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Executives

Carolyn Ross - Vice President of Investor Relations

Larry D. Young - Chief Executive Officer, President, Director, Member of Special Award Committee and Member of Capital Transaction Committee

Martin M. Ellen - Chief Financial Officer and Executive Vice President

Analysts

John A. Faucher - JP Morgan Chase & Co, Research Division

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Stephen Powers - Sanford C. Bernstein & Co., LLC., Research Division

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

Judy E. Hong - Goldman Sachs Group Inc., Research Division

William Schmitz - Deutsche Bank AG, Research Division

Mark D. Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

Dr Pepper Snapple Group (DPS) Q2 2013 Earnings Call July 24, 2013 11:00 AM ET

Operator

Good morning, and welcome to Dr Pepper Snapple Group's Second Quarter 2013 Earnings Conference Call. [Operator Instructions] Today's call is being recorded and includes a slide presentation, which can be accessed at www.drpeppersnapple.com. The call and slides will also be available for replay and download after the call has ended. [Operator Instructions] It is now my pleasure to introduce Carolyn Ross, Vice President, Investor Relations. Carolyn, you may begin.

Carolyn Ross

Thank you, Paula, and good morning, everyone. Before we begin, I would like to direct your attention to the Safe Harbor statement and remind you that this conference call contains certain forward-looking statements, including statements concerning our future financial and operational performance. These forward-looking statements should also be considered in connection with cautionary statements and disclaimers contained in the Safe Harbor statement in this morning's earnings press release and our SEC filings. Our actual performance could differ materially from these statements, and we undertake no duty to update these forward-looking statements.

During this call, we may reference certain non-GAAP financial measures that reflect the way we evaluate the business and which we believe provide useful information for investors. Reconciliations of those non-GAAP measures to GAAP can be found in our earnings press release and on the Investors page at www.drpeppersnapple.com.

This morning's prepared remarks will be made by Larry Young, Dr Pepper Snapple Group's President and CEO; and Marty Ellen, our CFO. Following our prepared remarks, we will open the call for your questions.

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

Larry D. Young

Thanks, Carolyn. It should come as no surprise to anyone that this was a challenging quarter. The headwinds facing the CSD category continue. Consumers remain cautious, and the U.S. saw some of the coldest and wettest weather in recent years.

However, against that backdrop, our teams continued to execute our strategy, and we gained both volume and dollar share in the CSD category. For the quarter, bottler case sales declined 3% on 2 points of price and mix. Dr Pepper declined 4% and our core brands, including our TEN platform, while performing much better than the category, still declined by 1%.

Hawaiian Punch declined 7% on lower promotional activity and overall category declines. Mott's grew by 2% and Snapple gained 4% on our recently launched regular Half 'n Half and SnapTea products. All other brands declined by 3%.

On a year-to-date basis, bottler case sales declined 3% on 3 points of price and mix. Dr Pepper declined 4% and our Core 4 brands were flat. Hawaiian Punch declined 10% and Mott's grew by 6% as we continue to gain distribution and availability across both our juice and sauce portfolios. Snapple grew 1%. All other brands declined by 3%.

On a currency-neutral basis, net sales declined 1% for the quarter, as favorable price/mix and foreign currency were more than offset by volume declines. Segment operating profit decreased 3% on the net sales decline, as well as higher commodity cost, driven primarily by apples, a $9 million increase in marketing and a pre-spin related unclaimed property audit settlement of $4.4 million. Decline was partially offset by year-over-year LIFO benefit of $11 million, ongoing productivity improvements and a favorable comparison associated with an $8 million depreciation adjustment recorded last year.

Core EPS was $0.84 for the quarter versus $0.85 in the prior period, a 1% decrease. As we finished the first half of the year, I thought I would share a quick update on how we're progressing against our key priorities. You've heard me say it many times, but increasing distribution and availability of our key brands and packages continues to be the single largest opportunity for DPS. And I'm pleased with the progress we've made so far this year, particularly given the challenging environment.

We've held space in both grocery and convenience on core CSDs across key packages. Snapple continues to gain traction, growing ACV by 1 point in grocery and 2 points in convenience. And Mott's showed a strong gain of just over 3 points in grocery, helping to fuel growth on this brand.

We're expanding single-serve availability and creating new sampling occasions with over 15,000 net new fountain valves across both local and national accounts. We know consumers love our brands, and our equity scores reflect just that. We continue to see gains in both brand relevance and brand strength scores across the portfolio, reaffirming that our marketing programs are reaching our target consumers and building brand loyalty. And from a Rapid Continuous Improvement standpoint, we've now identified $142 million in annualized cash productivity savings, and our teams are as energized as ever.

They're ensuring that we not only sustain our current progress, but also continue to build momentum and drive breakthrough change, as we focus on specific core activities within DSD business, such as warehousing, delivery and merchandising. It's certainly no secret that the CSD industry is up against tremendous headwinds and consumers are looking for low-calorie alternatives to regular CSDs without sacrificing taste.

And while we're all working toward a 0-calorie, all-natural sweetener, we must give consumers a solution today, and that's why we created the TEN platform. The national rollout of TEN is well underway. We've achieved 76% ACV in grocery across our key packages, and we'll continue to build distribution and availability based on retailer planogram resets. We've been strict about not putting TEN in accounts where they haven't give us incremental shelf space, and that strategy is working for us. And we expect TEN to be in full distribution by the end of summer.

Our media campaign, which lets consumers know they can get both great taste and only 10 calories, will continue to air through the summer, creating almost 0.5 billion impressions. We're also engaging consumers online through Facebook and Twitter, and our consumer-generated online videos have generated millions of impressions for TEN.

We've sampled in only 14 key markets and still have 21 markets left to go and have handed out almost 0.5 million cans of TEN. We're getting positive feedback on both the product and the messaging from consumers, and early trial and repeat rates are meeting our internal targets. More importantly, based on Nielsen Homescan Research, we know that 51% of TEN's purchases are incremental to the CSD category, meaning that we are achieving our goal of bringing lapsed and new users into the category. We are really pleased with these early results.

As I look to our summer and third trimester marketing plans, I'm confident that we will continue to engage our core consumers and build awareness, while providing exciting activation programs for our bottling and retail partners. Dr Pepper and the Core 5 are firing up the grills and tying in with retailers summer thematics, driving additional displays and points of interruption in the stores. Snapple is once again front and center on America's Got Talent, the #1 rated summer show. Judges' cups feature Snapple, and our Half 'n Half and "Win nothing instantly!" commercials are airing during the commercial breaks.

Soccer is a major passion point for Hispanic consumers. So 7UP is sponsoring the 2013 Gold Cup. We will have 7UP branding on all official Gold Cup material and we'll have an exclusive media buy on Univision during the tournament.

For over 20 years, Dr Pepper has been synonymous with college football. And this year, we'll continue the tradition, integrating our "/1" campaign. We'll give away over $1 million in tuition awards this year. America gets to participate by choosing the students who will compete at each championship game.

Our Core 5 brands are also getting in on the football action, partnering with MillerCoors and Mission Foods to build a national football program that will deliver bundled solutions for shoppers' game day needs. And as the kids go back to school, our Mott's lunchbox solutions program will help mom prepare healthy lunches for her kids that includes Mott's juice boxes and snack-and-go sauce pouches. The program features national media, a national FSI and pallet displays around Mott's. A&W will lead our Core 5 Halloween program, featuring a national partnership with Mars and color-changing 8-ounce cans. And these are just a few of the great things we have planned.

I'll end by saying we operate in a difficult environment with limited visibility, but I remain confident in our strategy and in our team's ability to execute it.

With that, let me turn the call over to Marty to provide further information on our financial results and our full year guidance.

Martin M. Ellen

Thanks, Larry, and good morning, everyone. Reported net sales for the quarter decreased a little less than 1% and were below our earlier expectations. With unseasonably wet conditions and cooler temperatures across much of the U.S., sales volumes declined 4%. This was partially offset by net pricing and mix of about 1 point each and just under 1 point of unfavorable foreign currency. Reported gross margins increased slightly to 58% this year from 57.7% last year. Net pricing and ongoing RCI productivity benefits each increased gross margins by 50 basis points.

Based on our current view of inflation and year-end inventory balances, we recorded a $10 million LIFO inventory benefit in the quarter. This compares to a $1 million LIFO inventory charge in the prior year, furthering the year-over-year improvement in gross margins by about 70 basis points.

Higher input costs, primarily apples and corn, on a constant volume mix basis, increased cost of goods by about 2% and reduced year-over-year gross margins by about 80 basis points, while certain mix factors, including growth from the TEN platform promotional activity in our Packaged Beverages segment, reduced gross margins by about 50 basis points.

SG&A, excluding depreciation and amortization, increased by $20 million for the quarter, primarily due to higher marketing investments of $9 million, a pre-2008 unclaimed property audit settlement of $4 million, unfavorable currency translation and the accelerated recognition of $2 million of pension costs. Below the operating line, depreciation and amortization expense decreased by $6 million in the quarter, as we cycled the $8 million pre-separation lease adjustment recorded last year.

Reported operating income decreased by $15 million, or 5%, from 18.5% of net sales last year to 17.7% of net sales this year. Net interest expense was flat to last year at $30 million.

Other income net was $41 million in the quarter. This includes a noncash $38 million charge related to a Canadian tax law change. This change required us to revalue downward both a balance sheet asset and liability, with the credit recorded as other income and the charge recorded as income tax expense. The net effect was a $12 million noncash reduction of net earnings.

For the quarter, our reported tax rate was 48%, including the Canadian tax law change that increased our effective rate by 12.3 percentage points. Our prior year effective rate was 34.3%, including a $4 million Canadian deferred tax benefit, which we recorded last year.

Moving to cash flow. Cash from operating activities for the 6 months was $276 million and capital spending was $61 million. Reported free cash flow was $215 million, compared to $401 million

[Audio Gap]

per year after adjusting last year for the taxes paid on the Coke and Pepsi licensing agreements. Receivables grew as a result of 1 less collection day in June of this year and payables decreased based on timing of payments. And on a FIFO inventory basis, raw materials increased by $8 million, primarily driven by the higher price we paid for apples and a favorable forward buy we did of resin from Mexico.

For the 6 months, total distributions to shareholders were $274 million, with $126 million in share repurchases and $148 million in dividends.

Before I review our guidance for the full year, let me provide a brief update on RCI. As Larry said, momentum continues to build, as we focus on the core activities within our DSD business, including delivery, merchandising and warehousing. We are making great progress. And let me give you a few examples.

On our delivery RCI track, in our Los Angeles branch, we found that our delivery drivers were spending 20% of their day in the branch instead of out in the field. Using Lean setup reduction tools, the team reduced delivery driver check-in and checkout times by 30 minutes per driver. And using cost-to-serve analysis, the team improved stop frequencies by 12%.

On the warehousing RCI track, our Irving team developed a dock scheduling solution to plan dock forklift labor 24 hours in advance, freeing up almost 13,000 man-hours. We have similar examples across all of our DSD business units, and I am very encouraged by these initial RCI track results. With $142 million of annualized cash productivity already identified, I am confident that RCI will create increasing flexibility and productivity for the business over the long term. Thereby, contributing significantly to further financial improvements.

Now moving on to full year guidance. As I said earlier, net sales for the second quarter did come in below our previous expectations. And as Larry said, although forward visibility is somewhat limited, we remain focused on executing our strategy to deliver profitable volume, while investing prudently in our brands for the long term.

Considering where we stand year-to-date and our balance-of-year view, we now expect net sales growth of about 2%. And as you saw in this morning's press release, we are maintaining our core EPS guidance range of $3.04 to $3.12, but with several changes to our assumptions. Consistent with our year-to-date performance, we continue to expect pricing and mix to be up 2% to 2.5% for the full year. From a modeling perspective, the balance of year will be more heavily weighted towards mix, as we've cycled the majority of the Mott's applesauce pricing actions taken during the third quarter of last year. We do not expect the CSD category headwinds to lessen. And with 80% of our volume in this category, we now expect total sales volume to be down around 1% for the full year.

Also, as a reminder, volume comparisons are easier in the third quarter, as our total system sales volume declined 3% last year and volume down 6% in Packaged Beverages, as a result of higher sauce pricing and 2011 CSD promotional activity that we chose not to repeat in the quarter last year.

With greater visibility into apple and corn crops and our overall commodity basket, we now expect packaging and ingredients to increase cost of goods sold by about 1.5% on a constant volume mix basis. And since we now believe our fourth quarter purchases of apples will be at more seasonal, historic price levels, we now expect to lower our full year LIFO inventory provision by approximately $30 million or another $15 million balance of year.

As Larry said, we're very pleased with the early results on our national rollout of Core 4 and RC TEN, and we remain committed to investing in excess of $30 million behind this critical launch. And for your models, we've spent almost $23 million through June as we previously said this would be skewed into the first half. We expect our full year core tax rate, which excludes the impact of the Canadian tax law change, to be about 37%.

And with continued productivity benefits from RCI, capital spending is now expected to be approximately 3% of net sales, down from 3.5%. We also remain committed to repurchase approximately $375 million to $400 million of our common stock in 2013, subject to market condition.

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

Larry D. Young

Thanks, Marty. Before we open the lines for questions, let me leave you with these thoughts. With increasing category headwinds, it's imperative that we reinvigorate the CSD category and bring lapsed and new consumers back to the products they know and love.

As the launch of TEN progresses, we're confident that we're doing just that, by giving consumers the great taste and full mouthfeel of a regular CSD, but with only 10 calories. We continue to execute against our focused strategy in a very challenging environment, ensuring that we build our brands and execute with excellence in the marketplace.

We remain focused on driving profitable growth and delivering value to our consumers, while continuing to invest wisely behind our well-loved brands for the long term.

RCI is becoming the foundation of how the organization operates on a daily basis and is delivering solid financial improvements. And finally, we remain committed to returning excess free cash to our shareholders over time. Operator, we'll take our first question.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from John Faucher of JPMorgan.

John A. Faucher - JP Morgan Chase & Co, Research Division

You guys talked about how you don't expect the headwinds to lessen for the CSD category over the balance of the year. I guess, could you talk about sort of how you're viewing that in the context of weather versus obesity trends versus what we've seen previously in terms of people doing category switching? And are you implying from that standpoint that all those headwinds continue into the back half of the year and the current trends continue? And then also, on top of that, can you talk a little bit more about the buildup of distribution of TEN? Do you feel like you're still getting it where you need to be? And will there be some offset from additional distribution in the back half of the year?

Larry D. Young

John, I think the biggest point is I don't know if we really are at a point yet we can say what the weather was. I mean, the entire first half was pretty rough. We're pretty excited about what we're seeing in July. The weather's improved. And we've got a good start for July going right now. When I talk about the headwinds, I look at what we keep getting hit with obesity, different municipalities that are trying to ban different sized drinks or certain packages or sugared brands. And then also, we stay very concerned with the decline in diets. Our diets continue to perform below what we see in the category, not just ours. I'm talking about the entire category. And so those are some things we look at. And one of the main reasons that we went after being so aggressive with the TEN. People want better for you, but the diets are going down. Is that the sweeteners? What is it? That's what we're trying to find. But with the TEN, I think we've been able to answer part of that. The TEN, as I mentioned earlier, we're ahead of where we thought we would be on ACV. I think the number is 76%. We'll have full distribution by the end of the summer. And that's mainly driven by what we're doing with the planograms, with the customers that were late coming in. And I think all the numbers we're seeing, I don't think, I know all the numbers we're seeing is ahead of where we thought we would be. Our trial and our repeat are at the numbers of the high end we wanted to see hit. And so we still feel very confident that, that can help us. But the biggest piece is going to be that part of the weather that like I have said I'm encouraged that it's 100-and-some degrees here in Texas and they're drinking soft drinks.

Operator

Your next question comes from Bonnie Herzog of Wells Fargo.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

I just have a little bit of a follow-on question. Certainly, CSDs continue to face pressure and you don't expect this to improve near-term. So given, as you mentioned, 80% of your portfolio is skewed in CSDs, how are you thinking about changing the makeup of your portfolio? Has this become an increased priority for you to grow your non-carb business maybe faster either organically or via acquisitions? I guess, I'd just like to hear how you're thinking about this over the next few years.

Larry D. Young

Yes, I think we'd look at most of it is growing organically. Never say never on acquiring something. But we look at -- I mean, some of them have such ridiculous multiples that we're not really going to do that. With 58 brands, I think we have a lot in there that we can start doing some programs with that you'll see coming in the back half of the year with some bundling. But being 80% CSD, we will continue a very strong focus on CSDs. We've already spent $23 million on TEN, and we're starting to see the benefits come from it. We're seeing 51% of the people buying it had left CSDs or have not been a user before. So we'll stay very focused on being a part of improving the CSD category. I wish I could wave a magic wand and change it overnight. It doesn't. It takes time to change people's consumption habits, but I feel very bullish that we've got the programs right now that can. And our R&D team, as everyone else in the industry, is working aggressively to come up with a natural sweetener.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Okay. And then in terms of your capital spending, as a percentage of sales, it's been trending lower over the last few years. So what have been the key drivers behind this? And then should we expect this trend to continue?

Larry D. Young

I think number one is RCI. And I'll let Marty answer the rest of it.

Martin M. Ellen

Well Larry answered it, Bonnie. I think -- remember we also, when we spun out of Cadbury, there were some initial investment program, IT, for example, information technology to replace the infrastructure that we were losing from Cadbury. And that's winding down as we speak. Handhelds related to our delivery bids and all that technology investment is down. Our cold drink investment, which was an aggressive program, as Larry said before, we more or less had no presence with vendors and coolers coming out of Cadbury. That was a 5-year view on our part, but lots of RCI activity around effectiveness on those assets that we're finding increasingly opportunities to replace existing assets and curtail the purchase of new assets. Lots of RCI work in warehousing. Obviously, with less inventory, we don't need to spend capital on warehouses, nor do we necessarily have to spend capital on racking warehouses in other in-warehouse capital items because we've reduced the level of inventory. Our first half trends are running really below the 3% I talked about. We'll sit with 3% now. But I think we're comfortable that the business can survive just fine at that level or possibly, in the future, even lower.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Okay, that's helpful. And then just one last quick question, if I may. What percentage of the 76% of the ACV in grocery does your TEN now represent? Did you mention that, Larry?

Larry D. Young

Of what percent now?

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Yes, what percent...

Larry D. Young

The TEN is the 76%.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Oh, okay, because in the first quarter, I think you mentioned TEN was -- had achieved a certain percentage of that 76%.

Larry D. Young

Oh, no, no. I think what I mentioned in the first quarter, we were running the TEN of the total Core trademark was a little over 7%.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Okay. So it's increasing?

Larry D. Young

And that's increased a little bit again.

Operator

Your next question comes from Steve Powers of Bernstein.

Stephen Powers - Sanford C. Bernstein & Co., LLC., Research Division

Yes, I know you plan to spend $30 million incremental on TEN marketing this year. I guess, the first question, to clarify. I thought that was supposed to be fully incremental to last year's base, such that overall marketing would be up roughly $30 million plus year-over-year. First, is that still right?

Martin M. Ellen

I think, Steve, we actually had about total $25 million up, not $30 million.

Stephen Powers - Sanford C. Bernstein & Co., LLC., Research Division

$25 million up in total, okay, okay. So in the first half, you spent essentially in the incremental $11 million with $23 million going to TEN. So as you look towards the back half, I think that implies roughly $10 million more on TEN and about the same amount on others. Can you just give us a sense for where that spending will occur? And to some extent, the split Q3 versus Q4?

Martin M. Ellen

Yes, Steve, I'll give you some color on it. So you've got the numbers more or less correct in terms of balancing your spend. And again, you're right, probably upwards of $10 million, maybe a little -- $10 million, a little -- maybe a little less on TEN. Look, we've got -- Larry talked about all these innovations and activities that we've got marketing dollars behind. So we fully intend to spend those. I will tell you though, against that, we're -- I think we're doing a much better job now looking at our marketing effectiveness. I'm really pleased by some of the internal data that we've recently seen from some people outside that are helping us with those and finding other ways to actually maybe reduce marketing. So I'll give you some anecdotes. The couponing, traditional couponing, we're finding today that the digital couponing is becoming much more effective. And that will probably cause us to maybe reduce our production cost of traditional paper coupons, for example. We will always do -- as we look every quarter at what's happening in various local markets where we have specific strategies, I'm just going to tell you we're always going to look at that. And if it doesn't make sense to us, mostly from a timing point of view, whether it's our market or our bottler markets, in terms of execution of retail, we've done this in the past. We want to make sure everything is well integrated. So I mean, we've got lots of great innovation we've got spend behind. But I'm here to tell you we are always going to look at those numbers hard and make sure that we're getting everything we can out of them, particularly in this environment.

Stephen Powers - Sanford C. Bernstein & Co., LLC., Research Division

Okay, that's great. And then this is -- this also maybe a bit technical, probably for Marty. But on the Q1 call, I think you said that you didn't anticipate any LIFO reserve adjustments being either positive or negative on the year. I think it was $7 million positive in Q1, but kind of unusual with the outlook for the year. Now it's -- they've got another $11 million flowing through this quarter and kind of an incremental $30 million positive on the full year. And perhaps, just a bit of an accounting refresher, but what's changed, what's driven the revised outlook? And is it fair to assume that benefits EPS by about $0.09, $0.10 versus the Q1 outlook?

Martin M. Ellen

Okay. Steve, I'm not going to give you an accounting lecture. But, of course, the simple method LIFO expenses, the dollars of inflation before the actual expense associated with the physical products, and the big factor here were apples last year. And so in essence, last year, we took a LIFO charge, we actually expensed the doubling of the price of apples. If you think about long before we ever sold any Mott's applesauce that had those apples in them, but that's just the way the accounting works. The reason we had no point of view coming off Q1 is because this is a crop. Last year's problem was the result of a May freeze. And therefore, the price went up. And so coming off Q1, it was too early to make a call on what might happen to the price of these commodities. So now that we're midway through the year, we're beyond any possibility of a freeze in the apples orchards [indiscernible]. We're pretty confident that when we now do our seasonal buy of apples coming up here soon that they're going to be more or less half the price they were last year. That means the inflation is going to be way down. And under LIFO, that means we're going to, in essence, recapture some of that, that we expensed last year.

Stephen Powers - Sanford C. Bernstein & Co., LLC., Research Division

Okay. Is there any double accounting between your 1.5% commodity cost outlook and this LIFO dynamics or are those 2 separate issues in the way you're guiding?

Martin M. Ellen

Separate.

Stephen Powers - Sanford C. Bernstein & Co., LLC., Research Division

Okay. And then, just lastly, I guess, more strategically, you guys had said in the past you have been looking at different opportunities, especially in some of the smaller markets, where maybe you could run distribution differently, whether -- either optimized through RCI or partnered with other forms of distributors become more structurally changing the way you go to market. Any progress there that you could share?

Larry D. Young

Yes, we've had some down in the southeast part of the United States, where we've looked at some of our markets that were -- didn't quite have the scale because of some changes in the Coke and Pepsi system. We use -- in some of the markets, we use beer distributors. Rodger's got a team that stays focused on what we refer to as the tail markets. And we've seen tremendous improvement in those. We also use RCI down there on those markets on how can we go to market more effectively. And we've seen some real benefits from that, too, Steve.

Operator

Your next question comes from Caroline Levy of CLSA.

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

So just want to ask you about the environment. It's sort of interesting because I believe Coke, Pepsi and you have all said that your share is stable to up in CSDs. And I don't know if you have any data that could back up your commentary. Did I get that right that your share you thought was up a bit?

Larry D. Young

Right. On Nielsen, our share's up. That's all from Nielsen, volume share and dollar share.

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

And so what is your actual share level at this point?

Larry D. Young

The total share level is -- let me see what the -- the total for all of our brands -- are you looking for something?

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

CSDs. Yes, I was just thinking about CSDs, yes.

Larry D. Young

CSDs are somewhere around 21%.

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

And so might the difference just be fountain or is somebody not accurate here?

Larry D. Young

No, there's no fountain in there, but your private label is really going down big. [indiscernible] people are going much more for the branded products.

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

That's very interesting. And why do you think that's happening despite price increases? Are those higher?

Larry D. Young

Well I think with, what, all of the spend and the awareness and just quality products.

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

So that's good news. And have you seen the weather -- with the change in weather, have you seen the traction take hold in your categories again?

Larry D. Young

The July is starting off encouraging. Yes, we finally got some warm weather.

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

That's good news. And what are retailers...

Larry D. Young

Just 3 weeks in, we don't know how much of the softness was the consumer and how much was the weather, but we should be able to update you on that on the third quarter where we see it at.

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

And what has been the retailer's response to the disappointing volumes in the first half of the year? Have they pushed back on you on shelf space at all? Are they trying to allocate more shelf space to different products?

Larry D. Young

We've been able to hold all of our shelf space with -- on our core products, plus incremental shelf space for TEN. I think if I would say that I'm seeing anything out there, Caroline, was the retailers were starting to margin up. And I think they looked at it and said, "With us margining up, our volumes are down and we're starting to see retailers kind of bring that margin down a little bit, kind of reinvesting." If we go back and look at the past before we all got some rational on pricing and disciplined, a lot of these retailers would use them as loss leaders. They would invest in the ads. But I think everybody kind of found that, that was just doing a stock up, didn't sell anymore. And so, right now, I think we're going to start seeing -- if there's better pricing out there, it will be a retailer that is bringing down the margin at certain times. They've kind of margined up. I don't think you're going to see any -- again, I'll go back to very disciplined pricing, very rational. You could see that in the Nielsen's, and I don't know why any of us would change that.

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

Yes, yes. Just lastly, if you could go back to TEN and if you could just repeat because I think you did talk about this. But what you know about trial, repeat? How this looks versus other product introductions, just sort of a compare and contrast on this?

Larry D. Young

Yes, we said -- we always set our internal targets. We don't ever share those, but we set our internal targets by brands we've seen that have been successful, ours and others. When you look at what we're doing on trial, we're exceeding our expectations. You look at repeat, it's slightly above where we set our targets, and we're very pleased with that. Our ACV is at 76%. That's considerably above where we thought it would be. And we feel we'll have full distribution by Labor Day.

Operator

The next question comes from Judy Hong of Goldman Sachs.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

So I guess, my question is really on the Dr Pepper brand. Just that the volume performance -- obviously, the category challenges have been there. But just how are you assessing the brand performance over the last -- you've got a few quarters where you've seen the brand declining in volume. Maybe talk about the DP TEN versus the core Dr Pepper brand performance and whether you think the spending allocation, the investments that you're making on the other core TEN platform has taken some focus or investments away from the Dr Pepper brand itself? And just going forward, how are you thinking about the growth prospects for that brand?

Larry D. Young

Yes, absolutely. No, we're still very pleased. We're not happy that Dr Pepper's down. But when you look at the category where it's performing, we're still pleased with that. We've got -- on Dr Pepper TEN, that is completely separate marketing. It's incremental to what we do on Dr Pepper. I think you'll see in the second half a lot more activity out there. We have a very strong third trimester for football with lots of activity. This time we will tie TEN in with it. We've just got back from all of our bottling partners with lots of incremental activity for Dr Pepper TEN. And our brand held scores. As we get them in, we constantly look at that, Judy. Whenever we see softness, we want to make sure that it is category, not our brand. We have gained on every one of the scores on our brand. So we still feel very confident. I think you're going to also see some improvement in fountain foodservice. We just picked up the balance of the Wendy's accounts for Dr Pepper and have a hunting permit to get Diet Dr Pepper in them. So I'm excited about the back half, not real thrilled with the first half. But there's a lot of factors that kind of lean towards that. But what I can see in the plans we have in place, we're excited about what we can do in the back half.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

And the alignment with your bottling partners on the Dr Pepper TEN product, I mean, has that been better? And what changes have you made on Dr Pepper [ph]?

Larry D. Young

It's very good. Yes, we're working together. We've got programs across all of our Queso [ph], our Peso [ph], our independent system. They're very supportive of it. We've got programs in place. And all of us want to see a better back half. And hopefully, don't have the cool and wet weather we had before.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Okay. And then, Marty, just on the commodity side. Obviously, the outlook has gotten a bit more favorable. If you look at corn prices and some of the agricultural complex, potentially, we could see further decline in those commodities. Can you just share us sort of your perspective on the outlook maybe for end of this year into 2014? Are you starting to layer in more hedges to take advantage of maybe a more favorable pricing? And if to the extent that this more benign commodity environment continues, do you still think that the pricing environment will continue to be rational on the beverage category?

Martin M. Ellen

Judy, on the commodity front, I'll tell you we have some of our commodities. We're fairly well hedged to the balance of this year. And at this point, we -- I won't quote numbers, but we've got some hedging out into next year already. With respect to the balance of this year, I would say, and the reduction from 2% to 1.5%, you should all think about that as really a Q3 -- a Q4 factor rather, with Q3 still being up about 2%. Then we're expecting, right now, a pretty benign year-over-year comparison, sort of flat-ish in Q4. We haven't changed our practices or view of how we think about the hedging. So we're not fully hedged on a roll-forward basis. But we are fairly well hedged. We, more recently, tend to look at corn as a more seasonal buy. That was the change we made a year or so ago and that benefited us. We don't see any pressure coming from the commodity front as far out as we can see.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Okay. Just lastly, on your free cash flow guidance, I'm not sure if you've updated it, but I think the last time the guidance was around $675 million to $700 million. With, say, CapEx coming down, would it be appropriate to think that free cash flow guidance is also coming up? And whether that perhaps changes, how you're thinking about capital allocation in terms of buyback and dividend?

Martin M. Ellen

I think, Judy, you're more or less still where we are in terms of free cash flow generation. If you think about -- where ever your net earnings number is, is you're starting point, yes, reduced capital spending will improve that. Also, to tell you that in the first half numbers, which were a little weaker, it's -- there's some timing of tax payments. So we're going to lose a little bit of some tax cash flow and have no impact on our accounting results just because of things like bonus depreciation changing the law at the beginning of the year. It's been reduced. And we were taking full advantage of that. But I'm still comfortable with sort of where your number is. And no, it hasn't changed our allocation. We're still committed to the $375 million to $400 million of share repurchases, and we have plenty of cash to do that.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Right. I mean, it looks like the first half run rate is actually a little bit bigger than the full year guidance on the buyback.

Martin M. Ellen

Back half will be stronger on share repurchases.

Operator

Your next question comes from Bill Schmitz of Deutsche Bank.

William Schmitz - Deutsche Bank AG, Research Division

Can you just talk about what the offset is to the change in the LIFO benefit? Because it sounds like commodities are relatively benign relative to the old guidance? So is it just the volume softness or what kind of keeps your guidance the same, given the benefits and the LIFO change?

Martin M. Ellen

Well okay. So the benefit LIFO change is roughly $0.10. So in reality, it's a softer top line environment. In essence, right now, in the near term, the LIFO benefit is compensating for that.

William Schmitz - Deutsche Bank AG, Research Division

Okay. Yes, that's what I thought. But it's just the top line. Everything else seems like it's pretty much similar. Is that sort of fair?

Martin M. Ellen

Everything else is in line with our expectations.

William Schmitz - Deutsche Bank AG, Research Division

Okay, great. And then most of my other questions have been answered. Does the sort of re-franchising of the Coke system, I know it's still early days. I mean, how does that impact your business and do you think it's going to be a net benefit or a net detriment or how do you kind of think about that?

Larry D. Young

No, I think, with the bottlers they've talked about, they're all very good partners of ours. CCR is a very good partner. I think it will be pretty much business as usual.

William Schmitz - Deutsche Bank AG, Research Division

Got you. I mean, could it help you in some of the places where you're underrepresented like Florida in the southeast, for example?

Larry D. Young

Well they've -- if you look at the bottlers they've talked about, they all are Dr Pepper bottlers. And to my previous point, you'd say CCR has done a great job. They're great bottlers, great executors. And I'm very pleased with the bottlers they're thinking about giving them to that are equally as good.

Operator

Your next question comes from Mark Swartzberg of Stifel, Nicolaus.

Mark D. Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

Question for you, Larry or Marty, more on the category than Dr Pepper per se. And I'm really focusing on the carbonated component of the larger LRB. What is your thinking about the long term? Obviously, the quarter was difficult for everyone, but these are not new issues. So you have the advantage of not having cola. So -- and yet, your noncolas are not doing as well as you would like. And you can tease out some weather and more temporary factors. But do you think this is -- it's right to think the category even can get back to 0? How are you thinking about carbonated in both the cola, noncola from a longer-term perspective?

Martin M. Ellen

Mark, I'll start. Larry may inject some of his own comments. I think it's a great question because we're all sort of wrapped up in what's happening currently in the marketplace and whatever we all think the impact of the various factors are, be it health and wellness, be it the consumers/economy. We went back and looked, and you have all of units [ph] that have Nielsens have all of this data. We actually went back and looked at both volume and retail dollar prices, paid for colas and noncolas going back to 2010 because I think that was the earliest period that was restated for Wal-Mart in the Nielsens. It's very interesting, if you look at -- and these are trailing 12 months of full year numbers. So for calendar '10, cola volumes, as reported by Nielsen, all channels were down 10.2%. Noncolas were down 5.4% so they were still down, again, both being impacted by -- whether it was pricing that was going on during this time frame, consumer changes and behavior attitudes would not have presumably mattered for colas versus noncolas. If you look at dollar spend at retail over that same time frame, colas declined 1.7%. Noncolas were actually up 2.3%. And this is 12 months '10 versus 12 months ended June 15 this year, the latest Nielsen period. So it's -- it still looks like a negative trend, more recent data you would say -- would still say there's some downward slope here, but that is a, I think, still a strong statement over recent past about the strength of the noncola sector of the total category.

Mark D. Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

Right. So you're in a better place than Coke or Pepsi simply because the other portfolio is situated in the way you've been managing it. And yet, they're still not numbers that anyone would applaud. So what, in your opinion -- because you're making capital spending decisions, you're making marketing spend decisions, you're making decisions that are far beyond the next 6 months, how is your thinking about, even just the noncola component potential? How is it different than it was a year ago, 3 years ago? I mean, this has been going on for a while.

Larry D. Young

I think [ph], again, we'll take the 2010 base that Marty had there. And I mean, Mark, we're looking at so many things. We'd be on this call until dinner time. But I think, one, is you've seen what we've done with TEN. We see we're bringing in people that have left the category or had never even been in the category. 51% of the sales are people that had left or had not been in. That's very encouraged to us, and we'll stay behind that to keep that going. As I mentioned earlier, the work all of us are doing on a natural sweetener. People love carbonated soft drinks. They love the bubbles. They love the flavor, but they have concerns about artificial sweeteners. So we're not oblivious to that. We're working on that every day, and I think we all are. That will be something that helps. Another one we're spending an awful lot of time on what our packaging is. What is the right price point? We're all out there running these 4 4, 5 4 [ph]. Well that point of sale has a large dollar ring there that I think could be a stop sign. So do we need to price differently without bringing price down, but it's by packaging, it's by channel. We're spending a lot of time there. So it's a large combination of items we're putting together. And I've told you and several before, I mean, I -- you will always see me with a very strong focus on carbonated soft drinks, not only because it's 78% to 79% of our mix, but my blood's carbonated. And I truly, truly believe we can turn this around and make this thing work.

Mark D. Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

That's great. And if I could just kind of close that topic. Simply does it -- you take all that you just said, is it fair to say that your view, kind of your multi-view -- multi-year view is lower today than it was a few years ago? Are we still -- I presume we're in a negative territory for the larger CSD space and then you're in a comparatively better but still negative territory from the noncola component.

Larry D. Young

I'd be very wrong if I told you that I didn't think that it was going to be lighter on the CSD, especially probably going into 2014. But we're still not taking our numbers down. I mean, we're going to outperform the category. With the visibility I mentioned earlier that it's so tough to see right now. I mean, our major goal is that we look out and say we will outperform the category and we build our plans around protecting our margins. And I think we're going to have a lot more upside in our non-carbs. As Marty mentioned, we're lapping now. The pricing and everything, we had to take with Mott's. We're seeing better activity with Wal-Mart right now with our Hawaiian Punch. The Hawaiian Punch has always been a big brand for Wal-Mart, a big brand for us, and we're both looking at it and saying we need to fix some things there. So I think we're going to see more growth, more focus on growth in the non-carbs and a dedicated approach to profitable volume in CSDs.

Operator

This concludes this morning's Q&A session. I would now like to turn the call back over to management for any additional or closing remarks.

Larry D. Young

All right. Well I want to thank everyone for joining the call today and for your continued interest and investment in Dr Pepper Snapple Group. Thank you very much.

Operator

Thank you. Ladies and gentlemen, this concludes this morning's conference. You may now disconnect.

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