Q4 2016 Real-Time Call Brief

Highlights

Our 7 Up lane track drove significant improvement in the back half trends for the brand as we experienced 2% growth this past quarter.

For perspective, the brand was trending down 10% on a year-to-date basis through the end of the second quarter.

Allied brand priority SKU volume was up over 30% as a result of our void closure link track.

We reduced our route delivery driver turnover by 14% over the course of the year.

We returned $905 million to our shareholders through share repurchase and dividends.

As you saw last week, we raised our dividend 9.4% in our continued commitment to return cash to our shareholders overtime and intend to repurchase up to $500 million of our shares in 2017.

Turning to the quarter, bottle case sales were flat on 3 points of positive mix and price.

CSD case sales increased 1% and non-carbs declined by 1% in the quarter.

Dr Pepper decreased 1%.

For the full year Fountain Foodservice volume was up 2%.

Our core four brands increased 3% in the quarter, as a 6% increase in Canada Dry and a 2% in 7 UP, were partially offset by a 2% decline in A&W, and Sunkist was flat in the quarter.

For the full year, Dr. Pepper increased 1% and our core four brands were flat.

Squirt grew 8% in the quarter, driven by strong performance in Mexico and the US, and Schweppes increased 7% on growth in Sparkling Waters and the ginger ale category.

Penafiel grew 1% in the quarter, and Crush decreased 1%.

Snapple decreased 3% primarily on lower promotional activity in a large retailer.

Hawaiian Punch decreased 5% on category headwinds and higher pricing on single serve packages and Mott's decreased 2%.

Clamato increased 13% and our water category grew 8%.

In our DSD System Bai grew by over 100% in the fourth quarter, cycling triple digit growth from the prior year period.

All other non-carb brands declined 10% in the quarter, almost entirely due to our exit of the Country Time business in early 2016.

In the fourth quarter, sales volumes increased 1% with reported net sales up 2%.

Currency neutral net sales were up 3%.

As expected core operating income declined 1%.

Core EPS were up 4% in the quarter and excluding both foreign currency translation and transactions, core EPS were up 8%.

For the year sales volumes were up 1% with reported net sales up 3%.

Currency neutral net sales were up 4%.

Core operating income was up 5%.

Yielding and operating margin up 21.5%, up 60 basis points from last year.

Core EPS for the year were up 9%.

Excluding foreign currency translation and transaction impacts, core operating income was up 8% and core EPS were up 12%.

Reported net sales increase included 2 points of favorable product and package mix, 1 percentage point of price realization and 1% increase in sale volumes.

Reducing this net sales growth was a point of foreign currency translation and 1 percentage point of unfavorable segment mix.

Reported gross margins declined 20 basis points in the quarter from 60.5% last year to 60.3% this year.

The impact of mix mostly from allied brands as expected reduced gross margin by 50 basis points.

Certain expected inflationary cost increases and increased depreciation, decreased gross margins by another 50 basis points.

RCI was our weapon of choice to completely offset these cost increases.

Positive net pricing added another 30 basis points.

Foreign currency reduced gross margins in the quarter by 30 basis points.

A favorable comparison of unrealized mark-to-market commodity price changes and lower commodity costs together increased gross margins by 20 basis points.

For the quarter, reported SG&A excluding depreciation rose by $7 million after a favorable mark-to-market comparison, lower fuel cost, and a $6 million foreign currency translation benefit.

Marketing as planned increased $7 million.

Depreciation and amortization declined $1 million in the quarter.

Other operating expense decreased by $4 million on a favorable comparison, to a $7 million impairment charge on a garden cocktail brand that was reported in the prior year.

Below the operating line, net interest expense increased $14 million driven by $12 million of mark-to-market activity related to certain interest swaps and amortization expense associated with a bridge facility related to the acquisition of Bai.

Our reported effective tax rate was 35.4% in the quarter compared to 36.4% in the prior year.

Cash from operating activities was $939 million, down $52 million compared to last year, primarily due to a $35 million multi-employer pension plan payment and certain income tax prepayments.

Capital spending was $180 million compared to $179 million last year.

For the year, total distributions to our shareholders were $905 million with $519 million in shares repurchased and $386 million dividends paid.

The impact on outstanding shares would have lowered 2017 core EPS expectations by about $0.03 before considering our detail 2017 factors.

We are expecting net sales growth before currency translation of about 5.5% with 3% of this growth coming from our acquisition of Bai.

In assets we've acquired Bai's sales to all the other bottlers, distributors and channel partners.

Underlying this revenue growth is 1% organic volume growth and 1% for the acquisition of Bai.

There's about 1.5% of price mix embedded within our currency neutral organic growth of about 2.5% and 50 basis points of this price mix is the impact of our January 1 concentrate price increase.

Foreign currency translation is expected to reduce our overall revenue growth by approximately 1%.

Given our hedge positions and current market prices for our un-hedged positions, we expect packaging and ingredients, excluding the acquired Bai business to be slightly up by about 50 basis points on a constant volume mix basis.

Higher gross profit margin along with the gross margin on Bai sales to other distributors will fund Bai's marketing investment of about $80 million.

Another $90 million in SG&A which is primarily in-selling expense as we are retaining the Bai sales organization and also maintaining Bai headquarters.

Excluding our acquisition of Bai, we're expecting an increase of approximately $30 million in general cost increases and additional increased investment in our frontline people collectively.

We're also expecting an increase of approximately $15 million in health and welfare and risk expenses in 2017.

We expect marketing investment against our base business to be about 7.5% of net sales in 2017 which implies a year-on-year increase of over $10 million and as I just mentioned we are expecting about $80 million of marketing investment behind Bai.

Our net interest expense will be approximately $170 million including $49 million associated with the debt to acquire Bai.

In other income, we'll be lapping a $5 million favorable non cash gain on our acquisition of our Aguafiel joint venture in Mexico.

Our full year core tax rate is expected to be approximately 34.5%.

We expect strong free cash flow in 2017 allowing for recently announced 9.4% dividend increase and stock repurchases of approximately $450 million to $500 million subject to market conditions.

We also expect capital spending to be approximately 3% of net sales.

We're expecting foreign currency to negative impact our results in 2017.

The combined effect of both foreign currency translation and transaction is expected to reduce core EPS by approximately 11% for the year primarily driven by the Mexican Peso.

The Mexican Peso averaged 19.83 to the US dollar in our fourth quarter and we are now planning an average rate of 22.53 for all of 2017, representing 14% depreciation and about 10% weaker than current spot rates.

For your reference the peso has been recently trading around 20.50 to the US dollar.

Should this rate hold for the balance of 2017, our core EPS cold increase by about $0.05 from our current guidance.

Regarding the effect of the Bai acquisition on expected 2017 core EPS, we now expect the impact to be $0.10 dilutive solely as a result of the application of purchase accounting.

We're now expecting approximately $33 million to $36 million in non-cash purchase price accounting adjustments for the year, the majority of which will be recorded in SG&A.

Taking all of the above into account, we are expecting core EPS in the $4.44 to $4.54 range.

Note also that about $8 million of the aforementioned purchase accounting adjustments relates to a write up of the value of the opening inventory.

So we will earn no margin on those sales in the first quarter.

Second, as we are currently in launching our new 7 UP communications strategy along with several other new priority brand creatives, our marketing expense is expected to increase by about $10 million in the first quarter.