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Executives

Carolyn Ross - Vice President of Investor Relations

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

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

Analysts

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

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

Brett Cooper - Consumer Edge Research, LLC

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

William Schmitz - Deutsche Bank AG, Research Division

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

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Brendan Metrano - Wells Fargo Securities, LLC, Research Division

Dara W. Mohsenian - Morgan Stanley, Research Division

Damian Witkowski - Gabelli & Company, Inc.

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

Dr Pepper Snapple Group (DPS) Q1 2012 Earnings Call April 25, 2012 11:00 AM ET

Operator

Good morning, and welcome to Dr Pepper Snapple Group's First Quarter 2012 Earnings Conference Call. [Operator Instructions] Today's call is being recorded and includes a slide presentation which can be accessed at www.drpeppersnapple.com. The call and slides will also be available for replay and download after the call has ended. [Operator Instructions] It is now my pleasure to introduce Carolyn Ross, Vice President, Investor Relation. Carolyn, you may begin.

Carolyn Ross

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 D. Young

Thanks, Carolyn, and good morning, everyone. As I'm sure you saw in this morning's earnings press release, our results for the first quarter came in consistent with our expectations. Our brands continued to perform well in the marketplace this quarter despite the fact that our pricing is up across both our CSD and juice portfolios. We grew both volume and dollar share in our CSD and Tea categories and outperformed the industry. Our teams continue to make our brands top of mind and close at hand for consumers. And with the traction building on RCI everyday, I am confident that we will achieve our expectations for the year.

For the quarter, bottler case sales were flat on 4 points of price/mix lapping 1% growth in the prior year. CSDs grew 2%, led by our flagship Dr Pepper, which also grew 2%, driven primarily by Dr Pepper TEN, which we launched nationally in Q4 of 2011 and continued growth in our Fountain business.

Our Core 5, which are our Core 4 plus Sun Drop, grew 3% in the quarter, fueled by the continued strength of Canada Dry and mid single-digit increases in A&W and Sunkist. 7UP grew 1%. These increases were partially offset by a double-digit decline in Sun Drop as we cycled the national launch in the first quarter of 2011. Together with Crush, these brands grew 1% for the quarter.

As expected, both Hawaiian Punch and Mott's declined double digits on larger relative price increases than were implemented in mid-2011. We would expect these trends for Hawaiian Punch and Mott's to continue in the second quarter.

Once again, Snapple continued its momentum, posting a 5% increase while lapping 10% growth in the prior year. I'm proud to say that Snapple continued to outperform the category while providing value to our consumers with new flavor and package innovation.

Our other brands increased 5%, fueled by growth in our Hispanic portfolio, including Peñafiel, Clamato and Squirt from our CSD value strategy and 2-liters and 20-ounce on brands such as RC Cola, Tahitian Treat, Cactus Cooler and Nehi. We also saw growth in our allied brands, most significantly VitaCoco and Neuro.

On a currency-neutral basis, our net sales increased 3% for the quarter, reflecting 4 points of price/mix partially offset by lower branded sales volume and a reclassification of certain customer transportation allowances from SG&A expenses. Segment operating profit decreased 3% for the quarter, with sales growth and productivity improvements more than offset by $31 million of higher packaging and ingredient cost, other operating cost, inflation and the higher market investments of $8 million. Reported earnings per share were $0.48 for the quarter, a 4% decline versus prior year.

As I look to our plans for the second trimester, I am confident that our activation lineup and new products will engage our target consumers and increase awareness of our brands. Once again, Dr Pepper is teaming up with the hottest movie this summer, The Avengers. And just like Dr Pepper, The Avengers are all one of a kind. We're running a national co-branded TV and radio campaign, reaching over 90 million of our target consumers. We'll have promotional packaging and collectible cans for take-home consumption, coupled with an x mark program for immediate consumption.

Guy Fieri, the celebrity face of summer grilling, is partnering with Dr Pepper to give consumers his own exclusive cooking tips and recipes featuring Dr Pepper as a key ingredient. Consumers will also have an opportunity to win a live grilling experience with Guy himself.

We're engaging the Hispanic consumer by sponsoring the PJ Awards, the #1 Hispanic awards show, for the third consecutive year. We're offering our consumers a chance to win a trip to Miami, attend a private Pitbull concert, and we'll also give them an opportunity to attend private PJ VIP parties, where they can meet and greet artists from the awards show.

7UP will be integrated into the hit show, Survivor, and our message in a bottle in-store merchandising and display activity will feature our entire Core 5 brand portfolio.

Sunkist will partner with the U.S.A. Dream Team to headline our Core 5 summer basketball program. We'll offer promotional packaging and collectible cans featuring former Olympians fully supported with national media.

Our Core 5 20-ounce Facebook credits program is on fire, driving growth in our immediate consumption business. And now, several of our brand pages have over 1 million Facebook fans, so we're extending this program throughout the summer.

And we're not stopping there. We brought news to the Tea category with our national launch of Snapple Diet Half 'n Half lemonade iced tea. And now, we're bringing more news to the category with our launch of Snapple Lightly Sweetened Teas. Snapple will also partner with America's Got Talent on an under-the-cap program that will give consumers a chance to win a VIP trip to see the talent finale. America's Got Talent is the #1 show during the summer selling season, and Snapple will get over 855 million media impressions throughout the season.

With that, let me turn the call over to Marty to walk you through some of our below-the-line items and our thoughts on our second quarter.

Martin M. Ellen

Thanks, Larry, and good morning, everyone. Before I cover corporate and other financial items, I'd like to briefly review the major items impacting our gross margins, which declined 180 basis points in the quarter.

Consistent with the guidance we provided on our fourth quarter call, the largest portion of our packaging and ingredients inflation was expected to occur in the first quarter. Net of pricing, this reduced gross margins by 140 basis points. Other manufacturing cost increases, including higher depreciation, reduced gross margins by another 50 basis points.

Changes in certain commodity prices at the end of the quarter caused us to record $6 million of unrealized mark-to-market gains on commodity hedges, approximately $5 million of which is in cost of goods and the rest in SG&A. This compares to a $2 million unrealized mark-to-market gain last year, all recorded in SG&A. This favorable comparison improved gross margins by about 30 basis points.

As a reminder, unrealized mark-to-market gains or losses on commodity derivatives are included in corporate expenses and will be included in segment results when the contracts settle. Additionally, as you saw in this morning's press release, we are now excluding these impacts from our core EPS result, and our full year EPS guidance is now stated on this basis.

Now moving to below-the-line items. Corporate costs were $65 million for the quarter compared to $67 million last year. Without mark-to-market impacts in both years, corporate costs were $71 million compared to $69 million last year. Net interest expense was $32 million, $6 million above last year as we refinanced a low floating rate debt last November. Our effective tax rate for the quarter was 37.4% and in line with our full year expectation now that we've lapped the onetime benefit in 2011 from the Coke and Pepsi agreement.

Cash from operating activities was a use of cash of $325 million after paying $508 million of taxes on the Pepsi and Coke licensing agreements. As a reminder, we'll make a $23 million tax payment related to the Pepsi and Coke agreement in the second quarter.

Capital spending in the quarter was $51 million, and we returned $153 million to our shareholders, with $85 million in share repurchases and $68 million in dividends. On February 8, we raised our quarterly dividend 6.3% to $0.34 per share from $0.32 per share. We repurchased 2.2 million shares in the first quarter and now have 211.8 million shares outstanding.

Now in the beginning of its second year, rapid continuous improvement, or RCI as we call it, continues to gain momentum across our entire organization, and I continue to be very encouraged by the progress we've made to develop a sustainable continuous improvement mindset at Dr Pepper. As you've heard me say, RCI is not a cost-reduction program, rather, RCI is about creating a sustainable business model of continuous improvement underpinned by a mindset of relentless focus on providing value to our customers and consumers and eliminating everything else. The result is, of course, improvement in cash flow and earnings over time.

Since we began our efforts in February of last year, we've engaged more than 1,900 of our people in 156 Kaizen improvement events and identified $77 million of annualized cash productivity. Our RCI efforts are focused on improving safety, quality, delivery, productivity and growth, and we're achieving results against each of these planks. We're emphasizing the importance of safety and making Dr Pepper a safer workplace with the identification and implementation of 350 improvements. We're improving quality and delivery for our customers by providing fresher product and reducing out of stocks, all while taking 7 days out of inventories.

Inventories, on a FIFO basis, when compared to March of last year are down $29 million. We're beginning to realize cost savings from the closure of 8 warehouses and reductions in outside storage totaling over 1.2 million less square feet of space. And fewer miles are being driven transporting products between location, and we're driving growth with more time spent in the selling process.

Year 1 was about getting the organization engaged, and we had some great wins at our Warehouse Direct and LAB businesses as well as in a number of other areas, including marketing, innovation and certain administrative functions. This year, we're focusing much more of our RCI resources on our DSD business, and we're kicking it off with 5S workplace Kaizen events across each of our DSD facilities. For those of you that are unfamiliar with the 5S's of Lean, they are sort, set in order, shine, standardize and sustain and are founded on the principle that a well-organized workplace increases and improves both productivity and safety. We completed our DSD pilot in Miami earlier this month, and we just completed a 5S event in our Plano R&D facility last week.

The improvements we've identified thus far, combined with the enthusiasm of our senior leadership and employees who'll be working on 150 improvement projects in 2012, gives me confidence that we'll achieve our goal of at least $150 million of cash productivity over the first 3 years of this endless journey.

Moving on to 2012 full year guidance. As you saw in today's press release, we continue to believe that we can achieve net sales growth near the low end of our 3% to 5% long-term range and full year core earnings per share in the $2.90 to $2.98 range. Despite high gas prices, we are pleased to see some early signs of improvement in the macroeconomic environment in the U.S. with sequential improvements in QSR traffic and immediate consumption trends. Against this backdrop, we continue to expect net pricing to be up about 2% to 2.5% for the full year, with around 0.5 point of volume increase.

Consistent with our last update, considering our hedged positions and current market prices for our unhedged positions, we expect packaging and ingredients to increase total cost of goods sold by 2% to 3% on a constant volume mix basis. While our outlook for commodities remains unchanged, if current trends hold, we could see this outlook improve in the latter part of the year, and we will provide an update on our next earnings call.

We continue to expect certain higher costs affecting transportation, both in terms of fuel cost for our company-owned fleet as well as higher lane rates from our common carrier. This is expected to increase SG&A by $13 million in 2012, of which $3 million occurred in the first quarter. Our net interest expense will be around 4.5% on our $2.7 billion of debt, an increase of $11 million over last year. And finally, we continue to expect our full year tax rate to be approximately 37%.

In terms of cash flow, capital spending is expected to be approximately 4% of net sales, and we remain on track to repurchase approximately 350 million to 375 million of our common stock in 2012, subject to market conditions.

For modeling purposes, let me highlight a couple of things that will impact quarterly phasing. As occurred in the first quarter, Mott's and Hawaiian Punch volumes will continue to be challenged through the second quarter as these brands cycle price increases, taken in the second half of 2011. Contract volume should grow at rates similar to this quarter as a result of growth in the energy category. We expect commodity to be up slightly on a constant volume mix basis compared to Q2 last year, with the comparisons improving in the second half of this year. And finally, as a reminder, Q2 was our highest quarter of marketing spend in 2011, and we can expect it to be up slightly in 2012.

Hopefully, these points of clarification are helpful to you. With that, let me turn the call back to Larry.

Larry D. Young

Thanks, Marty. Before we open the lines for questions, let me leave you with these thoughts. We're executing our focused strategy, and it's continuing to pay dividends with share gains in both CSDs and Teas. We're committed to always delivering value to our customers and ensuring we're investing wisely in this business for long-term sustainable growth. With strong leadership engagement and enthusiasm across the organization, we're winning with RCI and delivering results for our customers and on our financial performance. And finally, we remain committed to returning excess cash to our shareholders, with a view of providing very attractive shareholder returns.

Operator, we're ready for our first question.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from Steve Powers with Sanford Bernstein.

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

So as you laid out in your opening remarks, commodities and transportation costs were tough in the quarter. Elasticity was severe on the non-carb said. But on the other hand, weather was good. I think there might have been an extra selling day with the leap year, and you underspent your targets a bit on advertising again. So I think that the key question that this quarter has raised is whether you can consistently deliver external [ph] expectations on both volume and EPS at the same time. Last quarter, earnings were a bit better than expected, but volume's lighter. This quarter, volumes were better, at least on the CSD side, yet earnings came in a bit light, but I appreciate that external expectations may well have been higher than your own internal forecast. But especially in the context of RCI, should we now expect DPS to be able to deliver on both metrics more consistently? And what lies ahead to give you confidence that you can over the balance of 2012 and beyond?

Martin M. Ellen

Okay, Steve. Good summation. Let me take it from the top. This -- first of all, this quarter was not a surprise in terms of probably the biggest factor affecting the bottom line, which was commodities and therefore, had the impact that we thought it would have. I've given guidance on my overall view of commodity inflation for the balance of the year with a little footnote that says we'll take a look at current trends which are favorable and tell you what that means next quarter. I mean, I'll also add, just to help all of you model this year, as long as we're talking about gross margin, that for the full year, our expectation is we will be at last year's full year rate of gross margin or even slightly higher. So even though we're down this quarter, you could sort of think about that trend for balance of the year. In terms of volume, look, the weather did what it did. We're not going to quantify, nor can we, the effect of the weather. I think we should take great comfort in the performance of our CSDs, weather notwithstanding. Core 5 grew. Yes, Sun Drop declined, but remember, we're lapping the introduction a year ago. We pointed the volume declined, but if you think about a product introduction, you think about promotional pricing, if all of you look at your own Nielsens and you look at Sun Drop and you look at Q1 this year versus last year, you'll see price/mix up 20%, so again, lapping promotional activity. Mott's and Hawaiian Punch, as expected, we took some fairly large price increases last year. Everybody knows juice concentrate for Mott's was our Achilles' heel last year to a significant degree in commodity inflation. It doubled last year. Going into this year, it also had increased, and it's one of the areas that we're seeing softening in. So we'll see how that translates into our activities around Mott's for the balance of this year. And again, Q2, we expect that to happen. But if we look at where we are with those brands and our major customers, we feel really good about how those brands can perform in the second half. The marketing spend, I tell everybody, we continue to tell everybody, up $8 million. Maybe we're $2 million shy. We continue to equate -- overly equate, in our view, the effectiveness of the spend versus the total spend. We were drawing conclusions on effectiveness from total spend. We could talk ad nauseam about what we're doing in social media, what technology is doing to the cohorts by many of these brands and what the spend rate is to get effectiveness. And if you look at GRPs, they're up like 63%, 64% as a measure of our people getting the message around our brand. RCI, I continue to be thrilled by it, and yes, we measured $77 million cash productivity. The balance sheet components just jump out at you. Cash flow this quarter, if you take out the tax payments, was significantly better than last year in the first quarter. We probably had $5 million at best I can measure of the year-over-year cost improvement from RCI. And I believe if we did nothing else and just implemented what we've identified already, we can probably add another $10 million to $15 million to that balance of the year. So I don't if I've missed any of the areas you identified, but taken together, we feel pretty good about balance of this year.

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

Okay. So I mean, I guess I hear that, and I hear the excitement, and -- but I also see the results with not just this quarter but last couple of years and acknowledging the environment. But it's been hard to grow both the top line the bottom line thus far for DPS, and I'm just trying to get a sense for what's going to change. It sounds like the answer, to some extent, is commodities, and maybe that's the wrong read. But if I look at the commodity outlook that you got and maybe getting a little bit better, is that insurance policy? Or is that potential upside?

Martin M. Ellen

No . It should be upside. And I think, Steve, this question comes up a lot in this space about profitability over time. And if you go back to 2009, when the industry picked up a lot of commodity relief coming out of 2008, and so that was favorable, and that lifted earnings for everybody, as you recall. It didn't get competed away. And then we saw the increase in commodities, and everybody took price. And everybody knows the category's elastic, and everybody anticipated that it would result in a decline in volumes. And the pricing environment's been rational, and we get some relief on commodities. We'd expect -- we expect that to go to the bottom line.

Larry D. Young

And I'd like add too, Steve. If you'd look at it, I mean, we'll be 40 years old next month. And a lot of the prior year was a lot of our foundation spending, and I think we're really starting to see the benefits from the investments we've made. We've increased marketing over $100 million. I mean, we will spend where we can get results from our brands and what we spend. So we're very confident. We feel very good about this year, and I'm just thrilled to death with our CSD numbers for first quarter.

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

Okay. Great. Just, I guess, on the CSD point, Larry, just building on that. And Dr Pepper TEN, any comments around what that contributed in the quarter would be great. But it looks to us, at least, it's like grocery ACV for DP TEN on the base 2-liter and the 12-pack cans, kind of the SKU is only about 60% with single-serve 20-ounce only about 30%, and that's essentially the same levels that we saw in the month immediately following launch. So first, how do those numbers compare with the cold drink channel? And then more generally, is there -- is distribution on DP TEN where you want it to be? Can it be broadened from today's rate, et cetera?

Larry D. Young

Yes. I don't know where your numbers come from, Steve. We've got grocery ACV at 93%. Convenient and gas were at -- right at 60%. Our trial rate is at 10%. It's way above the target we set for it. Our repeat is right -- repeat rate is right where we had planned it to be. We've got a lot of strong brand impressions out there with it. So I would say on Dr Pepper TEN, it is doing exactly -- doing actually more than what we had planned, and we're very happy with it. And the test we're running on the Core 5 TEN is exceeding our expectations. So we're very happy with that.

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

Okay. And just -- my numbers are Nielsen, and maybe it's that I'm looking at all track channel ACV for the SKU. You're maybe just citing grocery. Is that a possibility?

Larry D. Young

I've got grocery at 93%, convenience at 59%.

Operator

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

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

Just want to follow up on the CSD piece. And you guys talked a little bit about the timing of concentrate shipments. And I guess there was a little bit of a load in the fourth quarter, but it's difficult to see how that played out given some of the repatriation, et cetera. So if I look at the CSD volumes up a couple of hundred basis points, concentrate shipment volumes down 300, I mean, that's a pretty wide gap. Can you talk with us about how that's going to progress over time and sort of how much the lost concentrate volume contributed to the gross margin decline? And I guess sort of going forward, in terms of looking at the second quarter, with Mott's and Hawaiian Punch down, it seems like that should have had a positive gross margin mix impact. Did we see that in the first quarter? And should we model that in for the second quarter?

Martin M. Ellen

Okay, John. So the movements around these items, I guess, in gross margin is your question. So let's go back to concentrate volumes. As happens every year, we do get bottlers that buy ahead of the price increase. And if we try to think about that's always going to happen, so we're always going to have a little bit of a gap between BCS and shipments when you go to Q1 of every year. If I had to put a number on what I think the impact was between Q4 and Q1 on volume, it could be upwards of 1% in terms of the impact and the buy. And now last year, in the fourth quarter, while the concentrate segment may have benefited from that in terms of volume over the prior year, last year, as you know, we were continuing to lap the Coke deal and the loss of those concentrate cases to the concentrate segment, the brand that came back into our distribution business. Mix, I mean, the Hawaiian -- I mean, the size of those brands themselves on mix itself and in the margin is not so great. I don't think it's a surprise Hawaiian Punch, for example, is not a very high -- and as the dollar case. So it's impacts on revenues are probably less than they are on volume, of course. Probably another factor of mix, which you didn't raise, the contract business. So we need to pay attention to some of this product we make for others. Everybody knows we do some manufacturing from some of the energy companies. That category has been growing. Our view of just the impact of the higher volumes in contract on a year-over-year basis reduced gross margins by between 30 and 40 basis points. So that's a factor that probably didn't get modeled at the level all of you tend to run numbers at. So I'll leave that with you, because that business is expected to continue to grow as best that we see into Q2. I think I've covered most of what I can cover.

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

Okay. So I mean, again, you talked a little bit about the annual increases, and you said that happens every year. So I guess I'm trying to figure out what was different this year aside from the repatriation, because that still doesn't get me to as big of a gap between concentrate and volumes as you guys showed in the quarter.

Martin M. Ellen

Well, the only thing I'll add is and which I can add is that when I said it had a -- maybe a 1% shipment volume impact in Q1 is our best year of trying to look at prior year trends associated with the purchase of concentrate before the year-ago price increase and capture what we think the incremental purchases were by our bottling partners. That's how it's measured, because you're -- we're always going to have some activity.

Operator

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

Brett Cooper - Consumer Edge Research, LLC

I was just wondering if you guys could give us a timeframe when you're going to make a decision on rolling out the other TEN products nationally.

Larry D. Young

We haven't come up with a time yet. We're still running the test in 4 or 5 markets. Right now, unless we have results like we saw on Dr Pepper TEN, we can always pull it forward. But right now, we're looking at it being more of a 2013.

Operator

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

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

First, just a clarification. On your comment that you gained share in CSD, is it a retail metric? Or is it a bottler case sales metric?

Larry D. Young

It's on Nielsen.

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

On Nielsen, okay. Okay. And then just in terms of the sort of the gross margin outlook, Marty, you've talked about ending the year or for the full year margins kind of being flattish versus last year, which obviously implies a pretty nice improvement as you get into the back half of the year, it seems like we have to rely on pricing still sort of staying positive to see the benefit of commodity relief. So may we just talk about the competitive environment and sort of your thought on -- at both the consumer level and at the competitive level, where the industry can actually hold on to the pricing that we've seen so far?

Martin M. Ellen

Let me -- I'll take a part of this, and Larry may want to make some comments from an industry perspective. Our pricing guidance for the balance of the year to be 2%, 2.5% for the full year, for the most part, is simply rollover pricing from last year. So it's not really based on any more upward pricing actions. So we don't have to do anything. We just have to sustain that. And of course, on our margin guidance -- and again, I'm not -- I don't want to talk without any mark-to-market impact info here. So last year, we had a fairly dramatic mark-to-market loss. So up -- flat to maybe up slightly for full year speaks to the enormous amount of inflation in Q1. I said up -- inflation up slightly. I think everybody should know that most of the increase we've said was going to be in Q1, and the environment continues to tell us that our expectation should hold. And as I said, we may get even a little more upside from here, but I won't say anything about that until next quarter.

Larry D. Young

Yes. And Judy, also on the -- what we're seeing out in the trade makes us continue to be more optimistic. I mean, we're seeing more confidence in the consumer out there. Our C&G traffic continues to grow. Our volume is up in the convenient and gas. We're seeing trips up. We're seeing the spend up. QSR is up. So we're very optimistic on how we're seeing these trends improve with unemployment in March coming in better. Seeing the overall number of trips in supermarket, convenient gas, QSR growing in mid single-digit numbers are very encouraging to us. When we see the pricing and the promotional activity and trade, again, I'll sound like a broken record, it's very disciplined. It's very rational, and I think we've all learned some lessons from what pricing will really drive.

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

Okay. Larry, just going back to commodity, is there a way you can just give us a dollar amount in Q1 that's just the commodity impact in Q1?

Martin M. Ellen

Yes. It was $31 million.

Larry D. Young

$31 million.

Operator

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

William Schmitz - Deutsche Bank AG, Research Division

On the SG&A line, if I kind take out the advertising spend, it looks like SG&A year-over-year in the consolidated numbers actually came down. And I was little bit surprised, because I think there was quite a bit of transportation inflation as well. So I guess the first question is that $31 million commodity impact you referenced, was that just cost of goods sold inflation? Or did that include some of the diesel and transportation? And then maybe more granularly, how does that sort of SG&A number, x the advertising, trend for the year? Because it seems pretty solid in terms of taking cost out.

Martin M. Ellen

Well, first of all, let's -- the $31 million of commodity inflation is not in SG&A. That's all in cost of goods. And in terms of cost headwinds in transportation for fuel, for example, this is where our early RCI activities beat that back. Most of that savings, I said, occurred in the quarter was in transportation. So even though fuel was up $3 million, we were able to more than offset it with savings. And I'll remind you, we're still looking at that fuel to be up, but we're also continuing to anticipate we'll get some good RCI savings. So we feel comfortable about the SG&A line, and you're right to take marketing out, because that will move around quarter-to-quarter. We like our SG&A cost performance.

William Schmitz - Deutsche Bank AG, Research Division

Got you. And what's driving that though? So it's $8 million of advertising and $3 million of fuel inflation. So effectively, you take $11 million out of the $553 million, and then you're down like 2% or 3% on SG&A with inflation.

Martin M. Ellen

Don't forget -- don't -- okay, a point of clarification. Don't forget that this reclassification of certain customer allowances this year is now reflected in sales as a reduction of sales. And last year, that was included in SG&A of about $6.5 million for the quarter. So it affected the trend you're looking at, and of course, it also, on the net sales line, reduced our dollar sales growth number by 0.5 point.

William Schmitz - Deutsche Bank AG, Research Division

Okay. Got you. And then in terms of advertising support, I mean, year 2 on Sun Drop, I mean I think there was quite a bit of a stepped up spending in last year against the brand. Is that going to be redeployed? Or do you think there's still sort of the strategy that continue to go off at that base from last year?

Larry D. Young

No. We'll continue to grow on that. You've got to remember too, our agreement with MTV on that is most of the marketing is done by MTV, and they do all the promotional, the marketing and what we do on pack. So we will continue to push on Sun Drop, very happy with the results. Like Marty mentioned earlier, I mean, we've seen a decrease in volume, but if you look at the dollar price/mix, we're up 20%. And so it's right where we'd like to see it and continue to build off of it.

William Schmitz - Deutsche Bank AG, Research Division

So -- and how sticky has distribution been? Have there been any losses on the distribution side?

Larry D. Young

No, none at all.

Operator

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

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

I wanted to talk a little more, if we could, about the carbonated performance. Nice improvement there in the quarter, both on the fourth quarter and on last year. You talked about share. What do you think happened in the category? How do you think the category performed versus year ago or versus recent quarters?

Larry D. Young

Well, the category was still weak, Mark. I think everybody can see that, but it -- I see it improving. It's a little spotty right now, how it moves up and down by a 4-week period, but I think it's encouraging to see where it's moving to. I think if we can start -- what I mentioned earlier what we're seeing in convenient and gas, more traffic. We're seeing our single-serve grow. We're seeing our convenient gas business grow. And soon, it should be getting to where the 2-liter and the 12-pack, which are still a little soft in large format. As of those trips into those stores keep picking up, we should see those starting to come back. So I think that's one of the things that makes me optimistic about where will see's CSDs go the rest of the year.

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

Got it. And I'm trying to understand a little bit more of what's driving the share improvement you've had here in the quarter. You've called out the brand Dr Pepper and a couple of your other large brands. As we try to think about what's going on underneath the hood, so to speak, and Dr Pepper TEN is a component here, can you talk a little more about what's going on to drive this improvement in these carbonated brands? And to be honest, one of the things I'm especially interested in is the role of the company-owned 2-liter and 20-ounce promotions. I think those are kind of $0.99 a $1 starting this year and to what extent that's a material contributor to the pickup here.

Martin M. Ellen

Larry.

Larry D. Young

I think one of the things we'd look at as we break it down -- I mean, if we go across all of our 10 platforms, we're seeing a great percent of total trademark across all 6 of them, including Dr Pepper. As we pull them out, we're still seeing the core business grow. So that tells us we've got a lot of strength there. I think point #2, Mark, would be I think we're just -- we really got some superior retail execution going out there. We're really focusing on points of interruption, especially in large format. And as Marty mentioned, we're just now getting into DSD with RCI, and we're going to be freeing up more time for our people to be there out there selling. Another one is all the investments we've made in marketing. I mean, as we increased that over the last 3 years over $100 million, we're starting to see it pay dividends for us. We've got good marketing working. I mean, we went from national to a lot of -- to local marketing. That local marketing is helping us in low per-cap markets, where we're really driving some growth. And so we're just seeing all of the things that we've put together in our strategy, the changes we've made starting to pay dividends for us.

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

And can you speak a little more to the role that -- I don't even know if it's significant, but you've got this company-owned 2-liter and 20-ounce less prominent brands. But are they a big contributor to this pickup in volume overall?

Larry D. Young

It's small, but it is positive for us. In some of our locations, it's a big increase. But we're seeing that the value strategy with the prepriced 2-liters are really working well for us. Like I've mentioned in my prepared remarks, I mean, the brands of RCE, Nehi, Cactus Cooler, Tahitian Treat, they're working well. It's -- a lot of those brands are very regional, so they'll have a larger impact of volume in a regional setting, but it's marginal when you roll it up into the total company.

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

Got it. And do you -- I may have missed this, but do you give us a price/mix number for your bottler case sales, either on carbonated or on a total portfolio basis at the bottler case level?

Larry D. Young

No.

Martin M. Ellen

No.

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

Got it. So was it positive? Can you give us that?

Larry D. Young

Yes.

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

It was positive? If you can give us that? Or it is positive?

Larry D. Young

It is positive.

Operator

Your next question comes from the line of Bryan Spillane with Bank of America.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Just one point of clarification and a question. Just on -- first, the clarification. On the marketing spend, $8 million in the first quarter, and I think you were planning on $10 million to $12 million originally. So is your marketing just rephased? Or is the total full year marketing budget still the same, and you're just going to spend it in different parts of the year? Or have you found more productivity on the marketing line?

Martin M. Ellen

Bryan, it's Marty. The answer is full year expectation should be up about $10 million. Don't forget that when we get to Q4, we're going to lap the $10 million we spent a year ago on the Dr Pepper TEN launch, okay? So unless we decide to do something else that's not in our plans right now, that'll be a favorable comparison for us just in terms of the spend, because we're going to lap that $10 million.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Okay. All right. And then on cash flow, if I look at cash from operations and I pull out the tax payment, it's cash from operations is up north of -- or came in at north of $150 million for the quarter. Am I looking at that right?

Martin M. Ellen

You might be. I look at it a little differently. And if you just take all the tax payments out in -- so just take taxes out, sort of neutralize for taxes in both years -- this year was the Coke and Pepsi. That was a unique payment. But if you take the timing of tax payments out in both years, you should be up about $96 million, as I recall these numbers, and $73 million of that $96 million came from working capital improvement.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Okay. And so, I mean, it's a pretty significant increase in improvement in working capital and in cash flow. Is there anything specific? Is that -- as we kind of trend that out over the balance of the year, I mean, is that a trend? Like...

Martin M. Ellen

Well, I wouldn't. Look, RCI, I mean, this is -- I just told all of you that I've talked to about RCI and Lean. And the early implementations of Lean, it's mostly about cash flow, because a lot of it in manufacturing companies is around inventories. We're operating with higher service levels to our customers, $29 million -- and less inventory at $29 million. It's 6.6 million cases across our PB and LAB businesses. And you got to compare to March, because, of course, the business is seasonal. Obviously, that's a big cash flow contributor. I think we'll continue to take -- I mean, if you're modeling, you, I presume, will model on days of inventory or inventory turnover. We took 7 or so days out. We'd expect that number to continue to grow. So our internal expectations are that we'll turn inventories even faster as we move through the year, and that's going to be a big contributor. On the operating line -- and then, of course, there's capital spending below the operating line which, as we said this morning, is 4%. It came in a little lower this year than a year ago. And when you free up 1.2 million square feet of warehouse space, it tells you something about what your future capital needs may or may not be when it comes to things like warehouses, for example. So we expect an improving cash flow story. That's in our expectations.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

And the effect that we're -- so just to be clear, the effect that we've seen so far, we've seen in the first quarter, is really just the work that you've done on the warehouse side. It doesn't -- you were not even seeing the effect of what you're doing on your DSD business. Is that correct?

Martin M. Ellen

Correct. When I look at RCI, as I said in my prepared remarks, most of last year was spent in our Warehouse Direct business here and across our entire LAB business, principally on the Mexican part of that segment. Nobody's commented on LAB, but you see it just continues to, over time, improve top line and bottom line. And we would attribute RCI and just the passion of the team in Mexico in terms of what they've done in all aspects. We really haven't done much in DSD. This is where we're devoting quite a bit of effort in taking our learnings from the other parts of the business to DSD. And DSD is where most of cost is, of course, and we're just getting started.

Operator

Your next question comes from the line of Bonnie Herzog with Wells Fargo.

Brendan Metrano - Wells Fargo Securities, LLC, Research Division

This is Brendan Metrano for Bonnie. Marty, you mentioned that gross margins would most likely be at least flat year-over-year. How can -- how should we think about the operating leverage, the SG&A line? And why wouldn't operating margins be up year-over-year? And could you maybe talk about some of the factors that would go into that and the sequencing?

Martin M. Ellen

Well, I haven't said anything about what could happen [indiscernible] expect to get some positive leverage. You guys [indiscernible] to think about the marketing, which we're looking, full year, the marketing to be up $10 billion (sic) [$10 million]. We are going to have to deal with higher fuel, as I said and hopefully get that -- we're going to get the savings that I identified. So we very likely should and could get leverage.

Operator

Your next question comes from the line of Dara Mohsenian with Morgan Stanley.

Dara W. Mohsenian - Morgan Stanley, Research Division

Larry, on gas and convenience in the U.S., you touched on this a couple of times, but I was hoping you could discuss in more detail how sustainable do you think the improving trends were from Q1. It sounds like you view it as more of a sustainable consumer rebound than something that was more weather driven. And also, just wanted to check on gas and convenience trends so far in April and how that compares versus Q1.

Larry D. Young

Yes. We're seeing the same going forward as we come out of Q1. Yes, I think sometimes as people talk about the weather, I don't anybody mentioned all the tornadoes we've had everywhere across the entire Midwest that are -- have just really been devastating. That kind of affects our progress too, but we were still able to grow even through that, where we have some locations that we completely lost the entire trade in some of them. So I don't put a lot of time on weather. I tease my guys when they give me a weather report. If I wanted weather reports, I'd hire weathermen instead of sales guys. But I think we've done well there. We're starting also to see gas prices come down a little bit, not where we want them, but they've kind of leveled off. They're coming down some. But I think as I -- when I'm out in the trade and with our customers, we didn't really see that much of an impact when the gas did get to $4. The consumer was still positive, and we saw traffic increases. If you remember back in '08 when that happened, they didn't go in the account -- into the store. They filled up at the pump and left. So we're seeing the traffic increase. We're seeing the ring increase, and it's very positive. Then we'd look at some of the things we're doing to help drive that. With what we've been able to do on Facebook with our 20-ounce program, that has been tremendously successful. And that's why I said in my prepared remarks, we'll continue that through the summer to keep driving that very profitable channel and that very profitable package.

Dara W. Mohsenian - Morgan Stanley, Research Division

Okay. That's helpful. And then it seems like the demand elasticity remains very high on the non-carb side of the portfolio despite pricing being in place for a few quarters now. It sounds like you're not expecting much improvement in Q2. So I just want to get your thoughts around when you'd expect to see demand elasticity moderate on the non-carb side.

Larry D. Young

Yes. I think from our last call, we've told everybody we took our pricing midyear last year. So we knew that our WD business would be a challenge through the first half of the year. We -- in our plans, we see it turning around in the second half. And to -- Marty mentioned a moment ago too that we saw at the beginning of the year another increase in apple juice concentrate on top of the doubling in cost last year. But now we're starting to see it come down a little bit, so that could be a very positive factor for us. I think whenever you look at the apple juice, it's just not Mott's. I mean, it affected the entire category. Everybody had to take pricing on that. And I think we'll see much better results in the back half, and it'll build all the way through the back half of the year.

Operator

Your next question comes from the line of Damian Witkowski with Gabelli & Company.

Damian Witkowski - Gabelli & Company, Inc.

A question. It's nice to see the growth in the quarter. What's driving that? Is it your lower per-cap states or higher per-cap states? Just wondering if there's no difference.

Larry D. Young

I think it's a combination of everything, Damian. I mean, we're seeing great results in low per-cap, great results on our Hispanic strategy. Our regional and our local marketing programs, we're going out and doing very specific -- account-specific marketing instead of just a national. Across the top line, it's paying off for us. TEN is doing a great job for us, and again, I got to go back to our teams on just improving retail execution, getting the points of interruption out in the accounts and then staying very focused on our single-serve growth.

Damian Witkowski - Gabelli & Company, Inc.

And then if you look at your Hawaiian Punch and Mott's business -- and obviously, you've had double-digit pricing that you did last year. So you're lapping that. But I -- and you just made a comment that everyone in the industry is taking pricing. I mean, people are just trading out of the category? Or are you losing share to private label up?

Larry D. Young

It's not as much share. I think we've lost some out of the category. I think everybody has. I think we're starting to see them come back in. I'm very excited about the programs and some of the innovation I see we have for the back half of the year. A lot of that innovation is going to be more into packaging and how we'd go out and did our retail execution. We're going to have a lot of palette displays going out. We've come up with a lot of different ways to pack out to get the point of interruptions in our juice, the same as we do with our CSD. So I really like the plans that I've seen our WD business, led by Aly Noormohamed, for the back of the year.

Damian Witkowski - Gabelli & Company, Inc.

And then cold equipment placement, I mean, what's the -- did I miss it? Or how many are you...

Larry D. Young

Well, I didn't mention that. We're still on track, yes.

Damian Witkowski - Gabelli & Company, Inc.

Okay. All right. And then Marty, your interest expense for the full year comment, you say it was at -- going to be up $11 million year-over-year?

Larry D. Young

Correct.

Damian Witkowski - Gabelli & Company, Inc.

So was it -- I mean, you already had $6 million. Yes. Okay. And then just remind me. On natural gas, how big of an impact does that have? I mean, price is just coming down.

Martin M. Ellen

It's not a huge impact.

Operator

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

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

Just going back to juice, do you think that this price dislocation could have alienated customers that have been gone to something else? What are they drinking instead? That's my first question.

Larry D. Young

Well, I think what we're seeing is our loyal consumer, the mom, is going to buy Mott's no matter what. But I think some that were more in as switchers, as we call them, I think it went to other juice. We're seeing a pickup in juice drinks instead of 100% juice. But I think as we watch what happened in the first quarter, the forecast we have for Q2, what we're seeing for trade, I really feel that we're getting them back.

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

Okay. Because there is a lot of new activity from Coke and Pepsi [indiscernible] and juice drinks. So I'm just wondering if that's going to affect that longer term.

Larry D. Young

I think that a lot of people, they experiment. Try Them. But Mott's is designed for 100% mom. Moms are our consumer there, and we don't see moms switching that.

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

Okay. Also, I don't want to belabor this, and maybe we have [indiscernible] time, but I still don't really understand the 2% CSD volume growth and the 3% shipment decline in beverage concentrate. I haven't been able to -- even if there's minus 1 point from reclass and 1 point timing, it's still not where we need it to be.

Martin M. Ellen

I picked up my other comment about thinking through impact. The concentrate business for Q1, the reclass [indiscernible] coming out of net sales this year [indiscernible]. So that's basically just a $1 comparison factor [indiscernible].

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

So it's the non-carbs down 7% that's driving the shipments down 3% largely.

Martin M. Ellen

If you look at our shipment volume, our shipment volume is down, 1% in total case volume. And of course, those brands are...

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

No. I'm actually just looking at beverage concentrate, which I thought was really largely CSDs.

Martin M. Ellen

Caroline, if I help you offline, right, because the non-carbs are not in CSD.

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

Yes. And then just lastly, Larry, you have something quite optimistic about the consumer in C&G and all that stuff. I mean, is this -- in other words, is April looking as good as or better than March?

Larry D. Young

Yes. We're just saying we don't see that much change. I mean, we've been watching, Caroline, for last the last 3 months just steady gradual increases there. We don't see that changing. We see a slight uptick, and it just kind of works each month, which is what's making us encouraged. We're not seeing any dips in there.

All right. Thank you. And I'd like to thank everybody for joining us on the call today and for your continued interest in Dr Pepper Snapple Group. Thank you.

Operator

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

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