Dr Pepper Snapple Group's CEO Discusses Q2 2011 Results - Earnings Call Transcript

Jul.27.11 | About: Dr Pepper (DPS)

Dr Pepper Snapple Group (NYSE:DPS)

Q2 2011 Earnings Call

July 27, 2011 11:00 am ET

Executives

Aly Noormohamed - Senior Vice President of Investor Relations

Martin Ellen - Chief Financial Officer and Executive Vice President

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

Analysts

Judy Hong - Goldman Sachs Group Inc.

John Faucher - JP Morgan Chase & Co

Kaumil Gajrawala - UBS Investment Bank

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

Brett Cooper - Consumer Edge Research, LLC

Ann Gurkin - Davenport & Company, LLC

Christine Farkas - BofA Merrill Lynch

Stephen Powers - Sanford C. Bernstein & Co., Inc.

Jeffrey Farmer - Jefferies & Company, Inc.

Andrew Kieley - Deutsche Bank AG

Damian Witkowski - Gabelli & Company, Inc.

Caroline Levy - Credit Agricole Securities (NYSE:USA) Inc.

Operator

Good morning, and welcome to Dr Pepper Snapple Group's Second Quarter 2011 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 Mr. Aly Noormohamed, Senior Vice President of Finance. Sir, you may begin.

Aly Noormohamed

Thank you, Jackie, 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, 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 Investor Relations 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, Aly, and good morning, everyone. As we highlighted in earlier calls, Q2 is expected to be our most challenging quarter of the year. Compounding an already very tough volume comparison, double-digit COGS inflation and incremental pricing actions, April was weaker than expected, and the consumer continued to reflect uncertainty.

Against this very challenging backdrop, our portfolio of leading consumer-preferred brands posted solid results. In fact, we outperformed the category in CSDs, teas and juices.

I remain concerned about the U.S. economy, unemployment trends and the impact this is having on the overall spending patterns. For the quarter and year-to-date, bottler case sales were flat, lapping 3% growth in the prior year. Dr Pepper volume declined 3%, lapping 3% growth as retailer-led price-offs last year were not repeated. I am once again pleased to report that Dr Pepper Fountain volume grew 5% on new distribution gains.

Combined, our Core 4, Sun Drop and CREST brands grew 1%. Canada Dry growth remained on trend, up double digits. And Sun Drop continued to gain distribution adding 2 million incremental cases. Snapple was up 8%, as we continued to gain distribution in both 6-pack glass and 64-ounce PET. Hawaiian Punch volume was flat, as a high single-digit price increase took effect June 1.

We're also seeing a greater mix shift towards the 10-ounce package. As expected, Mott's declined 10% as we took double-digit price increases early in the year to fully cover apple juice concentrate inflation.

For the quarter, currency-neutral net sales grew 3% on flat volume. Price mix added 2 points to growth, while deferred revenue recognition and repatriated cases under the Coke license agreement added a point to growth. Segment operating profit on a currency-neutral basis declined 5% or $19 million, as we incurred almost $70 million of input and transportation cost inflation in the quarter.

Margin investment in Q2 were up only $4 million, as we shifted approximately $10 million to the third quarter to support key innovation planks and to remind consumers of the value of our brands. As we highlighted during our first quarter call, we have opportunities to invest incrementally in our brands, and we now expect full-year marketing to be up $25 million to $30 million.

For the quarter, diluted earnings per share grew 4% to $0.77. This was better than our flattish expectations due to the shift of marketing investments. Increasing awareness and availability of our brands is a key focus for us, and I'm thrilled with the progress we're making in 2011.

We've increased the availability of our core CSD, tea and juice SKUs in both grocery and convenience. In grocery, for example, Dr Pepper ACV distribution is up 1 point, while Snapple and Canada Dry are up 3 and 4 points, respectively. We make great progress in cold drink with 14,000 net new placements so far this year. In Fountain, we're tracking right along in line with our plans for both key and local accounts, with net new installs up 12,000 valves.

We've increased consumer communications on our core brands and supported key innovation planks, such as Sun Drop, Mott's for Tots and Mott's Medleys. Dr Pepper's tie-in with Thor resulted in over 1 billion media impressions, and Snapple's integration in The Amazing Race generated over 400 million impressions.

We're penetrating low per-capita markets by shifting dollars from national media to local, and making sure local media is supported by strong retail activation.

Moving on to innovation, we're seeing strong trial and repeat in our new products. Laps users are returning, new users are experimenting and heavy marketing support is providing a halo in the base business.

Since its national launch in January, Sun Drop has grown by almost 90%, adding 5 million incremental cases. This brand now has a 4 share of the highly competitive Citrus CSD category, up almost 2 share points. Grocery ACV distribution is at 90% and convenience is at 55%. We're kicking off strong balance of the year activity with a back-to-school promotion, including college campus sampling and our active social programming and an online sweepstakes.

AC distribution of Hawaiian Punch 10-ounce is now at 70%. We have sold over 3 million cases of this convenient on-the-go package. We've added new users to the franchise and at almost twice the profit per unit, our retailers are making a nice turn as well.

In Snapple, our 64-ounce PET offering is driving about half the trademark's growth year-to-date. With grocery ACV now 38%, we still have plenty of runway ahead of us. We also believe retailers are using Snapple to help them drive profitable growth in the tea category. As we all know, bringing back CSD occasions is a huge opportunity, and we believe Dr Pepper 10 can do this.

In DP 10 test markets, not only did we see strong overall trademark growth, but more importantly, Regular and Diet Dr Pepper both grew. With purchase intent, velocity and repeat rates in the test markets exceeding our expectations, we're ready to take this product national. Our media plan kicks off on 10/10, and we will leverage our great association with college football to drive huge consumer awareness and trial.

The launch will also be supported by strong retailer activation, trial packaging, targeted coupons, and innovative merchandising and displays. With that, let me turn the call over to Marty to walk you through some of our below-the-line items and 2011 guidance.

Martin Ellen

Thanks, Larry, and good morning, everyone. Let me echo Larry's comments. While we are very pleased by the resilience of our brands in what we highlighted would be our most challenging quarter, we are somewhat concerned about the health of the consumer when the lower income side appears to be more cautious about their spending. That said, we believe our balance-of-the-year initiatives will still allow us to achieve our expected results, which I'll discuss in a few moments.

Now, moving on to below-the-line items. Corporate costs were $81 million for the quarter, essentially flat to last year. This included $7 million of unrealized mark-to-market losses, as we unwound gains from the portfolio of favorable hedge contracts. For the remainder of the year, we would expect corporate cost, including mark-to-market losses, to be around $80 million a quarter, in line with our beginning-of-the-year guidance. Net interest expense was $28 million, again, flat to last year and a good run rate for the balance of the year. Our effective tax rate for the quarter was 35%, in line with our full-year guidance and included $6 million of Pepsi and Coke-related tax benefits.

Due to the timing of certain items, the tax rate in Q3 will be about 100 basis points higher than our expected full year rate. Moving on to cash flow, year-to-date cash from operating activities was $256 million. This includes $37 million of cash taxes paid on the under Pepsi and Coke licensing agreements. Capital spending was $104 million compared to $114 million last year.

We continue to focus on working capital and CapEx management and are delivering better-than-expected results from rapid continuous improvement. We remain well ahead of our cash-conversion cycle improvement goals and expect to be 5 days better on average for the year. This should enable us to have free cash flow for the year ahead of our beginning-of-the-year expectations. We remain committed to returning free cash flow to our shareholders.

On May 18, our Board of Directors raised our quarterly dividend 28% to $0.32. We view this as an initial step towards being able to consistently raise our dividend over time. Through June of this year, total distributions to our shareholders were $436 million, $325 million in share repurchases and $111 million in dividends.

For the year, we continue to expect net sales to grow in the 3% to 5% range. Even though volume trends may be softer than we previously expected, as we now expect balance of the year pricing in the 3% range, which combined with the almost 2 points of pricing in the first half, gives us about 2.5 points of price for the year, 50 basis points higher than our beginning-of-the-year expectations. Also included in our net sales guidance is about 2 points of benefit from the Pepsi and Coke licensing agreements and foreign currency, which is up slightly from our earlier expectations.

Full year earnings per share are still expected to be in the $2.70 to $2.78 range. Our assumptions around input and transportation cost inflation remain unchanged from our last update. Again, as forward prices for our unhedged positions, we continue to expect packaging and ingredients to increase total cost of goods by 7% to 9% on a constant volume mix basis.

Also consistent with our last update, transportation costs included in SG&A are expected to be up approximately $35 million. As we highlighted during our first quarter call, we have opportunities to invest incrementally in our brands to support innovation and ensure we remain top of mind with our consumers.

This is particularly important now, given rising prices and increased consumer purchasing pressure. For the year, we now expect marketing investments to be up $25 million to $30 million. With the phasing adjustments we made in Q2, marketing spend is now more evenly spread over the full year. For your modeling purposes, however, you should expect to see about a $10 million increase year-over-year in the third quarter.

Our EPS guidance also assumes a full-year tax rate of approximately 35%, which includes an $18 million onetime benefit related to the Pepsi and Coke licensing transactions. As I said earlier, you should expect to see a step-up in the tax rate in Q3 and then a step-down in Q4, again due to the timing of certain tax items.

In terms of cash flow, capital spending is projected to be approximately 4.5% of net sales. I am encouraged by the progress we're making at RCI, and therefore, we expect to see further productivity in this number over time. Finally, we remain on track to repurchase approximately $400 million to $500 million of our common stock in 2011, subject to market conditions.

As I indicated earlier, we continue to make excellent progress behind our developing RCI capabilities. We are seeing greater activity and engagement across the organization, and this is delivering better-than-expected results. Through June, we have completed 46 projects and almost 700 of our employees are now licensed to Kaizen.

In terms of milestones, we achieved our very first Super Kaizen at our Aspers, Pennsylvania plant, running 4 events simultaneously. We were very fortunate to have had some of you join us for this event and experience firsthand the engagement and enthusiasm of the cross-functional teams and their ability to make breakthrough changes.

At the start of the event, we estimated cash savings of $2.3 million. By the end of the week, we were at $5.8 million in cash savings, with a very long list of new ideas. We have also had tremendous participation by our Mexico team in using RCI to focus on improvements in sales, supply chain and back office.

With a number of great wins behind us, I have asked the RCI team to focus on 3 things in the near term. First, ensure the improvements we have achieved so far are sustaining themselves; second, begin replicating these achievements across different locations and ensuring consistency of process; and third, increase the use of visual management tools to ensure alignment of goals within every team in every part of the business.

As I have said before, we're still in the very early stages of this journey, but I'm extremely pleased with and proud of our achievements so far. We're using RCI to improve in every aspect of its 5 platforms: safety, quality, delivery, productivity and growth. And we believe we're well on our way to achieving at least $150 million of cash productivity benefits through 2013.

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

Larry Young

Thanks, Marty. Before we open the lines for questions, let me leave you with these thoughts. Our teams remain committed to executing our focused strategy, ensuring our products are close at hand and top of mind.

We're seeing this in terms of solid distribution gains, positive, immediate consumption trends, increased levels of local consumer communications, improved brand activation and above-category trends in CSDs, teas and juices. Over time, we expect to cover higher input cost with pricing and productivity, but not completely this year. We do so with an eye to always deliver value to our customers and ensuring we're investing wisely in this business, for the long-term, sustainable growth. Finally, we're winning with RCI with increasing levels of activity and engagement leading to better-than-expected results. Operator, we're ready for our first question.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Christine Farkas with Bank of America Merrill Lynch.

Christine Farkas - BofA Merrill Lynch

Marty, I had a question for you regarding the productivity program. Your press release it does -- they do show us what you're seeing on a quarter-to-quarter basis, and that number is slowing a little bit, $6 million year-to-date versus $17 million in the first half of last year. I'm wondering if you can help us with how that's going, what's your year-end targets are if those changed at all? And then a follow-up question on taxes paid for Pepsi and Coke payments, is that coming through evenly through this year versus the big lump sum payment in the first part of 2012?

Martin Ellen

Yes, the numbers you're quoting relate to productivity office expenditures, which are actually a piece of, but not the larger piece of what's happening in RCI. As I said, I think I'm a little bullish on my comments this morning, which is a little uncharacteristic of me sometimes because I've seen what this organization has done in such a short period of time. And so -- and I know a few people, some of our investors, one analyst actually went out to the plant and had their own observations and that was really just one project of the many we've had. So we're firing on all cylinders. I'm confident that we'll get at least $150 million. We haven't really called out specifically RCI productivity benefits directly in terms of cash flow or cost savings. But again, my comment about where we are in days of inventory, if you even look at this quarter, we're down 3 days on a comparable basis with last June. That's $18 million of cash. That means a lot to us. It means a lot to the organization, and we're just at the -- scratching the surface, really, in some of these areas. So over time, I'll try to share more with you and give you a better sense of where you can actually see in the financials the result because we see a lot of good indicators inside, but you can't see them necessarily on the outside just looking at what we publish. With tax payments, let me -- there's a -- we had said this year that we would have about $53 million to $55 million, as I recall, for the full year and, as I said, $37 million has already been paid, so that leaves about $18 million in the second half. The large payment, the majority of the payment is about $535 million, and that's a Q1 2012 payment.

Christine Farkas - BofA Merrill Lynch

Okay, that's helpful. And Larry, just a broader question for you or 2-parter, why did you decide to defer some marketing spend into the second half? And then broadly, why are you or why do you seem more comfortable with pricing coming in at a bit stronger in the second half?

Larry Young

I think the biggest reason for the shift was a lot of our national went to a local media shift, and we're trying to tie more with our local activation on retail. And so, it made a lot of sense for us to move that especially with some more activity coming from Sun Drop and then also the launch of DP 10. And then on pricing, I mean pricing continue to be very rational. I think everybody's kind of heard that everybody's moving in the second half. So with that pricing move, you've got to have more marketing to keep that brand top-of-mind, and our retail teams keeping it close at hand, so that we continue to show the value to that consumer.

Operator

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

Caroline Levy - Credit Agricole Securities (USA) Inc.

I just want to clarify a couple of things. First of all, how is July started off from a sales perspective?

Larry Young

It's pretty warm out there.

Caroline Levy - Credit Agricole Securities (USA) Inc.

I know, that's what I was thinking. So I mean, I know that it could all fall apart in September, but I'm assuming this is pretty damn good for CSDs?

Larry Young

Yes, I mean you look at Q2, Caroline, I think everybody knows that April was pretty tough in Q2. I think a lot of companies are saying they didn't see an Easter this year. So I think we've got our challenges out there. But so far, we're in line.

Caroline Levy - Credit Agricole Securities (USA) Inc.

Okay. And then, you didn't give -- you gave some hints about the third quarter needing to come down because it sounds like $10 million more in marketing spend than you'd originally thought on a higher tax rate. So can you help us understand for the third quarter, just what sort of growth outlook we should have for earnings?

Martin Ellen

Well, Caroline, we don't give quarterly guidance. But I think you hit on the 2 important things for purposes of your modeling, which is the marketing spend of $10 million will be in Q3, the incremental, and the tax rate will be higher.

Caroline Levy - Credit Agricole Securities (USA) Inc.

And higher tax rate like 37%? Last year you were 37.7% in the third quarter.

Martin Ellen

I said in my prepared remarks, 100 basis points over the full year rate.

Caroline Levy - Credit Agricole Securities (USA) Inc.

Okay, fine, good. And then if I could just understand, for the full year, is the $25 million or so increase a number that relates to marketing and advertising? What's included in this, both the $10 million shift that you talked about and the, I think, $20 million to $25 million increase full year?

Martin Ellen

The answer is yes, the marketing spend includes advertising. And if you look at the larger programs, you'd be looking at Sun Drop, Dr Pepper and our sponsorship of college football, and now the Dr Pepper 10 national launch in the fall.

Caroline Levy - Credit Agricole Securities (USA) Inc.

Okay. And then also if you could clarify on Dr Pepper volume, did the number you release include the Fountain growth?

Larry Young

Yes, it did.

Caroline Levy - Credit Agricole Securities (USA) Inc.

So it was down 3 with Fountain up 4 or 5?

Larry Young

Down 2, and most of that Caroline was lapping the retail activity of a year ago when we had 24 packs out there from anywhere from $3.88 to $5, which was not repeated this year.

Caroline Levy - Credit Agricole Securities (USA) Inc.

So it seems like that was really about the comp, and then Dr. Pepper -- I mean I think you last time shared this quarter overall, which we just haven't seen in a long time. Would you expect that to reverse?

Larry Young

I haven't seen any share loss on our CSDs, and no -- well, definitely, you're going to see the Dr Pepper volume change because we won't be lapping those ridiculously old prices of last year. And Dr Pepper 10 is going to help also tremendously.

Caroline Levy - Credit Agricole Securities (USA) Inc.

And the launch is October for Dr Pepper 10?

Larry Young

Right.

Operator

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

Judy Hong - Goldman Sachs Group Inc.

Larry, just in terms of your volume outlook. I mean, you sound a little bit more cautious, just generally, about the consumer outlook here. So I guess as the industry is taking more pricing in the back half, how are you thinking about the price elasticity? And on the pricing side, what's the risk that as we deal with a tough consumer environment that even though you guys are taking list price increases, the retailers and perhaps manufacturers have to give back more in terms of promo spending?

Larry Young

Yes, we've not seen that yet. I mean our pricing has been able to be pretty stable. And as more pricing comes in to affect this month and I think you'll see most of that impact probably in August. That's one of the reasons we've shifted some of the marketing, so that we can continue to show value and keep our brands top of mind out there at all times. I say that I'm cautious. It's not gotten into -- the consumer's not getting any worse. They're just not improved like we thought they would. You guys have heard me say before, we continue to serve them bad news for breakfast everyday.

Judy Hong - Goldman Sachs Group Inc.

Okay. And then just on the clarification on the marketing spending, so the $25 million to $30 million increase for the full year, that compares to the $10 million to $15 million that you called out last quarter?

Martin Ellen

That's correct.

Judy Hong - Goldman Sachs Group Inc.

Okay. So I guess the question is really -- I mean your guidance for earnings haven't really changed, even though potential marketing spending is higher than what you thought before. So are there any positive offsets in terms of how you're getting to the full year guidance that's still intact even though marketing spending is now going up more?

Martin Ellen

Yes, I mean, Judy, again, so our top line guidance has a couple of moving parts that are important, a little more pricing, a little less volume. But that gives us a little more margin contribution to fund the higher marketing.

Judy Hong - Goldman Sachs Group Inc.

Okay. And then, Larry, just in terms of Sun Drop, just the ACV progression that you're seeing, maybe if you can talk about take home versus convenience because, certainly, it seems like take home, you've got a pretty good distribution out there, but C stores you're probably still lagging a little bit. Can you talk about the pace of progression, particularly on C stores from an ACV perspective in the next 6 months or so?

Larry Young

Exactly. Yes. Judy, we're very happy with the performance we've seen so far. Our convenience ACV right now is at 55%, and we're seeing that continue to grow. We've got great programs in the back half. Our partner with MTV, we've got some more activity going there. So we feel very confident with the Sun Drop in the back half of the year.

Operator

Your next question comes from the line of Jeff Farmer with Jefferies.

Jeffrey Farmer - Jefferies & Company, Inc.

There's been a lot of discussion about last summer's promotional environment. Could just remind me how that activity progressed over the summer for your brands?

Larry Young

Yes, I mean basically, it broke before Labor Day, and it had an effect on Q2 and Q3. I think the biggest effect was on Q2. But we had activity out there with the 24 packs that were running anywhere from -- it started off at $5. It got all the way down to $3.88 a 24-pack. If you look at what's out there today, I mean we're basically selling 12 packs for that price or higher.

Jeffrey Farmer - Jefferies & Company, Inc.

Okay, that's helpful. And then you did touch on this but just on Dr Pepper 10, if you use some of your other recent brand extensions, I guess I would point to Dr Pepper Cherry as a benchmark. How does Dr Pepper 10 compare in the test marks in terms of the some of the volume numbers you're seeing?

Larry Young

Like I'd mentioned in my prepared comments, we're just beating every expectation we set on it. We still got Pepper and Diet Pepper grilling in the test markets. Dr Pepper Cherry is still staying very viable out there. And just from the test results, we're seeing that stronger results than what we saw with Dr Pepper Cherry in the beginning.

Jeffrey Farmer - Jefferies & Company, Inc.

Okay. And then just finally for me just on Snapple, you talked about this in the past, but with some of that mix volume going to the 64-ounce container, what type of impact might that have on margins?

Larry Young

It shouldn't. It's just basically going to be neutral.

Operator

Your next question comes from the line of Steve Powers with Bernstein.

Stephen Powers - Sanford C. Bernstein & Co., Inc.

Maybe we could just go back to pricing for a moment. Just first a clarification, does the 2 -- sorry the 3 points price mix that I saw over the balance of the year, is that inclusive of mix benefits as you repatriate the bands from the Coke system? And then, just more specifically I guess, what kind of elasticity are you expecting on those price increases in the second half? It looks like your full-year volume guidance it now kind of implied to be slight to negative, which implies a pretty good drop-off in the second half despite the easier comps from the Dr Pepper innovation. So is that math right, and what are your assumptions there?

Martin Ellen

Steve, it's Marty. Number one, no, our 3% price does not include any impact of the transfer cases. And I would say our current volume expectation, you said negative, we would say maybe 0 to 1, which is a little softer than we previously had. Again, as a result of our view of the elastic impact, the higher pricing in the back half will have.

Stephen Powers - Sanford C. Bernstein & Co., Inc.

Okay. Can you help me bridge that with the 3% to 5% total top line guidance? If you're looking at 3% pricing, flat-to-neutral volume, benefits from FX plus the repatriated brands, how does not add up to 5-plus?

Martin Ellen

Okay, but 3% to 5%, so full year. So when you bake all the pricing at first half, second half you're really like at 2.5%. Yes, FX has been -- has recently become a tailwind for us. So we're getting a little benefit there. The totality of the Coke and Pepsi deals, both the revenue amortization and, in this case, the higher top line from the repatriated cases into our system, is about 1.5%. I mean those are the major factors.

Stephen Powers - Sanford C. Bernstein & Co., Inc.

Okay. Maybe shifting gears a bit. You talked about some foodservice again being positive, which is great. Can you give us a sense of the performance trends you're seeing and/or expect to see as the pricing goes into effect in the other channels, convenience versus grocery versus mass versus dollar, and/or any comments you might have on either regional differences. Are you still seeing better performance in lower per-cap markets versus the higher per-cap markets? Or is that performance gap kind of started to narrow or even reverse?

Larry Young

Our lower per-caps are still doing very well. I mean we've had a very focused strategy in there, and it's being executed very good. You look across the channels, I mean let's start with convenience. If you look at overall traffic and dollars spend in convenience is growing, in some markets, the CSDs are lagging a little bit on the improvement. We're watching QSR traffic come up, with a higher dollar spend. And so, the different trends we're watching there are encouraging, but not exactly where we thought they would be at this time. We thought there would be more improvement. Our large format, we have lots of activity going in large format. As I mentioned earlier, pricing has continued to stay very rational. We've got a lot of tie-ins this summer with movies, we've got our Core 4 tied with Captain America. Dr Pepper is with Thor. You saw the impressions we got on that. So we're doing a lot of things in the large-format to show value. It can be delivered in more ways than price off.

Stephen Powers - Sanford C. Bernstein & Co., Inc.

Okay. Lastly, I guess, the Core 4 x Canada Dry, 7UP I guess specifically, the reactions you saw with some of the activity you had in the quarter versus your expectations coming in, and do you still have the optimism you had a quarter ago in terms of the improvement in 7UP, specifically, and then kind of your outlook for when Sunkist and A&W might turn the corner quarter as well?

Larry Young

Yes, no, we look at our Core 4 as a total, and it's up one. So we're just very, very happy with that. 7UP, we're still very bullish on 7UP. We mentioned earlier kind of what we've been seeing with Canada Dry, that runway's long there, also. With the summer coming up, Q3, I think you'll see our Core 4 still doing well because some of the hot activity a year ago, our Core 4 wasn't involved in. So we're happy with that. Sunkist, we've got lots of plans behind Sunkist. We've got great expectations for it. It's a brand we believe in, and we've got the bottling system behind it, and some activity we're going to see through the summer that's going to give us some dividends.

Operator

Your next question comes from the line of Kaumil Gajrawala with UBS.

Kaumil Gajrawala - UBS Investment Bank

A couple of questions on cash return, if I could follow up on some of the commentary. First, it looks like year-to-date you've purchased about $325 million. The guidance, of course, is $400 million to $500 million. That implies, at minimum, you're likely trending to be at the high end. But Marty do you see any flexibility for increasing that amount?

Martin Ellen

We have authority by our Board to do more than this. So yes, we can, should we so choose.

Kaumil Gajrawala - UBS Investment Bank

Okay. And then on the dividend increase you mentioned it's the first step to potential increases over time. Can we maybe imply that those increases would be ahead of earnings growth given your cash flow profile?

Martin Ellen

Well, I think clearly, our cash flow generation will probably be a larger consideration than simply the earnings growth over time. We need a sustainable cash flow improvement of course to fund the dividend. But clearly early on now, you're right. We have more cash flow capacity. We're almost, on a dollar basis, we can -- we're simply self-funding future increases out of shares we're buying back. We did buy back 5.7 million shares in the quarter, we are down to about 217 million shares outstanding presently. And as we continue to buy back shares, the total dollar commitment to the dividend gets offset by any raises in the dividend. I think what we're trying to communicate is, we understand that many of our shareholders view the yield as a strong component of total return. And we're cognizant of that, and we want to try to raise it over time to provide them with a requisite level of return consistent with our business, the peer groups we're in and some other data point. And yes, we have the ability to do so.

Kaumil Gajrawala - UBS Investment Bank

Is there a target payout or anything, or is it too early?

Martin Ellen

Not at this point. Maybe one day we will, we'll express that as a policy, but I think it's too early.

Kaumil Gajrawala - UBS Investment Bank

Got it. And then if I could ask, we spent a lot of time in 2010 talking about Crush, but you haven't mentioned it at all. Can you maybe talk about how Crush, obviously, it's got some tough laps, how that's doing? And then also the dynamics between Sunkist and Crush?

Larry Young

Yes, I mean we're still very pleased with the Crush performance. We've got, again, activity in the third quarter with retail, retail execution on Crush. So we're very pleased with it. To your point, I mean it had some unbelievable costs to come against. Whenever you compare it with Sun Drop -- I mean with Sunkist, we knew that we were going to have some cannibalization on Sunkist. And actually, it wasn't high as we thought it would be. But you have to look at the overall category with Crush and Sun Drop or Sunkist, both in there. We have really expanded that category. And if you look at the Crush right now, up 21% last year for the first half and basically flat now. So it's kind of hard not to like numbers like that.

Operator

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

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

I guess starting with the pricing environment, Larry, you've been very consistent describing it as rational. There's obviously been some debate about that over the last week or so. How would you compare kind of what you're seeing in July to what you saw at the beginning of the summer in the first half? Any change in -- I mean obviously, you're going for more pricing, but would you just describe the environment as more disciplined or pretty similar to where it was in the first half?

Larry Young

Well, I think it's pretty similar is what I have say, Mark. I think we'll see it more disciplined as some of the pricing comes -- it takes hold at the end of July, 1st of August. Seeing a lot more with packaging, not just 12- or 24-packs stacked out there. We're seeing activity with 2 liters and 1/2 liter PET, different-sized can packages, which I think is very good for us and good for the industry and the category, that we get more choices out there. So I think the pricing's going to be rational. I mean, if you look at what we're seeing with commodities, I mean it has to be. And I think the biggest challenge for everybody is delivering that value to the consumer.

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

Great. And then a few questions on brand, Larry, Snapple, Sun Drop and Dr Pepper, can you talk a little bit about your outlook for Snapple, sequentially, pretty similar to the first quarter but a much easier compare. How are you feeling about the condition of that brand and the outlook for growth there?

Larry Young

Now we're looking at Snapple discontinues. I mean the premium, since we converted to 6-pack, we're looking at that as continuing to grow. We're seeing household penetration. We're seeing more activity in retailers. We're getting more space. So we're just very, very pleased with what we're seeing on Snapple. And I expect it to come close again to a double-digit growth this year.

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

Great. And then I might have missed it, but on Sun Drop, what are you seeing on the repeat side of things, how are you feeling that how's that's playing out?

Larry Young

Very good. Very good. And that's why I said we've got more activity coming into place for the back half. It's one of those things where you take a brand that was very regional and take it national. One of the most important things is stay behind the retail execution, get it top of mind, close at hand and have patience.

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

Great. And then Dr Pepper, in the state of Texas, it's had some problems. I think it's declining, and DP 10 should help. But could you just talk a little bit about the brand in that particular state, what you think is going on, to what extent it's a larger consumer issue, to what extent you think it's a brand issue, speak to its performance there?

Larry Young

Well, to your point, I mean it's one of our largest markets. I don't think, as I talked with the guys out here, I don't think we really have any concern. I think some of it's just timing. When you look at what happened last year with some of the pricing, there was tremendous volume growth to Texas. So we got to kind of lap those numbers. At this point, we really don't have a concern on that, Mark.

Operator

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

John Faucher - JP Morgan Chase & Co

Just want to follow up a little bit on a couple of the questions on the pricing and then related to the guidance because as you talked about sort of funding the extra marketing spending in the back half of the year, you talked about more pricing. And I guess is that more pricing than you had built in your last guidance, because the marketing spending is up from the last guidance. But the pricing -- again, so are you seeing the ability to take more pricing in the market now than you would have thought 3 months ago? Because again, that's kind of not necessarily what I think the rest of us are feeling like here.

Martin Ellen

John, it's Marty. Our answer is yes. And that's what I said in my remarks. It was probably an incremental 0.5 point or so in the back half, I think we lapped at 2.5, and now we're looking at -- when we look across our portfolio, both the CSDs and the non-carbs and put it together, you'll see a number about 3.

John Faucher - JP Morgan Chase & Co

And so, in that incremental improvement then, and I apologize if I missed it before, it sounds like you may be indicating that's mostly coming on the non-carb side.

Martin Ellen

Those are a little bit larger.

Operator

Your next question comes from the line of Ann Gurkin with Davenport.

Ann Gurkin - Davenport & Company, LLC

I wanted to talk about the consumer a little more. Do you think there is a growing risk as a consumer is switching to tap water from any beverage choice? I was kind of curious of your opinion on that trend.

Larry Young

No, as we kind of watch the economy and the unemployment levels, there's always going to be an impact on the consumer. I mean in the past, they've traded down to CSDs, value juices and, you're right, tap water. But traffic overall is looking up. I think we just have to stay very focused, as I said a moment ago, of showing that we can deliver value without just strictly price off.

Ann Gurkin - Davenport & Company, LLC

Okay. And then secondly, any stab at how we should think about cost in 2012 versus '11?

Martin Ellen

Hi, it's Marty. With respect to -- I assume you mean commodity cost?

Ann Gurkin - Davenport & Company, LLC

Right.

Martin Ellen

So for balance of this year, we've got pretty good visibility, 3 to 6 months out, clearly, less so into 2012. We'll be putting on some more 2012 cover here, probably over the next couple of months. So we feel pretty good about the next 3 and 6 months, and that's why we're staying with our 7% to 9% 2011 increase. But it's really too early to share too many details yet for 2012.

Operator

The next question comes from the line of Damian Witkowski with Gabelli.

Damian Witkowski - Gabelli & Company, Inc.

I just wanted to go back, Larry, on your comment on the consumer. And you've said it before that it's not the consumer is necessarily getting worse, it's just that they're not getting as better as you hoped. And I think this was kind of addressed, but I just want to make sure I understood that. Is it the fact that you just simply look out there and say, "Well, gallon of gasoline is up over $1 versus a year ago, and unemployment is still above 9%." Is that what gives you pause or is this something that you're actually seeing cracks somewhere in your channels that give you the more cautious tone on the consumer?

Larry Young

We didn't see as much decline with gas going up compared to what it did in 2008, Damian. So it's not as much of that. It's just that as we laid out our plans, we thought we would see more improvement than what we did. As everybody can tell, I mean I think in the entire industry, none of us thought commodities would hit us where they did. So that kind of -- there were wrenches in the gears there that I think we've done a great job of managing through. So the consumer will always be a top of mind for me. As I mentioned, they haven't gotten worse, but I just thought it would be a little better by now. And I think we still have room for improvement.

Damian Witkowski - Gabelli & Company, Inc.

Okay, fair enough. And then just Mexico, you had a great first half in terms of volume help from currency. But the operating income is still kind of is lagging, and I'm just trying to figure out if this is a -- if 2011 is sort of a transition year for Mexico, and we should look at it going up in terms of operating margins going forward? Or is it a structural change, and we're sort of looking at depressed operating margins there for the foreseeable future? And then sort of any changes in the distribution thinking there? Pepsi just announced something, and I'm just curious if you have any thoughts.

Larry Young

I'll let Marty kind of go through some points on this for you. But you're right, I mean this is a -- we turned Mexico over to reporting into Jim Johnston, our President. We're relooking how we go to market. It's a restructure, a rebuild year. And we remain very bullish on Mexico. I mean we've just got to get it set up right. And I keep up with what other people have done in Mexico, but that really doesn't change how I look at our strategy, and I'll let Marty kind of hit some of the points we're doing down there.

Martin Ellen

Well, the good news in Mexico got just completely swallowed up by inflation. In fact, if you just look at the margins for that segment, almost 700 basis points of decline in the quarter, due to mostly commodities in the 500 basis point range and almost 200 in fuel, which really just completely smothered about 200 basis points of gain they would have that in the margin from all the good things, including the increases in some of their key brands. Peñafiel, up 6%, Clamato was up 29%, Squirt was up 10% in a difficult environment. They actually -- but for the cost increase that they could not control, they actually did very well in our judgment for the quarter.

Damian Witkowski - Gabelli & Company, Inc.

And is Mexico an actual cash flow drain, Marty, on your cash flows?

Martin Ellen

No, actually, just the opposite. We were actually surprised. The combination of some of the things I said, including -- I can't tell you how much RCI they've done. They've done a lot. And as a result, they actually showed us a little more cash in the quarter than I actually thought they could generate.

Damian Witkowski - Gabelli & Company, Inc.

Okay. And then lastly, Marty, I think you said you have now $217 million basic shares outstanding, that's as of when?

Martin Ellen

As of today. You'll see that on the number on the face of the 10-Q when we file it.

Operator

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

Brett Cooper - Consumer Edge Research, LLC

Two questions. First of all on Dr Pepper foodservice, you guys mentioned that the distribution gains certainly got you some benefit, but can you break out what was distribution versus existing valve?

Larry Young

You mean break out?

Brett Cooper - Consumer Edge Research, LLC

The growth, so you had 4% growth. What contributed from distribution or existing valve?

Larry Young

Yes, let me see if I can find it. I think about -- on the distribution side, it was probably about 70% of that growth and then the rest was same-store growth.

Brett Cooper - Consumer Edge Research, LLC

And then just to continue on the pricing side of it, I think in your last call you indicated that juice -- I'm sorry, non-carbs were getting you guys at 150 basis points of pricing for the overall company. So that would imply that your CSD pricing in the second half is going to be up in the 2% range, is that right?

Larry Young

That's right. I don't recall if we broke it down last quarter, but for CSDs, yes, about 2% for balance.

Operator

Your next question comes from the line of Andrew Kieley with Deutsche Bank.

Andrew Kieley - Deutsche Bank AG

I was wondering if you could just quickly, is the second half pricing on CSD already in place nationally? And then Larry, for the second half of that pricing it looks like you're staying pretty flexible on the promotional reinvestment. But if passing the pricing through proves more challenging than you're expecting, I guess philosophically, which way will you lean in terms of pricing versus growing your volume and your market share objectives?

Larry Young

Well, that's -- you have to look at the total mix whenever you make those type of decisions. Everything we're seeing right now tells us that our strategy is right on. The pricing that we've got put out for the summer, we haven't had that much pushback from our customers. I think a lot of that is due to the promotional activity we're putting out there that's besides price off. But we have absolutely no intention of backing away from our pricing. I think we've got to get our pricing at the right levels with the input costs we have. And then, it just makes it that much more solid for us in 2012.

Andrew Kieley - Deutsche Bank AG

Okay. And then on brand Dr Pepper across the 3 bottling systems, is there any meaningful difference in volume performance?

Larry Young

Very similar. Very similar, especially lapping the activity that was last year.

Andrew Kieley - Deutsche Bank AG

Okay. And then lastly, the company stayed very disciplined with an organic strategy. But when you look at the growth in categories that you're not in like vitamin waters and sports and energy, how do you think about the possibility of participating there versus the cost of getting in those categories? Or is that a priority at all right now?

Larry Young

Like I said before, we've got such a runway with the brands we have right now, a long runway ahead of us. We're going to stay focused there. We never stop looking at them. But one of the key points of our strategy is that we pursue profitable volume channels and categories. And so, as I look at all of them, you take some categories that are growing tremendously right now, you got to look and say is there profit there also? Is it kind of volume that's sustainable? So we want to stay very focused on what we have right now. We constantly look at others. We do a lot of things with some allied brands that we distribute, so that we can see where the growths are. And we have a lot of different categories that we use up and down the street because it's profitable in those channels.

Operator

And your final question comes from Steve Powers with Bernstein.

Stephen Powers - Sanford C. Bernstein & Co., Inc.

I just wanted to go back to the comments you made around the dynamics for the laps, you keep full year EPS guidance despite the higher inflation you're dealing with, the weaker volumes and now the incremental marketing. You mentioned obviously the incremental pricing you've been able to take, but that doesn't seem like it's enough. So I'm wondering just how much productivity has helped you. Is there a way you could quantify that? Obviously, you got a formal productivity office initiatives, you got the RCI. And then, the cumulative effect of those, you can quantify that. And also maybe help us how much is kind of structural savings versus things you're maybe doing to get yourself through this year that may have to come back for the business on an ongoing basis?

Martin Ellen

Okay, Steve, look, I'll get a little more granular with you, okay. You talk about manufacturing productivity. Probably in this quarter, I'm going to guess in terms of margin, we probably picked up, I don't know, maybe 50 basis points of overall productivity. Some of that we would have done without RCI. Some of it includes RCI. Obviously, we expect that to improve. You were on the project. I think you know there's some trajectory here. And so, we know we've got some benefits coming in there. That helps us continue to stay within our range of guidance.

Stephen Powers - Sanford C. Bernstein & Co., Inc.

Okay. Any sense for just how -- to go back to your bullish tone earlier on the call, Marty, how much ahead of your run rate is I mean 50 basis points, it's good. But what were you expecting and any sense for how big it can get over time?

Martin Ellen

I read your report. You're even more bullish than I am. Look, I'd say this a lot. I don't think we really know completely. And that I think it's the beauty of -- and everybody I encountered on this journey myself has always done better than they originally thought. And my comments today simply go to, we set a goal, we put a financial goal out there over a long-enough period to allow us to really get ingrained in this. And I've only been looking at results now for 6 months, even a little less than 6 months, I think, in terms of when we really got started in the first quarter. And what I see, so far, tells me we're getting more done sooner, and that's what makes me bullish. Nothing we're doing is short-term, believe me. We're not interested in that. We're not interested in doing things short-term for the next 3 months or the quarter. We, truthfully, we don't worry about that. There's no reason for us to worry about that, get too focused with that. What we're doing is making changes that have to be sustainable, which is why as I said in my remarks the RCI team right now is going back, double-backing everything we've done. Are the changes sustainable? Are the processes documented? Do people know what they're doing? Are they working as we, in fact, architected them to work during the Kaizen? It's very, very, very important. Otherwise, none of this stuff will sustain itself. And that's critical. So we probably have some upside in our numbers, balance of the year, that help maybe close the gap on some of your math.

Larry Young

Okay. Well, I want to thank everybody for joining us on the call today. And for your continued interest in the Dr Pepper Snapple Group. Thank you.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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