occasions for our brands. We continue to focus our innovation efforts

on providing consumers options to meet their evolving needs. This y ear, we expanded our test of naturally

sweetened CSDs to three regional markets, and we'll continue to monitor how these products perform. We

launched Snapple Straight Up Tea nationally, giving tea lovers a product with fresh -brewed tea taste in

unsweetened and sweetened varieties. We've also entered into arrangements with Bai and other new-age brand

owners as a way to supplement our in-house innovation.

We expanded distribution of our Canada Dry and Schweppes sparkling waters, introduced Hawaiian Punch

pouches for moms looking for on-the-go convenience, and finally we're rolling out Peñafiel, Mexico's number one

mineral water, to key Hispanic markets in the U.S. RCI continues to help drive productivity and growth across the

business through our lean tracks and business-led RCI. This y ear, we've taken another step forward in embedding

RCI into our culture through DPS In Action, a framework we'll use to implement lean management across the

organization. Marty will provide some additional color on our RCI journey in just a few moments.





As I look at our calendar for the balance of the y ear, I am confident we have strong plans in place to build on our

first-half momentum and continue driving excitement and engagement with our consumers and with our retail

and bottling customers.

This summer, brand Dr. Pepper is once again partnering with the PJ Awards, America's number -one Hispanic

y outh award program, to celebrate Hispanic millennials' passion for music. We'll offer consumers a chance to win

a VIP trip to the award show in Miami, and a private concert featuring Latin music sensation, Romeo Santos.

We're also making this the summer of cherry by relaunching our Dr. Pepper Cherry line, with a smooth cherry

flavor designed to bring consumers into the trademark. And as we look to the fall, we're excited to kick off y ear

two of Dr. Pepper's partnership with ESPN during college football. And oh, yes, we're bringing back Larry

Culpepper in some new commercial spots this upcoming season.

7 UP will team up with two of the world's top electronic dance music DJs, Tiëst o and Martin Garrix , to create

limited-edition 16-ounce cans and a unique music collaboration airing on national television. We'll also bring back

tropical-flavored 7UP for a limited time only, and offer consumers a chance to win a VIP weekend in Las Vegas to

meet both the DJs. We know that soccer is a passion point for Hispanics, so 7UP will be on the air during the Gold

Cup as the official broadcast sponsor on FOX Sports and Univ ision, and we'll offer consumers a once-in-a-lifetime

game experience with soccer stars Tim Howard and Hector Herrera.

Our Born-in-New Y ork #lovesnapple campaign is in full swing, with national media featuring everyday people and

celebrities from New York sharing why they love Snapple with the rest of America. And our seasonal red

raspberry, white peach and blueberry-flavored Lady LiberTEA is giv ing tea lovers a refreshing new way to

celebrate their American heritage.

Mott's has partnered with the blockbuster Minions movie to connect shoppers, mom with her kids, with movie-

themed packaging and limited-edition flavors, kids are sure to love. And just in time for back-to-school, Mott's is

helping shopper mom support her school through the Box Tops for Education program. I'm sure y ou'll agree that

our plans are stronger than ever.

Now let me turn the call over to Marty to walk y ou through our financial results and 2015 guidance. ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer

Thanks, Larry . Good morning, everyone. For the quarter, reported net sales increased almost 1 .5% on an increase

in sales volume of 1% and favorable product, package and segment mix. Limiting our net sales growth was two

percentage points of unfavorable foreign currency translation, slightly worse than our previous expectations,

driven by the further strengthening of the U.S. dollar. While CSD pricing in both our Concentrate and DST

businesses added almost a half point of consolidated net sales improvement, it was partially offset primarily by

growth in our pre-priced Venom Energy Initiative.

Reported gross margins increased 10 basis points in the quarter, increasing from 59.2% last y ear to 59.3% this

y ear. Strong productivity benefits, including those from RCI, increased gross margins by 50 basis points, while

lower commodity costs and certain other manufacturing cost improvements increased gross margins by another

7 0 basis points. Product mix, driven primarily by continued growth in our allied water brands which we purchase

as finished goods, and segment mix, collectively reduced gross margins by 50 basis points. Furthe rmore, foreign

currency reduced gross margins in the quarter by 40 basis points as Mexico sources certain input costs in U.S.

dollars, and finished products sold in Canada are sourced from the U.S. And finally , the net effect of y ear-over-

y ear mark-to-market comparisons decreased reported gross margins by approximately 10 basis points.





Now moving down to P&L, SG&A for the quarter excluding depreciation decreased by $6 million on $9 million of

favorable foreign currency translation and a favorable $6 millio n unrealized mark-to-market comparison. All

other SG&A increased by just under 2%. Depreciation and amortization expense declined $3 million in the

quarter. Reported operating income was $369 million in the quarter compared to $348 million last year. Core

operating income of $365 million was up 5% y ear-over-year and represented 22.1% of net sales, up 80 basis points

from 21.3% last y ear. Below the operating line, net interest expense was flat in the quarter and our effective tax

rate for the quarter was 35.5% compared to 35.1% last y ear.

Moving on to cash flow. Cash from operating activities was $349 million, down $89 million compared to last y ear,

driven primarily by timing of bottler incentive billings, vendor payments and higher 2015 incentive compensati on

pay ments made in the first quarter. Capital spending was only $42 million compared to $71 million last y ear.

Total distributions to our shareholders were $423 million, with $251 million in shares repurchased and $172

million in div idends paid.

Before I update y ou on our 2015 guidance, let me provide you with a quick update on Rapid Continuous

Improvement. Larry mentioned DPS In Action, which defines how we work. Its core pillars consist of customer -

driven work, employee-led RCI, lean daily management, and data-driven solutions. We've also developed an

internal scorecard to measure our improvements in these areas over time. These pillars define our RCI

management process as we seek to make breakthrough change in safety, quality, delivery, productivity and

growth.

We break down some of our improvement activities into something we call lean tracks. And as I mentioned last

quarter, we've implemented five new tracks this y ear, targeted at waste elimination in areas such as non -working

marketing spend, ingredients and the customer deductions collection process. We also have tracks focused on

driv ing growth across our Canada Dry brand and through our Telcel channel. These tracks are continuing to

achieve solid results. And let me just provide a few examples. We've eliminated over 2,000 hours of agency work

by implementing standard work across our marketing creative processes. We've continued to focus on driver

check-in and check-out times and this productivity improvement has already taken 30 delivery trucks off the road

with absolutely no reduction in deliveries or customer service.

To-date, we've gained over 7 ,000 additional points of distribution for Canada Dry , and in our Ohio Valley region,

as a result of our Telcel track, we've driven a 20% increase in volume on our higher-margin brands such as water

and energy . Like I've said before, while these wins may appear small individually, taken together and coupled with

other RCI initiatives across the company, they drive a meaningful impact. And we have a long run way to go.

Now moving onto 2015 full-year guidance. As you saw in this morning's release, we have now raised our full -year

core EPS guidance by $0.05 to a range of $3.85 to $3.93 based on stronger -than-expected first-half performance

and our v iew of our balance-of-the-year activities. We now believe our 2015 net sales will be up just over 1%, net of

a foreign currency translation headwind of about 2%. While CSD category trends are improving slightly, diets still

do remain under pressure. Therefore, with 80 % of our volume in CSDs, we believe that total company sales

volume for the y ear will be up about a half a point.

Our volume expectations reflect slight overall CSD declines, offset by growth in our non -carb portfolio and allied

brands. On a total company basis, we expect combined price and mix to be up about 2.5%. Our January 1

concentrate price increase will drive about 40 basis points of this increase, and the remainder will come from

expected growth in our higher-priced non-carb and allied brands. Foreign currency is now expected to be about a

two-point headwind on net sales, and inclusive of foreign currency transaction exposure, about a 4% headwind on

operating income and EPS. To give y ou some further insight into our exchange rate assumptions, we're currently





planning the Mexican peso at MXN 15.75 to the dollar and the Canadian dollar at CAD 1 .27 for the balance of the

y ear.

Moving on to cost of goods. We continue to expect packaging and ingredients deflation, primarily from lower PET,

aluminum and apple juice concentrate. However, we now expect this deflation to reduce total cost of goods by

approximately 1 .5% on a constant volume mix basis. For modeling purposes, remember that growth from our

non-carb portfolio and allied brands, which are higher dollar revenue cases, will also increase the dollar value of

cost of goods. Taken together, these factors should result in a slight increase in gross margins for the y ear.

Moving to SG&A. Though we are still experiencing the higher cost effects of capacity shortages in the

transportation industry, recent RCI improvements have reduced our expected transportation exposure to about

$10 million for the full y ear, down $5 million from our previous guidance. And given recent favorable trends, we

now expect health and welfare and other insurance costs to increase by about $10 million versus our previously

communicated $20 million. As previously communicated, general inflation and field labor will increase total

operating expenses by approximately $20 million. That said, RCI productivity benefits will help offset a portion of

these increases. We continue to expect marketing spending to be approximately 7 .6% of net sales this y ear as we

continue to hone our return on investment capabilities and ensure that we are maxi mizing every dollar we spend.

Now moving below segment operating profit. Our net interest expense will be around 4.3% on our current debt

structure of about $2.6 billion. Our full-y ear core tax rate is expected to be approximately 35.5% and we continue

to expect capital spending to be about 3% of net sales. We expect to repurchase approximately $500 million to

$550 million of our common stock this y ear subject to market conditions.

Before I turn the call back over to Larry, let me highlight a couple of ph asing items that will help y ou update y our

models. First, the cost of goods deflation of 1 .5% will be more pronounced in the back half of the y ear. Second, the

health and welfare and other insurance increases will be predominately in the third quarter. And third, marketing

expenses are expected to increase by over $6 million in the third quarter based on program timing.

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


Thanks, Marty . Before we open the lines for questions, let me leave y ou with these thoughts. Our priorities remain

the same. We will continue to execute our strategy in a competitive environment, ensuring that we build

awareness and relevance of our brands while executing with excellence in the marketplace. We're committed to

providing consumers with the options to address their evolving needs and lifestyle. RCI continues to drive both

top-line growth and productivity throughout the organization. And importantly, we remain committed to

returning excess free cash to our shareholders over time.

Operator, we're ready for our first question.





QUESTION AND ANSWER SECTION

Operator: Thank y ou. [Operator Instructions] Our first question comes from Bryan Spillane of Bank of America

Merrill Ly nch. ................................................................................................................................................................................................................................

Bryan D. Spillane Bank of America Merrill Lynch Q Hey . Good morning, guys. ................................................................................................................................................................................................................................

Larry D. Young President and Chief Executive Officer A Good morning, Brian. ................................................................................................................................................................................................................................

Bryan D. Spillane Bank of America Merrill Lynch Q I wanted to ask a question just specifically about pricing, and I'm going to try not to muddle this. But y ou've now

gone through two holiday periods, Memorial Day and July 4th, and I know there's been a lot of focus in the

analy st community about price elasticity and sort of the effect o f the environment being less promotional. The

key s, though, are really how – I think, how the holiday periods have – how we'd perform at the holiday periods. So

can y ou talk at all about whether or not the elasticities have been better than expected or bet ter at the holiday

periods themselves, or whether it's the sort of off-holiday periods where the industry seems to be getting a little bit

better? I hope that's clear. ................................................................................................................................................................................................................................

Larry D. Young President and Chief Executive Officer A Y es, I think if I'm following y ou, Brian, I mean, y ou know, last y ear, we looked at an awful lot of before the gas

prices and the economy started ticking up a little bit, but everybody was the first half of the month and was really

tailing off towards the end. I think we're seeing a little more consistency right now. We still continue to see

tremendous discipline in pricing out there. I thought the pricing was excellent for both holiday seasons. Not a lot

of load in, just good promotional activity, which moved some product out there. Bu t I think we're seeing some

improvement, you know, not major, but some. ................................................................................................................................................................................................................................

Bryan D. Spillane Bank of America Merrill Lynch Q So, it gives y ou some confidence that that will hold for Memorial, as we go to the holidays for the balance of the

y ear that nothing to suggest that it would be more, it would need to be more promotional or different at, let's say ,

Labor Day or some of the other holiday periods? ................................................................................................................................................................................................................................

Larry D. Young President and Chief Executive Officer A Nothing at all. ................................................................................................................................................................................................................................

Bryan D. Spillane Bank of America Merrill Lynch Q





Okay , great. Thank y ou. ................................................................................................................................................................................................................................

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

John A. Faucher JPMorgan Securities LLC Q Thanks, good morning, guys. ................................................................................................................................................................................................................................

Larry D. Young President and Chief Executive Officer A Morning, John. ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A Morning, John. ................................................................................................................................................................................................................................

John A. Faucher JPMorgan Securities LLC Q Wanted to ask a question – two questions. First off, Larry, y ou commented on diets and the weaknesses there.

And can y ou talk about two things? One is sort of y our v iew in terms of any updated thoughts on mid -cal as a

possibility, or is it really sort of an all-natural sweetener that needs to happen, and kind of, how y ou think the

formulations will move going forward? And then a second separate question which is for Marty , which is about,

sort of, the one-offs that y ou mentioned on the gross margin line, how we should expect those to impact gross

margin over the balance of the y ear, things like transactional FX, et cetera. Thanks. ................................................................................................................................................................................................................................

Larry D. Young President and Chief Executive Officer A All right, y eah, I'll start. John, I think it's going to be a combination of diet, mid -cals, natural, the TENs. Y ou take

our TEN product, we've got a great consumer base there. You've got people th at are maybe happier with a mid-cal

if it's natural. We're very excited about seeing our diets kind of bucking the trend out there right now. Diet Dr.

Pepper was down 3%. And I think a lot of it, y ou've heard us talk about it in the first quarter that we w ere putting

some immediate marketing against Diet Dr. Pepper, and everything's showing us it's working.

And so, we're excited about that. We've got Dr. Pepper back to growth, I mean, so we've got a lot of the summer

selling season still going, we're seeing that growing, diet looking better. The TEN is still out there serving a

purpose. We're testing the mid-cal, the natural in three markets, and hopefully in the third quarter, we can give

y ou an update on that. But my answer would be, it's going to be a co mbination of all three. This consumer is very

different any more. ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A And John, let me talk about gross margins. So a couple factors, of course productivity improvements have been

strong. We've guided on COGS deflation for the y ear. FX transaction impacts, so again, because our Mexican

business, it's principally resin for them, that's U.S. dollar-denominated and our warehouse-direct products in

Canada which are sourced out of our plants in the U.S. I would say that impact in the back half will be about what

it was in the first half, it might be slightly lower, but about what it was, so y ou can model that. And the other point





I want to make for y ou and everybody is, as we continue to grow our allied brands, because we buy these, we don't

manufacture them ourselves, they come with a higher gross margin, a higher – a lower gross margin because of

higher cost, but they're very accretive to the operating profitability. ................................................................................................................................................................................................................................

John A. Faucher JPMorgan Securities LLC Q Okay . So nice price mix benefit offset at the gross margin line. ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A Correct. ................................................................................................................................................................................................................................

John A. Faucher JPMorgan Securities LLC Q And I guess the question then would be, how do we model the SG&A implications of that then? ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A I guess I would model consistent with sort of where you see our run rate SG&A plus o verlay the few items I

mentioned about transportation and insurance and other factors. Because we've been – over time, these brands

have been growing great. They do have a little different complexion below the line for us. But I think work off

current trends, I think y ou'll be okay. ................................................................................................................................................................................................................................

John A. Faucher JPMorgan Securities LLC Q Okay . Thank y ou. ................................................................................................................................................................................................................................

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

William Schmitz Deutsche Bank Securities, Inc. Q Hey , guy s. Good morning. ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A Good morning, Bill. ................................................................................................................................................................................................................................

Larry D. Young President and Chief Executive Officer A Good morning. ................................................................................................................................................................................................................................

William Schmitz Deutsche Bank Securities, Inc. Q





Hey , a couple quick ones. On that beverage concentrate [indiscernible] (28:22) as y ou guys had in the press

release, there was some commentary about higher discounts. What is that, because your commentary suggested

and all the data suggest that things are very rational? ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A Y es, that's – so, our funding back to our bottling partners is accrued on a bottler case sales basis and we have

stronger flow through the system. We have increased accruals for funding, which, in essence, means over time it's

timing. Right? If y ou believe that case sales over time and shipment volumes over time true up, it's really timing

and the periods in which we accrue the funding. ................................................................................................................................................................................................................................

William Schmitz Deutsche Bank Securities, Inc. Q Okay , that makes sense. Was this the one quarter with the timing catch -up, and it should be sort of normalized the

rest of the y ear? Is that kind of the way to look at it? ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A Y ou know, we like when bottler case sales keep ahead of our shipments; that means people need to replenish. But

over time, y ou'd have to expect them to come in line for us. ................................................................................................................................................................................................................................

William Schmitz Deutsche Bank Securities, Inc. Q Okay . Y ou know, y our balance sheet is in unbelievably good shape and y ou talked about the gross margin hit from

some of these allied brands. Why haven't y ou been more active maybe trying to buy some of them? I know y ou

made that equity stake in Bai 5. But intuitively, it seems like they're good businesses. I know multiples are pretty

high, but is that part of y our consideration set? ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A Well, y ou answered y our question, Bill. I'm serious. There are a lot of good things happening I think in the space

broadly. And y ou know we've partnered with a few of them, whether it's Bai or Vita Coco, for example, and we're

looking at some others. And as Larry said in his prepared remarks, it's a great way for us to use the opportunity,

the entrepreneurial passion of these organizations to drive innovation, that admittedly would unlikely come out of

this organization, and we're not afraid to admit that. So we're okay partnering with these companies. To acquire

them would be just too expensive and we're not sure the right thing to do in terms of the amount of money it

would actually take to own all these businesses.

They 're great partners. We love some of the innovation they have in their pipelines. And some of this little bit of

equity , for example, that we took in Bai wasn't so much about buy ing some equity, because we're not a PE firm,

was as much to help them fund some future innovation which is going to flow through our system. ................................................................................................................................................................................................................................

William Schmitz Deutsche Bank Securities, Inc. Q Okay . That makes total sense. And then just lastly, it seems like most of the RCI so far has been gross margins,

unless I'm wrong. Do y ou think there's an overhead opportunity? I know it's hard to benchmark across companies





[indiscernible] (30:53) before, but as a percentage of sales, the non-transportation/advertising overhead is a little

bit higher than some of the peers. So is that going to be an opportunity go ing forward? ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A Well, I don't know what peers we're looking at because all our business models are different. Our complexion

across the beverage base, SG&A for the most part is structural. When y ou compare it across the industry in terms

of how much DSD business do y ou have versus concentrate business? As we said, we're applying RCI everywhere.

We talked about growth opportunities, Canada Dry . Last y ear, we talked about Snapple on the growth side. Telcel

channel, which we think is going to be a big upside opportunity for us to penetrate [indiscernible] (31:38) in C-

stores and of course supply chain. That's where traditional lean is applied. But as we said, marketing spend, non -

working marketing spend, there's opportunities everywhere. And I just remember, and those of y ou on the call

that have been involved with us since we began this journey, when our margins were in the upper teens and

everybody said, gee, can you get to 20%? Well, that's in our rearv iew mirror right now. And I don't think I would

have predicted this back then. Okay . I don't know where we can do, but I'll tell y ou we see opportunity everywhere

and y ou can tell we're confident about it. ................................................................................................................................................................................................................................

William Schmitz Deutsche Bank Securities, Inc. Q Great, thanks. I appreciate your time, guys. ................................................................................................................................................................................................................................

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

Judy E. Hong Goldman Sachs & Co. Q Thank y ou. Good morning. ................................................................................................................................................................................................................................

Larry D. Young President and Chief Executive Officer A Good morning, Judy. ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A Hi, Judy . ................................................................................................................................................................................................................................

Judy E. Hong Goldman Sachs & Co. Q So my first question is just on y our price mix, and I think we've talked about this in the past, but just the way we

see y our price mix seems a little bit more modest than some of y our peers. So can y ou – I know y ou talked a little

bit about the Venom issue in the Q2, but can y ou just talk broadly about how you see that kind of play ing out in

the back half of the y ear? As y ou think about, I think in the past, y ou've talked about it may be increasing the

capability on the packaging mix side. So should we see some of that contributing more to the mix side of the

equation as y ou look out six months to 12 months? ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A





Okay , Judy , it's Marty . So, y es, if y ou simply look at, and I assume we were referring to CSDs only , and y ou look at

the implied price mix coming out of the Nielsen's, y es, we look lower than our two competitors. And we know one

of our competitors, particularly, although both, but one in particular has an abundance of different package sizes,

smaller package sizes, which you know we do participate in, in those markets where they have brand Dr. Pepper.

We, too, are moving down that pathway. I doubt you'll see us have as many packages. We're not sure that that

added complexity makes sense for our operating model, but does make sense at the top line and for our

consumers. And so you're going to see us moving down a little bit. So they're advantaged in terms of price per

equivalent ounce that they can capture.

But in terms of our underlying pricing, as I said, we really, if y ou look at our pricing, pure pricing in CSDs, and

strip out some of the – some things that I've said, it was about, it added about – about 1% of our CSD business,

about a half a point across the total company revenue because we don't really break out our CSD sales in our DSD

business. The offsets were, we've been growing Venom. We've decided to take advantage of the opportunity in that

category. It's pre-priced cans, $0.99. We've got some new flavors. And we're actually getting a pretty good [ph]

take (34:21) – it's small, but it was enough to partially offset the increase I just said.

And [ph] seriously (34:25), there was another offset. As part of our Snapple st rategy, we introduced three

variations of straight tea, sweetened, lightly sweetened, unsweetened. We prev iously had a lightly sweetened tea in

the Snapple traditional glass bottle. These new ones are in 18.5 ounce PET. So we sold off at discounted prices the

old inventory, the old product. And we've deemphasized and more or less discontinued our Snapple value gallons,

because we're focused on premium and we decided to go ahead and sell off some of that inventory at lower prices.

So, those two offset. But underly ing our pure pricing on our CSDs would be about 1%. ................................................................................................................................................................................................................................

Judy E. Hong Goldman Sachs & Co. Q Okay . That's helpful. And, Marty , just on y our guidance, so if I sort of take all the changes that y ou've called out

today , the more favorable transportation costs, the health and welfare costs, and then partly offsetting that was, I

guess, more adverse FX. I still come up with a number that's may be about a dime higher than y our prior guidance.

So I know we may be splitting hairs, maybe it's a range, but is the re any thing that you can kind of point to where

may be I'm missing something here just in terms of that bridge? ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A No. Well, Judy , let me overlay a couple considerations. First of all, let's talk about Mexico. We don't talk a lot

about Mexico on these calls, but it's becoming an increasingly important part of our business. And obviously, their

results are actually fantastic. In this last quarter on a currency -neutral basis, sales up 5% in dollars and operating

profit up 29%. Lot of growth down there in Peñafiel. We've done a great job with brand Peñafiel and including

penetrating the largest C-store chain in Mexico, OXO. We're going to start lapping some of that in the second half.

Now that's built into our growth guidance for the balance of the y ear. But I want to point that out to everybody.

And built in is still some conservative view, maybe not conservative, but just v iew on where CSDs are going

relative to where we've been in CSDs and not attempting to get too optimis tic just yet on what can happen in that

category as it relates to us. We want to be a little conservative.

I don't know, that's about all I can say , Judy . I think y ou guys can tumble the numbers. And we took our guidance

up to a level that we're very comfortable with. And so, I'll leave that with y ou. ................................................................................................................................................................................................................................

Judy E. Hong Goldman Sachs & Co. Q





Okay . And then marketing as a percentage of sales, y ou said it's unchanged. But in the second quarter, did y ou

give us that number how much marketing was up in the second quarter? ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A I didn't give it to y ou. But I would tell y ou it's up $1 million. And just coincidentally that for the first half of the

y ear, actually marketing spending came in at 7 .6% of sales. We've said it's going to be 7 .6% for the y ear. So if I

remember my mathematics correctly, it sounds like it should be 7 .6% in the second half. ................................................................................................................................................................................................................................

Judy E. Hong Goldman Sachs & Co. Q Got it. Y eah. All right. Thank y ou. ................................................................................................................................................................................................................................

Operator: Our next question comes from the line of Amit Sharma of BMO Capital Markets. ................................................................................................................................................................................................................................

Amit Sharma BMO Capital Markets (United States) Q Hi. Good morning, everyone. ................................................................................................................................................................................................................................


Marty Ellen Chief Financial Officer A Good morning. ................................................................................................................................................................................................................................

Amit Sharma BMO Capital Markets (United States) Q Marty , just talking about – y ou talked Mexico, and a question on that. Clearly, margins are up pretty big in the

first half. Is this simply a larger pay out from the distribution gains y ou had last y ear and earlier this y e ar as well?

Or is there more incremental productivity that you're finding there? ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A I would tell y ou that in Mexico, we've done some great innovation, and coupled with RCI. And that includes sort of

changes in certain product formulations and other things that have added value to the products, while being able

to improve the gross margins on those products. When y ou talk about distribution in Mexico, I think many of y ou

know this. We are not actually very well distributed throughout the country at all. We're concentrated in the

middle part of the country, Mexico City , Guadalajara, to the North a little bit. There's actually lots of white space

for us in Mexico, and we think that's a good runway .

But over the last few y ears, we wanted to make sure that our business down there had a solid foundation, the

house was in order. We believe that's critically important to establish that foundation for growth. This business,

the margins now are in the low-double-digits, and I remember when they were in the single-digits. This is a





textbook case of classic improvement up and down the business, solid team, solid foundation, and we've got some

growth opportunity there. ................................................................................................................................................................................................................................

Amit Sharma BMO Capital Markets (United States) Q Great. And then y our BCS volume, as y ou said, were running a little bit ahead of y our concentrate shipments. Is

that something that concentrate shipments will catch up in the back half or will we continue to see a little bit of a

lag there? ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A I can't, it's hard to predict the BCS volumes by themselves, but you would expect it catch up. ................................................................................................................................................................................................................................

Amit Sharma BMO Capital Markets (United States) Q Okay . Got it. And then, Larry , a question for y ou. I mean in most beverage and food categories that we cover,

pricing tends to be more rational when commodities the environment is challenging and discounting levels tend to

rise when commodities are favorable. And we're seeing quite the opposite here in the CSD category, right? So, the

question is, when commodities do turn, and they will, would y ou expect to lose some of the discipline as

companies trying to scramble to hold share at that point? Or do y ou expect this behavior to continue even if

commodities environment changes? ................................................................................................................................................................................................................................

Larry D. Young President and Chief Executive Officer A No, I think it would continue, and probably even more so if commodities increased. I think we see everybody more

taking some price. I don't think it would be an issue of the share, but I feel very confident going forward. I think

y ou're right. I mean, Commodities aren't going to stay like this forever, but we're hoping they get back to more of a

normal where the algorithms that we can look at as commodity is a couple of percent each year and just go on

from that. But if they do, we'll definitely [ph] have pricing that will catch it (40:33). ................................................................................................................................................................................................................................

Amit Sharma BMO Capital Markets (United States) Q Got it. Thank y ou very much. ................................................................................................................................................................................................................................

Operator: Our next question comes from the line of Viv ien Azer of Cowen & Company . ................................................................................................................................................................................................................................

Vivien Nicole Azer Cowen & Co. LLC Q Hi. Good morning. ................................................................................................................................................................................................................................






Vivien Nicole Azer Cowen & Co. LLC Q My one question has to do with the Dr. Pepper brand. Clearly, the improvement is encouraging and seemingly the

improvement in diet is certainly helping, but it also feels like the underlying Dr. Pepper brand itself is looking a

little bit healthier. So can y ou talk to that a little bit? Is it benefiting from a halo around the increased media?

Any thing you could offer on that would be helpful. Thank y ou. ................................................................................................................................................................................................................................

Larry D. Young President and Chief Executive Officer A Y es, as I mentioned in my prepared remarks, our fountain food service volumes was up very strong, so we were

excited about that. We've got a bunch more new accounts coming on, especially taking on diet, which is also

helping our diet. I think with our marketing campaign again that we did on diets to kind of help that turn that

around. Our fast food partners out there are picking up on that, liking that, seeing people come in and do it.

Also, I mean, we just continue to focus on our priority brand execution out there with our partners. I think

everyone is excited when they see Dr. Pepper back to growth and then look at it and say we're coming in to. Not

only are we back at growth now, but we're coming into Dr. Pepper's time of y ear with college football. I mean, as

we get coming in with that and we got the right momentum with the diet, we feel very, very good and so do our

partners that Dr. Pepper will continue to be a strong brand. ................................................................................................................................................................................................................................

Vivien Nicole Azer Cowen & Co. LLC Q Terrific. Thank y ou very much. ................................................................................................................................................................................................................................

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

Nik H. Modi RBC Capital Markets LLC Q Y es, good morning, everyone. ................................................................................................................................................................................................................................


Nik H. Modi RBC Capital Markets LLC Q The quick question I had was really around the diet portfolio. And, Larry, I was curious if y ou could comment on

Pepsi reformulating, and have y ou thought about potentially testing a diet version with a different sweetener? Any

help around that would be useful. ................................................................................................................................................................................................................................

Larry D. Young President and Chief Executive Officer A No, I mean, we watch everything that's out there. I mean we're very satisfied with our diet Dr. Pepper and with the

aspartame, the taste, I mean, that's the profile. Our customer, our consumers love it. We have a lot of products out

there that – our Diet Rite is sweetened with Splenda. We have different sweeteners across the portfolio. But as far





as our Core 4 and our Dr. Pepper, our base business, we'll be watching everything, but we're very pleased with

where we're at right now. ................................................................................................................................................................................................................................

Nik H. Modi RBC Capital Markets LLC Q Great. Thanks so much. ................................................................................................................................................................................................................................

Operator: Our next question comes from the line of Dara Mohsenian of Morgan Stanley . ................................................................................................................................................................................................................................

Dara W. Mohsenian Morgan Stanley & Co. LLC Q Hi, guy s. Hi, Marty , wanted to get an update on your thoughts around returning cas h to shareholders.

Fundamental outlook looks like it's improved here over the last y ear or two with U.S. CSD pricing turning more

rational on the limited demand elasticity. Your Mexican business is performing well. So we'd love to get y our

perspective on if improved fundamentals give y ou more comfort going forward that y ou can increase your payout

ratio or y our dividend going forward or take on more debt leverage than the two times level you're at here. ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A Dara, it's Marty . So we do return all of our cash and y ou're – so y our question goes to allocation on the one hand

between div idends and share repurchase. Our pay out ratio is about – it's about a 50-50 split right now. We've

alway s said that if we were to lean one way or the other, we would lead into the dividend more so and tick the

pay out ratio up, and that's still our point of v iew. And that's annual consideration by our board every February. In

terms of using leverage, we're about two times. We said we, early on, were targeting two and a quarter times.

That's come down a little bit as our EBITDA has gone up. We're not looking to materially change the capital

structure of the company. It's just – our point of v iew is that's not necessarily the way we ought to create value.

And so, we sort of like the mix and like the profile today. ................................................................................................................................................................................................................................

Dara W. Mohsenian Morgan Stanley & Co. LLC Q Okay . Thanks. ................................................................................................................................................................................................................................

Operator: Our next question comes from the line of Kevin Grundy of Jefferies. ................................................................................................................................................................................................................................

Kevin Michael Grundy Jefferies LLC Q Thanks. Good morning, guy s. So first one for Marty. The question is on long -term profit growth for DPS. And I

guess this goes back, so y ou guys decided to take the 3% to 5% sales growth off the table, I guess, a few y ears, a

couple y ears ago now. But the irony is, y ou've exceeded the old high-single-digit EPS growth target for a couple

y ears, and I understand the commodities are favorable. But, Marty, I guess based on kind of how, and Larry , too,

how y ou see the environment with greater pricing discipline, y ou talked about the long runway for productivity,

and again, understanding commodities could be a wild card, are y ou thinking high -single-digit sort of EPS growth

is sustainable now going forward for DPS? ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A





Y eah. It's an interesting question because when we saw this quarter's numbers and thought about where we had

been in the past and our, y ears ago, talking about 3% to 5% top line, I know Steve Powers was try ing to call, he

would ask me [ph] for everyone (46:05) y ou're going to take that number down as the world was changing on us.

It is interesting that when we look at FX-neutral, translation-neutral results this quarter being up 3% and having

the leverage at the operating line up 7 % and as y ou said, EPS up 9%, that was, in essence, our model then.

And I think the financial construct of the company and the cost structure of the company sort of indicates that this

is achievable if we can get the top line, but y ou know, the business is competitive, the business is chal lenging. We

think we're doing some good things. But if y ou were to tell me we could be at these levels of revenue growth, could

we drop sort of mid or so improvements in operating profitability and a little higher in EPS? Absolutely. The

question is over the long term, can we achieve this level of revenue improvement? But the model will work. ................................................................................................................................................................................................................................

Kevin Michael Grundy Jefferies LLC Q Very good. That's helpful. And then a quick one for Larry. Just on Coke's re -franchised bottlers as they're in the

process of continuing that, have you seen any difference? Do y ou expect to see any difference in terms of execution

there in those regions? Thank y ou. ................................................................................................................................................................................................................................

Larry D. Young President and Chief Executive Officer A No. We've, we're very familiar with all of these bottlers. They handle our Dr. Pepper right now. I think the re -

franchising is going very well, very smooth, and our bottling partners are excited to be picking up more territory. ................................................................................................................................................................................................................................

Kevin Michael Grundy Jefferies LLC Q Very good. Thanks, guy s. ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A Thank y ou. ................................................................................................................................................................................................................................

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

Ali Dibadj Sanford C. Bernstein & Co. LLC Q Hey , guy s. I have a few questions, but I want to focus on maybe two things. One is, if y ou can unpack and may be

quantify a little bit more the SG&A drivers, so y ou talked a little bit about distribution, health and welfare going

forward. But in the quarter, if y ou can talk a little bit more that, and then I feel little marketing as well, at least in

this quarter as a percentage of sales. And in that, if y ou could talk about the effect of allied brands, I think I get it

on the gross margin line, but what the kind of effect would be on the SG&A line. And if that becomes a bigger and

bigger piece of y our business, does that just continue to be a tailwind for y ou going forward? So first on SG&A. ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A Y eah, Ali, let me take it. It's Marty . Good morning. Okay . Let's talk about SG&A in Q2. Let's get grounded on what

happened in Q2. As I said in my prepared remarks, so foreign currency reduced dollar reported expense levels by





$9 million. Our mark-to-market adjustments on commodities, so in SG&A, that's where our fuel contracts occur,

that actually y ear-over-year net reduced, dollar reported SG&A by $6 million, so y ou had a $15 million decline

there. We took up about $3 million in higher incentive compensation accruals, given where our results are first

half of the y ear, and then just everything else was sort of just, as I sa id, some general inflation, okay, which we said

was less than 2%, so we're pleased there.

Look, on the allied brands, the real issue – so y ou understand the gross margin impact, these go right to our

distribution centers, they really go right on the truck. So in essence, there's very little – when we look at it, we

don't really add any thing incrementally. So it's more about, call it, variable drop here or contribution margin.

There's no real incremental costs. There's some, but it's really at the marg in and so we get a nice profit drop-

through. ................................................................................................................................................................................................................................

Ali Dibadj Sanford C. Bernstein & Co. LLC Q Okay . And one – sorry , one thing y ou did mention and this is [indiscernible] (49:44) specifically as SG&A and I

think that's part of the kind of cost reduction y ou guys are doing. For what it's worth, we're starting to hear a little

bit of squirming from y our employees and former employees, and of course y ou have to always take that with a

grain of salt, but about, gosh, maybe it's going a little too far in some area s. Is there any kind of reasonable reason

why folks would be nervous or concerned that perhaps it's going a little bit too far in some areas? ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A Y ou know, Ali, the answer is no, and I find it interesting that we're pro bably the only company in our space that's

not been aggressively restructuring and taking loads of people out. So I'll tell – our people don't walk around this

company looking over their shoulder, worrying whether they're going to have a job come next week , and that's

very healthy for our organization. And as well, I'll say , I don't think – we don't [indiscernible] (50:39) – we don't

underpay our people. We look at this all the time. And so, I think – I don't think we think much to it. And I'll tell

y ou everywhere Larry and I travel in this company, for the people who work for this company, they're thrilled, and

not just what we're getting done, but the way we're getting it done. The fact that we're listening to them, we say

change is led by our employees, not by management. They love that, they love participating. And that's why we can

grow – we can grow and grow profitability. And the last time I looked, I – y ou can't find restructuring charges in

our numbers because we don't feel we need to go that way . ................................................................................................................................................................................................................................

Ali Dibadj Sanford C. Bernstein & Co. LLC Q Okay . No, that's helpful. And last question, kind of a bigger -picture question, y ou guys were part of a bigger

company. Actually Larry and Marty came after, but were certainly part of a bigger company and now y ou're on

y our own, and clearly doing quite well. Is there a time in the future where y ou would be better off as part of a

bigger company, and is that just too far away for kind of an [ph] investable (51:45) timeframe to think about? Or

are there milestones where you say, gosh, at this point, we need international exposure or we need being part of a

bigger distribution sy stem? Or, at what point, if ever, do y ou think it might actually be worthwhile to be again part

of a bigger company? ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A The answer is no. ................................................................................................................................................................................................................................





Ali Dibadj Sanford C. Bernstein & Co. LLC Q So y ou'd never think that there would be a benefit? ................................................................................................................................................................................................................................

Larry D. Young President and Chief Executive Officer A We can operate the way we're operating, the way we have, the behaviors, the culture. Whenever people ask us

about, why don't we buy some of these new allied brands and these startups, I mean, we look top -heavy whenever

y ou look at them, how fast they can move and why we don't want to go in and mess them up. As Marty has said,

especially with RCI and what we look at in distribution and availability, our runway is very, very long. And we've

got a strategy, we've got a tactical plan in place. And we're going to continue to work it, drive our priorities, and

we're very, very happy with the size we are and what we're capable of doing. ................................................................................................................................................................................................................................

Ali Dibadj Sanford C. Bernstein & Co. LLC Q Thanks very much, guys. ................................................................................................................................................................................................................................

Operator: Our next question comes from the line of Mark Swartzberg of Stifel Financial. ................................................................................................................................................................................................................................

Mark D. Swartzberg Stifel, Nicolaus & Co., Inc. Q Y es, thanks. Good morning, guys. ................................................................................................................................................................................................................................

Larry D. Young President and Chief Executive Officer A Hi, Mark. ................................................................................................................................................................................................................................

Mark D. Swartzberg Stifel, Nicolaus & Co., Inc. Q Larry , a question on the Core 4. We saw a slowdown in that portion of the portfolio's bottler case sales

performance, and I was wondering if y ou could speak a little bit more to y our outlook for that component of the

portfolio. I think there's going to be a pickup in spend against 7 UP here in the second half. I think the 10 -calorie

laps are going to ease at some point over the next few quarters, but just help us understand what's really going on

under the hood there and what y our plans are to improve performance there. ................................................................................................................................................................................................................................

Larry D. Young President and Chief Executive Officer A No, y ou're exactly right, Mark. I mean, for the y ear, we're up 1%, we're very happy with that. We were lapping

some heavier activity in Q2 the last y ear, so we were not too concerned about it. Our activation plans and

marketing plans for 7 UP in the third quarter and fourth quarter, y ou heard me in my prepared remarks. We've got

a lot of things going on there, not only with the electronic – I don't know what this music is called, but all that

flashing and everything. But also the World Cup and the Gold Cup on s occer, which is going to really drive us a

bunch out there. We've got some LTOs for the summer that we'll come back in with. So we think the core is going

to look good. But the biggest thing on Q2 is just lapping some heavier activity last y ear. ................................................................................................................................................................................................................................





Mark D. Swartzberg Stifel, Nicolaus & Co., Inc. Q And is it fair to think that these 10 -calorie laps have been an issue? And they become less of an – A) is it fair to

consider them an issue in the quarter that we just saw here? And B) when, in y our opinion, do th ey become less of

an issue from a lapping perspective? ................................................................................................................................................................................................................................

Larry D. Young President and Chief Executive Officer A I think it was a slight issue on lapping those. I mean it's – y ou're exactly right. It's starting to trend off. There's still

a sizable piece of our business. We have a good consumer base that likes those brands. So it's kind of settling into

where it's going to be in the lineup. But it's not that big of an impact on. ................................................................................................................................................................................................................................

Mark D. Swartzberg Stifel, Nicolaus & Co., Inc. Q Got it, got it. And then if I could, also, Marty, just kind of a subcomponent, if y ou will, of RCI, this focus on the

distinction within y our marketing dollars between working and non-working, I think y ou're looking for something

on the order of about a $5 million improvement in the non-working number? But could y ou just give us a little

more color on how that's going? And if it's possible, even that split, as y ou see it, what portion of y our dollars

presently do you think are non-working on a percentage of total marketing spend basis? ................................................................................................................................................................................................................................

Marty Ellen Chief Financial Officer A And so, Mark, y ou're right. We did target this y ear. That team targeted a $5 million savings, and non -working

dollars are not insignificant in terms of the whole, so it's a good number to go after. Lot of way s – obv iously, we

run zero non-working dollars. Right? We run every one of our dollars to work towards our brands.

As I said in my prepared remarks, here's a classic one, just basic standard work. We use outside creative agencies

to do work for us. They can only do the work based on the specs we give them. And when y ou get into the process,

y ou realize that there are iterations through these specs. They go back and forth, and that is just rework. Those are

defects and they need to be eliminated. And that's – and when we talk standard work, we mean standard work.

We mean there's a – we are creating a process, a step-by-step process that everyone will adhere to, to eliminate all

that. That's – that principle, y ou can sort of apply anywhere in the company, stand ard work in any process, get rid

of defects, get rid of iterations and rework, and so far so good.

I mean, as I said, they 've eliminated – y ou could – 2,000 hours of cost per hour with outside agencies is not an

insignificant sum of money , so there you have it. ................................................................................................................................................................................................................................

Mark D. Swartzberg Stifel, Nicolaus & Co., Inc. Q Great. Y eah. Yeah. And last one is on the input comment, can you give us any help as we – we all obviously have

models that go beyond calendar 2015, and y ou made the comment about deflation being more beneficial, if y ou

will, in the second half. And we all know what the spot markets are. So it just seems reasonable to think that the

one-and-a-half becomes an even bigger benefit, if y ou will, in calendar 2016. If things stay , if the spot markets for

the various inputs stay where they are presently, is that a fair way to think about our models for calendar 2016? ................................................................................................................................................................................................................................





Larry D. Young President and Chief Executive Officer A Mark, it's just too early for me. And I haven't seen enough. I know where I've seen where our commodities are

hedged through, and we've got some decent coverages already into 2016. But in terms of the total impact in next

y ear's COGS, I need a few months here as we begin in the fall, in the planning process, to see where it all shakes

out. But needless to say , we feel good about our hedge positions, and oh, by the way, the open positions right now

are not too bad because most of the things that are important to us have softened. ................................................................................................................................................................................................................................

Mark D. Swartzberg Stifel, Nicolaus & Co., Inc. Q Y eah. Yeah. Got it. Great. Okay . Thank y ou, guys. ................................................................................................................................................................................................................................

Operator: Y our final question this morning comes from the line of Rob Ottenstein of Evercore. ................................................................................................................................................................................................................................

Robert E. Ottenstein Evercore ISI Institutional Equities Q Great. Thank y ou very much. I was wondering if y ou can give us a little bit more detail on Diet Dr. Pepper, which

had a strong quarter? How sustainable is that reduced decline, which is doing better than your – a lot of y our

peers? And what amount of that improvement had to do with increased distribution? ................................................................................................................................................................................................................................

Larry D. Young President and Chief Executive Officer A I think the majority of it is from our marketing, the media that we've put behind it that was – before, whenever we

started going down, our media was basically Pepper, Diet Pepper and Pepper TEN togeth er. And we broke the set

out with Lil' Sweet, that is Diet Dr. Pepper completely, so I'm going to give the majority of that turnaround to my

marketing department and our media partners that were able to put that together for us.

Sustainable, very sustainable. I'm very excited about how we can use that through college football, that we can

continue this momentum. And as far as added availability, I mean, Pepper, Diet Pepper's basically everywhere. I

mean, it's good ACV out there, so maybe a little more tie -in rates because of us being able to do the median,

because we can show a lesser decline that we may be on a track to grow again, helps with our bottling partners and

our retail partners out there. ................................................................................................................................................................................................................................

Robert E. Ottenstein Evercore ISI Institutional Equities Q Great. And then just as a follow-up on 7 UP, I know the majority of the marketing and promotion is in the second

half of the y ear, and y ou went through that. But as I recollect, and correct me if I'm wrong, y ou did a lot of that last

y ear and I would have thought y ou would see some benefit in the first half. Can y ou give us any more sense in

terms of why the first half was so weak for 7 UP? ................................................................................................................................................................................................................................

Larry D. Young President and Chief Executive Officer A Y eah, no, we had a good first quarter, and y ear-to-date were up one with our Core out there right now. So I think

with what we have coming up, especially the – the third trimester is alway s the biggest time for the green bottle,

7 UP, Canada Dry , everything, for the holidays and the mixers. So we're not concerned with what happened in the





second quarter. Everything we're showing is that we've got the right plans in place, just a little less activity in this

y ear in Q2 than we had last y ear. So, third quarter is going to look good for us. ................................................................................................................................................................................................................................

Robert E. Ottenstein Evercore ISI Institutional Equities Q Terrific. Thank y ou very much. ................................................................................................................................................................................................................................


Well, I'll end by say ing again that we're pleased with our first half performance and feel confident in our

commitments for the remainder of the y ear. Thanks for joining the call today, and for y our continued interest and

investment in Dr. Pepper Snapple Group. ................................................................................................................................................................................................................................

Operator: Thank y ou, ladies and gentlemen. This concludes today's Second Quarter 2015 Earnings Conference

Call. Y ou may now disconnect and have a wonderful day.

Disclaimer

The information herein is based on sources we believe to be reliable but is not guaranteed by us and does not purport to be a complete or error-free statement or summary of the available data.

As such, we do not warrant, endorse or guarantee the completeness, accuracy, integrity, or timeliness of the information. You must evaluate, and bear all risks associated with, the use of any

information provided hereunder, including any reliance on the accuracy, completeness, safety or usefulness of such information. This information is not intended to be used as the prim ary basis

of investment decisions. It should not be construed as advice designed to meet the particular investment needs of any inv estor. This report is published solely for information purposes, and is

not to be construed as financial or other advice or as an offer to sell or the solicitation of an offer to buy any security i n any state where such an offer or solicitation would be il legal. Any

information ex pressed herein on this date is subject to change without notice. Any opinions or assertions contained in this i nformation do not represent the opinions or beliefs of FactSet

CallStreet, LLC. FactSet CallStreet, LLC, or one or more of its employees, including the writer of this report, may have a position in any of the securities discussed herein.

THE INFORMATION PROVIDED TO YOU HEREUNDER IS PROVIDED "AS IS," AND TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, FactSet CallStreet, LLC AND ITS

LICENSORS, BUSINESS ASSOCIATES AND SUPPLIERS DISCLAIM ALL WARRANTIES WITH RESPECT TO THE SAME, EXPRESS, IMPLIED AND STATUTORY , INCLUDING WITHOUT

LIMITATION ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, ACCURACY, COMPLETENESS, AND NON-INFRINGEMENT. TO THE

MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, NEITHER FACTSET CALLSTREET, LLC NOR ITS OFFICERS, MEMBERS, DIRECTORS, PARTNERS, A FFILIATES, BUSINESS

ASSOCIATES, LICENSORS OR SUPPLIERS WILL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES, INCLUDING WITHOUT

LIMITATION DAMAGES FOR LOST PROFITS OR REVENUES, GOODWILL, WORK STOPPAGE, SECURITY BREACHES, VIRUSES, COMPUTER FAILURE OR MAL FUNCTION, USE,

DATA OR OTHER INTANGIBLE LOSSES OR COMMERCIAL DAMAGES, EVEN IF ANY OF SUCH PARTIES IS ADVISED OF THE POSSIBILITY OF SUCH LOSSES, ARISING UNDER OR

IN CONNECTION WITH THE INFORMATION PROVIDED HEREIN OR ANY OTHER SUBJECT MATTER HEREOF.

The contents and appearance of this report are Copyrighted FactSet CallStreet, LLC 2015 CallStreet and FactSet CallStreet, LLC are trademarks and service marks of FactSet CallStreet, LLC.

All other trademarks mentioned are trademarks of their respective companies. All rights reserved.

23-Jul-2015 Dr. Pepper Snapple Group, Inc.filecache.drivetheweb.com/mr5ir_drpeppersnapplegroup_ir/654/... · Dr. Pepper Snapple Group, Inc. (DPS) Q2 2015 Earnings Call . Dr. Pepper

Documents