Keurig Dr Pepper Inc (KDP) 2008 Q3 法說會逐字稿

Good morning, and welcome to Dr. Pepper Snapple Group's Third Quarter 2008 Earnings Conference Call. Your lines have been placed on listen-only until the question and answer session.

Today's call is being recorded and includes a slide presentation, which can be accessed at www.drpeppersnapple.com. The call and slides will also be available for replay and download after the call has ended.

(Operator Instructions) It is now my pleasure to introduce Mr. Aly Noormohamed, Senior Vice President of Investor Relations. Sir, you may begin.

Thank you, operator, and good morning, everyone. Before we begin, I'd like to remind you that this call contains forward-looking statements and includes statements concerning our future financial performance, which should be considered in connection with cautionary statements and disclaimers contained in this morning's earnings press release and our SEC report.

During this call, we may reference certain non-GAAP financial measures, 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 John Stewart, our CFO. Following our prepared remarks, we will open the call for your questions. With that, let me turn the call over to Larry.

Thanks, Aly. Hopefully you've all had a chance to go through our press release this morning. Let me start by addressing the performance in the premium end of our business.

With contracting GDP, reductions in disposal income, rising unemployment, and consolidation of shopping trips, we're seeing consumers pull back on their discretionary spending and become much more selective about what they buy. This is impacting the premium end of our business much more than our core business. We saw this in September, and we're seeing it in October, and we expect this trend to continue into 2009.

Now it's important to remember that this part of our business is less than 10% of the total portfolio in volume terms, but it's high revenue and high margin dollars per case. The plans we shared with you during our second quarter conference call assumed strong growth in this part of our business.

While sales of our premium priced products were below our expectations, our core business performed very well in the quarter, with CSDs growing half a point, and our value play, Hawaiian Punch, up over 20%. We believe this underscores consumers' desire to seek out value and to seek out products that are not easily substituted. It's the strength and diversity of our brands and the opportunities they have to grow that give us confidence in the sustainability of this business, and we're taking action to support our long-term growth.

In September we announced a number of organizational changes that are centered on the customer and the consumer. These changes will drive process simplification, speed decision making, and ensure the ongoing health and profitability of the total system.

Responsibility for our finished goods business has been moved to Rodger Collins, President of Bottling Group Sales. So now we have all of our US manufactured beverages under one capable leader. Rodger's customer is the retailer, and he has two delivery systems that he can leverage to service them effectively.

This change frees up Jim Johnston, President of Beverage Concentrates, to focus on our other key customer, the third party bottlers. Jim is tasked with putting in place the right programs and processes that not only enable the sharing of the profit pull, but make it bigger as well. For a brand owner like us, there's nothing better than a strong, healthy, and engaged bottler.

Jim and Rodger have already started to work on how to organize and execute more effectively. We're in a unique position where we can learn from our bottlers to make our Company owned operations stronger, but at the same time, by owning operations, we are more sensitive to the challenges our bottlers face. The result is a total system that is better able to meet and exceed the needs and demands of the retailer, while driving maximum profitability. Through these actions we will create a route to market that is equal in strength to our portfolio of strong and iconic brands.

Another change we made was to flatten my leadership team and have both marketing and R&D report directly to me. This will allow us to balance and sequence brand and product development with route to market improvements.

Towards the end of October I had the privilege, along with Victorville Mayor Terry Caldwell and other local dignitaries, to turn the first scoops of dirt on what will come the fifth and final platform plant, scheduled to open in 2010, at an estimated cost of $120 million. This facility will be able to produce up to 40 million cases and will give us critical finished goods capacity to build our business on the West Coast.

Q3 was our first quarter as a stand-alone Company since our separation from Cadbury in May of 2008. A tremendous amount has changed since then, and I suspect we will continue to see more changes in the environment we operate in. As you look at our results, the first point to note is that Q3 2007 was our largest ever quarter of glaceau sales. The absence of those sales in this year's quarter reduced volume by 2 points, net sales by 7 points, gross profit by 3 points, and segment operating profit by 5 points.

So excluding glaceau, volume was up 1%. CSDs were up 0.5%, and non-carbonated beverages were up 3%. Our CSD growth shows that we still have lots of opportunities to grow the portfolio, even in tough times like these.

Dr. Pepper was up 0.3%, and our "Core 4" brands were up 1.5%. While 7UP was down 3%, it showed improvement in its trend, and with the holiday LTO and planned new items for 2009, we expect this trend to get better still.

Sunkist grew 3%, and A&W was up 1%. We continue to see strong growth in Canada Dry, led by Canada Dry Green Tea Ginger Ale. Adding the health credentials of tea, ginger, and AOX to a CSD is attracting newcomer -- new customers and driving up the base. This is exactly what we mean by bringing functionality to CSDs to reignite growth. And I'll share some of our ideas for 2009 in a few minutes.

At a time when fountain beverage sales are declining, Dr. Pepper volume was flat, another sign that consumers are switching from colas to flavors. We continue to add incremental new valves to the system, and we're on target with our installation plans year-to-date.

A combination of consumer retrenchment and higher than expected discounting in teas and enhanced waters resulted in our premium priced products coming in significantly below our expectations. We're seeing consumers either trade down to value products or trade out altogether. For the quarter, Snapple tea and juices were down 10%. Our Mott sauce and RealLemon, RealLime businesses were impacted by crop damage. RealLemon and RealLime, for example, was down 40% for the quarter. To put this into context, this brand has one of the highest revenues we have per case.

Despite these challenges, we continue to find new opportunities to grow our business. Year-to-date we've placed around 8,000 incremental cold drink units, and our "Feet on the Street" pilot program has sold in over 100,000 new SKU facings.

Excluding glaceau, net sales grew 5%. Volume gains and mid-single digit price increases were partially offset by unfavorable comparisons in the discount line. Let me take a second to explain what happened here. A combination of higher planned fountain food service investments and the timing of trade spending in the current year and favorable trade adjustments in the prior year resulted in a $19 million unfavorable comparison, net of volume.

Negative mix from selling more Hawaiian Punch and less Snapple, coupled with the end of certain pricing overlaps, resulted in COGS dollars growing faster than net sales dollars for the first time this year. COGS per case, ex glaceau, were up 10% for the quarter and was in line with our first half trends.

Our supply chain teams continue to drive productivity through the system to help offset some of the commodity cost inflation. OEE, our operating efficiency measure, is up 3.3 points, and we've completed 33 Lean Six Sigma projects so far this year.

SG&A for the quarter was up 9%. The majority of this increase came from below the line items, which John will explain in a few moments. At the segment operating profit level, SG&A increased 3%, driven by higher diesel and transportation costs, labor, and benefit related items and offset by the savings from last year's restructuring actions.

In Mexico, volumes were down 4%. We've taken pricing to cover input cost, and our Aguafiel business continues to face tremendous pressure from bulk water discounting.

In CSDs, Squirt was flat, and Penafiel was down 5%. Net sales were up 7%, and operating profit was up 4%. Total segment operating profit for the quarter down 17%. If you adjust for the items I just discussed, namely unfavorable comparisons in the discount line, the absence of glaceau, and higher transportation costs, what you'll find is an underlying business that we believe performed very well in this climate.

2008 has certainly been an interesting journey, and while our brands are trenched in history, we're still developing as a newly formed public Company. As we end the near of 2008, we are quite concerned about the health of the US and Mexican economy and the impact this is having on the consumer and our industry. We're seeing a dramatic slowdown in liquid refreshment beverages and are being impacted by the strengthening of the US dollar.

Rest assured, we're taking steps to support the long-term health of this business. We will continue to focus on execution and on strengthening our broad and flexible route to market to ensure the distribution side is on par with our brands. We're looking at every aspect of our business, turning every stone in the pursuit of crushing costs.

We're redoubling our efforts around our energy portfolio. We already have a great lineup of brands in the space with Venom, Squirt Energy, and High Drive, and all of them are winning with consumers. Now I'm not saying that we'll make up the Monster loss in 2009 or the next few years, but it is a top priority for our selling team. We know how to build brands, and over time, we believe our energy trio will gain their rightful place in this category.

We will continue to develop strong and relevant product news that meets the demands of the consumer and reenergizes CSDs. Having both market and R&D report directly to me means we're able to develop, scale up, roll out, and execute faster than at any time in our history, and I think you'll see a lot of this in 2009.

We began the fourth quarter with our Dr. Pepper college program and the 1-in-6 under the cap promotion in full swing, and in certain markets we've launched Dr. Pepper in a fund 16.9 ounce football shaped bottle. The feedback we've received from this simple, yet impactful packaging innovation, has been extremely positive.

In October we launched 7UP Pomegranate as a seasonal in and out. Our 2008 program includes a diet version and a 20 ounce offering to complement the two liter regular that was in the market last year. Taking advantage of the strong trends we're seeing in Canada Dry, we will launch Canada Dry cranberry for the holidays, and we'll change our Canada Dry graphics to celebrate the season.

Adding to the success of Venom, we're launching a 16 ounce, four pack offering in December, with what I think you'll agree, is a truly eye catching packaging. We're rolling out Sunkist with updated graphics that communicate its vibrant orange taste, and we're getting ready to restage Snapple Premium. We have a very exciting campaign around this, and you should start seeing this in your markets soon.

We're confident that the new look, better taste, and comprehensive margining plan will reenergize this brand and return it to growth. Our Snapple mainstream offering is also gathering momentum, but faces increased pressure as the category leaders have been using price to drive share.

We're supporting our base brands with new items of new -- with strong marketing. Our second "Trust Me, I'm a Dr." commercial for Dr. Pepper tapped iconic TV shrink, Dr. Frasier Crane, to remind consumers to drink it slow. In the area of sponsorships, Dr. Pepper extended its support of college football and its position as the official soft drink of the Big 12 Conference through 2011 to 2012 season.

Venom Energy signed Dallas Cowboys receiver, Terrell Owens, as its chief mayhem officer and recently completed a national product sampling tour, and along the way, our teams are being recognized for the great work they are doing. For the third time in four years, DPS won Progressive Grocer's best in class category captain for soda. A&W floats become convenient store and petroleum retailers' best new product in the CSD category.

Label Networks' youth culture study named Dr. Pepper the number one favorite soft drink among 13 to 25 year olds, and finally, Sarah Palin went on record as saying, "I never asked for anything more than a Diet Dr. Pepper." A great way to close out a year of many firsts.

Without a doubt, 2009 will be a challenging year for the industry and for us. We're in uncharted territory, and I suspect the normal rules of the road will not apply. I'm reminded of the early 80s when we faced similar economic challenges. Consumer spending pulled back severely, and unemployment kept on rising. The difference today is the consumer has a lot more choice, and this will require a more balanced plan that delivers value and excitement.

We're in the process of finalizing our 2009 plans, and we're adjusting them as we learn more about the health of the economy. While pricing is still needed to cover input cost inflation, we believe it will become increasingly more difficult to execute. Resetting the consumers' perception of value and maintaining strong pricing discipline continue to be must do's for us. At the same time, it will be important to reinvest behind the brands, not in the traditional price soft ways, but surgically, to create excitement, choice, and a reason for consumers to come into and stay into the category.

As we reinvest pricing dollars, we will step up our efforts in the area of mix management and cost controls to deliver a balanced P&L in 2009. 2009 will also be the official launch year of our cold drink strategy. This is a key building block for our business, and our goal is to place 35,000 incremental pieces of equipment per year for the next five years.

Our innovation pipeline is the best I've seen and builds on the successes from 2008. We're bringing excitement to CSDs, functional beverages, and juices. And CSDs will launch Cherry 7UP with AOX, as well as Canada Dry Green Tea Ginger Ale in diet form, to build on the all natural, functional, and diet trends we saw in 2008.

Following this, we will launch Dr. Pepper Cherry that brings light users an amazing smooth experience. One of our findings with the light user was that Dr. Pepper was too heavy, too strong, or too sweet in its flavor characteristics. Dr. Pepper Cherry delivers a smoother Dr. Pepper experience, and in taste tests, both the regular and the diet version had overall -- higher overall liking scores than already high CSD norm.

With our distribution agreement with PBG, PAS, and others, we will extend the reach of Crush in the US from 40% today to almost 100%. We are very excited about building this brand, and will be stepping up our support accordingly.

On the heels of the Venom four pack launch, we will bring two new flavors in the 16.9 ounce resealable cans, Mango and Fruit Punch. This brings the Venom SKU count to six, and along with Squirt Energy and High Drive, gives us a compelling energy lineup that we can take to our retailers and one that we can grow for many years to come.

In juices we will restage Mott's and add more vitamin C per serving. We'll also continue to drive trial in Mott's for Tots with national count sampling programs.

As I look ahead, I remain confident in the strength of our brands, the power of our integrated business model, and the passion of our people to help us navigate 2009. Let me turn the call over to John to walk you through third quarter below the line items, our outlook for the balance of 2008, and a preliminary view of 2009. John?

Thanks, Larry, and good morning, everyone. Below the segment operating line, our costs were in line with our expectations. As Larry noted, the majority of the SG&A increase came from below the line items. Stock-based compensation was $3 million for the quarter, in line with the approximately $10 million that we guided you to for the year.

Under the Cadbury stock plan, options were revalued each quarter. In the third quarter of 2007, a decrease in the fair value of those options resulted in an $8 million gain. The net result was an $11 million unfavorable swing in this line. Similarly, miscellaneous expenses of $4 million in the current year, compared with gains in related party items in 2007, resulting in a $10 million unfavorable swing in other adjustments to operating profit. The final item related to transaction and separation related costs of $9 million, compared with zero last year.

Interest expense of $59 million reflects our first full quarter as a stand along Company with our stand alone capital structure. Interest income last year of $19 million was driven by significant related party receivables that were settled upon separation and thus generated no income for us in this quarter. The combination of these four items drove all of the deleverage from segment operating profit down to EPS versus the comparable period last year.

The effective tax rate for the quarter was 35.8%. In addition to $5 million of items that are indemnified by Cadbury, for which there is an equal offset recorded in other income, our tax team was able to take advantage of a number of foreign and other tax credits to reduce the rate for the quarter. This improved utilization reduced our tax charge for the quarter by a little less than $3 million. The remaining favorability came from overall territory mix.

Our business continues to generate strong cash. Year-to-date, cash from operations was $523 million. Excluding the impacts of related party items, cash from operations was $582 million, up $218 million from the prior period.

We continue to drive productivity in working capital, with trade working capital $51 million favorable year-to-date. Net purchases of property, plant, and equipment were $203 million and are trending in line with our 5% of net sales guidance.

With our strong free cash flow, we have paid down $295 million of our floating rate term loan since our May 7 separation. This puts us significantly ahead of our repayment schedule. At the end of the third quarter, our mandatory debt repayment for 2009 stood at just $90 million, so we have lots of flexibility if we need it.

One item that has been getting a lot of attention recently is pensions. For our business, pension changes have relatively minimal impact. In Q3 we decided to freeze a defined benefits plan and incurred a $2 million curtailment charge in the quarter.

With falling asset values, we expect to make additional cash contributions in 2009. However, these contributions are not considered significant. They have no impact on the P&L, and they will not impact our capital investment or debt repayment plans.

Cash and cash equivalents at the end of September totaled $239 million and comprised approximately $100 million of cash in Mexico and Canada, $100 million of targeted cash for our US operations, and a build of cash ahead of our bond interest payment that was due at the beginning of November.

As you may have seen in our news release this morning, our full year EPS guidance has been reduced to $1.83 to $1.86, excluding items. The rapid deterioration in the health of the US and Mexican economy and its impact on the consumer has greatly reduced our forecast visibility, and that's why we're giving you a range to date.

RB trends slowed in September, and we're seeing this continue into October. We expect those trends will continue into 2009. Our revised guidance also reflects the strengthening US dollar, which is impacting earnings translation and, given the level of US dollar denominated purchases that our Canadian and Mexican operations make is impacting transaction as well. The loss of Hansen natural product distribution is expected to reduce full year operating profits by $7 million.

Partially offsetting these items is lower fuel costs and tax planning benefits. So our updated 2008 guidance assumes net sales growth of 1%. Continued momentum in Hawaiian Punch will be offset by premium priced beverage weakness and the loss of Hansen natural product distribution. Just a reminder, we lapped the termination of glaceau product distribution at the beginning of November.

Packaging and ingredient cost inflation is expected to add 6% to COGS. A slight favorability in our commodities basket is being offset by higher concentrate component and other ingredient costs. Ingredients such as acidulants, caffeine, et cetera, have risen significantly, partly due to a lag in cost pass through and part due to capacity in China that was taken off-line ahead of the Olympics.

One-time items are unchanged, restructuring charges of $43 million, transaction and separation related costs of $35 million, bridge loan fees and expenses of $24 million, and separation related tax items of $11 million.

We're in negotiations with Hansen Natural regarding the settlement under the provisions of the distribution agreement, and we expect to use proceeds from the settlement to play -- to pay down additional principal on our floating rate term loan.

During the third quarter we entered into an interest rate swap to convert a substantial portion of our floating rate debt obligations to fixed rate through the end of 2009. These swaps effectively reduce our interest expense variability over the coming year.

For the fourth quarter our blended average interest rate on our entire debt portfolio, including amortization, is expected to be approximately 6.4%. Our full year tax rate is estimated to be 39.4% and includes $13 million related to indemnified items and $11 million related to separation related items. A 60 basis point improvement versus our previous guidance is driven by our ability to utilize certain foreign and other tax credits, about 40 basis points, and the overall mix of territories, about 20 basis points.

Operating cash flow is expected to trend in line with earnings. CapEx is expected to 5% of net sales, and we continue to expect to use free cash to pay down our debt.

Turning now to the 2009 outlook. As I'm sure you've heard on many other calls, consumer weakness, coupled with increased market volatility, is reducing forecast visibility, and it's making the annual planning process much harder than usual, and we are not immune to this. As Larry said, while pricing is necessary in 2009, we expect it will be much harder to execute. We're committed to building our brands, and we'll look to invest some of the pricing back into the business to create excitement, choice, and a reason for consumers to come into and stay in the category.

While commodity costs have come down substantially, we're seeing a dramatic rise in concentrate component and the other ingredient costs. As a basket and at today's prices, we would expect this to be an inflationary item in 2009. We continue to take cover where we can, and we have a good portion of first half 2009 locked down.

The Hansen Natural distribution agreement has just ended, so we're still adding up the numbers. Through the November 10 termination date, net sales are estimated to be approximately $200 million, and operating profit is estimated to be approximately $40 million.

2009 will be our first full year as a stand-alone Company. As I mentioned on the second quarter conference call, we expect to incur approximately $25 million in higher unallocated corporate and stock based compensation costs and to lose the benefit of approximately $25 million in related party interest income. In total, this will add $50 million of incremental cost to 2009.

With interest rate swaps in place, we expect the blended interest rate on all of our debt, including amortization, to be approximately 6.6%. We continue to expect to spend 5% of net sales on CapEx, half tied to maintenance projects and the remainder tied to the building of the Victorville plant, our cold drink strategy, and our hub and spoke distribution network.

We still have some work left to do to finalize our 2009 plan. There's a lot we know, which we have shared with you today, and the rest is work in process. At the same time, we're looking at ways to make our business more transparent and better mirror the recent organizational changes. We will have more to tell you on our fourth quarter call in March, 2009. With that, let me turn the call back to Larry.

Thanks, John. We expect the remainder of 2008 and 2009 to remain very challenging, given the need to execute pricing to cover costs, at a time when consumers are pulling back on their spending, and the financial and commodity markets remain volatile. We are redoubling our efforts in the area of mixed management and cost controls. With our Lean Six Sigma program and continuous improvement mindset, our teams are finding ways to crush cost every day.

We will look to invest some of the pricing we take, as well as incremental productivity, back into the brands and stay even more connected with the consumer. We are increasing our focus on Venom, High Drive, and Squirt Energy, so we can start making up the loss for Monster. While the landscape may be harder to navigate, we still believe we have an advantaged portfolio of flavored beverages, a broad and flexible route to market, and the ability to leverage our integrated business model to drive total system profitability, while keeping the consumer engaged and excited. Operator, we are ready to take our first question.

(Operator Instructions). Your first question comes from the line of Kaumil Gajrawala from UBS.

First question is it looks -- obviously, gas has come down from about $4.00 to about $2.00. Can you talk a little bit about what you're seeing in terms of traffic trends, as the prices come down? And then also, give a little bit of an update on your goal of expanding [its] distribution there.

Yes, I think whenever you look at the convenience store traffic, we're seeing it starting to pick up a little bit with the gas coming down, but I think we have much bigger issues in the economy right now than just the gas. I think where our consumer was concerned, now they're starting to look at it and say, the savings I have right now I may need to be getting into the bank instead of going out and spending.

We're still seeing strength in our CSDs. As I mentioned in the call, I mean, it's our premium brands where we're seeing the greatest decline. Our teams are continuing to put programs together to help drive traffic into that retailer's account. We're doing a lot of things with the pump poppers, coupons, promotions, buy one, get one, so we're still putting a tremendously strong focus on that. But it's still not -- the volumes are still not -- the strength still not where we'd like to see it there. So it's going to be a continued focus.

Okay. And then, with mainstream, how far are you along in the distribution of mainstream Snapple, and is this going to be the fighter brand, so that (inaudible - background noise) big discounting for competitors?

Yes, it's getting us away from the discounting. You're right there. I mean, right now our ACV is about 11% in grocery. Our best market out there right now, if I'm not mistaken, I think Chicago has about a 67% ACV. As we get this rolled out, we're -- it's going a little slower than we thought. As I mentioned earlier, we're seeing a little bit of price war out there. Some discounting -- just kind of drive some share, but we're very pleased with how it is going right now, and I think the big win is we've been able to stop discounting the premium.

Okay, thank you.

Your next question comes from the line Bill Pecoriello from Morgan Stanley.

Hi, Larry, how are you?

I'm good, Bill.

My first question, just on -- we've heard that the October volume is real weak for some of the players. I mean, some of them are down as much as high single digit. You're saying you're seeing the weakness still in a premium end, but the CSDs still remain relatively strong for you through this weakening October?

Correct.

And then, just on the pricing. Private label pricing is not moving up until January, and then Coke says they're going to spend back some of these funds they took from CC during the holiday period. They lost a lot of share in October. So how do you think the pricing plays out in Q4? You mentioned you're seeing some of those promotions in tea, but do you think it's going to heat up also on the CSD brands into the holidays?

Yes, like you said, we're not seeing as much pricing on the private label, and of course, any time the economy gets like this, you see an uplift in private label volumes, but I think we're also getting a piece of that with our flavors. We're seeing our flavor brands -- the numbers showing some growth.

In the fourth quarter our plans that we have out there now are -- where -- with this economy and the commodities and all the costs we're facing, it's important to execute price, but I think it's going to be one where it's going to be more bill of managing mix, making sure you have the right promotions out there to drive excitement and traffic into the retailer, and really look at efficiencies, productivity, and how can we crush cost, just kind of a trifecta there on that.

Right. And so some of the -- you think some of the post Labor Day pricing over shot a little bit and [comes] back in a bit on that.

We're seeing a little bit of that now, but still, fairly pleased with the pricing discipline we've seen. I think Thanksgiving pricing will tell us, kind of, what we're going to have up through Super Bowl.

Thanks a lot.

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

Thanks. Hi, Larry.

Hi, Judy.

Just going back to the fourth quarter volume outlook. As you think about your CSD part of the business, and clearly, as some of your competitors are taking more aggressive price increases, I'm just curious whether you think that there is actually an opportunity for you guys to gain more share or even take more opportunistic pricing?

Well, right now we don't really -- we've gained dollar share, if I'm not mistaken. The last four periods in a row -- we're up right now 0.3%. So when I look at the -- promoting it back to growth share, we're looking more at promotions, more and more excitement, the in and out promotions.

So as far as discounting, I mean, that's not exactly what we're looking at now. Like I said, we'll see what Thanksgiving tells us on pricing, but I think with the environment we're all in, I'm again thinking that pricing is going to be more of an execution on promotional activity than just actual price off.

Okay. And then, sort of, on the longer term basis, as we think about the LRB category outlook going forward -- obviously, right now we're in a tougher environment, and you're seeing volume pressure there. But longer term, as -- do you think that the LRB category growth outlook has changed in any meaningful way, and if that's the case, how do you think about your investment strategy and, sort of, your initiatives to have your CapEx as a percent of sales in that 5% range going forward and continuing to build your capabilities in terms of the cold drink equipment and et cetera?

Well, Judy, we're looking at LRBs, in a long term, to come to 1% to 2% growth over time. We think CSBs are going to be flat to down 1%, and we really believe our DPS flavored CSDs to be flat to up 1%. In '09 I think we're going to see LRBs down about 2% and CSDs down 3% to 4%. But we think we'll continue to see the strength in the flavored CSDs.

And on as far as long term for our investments, where our CapEx is going right now is into the markets where we have the greatest opportunities for growth, where we're most underdeveloped. The cold drink strategy is getting equipment into places where people -- they work, they play. It's -- if they're not going into the convenience store, we've got it in front of them, where they can pick up a cold Dr. Pepper. Right now we're not in a lot of those locations, so we see that as a great opportunity. The 8,000 that we've placed this year just -- are just doing tremendously well for us, so it tells us the strategy is on track.

Most of our CapEx for next year is the Victorville plant. Victorville -- when you look at the market out there, the opportunities for our finished goods, that's the weakest margin we had, and we got a tremendous amount of upside there, so that can -- we're kind of investing for 2010. We'll have that up and running 2010 and start expanding our lineup out there and also gives us some great efficiencies in our hub and spoke, taking out transportation costs and helping us to crush cost.

Okay. And then finally, Hansen, on their conference call, talked about potentially working with their existing distributors that they're terminating, in order to take back some of the inventory that the current distributors hold. Is that something that you guys could potentially benefit, in terms of the fourth quarter?

I don't know if it -- I don't think it'll have any benefit for us on the fourth quarter. We've been working together on this real close since the announcement come out. Both sides -- you've got to kind of manage in what we're doing with sales. We've had such a great relationship with Hansen's for years that, I mean, we want to make sure that -- we took care of each other on both sides of this deal as it went forward. John, do you think there would be anything on fourth quarter that maybe I'm missing?

No, in fact, the numbers are already quoted and closed. The $200 million and the $40 million includes, Judy, the full sell through -- our current best estimate of what we'll get for selling through the inventory we have.

Okay. All right, thanks.

Yes.

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

Hey, good morning.

Morning, Andrew.

Larry, I was wondering if you could talk more about pricing strategy when you talk about reinvesting. Do you think that would be applied broadly across all categories or any specific channels where you would be applying that more or less?

No, our plans right now, the way we have it laid out, it's across the -- all channels in all categories. We always have to look at it and admit we're facing tough -- a tough economic climate. We're still seeing some COGS rising, so it makes the pricing necessary. But when you get out there, I mean, I think we're going to see a step up in our efforts in mixed management, productivity, make sure we're lean and efficient. I think our price and pack architecture has to be continuously refined. I don't believe that there's no one size that fits all.

There's a lot going on in the CSD industry right now, and at DPS we participate directly and indirectly in all the current tests that are going on. But I think the opportunity is not to buy less for less in single serve, but get -- keep price points in the take home. Take home is where we really got to put a strong focus. We've got to keep customer specific programs, see if there is incremental marketing, do tie-ins with coupons under the cap. Things, as I said earlier, to pull people in and get some excitement, and keep the volume moving.

Okay. Secondly, I guess, related to that. I wonder if you could talk about some of the puts and takes, in terms of building to grow your CSD share in 2009. You will be reinvesting more. You've got a major competitor who will be reinvesting more in the category, and at the same time, some of your third party bottlers are going to be -- are still talking about very aggressive pricing at retail. So I wonder if you could help us sort of balance those factors for next year.

You know, I -- the visibility right now, Andrew, is really tough out there. I know the plans that we have out there is we have the pricing in there. I think all of us are going to be spending more back on our concentrate pricing. When we go out with it, it's going to be mid single digit. That one will come out in the first of the year on our -- when you look at our actual sales up and down the street, we've got a -- we've got some increases in there, but much more of it is going to be mixed and incremental distribution to get that mix of that single serve up, and then to really manage closely that take home.

And in the take home piece, which is the majority of it, I mean, we've got to look that and say it's going to be a combination of mix. It's going to be a combination of innovation, in and outs, bringing excitement in, and then just making sure that every person on the team, every day, is crushing cost out there.

Okay. Did you see any change in your distribution availability in single serve or cold drink this quarter, or is that something that would be more beginning of next year?

The majority of it will be next year. That's when the bulk of it will be going out, but like I said, with the 8,000 we've put out, our Feet on the Street program, we're seeing continued improvement in that and getting some of our -- not a lot, but it doesn't take a lot. Some of our mix shifted off of 12 pack cans.

Okay. Just one final question. In the bottling segment, excluding some of the one-time impacts, like the Hansen's loss, do you think there's an opportunity to improve the cost management in bottling next year? And secondly, will there be much reinvestment required for some of this realignment that you're doing in the bottling group?

Well, there's absolutely opportunity on the bottling side, and that -- Rodger Collins and his team are all over that. As far as an investment into that, there's not that much. The cold drink is the primary investment. The realignment of our business -- it's not going to take a lot of investment. I mean, it's just more of a dedicated focus, more speed with decisions, and much more clarity on accountability.

Okay, thank you very much.

Your question comes from the line of Bryan Spillane from Banc of America Securities.

John.

Hey, Bryan.

Two topics that I wanted to cover. One, in terms of the cold drink placements, how much was Monster a factor in those equipment placements? So is there any way you can kind of quantify how much Monster was in the 8,000 coolers that you placed this year, and, sort of, what had been, at least, anticipated in terms of future placements, and assuming that it's in there, has losing Monster sort of affected your -- the way you're thinking about cooler placements going forward?

Well, first, Bryan, remember that Monster is only in a third of our footprint here. Of the 8,000 coolers, none of that is Monster.

Okay.

Where we have relationships with Monster coolers, they have generally funded the cooler placements themselves, as was the case with glaceau.

Okay. And so there is no real impact on your cooler place (inaudible - multiple speakers). Monster really isn't going to affect the cooler placement economics?

No.

Okay. Great. And then, Larry, we've talked before about the potential for Coke and Pepsi to -- making changes in their packaging, both -- maybe introducing smaller pack sizes or configurations in the take home channels, and then also experimenting with smaller pack sizes in the immediate consumption channels.

Can you talk at all -- just observations that you've made -- do you think that, at least where they've experimented in take home channels -- or, I'm sorry, in impulse channels, whether it's been incremental, whether it's been effective, and also just how you guys are thinking about potential packaging configurations for next year?

Right. Right. Yes, we participate in all the tests with our third party bottlers. I mean, we've got every pack size out there. I'd -- the major focus that, at DPS, we as a team here look at it and say there's got to be more focus put on take home than necessarily immediate consumption. Our immediate consumption is still doing okay. I think the -- I'm not big on buy less for less, but I like to put a lot of focus on what are we doing different in take home, whether it's -- and with our partners, I mean, we're participating there also, whether it's the 18 packs, the 15 packs.

I mean, we're doing a lot of things here right now, really looking at value. We've got some markets that we're running a 1.5 liter in to get a better price point to show the value. And so we're putting more of a focus on the take home than we are the immediate consumption.

Has anything jumped off the page at you yet that seems like it's -- it might have some traction?

I think the biggest thing on take home is make sure you have the right price point out there. You've got to have that price point that shows the value on their favorite flavors and their brands. I've been excited with what I've seen on the 1.5. Kind of reemphasizing on the immediate consumption, I hate to sell less for less, but I think if we just drive traffic there, we get much more done.

I think a lot of it right now is not getting as wild on discounting 12 pack, coming out with some other packages with half liter [PT], two liters, 1.5s, one liter. Have it mix and match. We're seeing a lot of success with that, instead of having that stand alone 12 pack display, giving that consumer the opportunity to mix and match several different size packages. That way it gives -- you'll see Mom pick up her 12 pack in a PT, and she's probably buying a regular Dr. Pepper for Dad and Sunkist for the kids.

Helps bring more variety into the pantry, right?

Exactly.

And just one last thing, if I could follow up on the -- just the pricing. We've heard from -- and mainly from food manufacturers, that retailers in the last couple of weeks have begun reaching out to manufacturers, and given where commodity prices have gone, are looking for some price roll backs?

Yes.

Have you seen or heard of any similar letters coming out of retailers, coming back into your business or into the soft drink industry?

Well, in my entire career, that's kind of their job to try to do that. Yes, we've seen some ask about -- well, now commodities are coming down -- I mean, they came down for two weeks. We've got to look much more long-term. I think that whenever we look at some of them, they've been pushing on the prices coming back is probably where it's starting to show where it's not a value.

I still believe where we're priced right now, it is truly a value, and there is still opportunity for pricing, if you have the right promotion behind it, if you have the right excitement. So we're not getting a lot of pressure on that, but every retailer will always try and see if there's a little more to go back on.

Okay, great. Larry, John, thanks for the answers.

Thanks, Bryan.

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

Yes, thank you very much.

Hi, John.

How are you doing? I guess I should be Gaylord Faucher for this call, not John Faucher. I do have to say I've used that joke on conference calls before, so -- quick question on the negative price mix on the concentrate side. Can you walk us through how that happened? Is that maybe more Crush? Is that extra promotional spending to try to hit the right price points?

And then, I don't know if this is an odd question to ask or not, but "Chinese Democracy" is hitting stores, apparently, on November 23. Is there any impact to your spending levels, in terms of having to do the national promotion, in terms of giving away a bottle of Dr. Pepper? Thanks.

I'll let John add some of that on. "Chinese Democracy," I mean -- of course, we had a policy to cover that, so, I mean, we don't really see an impact there. I mean, that was much more kind the excitement and getting some hype.

John, on the discounts, we don't have any negative mix in concentrate. The discount issue is all around [fun] food service, and it's discounts that we planned for the full year. About 11 of the 19 was planned in our numbers and fully expected. About six of it is timing, where we had some favorability in prior quarters that's come back and reversed this quarter. And the balance, just some favorability in the prior year. So it's pure -- it was unrelated to volume, and there's no overall dilution in concentrate margins.

Okay. Thank you very much.

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

Hey, good morning.

Good morning.

I was hoping you could give me more clarity on Mexico, as we sit here today. The currency, obviously, has taken a hit, beginning end of July, I guess, and on. Can you help me understand the cost structure? Obviously, -- it sounds like the -- lot of your costs for the Mexican business are actually in US dollars, so you're getting a double whammy here.

Damien, hi there. Couple of things on Mexico. As I mentioned in my comments, obviously, [we've got] translation, and obviously, the translation has only become an impact since the last several weeks. But we're projecting that forward, both for this year, and as far as we know at the moment, for next year.

The transaction exposure we have in Mexico, and this is true in Canada as well, there's a not insignificant piece of our Mexican business that is sourced US products, and actually, in some cases, ingredients for Mexican produced products include sourced US raw materials. So we've got a combination of transaction variants, and translation as well, that is the double whammy, and then if you add what's happening to the Mexico consumer, the deceleration in consumer confidence has been very sudden and quite severe.

Indeed, we're looking at October volumes that are extremely challenging and -- on our major brands down there, and we've just seen that consumer confidence is at its lowest in six years. What's more, we're seeing the C-Store chains in Mexico report some really dismal same store sales. So when you combine the economic environment with translation and transaction, you've got a trifecta of bad news in Mexico.

Not just a double whammy. It's a trifecta. Good. The -- but back of the envelope -- I'm sort of backing into -- or just for the fourth quarter, if the translation rate stays where it is, about $0.04 impact, am I close or way off mark?

It's probably nearer to $0.02 on --

Okay.

On [effect].

And just remind me, John, on raw materials for 2009, how much of it is hedged currently?

We are -- most of the first half of 2009 is hedged, and we're looking to take cover as we see these new lows, literally, day by day, at the moment. So most of the first half.

Okay. Thank you.

Thanks, Damien.

The last question comes from the line of Mark Swartzberg with Stifel Nicolaus.

Thanks. Good morning, everyone.

Hi, Mark.

Larry, I was hoping to get a little more color or detail here on the tea business. I don't know if I missed it, but can you tell us -- that 10% down number for Snapple, how that broke out by channel?

Well, on the 10%, if we kind of break it out -- I mean, our -- as I mentioned earlier, our super premium was probably affected the most, because of the price points. So, I mean, that's going to be more your -- it's across all channels, but, I mean, a lot of it's on the immediate consumption. Our 16 ounce premium glass has kind of followed the same suit all the way along the lines of the convenience stores -- the immediate consumption, but we run into some pretty heavy discounting. But as we go through it and look at them, it's pretty well even throughout the categories.

Okay. And then, I mean, if you think about mainstream to -- how powerful is it as an antidote to some of this price competition? Where is this power greatest from a channel perspective? I would think it's -- well, where is it greatest from a channel perspective? And then, what does that imply for other activities you need to do, including -- getting more promotional, including on the super premium brand?

Right. What you're going to see is the -- when you look at the mainstream, that is a take home package. So, I mean, that's going to play into take home channels -- super market, and most of it's done on display, which kind of helps us get the price points back up on our premium.

I think the biggest thing that's going to help us with this and get it reenergized is you're going to see our complete facelift of Snapple coming out. I mean, we're going to make the best stuff on earth even better. We're coming out with the new glass, the new packaging, making it more consumer friendly, more modern, more hip, and we'll have some of our first product running off the line in Florida next week.

So everything we're seeing on that, everything that we've shared with our customers, we're very excited about what we can do on getting the premium back in place. If you remember, in my -- speaking a little while ago about -- I mean, on mainstream and take home, you take a market like Chicago's, where one of the first that we into, the ACB there we have is fantastic, and we really expect we'll see that grow across the other markets, as we keep this roll out going on.

Okay. And then -- that's helpful. Thank you. And then lastly, on mainstream -- I mean, this is pretty much the time of year -- it seems that it's key to get the ACB number up pretty significantly over the next six months. And this is the time of year where you're having those conversations with retailers about how they're going to be setting their shelves next year.

Right.

Is that a fair characterization, and is it fair to say that you didn't really go into '08 placing the focus on it, vis-a-vis, the retailers at this time of year in '07 that you intend to this year?

Exactly. You're on it exactly. I mean, we had -- we did a test in '07. We had to come up and make our changes, but you've hit it right on the head. You've got to be in the right windows to get in those planograms, and our teams are out there right now, getting that sold in, and we're pretty excited about it.

Great. Thanks, Larry.

Thank you. Well, thank you once -- well, I was waiting for the operator there, but -- thank you, and if there are no more questions, I'd like to thank every one of you for your time and for your interest in Dr. Pepper Snapple Group. Thank you very much.

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