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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

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

Bryan D. Spillane - BofA Merrill Lynch, Research Division

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

Brett Cooper - Consumer Edge Research, LLC

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

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Kaumil S. Gajrawala - UBS Investment Bank, Research Division

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

William Schmitz - Deutsche Bank AG, Research Division

Damian Witkowski - Gabelli & Company, Inc.

Dr Pepper Snapple Group (DPS) Q2 2012 Earnings Call July 26, 2012 11:00 AM ET

Operator

Good morning, and welcome to Dr Pepper Snapple Group's Second 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 Relations. 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 the cautionary statements and disclaimers contained in the Safe Harbor statement in this morning's earnings press release and our SEC filings. Our actual performance can 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, Caroline, and good morning, everyone. As you may have seen in this morning's press release, we once again delivered results in line with our long-term strategy. Our brands continue to perform well in the quarter, despite an unstable macro-environment. We grew both volume and dollar share in CSDs, outperforming the industry. We made solid progress against our goals to increase distribution on availability, and we continue to invest behind our well-loved brands, ensuring that we always bring value to our consumers and our customers.

For the quarter, bottler case sales declined 1% on 4 percentage points of price/mix, as we continue to experience volume declines in our Hawaiian Punch and Mott's brands as we had expected. CSD volumes were flat for the quarter. Our flagship Dr Pepper brand grew 1%, led by Dr Pepper TEN, which we launched nationally in Q4 and our Dr Pepper Fountain business also continued to grow.

Our Core 5 brands grew 1% in the quarter, even though we were lapping the successful launch of Sun Drop a year ago. As expected, both Hawaiian Punch and Mott's declined on a larger relative price increases that were implemented in mid-2011. While Hawaiian Punch declined double digits, Mott's declined 2% this quarter, a sequential improvement from the first quarter. Snapple volume grew 1% as we lap 8% growth in the prior year, fueled by a limited time offering product. We have made solid gains against our distribution of availability goals for this brand, and since it's launch in the first quarter, our Diet Half 'n Half has become one of our top 5 selling SKUs. Our 64-ounce take-home package continues to perform well, while providing value for our consumers. The balance of our portfolio decreased 1% with a high single-digit decline in Crush, partially offset by strength in our Clamato business resulting from our Hispanic marketing efforts.

Moving to our financial results, on a currency-neutral basis, our net sales increased 4% for the quarter, primarily reflecting 4 points of price and mix. Segment operating profit increased 3% for the quarter, with sales growth and productivity improvements more than offset by higher packaging and ingredient cost. Plant field operating cost increases, higher-margin investment of $9 million to support the long-term health of our brands and an $8 million pre-separation related capital lease adjustment.

Reported earnings per share were $0.83 for the quarter versus $0.77 in the prior year. Core earnings per share, which exclude the impact of mark-to-market losses in both years and several other items affecting comparability in the current year were $0.85 for the quarter versus $0.78 in the prior year.

As I've said many times, increasing the per capita consumption of our brands to increase awareness and availability remains DPS' single largest opportunity and I am thrilled with the progress we've made through the first half of 2012. We've increased the availability of our core CSDs, Snapple and Mott's juice SKUs in both grocery and convenience. In grocery, we gain 0.5 point of ACV distribution across our core CSDs. While Snapple and Mott's juice are up 6 and 2 percentage points, respectively. We've also made great progress in convenience where the space is much more limited and harder to win. With ACV gains of almost 7 points of Snapple and over 0.5 point in our core CSDs. In Fountain, we're expanding single-serve availability and creating new sampling occasions with 18,000 net new valves across both local and national accounts, including wins in [indiscernible], Jersey Mike's, Firehouse Subs and SUBWAY. We're penetrating low per capita markets, combining local media with strong retail activation. Our Dr Pepper coastal program targets markets such as Seattle, Baltimore and New York. Year-to-date, our display tie-in rates in these markets have increased by 3 percentage points, and we will also increase our average number of items.

Our Snapple, middle-of-the-country expansion markets continue to outperform the rest of the country. With focused execution behind our innovation, year-to-date volume in these markets grew by 20%, with per caps up almost one serving.

I am extremely proud to see our people leading the charge to develop a sustainable, continuous improvement mindset at DPS. Since we began RCI 16 months ago, we've engaged more than 2,400 of our people in 160 Kaizen improvement events and identified $94 million of annualized cash productivity initiatives which are being implemented. The runway here is long and the journey is endless. I firmly believe RCI holds incredible potential and can be a game changer for this business.

Moving on to marketing. We'll engage our target consumers and increase the awareness of our brands with summer and third trimester activation plans that are stronger than ever. Guy Fieri, the celebrity face of summer grilling, is firing up the grills and giving Dr Pepper consumers exclusive cooking tips and recipes featuring Dr Pepper as a key ingredient. Sunkist and our Core 5 brands have teamed up with U.S.A. basketball to celebrate the 20th anniversary of the 1992 Olympic Dream Team. Collectible cans feature members of the Dream Team, including NBA legends Magic Johnson and Larry Bird. And we're giving fans the chance to win a trip to Barcelona, the city where the team won the gold medal.

Dr Pepper continues its role as a major supporter of college football for the 17th year. We just kicked off our successful Dr Pepper tuition giveaway program, which offer students a chance to win $2,500 in tuition, each week, by submitting videos on the Dr Pepper website or Facebook page. Throughout the football season, Dr Pepper will showcase contestants' stories at halftime, to build excitement, leading up to the championship game.

7UP is partnering with successful crossover artist Enrique Iglesias and sponsoring the Latin Grammys, the #1 rated Hispanic awards show of the year. Consumers will have a chance to win a private performance with Enrique and tickets to the awards show in Las Vegas. Local activation will include Latin Grammy street parties and private sessions. And these are just a few of the great things we have planned.

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

Martin M. Ellen

Thanks, Larry, and good morning, everyone. Reported net sales for the quarter were up 2%, which included 4% of combined net pricing and mix, offset by currency translation and volume. Gross margins were 57.7% this year compared to 58.2% last year. Consistent with the comments we provided in our first quarter call, packaging and ingredients remained inflationary, albeit at much lower levels than in the first quarter, reducing gross margins by about 80 basis points. This was partially offset by positive price/mix, which limited the gross margin decline to about 50 basis points. From a housekeeping perspective, we recorded $7 million of unrealized mark-to-market losses on commodity hedges with approximately $5 million included in cost of goods sold and the rest in SG&A. This had no impact on the year-over-year gross margin rate comparison as we recorded a similar loss in the second quarter of last year. As a reminder, we are now excluding unrealized mark-to-market impacts from our core EPS results and our full year EPS guidance is now stated on this basis.

SG&A expenses for the quarter, excluding depreciation, increased only $1 million, and as a percentage of sales, declined from 37.9% last year to 36.9% this year. We are very pleased with this cost performance given that marketing increased $9 million and we incurred higher field operating costs. Productivity gains, much of which is from RCI, provided some offset to these cost increases. Furthermore, currency reduced SG&A expenses by $7 million.

Depreciation expense increased this quarter by $8 million, $2 million of which is included in cost of goods due to a pre-separation related capital lease adjustment. This has been excluded from our core EPS. Reported operating income of $300 million, which has been reduced by the depreciation adjustment I just mentioned and $7 million of mark-to-market losses, which were similar in amount to last year, represented 18.5% of sales this year compared to 18.3% last year.

Moving below the operating line, net interest expense was $30 million, $2 million above last year as we refinanced low floating rate debt at the end of last year. Our effective tax rate for the quarter was 34.3%, which is below our full year guidance of 37%. This includes a $4 million Canadian deferred tax benefit as a result of a recent tax law change in Canada. This benefit has been excluded from our core EPS. In the quarter, we also recorded benefits from the favorable settlement of some tax contingencies, which were already considered in our full year guidance.

For the 6 months, cash from operating activities was a use of $41 million as we paid $531 million of taxes on the Pepsi and Coke licensing agreements. Excluding the tax payments related to these licensing agreements in both years, cash from operating activities increased by $197 million. Capital spending year-to-date was $89 million, and we returned $293 million to our shareholders with $152 million in share repurchases and $141 million in dividends.

Inventories at the end of this year's second quarter were $58 million lower than at the same time last year, and on a day sales basis, improved by 8 days. This is the most visible and tangible evidence of the success of our supply chain-related RCI initiatives.

With that as a segue, let me add a few comments related to RCI. In addition to reducing inventory by 8 days, we've also closed 10 warehouses, significantly reduced miles traveled and implemented over 500 safety improvements. And very importantly, we've improved customer service levels. The progress we've made thus far gives me great confidence that we'll achieve our goal of at least $150 million of cash productivity over the first 3 years. This year, we're focusing many of our RCI resources on our DSD business, whereas previously most of our efforts were focused on our Warehouse Direct business. We're making great early progress. As Larry said, the organization is broadly engaged. We have a full calendar of improvement activities and we're beginning to demonstrate meaningful financial results.

Moving on to 2012 full year guidance. Despite a challenging macroeconomic environment, including an uncertain and somewhat unpredictable consumer, 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. The pricing environment remains as rational as we've seen it in recent years. Against this backdrop, we continue to expect net pricing to be up about 2% to 2.5% for the full year, with volume up 0.5%. As a reminder, we've now fully cycled the Mott's and Hawaiian Punch price increases that were taken in the second half of last year. So we do expect the volume comparisons to improve.

Let's talk commodities and cost of goods inflation for a moment. PET, and to a lesser extent, aluminum and apple juice concentrate all have shown positive trends since last quarter. And while corn prices have recently spiked, we were already pretty well hedged for this year. And if it weren't for the spring freeze in the Northeast Apple growing regions, I would have been guiding our cost of goods inflation assumption down to about 1.2% this year. But because of this condition in the apple market, we'll have to stay with the guidance of about 2% at the low end of our previous 2% to 3% range.

Consistent with our prior communications, net interest expense will be around 4.5% on our $2.7 billion of debt. We expect our full year tax rate to be approximately 37%. Capital spending is expected to be approximately 4% of net sales, and we remain committed to returning all excess cash to our shareholders in the form of dividends and share repurchases over time.

For modeling purposes, let me highlight a couple of things that will impact quarterly phasing. We expect commodities, excluding mark-to-market gains and losses, to be flat on a constant volume mix basis compared to Q3 last year, with higher cost in the fourth quarter related to apples. And finally, with the strong activity Larry highlighted and heavier media rotations, marketing spend is expected to be up at least $10 million to $15 million in the third quarter, with lower spending in the fourth quarter, as we will lap the national launch of Dr Pepper TEN. Hopefully, these points of clarification are helpful to you as you update your models.

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

Larry D. Young

Thanks, Marty. Before we open the line for questions let me leave you with these thoughts. Our results in the second quarter, once again, demonstrate that our teams are executing against our focused strategy, and we're winning with distribution gains in key packages and channels. And we're driving trial with expanded Fountain availability. We remain committed to always delivering value to our consumers, while ensuring that we're investing wisely in this business and in our brands to drive long-term sustainable growth. We're winning with RCI, with increasing levels of activity and engagement across our entire business and delivering results for our customers and improvements on our financial performance. And finally, we remain committed to returning excess cash to our shareholders over time, 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 Judy Hong with Goldman Sachs.

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

Larry, just in terms of the consumer environment, you've talked about the uncertain and unpredictable consumer. So maybe if you can just give us your assessment of what you're seeing as you sit there today, some of the channel mix dynamics that you're noticing. And then as you think about the volume outlook for the balance of the year, the sequential improvement. How much of that is really just the non-carbs improving as you're lapping the pricing, as opposed to sort of CSD also getting better?

Larry D. Young

Right, right. There's a lot of them there Judy. First of all, the consumer. We continue to be cautiously optimistic as we watch the U.S. economy. But we're also -- a lot of the things we're hearing from others is that they're seeing it slowdown. None of our trends are showing that. We're staying pretty steady in large format. We're seeing continued growth in small format, especially convenient and gas, with our single-serve in our Fountain business. So I would say we're staying cautiously optimistic on that. As you look at kind of going forward on what we're doing with our volumes and everything, you're correct with the lapping the large price increases. We'll be seeing better volume coming in from the non-carbs, especially Mott's, that had the highest increase and then we're seeing a lot more activity with Hawaiian Punch. But we continue to see our CSDs will continue to come in because we'll be cycling Dr Pepper TEN. We've got a lot of good activity out there as we continue with our coastal and the center-of-the-country Snapple programs. And the team just feels very, very enthusiastic about how we'll be able to continue this current track.

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

Okay. And then Marty, just in terms of guidance, so commodities coming down to the low end of your prior guidance. The earnings guidance aren't changing. So is that just offset by marketing spending step-up? How are you sort of reconciling kind of the different components as you think about guidance?

Martin M. Ellen

Okay, Judy. I think, unfortunately, as I said, with respect to -- let's take it piece by piece. No real change on the top line. Cost of goods actually would've been more favorable, but for the unfortunate situation we had in terms of an apple freeze and the run-up on apple prices which, of course, affects Mott's apple juice. We have taken up our view a little bit on some expenses related to industry-related issues. There's a lot of discussion, a lot of things happening in some of those cost that we share with the rest of the industry participants. We've taken up a little bit, in our view, in the balance of the year. Full year marketing could be upwards of $15 million for the year. And as I said in my remarks, with the phasing of that, such that, more so Q3 and then lapping Dr Pepper TEN last year with some favorability there. So I don't really think much has really changed. There's nothing sort of in results, this quarter, that tells us, and our view of the forecast, that we ought to make any change to what is an $0.08 range.

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

Okay. And just following up on commodity. So if you sort of think about maybe 2013, is the apple juice concentrate pricing issue sort of -- that flows into 2013 and how much are you covered on the other component for 2013 at this point?

Martin M. Ellen

Okay. So to be clear for everybody, the comment relative to apples is not really a juice concentrate factor. It's a whole apple factor as it relates to the manufacture of apple sauce. I think most of you know, actually, we procure most of our apple juice concentrate, like many people do, from other regions outside the U.S., most notably China. So that's not a juice issue. That's an apple sauce issue. In terms of -- let me just talk little bit about sort of about commodities, I covered off on where we were on corn this year and so we're pretty good shape this year. It's a little early to talk about commodities for next year. I would say we have layered in, already, some hedging on some of the key items. At not huge numbers, but reasonable numbers at this stage in 2012.

Operator

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

Bryan D. Spillane - BofA Merrill Lynch, Research Division

So just a point of clarification. I might have missed this in response to Judy's question. But your expectation for marketing in advertising for the year. Is it going? Because it was higher in the second quarter than we thought it would be. Is it going up for the year as well?

Martin M. Ellen

On a full year basis?

Bryan D. Spillane - BofA Merrill Lynch, Research Division

On a full year basis, yes.

Martin M. Ellen

On a full year basis I said, Mark, will be up about $15 million.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Got it. And then the second question. Just, I guess, more specifically to the consumer environment. Can you talk at all about how consumer behavior in the convenience store channel and how the convenience store channel has performed maybe more recently?

Larry D. Young

Yes, we're still -- as I just mentioned a moment ago, we're cautiously optimistic with the consumer. We're still showing growth in our small format and convenience and gas. Our Single-serve business is doing well, in bottling can and Fountain. But our Snapple business is just really expanding. We're getting a lot out with the Dr Pepper TEN and our 20-ounce programs that we have out there. So we're cautiously optimistic there, but we are also always aware of listening to other people talk about seeing weakness. We want watch that closely and make sure that the consumer doesn't start listening to it also and believing it. But we feel we have the plans in place to continue our momentum, and so we feel very comfortable where we're at right now.

Operator

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

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

In reading through press release, we see the volume declines on Sun Drop as we cycle the launch and Crush is down year-over-year as well and we're, obviously, a little bit further out from the launch of that. As you look at Dr Pepper TEN and sort of lapping that launch period, what are the key things that you think you need to execute on to avoid having sort of volumes down in the second year? Because that's, obviously, been a big drag on some of these growth brands that come in. You get some excitement, you get some decent volumes in the first year, but you probably had a little bit tougher time, I think, sort of sustaining that volume growth going forward.

Larry D. Young

Right. That's a good question, John. I think our plans on Dr Pepper TEN are completely different than what we've done before. If you look at what we've been doing with the TEN, we've told everybody you've got to be patient. It's something that we look at long-term, that we're going to stay behind, build it. We're even testing some more TEN products to increase that platform. So we're looking at this will be a long term. It's always tough to lap a launch because of just that initial pipeline fill. But the plans we have in place on TEN have us very confident. And then also our Core 5, I mean, our entire portfolio is growing. We're seeing a 1% growth for the quarter. We're seeing a lot of activity behind Sunkist. We're going to continue that. We've got great plans with our partners on Crush. So we feel like we've got a great third trimester program going there. And Sun Drop is another one that -- we're going to be patient on it. We're going to stay behind it. We've made some tweaks to it. We're going to get a little more involved with MTV and we look forward to have a sustainable program out there that'll just have continued growth for us.

Operator

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

Brett Cooper - Consumer Edge Research, LLC

A couple of questions. First one on CSD pricing. Do you expect to take or see industry take price in the second half this year?

Larry D. Young

I think we might see some pricing after Labor Day.

Brett Cooper - Consumer Edge Research, LLC

And then on your concentrate business, year-to-date. I think, if I have this right, your pricing is up I guess 100 to 150 basis points, I think, more than you took to bottlers. Can you just talk about sort of what you're doing in reducing discounts and whether that's sustainable in the second half or should we expect that to reverse out?

Martin M. Ellen

I don't think that's -- first of all, I mean, I think we've talked about our concentrate price increase before being a little higher than the number you quoted. And yes, out of that money, of course, we fund marketing and brand programs with our bottlers and the effect on discounts is as much about programs we're either putting in place in adding to or adjustments we're making to existing programs. And sometimes we talk about this issue of discount [indiscernible], simply not spending either everything we've targeted to spend or in some cases actually decided we need to spend more.

Operator

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

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

Marty, maybe the credit to RCI, you end of the quarter, with more cash than what I, at least, think might be operationally necessary long-term. Maybe by about $150 million, $175 million or so. I guess, first off, is that a fair read on how much cash you need to kind of maintain an operational buffer? And then second, assuming the business continue to generate cash for the balance of the year. How do you expect that cash to be used? Acknowledging higher CapEx, probably in the second half. Should we expect an accelerated pace of buybacks? And I guess is there any chance of interim dividend raise?

Martin M. Ellen

Steve, I would say we've, I think, for cash flow modeling purposes, whether we said it or not, I think $100-plus million in terms of operating cash flow on your balance sheet is probably as good as any number. Yes, we are ahead in terms of cash flow generation from our own view earlier in the year. I can't say enough about RCI in terms of its improvement on the balance sheet. I just threw a metric at you that I looked at the other day. If you look at days and inventories down 8 days and that's why I covered it Steve and I'll get back to the cash deployment. But it's $58 million, it's 8 days. If you actually go back and look at some periods, long before we started RCI, long before last year and you looked at inventory turns from the business and apply those turns without improvement to our financials today, our inventories would be a little more than $100 million higher today. So I think -- I just like great productivity there. So we're generating more cash than we anticipated earlier in the year. Our strategy remains the same, deployment of free cash flow. We'll go into share repurchase in dividends over time. Our pace of repurchases was planned to be sort of where we are. Right or wrong, we concluded that, given the cash flow profile of the company being somewhat back half skewed versus first half and the need to have made the $531 million in tax payment, in our election not to borrow to buyback shares, all resulted in us buying in dollar amount. Fewer shares than if you prorated to $375 million evenly over the year. Long winded way of saying, yes, we anticipate and had put more cash than we thought earlier. We're going to continue to deploy it. I've said we're sticking with $375 million. I think that's a good number for you guys to model. With respect to our dividend we've said earlier that we expect, over time, to be able to be a company that can continue to raise its dividend and, over time, that investors can sort of count on. It is a board matter that our board takes up every year.

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

Okay. I guess on RCI, you again said it confidently, achievement of the $150 million target. But just on the inventory alone, it seems like you're more the majority of the way there. Maybe you said it, but can you quantify where you think you are against that target and how do you assess has been realized on the cash flow statement versus the income statement?

Martin M. Ellen

Well, Larry said, and $94 million, I sort of just give you a metric and if you dialed back even further, applied simple inventory turns, you could argue inventories alone above that. But I think -- I mean, we're well more than halfway. That's in our tailpipes now, 16 months in. P&L a little more slowly, but let me just add this, that our ability to hold our SG&A relatively flat in the face of marketing increases, some labor cost increases. I'd say that's a pretty good result. And if you peel the numbers back this quarter alone, probably RCI was, I'd say, in the $4 million, maybe upwards of $5 million range of actual cost improvement in 1 quarter year-over-year. In essence, this time last year, we were just getting started. So there's nothing in that base number that we're lapping. I think the balance of this year could easily include another $12 million to $15 million. And I continue to say -- Steve, and I give you credit, I think you're closer to this than other people, in having experienced it. We're just getting started, we're just getting started.

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

Great. And one last sort of housekeeping. Branded sales volume in the quarter lagged BCS. For the balance of the year, how should we think about those numbers running versus one another in the back half? Basically in line or will it be some normalization?

Martin M. Ellen

In terms of BCS, your question really goes to volume. So let's go back to this again. And to, I don't know, Brian's question earlier. Our model for this year, the low end, the 3% recall was sort of viewed as in a more difficult environment than maybe other periods and a less than robust environment. Only 0 to 0.5 point is all we ever counted on CSDs and our CSDs are flat. And we acknowledge that Mott's, Hawaiian Punch, even Snapple, I mean not just those brands but those categories are the ones that have always had, in our view, more growth potential and so we've get over them for pricing. And some of the retailer response to that, we saw from. I'm not going to comment too much on how it lays out by quarter. But have our CSDs where they are in this environment, we're pretty pleased about. And the other brands I just mentioned outside, we think have some reasonable growth potential for the balance of this year.

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

Okay. But is there reason to think that sales volume will lag -- branded sales volume will lag BCS in the second half to kind of catch up from what we've seen in the so first half so far?

Martin M. Ellen

We'll catch-up. We have every view we'll catch-up.

Operator

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

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Just a question on Dr Pepper and DP TEN. How much did DP TEN contribute to your brand Dr Pepper growth during the quarter? And was that in line with your expectations? And then also, can you give us an update on the other TEN products and test markets? And then can you also talk about the breakdown of Dr Pepper, brand bottle, TEN versus Fountain growth during the quarter? I guess I'm just trying to get an understanding of sort of the underlying health of brand Dr Pepper.

Larry D. Young

Yes, if you look at our TEN, we're still very happy with the performance of our Dr Pepper and our Diet Dr Pepper. Everything on TEN has come in of our expectations. It's total trademark is coming in as the percent we have planned, in that 5% to 6% of trademark. Again, like I mentioned earlier, it's one that's we're going to do -- it's a long-term strategy for us, we're going to continue to build it. But we're very pleased with the performance we're seeing in Dr Pepper and Diet Dr Pepper. As far as the other TEN products, still a little early to really go into a lot of detail. But we're very, very encouraged. We're seeing even, actually, stronger performance as a percentage of the total trademark on the other TENs. And so small test market out there, still early, but everything is very, very encouraging to us, that we definitely do have something here with a platform on this 10-calorie product. Breaking down the bottling can and everything and the Dr Pepper TEN, our Dr Pepper TEN was, of the second quarter, probably about 1 million cases of our growth on Dr Pepper, which kind of hit Dr Pepper maybe just basically flat, with Fountain food service continuing to grow low single-digit.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Okay. That's helpful. And then, speaking of Fountain, it was up nice, up 3%. And how much of that was driven by incremental valves? And is this sort of a good growth rate or run rate to expect for this [indiscernible]?

Larry D. Young

I think if you look at it, it's consistent with what we've been seeing the last quarters, of about 50-50. The guys have got 1,800 incremental valves out there, so that's the incremental piece of it. Then we're seeing increased VPOs out there. The volume per outlets are looking very good. So I'd look at it as 50-50 as we go forward.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Right. And then just a final question on package beverages and sort of your price/mix in the quarter, I might have missed it, for your package beverage business. And then how did the volume breakdown in the quarter between your branded and then the contract manufacturing in terms of that?

Martin M. Ellen

Okay, Bonnie it's Marty, good morning. The trade-off on volume side, between contract and branded, you're probably looking at, contract up, about 0.5. And then branded being down maybe 1.5, almost 1.5. Sorry, give me the rest of that question again.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Just the difference between the price/mix from each of those will be helpful.

Martin M. Ellen

Okay. I'll go through it to you again, on a reported basis. In beverage concentrates, you're looking at price and mix of upwards of 5 and package beverage is about 4 or 4.4, about 4.4 and LAB about 5. So the differences is volume. On a reported basis and then for LAB you'll have deal with outbacks.

Operator

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

Kaumil S. Gajrawala - UBS Investment Bank, Research Division

In the past you've sometimes given us some additional context on where the marketing dollars were going. We knew there's a launch of 7UP or a rollout of Dr Pepper TEN. For some of the step up in marketing, are you willing to give some context on where you're allocating the funding?

Martin M. Ellen

I don't know specifically. I mean, Larry rattled off, in his prepared remarks, a number of initiatives. Clearly, money is going behind Core 5. Because we always have money behind Dr Pepper and again, it's coming out -- coming out football season and that's a big activity for us. As well, as I would say, Snapple. You're going to see -- but you're going to see more activity coming into the holiday season, on 7UP and Canada Dry. That's seasonal, we do that. So I don't -- nothing, I don't think anything unusual about where the money is being directed or to what activity it's being directed.

Larry D. Young

It kind of ties in my remarks earlier, where it's the Core 5 with our Dream Team. Our continued focus on Snapple and then this is the first time we'll have Dr Pepper TEN in the football schedule. So there's a little extra there.

Kaumil S. Gajrawala - UBS Investment Bank, Research Division

Okay, guys. it doesn't sound like there's any one brand that's disproportionally covers -- not much of it?

Larry D. Young

No, not at all.

Kaumil S. Gajrawala - UBS Investment Bank, Research Division

Okay, got it. And then the final thing on the COGS, just so I can understand this applesauce situation, is this something that's temporary but you now know what the numbers we look like for the next 6 months or is this something that is maybe going to impact COGS a little bit further out.

Larry D. Young

It's always temporary on whenever you have a harvest that's been hit by an early freeze. And it will go away next year but we've got to live with it, it'll hit us in fourth quarter and most of the first 3 quarters of next year. So we know the impact. Our team has been able to put the apples in place and we've also got our price increases already up to the market.

Kaumil S. Gajrawala - UBS Investment Bank, Research Division

Okay, got it. And then with corn pricing. I know you're covered for the bulk of this year, but how should we be thinking about HFCS pricing, and such, next year?

Martin M. Ellen

I think it's too early to comment. We'll be closer to it when we get of the next call. So I think we to wait about 3 months.

Operator

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

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

A follow-up on Kaumil's question and then back to the top line. But is it fair to think that this -- it sounds like this apple issue is about a 3-point incremental headwind in the second half, if you take the comment about 2% versus 1.2%. Is it fair to think that basically you're going to have an increase in commodities in the first half knowing what you know right now? About how your hedges roll off and just this kind of 12-month headwind on the apple side?

Martin M. Ellen

Apple bonds sales unit [ph] have nothing to do per se with hedging. You do the math on 80 basis points on cost of goods and can you can box the impact of the higher apple prices. I don't want to lose people on this. It's get a little complicated, in terms of the phasing of the cost through cost of sales, it gets a little complicated because we are on the LIFO method. If you think about it, we will buy these apples in the fall. Many of them will be in the inventory carried into next year. And so you'd say well, you paid more, but why is it hitting your COGS this year? Why not next year to sell both finished applesauce and the answer lies in LIFO, which expenses inflation currently. So we're going to pay more for apples. Even when we don't sell all the applesauce, we may have lowest-cost likely to have those cost in our cost of sales this year. I tell, you for your models, just stick -- we've, obviously, put all this in our forecast, it's all baked into the 2%.

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

Fair enough. And I know you're not give us the guide on commodities next year, but we're all going to update for next year. It just sounds like, knowing what we know today, you're going to have an increase in cost of sales in the first half next year?

Martin M. Ellen

Yes, Mark, I can't comment now. We'll have color on it for you, much better color, I think, on the next call. It's too early for us to comment on that.

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

Okay, fair enough. And then Larry, on the top line, actually, real positive when you look over the last year or 2, beyond the Dr Pepper, simply Canada Dry and ginger ale, which is on-trend consumer-wise. Is there anything else in your portfolio whether it's root beer or otherwise you think it's just an untapped opportunity that ties into this notion of indulgence and, at the same time, doing something that's better-for-you or at least perceived to be better-for-you something that could start to replicate the success you had with Canada Dry?

Larry D. Young

I think the biggest thing Mark is we're going to stay focused on our Core 5, our spending on the Core 5. To your points, you go across the entire Core 5. I mean, some of this very positive numbers that we're seeing Sunkist come back. But whenever we get this TEN platform out there, as I mentioned earlier, where we're testing it, we're seeing tremendous results. We're seeing a larger percent of the trademark than we saw in Dr Pepper TEN and our core business is growing. So we're going to stay very focused there. We're going to stay very focused on our allied brands. We just continue to grow with VitaCoCo, with Neuro and our other partners out there with big bread and with a high drive that had got some really nice numbers coming in. We're also excited on not just the brands but the channels. I mean we continue to grow in C&G in our strategy there is working. If you look at the Q2 volumes from Nielsen, I mean, the category was up 2.9% and we were up 4.4%. On a year-to-date basis on volume, the category is up 6.2%, we were up 7.2%. So all our programs are working, the brand, the package, the channel. They're just all coming together in the very excited about it.

Operator

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

William Schmitz - Deutsche Bank AG, Research Division

Are you strategically wedded to the applesauce and apple juice business, I mean just curious what it does the broader portfolio because sometimes it seems like more of a nuisance than a help?

Martin M. Ellen

The Mott's a brand is a great brand and we think it's got a lot of legs.

Larry D. Young

In plays very strong on our better-for-you category.

William Schmitz - Deutsche Bank AG, Research Division

Okay. So do you think there's real secular growth drivers for the brand going forward?

Larry D. Young

It had some hiccups we've work through these and I think we'll see it go back to more historical rates of growth. It's been a fabulous brand for us for many years and with what the problems we had with concentrate, I mean, as an industry issue, not just Mott's. But whenever it grows you get a COG that 100% increase that's devastating, we've got through that. The apples sauce something that we've dealt with before. It's always a matter of Mother Nature there early in the spring. And so we're going to work through this and if you look at a lot of the innovation we talk about, I mean in our Mott's brand, our Mott's for Tots, I mean it's a brand that mom is so loyal to that we'll continue our focus behind it. We'll continue to spend behind it and we'll just going to kind of work through these bumps in the road right now.

William Schmitz - Deutsche Bank AG, Research Division

Okay, fair enough. I probably know the answer to this, but it seems like PepsiCo a lot more active in the foodservice channel. When they get a new account do you automatically to go in with them like you...

Larry D. Young

Nothing is automatic. But if it's a location that we have Dr Pepper in, we have a pretty good chance of getting in there. We work very good as partners, and they know what sells good, but there's nothing that's given. Our national account sales team work together, and if it make sense, we're there.

Operator

The final question this morning comes from the line of Damian Witkowski with Gabelli & Company.

Damian Witkowski - Gabelli & Company, Inc.

I just wanted to follow up on pricing. I didn't understand exactly volume pricing was already in the market and then if there is a increase in the second half. I mean would that be upside to what you were thinking right now and am I think about this wrong?

Martin M. Ellen

Damian, Marty Ellen. In terms of our full year pricing guidance, we don't need to take any further actions to achieve that full year number.

Damian Witkowski - Gabelli & Company, Inc.

So your comment about perhaps the CSD industry taking price in the second half could be upside?

Martin M. Ellen

It could be.

Larry D. Young

It could be.

Damian Witkowski - Gabelli & Company, Inc.

I want to step back if you look at your categories and obviously, you're about 80% of your volume comes from CSDs and it sounds to me like if you look at your 3% to 5% doubling growth, even though you don't break it out between volume and price long term, but it sounds to me like probably the growth is going to come mostly from, or at least the non-carbs portion of your portfolio is going to grow a lot faster. Just wondering if that's the case, a? And b, if you look at some of the faster growing non-carb categories energy, which I guess is carb, but I mean the energy is one way your participating to some extent with the growth in the industry. I'm not sure if you're looking at any other categories that you're not in, that you feel like maybe 5 years you should be?

Larry D. Young

No, that's kind of go back to the previous question. But on carbs, we've been consistent on this, with this tough economy right now we're looking at flat to 0.5% and then mid single-digit on our non-carbs, so you're correct. As we get through the tough economic times right here, we'll see probably carbs go to 0.5 to 1 and can see the non-carbs grow a little stronger. Then what else are we looking at? We do play in energy, but we plan it very strategically very local, it's more up and down the Street where we have a lot higher margin on the product that we're selling. Then our Allied brands. I mean, we're out here with VitaCoCo seeing tremendous growth with high drive with Neuro and so we're playing the those have it is what could be the next category. So we are pretty good outlook for these new entrepreneurs to come into to get some distribution. So we've got a team, Damian, that's full-time team that looks at everything that's coming out and see if it makes sense strategically to go into our portfolio for distribution.

Damian Witkowski - Gabelli & Company, Inc.

Larry, what spurred this question, was thinking about Bold House [ph] and what's going on in the refrigerated juice category and a fairly small category $5 billion, $6 billion out of retail. It seems like it's growing its hybrid growth like energy, but a, have you looked at it? And b, if you had why not I mean why not go after either with your own brand expanding or might be acquiring a brand?

Larry D. Young

We've looked at all of Damian, like a Bold House [ph] an example 1 of the things we look at is it's refrigerated. We don't operate in refrigerated. The cost for us to go in and of shipping change in our entire footprint to have something that small a percent of our mix just doesn't make any sense. So we like to stay in our arena, and fight within the ropes that we understand and we're good at.

Damian Witkowski - Gabelli & Company, Inc.

That make sense. And then lastly, you guys have done a terrific job in a pretty tough environment since going -- being spun out of Cadbury back in May of 2008. Focusing on your core business and returning excess cash to shareholders through buybacks and dividends and I think if you look at the stock price, it's all in the chart and the outperformance is there. But I'm wondering, I mean, if you look at your portfolio now, do you think that being 80% CSD, does it hide the potential future growth for non-CSD and have you actually looked at perhaps spinning off the non-CSD portfolio and you have a separate entity in whatever form?

Larry D. Young

No, we're very happy with our portfolio, Damian. Like I said, we're going to see more growth there, we have a lot of focus. I think when you look at our CSDs, yes, we're almost 80% but I think that what stands out for us is that, that 80% is flavors. Flavors are growing. That category is expanding, so we feel we're really in planted in a sweet spot right now. And if you look at where the population growth is going to come from within Hispanic being 50%, their #1 CSDs are flavors, that's what we're going to play and see a lot of our long-term growth. A lot of people I do you see the 3% to 5%. Our team is very confident with our per cap consumption, our Hispanic, our coastal markets, our Snapple. Fixing those per cap is our going to continue to do it.

I want to thank everybody for joining the call today. And for your continued interest to the Dr Pepper Snapple group. Thank you.

Operator

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

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