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Dr Pepper Snapple Group, Inc. (NYSE:DPS)

Q1 2014 Earnings Conference Call

April 23, 2013 11:00 AM ET

Executives

Carolyn Ross - VP IR

Larry Young - President, CEO & Director

Martin Ellen - CFO & EVP

Analysts

Bryan Spillane - Bank of America/Merrill Lynch

John Faucher - JPMorgan Securities

Wendy Nicholson - Citigroup

Ali Dibadj - Sanford C. Bernstein & Co.

Mark Swartzberg - Stifel, Nicolaus

Brett Cooper - Consumer Edge Research

Steve Powers - UBS Securities

Caroline Levy - CLSA Americas

Judy Hong - Goldman Sachs & Co.

Operator

Good morning and welcome to Dr Pepper Snapple Group's First Quarter 2014 Earnings Conference Call. Your lines have been placed on listen-only mode until after the question-and-answer session. Today's call is being recorded and includes a slide presentation which can be accessed at www.drpeppersnapple.com. The call and slides will also be available for replay and download after the call has ended. (Operator Instructions) It is now my pleasure to introduce Carolyn Ross, Vice President, Investor Relations. Carolyn, you may begin.

Carolyn Ross

Thank you, Laurie and good morning everyone. Before we begin, I would like to direct your attention to the Safe Harbor statement and remind you that this conference call contains forward-looking statements including statements concerning our future financial and operational performance. These forward-looking statements should also be considered in connection with cautionary statements and disclaimers contained in the Safe Harbor 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 in 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 Young

Thanks, Carolyn and good morning, everyone. We're very encouraged by our start in 2014. The teams, once again, executed our strategy in the face of continued headwinds against CSDs both in North America and Mexico. We continue to build our brands, bring innovation excitement to our consumers and customers while driving continued productivity throughout the business.

For the quarter, bottler case sales declined 1% on two points of positive price of mix, with CSDs declining 1% and non-carbs declining 2%. Our flagship Dr Pepper declined 4% while our Core 4 brands were flat in the quarter. Canada Dry increased 4%, cycling at 8% increase in the prior year and 7 UP was flat in the quarter on increased shipment sales into the Caribbean. This was offset by a mid-single and low single digit decline on Sunkist and A&W, respectively. Hawaiian Punch declined 8% on category headwinds and increased competitive activity while Snapple grew 2%. Our Mott's business declined 1%, cycling 11% growth in the prior year with our lower applesauce sales partially offsetting growth in our juice business. All other brands increased 1% for the quarter driven by strong double-digit growth in Peñafiel and Schweppes partially offset by a high single digit decline in Squirt as a result of the Mexican sugar tax.

On a currency neutral basis, net sales increased 2% in the quarter on 1% shipment volume growth driven primarily by concentrate timing, favorable product and package mix and net pricing of 2% that was partially offset by unfavorable segment mix. Core operating income increased $44 million or 22% on net sales growth, lower cost of goods and ongoing productivity improvement. Core EPS increased 40% in the quarter. As I shared in our last earning call, we kicked off 2014 with an ex citing marketing calendar. Dr Pepper continued one of a kind messaging featuring Macklemore and Michelle Phan in our anti -resolution campaign with Chelsea Handler created quite the buzz. Overall, our first quarter advertising generated almost 2 billion targeted impressions and through our continued focus on margin return on investment, we grew GRPs by 30% in the quarter with media spend up only 10%.

We're bringing refreshment and fun to consumers' summer parties with our limited time offer Dr Pepper Vanilla Float. And this year, Dr Pepper is teaming up with Latino artist Romeo Santos to sponsor the PJ Awards, the number one rated Hispanic youth award program. We'll sponsor a local VIP tour in targeted Hispanic markets and have a consumer sweepstakes where consumers can text to win a trip to the live event.

We're very ex cited about ESPN's recent announcement that Dr Pepper is the first official college football championship partner and presenting sponsor of the new national championship trophy. College football is the number two watched sport in the U.S. and is heavily skewed toward our targeted Coke consumer. Thanks to our partnership, Dr Pepper will now be represented from August through January with relevant football content. Dr Pepper TEN found its match with FX Networks' Archer, the manliest spy in history. Through our new branded entertainment partnership, Dr Pepper TEN is giving one winner the chance to experience a once -in-a-lifetime animated walk-on role on the show.

We're engaging the Millennial consumer with 7 UP's Project 7 program, allowing consumers to influence where donations are distributed. We'll also be launching a limited time offer Tropical 7 UP is 16 -ounce cans along with lemon-lime and cherry. 7 UP has partnered with seven electronic dance music DJs, including Tiesto, to make the brand synonymous with EDM culture. We'll have on -site activation at key EDM festivals and on -premise EDM sampling packages. We remain committed to giving consumers options for their changing needs and lifestyle. We're currently testing naturally sweetened versions of Dr Pepper, 7 UP and Canada Dry in a few key markets with select retailers.

We recently launched our new Mott's juice drink with 40% less sugar and no artificial sweeteners. We have expanded our Mott's [ph] Adults line to include several new flavors, giving moms another great solution for on-the -go snacking and new Vita Coco Lemonade brings consumers into the Vita Coco franchise with mainstream flavor.

Now let me turn the call over to Marty to walk you through our financial results and 2014 guidance.

Martin Ellen

Thanks, Larry, and good morning, everyone. For the quarter, reported net sales increased 1%, slightly ahead of our expectations. Sales volume increased 1% on higher concentrate shipments following lower shipments in the fourth quarter of last year. Package and product mix combined with net pricing, including the impact of the price increase in Mexico to cover the sugar tax, increased net sales by two points, or roughly one point each. This was partially offset by one point of unfavorable segment mix at the net sales line due to a higher proportion of concentrate case sales and one point of negative foreign currency. Reported gross margins were up 320 basis points in the quarter, increasing from 57 .2% last year to 60.4% this year.

Changes in certain commodity prices at the end of the quarter caused us to record a $12 million unrealized mark-to-market gain on commodity hedges all in cost of goods. This compares to a $7 million unrealized mark -to market loss a year ago, with approximately $6 million recorded in cost of goods and $1 million reported in SG&A. The net effect of these items increased reported gross margins by approximately 130 basis points. Lower input costs, primarily sweeteners and apples, combined with an unfavorable year-over-year LIFO comparison increased gross margins by 150 basis points. Strong productivity benefits mainly from RCI further increased gross margins by 80 basis points in the quarter while product and package mix reduced gross margins by 40 basis points. The net impact of the Mexican sugar tax further reduced gross margins by 40 basis points, as it will all year, as our pricing is intended to cover only the tax. This was fully offset by favorable concentrate timing.

For the quarter, SG&A, excluding depreciation, decreased by $9 million. And, as we highlighted in our full -year guidance back in February, marketing spend declined $7 million, notwithstanding an increase in media spend in the quarter as we're leveraging our developing marketing return on investment capabilities to ensure we're getting the best returns we can. Higher transportation costs from our third-party carriers, which was partially driven by tighter than expected system capacity, were fully offset by reductions in certain other operating costs, lower field related costs resulting from the small restructuring activity we took last July, and the unrealized mark-to-market comparison I mentioned earlier. Depreciation and amortization expense was flat at $29 million. Reported operating income was $260 million, compared to $197 million last year. Core operating margin of 17 .7 % of core net sales was up almost 300 basis points from 14.8% in the prior year.

Below the operating line, net interest expense was $25 million, $9 million below last year, reflecting the repayment of senior unsecured notes in May of last year, an additional interest rate swap entered into in December of last year and favorable adjustments to certain existing interest rate swaps. Our effective tax rate for the quarter was 34.3%, which is below our guidance for the year, as we recorded a $2 million deferred tax benefit as a result of a New York State law change which occurred in the first quarter. Moving on to cash flow, cash from operating activities was $129 million, up $52 million. And capital spending was $37 million, compared to $46 million last year. Reported free cash flow was $92 million, compared to $31 million in the prior year. Total distributions to our shareholders were $135 million, with $60 million in shares repurchased during the quarter and $7 5 million in dividends. In addition to this, we prepaid $90 million under a VWAP for shares we will receive at the end of April.

Before I update you on our 2014 guidance, let me provide you with a quick update on RCI. RCI is thriving at DPS. We've just entered the fourth year of our continuous improvement journey with strong momentum and energy across the entire organization. And internally, we know the runway is endless. As RCI continues to mature, we're leveraging employee -led change to improve productivity and to drive growth. For 2014, we've created lean leadership tracks led by senior members of the DPS team and supported by RCI experts, with the goal of achieving break-through results while creating a set of lean leaders that we believe are unparalleled in our industry. These tracks are already achieving great results, and let me just list a few examples.

By eliminating excess inventory and double handling, just this year, we've already reduced our warehouse footprint by nearly 0.5 million square feet, or about 3%. In the Columbus market, the team closed 20% of voids on Snapple premium, achieving almost 12% volume growth on this brand in the month of March. And against our DSD delivery track in San Diego, we reduced driver check -in and check-out times by over 50%, enabling us to reduce the number of routes needed by 11% without any impact on customer deliveries. And these are just a few examples. We're confident that RCI will continue to create increasing flexibility and productivity while enhancing value for our customers, suppliers, employees, and shareholders over the long-term.

Now, moving on to 2014 full-year guidance. As you saw in this morning's earnings press release, we continue to believe that net sales will be flat to up 1% for the year, and full -year core earnings per share in the $3.38 to $3.46 range, unchanged from our prior guidance. Consistent with our first quarter performance, we expect combined price and mix to be up just over 2%. As a reminder, the higher pricing in Mexico, as a result of the sugar tax, will contribute approximately 60 basis points of this positive pricing. And the January 1 concentrate price increase will drive another 40 basis points of growth. We continue to expect volume to decline over one point with growth in our non-carb portfolio and allied brands partially offsetting continued expected declines in CSDs. Based on our current view of foreign currency, we now expect foreign exchange translation to unfavorably impact net sales and operating profit by approximately 50 basis points each for the full year.

As we communicated previously, considering our hedged positions and current market prices for our unhedged positions, we expect packaging and ingredients deflation. This is expected to reduce total cost of goods inclusive of the year-over-year LIFO comparison by approximately 2% on a constant volume mix basis. Separately, and based on our latest projections, we expect the Mexico sugar tax, which is recorded in cost of goods sold to increase total cost of goods dollars by approximately 1.6%. The net of all these items should result in full year 2014 gross margins flat to slightly better than last year.

Consistent with our previous expectations, higher transportation costs are expected to add $17 million to our cost base in 2014. People -related costs are expected to increase roughly $30 million for the year, reflecting both general inflation in our field labor costs and higher health and welfare costs. And we continue to expect marketing spend to be approximately 7 .5% of net sales. Below segment operating profit, net interest expense will be around 4.4% on our $2.5 billion of debt, and our full-year core tax rate is expected to be approximately 35.5%. In terms of cash flow, capital spending will be approximately 3% of net sales, and we are on track to repurchase approximately $37 5 million to $400 million of our common stock in 2014, subject to market conditions. For your modeling purposes, let me highlight a couple of items that will impact quarterly phasing.

First, as a reminder, the trade expense associated with the higher concentrate sales we experienced in the first quarter will be recognized across the second and third quarters as our third -party bottlers sell through the finished products.

Second, packaging and ingredients deflation will be skewed toward the first three quarters of the y ear with an expected more difficult comparison in the fourth quarter. Third, the transportation cost increases will be spread fairly evenly across the year. And finally, people cost inflation, including the health and wellness increases, will be more pronounced in the third and fourth quarters as we cycle the benefits of last year's restructuring activity combined with lapping certain favorable health and wellness cost true -ups last year.

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

Larry Young

Thanks, Marty. Before we open the lines for questions, let me leave you with these thoughts: Our 2014 priorities remain unchanged. We will continue to execute our strategy in a challenging environment, ensuring that we build our brands while executing with excellence in the marketplace and driving productivity throughout the business. We're committed to providing consumers with options to address their evolving needs and lifestyles. We remain focused on managing the business prudently for the long -term and we'll continue to invest in our brands and our people while ensuring we optimize every dollar we spend. RCI is the permanent foundation of our business and it continues to drive meaningful improvements. And importantly, we remain committed to returning excess free cash to our shareholders over time.

Operator, we're ready for our first question.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Bryan Spillane of Bank of America Merrill Lynch.

Bryan Spillane - Bank of America Merrill Lynch

Just a couple of just housekeeping things and then just one question related to Mexico. Marty, I think I missed on gross margins for the first quarter, what were they, or what was it excluding the mark-to-market?

Martin Ellen

Excluding mark-to-market, up 190 basis points.

Bryan Spillane - Bank of America Merrill Lynch

Okay. And then as we're looking at the gross margin progression over the balance of the year and also, I guess, revenues for the balance of the year, will second quarter have a negative effect on concentrate meaning you shipped ahead of bottler case sales in 1Q, will the reversal happen in 2Q, or is that more second half?

Martin Ellen

Look, we shipped more concentrate in the first quarter, which we were hopeful what happened coming out of the fourth quarter, we talked to many of you about that. As I said in my prepared remarks, from a revenue perspective, the trade we pay to bottlers that comes off the revenue line, a larger portion of that will get paid in the second quarter as they turn through the inventory. Otherwise, if you look at the impact of the concentrate shipments in Q1, and that we think came out of Q4, and sort of put those back in the fourth quarter, our concentrate business is probably down otherwise pro forma 1% to 1.5%, so, in line with trends. April should be a good month comparably because the Easter holiday this year is in April and it occurred in March last year. So, we should have some good comps there. We've got reasonably good activity planned for the concentrate business well into the second quarter. Beyond that -- and then we'll be in the midst of the summer selling season and we'll have a good checkpoint with all of you when we get on our call in the third week in July.

Bryan Spillane - Bank of America Merrill Lynch

Okay, and then just the last one in Mexico, could you just talk a little bit about -- it was certainly better than we were modeling and just maybe separate the CSD business versus your -- maybe your non-CSD business or maybe a better way to think about it is the part of your business that was impacted by the tax increase and the part that wasn't and how each one of those performed? It seems to me that maybe the part that's not -- not tax-impacted

maybe performed better than we were all thinking?

Martin Ellen

Yes, and it did. So when going into the year and sort of not having much visibility to what would happen, we built our expectations on that portion of our portfolio that was subject and is subject to the tax to be down in the 8% to 10% range with commensurate price increase on those products. Those products are about 7 5% of our portfolio total mix in Mexico and those products were down in that 8% to 10% range, our price increase was 9%, so we more or less offset it. The good trade for us is Peñafiel. Peñafiel is a big brand for us down there and it has a line of mineral waters and they're not sugared of course, so they're not subject to the tax, and we had really strong growth in the mineral water category with Peñafiel and that really helped us.

We've also had some really good innovation under the Peñafiel brand and a product called Lemonade and Orangeade and those drove quite a bit of growth for us. So, yes, the sugared products were impacted somewhat as expected. The price increase was sort of as expected and for us at least it looks like about a one-for-one trade. Offsetting that was favorability in mineral water, favorability in Clamato and other products. The innovation improvement from some of the Peñafiel innovation is lapping these products that we introduced later this year, so most of those products will have a more difficult comparison as we move through the year, but we are really pleased with our performance in Mexico this quarter and in fact, over the last two years.

Operator

Your next question comes from the line of John Faucher of JPMorgan.

John Faucher - JPMorgan

Thank you. Marty, I wanted to follow up a little bit on Bryan's question, which if I take a look at let's say roughly 180 basis points, 190 basis points, excluding mark-to-market this quarter, as I look at the gross margin over the balance of the year to get to your sort of flat to slightly up gross margin guidance, does that imply a pretty big deceleration with gross margin down nicely over the balance of the year and you talked a little bit about Q4. How much of that is the -- reversing the leverage on the concentrate and it seems like RCI delivered some nice productivity in the quarter. Is that not sustainable? I guess I'm just having a hard time getting to your gross margin guidance, so any further color there would be greatly appreciated.

Martin Ellen

Sure, John, no problem. Well, first of all, let me -- I mean RCI productivity, that is sustainable. We're not concerned the least bit about that. There is a deceleration over the quarters, particularly when we look out to the fourth quarter. So I'd say we had about $14 million of unpredicted upside ourselves in the first quarter in a handful of categories including PET and HFCS and juice concentrate and a little bit [ph] in glass in glass. So as we look out at the balance of the year based on where we're hedged and not hedged for some of those, we're taking a conservative view right now in terms of holding our guidance to deflation down to 2%. It's possible we could come in a little better than that but right now we're not guiding to do better than that.

John Faucher - JPMorgan

Okay. That's great. And then Larry, I wanted to follow up a little bit, we heard something from Coke and Pepsi both about maybe the retail pricing environment not really matching up with what the concentrate companies or the bottling arms are being able to put through in terms of pricing at the wholesale level. So can you talk a little bit about the disc repancies we've seen between some of the reported pricing numbers and some of the scanner data and how you see that playing out over the balance of the year? Thanks.

Larry Young

Yes, I think what we've seen a little bit more of here lately, or we're seeing, is especially in Q1 with the weather, there was some activity out there I think trying to drive some traffic. I think also you were seeing some of the retailers that h ad went back to like a couple years ago and doing a little investing themselves to drive some traffic. But overall, what we're seeing on pricing continues to be very rational and very disciplined.

John Faucher - JPMorgan

Great, thank you very much.

Martin Ellen

Let me add to Larry's comment to just as you all try to look at scanner data, Nielsen data against our reported data that be reminded about 50% or so of our price mix mostly due to concentrate pricing, syrup pricing and fountain and our water brands, about 50% of our price mix you'll never pick up in Nielsen.

Operator

Your next question comes from the line of Wendy Nicholson of Citi Research.

Wendy Nicholson - Citigroup

Hi, good morning. Given that you're expecting more growth to come from the non-carb side of the business, can you talk a little bit more number one about Hawaiian Punch, it just seems like that business is sort of dying, maybe not, it's such a slow death, but it seems to not grow no matter what you do, are you kind of giving up there or what's your strategy on Hawaiian Punch. And then, same thing with Snapple, on Snapple specifically, it sounds like you've done a fair amount on innovation, but can you talk about your advertising strategy, specifically with respect to the tea category because I know you're pulling down advertising across the board, but is it more or less in tea, because that business looks like it maybe has more potential for growth than just about anything else in the portfolio. Thanks.

Larry Young

Yes, I'll start with Hawaiian Punch. We're not giving up. We'll never give up on Hawaiian Punch. It's had some struggles out there on growth but also it's a huge brand, there's a lot of volume there that we wouldn't give up on. I think another thing, too, Wendy, is that when you look at it, there's a lot more competition out there. Now I mean, for a long, long time, I mean, Hawaiian Punch was pretty well the player in that -- I like to refer to, as a sweet cheap treat. We're seeing a lot more. We're seeing Tang out there now, Kool-Aid out there, private label, Tampico, there's just a lot more playing there in that part of the aisle. So, we're looking at it. We're not doing anything silly with it; we're not doing anything with pricing. We think it's starting to level off a little bit. It's not as bad as it was.

So, we're seeing some improvement on what we've got going with Walmart, our largest customer on that. And so, probably won't be back to the growth levels it used to be but it will continue to be profit able for us. I think on the Snapple, you won't see us cut anything back on Snapple. Our Snapple brand, we have a tremendous amount of programs on it, not only with the innovation that's coming out, but also different marketing. Again, we're following our return on market investment on where it is best to spend. We're seeing a lot of upside with Snapple on digital. And so, we're going to play that very strong. The digital plays very well with our under-the-cap that Snapple's famous for. So, we're very bullish on Snapple, we've got a lot of great plans and that's one that will stay behind for the long-term.

Wendy Nicholson - Citigroup

And is Snapple a business that you're still focused on expanding geographically the distribution, because I know it's real strong in some parts of the country, but not so much in the others?

Larry Young

Exactly. In my prepared remarks, we were talking about how we even used RCI sales and growth. I think so many times people look at continuous improvement as strictly productivity and cost-cutting. I mean we look at it and say we're going -- the last plank in ours is we do all of this for growth. In Columbus, we went in there. I told you the numbers on how we grew Snapple. That heartland's where we're kind of weaker on the Snapple part, the middle of the Midwest, and the results that we had in there were just phenomenal. So, we'll continue to go after the Midwest. Both of our coasts are very, very strong with the Snapple, so we're going to focus on the Midwest. And then, also, we're looking at -- we're still working on what we're doing with the markets we've got over in Hong Kong and Singapore. We've recently hired a new RSM that will be running Singapore and he'll be looking for an RSM in Hong Kong. We're going to start getting that staffed up. We've got meetings with a lot of different distributors over there, so we're hoping to see some good results, a good building in 2014 and start to see some results in 2015 from our Asian business.

Wendy Nicholson - Citigroup

And you're still doing the Snapple K-Cups for Green Mountain, is that right?

Larry Young

Yes, we are.

Wendy Nicholson - Citigroup

And how is that business doing?

Larry Young

We're very, very pleased with it. And the nice thing we're seeing is not a lot of cannibalization and so, it looks like we're picking up new users.

Operator

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

Ali Dibadj - Sanford C. Bernstein & Co.

I mean, it sounds like it was a better quarter than you guys anticipated. It's certainly a better quarter than us in the market anticipated. And I still don't understand, to answer the question what's driving the conservatism going forward, so whether it be taxes that seem sustainable, whether it be top line a little bit better. That seems, at least to a certain extent [indiscernible] concentrate, sustainable, certainly on gross margin. I'm struggling to understand why, especially there, you're being a little bit more conservative.

Larry Young

I'll start and let Marty kind of go into the detail. But, Ali, I think if you look at -- everybody would agree the visibility is still next to zero with these headwinds we're facing. We knew when we built our plant, we don't do anything by the quarter here. We operate long term, we build annual plans and five-year plans. And so, we see that we're pretty well on track of what we thought was going to be out there. Marty listed some of the one offs that don't reoccur, and so we're pretty bullish on that. That our numbers are solid, our plans are solid and I'll let Marty kind of walk through some details if he has any extras.

Martin Ellen

Of course I have extras. [ph] Let me couple, I'll come back, I'll handle gross margin in a second. But if you dissect Q1 the way we've dissected it, on an EPS basis, I would tell you that about $0.04 of upside came from the additional concentrate volume in the quarter. I would say $0.03 came from COGS improvement, over and above our expectation. About a $0.01 per share equivalent on the interest expense reduction, I would say was sort of one-off in the quarter. The rest came, as I said, from lower interest rates on shorter term debt. And about a $0.01 in tax rate from the New York law change.

And so, there's about $0.09 in there that came as upside surprised us. Because I said to John, in terms of our cost of goods deflation expectation we're holding it to -- look it's never been spread evenly, it was always internally in our view skewed to the first half, so there is deceleration. We're not completely hedged, although we're fairly well hedged across the key items, say 7 5% or more. But remember, when those hedges were layered in. Everybody knew corn was really low a year ago in the summer time, we didn't lock up all our corn then. So even in our hedged portfolio, it's layered in at much different prices, and in some periods higher prices than we experienced in Q1. So when we look at our data, we're comfortable holding our guidance at down 2%.

Ali Dibadj - Sanford C. Bernstein & Co.

And on the $0.09, I was surprised to hear why that's not even being carried forward.

Martin Ellen

Well, look, as Larry said, look at the concentrate, it's uncertainty. Right now, it's simply our view of let's look at our macro world. Nobody's saw the headwinds in the CSD category, so we're being cautious there. Mexico, as pleased as we are with Mexico's performance in the first quarter, we don't think that story on the category has completely played out. Many of the price increases were taken later, even in January. We don't even have a full quarter's worth of data yet. So we're still cautious about Mexico. We're cautious about the CSD category. You can say we're cautiously optimistic, but nevertheless cautious. So when we think about our all-in earnings expectations for the year and put that all together, at least as of the first quarter, which is very early in the year, we've held our guidance, which is, of course, is a range.

Ali Dibadj - Sanford C. Bernstein & Co.

Okay. So just switching gears a little bit, the concentrate pricing of 5% versus the packaged bev price is a negative 1%. Can you talk a little bit about that gap and how we should think about that going forward, related to the CSD pricing environment and CSD environment you were describing earlier versus the Packaged Beverage environment?

Martin Ellen

So going into the year, our assumption, which we shared with all of you on pricing, where I'll say like packages across the core of our PB portfolio, we made no assumption or any price increase for the y ear, so we held pricing flat in our expectations. And so far, that appears to be playing out when you strip out the impact of mix, so like for -like products, more or less the same. So at least three months into the year, we seem to be right on our expectation and Larry said pricing has been rational, and that's a good thing. Yes, the concentrate pricing always goes in January 1, nothing odd about this year's. And with respect to pricing, as I said, Mexico, the big pricing story is the incremental pricing for the sugar tax. And nothing has really changed in our expectations there on pricing assumptions.

Ali Dibadj - Sanford C. Bernstein & Co.

And it's not -- sorry, this is my last one. Is it not at all related? And if you could comment a little bit about the Dr Pepper, the flagship DP negative 4% volume. So, that's not really related to the concentrate pricing, and if it isn't, can you talk a little bit about why that's down 4%? Thanks.

Martin Ellen

Let me dissect that 4% a little because it is our flagship brand. When we look at those numbers, I would tell you that minus 4%, in our best estimation, comes in terms of probably 1 point for the holiday shift. And really this quarter, 1 point or so from lower fountain business, Dr Pepper is the predominant brand, the only brand on the fountain side. Fountain occasions for CSDs are supported by QSR data are down, so that's not surprising. It appears, though, internally for us, a big part of the shift there is more of that loss at the larger national accounts while we're still getting good growth in local accounts. And so for us, that's a good profit trade-off, so the remaining 2% we sort of ascribe to the category.

Ali Dibadj - Sanford C. Bernstein & Co.

Thanks.

Martin Ellen

Then the weather had a huge impact, especially January and February. We're seeing much better March, especially with fountain and food service. We had a lot of QSRs that were shut down in the snow and ice, so we feel like we're back on the right track.

Operator

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

Mark Swartzberg - Stifel, Nicolaus

Thanks. Good morning, guys. Couple questions here. First, on the SG&A, can you talk a little bit more about the $8 million decline? Trying to get a sense how much of that is a symptom of RCI and this continued focus on cost discipline, kind of structural in nature, and how much, if any, is timing -related? Perhaps you're putting some more marketing into the summer months than you have in the past. And then, I had a couple of unrelated questions.

Martin Ellen

Mark, good morning. Now, marketing was down year-over-year in total $7 million, notwithstanding the higher media spend that Larry talked about. That's probably the biggest driver, which means that any inflation in wages, for ex ample, and healthcare we were able to beat back with just good cost discipline and in RCI improvements. It's a fairly simple story.

Mark Swartzberg - Stifel, Nicolaus

Fair enough. And you're still thinking a $30 million year -on-year decline in marketing this year?

Martin Ellen

Yes, we haven't changed our marketing expectation. Plans are in place, it will be $30 million down in dollars and roughly 7 .5% in net sales.

Mark Swartzberg - Stifel, Nicolaus

And I know it's dynamic, but as you think about what sounds like some COGS flex, and everyone would hope for some revenue upside from a category perspective. If you think about kind of that dynamic, if it plays out in your favor as you move through kind of the peak months, do you have a bias towards kind of reducing that amount of cut, perhaps putting some more money back into -- have a lower level of decline in marketing? Or is the bias to drop the money to the bottom line? How are you thinking about, what seems to be, it's early, but a favorable start to the year?

Martin Ellen

Mark, I'd tell you what we've always said about flexing marketing, which is simply that we're spending an inordinate amount of time on marketing return on investment, making sure that everything we're putting our money at we can try to predict a fairly good outcome. And as we've always said, we're spending everything that we want to spend right now, based on expected returns. We've talked about shifts we've made based on MROI learnings, media, just traditional media, national media, we've done a lot of work recently on improving the effectiveness.

Larry talked about significantly higher GRPs and impression s, and really at targeted consumers, not at the broad base of consumers, cuts in areas at the local level that were just giving us very poor return. So every time we sit down and review the results, we internally make some adjustments based on those outcomes. And so, really doesn't enter into our thinking around, well, it takes some upside here and spend it over here, because if we thought we could spend and get a return we'd already be doing it.

Mark Swartzberg - Stifel, Nicolaus

Got it. That's great. That's really great. Topic change: Single-serve cold, obviously, a lot of incremental industry focus there. Can you just share with us how you're thinking about your own posture there? And what I mean is, one could argue that you should actively kind of make a stand with one platform or another here ahead of kind of the greater availability of different options out there. Or, one could argue that you should take a more kind of a wait-and-see approach and see what's validated kind of more at the consumer level, considering at this stage there's a relatively a small amount of single-serve cold that's actually sold out there and bought by consumers. So can you just talk a little bit about how you're thinking about your optionality as these platforms are obviously going to become more and more of an emphasis and more available to consumers?

Martin Ellen

So you're talking about the K-cups or?

Mark Swartzberg - Stifel, Nicolaus

Well, I'm talking about the cold, to be specific, current cold is going to be out there, it's coming. Obviously, SodaStream is out there and available, but there's a number of platforms that are either in the marketplace today or are going to be in the marketplace over the next kind of 12 months, 18 months, on the cold side. And you were there with the Snapple product in the Keurig hot machine, and of course, you can turn it into an iced tea, but there's optionality for you all with your carbonated products and certainly with your non-carbonated products to be making a stand here, either with Keurig platform or the SodaStream platform or some other platform as this emphasis on cold products becomes increased and I'm just wondering how you're thinking about your position in that.

Larry Young

Oh, yes, we look at it constantly, Mark. Every one of them that are out there. I mean, they've been in and seen us, we've looked at them, I mean, we were one of the first to go in with Keurig with the Snapple. As I said, it was very successful. But we don't spend as much of our time on that as we do staying with our strategy on our cold drink up and down the street. We still have a tremendous amount of distribution and availability opportunities out there. As these new platforms come along, you can rest assured we'll be right there with them, we'll be looking at it, seeing if it makes sense for our brands, for our partners, but I think there are little ways -- I think they may be farther away than what you're even thinking on, 15 months, 18 months. I mean, that's something that, especially with us, we will never put any one of our bran ds in any platform that doesn't have the taste and the profile that people are used to. And so we look at them, but we're also very fixed on they have to be perfect.

Mark Swartzberg - Stifel, Nicolaus

That's great. Great. Final question; just capital return, Larry, you made the comment, and the data and the behavior certainly supports this, that you remain committed to returning a good bit of cash to shareholders. You're now below two times EBITDA leverage. I mean, as you think about and maybe this is for you, Marty, but as you think about kind of that commitment, do you think maybe there's an opportunity to have a leveraged target in excess of two times or, you know, making it even clearer what your level of commitment is to kind of deliver even further on those practices you've had to-date?

Larry Young

I'll start and let Marty finish up on that. But I think from what we can see, our shareholder base is very pleased with how we have ours allocated. Our board, they love having this problem every meeting on what are they going to do with the money, which way does it go and so, we're happy where we're at right now, but I'll let Marty kind of give you detail on that.

Martin Ellen

Mark, we think our debt is comfortably where it should be. Don't forget, too, on a pro forma basis which is the way we look at it when we put off balance sheet, leads us back on the balance sheet, for ex ample, pro forma basis, our leverage is much higher and we're cognizant that -- not that it's uncomfortable and not that it couldn't be higher, except that we think we're at the right lever age ratio.

Operator

Your next question comes from the line of Brett Cooper of Consumer Edge Research.

Brett Cooper - Consumer Edge Research

Good morning, guys. A couple of questions. The first would be on pricing in the U.S. There's been some discussion that there may be incremental pricing taken by your competition over the balance of the year. I was just wondering what your, I guess, willingness would be to follow that pricing where you are the bottler, if that actually comes through given the weakness in the category? And then I have a separate question.

Larry Young

Like we said, we didn't plan any pricing for this year and we've heard the same things you have, but we haven't seen anything on pricing. We look at it across our geographic territories. We look at it on what the consumer and the customer can take. And we make our decisions more off of that. I think the pricing environment, as I said earlier, is still very rational. I don't know -- if the pricing was to go up, absolutely we would follow if we felt it was the right thing for our customer and our consumer.

Brett Cooper - Consumer Edge Research

Okay, great. And then a follow-up, I think if I heard you correctly in the prepared remarks, you said media was up, marketing was down, is that the relationship we should expect to see for the full year?

Martin Ellen

Not necessarily at that level. So there is some phasing in there, but not necessarily at that level.

Brett Cooper - Consumer Edge Research

Okay, perfect. Thank you.

Martin Ellen

Let me come back to Larry's point on pricing just for a moment, because the market is very competitive and pricing is really a market -based decision. However, from our point of view, our assumption is flat pricing, you look at our cost projection trends, I think we're the only one of our main competitors that's actually projecting COGS deflation. We've got our other costs well under control and coming down. So actually, when you look at it from an internal point of view, we're under no pressure to do anything with pricing from a profitability point of view. If others are in a different position, one of our choices will always be to take advantage of that.

Operator

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

Steve Powers - UBS Securities

Hey, guys. I guess following on the pricing theme. Maybe it's more of a philosophical question, but why is kind of flat wholesale pricing on like -for-like SKUs rational in a market that's, I think, by most people's observation would be characterized as sub -optimally profitable. And I guess the question really is, is the elasticity really that severe on the bottom-line impact that a bit more incremental pricing wouldn't be beneficial to everybody?

Martin Ellen

Steve, you just hit it, you answered your own question, we look at this all the time. We run our elasticity models all the time, and what we're always trying to do is find the optimal point at which we maximize our profits, meaning the volume price trade-off. We do this all the time. I'm sure others do it as well. So it's not about the price point per se not moving, whether that's rational, it's about the net impact of what a pricing movement will do to the overall business.

Steve Powers - UBS Securities

Okay. All right. I'll leave it there. I guess on the volume side, negative 1% CSD volumes in the quarter, maybe negative 2% if you strip out Mexico. Is it fair to say that's a little bit better than you would have expected coming into the quarter? I think, you know, Larry, when we last spoke, you were looking at kind of category growth rates of like a negative 3% run rate being kind of the foreseeable CAGR going forward. So how do you view the first quarter? Are you more optimistic now than you were in early March or do you hold out a lot of reservation that we might slip back more negative than we're running at now?

Larry Young

Oh, I think biggest piece we've got to go back and remember the timing of the concentrate shipments for the total. For the year, we basically planned -- we looked at CSDs being down around 2%, 1.82%, which if we take all the adjustments, the weather, the shipments and everything, we were pretty close. We were right on where we thought we would be. No one knows ex act impact of the weather, but I mean, everybody knows January, February were tough, it was tough.

So we think we're on track with that. We think that the volume will come back. The pricing environment, everybody's not had the pressure on COGS and commodities. And I think the big thing now is instead of just pricing, when I say pricing is rational, I mean, you've still got to look and say what is the activity, the promotional activity that's going on. The pricing is set, but then where do you get the right activity and I think right now, another one that makes it tough reading some of the Nielsen's data for a week is that we went back to the old days where most of our sales are in the first 10 days of the month and that tells you the economy is still tough out there and the consumer is very price -conscious. So any pricing at this time I think would really stand out.

Steve Powers - UBS Securities

So that seems to make it less likely you would follow -- if I put all those comments together on pricing, it seems less likely that you would follow an industry price increase than given all that, given your internal cost profile, given your view of the consumer, is that a fair read?

Larry Young

I've never [ph] not followed, sometimes even leads.

Operator

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

Caroline Levy - CLSA

Congratulations on this quarter. It's amazing. I'm just struggling to understand if I look at the almost 5% price mix in concentrate, how much of that might have been driven by the timing of shipments. And similarly, on the volume growth within concentrate. Can you help me with that?

Martin Ellen

It's related to the shipment increase. As I said in my prepared remarks, not only did we have the volume, but the rate per case, if you will, on each of those concentrate cases is much higher than on our, I'll c all our net rate net of trade spend because we have to deal back the agreed funding back to the bottlers, but we only accrue that when we get the data that reflects the product which actually sold into retail and that will lag.

Caroline Levy - CLSA

You said $0.04 a share or so from that, but within the price mix and volume, can you help us -- because it sounds like it's going to come out of the second quarter.

Martin Ellen

Right. And I said $0.04, I put in that $0.04 both the impact of the volume itself and, if you will, the delayed impact of the discounts is all in the $0.04.

Caroline Levy - CLSA

Okay. And, again, getting back to this issue of not raising the full year guidance, it really sounds like it's only the $0.04 that really maybe should not go into the higher full year number, if all else were equal with our estimates.

Martin Ellen

No, not necessarily. I called out a couple of other things in the quarter, right, like the higher -than-expected deflation in COGS.

Caroline Levy - CLSA

Yes. But what I mean is that doesn't reverse, it's not going to come back to bite you. It's just all else should stay the same for our estimates I think.

Martin Ellen

Let's see what happens for concentrated shipments in the fourth quarter in December, right? Because that's always an unpredictable number for us even going into the fourth quarter in terms of what bottlers buy before the end of the year, after the end of the year, whether it's a decision made on buying ahead of the price increase, whether it's a decision made on how they want to end the year on their inventories.

Caroline Levy - CLSA

Okay.

Martin Ellen

And last year, of course, December was really weak.

Caroline Levy - CLSA

Right, right. Okay and then similarly within the price mix in Latin America, I know you said you took a 9% increase or so to cover the sugared part of the portfolio, but within that 15%, how much of the price mix do you think we can say is sustainable through the year of that increase?

Martin Ellen

The sugar tax increase so far, we expect to maintain itself. There's nothing to indicate at this point that that would change and, again, we're only pricing through the tax, we're not creating margin on the tax. All other pricing in Mexico was otherwise low.

Caroline Levy - CLSA

But you got 15% price mix, so some of that was mix?

Martin Ellen

Well, absolutely.

Larry Young

Absolutely. Especially with that tax, Caroline, it stands out much more on the 2 liter and 3 liter packages, so we saw much more activity on the 0.6%.

Caroline Levy - CLSA

Right. So it sounds like you're massively advantaged by having water, number one, and the innovation on water, but it actually sounds like price mix should be very good for the balance of the year in Mexico.

Martin Ellen

Well, as Larry said, there's a good package trade down to the smaller bottle sizes...

Caroline Levy - CLSA

Yes.

Martin Ellen

From the large multi -liter bottle sizes, and you're right, I mean, Peñafiel is -- the mineral water category for Peñafiel is a good upside surprise, but the carbonated portfolio, Squirt is our biggest carbonated brand, I mean that was down not surprising to us, double -digits. Part of that's in our system, part of that is in other bottler systems. So there are still some challenges inside that portfolio.

Caroline Levy - CLSA

Got it. No, that makes sense. Just finally I wanted to ask about risk of sugar taxes coming to the U.S. and how you're monitoring that because we think state and local governments here will be watching what happens in Mexico, and if volume goes down on sugared beverages, they could argue that's good for obesity and et cetera, et cetera. And what are you doing about that proactively?

Larry Young

Well, we stay very involved in not only nationally, but every state and local municipalities, with the American Beverage Association, Rodger and Jim both are two presidents are on the board, Randy Downing, our head of government affairs, we're constantly monitoring each one of them, we're very well-funded. I think we've been, knock on wood, very successful on all of them that have come up. So, again, it's one that we're always cautious on, but we feel we're in a very, very good position to protect us from anything that would harm our industry.

Operator

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

Judy Hong - Goldman Sachs

So just wanted to go back to the Dr Pepper brand performance and understand that, obviously there's some timing issues here, but the brand was lapping pretty easy comp, 3%, and if I look back, in our numbers, the brand really hasn't grown for I think the past eight quarters or so, so I'm just really trying to understand why you shouldn't be more concerned about the brand itself, if you can speak to the core health of the brand, maybe stripping out the TEN performance, and then, in addition to that, in some of the test markets where you've launched natural sweetened products, can you just give us a little bit more details around what you've learned and how much is that incremental to the brand itself as opposed to maybe getting more cannibalization?

Larry Young

Judy our brand and health scores on Dr Pepper are just continuing to increase. I don't ever like to see the brand to be down, but whenever I look at it and understand the conditions, what drove it, what programs we have in place to bring it back, and what we're doing with the marketing programs, the TEN, we've got a lot of great programs going together on TEN, as I mentioned, we're going on FX and got some activities there. We've had some great meetings with our bottling partners with activity that's just kind of started in March on TEN. We've got a lot of things happening with Dr Pepper, the numbers were light coming in, but I can show you where the majority of that was January and February which was just tremendously impacted by weather and tremendously impacted by the QSR being down in our fountain food service.

So we always watch it very closely, but when we look at our brand health scores, we look at the activity we have in place, we're very comfortable with it. We also have some LTOs coming up that'll be starting here before long that I mentioned earlier with our Vanilla Dr Pepper that we're very, very bullish on, our bottlers are ex cited about it, so we're looking forward to that. And then on the naturals, with them just launching, Judy, it's just way, way too early. We just got them out, the end of March/April 1. We're doing this very laser -like. We have specific retailers in specific geographic territories. We will be going in, and they were all set direct, we will be going in and getting the information from that customer and from the consumer. We want to really understand it completely before we really start making any decisions to get any bigger or to expand and when we have that; we'll share with you just as soon as we get all that information in.

Judy Hong - Goldman Sachs

And just to follow-up on that, is that going through the Coke and Pepsi bottlers, the natural sweetened products?

Larry Young

No, we sent the test out direct as a test.

Judy Hong - Goldman Sachs

Okay. And are you following kind of a similar strategy with the TEN where you would only go into the retailer if they're going to give you the incremental space as opposed to getting the existing products out?

Larry Young

That's the information we're finding from the test. We want to know where should it be. Should it be in the normal CSD section, should it be in the natural foods, should it be standalone display, should it be stackers. That's what we're doing right now. We have it in different places. We're seeing where the best results were. And so we've made no decisions on how we will do this until we get the data back in that tells us where it was most successful.

Operator

We've reached the allotted time for questions and answers. I'll now return the call to management for any additional or closing remarks.

Larry Young

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

Operator

Thank you for participating in Dr Pepper Snapple Group's first quarter 2014 earnings conference call. You may now disconnect.

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