12-feb-2014 dr. pepper snapple group, inc.filecache.investorroom.com/mr5ir_drpeppersnapple...thanks,...

Corrected Transcript

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12-Feb-2014

Dr. Pepper Snapple Group, Inc. (DPS)

Q4 2013 Earnings Call

Dr. Pepper Snapple Group, Inc. (DPS) Q4 2013 Earnings Call

Corrected Transcript 12-Feb-2014


2 Copyright © 2001-2014 FactSet CallStreet, LLC

CORPORATE PARTICIPANTS

Carolyn Ross Vice President-Investor Relations, Dr. Pepper Snapple Group, Inc.

Larry D. Young President, Chief Executive Officer & Director, Dr. Pepper Snapple Group, Inc.

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc.

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

OTHER PARTICIPANTS

John A. Faucher Analyst, JPMorgan Securities LLC

Bryan D. Spillane Analyst, Bank of America Merrill Lynch

Judy E. Hong Analyst, Goldman Sachs & Co.

Brett Cooper Analyst, Consumer Edge Research LLC

Ali Dibadj Analyst, Sanford C. Bernstein & Co. LLC

Amit Sharma Analyst, BMO Capital Markets (United States)

William G. Schmitz Analyst, Deutsche Bank Securities, Inc.

Bonnie L. Herzog Analyst, Wells Fargo Securities LLC

Jesse Avery Reinherz Analyst, Stifel, Nicolaus & Co., Inc.

Michael Steib Analyst, Credit Suisse Securities (USA) LLC (Broker)





MANAGEMENT DISCUSSION SECTION

Operator: Good morning, and welcome to Dr. Pepper Snapple Group's Fourth Quarter and Full Y ear 2013

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

Today 's call is being recorded and includes a slide presentatio n 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 Caroly n Ross, Vice President, Investor Relations. Caroly n, y ou may begin. ................................................................................................................................................................................................................................

Carolyn Ross Vice President-Investor Relations, Dr. Pepper Snapple Group, Inc.

Thank y ou, Brandy, and good morning, everyone. Before we begin, I would like to direct your 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

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 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 Y oung, Dr. Pepper Snapple Group's President and CEO;

and Marty Ellen, our CFO. Following our prepared remarks, we'll open the call for y our qu estions.

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


Thanks, Caroly n, and good morning, everyone. It's no secret that 2013 was a challenging y ear. We're up against

the toughest CSD category headwinds I've seen in my career. And y et, our teams remained focused on delivering

against our strategy , and I'm proud of what we were able to accomplish.

First, we launched our Core 4 and RC TEN platform nationally, providing regular CSD consumers with an option

to enjoy the taste and mouth-feel of a regular CSD, but with only 10 calories per 12 -ounce can. We launched

Snapple Regular Half 'n Half Lemonade Iced Tea on the heels of our successful Diet Half 'n Half launch i n 2012.

We brought Hawaiian Punch to the Morning occasion with Aloha Morning, giv ing both moms and kids something

to get excited about, the same great Hawaiian Punch taste with 40% less sugar, and we continue to expand our

reach into the segment's leveraging our allied brands.

In the coconut water category , we grew Vita Coco volume 37 %. We continue to connect and engage with our

consumers through innovative and powerful marketing programs, including our well -known and loved Dr. Pepper





College Football Tuition program. And with our strong brand equity scores, we know these programs resonate

with our consumers.

From an execution standpoint, we continued to gain distribution and availability of our key brands across key

packages, with Snapple increasing 3 points in grocery and almost 2 points in convenient and gas and Mott's

increasing over 3 points in grocery . And our CSDs gained space in convenient and gas, despite the category

headwinds.

We gained over 43,000 new fountain valves, providing thousands of additional sampling opportunities and brand

impressions for the Dr. Pepper trademark. RCI continues to be the foundation on which the organization

operates, gaining more and more momentum every year. I'm pleased to say that after three years, we exceeded o ur

initial financial target with $169 million in annualized cash productivity. But as y ou've heard say, RCI never ends.

It is simply the way we do business.

We returned all of our free cash flow to our shareholders, totaling $7 02 million in 2013. And as f urther

commitment to our shareholders, last week we announced an increase to our quarterly div idend of 7 .9%.

Moving on to results. For the quarter, bottler case sales declined 2% on 3 points of positive price and mix. Dr.

Pepper declined 1% and our Core 4 brands declined 4%, as we continue to face strong category headwinds.

Hawaiian Punch declined 8%, while Snapple grew 3%. Mott's and all other brands were flat. For the y ear, bottler

case sales declined 2% on 3 points of price mix. Our flagship Dr. Pepper declined 2% for the y ear, and our Core 4

brands, which include our TEN products, declined 1%, both outperforming the overall CSD category .

Hawaiian Punch declined 9% on lower promotional activ ity and overall weakness in the juice drink category .

Snapple grew 2% for the y ear and Mott's grew 3%, as we continued to close distribution gaps across both juice and

sauce. All other brands declined 1% for the y ear.

On a currency-neutral basis, net sales declined 1% in the quarter, Core operating income increased $ 30 million, or

10%, and Core EPS increased 18%. For the y ear, currency-neutral net sales were flat. Core income from operations

increased $40 million, or 4%, and Core EPS increased $0.28 per share, or 10%.

Our TEN products are important and strategic priority for us, and we will continue to invest behind them in 2014.

We believe this is one of the important components of innovation in CSDs to bring regular consumers who either

left the category or cut back on their consumption back to the category and to t he brands that they know and love.

Our first y ear results were encouraging. A recent Nielsen Homescan study shows that 52% of TEN's purchases are

incremental to the CSD category, proving that we are bringing back lapsed consumer occasions. The repeat rate s

on the platform are strong, nearly three times higher than trial rates, telling us that once a consumer tries the

product, they will come back for more. Based on these learnings, we'll focus our 2014 efforts on consumer

education and awareness to drive trial of products and our new media campaign does just that.

We have teamed up with Chelsea Handler for our anti-solution campaign, telling consumers to not give up what

they love and drink TEN. Chelsea is being featured on packaging, in-store displays, merchandising, and our digital

campaign. We'll continue to drive sampling with a national FSI and other valuable offers.

Now let me spend a few moments talking about our 2014 priorities and plans. Our fundamental strategy hasn't

changed. We will continue to build our brands and execute with excellence in the marketplace. All underpinned by

the principles of RCI. I just said, we are committed to the TEN platform and we'll continue to drive it in 2014.

We're launching some exciting new innovation on several of our key brands, ensuring that we're providing





consumers with options to support a balanced lifesty le. And our sweetener development has successfully

progressed to the point of enabling us to test all naturally sweetened 60 -calorie versions of some of our brands in

2014.

And as we continue to develop and execute consumer programming, we're sharpening our marketing return on

investment capabilities, ensuring we optimize every dollar we spend and actively shifting dollars from low return

vehicles into higher return vehicles.

Execution is key in this business, we'll continue to strive for excellence through our third -party bottling partners

and our own DSD, gaining incremental display s and points of interruption, while ensuring that we alway s have

the right product and the right package at the right price in every channel.

[ph] Winning with (8:58) the Hispanic consumer is critical. With our strong flavor portfolio and our dedicated

Hispanic sales and marketing team that are focused not only on national progra m, but also on local activation and

programming in strategic markets, we are poised to win.

From an RCI standpoint, goal deploy ment is in place across the organization, ensuring alignment and focus on

our key initiatives. We're also investing in our strong performing leaders, training them to become stewards of

RCI throughout the business.

We've got a great starting lineup of programming for 2014. Dr. Pepper returns to the ACMAs showcasing Diet Dr.

Pepper and Rascal Flatts. We'll give away a VIP experience and private concert with the band and free music

downloads on our 20-ounce bottles.

Our popular, one-of-a-kind campaign features one-of-a-kind indiv iduals like GRAMMY Award winners

Macklemore and Ry an Lewis and recording artist, Romeo Santos. 7 UP is teaming up with Project 7 , an

organization that makes and sells everyday items and whose sales help fund seven areas of need around the world.

Millennial consumers can make every bottle count by redeeming under the cap codes on 20 -ounce bottles, that

choose which area need receives the benefit. And 7 UP isn't stopping there. We're also teaming up with seven

electronic dance music DJs to make the brand sy nonymous with EDM culture. We'll have a new media campaign

with on-site activation and sampling at key festivals in the strategic markets. We're leveraging two of our largest

trademarks, Canada Dry and Schweppes to capitalize on the growth in carbonated water category .

We're expanding Canada Dry Sparkling Seltzer Waters into new markets, as well as lau nching a new peach mango

flavor. And we'll launch a line of Schweppes Sparkling Waters nationwide. Moms and kids will love the new Mott's

juice drink line. In three bold flavors like Wild Grape Surge. The line is made with real fruit juice, has 40% less

sugar, and no artificial sweeteners. We're adding new consumer preferred flavors to our successful line of Snack &

Go applesauce pouches.

Snapple Apple is one of the brand's most popular single served flavors and this y ear we'll expand into a take -home

packaging. We'll also add new flavors to the current 64-ounce take-home package.

Consumers have told us they want a less sweet tea. So we are testing Snapple Straight -up tea across several

markets. Straight-up tea has a true tea taste and is made from all natural black tea with a touch of real sugar and

only 40 calories per serv ing. And we'll continue to leverage our allied brands, gaining entry into emerging and

growing categories with Vita Coco and Bai, an all-natural juice made from coffee fruit. I'm confident these

programs in place we can drive the business in 2014.





Now let me turn the call over to Marty to walk y ou through some of the financial results and our 2014 guidance. ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc.

Thanks, Larry . And good morning, everyone. For the fourth quarter reported net sales declined 1% in line with our

prev ious guidance resulting in net sales that were flat for the full y ear. Sales volumes declines of about 3.5% in the

quarter and an unfavorable trade comparison to the prior year were partially offset by almost 2 points of package

and product mix and just over 1 point of pricing.

Reported gross margins were up 100 basis points in the quarter, increasing from 59.2% last y ear to 60.2% this

y ear. Price mix increased gross margins by approximately 80 basis points, but was offset by lower volumes and an

unfavorable trade comparison to the prior-y ear. Based on our y ear-end inventory balances, which included a

higher volume of apples, but at significantly lower prices than last y ear, we recorded a $14 million LIFO inventory

benefit in the quarter. This compares to an $11 million LIFO inventory charge in the prior y ear, improving y ear -

over-y ear gross margin comparison by 17 0 basis points. This simply means that with respect to apples, we

benefited this y ear by lapping the higher cost for apples a y ear ago as apple prices are now at normal historical

prices.

Changes in certain commodity prices at the end of the quarter caused us t o record a $3 million unrealized mark-

to-market loss on commodity hedges, with approximately $4 million recorded in cost of goods, offset by a $1

million gain reported in SG&A. This compares to a $1 million unrealized mark-to-market loss a y ear ago, which

was all recorded in SG&A. The net effect of these items reduced reported gross margins by approximately 30 basis

points.

Higher input costs, primarily PET and packaging materials, combined with certain higher manufacturing costs,

reduced year-over-year gross margins by 80 basis points. However, solid RCI productivity improvements enabled

us to offset about 40 basis points of this decline.

SG&A for the quarter, excluding depreciation, decreased by $28 million. The unrealized mark -to-market

comparison I just mentioned reduced SG&A by $2 million. And as we highlighted on our third quarter call,

marketing spend declined, as expected by $9 million due to this y ear's phasing, resulting in full y ear marketing

spend of $5 million or a little over 1%. We also benefited from lower people-related costs, including favorable

health and wellness cost trends.

As y ou saw in our earnings press release, in the quarter, we recorded a $56 million non -cash charge related to our

intent to withdraw from a multi-employer pension plan. This was excluded from core earnings. The pay -down of

this liability is expected to occur over approximately 36 y ears, at the annual amount similar with existing funding

for this plan. Depreciation and amortization expense was flat in the quarter at $29 million.

Reported operating income for the quarter was $264 million, compared to $292 million last y ear. Core operating

income of $323 million, as shown in the reconciliation tables in the press release, was up 10% from $293 million

in the prior y ear, with the Core operating margin of 240 basis points to 22.1%.

For the full y ear, Core operating income of $1.123 billion, representing 18.7% of sales, was up almost 4% from last

y ear's $1.083 billion, which represented 18.1% of sales.





Below the operating line, net interest expense for the quarter was $28 million, $2 million below last y ear. Our

effective tax rate for the quarter was 34.2% and our Core income tax rate was 34.8%. This brings our full y ear Core

income tax rate to 35.3%.

Moving on to cash flow; for the y ear, cash from operating activ ities was $866 million and capital spending

continued to decline to $179 million. This brings full-y ear reported free cash flow to $687 million or 105% of 2013

Core net income of $655 million.

For the y ear, total distributions to our shareholders were $7 02 million, with $400 million in share repurchases

and $302 million in div idends. Our actual year-end outstanding shares have declined below 200 million or 198

million to be more precise. Since the 2010 inception o f our share repurchase program, we have repurchased about

62.5 million shares at an average price of $38.86.

And as Larry mentioned, we remain very committed to returning excess cash to our shareholders over time as we

further demonstrated last week with our announcement of a 7 .9% increase to our quarterly div idend.

Now, moving onto 2014 full y ear guidance; as we enter the y ear, the CSD category continues to face significant

headwinds with ongoing consumer health and wellness concerns, particularly around artificial sweeteners as well

as sugar content, and we expect this trend to continue in the near term. We will remain focused on driv ing our

important innovation platforms, including further advances in our sweetener capabilities to build our brands by

providing consumers with a variety of great tasting products to support their balanced lifesty les, drive execution

excellence in the marketplace, and continue to develop broad organizational RCI capabilities which we expect will

deliver further financial improvements.

Based on the plans we now have in place, we believe our 2014 net sales will be flat to up approximately 1%. With

80% of our volume facing CSD category headwinds and the impact of the one peso per liter sugar tax on our

business in Mexico. Total company sales volume is expected to decline over 1 point with growth in our non -carb

portfolio and allied brands partially offsetting these declines.

On a total company basis, we expect combined price and mix to be up just over 2%. We have raised prices in

Mexico as a result of the sugar tax and expect this will contribute approximately 65 basis points of this positive

pricing impact. Our January 1 , concentrate price increase will drive another 40 basis points of growth and the

remainder will be mix, from growth in our higher priced non-carb and allied brands.

Moving on to cost of goods sold. Considering our hedged positions and current market prices for our unhedged

positions, we expect packaging and ingredients deflation, primarily from lower sweetener and apple costs.

This is expected to reduce total cost of goods inclusive of LIFO, by approximately 1 .5% on a constant volume mix

basis. Separately, the impact of the Mexico sugar tax, which is lev ied based on manufactured volume, will increase

total cost of goods by approximately 2%. For modeling purposes, remember that growth from our non -carb

portfolio will also increase cost of goods dollars. We currently believe that the net effect of all these factors should

result in 2014 gross margins consistent with those achieved in 2013.

We're seeing some upward pressure on transportation costs, which is expected to add approximately $17 million

to our cost base in 2014. We're expecting an increase of approximately 10% or $12 million in health and welfare

costs due to medical cost inflation and fees we'll pay under the Affordable Care Act. General inflation on our field

labor cost will also increase total people-related costs by approximately 2%, or about $20 million. RCI

productiv ity benefits will help offset a portion of these increases.





We're continuing to enhance our marketing return on investment capabilities, and we're working harder than ever

to ensure that we are getting the best return we can. We are shifting marketing dollars across media platforms

from traditional to digital and focusing more programs and tie -ins with retail activation.

In addition, spending across our TEN platform will continue to be approximately $30 million. As a result, we

expect marketing spend to be approximately 7 .5% of net sale s in 2014. Though this is lower than our marketing

spend rate in 2013, it is still a very healthy investment level for the business.

Now, moving below segment operating profit, our net interest expense will be around 4.4% on our $2.5 billion of

debt and our full y ear Core tax rate is expected to be approximately 35.5%. We expect capital spending to be

approximately 3% of net sales and we expect to repurchase approximately $37 5 million to $400 million of our

common stock in 2014, subject to market conditions. Considering all of these items, we expect full y ear Core

earnings per share to be in the $3.38 and $3.46 range.

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

models. First, the packaging and ingredient deflation will be skewed toward the first three quarters of the y ear.

Second, the transportation cost increases will be spread fairly evenly across the y ear. Third, people cost inflation

including the health and wellness increases, will be more pronounced in the third and fourth quarters. And finally,

remember, that we are no longer recording other income associated with our former tax indemnity agreement

with Mondelez. So, y ou will need to remove these from y our models.

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. We continue to

execute our strategy in a very challenging environment, ensuring that we build our brands while executing with

excellence in the marketplace. We've been and will continue to launch new innovation that offers consumers

options to help them lead balanced lifesty les. We remain focused on managing the business prudently for the

long-term as reflected in our full y ear results, we'll continue to invest in our brands and our people, while ensuring

we optimize every dollar we spend. RCI is the foundation of our business, and i t will continue to drive

improvements and provide financial flexibility. And finally, 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 is coming from John Faucher from JPMorgan. ................................................................................................................................................................................................................................

John A. Faucher Analyst, JPMorgan Securities LLC Q Thanks. One quick question, sort of a housekeeping question, which is on, sort of where corporate came in for the

quarter, and y ou have the segment operating profit numbers, but I'm assuming we have to make some

adjustments for the pension charge. So, that would be the first question. And then secondly , can y ou talk about

sort of the underly ing pricing dy namic in the North American CSD category ? Cott just actually talked about it,

may be getting a little bit better in the first half of the y ear, but what are y ou expecting in building in as we get

closer to the summer selling season? Thanks. ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A John, good morning, it's Marty . Let me take care of the housekeeping on the numbers. The $56 million non -cash

pension charge in the segment table is actually included in Pa ckaged Beverages, not in corporate. ................................................................................................................................................................................................................................

John A. Faucher Analyst, JPMorgan Securities LLC Q Great, thank y ou. ................................................................................................................................................................................................................................

Larry D. Young President, Chief Executive Officer & Director, Dr. Pepper Snapple Group, Inc. A Y eah, John, on pricing, we think the pricing for the y ear's going to be still reasonable. We saw a little activ ity

towards the end of the y ear for the holiday s, but so far this y ear, it's looking good. I think every body would be

looking at what we can do in a bond market opportunistically. But we are not planning a lot of pricing in our plan

and we think where the prices are at now we can do quite well with that. ................................................................................................................................................................................................................................

John A. Faucher Analyst, JPMorgan Securities LLC Q Great. ................................................................................................................................................................................................................................

Operator: Y our next question comes from the line of Bry an Spillane of Bank of Am erica. ................................................................................................................................................................................................................................

Bryan D. Spillane Analyst, Bank of America Merrill Lynch Q Hi, good morning. ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A Good morning, Bry an. ................................................................................................................................................................................................................................





Bryan D. Spillane Analyst, Bank of America Merrill Lynch Q Just a couple of questions regarding the outlook. I think, and Marty , just want to make sure I'm understanding

sort of building a bridge for operating income for 2014, just kind of backing into some of the other items y ou've

given in terms of the guidance. Operating income will be up somewhere in the 5% or 6% range. And with revenues

flat to plus one gross margin is flat it means the SG&A leverage is going to drive I guess about 4 points to that. And

so we look at that SG&A leverage. How much of it is just the marketing expense coming down and how much of it

is mix or RCI. So I'm just try ing to get a better understanding of kind of what the drivers are of that, and like how

v isible that is, how variable that might be. ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A Okay , Bry an, I think y ou have it, as we've guided, flat to up one of the top line, constant gross margins as a result

of sort of the pluses and minuses that I went through in my script. We are really pleased with our SG&A

productivity, this y ear we measured about $16 million in y ear -over-y ear operating income improvement as a

result of RCI initiatives and we are expecting as I said in my remarks notwithstanding some of the inf lationary

items, whether they'd be health care, whether they'd be transportation costs, we are going to beat back a big chunk

of those with planned RCI improvement. ................................................................................................................................................................................................................................

Bryan D. Spillane Analyst, Bank of America Merrill Lynch Q Okay . ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A So SG&A is going to be a big contributor. As I said in my remarks, we're going to spend 7 .5% of net sales on

marketing, a little lower than this y ear, but if y ou look back historically, sort of in the range where we've been. And

I'll repeat what I've said to many of y ou as I've traveled that, our learnings from our MROI developing capability is

giv ing us some insight into where we should spend money and where we shouldn't spend money. And we're really

comfortable with it. We're funding, as Larry said, all of the important initiatives next y ear, including our rolling

out some test products that we think will be squarely within the crosshairs of what consumers are going to be

looking at for naturally sweetened beverages and reduce calories. And that's where we settled on the marketing

budget for next y ear. ................................................................................................................................................................................................................................

Bryan D. Spillane Analyst, Bank of America Merrill Lynch Q Okay , thanks for that clarity . Just, Larry , may be if y ou could just give us may be a first impression, any first

impression you've seen in terms of how consumers have responded in Mexico to the higher prices and how the

market has – or how the industry has sort of dealt with it, if y ou give any color at all in terms of how that's gone so

far, that'd be helpful. ................................................................................................................................................................................................................................

Larry D. Young President, Chief Executive Officer & Director, Dr. Pepper Snapple Group, Inc. A Not really , Bry an. It's still so early . With it, just coming out and a lot of it's got some carry over, and it's ju st not

completely across the market. We're seeing there is an impact, but the size of it, I'd be afraid to even try and

dimensionalize that right now.





Bryan D. Spillane Analyst, Bank of America Merrill Lynch Q Y ou said that consumers might have bought ahe ad of the increase, like there was any sort of pantry -loading? ................................................................................................................................................................................................................................

Larry D. Young President, Chief Executive Officer & Director, Dr. Pepper Snapple Group, Inc. A We didn't notice it in December. Our trends stay ed pretty steady through December. ................................................................................................................................................................................................................................

Bryan D. Spillane Analyst, Bank of America Merrill Lynch Q Okay , thank y ou. ................................................................................................................................................................................................................................

Larry D. Young President, Chief Executive Officer & Director, Dr. Pepper Snapple Group, Inc. A Y ou're welcome. ................................................................................................................................................................................................................................

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

Judy E. Hong Analyst, Goldman Sachs & Co. Q Thanks, good morning. ................................................................................................................................................................................................................................

Larry D. Young President, Chief Executive Officer & Director, Dr. Pepper Snapple Group, Inc. A Good morning, Judy . ................................................................................................................................................................................................................................

Judy E. Hong Analyst, Goldman Sachs & Co. Q So, it's really admirable that y ou're doing really well on the cost side and growing profit in the context of a

challenged volume situation. I guess my question is just really thinking about the industry and y our business over

time. What can we really look forward to get volume growth again? And I guess in the context of the marketing

spending coming down and I hear y ou, y ou really want to find the right opportunity to spend money . But just

really want to understand how y ou're thinking about the growth opportun ity for some of y our core brands and I

think the industry is challenged but just beyond that, can y ou do more to really accelerate the top line growth? ................................................................................................................................................................................................................................

Larry D. Young President, Chief Executive Officer & Director, Dr. Pepper Snapple Group, Inc. A Well, rest assured, Judy . We never stop looking at that. As I said in my prepared remarks, we expect the

headwinds to continue in 2014. I love how the y ear started so far, the weather has been so wonderful, just kind of

ties right into soft drink business. But I 'm bullish on how we've started the y ear even with the weather. We will

never stop looking at ways to grow, but we want to make sure that all that growth is profitable. As I mentioned,

we're going to be testing in select markets across the U.S. here and no t too long in time. A 60 calorie natural

sweetened CSD and some of our top brands and we feel good about that. Also, TEN, we're still getting new

distribution of TEN. We just got some new authorizations on the West Coast. And so, we're still bullish on tha t,

we'll continue to spend behind it.





As far as the marketing front, we're not concerned at all of where the dollars are coming in. We don't really worry

that much what the dollars are. It's what we get in relevance and activation and we're finding that w e've got

programs that are working better for us. As Marty mentioned, we're going to continue to spend $30 million on

TEN and we think we have every one of our brands where we can continue to build and grow them, as we get

down the road and get past some o f these headwinds. ................................................................................................................................................................................................................................

Judy E. Hong Analyst, Goldman Sachs & Co. Q Okay . And then Larry , I just wanted to get y our thoughts on the announcement between Coke and Green

Mountain, the partnership that they 've announced, whether y ou think that, that could poten tially help the

category, bringing some excitement into the category, y ou've got a Snapple brand in the Keurig sy stem. Is there

some opportunity to expand y ou brand offering with the likes of Green Mountain and then just in terms of the

potential impact on that could have on y our bottlers? ................................................................................................................................................................................................................................

Larry D. Young President, Chief Executive Officer & Director, Dr. Pepper Snapple Group, Inc. A I think it was a great move for Coke and Green Mountain, both. News to the category is always good. I think we all

have a lot of work to do on how do we do this as partners with our bottlers. They 've got franchises out there that,

my job is to make sure that we protect their equity and, but we've also got to look at it and make sure we're doing

the right things for the future on growth. And we may have to do some things different. So, we look at all these

things, like with the K-Cup and now we've got Amazon coming out and Walmart.com, and they 're changes to our

industry . It's a different way of going to market than we've had b efore and I think all us in the industry are sitting

down, figuring out how do we do this the right way where it's a win-win for every body . ................................................................................................................................................................................................................................

Judy E. Hong Analyst, Goldman Sachs & Co. Q Okay . Thank y ou. ................................................................................................................................................................................................................................


Operator: Y our next question comes from the line of Brett Cooper of Consumer Edge. ................................................................................................................................................................................................................................

Brett Cooper Analyst, Consumer Edge Research LLC Q Good morning, guy s, quick question. In 2013, y ou reached [ph] concentrated pricing (34:42) by 3.5% or so. It

appears that y ou reduced discounts by another 150 basis points, increased marketing by $5 million, and it seems

that retail prices for CSDs are up a fraction, about three -tenths of a percent, and given that we on the outside don't

have all of the information, it'd be great to hear, any insights you have on this relationship as it seems that 2014 is

setting up for something similar, and just try ing to get an understanding of how sustainable this is as a source of

growth for y ou guy s in the coming y ears? ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A





It's Marty , I'll deal with some of that. I'm not sure I can connect all the dots there for y ou, I'm not – try to

recognize all the numbers you have there either. Our concentrate price increase is net of funding we paid bottlers

and money that we put aside for our bottlers, [ph] to fund their programs (35:29). In 2013 it was probably in the

2% probably we may have even netted a little less and that's going to be sort of where the number lands in 2014.

And I would only tell y ou concentrate cost is a pretty small portion of the total package cost to our bottlers. ................................................................................................................................................................................................................................

Brett Cooper Analyst, Consumer Edge Research LLC Q Okay . I mean, my understanding of it, y our Beverage Concentrate business price mix was up 5 point? ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A Y eah. ................................................................................................................................................................................................................................

Brett Cooper Analyst, Consumer Edge Research LLC Q So if y ou had 2% on the net, right, I mean is the other 3 points to reduce discounts. How do y ou get to it – can y ou

bridge the 5 point for me? ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A There is a factor in our Beverage Concentrate business this y ear that actually relates to our fountain business, it

has nothing to do in our bottle and cans business. We've increasingly and to our advantage, are producing more

fountain sy rup in our sy stem and taking some of that away from some of our bottlers. The sy rup price per case or

revenue per case is higher than simply selling the concentrate to them to make the sy rup. So we've been shifting

some of our fountain business in-house, it raises the revenues, it's good profit, it also raises the transportation

costs that we are shipping sy rup, but still a good market. That's not a factor we've talked much about this y ear, but

it's had a little bit of impact on the Beverage Concentrate number s. ................................................................................................................................................................................................................................

Brett Cooper Analyst, Consumer Edge Research LLC Q Okay . That's great. Thank y ou. ................................................................................................................................................................................................................................

Operator: Y our next question comes from the line of Ali Dibadj of Sanford Bernstein. ................................................................................................................................................................................................................................

Ali Dibadj Analyst, Sanford C. Bernstein & Co. LLC Q Hey , guy s. How are y ou? ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A Good. ................................................................................................................................................................................................................................

Ali Dibadj Analyst, Sanford C. Bernstein & Co. LLC Q





So, I wanted to focus in on first, just on the beverage concentrated margins. It makes sen se that the pension

prepayment or withdrawal I guess is in there; wanted to understand whether there'll be ongoing benefits. And if

y ou endeavor to strip that out for us, can y ou talk a little bit about the RCI impact on that business unit in

particular – sorry , Packaged Beverages, on that piece of the business in particular, especially from the opportunity

within the DSD sy stem that y ou have? ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A Ali, it's Marty . I'll take it. Y ou mentioned Beverage Concentrate, but you corrected the Packaged Beverages. I want

to everybody to understand that on a reported basis the pension charge, the $56 million on a segment basis is in

Packaged Beverages. Of course, we've taken it out on a core basis, but we don't provide core reconciliations by

segment. So, that's out. I just want to make sure every body understands, the pension liability , as I said in my

prepared remarks, from a cash funding point of v iew, which is what's really important here for us, the next 36

y ears we'll be making contributions to this plan more or less in line with what we've been pay ing, so no impact

there.

Okay , in terms of Packaged Beverages, y ou asked about – I mean, RCI, of course, has had probably the biggest

impact of Packaged Beverages. It's had a big impact in Mexico as well. And we made a lot of great progress in

2013. I've talked before about lean tracts and warehousing and delivery and selling. The better part of the –

roughly $16 million of y ear-over-year cost improvement we've had this y ear, it has been in – that I quoted earlier

as ascribable to RCI has been in Packaged Beverages. So, it's helped them quite a bit. ................................................................................................................................................................................................................................

Ali Dibadj Analyst, Sanford C. Bernstein & Co. LLC Q That's helpful. So, if y ou try to piece them together with the volume delevers that y ou're getting, is there any way

to quantify and really disaggregate the volume deleverage that y ou're seeing given the volumes in that segment, in

particular and kind of how y ou're offsetting that with RCI; it sounds like y ou are to a certain extent, but how much

y ou're offsetting? ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A Ali, here is that I would tell y ou about the economics of Packaged Beverage. As y ou think about it first and

foremost, in terms of declines in volume and CSDs, which, of course, hits them in terms of cost absorption. Where

they are actually and where we are actually making improvement, so I just – productivity through RCI is mix shift

in our non-carb portfolio. So whether y ou're talking about Vita Coco; Larry mentioned, it's up 37 %, our recent

announcements on products like Bai and Fruit2O, and all of these allied brands, as we call them that are becoming

very important in our portfolio, that have reasonably good growth prospects, particularly in the near -term as we

see it, is actually helping Packaged Beverages quite a bit.

Don't forget too that one of their 800 -pound gorilla products is Hawaiian Punch. Now we've talked a lot about

Hawaiian Punch in the past. It hurts their top line when volumes are down, but does not have such a meaningful

impact on the operating profit line. So, y ou see the volume decline, y ou don't see it on the operating profit line.

Y es, CSDs are down, but we claw back with non-carb products, by the way Mott's. We shouldn't forget Mott's; did

well this y ear, both in sauce and in juice. These products shift the margin up in PB reasonably importantly . ................................................................................................................................................................................................................................

Ali Dibadj Analyst, Sanford C. Bernstein & Co. LLC Q





Okay . And then, last question is, what would Core 4 plus RC be in terms of volume growth, without TEN? And I

guess, what does that suggest about your still 3% to 5% long-term top line target that frankly I'm not sure any body

believe, and I'm wondering whether y ou guys do still to, so kind of two questions, just on TEN and one long -term.

Thanks. ................................................................................................................................................................................................................................

Larry D. Young President, Chief Executive Officer & Director, Dr. Pepper Snapple Group, Inc. A They would've been down. I mean the Core 4 would've bee n down greater, but I think still above the industry .

That's one of the reasons we're staying so focused on, is that we see that we're bringing people back to the category

that had left CSDs and then getting greater CSD occasions. So, y eah they would've be en down more, but I think

still above what we'd have seen in the category . ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A Ali, It's Marty . Look, I took the 3% to 5% off the table last y ear at some time, clearly , because look, the

environment as everybody on this call knows is different today than it was three or four y ears ago. We understand

better what's happening with consumer on the health and wellness front. Every body sees how the CSD category

has performed. We talked last y ear a lot about particularly the big reductions in Diets which was a relatively new

factor versus two y ears ago, and the consumer, what's happening to the consumers' discretionary income, whether

it's higher taxes, whether it could be impact of food stamp reduction. So, the world has changed, but we believe

what we're going to demonstrate is that even on lower volumes, we can make more money . ................................................................................................................................................................................................................................

Ali Dibadj Analyst, Sanford C. Bernstein & Co. LLC Q Look forward to it. Hope the [indiscernible] (42:51). Thanks, guy s. ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A Thank y ou. ................................................................................................................................................................................................................................

Operator: Y our next question is from the line of Amit Sharma of BMO Capital. ................................................................................................................................................................................................................................

Amit Sharma Analyst, BMO Capital Markets (United States) Q Hi. Good morning, every one. ................................................................................................................................................................................................................................

Larry D. Young President, Chief Executive Officer & Director, Dr. Pepper Snapple Group, Inc. A Good morning. ................................................................................................................................................................................................................................

Amit Sharma Analyst, BMO Capital Markets (United States) Q Larry , y ou talked about artificial sweetener – not artificial, the natural sweetener, soda and y et y ou're starting to

bring it to the consumer. Can y ou provide us a little bit more color in terms of what's the platform that y ou are

using for ad, what kind of incremental marketing spend y ou are looking behind that product. And what is the

internal expectation?





Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A I'm not going to give a whole lot because for competitive r easons. But we've worked on – our R&D team has put

together a proprietary blend with stevia and sugar that we've been very pleased with. One thing that we have been

working on a while but we will not sacrifice the taste of our brands. And this will be a ve ry limited test in certain

markets that will go out and the biggest thing for this is to get the consumer insights. We are working with some

national retail partners so that we can both look at the data. We hear what people are telling us they want natural ,

but we want to see if they buy the natural and where should we put the natural. So it's going to be a test that we

are excited about, but I want to emphasize it is a test for, we'll decide later what ty pe of a rollout we'll do on it. ................................................................................................................................................................................................................................

Amit Sharma Analyst, BMO Capital Markets (United States) Q And expectation is that this will stay within Dr. Pepper bottling sy stem not go to y our bottling partners. ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A We're right now just doing the test I mean it's within our sy stem and then we get the data points, that's when we

share with our bottlers. And I think we have talked to some of them already, they are very excited about it. I think

everyone is excited about finding something natural, but we want to be able to share the facts with them on what it

does in these markets. ................................................................................................................................................................................................................................

Amit Sharma Analyst, BMO Capital Markets (United States) Q Got it. And one more. Your private label competitor on the juice side indicated that they will probably be spending

a little bit more in the juice category and then y ou talked about apple sauce being one of the tailwind commodities.

Is there an expectation that y ou'll also spend a little bit more to get volumes going in that segment? ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A No, we are happy with what our volume is doing right now. We've got plans in place that we put together last y ear.

We will stay with those. We've also got innovation coming in with our new line-up of Mott's fruit flavors. We've

got more Mott's pouches coming out with different flavors. So, we're very happy where we're at in the category

right now. ................................................................................................................................................................................................................................

Amit Sharma Analyst, BMO Capital Markets (United States) Q Great. Thank y ou. ................................................................................................................................................................................................................................

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

William G. Schmitz Analyst, Deutsche Bank Securities, Inc. Q Hi, good morning. ................................................................................................................................................................................................................................





Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A Good morning. ................................................................................................................................................................................................................................

William G. Schmitz Analyst, Deutsche Bank Securities, Inc. Q Hey , y ou know, all the speak in y our private label competitors' call, I mean every one has been sort of lamenting

the capacity situation in the U.S., so do y ou think there's room for a broader restructuring as kind of y ou look at

y our global manufacturing footprint? And obviously, to the previous question, y ou talked about the 3% to 5% no

longer being realistic. So, is room incrementally for maybe a bigger broader restructuring on the cost of goods sold

side? ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A Well, I guess that – look, I mean, as industry volumes go down, of course, that's go ing to y ield excess capacity and

everybody 's going to have to decide how they want to deal with that. Some of our RCI is getting at this. But it's

going to be an industry issue for everybody depending upon what they 're making in those plants. Obviously , we

see the Nielsen data; we're not really in the private label business to any degree, and obviously , those volumes

have taken a much, much greater hit than branded volumes, so, of course, that's going to put pressure on

manufacturing capacity and what to do with that capacity . ................................................................................................................................................................................................................................

William G. Schmitz Analyst, Deutsche Bank Securities, Inc. Q Okay , I mean-- Go ahead. ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A There's a trend in business and manufacturing too which is, y ou can look at y our footprint of manufacturing

plants on the one hand, decide whether y ou need them all or not, but on the other hand, y ou have to deal with

transportation. Still got to get the product to the customer, and fuel prices today are a lot higher they were than 30

y ears ago when a lot of this manufacturing footprint was constructed. ................................................................................................................................................................................................................................

William G. Schmitz Analyst, Deutsche Bank Securities, Inc. Q Gotcha. That makes total sense. And then, just in terms of the advertising spending and going back to historical

levels, I mean where is the money going to be spent? Now I know y ou said y ou're going to move a lot of stuff from

conventional to digital, but do you still kind of think that may be the coastal strategy is on a hold a nd then may be

kind of where y ou're going to put the brand support besides TEN? ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A Bill, I think we talked in our last quarter or the quarter before about some reductions to the coastal program, and

not because we don't think there is opportunity there, but we just couldn't see the – get the activation that would

have made the spend most effective. So, there's been a lot of that in our – a lot of those kinds of adjustments in our

total marketing plans.





As I said, TEN, we're still investing, and Larry talked about it, it's early , it's important. So, we've made the

adjustments we think are the right adjustments to make given what's happening in this environmen t and making

sure that they 're really aligned with what our field teams are doing in terms of execution at retail. ................................................................................................................................................................................................................................

William G. Schmitz Analyst, Deutsche Bank Securities, Inc. Q Gotcha. And then, [ph] how agile is that spending? (48:20) So, if things do c ome in a little better; obviously , the

weather comps are pretty undemanding, I mean, will y ou let that flow to the bottom line, or will y ou take some of

the incremental sav ings and put it back into the marketing line? ................................................................................................................................................................................................................................

Larry D. Young President, Chief Executive Officer & Director, Dr. Pepper Snapple Group, Inc. A So, I said this to everybody; we spend on that which gives us a return and what we think we should do and it's not

a function of spending top line – unexpected top line margin dollars just to spend. I don't think any body thinks –

any body would do that any way . ................................................................................................................................................................................................................................

William G. Schmitz Analyst, Deutsche Bank Securities, Inc. Q Y ou'd be surprised. ................................................................................................................................................................................................................................

Larry D. Young President, Chief Executive Officer & Director, Dr. Pepper Snapple Group, Inc. A But somewhat it's an independent decision with us. It first and foremost is driven by the analy sis and data we're

presented with on the project. ................................................................................................................................................................................................................................

William G. Schmitz Analyst, Deutsche Bank Securities, Inc. Q Great. Thanks very much. ................................................................................................................................................................................................................................


Operator: Y our next question comes from the line of Bonnie Herzog of Wells Fargo. ................................................................................................................................................................................................................................

Bonnie L. Herzog Analyst, Wells Fargo Securities LLC Q Good morning. ................................................................................................................................................................................................................................

Larry D. Young President, Chief Executive Officer & Director, Dr. Pepper Snapple Group, Inc. A Good morning, Bonnie. ................................................................................................................................................................................................................................

Bonnie L. Herzog Analyst, Wells Fargo Securities LLC Q





I was hoping y ou could give a little more color on y our Beverage Concentrate business, ty pically this business, it's

outperformed y our Packaged Beverage business, but this quarter your volume was down quite a bit, so could y ou

drill down a little more on what some of the main drivers of this were and then really, how we should think about

this business going forward? ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A Bonnie, it's Marty , good morning. I'll take this initially . I would tell y ou their volumes were a little weaker in

December than we thought and we'll see what happens in January, whether or not certain bottlers decide either

not to buy concentrate before y ear-end or not. We have reason to believe some bottlers want to keep their

inventory levels lower. And I'll also tell y ou, if y ou think about Beverage Concentrates versus Packaged Beverages,

don't forget Beverage Concentrates is pretty much all reliant on CSDs. ................................................................................................................................................................................................................................

Bonnie L. Herzog Analyst, Wells Fargo Securities LLC Q All right. ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A All right? So, they don't – or versus, as I just said, Packaged Beverages is starting to put more emphasis on it

hav ing greater success in the non-carbs. ................................................................................................................................................................................................................................

Bonnie L. Herzog Analyst, Wells Fargo Securities LLC Q Right. ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A And of course, within Beverage Concentrates it is reliant very much so on brand Dr. Pepper itself, so, like I said,

December was a little lighter than we thought. I know we've also made a change in the concentrate, we've got

something I'll call a high y ield concentrate, it's a more effective package to the ship, because it has less water in it

and I think some bottlers waited for us to put that product out and buy it in January instead of December. ................................................................................................................................................................................................................................

Bonnie L. Herzog Analyst, Wells Fargo Securities LLC Q So, just to clarify , y ou're already seeing this business improve from December? ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A I'm say ing we see signs in January that maybe some purchases that would have otherwise happened in December

may have happened in the first half of January . ................................................................................................................................................................................................................................

Bonnie L. Herzog Analyst, Wells Fargo Securities LLC Q Okay . Thank y ou. ................................................................................................................................................................................................................................





Operator: Y our next question comes from the line of Mark Swartzberg at Stifel, Nicolaus. ................................................................................................................................................................................................................................

Jesse Avery Reinherz Analyst, Stifel, Nicolaus & Co., Inc. Q Good morning, this is Jesse Reinherz in for Mark. Just a quick follow-up to Bill's question, given the pressure

we've seen on the CSD volumes and the excess capacity you guys mentioned. Have you ever explored getting into

the private label business or just perhaps seeking out additional co -packing arrangements or is this just really

going to be business as usual going forward? Thank y ou. ................................................................................................................................................................................................................................

Larry D. Young President, Chief Executive Officer & Director, Dr. Pepper Snapple Group, Inc. A We've alway s done a little bit of contract pack. You see that in our numbers. We do it very opportunistically, we do

it where we have capacity , we make sure that we are in the right shipping lanes because, as Marty mentioned

earlier transportation gets very expensive on that, but as far as wanting to get into it that's not what we do. We

build enhanced leading brands and we will continue to do that. ................................................................................................................................................................................................................................

Jesse Avery Reinherz Analyst, Stifel, Nicolaus & Co., Inc. Q Okay , great. Thanks a lot. ................................................................................................................................................................................................................................

Operator: And y our final question this morning comes from the line of Michael Steib with Credit Suiss e. ................................................................................................................................................................................................................................

Michael Steib Analyst, Credit Suisse Securities (USA) LLC (Broker) Q Good morning. Can I ask just a follow-up question on the SG&A line in the quarter. I think y ou mentioned that of

the $28 million reduction some $9 million was due to phasing of marketing spend, my question is what's the

remainder, where's the remainder coming from. Are these RCI sav ings? And are these going to be carried forward

into the next y ear? Thank y ou. ................................................................................................................................................................................................................................

Martin M. Ellen Chief Financial Officer & Executive Vice President, Dr. Pepper Snapple Group, Inc. A Y eah, Michael, it's a combination we said, we've had some favorability in health and wellness cost, but I'll also tell

y ou that all of the RCI initiatives that are being deployed particularly in our DSD business all of that has shown up

as productiv ity improvement in SG&A. ................................................................................................................................................................................................................................

Michael Steib Analyst, Credit Suisse Securities (USA) LLC (Broker) Q Okay , great. Thank y ou very much. ................................................................................................................................................................................................................................


Well, thanks again for joining us on the call today and for y our continued interest and investment in Dr. Pepper

Snapple. ................................................................................................................................................................................................................................

Operator: Thank y ou. This concludes today 's fourth quarter 2013 earnings call. Y ou may now disconnect.





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