Keurig Dr Pepper Inc (KDP) 2009 Q3 法說會逐字稿

Good morning. Welcome to Dr. Pepper Snapple Group's third quarter 2009 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 that can be accessed at www.DrPepperSnapple.com. The call and slides will also be able for replay and download after the call has ended. (Operator Instructions)

It is now my pleasure to introduce Aly Noormohamed, Senior Vice President Finance and Investor Relations. Sir, you may begin.

Thank you, Jackie, and good morning, everyone. Before we begin, I would like to direct your attention to the Safe Harbor statement and remind you that this conference call contains forward looking statements, including statements concerning our future financial and operational performance. These forward looking statements should also be considered in connection with cautionary statements and disclaimer contained in the Safe Harbor statement in this morning's earnings press release and our SEC filings. Our actual performance could differ materially from these statements but we undertake no duty to update these forward-looking statements.

During this call we may reference certain non-GAAP financial measures which we believe provide useful investigation 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. Good morning, everyone. As you saw last week, we announced John Stewart's plan to retire in March of next year. John has been a great partner to me and a great CFO for our Company through an incredible period of change. So while I am happy for John and his future plans I am sad to see him go. There is no question the Company could not be where it is today without John's talent, dedication and strong work ethic. He played a critical role in our successful separation from Cadbury and has led significant improvements in our systems and financial controls. He deserves much credit for building a talented and highly effective finance and IT organization. In short, John has made a lasting contribution to our great business. I am pleased he has agreed to stay until March 31st to ensure a smooth and orderly transition.

Before I comment on our results for the quarter, let me start with some of the great wins we have had this year. We are proud of the growth we are delivering, Year to date in measured channels, volume and value share in flavored CSDs and juices is up in the US, Canada and Mexico. Leverage in our flexible route to market, we teamed up with our Pepsi bottlers to significantly expand the distribution of our Crush brands across the US, driving significant incremental volume and profit growth. With both Sunkist and Crush in our portfolio, we now have the number one and number two orange flavored sodas in measured channels. And more importantly, Sunkist and Crush are also number one and number two in the fruit flavored CSD space.

Successful product innovation launched during the year has brought new users to CSDs, driving momentum across our trademarks. Dr. Pepper Cherry which was formulated to specifically target the light user, is igniting growth across the Dr. Pepper trademark and driving trial and repeat, especially in the critical coastal markets. In fact, this product was recently awarded the 2009 CSP retailer choice best new product award.

Continuing our success with Dr. Pepper, we've expanded our fountain availability with key wins at McDonald's and Jack in the Box. 7Up Cherry with antioxidants and Canada Dry Green Tea Ginger Ale, both with functional benefits, at a great CSD price, are bringing consumers back to CSDs. The Snapple premium restage with real sugar, updated graphics, new packaging and national media, together with expanded distribution of the value tea line is helping us to turn this business around. We are also very happy to report our second quarter of sequential improvement.

Despite a challenging macro economic environment, our cold drink placements are progressing to plan and year to date through October, we have placed 32,000 units. To strengthen our Company on routes to market and to improve operating efficiency, we have invested heavily behind network infrastructure upgrades. We are optimizing our hub and spoke model through distribution centers and warehouse consolidation, and will soon open Victorville, our fifth regional center. Our SAP upgrades and handheld rollouts are well underway and are driving much needed back office standardization and productivity. Our first phase of the SAP upgrades, which covers our CSD business, is 85% complete with no loss in business continuity and includes 110 branches and over 2,500 users. Blueprinting has begun for the second and final phase of SAP upgrades which will encompass our warehouse business, Mexico, with completion targeted for Q4 2010.

Our handheld rollouts are over 75% complete and we have already begun to drive improvements. We are seeing benefits in inventory tracking and product shrink.

On the cost front, our procurement team capitalized on weaker market conditions to renegotiate key contracts at more favorable rates. We are also utilizing our productivity office to fund continuous improvements across the Company. We remain committed to paying down debt. This year through September, we've repaid $480 million. During the third quarter, S&P raised our outlook from negative to positive.

Our call to action programs, designed to communicate our business priorities and drive key behaviors, is already delivering results. Today we have taken over 5,000 employees through 300 workshops across the US, Mexico and Canada. We will continue to drive this program to all of our front line employees in 2010, and launch the next phase focusing on developing great coaches. I am truly proud of the organization we have built and continue to build in our first full year as a stand alone Company.

Moving onto Q3 and full year results, the business delivered another quarter of solid top line and strong bottom line results. However, across North America, LRBs continue their declines. Consumer spending remains weak and people continue to gravitate toward value. Large retailers are looking to reduce prices across the store to drive incremental traffic and retain their customers. DPS brands and category management leadership, as well as strong retailer relationships, will insure we continue to provide solutions and value. Through Q3 we continue to see a bias towards promotional activity versus price off, and we're happy to say that pricing remains rational.

Excluding the loss of Hansen's product distribution in the prior year, volume grew 4% for both the quarter and year to date. For the quarter, CSD volume was up 5%. In total, Crush accounted for 70% of this growth. Also contributing handsomely was Dr. Pepper which grew volumes 3% on continued success of Dr. Pepper Cherry. Penafiel grew volumes 10% on expanded distribution and its restage. Our fountain volume was up 2% for the quarter and up over 1% year to date despite 3% declines in total restaurant traffic. In noncarbs, Hawaiian Punch grew 3%, lapping strong double digit growth in the prior year. Premium price beverages continue to be negatively impacted by the consumer shift to value offerings.

Snapple declined 6% in the quarter, but improved sequentially for the second quarter in a row. Net sales, as adjusted, grew 2% for the quarter and 3% year to date as pricing taken early in the year and strong volume growth were offset by negative mix from higher sales of CSD concentrate and value juice. Segment operating profit as adjusted grew 31% in the quarter driven by lower packaging, ingredients, and transportation cost, a strong cost control focus and favorable comparisons to certain discounts and inventory adjustments in the prior year.

Better than expected trends in input cost have given us the flexibility to invest in the marketplace, to support the long term health of our brands. As brand owners, we believe that such investments are not only necessary but in times like these critical to drive increased relevance and awareness. We're proactively leveraging lower advertising rates to put more brands on the air, more frequently, at lower costs while driving strong GRP growth. In fact, our back half media investment is almost double last year's level with GRPs growing even faster.

To capitalize on the success of cherry with antioxidants and 7Up momentum, we have significantly stepped up our TV, radio and outdoor investments. Our most recent spot features the notoriously crabby celebrity, Brad Garrett, experiencing 7Up's positive mood boosting capabilities as part of our new Ridiculously Bubbly campaign. Expanding on its role as a major supporter of college football, Dr. Pepper kicked off the season as the presenting sponsor of the BCS championship coaches trophy. Diet Dr. Pepper also returned to the airwaves with a new spot designed to remind consumers of the great taste of Diet Dr. Pepper. The ad features a support group learning for the first time that Diet Dr. Pepper is unbelievably satisfying.

We've expanded our two-liter light user program with incremental IRCs targeted at increasing consumer trial and repeat purchases. We are also bringing news to Snapple Premium. In September we launched a limited time offer, Make a Mint tea. With a win free rent promotion running through November. The Better Stuff media campaign was expanded through mid November with spots airing during top prime time shows including "Dancing with the Stars," "Glee" and "Private Practice." To fully participate in the large value tea market and complementing our Snapple 16.9 ounce PT offerings, we are testing Snapple value cans prepriced at $0.79. We will test these in five select markets. Our significant distribution of availability opportunities will be supported by our multi-year innovation platforms featuring Dr. Pepper Cherry, 7Up Cherry with Antioxidants, Canada Dry Green Tea Ginger Ale and Venom.

Dr. Pepper is the oldest major soft drink in the United States and in 2010 will celebrate its 125th birthday with a series of collectible vintage glass bottles. To continue the positive momentum on Crush, we will add cherry to the line up with a national launch in January. We are bringing news to the Mott's for Tots lineup by adding vitamin A, C, and E to the strawberry banana and fruit punch flavors. We'll help mom give her kids the fruit and veggies they need with the introduction of Mott's Medleys. With the great taste of Mott's juice, each eight-ounce portion will continue two fruit and vegetable servings, in addition to 100% of their daily vitamin C needs. In Snapple we will take our $0.79 value cans nationally and to energize our premium single serve business, we'll introduce another limited time offer, a cranberry tea with the tag line "Cran you do it?"

In this value oriented economy, consumers are entertaining more and more at home. And with this in mind, we are restaging our entire Mr & Mrs T mixer line with improved products, updated graphics and a new, one liter bottle. We are supporting our brands and our new products with strong consumer messaging. Dr. Pepper will kick off the year with the Academy of country Music Awards, supported by instore and on-pack promotions featuring the award-winning group, Sugarland. Building on the success of our Trust Me, I'm a Doctor campaign, we will bring back Dr. Love and a whole new rosters of doctors to make house calls on your behalf, reminding consumers to drink Dr. Pepper slow.

We've partnered with EA Gaming to create a relevant year long event on single serve Dr. Pepper bottles where everyone wins free gaming prizes. Core 4 CSD programming is a bundled approach to display activity with a focus behind key mega events. Each event will be a brand led but will showcase the entire Core 4 portfolio. We will tip off 2010 with a Sunkist led basketball program, fueled by bigger than life college basketball personality, Dick Vitale and we will continue to run our 7Up spots.

Moving to Snapple, we have found Better Diet Stuff and will support it with TV, online, FSIs and a free diet 6-pack promotion. With such a strong line up we are confident of a fast start in 2010.

Now, let me turn the call over to John to walk you through some of our below the line items and our guidance update in more details.

Thanks Larry, and good morning, everyone. As we discussed on our second quarter call, our unallocated corporate costs include our exposure to unrealized mark to market gains and losses from commodity related hedging activity. In the quarter we recognized an unrealized gain of $3 million. We are also incurring increased expanses related to our productivity office and this will continue into the fourth quarter. Our reported tax rate for the quarter was 38%.

Let me take a moment to explain the items impacting tax for the quarter. First, we recorded $16 million of indemnity in the other income line and $8 million of tax expanse related to separation. Driven by a tax audit resolved in the period. Second we recorded a $5 million one time Mexican tax benefit. The net of these three separation related tax items was the $13 million benefit you saw in the press release.

Year to date cash provided from operating activities increased by $178 million compared to the year ago period. The absence of separation related uses in the prior year added approximately $80 million, and a higher level of accrued customer rebates and compensation related items in the current year added $85 million. Net capital spending of $218 million continues to track in line with our full year guidance of approximately 5% of net sales. For the quarter, we made optional principal repayments on our term loan of $200 million, bringing our year to date repayments through September to $480 million. We now expect full year revenue to be down 3% to 4% on a currency neutral basis and excluding the loss of Hansen's product distribution we now expect full year net sales to grow approximately 2%. This represents a modest reduction from our second quarter call, driven by the following recent changes. A higher mix of marketplace spending recorded in the sale's discount lines, more pronounced declines in Sunkist starting in Q3, similar promotional activities as before but without the customary lift impacting revenue management, lower than expected velocities through our coolers due do continued macro economic pressures. And finally, during 4Q, we will start to exit certain low margin contract business.

We expect full year earnings per share, excluding certain items to be $1.92 to $1.96. The benefits of lower packaging and ingredient costs which are now expected to reduce total costs by less than 4% on a constant mix base will be offset by lower revenues and continued strong marketplace and productivity office investments. Our cash priorities are unchanged. We now expect full year debt repayment of $550 million, an increase of $75 million from our last guidance update. As we approach our optimal capital structure, we will look to balance future debt pay down with cash returns to shareholders.

Regarding 2010, we are in the process of finalizing our plans. While we are confident in delivering our long term guidance, off our 2009 base year there are a number of items I would ask you to be mindful of. First, based on the commodity coverage we have taken to date, we expect packaging and ingredients to increase total COGS by less than 1% on a constant product mix base. You will recall on our second quarter call we said down 3% for 2009 and flat for 2010. Essentially we are the same over a two year period but now with more of the favorability in 2009. Secondly, we will be accessing certain low margin copack business starting in Q4 2009. Third, we will incur significant startup and depreciation costs related to our Victorville facility coming online. Finally, we will incur our third year of stepped up stop base compensation costs. We will provide further details of 2010 during our fourth quarter call in February.

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

Thanks, John. Before we open the lines for questions let me leave you with just a few thoughts. We remain focused on executing our strategy. Through selective marketplace, productivity and people investments, as well as infrastructure enhancements, we are laying the foundation for our long term growth. We have increased our full year EPS guidance by $0.29 since the beginning of the year, while investing heavily in the business. With strong business performance and strong cash controls, we expect to repay $ 550 million in debt for the full year, an increase of $150 million from the beginning of our year guidance.

Operator, we are ready for the first question.

Thank you. Our first question is coming from Judy Hong with Goldman Sachs.

Good morning. My first question is trying to better understand the reduction to your revenue guidance for the full year. Year to date you are running up about 3% on an adjusted basis. Larry, you talked about the pricing environment still being pretty rational. I am wondering what really changed in terms of why you think the expectations are lower. John, I know you talked about some of the one time factors. Is there anything on a competitive landscape or from a macro landscape that makes you more concerned about the trends?

Judy, I don't think there is anything on competitive. We are still really watching the macro economics closely. I will let John walk you through some of the steps of what we are looking at.

Judy, as you know, we always expected 4Q to be challenging. We are obviously overlapping the build of the launch of Crush, and that was some 8 million cases last year hen you combine it with the concentrate buy ahead of the price increase. We are overlapping very strong growth in Hawaiian Punch, it was almost plus 20% in 2008. We also have stronger 2 liter promotions in 4Q of last year, and we have stepped up our investments of a higher mix of coupons which, as you know,has the sales discount line. Those were always in our forecast.

But what we are seeing, in addition to that, is the decline is greater than expected as we referenced earlier. We are executing the trade activities we planned to do, but the events are not generating as much lift as we expected. Our baselines are weaker, and the same volume is now more expensive for us. You will also note the trend that consumers are buying more at the start of the month. The paycheck driven environment. And retails are obviously still very heavily pushing the private label. We are committed, though, to sustain the course. We are not knee-jerking here. Our strategies remain unchanged. Although we expect this weakness to continue through Q1 and Q2, we are absolutely recommitting to our long term growth algorithm.

When you say the trade promotions are not driving the expected volume lift, can you say what the factors are. Is it just really the consumer?

I think a lot of it is the consumer, Judy. We are seeing stronger activity in the 1st third of the month, first half, then it drops off. I think it is some of the indication of some of the unemployment and things out there.

John, in terms of the margin behavior on the gross margin side, the third quarter was pretty impressive. As we think about the rest of the year, implicit in your guidance is the margins are not going to be as favorable in the fourth quarter. So maybe you can walk us through. Is the bulk of the commodity declines, have you realized that already so far in the year and really that becomes a bit more challenging? What are some of to the factors driving margins to not be as favorable?

Let's go all the way down to the EPS and we can deal with both the gross margin impact and some of the other impacts. If you look at last year our Q4 EPS was $0.46. If you project the current guidance, that implies $0.39 to $0.43 for this year. We are starting to overlap the commodity benefits that we benefited from a year ago. So we are not seeing as much in Q4 as perhaps some of our competitors are. Recall our earlier guidance, we said Q2 and Q3 will be the major commodity benefits for the year. That will start to trail off as we lap in Q4 and that is probably $0.03.

We have obviously got our marketing investments and our productivity office where we are investigating very very strongly. That wasn't present a year ago. That is probably a full $0.10 of EPS in those investments. The Crush buy-in which you know about a year ago, that we'll not be repeating that, is around $0.03 when you combine it with the concentrate price increase of a year ago. And then net net the balance is our underlying growth that is in a range of some $0.03 to $0.07. Fundamentally we are still growing the business, but we're investing very strongly to insure that growth.

Thank you. That is helpful.

Our next question comes from the line of Wendy Nicholson of Citigroup.

Thank you. Could you start by explaining the strategy of exiting the low margin co-pack business, order of magnitude, how big a business that is, so what the pressure on 2010 revenue should be?

Yes, I will take that one. I think I want to stress, first, that we are only exiting selected pieces of co-pack. In fact, you may have seen an announcement that we are closing a hot fill plant in Holland, Michigan. That will close by year end. That plant provide hot fill capacity to some third parties. That was a low margin business. But the basis of our co-pack and our strategy around co-pack has always been to use it to fill in capacity for absorption. And of course, has a disproportionate impact on revenue versus profit. It is hard to say the impact specifically. We have to talk to our customers and we are still, obviously, in the process of finalizing our 2010 plans.

It sounds obviously like a great decision for the bottom line. I am just trying to get a feel for whether that is 50 basis points or 100 basis points or much less than that on the top line.

We are not at that stage now. If I was to do an estimate, we'll clarify more in February, if I was to guess just now I'd say 50 basis points.

Great, that's very helpful, thank you. My second question has to do, though, with what you are talking about with your promotional spending maybe not providing the right level of lift. My question is what your confidence is in your ability to analyze the return on your marketing investments. In other words, it sounds like you are doing awesome stuff on the advertising side. Do you think in this market that that is having the impact on volumes, or should there be less advertising, even more couponing? As you think about 2010, how you see that shift, or the mix shifting even further.

I will take the first part of that and then let John walk you through the return we are looking at on it. I am still happy with the promotions we are doing out there. We have been successful at outperforming the industry. We have to see that consumer pick up a little bit more. As I mentioned earlier, we are seeing a lot of traffic in the first half of the month, then it falls off. We are spending a lot of time right now with our customers, looking at that and saying how do we pick up the back half. How do we get more traffic there on that. I will let John walk you through the returns and what we are seeing on it. But a lot of what we are doing right now, of course, is for the present, but we are really building for the future.

Yes. I would say if you look at the returns we are getting, or rather the effectiveness we are getting, obviously you have all seen our value share performance. In flavored CSDs year to date we are up 40%, up 1.6 points in the US. In juice we are up 0.1. In teas we are starting the recovery. We are seeing the second quarter of sequential recovery. Also, looking at our GRPs, our GRPs are very strong, plus 58% for the full year. Our back half up 220%. And our cost for GRP is coming down. So, clearly the investment is paying back in terms of the value share growth and we are recommitting to continuing that. I think looking forward, we would see a balanced approach to our incremental investments. 75% probably hitting the marching line in SG&A and 25% hitting sales discounts with coupons.

Great. Thank you.

Our next question comes from the line of Kaumil Gajrawala with UBS.

It seems like in October things sequentially got worse. Can you help us understand a little bit more of what is behind it, if anything has changed. The economy has been tough for a period of time, is it incrementally getting worse? And then if you could you us some details as to specific channels that might be weaker than others.

Kaumil, I would not say it is getting worse. We're just not seeing the pickup we were anticipating. We thought there would be a little more of an uptick. We are watching that really closely. Whenever you look across the entire portfolio, our CSDs are definitely benefiting from the current economic climate. The private label sales have been easing a little bit, so you look at it across the board. Pricing is flat there year-over-year. I think you have to look at October, too, with some lapping of some significant pricing in 2009. So, category is still under a little bit of pressure, but I wouldn't necessarily say it got worse.

Okay. Then, as it relates to the specific channels?

Well, the channels -- one of the things we mentioned, we are on track with our cold drink placements. We are very happy with that. The throughputs are a little bit less than what we thought but we have a lot of opportunity there to keep driving that. Our single serve is not down as much. We're putting a strong focus on how can we drive more traffic in our C&G customers, getting that traffic count back up because if we get the traffic we know we'll get the sales. And then as I mentioned earlier, as we get into the large format, we are seeing pretty heavy activity in the first part of the month. I think it is a sign with the consumer that the rising unemployment continues to weigh on their psyche. I think they are trying to save more. So we just have to watch that and say where and when is the best effectiveness for our promotional activity.

Then a quick one on COGS. Are you now covered through 2010 which what is incorporated in your COGS guidance or are you just assuming the inputs stay the same over the course of the year?

We are obviously covered through 2009 We are not 100% covered through 2010. As you know our basket is not 100% hedgable, in any event. I'd call out the major areas of cover where we have significant cover are the ones we've referred to in the past, aluminum, corn and natural gas.

Got it. Thank you.

Our next question comes from the line of Christine Farkas with Bank of America.

Thank you very much. A question, if I could, Larry, to follow-up on the overall environment. Particularly on your noncarbs. Hawaiian Punch still growing, though lapping some strong numbers. I'm wondering if you could dissect a little bit. Are we at a point where consumers may actually just be stalling packaged beverage growth, or even the value brands could suffer, or do you think it is really just a cycle issue here?

It is a little bit of both. The consumer is definitely looking for the value out there. Like you mentioned, our Hawaiian Punch is up over some unbelievable growth last year when everything fell off the face of the earth. But I think the biggest thing we look at is, we have to watch the consumer. We thought it would be stronger in the fourth quarter. We're seeing it still a little weak, but we are still very confident that we can outperform.

Great. Then on Snapple, sticking with the noncarbs, you had previously indicated expectations for the brand to show some growth in the fourth quarter. Along with the $0.79 can launch, do you think that is still in the plan?

We are going to be very close to it. The one thing that I focus on the most in that is the 16-ounce premium. That is our base. I am happy with what I am seeing. The improvement. John and I have a little bet on when it does come back to growth, and I think right now I am in the lead to win.

Okay. Great. Moving to Latin America. Volumes were very strong in the quarter, reversing some trends we saw earlier in the year. Was that really just the brand restage? Anything on a macro basis you can point to in terms of what could be sustainable for Latin America?

A lot of it was our restage. I would like everybody to look at it. Mexico is still a very attractive market. With the CSDs, teas and juice that's a $15 billion category. We have the number one mineral water down there with Penafiel, so we had some restage. We also expanded some territories. We have the same thing we are doing in the US. We are having some great value price offerings with Crush. We started an SAP upgrade down there that will help us drive more. Standardization. Our Penafiel, we have two new flavors out there, going along with our existing flavors. And, again, some incremental distribution, getting a bigger footprint in Mexico. So, we are very bullish on Mexico.

And John, you went through the puts and takes of the fourth quarter, year-over-year comparisons on an earnings per share basis, no mention of interest though despite the fact the repayment is a little accelerated. Is it just a rounding error or is that part of your underlying business growth?

That is probably round about $6 million for the quarter. And it was part, it was lost in the various much bigger components that I had given you earlier.

Terrific. Thanks very much.

Our next question comes from the line of Mark Swartzberg from Stifel Nicolaus.

A couple questions. As we think about how you are looking at your carbonated soft drink business by comparison to your noncarb business versus, say, early in the summer. Is it fair to believe that your CSD outlook is holding up, if you will, better than the noncarb outlook? And related to that, when we back out the effect of Crush, do you think it is right to think about the underlying CSD trend for your business in this kind of 1 to 1.5 range as we do our 2010 models?

Yes. CSDs are definitely going to benefit as the consumer continues to look for value. We still feel very good on our CSD numbers. And like we just talked about a moment ago, one of the things that's slowing down the growth on our Snapple and other premiums is the economy. I would probably be looking more as a industry, probably next year being flat to 1 with flavors driving stronger growth. So, your numbers are probably about in line.

Okay. Great. Then if you think about the noncarb outlook, it is not lifting to extent you had hoped. Obviously others in this space have had their own challenges. But, what is your outlook for that segment of your business? Do you think you are getting the lift, it's going to continue, it's just not going to be quite at the pace you had hoped, or do you think it is actually likely to get worse before it gets better?

What we are looking at for 2010 is basically flat on the noncarbs.

Great. As we look at your Sunkist business, you mentioned it was disappointing in the quarter. Can you be more specific there will and talk to us about how that fits in with your larger plans for the flavors next year?

A lot of it has been a shift. Our partners out there have done a fantastic job on executing the Crush distribution, so there has been some shift to Crush. Net, if you put them both together there is tremendous increase to DPS. It is just a huge win all the way around. We are very pleased with it. Sunkist is still number one, a very strong brand. We have plans behind it for next year. We knew there would be cannibalization in year one and it there would be a hit, but we are looking forward to next year.

Lastly, to continue here with the carbonated portfolio, Dr. Pepper obviously continuing to do well. You've talked about a Diet Dr. Pepper blitz in the first quarter. Can you give us an update to some of your plans for the trademark as you prepare for 2010?

The biggest thing is, I think, staying right with our strategy is going after our low per cap markets out there. Our coastal strategy, our Hispanic strategy which are working very well for us. We are going to continue a strong focus there. With our diet, having the best tasting diet out there, we want to continue that with the items we walked through. We need to get greater household penetration. But I'd say the main focus is going to be on staying on that coastal, the Hispanic and the low per cap markets.

Great. Thank you, Larry.

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

Larry, I was wondering, you talked about the pricing environment, could you talk about are the retailers kicking in any of the price promotion that's going on in the category? Is that helping at all?

It is across the board out there. Our retailers are looking at how to drive traffic and deliver value. I think you can look at it and say we are all investing in it and making sure we are doing it at the right time, that we're getting the right returns on them. They are really starting to pick up, CSDs do drive a lot of traffic. I think we are seeing more display activity, more incremental space for CSDs on the floor, not necessarily on the shelf. There is investment on both sides in there.

Could you help us out with timing of your pricing increases for the fourth quarter and 2010, how we should think about timing?

In the first quarter? What are you looking for there?

Concentrate pricing for fourth quarter and for 2010, how we should look at that timing?

We haven't put that together yet. Our concentrate will be January 1. We are having meetings with our bottlers and everything right now, laying our plans out for the year. So, we don't have that ready yet. As far as on the package beverage side, if you look at pricing, look at the Nielsen numbers, we are in a pretty good position right now. Everything was taken post Labor Day.

For John, I want to turn to the package segment. You had a good lift on the margin for two quarters now. Is this 15% to 16% margin level sustainable longer term? Maybe you can help quantity Victorville cost savings a bit. I know you have to make some upfront investments in 2010, but would 2010 be a net savings year from Victorville?

Let me take Victorville first. 2010 will be a net cost year because we have the obviously one time cost associated with start-up. Then we will get probably a half year of annualized savings. Because we won't be getting to run rate until the second half in Victorville with the first half being shake down and start up. Obviously we have the year one depreciation burden without the full volume throughputs. So I think the way I think of it is we are not going to obviously give gross margin guidance. That is not our plans, but our focus is on building the gross profit dollar growth. I think the other thing you have to bear in mind with our package beverage segment, and you are seeing it this year with Crush, obviously our BC business is benefiting very significantly from all the benefits associated with the Crush launch. However, the cannibalization is principally hitting our packaged beverage business with a higher margin impact on the full goods.

So bear in mind the structural changes we will continue to see in the business related to some of our innovation. And of course, a perpetual focus on Crush and costs, focusing on improving standalone margin is where we are at. But we manage this business as a portfolio. Those two segments, we have to look at on a combined basis.

One last thing on the debt side. I was wondering. I think you have some interest rate swaps running through the end of the year. Are you locked into those as debt rates come down is there an opportunity to benefit there?

They come off during next year. When they come off, we have no plans to renew them at this time. We will reflect that in the guidance we will give you in February. But they do roll off over the course of next year. Mostly in the early part of the year.

Okay. Thank you very much.

(Operator Instructions) The next question comes from the line of John Faucher with JPMorgan.

Larry, if we look at the fourth quarter and you guys talked about the slow down in October, in the fourth quarter of last year we saw some pretty big declines from your competitors, the big price increase post Labor Day. I'm wondering, is that a little bit of a normalization of that or could that at least be somewhat of a contributor to what you are seeing out there from a volume standpoint or do you think it's almost entirely an industry issue?

We didn't mention anything about a slow down in October, but possibly just not seeing the uptick that we were expecting. But, you are exactly right, John. There is pricing being overlapped in there. There was aggressive pricing taken last year at that time. Early into the quarter, I think the main thing I want to get across, it is just not coming up like I anticipated it would. It is still staying fairly flat.

So, it is not unhealthy from that standpoint. The dynamics are just slightly different?

Right, not at all unhealthy.

John, if I can build on Larry's comment. Remember, through the year we've said 2% to 4% guidance. 4% is the best case, obviously for Q4, 2% reflects the consumer being soft and a worse than expected outlook, but it is still within our range. It's just at the lower end of our range.

Okay. Sounds good. Thanks.

Our next question comes from the line of Mark Swartzberg with Steve Nicholas.

Two quick follow-ups. John, on FX, can you give us some sense if that's going to be a significant benefit to OI in the quarter in terms of US dollar impact? And then regarding the co-pack, what kind of assumption are you making regarding co-pack for Hansen? Do you lose some of it, all of it? We have heard indications you are losing some of it.

On FX there will be very minimal impact in Q4 because we are essentially lapping the big changes from a year ago. And on Hansen we co-pack for them today. We expect to continue to co-pack for them tomorrow. That business does fluctuate depending on regional demands and dependent on their product portfolio development, but we are a co-packer today and we expect to be a co-packer for them next year.

So, the adverse co-packing would assume no change in the extent to which you co-pack for Hansen?

No. Like we said earlier, it is across the market, different places. A lot of it is CSD. We just always looked at our co-pack as a way to take our absorption. We look at it on a quarterly basis. We constantly look at it. But, we still have a great relationship with Hansen's and expect to it carry on.

Great. Thanks, guys.

And our final question this morning comes from Caroline Levy of Calyon Securities.

Just want to dig in a little bit on 7Up and Snapple. 7Up is still your second largest brand, I believe. If you could just talk about what the trends have been year to date in 2009 and whether you think the brand should actually grow in 2010 faster than the category. Then on Snapple, who is gaining share against Snapple? Is it Arizona, is it Sobe? Where is the business being lost? I understand, I think the category is still flattish or down slightly. It looks like Snapple is down more.

Yes. I will start with 7Up, Caroline. We are just really thrilled with our 7Up business. A lot of it is being driven by the Cherry 7Up box. One of the beautiful things about the brand, whenever we have media going on 7Up, on activity behind a new launch or something with diet, 7Up is a brand that gets a really great halo effect across the entire trademark. We have been pleased with the growth we have been seeing. It continues to grow and we expect to see that in 2010.

On Snapple, you are exactly right on Snapple. It is Arizona. As I dig down into it and look at Arizona, the majority of it is being driven by the 23.5-ounce can at $0.99. Which drove us to look at our value can. And also their gallon. What we're seeing is everything in the tea category right now is going down to the value. All of it is in value. That is where we have our plans in place to have the can, more of our Snapple value tea in the 12-pack PT.

But very pleased on seeing our premium, even in this tough economic climate, come back up. So, it is coming back up. We did the complete relaunch, no packaging. We are very thrilled with our 6-pack now being up to 75% ACV. Still pretty heavy on 12-pack in the Northeast, but even seeing 6-packs show up there. We are very happy with what we are seeing in Snapple.

On the share, if you look at it, DPS has a 1.8 share of the value tea. We expect the cans and PET to do even more for us in 2010.

Thank you. Just a sense, how much is 7Up up year to date?

7Up is up approximately, I think it's 1%. I don't have the numbers in front of me, but 1%.

Great. And are you doing much with Stevia? Last question.

We are looking at Stevia, still not doing much out there with it But our R&D is constantly looking at all the different new sweeteners and everything that's out there.

Thank you.

With that, I would like to thank all of you for your interest in Dr. Pepper Snapple Group today. Thank you very much.

Thank you. That concludes the earnings conference call. You may now disconnect.