Dr Pepper Snapple Group (DPS) Larry D. Young on Q4 2015 Results - Earnings Call Transcript

| About: Dr Pepper (DPS)

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

Q4 2015 Earnings Call

February 17, 2016 11:00 am ET

Executives

Heather Catelotti - Vice President-Investor Relations

Larry D. Young - President and Chief Executive Officer

Marty Ellen - Chief Financial Officer

Analysts

Kevin Grundy - Jefferies LLC

Ali Dibadj - Sanford C. Bernstein & Co. LLC

Bill Schmitz - Deutsche Bank Securities, Inc.

Nikhil Nichani - RBC Capital Markets LLC

Stephen R. Powers - UBS Securities LLC

Judy E. Hong - Goldman Sachs & Co.

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

John A. Faucher - JPMorgan Securities LLC

Robert E. Ottenstein - Evercore ISI

Operator

Good morning and welcome to Dr Pepper Snapple Group's Fourth Quarter and Full Year 2015 Earnings Conference Call. Your lines have been placed on listen-only until the question-and-answer session. Today's call is being recorded and includes a slide presentation, which can be accessed at www.drpeppersnapple.com. The call and slides will also be available for replay and download after the call has ended. We respectfully request the limit of one question per person.

It's now my pleasure to introduce Heather Catelotti, Vice President, Investor Relations. Heather, you may begin.

Heather Catelotti - Vice President-Investor Relations

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 Investors' page at www.drpeppersnapple.com. This morning's prepared remarks will be made by Larry Young, President and CEO; and Marty Ellen, our CFO. Following our prepared remarks, we will open the call for your questions.

With that, I'll turn the call over to Larry.

Larry D. Young - President and Chief Executive Officer

Thanks, Heather, and good morning, everyone. I'll start off this morning by saying I'm proud of our teams for the strong performance they delivered. We remained focused on our priorities and delivered tremendous top line and bottom line results. We grew both dollar and volume share in CSDs and shelf-stable juice. We executed a strong year long calendar consumer relevant programming and launched several new products to meet consumers' evolving needs, such as our Snapple Straight Up Tea and Hawaiian Punch in pouch packaging. We also added new flavors to our sparkling water lineup and brought Peñafiel into several Hispanic markets in the U.S.

From a distribution and availability standpoint, we held ACV for CSDs in grocery and grew distribution of sparkling waters in that channel. We also grew ACV for Snapple Premium by about a point in both grocery and convenience, and in grocery, we grew distribution of Mott's single-serve juice just over three points. Our fountain team added over 42,000 new valves across local and national accounts, expanding single-serve availability and creating new sampling occasions for our brands. And finally, our improving RCI capabilities across the organization are driving improvements in growth and productivity. This past year, we introduced an RCI management framework we call DPS In Action, starting with Visual Management across the company, and we'll build upon this framework in 2016.

Turning to the quarter, bottler case sales increased 1% on three points of positive mix and price. CSD case sales were flat and non-carbs increased 4% in the quarter. Brand Dr Pepper decreased 2%. About half of this decline was driven by fountain foodservice in the quarter, as we lapped a fountain limited time offering in one of our larger accounts a year ago. We also continued to experience declines in diet for the quarter.

Our Core 4 brands also decreased 2% in the quarter, as a mid-single digit increase in Canada Dry was more than offset by a high single digit decrease in 7UP, a mid-single digit decrease in Sunkist and a low single digit decrease in A&W. For the full year, Dr Pepper declined just under 1% and our Core 4 brands were flat, reflecting better than category performance across our key CSD brands. Crush grew 4% in the quarter, and Schweppes increased 7% on distribution gains in sparkling waters and growth in the ginger ale category. Squirt increased 3%, and Peñafiel grew 10% on increased promotional activity and distribution gains. All other CSDs declined 1% in the quarter.

In non-carbs, Snapple increased 4% on distribution gains and the launch of our Straight Up Tea line. Hawaiian Punch increased 3% and Mott's grew 2% in the quarter. Clamato increased 5% on distribution gains and increased promotional activity, and our water category grew 21% on strong growth in Bai brands, FIJI and our Aguafiel brand in Mexico. All other non-carb brands declined 5% in the quarter.

As we move into 2016, our strategy of building brands, executing with excellence and continuing to embed RCI and Lean management across the organization remains the same. This year, we'll unlock growth in our portfolio through focused communications and relevant product and packaging innovation across our priority brands that consumers have told us we can win with. And we will continue to use our improving marketing return on investment capabilities to provide better effectiveness on every dollar we spent. Execution is critical in this business. We will continue to work with our bottling partners to ensure priority brand execution on brand Dr Pepper.

In our own DSD network, we will continue to focus on execution excellence and driving distribution and availability across key brands and SKUs, with added focus on high margin channels, like convenience and on premise. Our strategy of partnering with select allied brand partners is contributing to our growth, and these partnerships are a great supplement to our own in-house innovation. These brands allow us to leverage our large scale distribution network and participate in growth emerging categories where we don't currently have a brand presence. And finally, we'll continue to evolve RCI into our daily management process. We'll further integrate GOAL deployment and Visual Management across the business and we will continue to develop Lean capabilities and bench strength through our Developing Leader Program, all to ensure we continue to build the best operating team in the industry.

As I just said, building our brands is a key component of our strategy, and we've got some great plans in 2016 to drive excitement with our consumers, retail and bottling partners. Dr Pepper returns to the big screen in March, partnering with this year's blockbuster superhero movie, Batman v Superman, driving activation at all our top retailers. We will also bring back superstar, Lil' Sweet, in a new media campaign, continuing to highlight the great taste and sweet taste of Diet Dr Pepper. This summer, Dr Pepper's Pick Your Pepper will give Millennials a unique way to express their individuality, with 150 one-of-a-kind labels to choose from.

And in the fall, the brand will once again dominate college football. We'll feature several periods of holiday-themed activity throughout the year across our Core 4 brands, and we'll take advantage of the growing Ginger Ale and Cherry segments with incremental media and retail activity behind Canada Dry, Cherry Dr Pepper and Cherry 7UP. We're also rolling out 7.5oz slim cans across our Core 4 portfolio and our company-owned DSD network to participate in the growth of this consumer-preferred package.

Snapple will continue to deliver new news to the category, with two new seasonal LTOs planned for later in the year. And Straight Up Tea is getting a facelift with new graphics and two new varieties of green and herbal teas. Mott's is partnering with Universal Pictures' The Secret Life of Pets, and will feature packaging with characters from the movie. And Clamato will share recipes for mixing occasions on social media throughout the year, as we take advantage of this brand's strong mixer heritage.

I'm sure you'll agree, we've got a full calendar of activity planned for the year.

Now, let me turn the call over to Marty to walk you through our financial results and our 2016 guidance.

Marty Ellen - Chief Financial Officer

Thank you, Larry. I'd like to begin with a high level financial summary, starting with the fourth quarter. Sales volume was flat with reported net sales up 2%. Currency neutral net sales were up 4%. Core operating income was up 13% and core operating margin stood at 21.3%, up 200 basis points. Core EPS was up 14% in the quarter. Excluding foreign currency translation, core operating income was up 15% and core EPS was up 16%.

For the year, sales volumes were up 1%, with reported net sales up 3%. Currency neutral net sales were up 5%. Core operating income was up 9%, yielding an operating margin of 20.9%, up 120 basis points from last year. Core EPS for the year was up 10%. Excluding foreign currency translation, core operating income was up 11% and core EPS was up 12% for the year. And without foreign currency transaction, these year-over-year growth rates would be even higher, all in all, some very good results for the quarter and the year.

Now, let me provide some further details on the quarter. Contributing to our currency neutral net sales increase of 4%, were favorable product, package and segment mix, along with increased price realization. Net sales also benefited from lower discounts, primarily in our fountain foodservice business, as we lapped a higher trade accrual recorded last year.

Reported gross margins increased 120 basis points in the quarter, increasing from 59.3% last year to 60.5% this year, of which 20 basis points was driven by the favorable effect of unrealized mark-to-market commodity changes. Lower commodity costs increased gross margins by 150 basis points in the quarter and continued strong productivity benefits, including those from rapid continuous improvement increased gross margins by another 60 basis points.

The impact of net pricing in the quarter increased gross margins by 50 basis points, and decreases in other manufacturing costs increased gross margins by 10 basis points. Product, package and segment mix reduced gross margins by 110 basis points. And finally, foreign currency reduced gross margin in the quarter by 60 basis points, as Mexico sources certain inputs in U.S. dollars and finished products sold in Canada are sourced from the U.S.

For the quarter, SG&A, excluding depreciation, decreased by $24 million on a favorable unrealized commodity mark-to-market effect of $21 million and a favorable comparison to a $14 million pension charge recorded last year. Foreign currency translation also reduced reported SG&A expense by $9 million. These decreases were partially offset by increases in certain operating expenses, increased management incentive compensation and an increase in marketing investments.

Depreciation and amortization declined $3 million in the quarter, reflecting recent trends in our capital spending efficiencies. We also recorded a $7 million impairment charge on our Garden Cocktail brand, which is included in other operating expense. Garden Cocktail is a vegetable juice sold in Canada. It's a fairly small volume brand that we continue to sell, but given recent declining category trends, an impairment was indicated. Below the operating line, net interest expense increased $5 million in the quarter, as we borrowed in November to refinance a $500 million debt maturity in January. And our reported effective tax rate was 36.4%, compared to 34.8% last year.

Now, moving on to cash flow, cash from operating activities was $991 million, down $31 million compared to last year. Capital spending was in line with our guidance at $179 million, compared to $170 million last year, resulting in another strong year of free cash flow conversion. Total distributions to our shareholders were $876 million, with $521 million in shares repurchased and $355 million in dividends paid.

Before I move into 2016 guidance, let me give a quick update on RCI and our Lean track performance. Our 2015 Lean tracks were able to achieve significant results. Let me briefly provide just a few examples, and then talk about our tracks for 2016. As a result of our Snapple void closure track, we closed over 17,000 voids on our Snapple brand across our west business unit, adding to increased sales of the brand. In one of our back office productivity tracks, we've reduced customer deductions by 13% across all of national and regional accounts, which has contributed to higher deductions collections. And our South Texas region grew Canada Dry volumes by 15% this year, as a result of our Canada Dry void closure growth track. Again, those are just a few examples of the broad array of RCI activities we have going on in the business.

As we move into 2016, we have a new set of Lean tracks that are currently underway and focused on driving a balance of both top line growth and productivity. From a growth perspective, we'll have separate tracks dedicated to closing voids on smaller packages on brand Dr Pepper, and improving distribution and availability on several of our allied brands. We also have a track specifically dedicated to driving 7UP share growth.

We'll continue to drive productivity across the business with tracks focused on reducing DSD driver turnover rates and reducing additional non-working costs within media, so that we can reinvest those dollars back into supporting the business. And, of course, we'll continue to develop and embed Lean capabilities throughout the organization.

While the business improvements we've achieved have been important, I can add that more than 7,000 Kaizen Certificates have been earned by our people participating in these improvement projects, and they have been proudly signed by Larry, myself, and others. This may in fact be our most important achievement.

Now, moving on to 2016 full year guidance, we are expecting reported net sales to be up approximately 1%, inclusive of a foreign currency translation headwind of about 2%, and earnings per share to be in the $4.20 to $4.30 range, inclusive of an $0.18 headwind from both foreign currency translation and transaction combined. I'll talk about our underlying foreign currency exchange rate assumptions in a moment.

Removing the year-over-year non-comparability caused by exchange rates, this guidance is in line or actually slightly better than our longer-term expectations of low single digit net sales growth and mid-single digit operating profit growth, reflecting an expectation of continued strength in our underlying business. Roughly 80% of our volumes are exposed to the CSD category, which continues to face headwinds, particularly in diets. And we expect this trend to continue in 2016. That said, however, we have continued to outperform the CSD category, and we expect that trend to continue this year as well.

We also have pricing opportunity across several of our warehouse direct brands that will temper our non-carb volumes in 2016, but are expected to improve our profitability. And in Mexico, we have made a business decision to terminate a distribution agreement on our Aguafiel 10-liter business, which will also have a negative impact on our non-carb volumes, but will modestly help our bottom line.

This volume reduction is expected to reduce total company volumes by just under a half a point. Given these assumptions, we expect total company sales volume to be about flat, with CSDs up slightly and non-carbs down slightly, again, with non-carbs driven by pricing actions and the termination of the Aguafiel 10-liter business. It's important to highlight that we still expect continued growth from other non-carb brands, such as Snapple, Clamato, and our allied brand portfolio.

On a total company basis, we expect combined price and mix to be up about 2.5%. Our January 1 concentrate price increase will drive about 40 basis points of this increase. Price increases on several of our warehouse direct brands will drive another 30 basis points of pricing, and the remainder will come from mix as a result of stronger growth from smaller CSD packages and brands such as Snapple, Clamato and our allied brand portfolio.

And as I just mentioned, we are expecting foreign currency to negatively impact our results in 2016. To give you some further insight and to help you with your modeling, the Mexican peso averaged MXN 15.87 to the U.S. dollar in our 2015 results, and we are now planning on MXN 18.67 for 2016, an increase of almost 18%. The Canadian dollar is also trending almost 15% higher than we experienced in 2015, with our current expectation at 1.47 Canadian to the U.S. dollar.

Moving on to cost of goods, given our hedge positions and current market prices for our unhedged positions, we expect packaging and ingredients to be about flat on a constant volume mix basis. This expectation includes deflation on certain commodities such as aluminum and PET, however, also assumes offsetting inflation in corn, driven by the price of co-products and higher tolling fees.

For modeling purposes, remember that growth from some of our non-carb portfolio and allied brands, which are higher dollar revenue cases, will also increase the dollar value of cost of goods. And also remember that cost of goods is negatively impacted by foreign currency transaction, as I mentioned a moment ago. Collectively, all the factors I mentioned above should result in roughly similar gross margins in 2016.

Moving to SG&A, we're expecting an increase of approximately $20 million in health and welfare and other insurance costs, compared to the more favorable trends we experienced in 2015. Furthermore, general inflation in our field labor costs will also increase total operating expenses by approximately $20 million. That said, and as we were able to achieve this year, RCI productivity benefits will help offset a portion of these increases. We expect marketing spend to be about 7.5% of net sales in 2016, and while we expect favorability from lower fuel costs in 2016, we will also experience rate increases from our third-party carriers.

Now, moving below segment operating profit, net interest expense will be around 4.5% on our $2.9 billion of debt, which implies an increase of approximately $14 million, driven primarily by our recent debt issuances and refinancing. Our full year core tax rate is expected to be approximately 35.5%, and we expect capital spending to be approximately 3% of net sales. We expect to repurchase approximately $650 million to $700 million of our common stock in 2016, subject to market conditions.

Now, let me highlight a couple of phasing items that will help you update your models. First, given the strengthening of the U.S. dollar over the course of 2015, our foreign currency headwind will be more pronounced in the first half of the year. Second, as I mentioned earlier, we will be terminating a distribution agreement on our 10-liter Aguafiel business in Mexico, which will go into effect on April 1. Third, while we expect commodities to be about flat on a constant volume mix basis for the full year, we do expect deflation in the first half of the year. Fourth, we expect a reduction in marketing investment in the first quarter of the year, based on timing of several of our media campaigns. And finally, we expect the uptick in interest expense to be heavily weighted towards the first half of the year.

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

Larry D. Young - President and Chief Executive Officer

Thanks, Marty. Before we open the line for questions, let me leave you with a few brief thoughts. The fundamentals of our business remain strong. We're focused on unlocking growth across our priority brands through integrated and aligned communication and execution, and relevant innovation. RCI continues to permeate the organization and drive meaningful improvement in growth and productivity throughout the business. And, importantly, we remain committed to returning excess free cash to our shareholders over time. And as you saw last week, we raised our dividend by just over 10% as a further commitment to that strategy.

Operator, we're ready for our first question.

Question-and-Answer Session

Operator

Thank you. Our first question comes from the line of Kevin Grundy with Jefferies.

Kevin Grundy - Jefferies LLC

Thanks, guys. Good morning.

Larry D. Young - President and Chief Executive Officer

Morning.

Marty Ellen - Chief Financial Officer

Morning, Kevin.

Kevin Grundy - Jefferies LLC

So, first, a housekeeping question and then two broader questions. So, the housekeeping question is, price mix in the quarter came in much higher. Marty, I think you mentioned that you're lapping some reversal reserves in the prior year, or booking reserves, I'm sorry. So I just want to understand that a bit better. Was this potentially mis-modeling, I guess, from our side, or was there a reversal of reserves in the quarter? If you could comment on that, that would be helpful.

Marty Ellen - Chief Financial Officer

Kevin, for housekeeping purposes, you hit on it. We did record a higher trade accrual last year in the fourth quarter in our concentrate segment, probably in the neighborhood of $8 million or $9 million, and that probably accounts for most of the difference.

Kevin Grundy - Jefferies LLC

Okay. That's helpful. And then, Marty, just sticking with gross margins, I guess, for a moment. In 2016 and then beyond, is it your hope that unfavorable product and segment mix, given higher growth that you're getting there, particularly on the non-carb side and allied, can be offset with RCI and productivity?

Marty Ellen - Chief Financial Officer

Kevin, let me step to the gross margins and let's think about where they could go. So, first of all, of course we expect better margins from smaller package mix. Allied brands, let's be careful on allied brands. As we've reminded everybody, at the gross margin line, they're a little smaller because we buy the finished goods from third parties. But at the operating line, they're pretty good, because we don't do all the selling and we don't do all the marketing. So the operating profit flow-through is pretty good on allied brands.

Segment mix will always be a function particularly of concentrate versus finished goods with, of course, concentrate margins being much higher. And then, of course, whatever happens in pricing, which, in here, in CSDs, we don't plan for any. Not that it doesn't happen, but we sort of take that out of our expectation to make sure that we otherwise focus on driving the operating plan with respect to those things that we can control, and we don't, of course, unilaterally control CSD pricing in the marketplace.

I mean those are the factors you need to consider in modeling gross margin. And, of course, RCI, I mean, productivity benefits have been strong, whether from RCI, whether from other things going on in supply chain, particularly around packaging and packaging engineering. But we expect continued strong productivity results in gross margins as well.

Kevin Grundy - Jefferies LLC

Okay, thank you. Just one more for me. Larry, on Snapple, you guys had a great year. I think it was your strongest year from a volume growth perspective since 2011, if I'm not mistaken. Can you talk a bit about where you're seeing the distribution gains by geography and by channel, and where you think you're gaining market share? And then if you care to comment on what you think the runway is for that brand. That's it for me. Thanks.

Larry D. Young - President and Chief Executive Officer

Yes, well, we've said all along, we have a long runway on our distribution and availability. I mentioned in my prepared remarks, and I think Marty's mentioned it, too, I mean, RCI has shown us growth also. We were able to close distribution voids on Snapple of 17,000, I believe, was the number on it. So you're seeing a lot of that coming from convenience and gas up and down the street. A lot of channels that are not measured by Nielsen that kind of make the numbers look a little different. But I will say our runway continues to be long.

Kevin Grundy - Jefferies LLC

Very good. Thank you.

Operator

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

Ali Dibadj - Sanford C. Bernstein & Co. LLC

Hey, guys. So, a couple of things. One is on packaged beverages, clearly, that's been driving a lot of your growth, again, quite successful, especially kind of that water is generally 21% growth. Is that what you're assuming going forward as well for 2016? So how big of a driver will packaged beverages growth be, and how much, really, from the allied brands? I think, Marty, last quarter, you said allied brands were close to half of the growth in the packaged beverages business. So I want to understand the trajectory going forward as well as what it was in the quarter.

Marty Ellen - Chief Financial Officer

Well, it's clearly the allied brands, which are principally in our water category, whether they be Vita Coco, Bai, more recently BODYARMOR, et cetera, FIJI, which had another great year, are becoming increasingly important, which seems logical, right? They are capturing growth in those parts of the marketplace that are growing. They probably, this year, if I remember my numbers, I think, shifted our total mix somewhere around a point for the whole company, which, again, is small but it's on a pretty big number. They are a very important part of our strategy.

Now, we have done well with CSDs, the packaged beverages team, our DSD team, pretty good results overall in CSDs. You'll at least see some of that in the Nielsen's. So we continue to drive execution on CSDs. We like where our portfolio is positioned in flavors. All of you know this. Flavors continue to outperform colas. So, that is the foundation of the house. But I would tell you that building upon that foundation is happening in growth areas that we're participating in, in maybe a little different way than others by partnering with allied brand owners.

Ali Dibadj - Sanford C. Bernstein & Co. LLC

And so is it – I've got a couple things . Is it more than half of your packaged beverage growth, then? Is that this quarter as well, and what we should expect going forward? And then, I...

Marty Ellen - Chief Financial Officer

Yes, Ali, it's a meaningful portion. So I think you're heading in the right direction. And we've got a lot of runway with those because they're not all completely rolled out at this point, just in terms of D&A across the country.

Ali Dibadj - Sanford C. Bernstein & Co. LLC

Yes, I know. I mean, I think you guys have picked up on some really interesting brands. And in that context, so I understand – I'm starting to understand more and more about the margin impact on you guys, gross margin versus operating. How does it impact the bottlers' margins at all? Do they care when they're distributing it for you, or is this all in your system?

And then, from an investor's perspective, and this is a question I get a lot, so some guidance would be helpful; how should we think about you guys as you're relying more and more on not your brands, right, more and more on distribution of others' brands? And particularly, in the risk that we saw with other, where it could go away from your distribution system? So a little bit more help thinking through it would be useful.

Marty Ellen - Chief Financial Officer

Ali, let me take the latter part of that question, really, which is a question of strategy in terms of opening up our distribution system to third-party or non-owned brand. It's a conscious decision we made. We look at our distribution platform and the coverage that we have as being a strategic asset and recognizing that unlikely that we on our own through our own development would ever create the breakthrough, we'll call them breakthrough innovation brands that some of these allied brands have become or look like they may become.

You're right to hit on the risk, that probably not if, but when these entrepreneurs decide to exit, could there be some risk that somebody else steps in and acquires them and removes the distribution from us? The answer, of course, is yes. So it's a choice we've made to participate in growing and emerging categories, recognizing that down the road that risk is there, and some may end up going away at some point, but others are coming in all the time, and unlikely they'll all go away at the same time. So maybe we will see that portfolio shift as those things happen. Now, there are many potential acquirers of these businesses that are in fact – would still need our distribution. There are a couple that may not, but there are others that will.

Ali Dibadj - Sanford C. Bernstein & Co. LLC

I'm sorry. And the bottler economics; sorry to – I'll just go back to that one. So do they care?

Larry D. Young - President and Chief Executive Officer

On our bottlers, I mean, a lot of them carry a lot of the different allied brands. We don't really go out and push the allied brand ourselves to them.

Ali Dibadj - Sanford C. Bernstein & Co. LLC

Okay.

Larry D. Young - President and Chief Executive Officer

They watch what we do. They really help us on some of the bigger ones to get the full footprint. And I like that they're very excited about them. I mean, they're seeing the same growth that we do. And it lets them play in categories that they were not in.

Ali Dibadj - Sanford C. Bernstein & Co. LLC

Okay. Thanks so much, guys.

Larry D. Young - President and Chief Executive Officer

Thanks, Ali.

Operator

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

Bill Schmitz - Deutsche Bank Securities, Inc.

Hey, guys, good morning.

Larry D. Young - President and Chief Executive Officer

Morning, Bill.

Marty Ellen - Chief Financial Officer

Hi, Bill

Bill Schmitz - Deutsche Bank Securities, Inc.

Hey, it seems like you're squirreling away a ton of cash on the balance sheet, it looks like there was a timing difference between the refinance, the old debt, and the new debt, but it's almost like $1 billion. So I'm just wondering if that was purposeful and if there's going to be some different use of proceeds going forward.

Marty Ellen - Chief Financial Officer

Bill, so last year in November we actually raised $750 million, which you see included in that $900 million number on the ending balance sheet. $500 million of it was 10-year maturity targeted to retire the $500 million debt maturity that matured in January, so that was just timing. And you should note that we did $250 million, so we actually took our aggregate debt up by $250 million. We took advantage of what was then, in our view, very attractive 30-year financing rates, in essence creating that some would say a strip of surrogate-like equity, very patient capital, public debt, no covenants, really. And at very attractive rates that were then apparent. And in essence, you're seeing that additional $250 million go into share repurchase. That's why our repurchase guidance is $650 million to $700 million, higher than our roughly $500 million run rate, if you will.

Bill Schmitz - Deutsche Bank Securities, Inc.

Okay, great. And then, it's sort of a cryptic question, but if given the choice, would you manage the business for sales maximization or gross margin? Because obviously, you can toggle it, given the trade-offs between the allied brands and some of your own brands. So in a perfect world, what do you lean towards, and can you kind of control that?

Marty Ellen - Chief Financial Officer

Well, Bill, it's two important things in the business. There is importance in maintaining and growing a certain share position, because that's important to retailers, it goes to our ability to maintain our brands on the shelf. But once we get through that, it's not about volume. It's about profit. Get the share position that puts us in good stead and our ability to grow at retail, and then from there, our strategies are drive profitability.

Bill Schmitz - Deutsche Bank Securities, Inc.

Okay, yes. But, I mean, my question was sort of like growing at retail, you're growing at retail much faster than some of the allied brands. It kind of goes back to the previous questions, the questions from last call. So at what point do allied brands become too big as percentage of the overall mix? That's kind of the question, because obviously, it's pretty gross margin dilutive. I know you said it's sort of agnostic on the operating line.

Marty Ellen - Chief Financial Officer

Yes, but it's – but in reality, though, it's operating profit accretive. So normally focused on the gross margin, I mean if those brands grow to be tremendously big, wonderful, because we will do great.

Bill Schmitz - Deutsche Bank Securities, Inc.

Okay. Yes, no, that's totally fair. And then how long do you think the runway is in sparkling water and ginger ale? And how big are they now as percentage of your system sales?

Larry D. Young - President and Chief Executive Officer

Yes, I don't have the exact percentage of sales we have in here, but if you look at what we're doing, especially with Schweppes, just on the Canada Dry growth that we've had across the market in ginger ale, now Schweppes is really starting to go across the country, where we really didn't have Schweppes ginger ale on our bottlers system, and our bottlers are behind it because they want to have a part of that ginger ale growth. So the runway just on distribution and availability is long. And then the increasing – people are looking at ginger ale, Bill, as better for you. They're looking at it as an alternative. And it's just got a lot of things working for it now that make it very prominent. It just continues to grow.

Bill Schmitz - Deutsche Bank Securities, Inc.

Great, thanks. And how about on the sparkling water side?

Larry D. Young - President and Chief Executive Officer

Same with the sparkling water. Sparkling water is a tiny piece of our business, but it has got some really great growth and we continue to see more distribution of that brand also.

Bill Schmitz - Deutsche Bank Securities, Inc.

Great. Thank you, guys, very much.

Operator

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

Nikhil Nichani - RBC Capital Markets LLC

Hey. This is actually Nikhil Nichani on behalf of Nik Modi. Just a simple question quickly. So you talked about the allied brands being operating profit accretive. Could you give a little bit more color on actually how much they are contributing to your profit growth over the past year or so, and just a color on how much they will contribute going forward? Thank you.

Marty Ellen - Chief Financial Officer

Well, I wish I could, but we don't want to give too many of those details. We're trying to help you guide you through your growth algorithms and your profit algorithms. They are contributing an important part of both the growth and profitability in the packaged beverage segment, but we just haven't been granular and don't want to at this point, in terms of those specifics.

Nikhil Nichani - RBC Capital Markets LLC

Okay, thank you.

Operator

Our next question comes from the line of Steve Powers with UBS.

Stephen R. Powers - UBS Securities LLC

Hey, thanks. Can you hear me?

Marty Ellen - Chief Financial Officer

Yes, good morning, Steve.

Larry D. Young - President and Chief Executive Officer

We can.

Stephen R. Powers - UBS Securities LLC

Good morning. Good morning. So, on brand Dr Pepper, the past few quarters, you guys have been, at least from my perspective, more confident in that trademark, in the trends there, including on the diet side. And especially Q4, heading into the heart of college football season, through that lens, that negative 2% volume number looks a bit disappointing, even acknowledging the fountain promotion that you were cycling. And I guess your perspective on that would be great. Do you agree with that? Is it modestly disappointing? And how do you think about that trademark heading into and through 2016?

Larry D. Young - President and Chief Executive Officer

Well, we still look at it, Steve, we were outperforming the category. So, I mean, we will always have lots of programs behind Dr Pepper. College football was phenomenal. I mean part of college football came into Q3 and Q4, the way it laid out there. We had tremendous upside in the first half of college football. We still had growth for the total program. But as we factored in the diets and we had the large promotional activity and new availability on fountain a year ago, we're still very pleased with where Dr Pepper is at, and where our plans are for taking it in 2016. You heard some of the programs we had out there with it. Our bottlers are committed, excited about the brand. It continues to be a big contributor for them. So, we're very pleased.

Stephen R. Powers - UBS Securities LLC

Okay. Okay. And I guess a question, if I could, on the cash return strategy. And maybe the answer is embedded in your response to Bill's earlier question, but, you've talked in the past about striking a balance between the dividend increase and share buybacks, and I appreciate you doing both in 2016. But the 10% dividend increase really doesn't move the needle too much on your payout ratio, which is still below peers. And It seems it was out of balance with the, essentially, 30% increase in buybacks at the midpoint, in terms of striking that balance, when the multiple on your stock is, essentially, at all time high levels.

So, can you give us some insight into your thinking there, in terms of what you recommend to the board? And maybe the answer is that $250 million debt finance step-up is kind of one-time and it rolls back off. But, just how do we think about you striking a balance between what right now seems like an imbalanced strategy for 2016?

Marty Ellen - Chief Financial Officer

Okay, Steve, thanks. It's Marty. How's Boca, by the way? Is it good? Are you down there?

Stephen R. Powers - UBS Securities LLC

It is sunny, yes, very nice.

Marty Ellen - Chief Financial Officer

Larry and I miss you guys. I had to get this on the call. We miss you, but we don't get invited.

Stephen R. Powers - UBS Securities LLC

You're welcome to come.

Marty Ellen - Chief Financial Officer

Thanks, Steve. Listen. So, okay, the $250 million, that is one-time, right? So, the imbalance, as you call it, between more share repurchases in 2016 is simply the one-time $250 million. Otherwise, expect to see our distributions come out of free cash flow and not through incremental borrowings to lever up to distribute.

The roughly 50%/50% balance between share repurchases and dividends is where we have been. I know I have communicated to many of you that, if we were going to lean one way or the other, probably we would go more heavily into the dividend, and maybe one day, we will. But as we go out and talk to shareholders, Steve, most of them are satisfied with this. So, we didn't see the need to do anything much different. We simply, as you said, raised it on an equivalent basis with this year's EPS growth rate that kept the payout ratio more or less the same.

Stephen R. Powers - UBS Securities LLC

Okay. And if I could just one more thing, I don't want to belabor the point too much, but going back to Ali's question on the allied brands. I mean, do you think we should treat all profit dollars the same when looking and valuing your overall business? Or is there inherently more risk attached to those brands that you yourself do not own? It seemed from your prior answer that maybe the answer is yes. So I just wanted to kind of give you a chance to expand on that.

Marty Ellen - Chief Financial Officer

Steve, here's what I would tell you. I understand the nature of that question. I'll tell you that, the other day, I was looking down at the opportunities of people that we're at some stage of discussion with. There are 25 companies, at least, on that list. So there's a lot happening in the beverage space. All of you see it when you go into stores. You see what's on the shelf. You see these niche products. So, I said earlier, maybe we'll lose some at some point, but we'll also gain. And so the question is, what's the best position for us, in our view, to capture LRB growth, but not CSD growth, LRB growth, both through better execution on our core, which is what we're showing each and every period. Larry talked about a few of the accomplishments. There's opportunity there in our core, and then capturing these growing categories by partnering with people that have a lot of passion, energy, credibility, financing associated with them. And I would tell you that the allied brand portfolio might be different 10 years from now, in terms of what's in there than in today, but I guarantee you, it will be a lot bigger.

Stephen R. Powers - UBS Securities LLC

Okay. Okay. Thanks a lot. Appreciate it.

Operator

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

Judy E. Hong - Goldman Sachs & Co.

Thanks, and hi, everyone.

Larry D. Young - President and Chief Executive Officer

Hi, Judy.

Marty Ellen - Chief Financial Officer

Morning, Judy.

Judy E. Hong - Goldman Sachs & Co.

So, a couple of questions from my end. First, just in terms of the price mix outlook for 2016, it sounds like you're embedding both the concentrate price increases and a little bit of the rate increases in the warehouse. So, I know at the start of last year, you were a little bit cautious on maybe taking some rate increases. So can you just talk about how you feel about the ability to sort of take pricing? And how much of the focus on the smaller tax sizes also do you think that will contribute to the mix component of that in 2016?

Marty Ellen - Chief Financial Officer

Judy, good morning. It's Marty. The concentrate price increase is already in effect, and that's worth spread across the entire company, 40 basis points. The warehouse direct pricing actions I referred to, those have already been communicated to customers and those are already in effect. And as I said earlier, we've made no assumption on any absolute pricing in CSD. So to the extent that that happens in the marketplace, as we have done in the past, we will take advantage. That would be upside to us.

Package mix continues to shift. We, too, are shifting to smaller cans in our own system. Larry mentioned that. We're rolling that out now. We've got the capability in a few of our plants with some more of our plants coming up. The remaining part of our network, where we're going to do this, coming up through the first half of the year, primarily. We haven't disclosed, on a package mix basis, what that is worth. Allied brands, of course, just because they're higher revenue cases, as you model your top lines, of course those are going to be positive in terms of rate per case. But I want to be clear. The pricing assumptions that we have embedded, the absolute pricing, is already in place.

Judy E. Hong - Goldman Sachs & Co.

Got it, okay. And then, Marty, just on the FX side, so, can you just remind us of your transaction exposure there? Because it sounds like 2016 maybe is a little bit more of a transaction headwind than I think we're modeling.

Marty Ellen - Chief Financial Officer

Yes. The $0.18 is worth about $47 million, $48 million on a before-tax basis. You're going to have about $28 million of that, I believe, is going to be transaction and $19 million, translation. Okay? At the operating line, at the operating income line.

Judy E. Hong - Goldman Sachs & Co.

And what was the exposure, just in terms of transaction?

Marty Ellen - Chief Financial Officer

So, transaction, the key exposures are when you go to Canada and you look at our WD business, whether it's Hawaiian Punch, Clamato, et cetera, all of those products are manufactured in the United States. So we have a currency transaction risk there between the sourcing currency and the selling currency. And the big transaction exposure for Mexico, as you know, the industry in Mexico is predominantly a bottle business, not a can business. And the price of resin, which is oil denominated, is U.S. dollar priced.

Judy E. Hong - Goldman Sachs & Co.

Got it. Okay, and then just lastly, on commodities, how much are you hedged at this point in terms of 2016 exposure?

Marty Ellen - Chief Financial Officer

Right now, Judy, we're roughly three-quarters covered. And if you were to look at it rolling out to there, you would find lots of coverage in Q1, about 90%. By the time you get out to the fourth quarter, as we sit today, we're down to 30%. So, we have open opportunities later in the year.

Judy E. Hong - Goldman Sachs & Co.

Got it. Okay. Thank you.

Operator

Our next question comes from the line of Mark Swartzberg with Stifel & Nicolaus (sic) [Stifel Nicolaus].

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

Thanks. Morning, Marty, morning, Larry. How are you, guys?

Larry D. Young - President and Chief Executive Officer

Good.

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

I have two questions, I guess. One is on 7UP, which isn't the most obvious choice from where I sit for getting this Lean track focus, in the sense that it seems to have some velocity issues. And I know you've struggled to try to re-position the brand. So could you talk a little bit about the health of the brand from a consumer standpoint and then why, in fact, it is getting this kind of relative focus in terms of filling those distribution voids?

Larry D. Young - President and Chief Executive Officer

Absolutely. I mean that's – to your point on the velocity, that's the main reason we're doing it. As we go across our organization, especially Rodger's packaged beverage on the DSD side, I mean, it's the biggest brand a lot of the guys have; it's their lead brand. The category, the lemon-lime category has struggled somewhat. But we have got the organization as a whole looking at it saying, let's get behind our brand. Let's figure out what we're doing right, what we're doing wrong and let's get a Lean track in place. The name's on our buildings in a lot of these locations, and we want to see that brand growing. And so we've got some of our top people, some of our veterans that have been around for a long time that love that brand. And we're going to grow it and figure out what we're going to do for the long-term.

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

But where I'm coming from is, and it's great to hear the focus, but where I'm coming from is that there's a pull issue there. So part of the pull, I appreciate, is a function of seeing it becoming more visible to folks as they walk in and out of the store. But there seems to still be a more fundamental issue with the brand. So can you talk about what your research actually says about the health of the brand? And for that matter, how important simply added facing is to the health of the brand?

Larry D. Young - President and Chief Executive Officer

That will be part of the entire program. You're exactly right. We've got to figure out the pull. The guys in the field will solve for the push. We're going to get it in the back door, now what are we going to do to get it out the front door? So, I mean, we've got to get – the equity is great, but I think we can improve it. And you're exactly right. Rodger's team will get it in the back door and in this track, Jim's team is going to figure out how to get it out the front door.

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

Okay, okay. And then shifting to fountain, I believe that's weakened as the year has progressed. There was this promotion you were lapping, but can you give us an update on conditions in the fountain component of your business and your outlook for fountain?

Larry D. Young - President and Chief Executive Officer

Yes, I think the fountain – we lapped the large one-time, we had a lot of activity that was going on out there that we have to go against. As we look at it, we're seeing the traffic in QSR is up about 1%. So we're watching that. We're still very bullish on it, 42,000 new valves, the guys have a goal of the same this year, especially getting more diet out there. So it helps us with the diet and with our Sweet program on Diet Dr Pepper. The fountain team has delivered great results, and sometimes when you get these big hits, you've got to lap them. And so we didn't think it was that bad of a hit for us.

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

Fair enough. Okay, that's all I've got. Thank you, Larry.

Larry D. Young - President and Chief Executive Officer

Thanks, Mark.

Operator

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

John A. Faucher - JPMorgan Securities LLC

Yes, thanks. Just a quick follow-up on the question about 7UP. Is 7UP getting hit because of sort of this move to – I mean, are you seeing a direct response for the sparkling waters replacing it given maybe what was perceived as a healthier halo surrounding some of the lemon-lime category? Or, I guess, do you have any information on switching?

And then finally, just some thoughts on diets. Have you seen any stabilization of the trend here? And do you still think that Diet Pepper sort of operates a little bit in its own aura there where it can avoid some of the negatives that we're seeing more on the cola side? Thanks.

Larry D. Young - President and Chief Executive Officer

Yes, John, for years we have always noticed that lemon-lime seems to be the last spot where the CSD player switches over. And so we're looking at that saying how do we – we have got them in there. Let's get more in there, keep them in there once we get them in. The sparkling waters are very big on, especially the flavored that are similar to it. So we're going to get a lot of findings from that as we do the Lean track. The Kaizen, the guys doing the work in the street, I mean, we just think there's things out there that we haven't picked up on that we've got to be very focused on and get this brand back where it's got a growth potential again.

Oh, and on to diets. Yes, the diets, I mean, you heard me in my prepared remarks. We're coming back with Lil' Sweet again and we've got a great campaign there. We're performing better than the category, but I think we're going to continue to see some headwinds there for diets. But our plan is, stay focused on them. Make people understand that they have a great taste. They want a great taste. And that they're safe.

So, we will continue to go down that line and there will be some headwinds, but we're very happy that we're outperforming the category there.

John A. Faucher - JPMorgan Securities LLC

Okay, great. Thank you.

Operator

Our final question comes from the line of Rob Ottenstein with Evercore ISI.

Robert E. Ottenstein - Evercore ISI

Great. Thank you very much. On RCI, I'm getting the sense that you may be shifting the mix a little bit to projects that are more top line focused than bottom line focused. Is that correct? And does that suggest that perhaps you've got more runway in terms of top line focused projects at this point?

And related to that, in terms of your pipeline of projects for 2016, how does that compare to prior years?

Marty Ellen - Chief Financial Officer

Rob, clearly, recently, we've probably done more growth-type projects. But really, that's just part of the evolution of Lean. Lean is embedded in supply chain. It grew out of Toyota and supply chain. And so, it makes sense to apply the tools. And those of you that were around us back five years ago, you heard us talk about warehouse direct and supply chain, and warehouses and lowering inventory levels, et cetera. So, this is really just a natural evolution. We want balance, of course. We want to work on projects that contribute to growth and strength in our brands, and that's obvious.

It's not – we don't have a targeted mix with respect – remember, we don't even use the word productivity much around here, actually. We talk about waste elimination. Your question goes to how we're focusing on eliminating cost, really, on the productivity side. And all we do is worry about what our customer's paying us to do, where's the value add in the value stream, and get rid of everything else. And I think the tracks are also a balance of involvement of the organization. So, we want our field people, our sales management people, we want them involved in improvement activities. It's just another improvement activity. This organization is about total engagement. Nobody sits on the sidelines, nobody watches, nobody is outside the process. And I think that also goes to making sure that our field teams are working on things that are important to them, and, of course, what's important to them are sales activities.

Robert E. Ottenstein - Evercore ISI

Great. And then just some housekeeping items. Could you give us, for the quarter and the year, Dr Pepper Regular and Diet, in terms of the volume change? And for Peñafiel, how much of the growth was split? How would you split the growth between U.S. and Mexico, please?

Larry D. Young - President and Chief Executive Officer

Of course, of course. Peñafiel is principally – is still principally Mexico. We're rolling it out with success in Hispanic markets in the U.S., but its double digit growth is principally Mexico. And remind everybody that we continue to have great innovation around that brand. Our flavored Peñafiel waters continue to do really well in Mexico. Your question on what, Dr Pepper?

Robert E. Ottenstein - Evercore ISI

And how much was Peñafiel up in the U.S. and where are you in terms of rolling it out?

Larry D. Young - President and Chief Executive Officer

Last quarter – it's very early in terms of roll-out. This, Rob, goes to – we had Peñafiel in the market previously. It was sort of U.S. made. That was probably not the best strategy in terms of authenticity for the brand for its consumers, so more recently, we're now bringing it up from Mexico and you're seeing lots of other products in the space coming up. But it's still small, so that's a lot of opportunity. Let me go to Dr Pepper, if that's okay. I think you then want to know percent changes on Dr Pepper. As we measure bottler case sales, so throughput cases, the brand is Regular Dr Pepper, actually, I will round it to down 1%, but it was actually even less than that fourth quarter, and on a bottler case, diet was down 4.5%, and if you look at Nielsen data, you will see other diets down 6%, 7%, 8%.

Robert E. Ottenstein - Evercore ISI

Terrific. Thank you very much.

Larry D. Young - President and Chief Executive Officer

Okay, well, thanks for joining the call today and for your continued interest and investment in Dr Pepper Snapple.

Operator

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

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