Keurig Dr Pepper Inc (KDP) 2010 Q3 法說會逐字稿

Good morning and welcome to Dr Pepper Snapple Group's third quarter 2010 earnings conference call. Your lines have been placed on listen-only mode 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 be available for replay and download after the call has ended. (Operator Instructions).

It is my pleasure to introduce Aly Noormohamed, Senior Vice President Finance. 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 statements and remind you that this conference call contains forward-looking statements including statements about our future financial and operational performance. These forward-looking statements should also be considered in connection with cautionary statement and disclaimers contained in the Safe Harbor statement in this morning's press release and our SEC filing. Our actual performance could differ materially from these statements, and we undertake no duty to update these forward looking statements.

During this call we may reference certain non-GAAP financial measures that reflect the way we evaluate the business, and which we believe provide useful information for investors. Reconciliations of those non-GAAP measures to GAAP can be found in our earnings press release and on the investor relations page at www.DrPepperSnapple.com. The prepared remarks will be made by Larry Young, Dr Pepper Snapple Group's President and CEO, and Martin Ellen, our CFO. Following our prepared remarks, we will open the call for your questions. With that, let me turn the call over to Larry.

Thanks, Aly, and good morning, everyone. Before Marty and I cover third quarter results and full-year guidance, I'd like to take a moment to update you on our recently completed license agreements with the Coca-Cola company. We are thrilled to have the distribution of a portion of our Dr Pepper business secured in the Coke system. We believe this further secures and strengthens the long-term growth of this trademark. As I think about the new agreements with Coke, I see several benefits.

First, with initial term of 20 years, with 20-year renewal periods, and more robust performance conditions, both sides are committed to invest and grow the business. Second we benefit from Coke's strength in fountain, to build awareness for Dr Pepper while creating millions of sampling occasions through local access to local fountain accounts previously serviced by CCE and on Coke's revolutionary freestyle machine.

Third, starting early January, brands such as Squirt, Canada Dry, Schweppes, and Cactus Cooler will be sold through our Company-owned DSD business. Let's face it, these brands were low priority in the former CC system, but 15 million cases in our system gives us significant operating scale, and we believe allows us to find another Crush.

As you may have seen in an earlier press release, we've received a one-time payment from Coke, totaling $715 million. In fourth quarter 2010 and similar to the accounting for the Pepsi payment, we'll begin recognizing deferred revenue on this amount over 25 years. We'll also record approximately $3 million in fees and expenses related to this transaction.

Now turning to our results. I am very pleased with how well our brands performed in the quarter. BCS volume was up 2%, cycling a 4% growth last year. We once again posted industry-leading growth against a backdrop of weak macros, a fragile consumer, and a changing LRB landscape. In the quarter, Dr Pepper grew 2%. Our core four brands plus Crush grew 3%, Hawaiian Punch was up 7%, Snapple was up 10%, and Mott's grew 3%. These brands drive 75% of our volume, and with improving LRB trends, I believe we still have plenty of room to grow.

Contract manufacturing declined over 30% in the quarter, as we continued to rationalize this part of our business in of pursuit of more profitable growth. To put this into context, contract manufacturing declines reduced overall volumes by 2 percentage points. Net sales by 1 percentage point, but had no impact to segment operating profit. As a reminder, we will begin to cycle contract manufacturing declines in December. On a year-to-date basis, BCS volume and branded shipments are much more in line as you'd expect.

Moving on to net sales. In the quarter, there were three items I believe impacted our comparison to last year. First, our continued deemphasis of our contract manufacturing business reduced net sales growth by 1 percentage point.

Second, as consumers continue to seek value, we continue to see more sales of non-cola CSDs and value juices, and this is driving negative revenue mix. What's important to note here is the bias toward value is lasting much longer than I think any of us expected. It's certainly not getting worse. In fact, in some markets, it appears to be getting better.

Third, we continue to invest in promotional activity both with our bottlers and our Company-owned systems to help stimulate traffic for retailers. Examples in the quarter include two liter CSD events in grocery and mass merch, Hawaiian Punch one-gallon programs in grocery and dollar, Snapple premium six-pack sampling promotions, more "Try me" coupons and increased retailer support behind new 7-up. These three items combined reduced net sales growth by 3 percentage points and were partially offset by revenue recognized under the Pepsi license agreement, which added less than one point of growth.

It's also important to highlight three factors that contributed to segment operating profit declines in the quarter. First, packaging ingredient and transportation costs increased approximately $28 million, which we worked hard to offset in part with incremental productivity.

Second, we incurred strike-related costs of $15 million. Let me pause for a moment and talk about this item. Our primary goal throughout the negotiations was to provide our customers and consumers with uninterrupted product supply. At the same time, we sought an agreement that would support our long-term supply chain optimization strategy by bringing labor practices and costs at our Williamson plant in line with industry standards and to improve our overall competitive position. I am happy to say that we achieved both objectives, and the facility is back up and running.

The third item impacting segment operating profit was increased marketplace investments, in line with our previous comments. In the quarter, we made focused investments in network TV and local radio supporting Dr Pepper, Sunkist, Canada Dry and Mott's, driving GRPs up over 90% and with media spend up 30%. We also achieved a better return on our invested dollars, a practice we believe will allow us to drive even more effectiveness out of our marketing spend.

Despite negative mix, higher input and transportation costs and a strike, which alone reduced operating margins by 100 basis points in the quarter, we were still able to achieve operating margins of almost 18% compared to 19% last year and do so with continued increases in marketplace investment. EPS for the quarter was $0.60, including $0.04 of strike-related costs. This was in line with our expectations and up 11% from the prior year period on a comparable basis.

Looking ahead, let me highlight some of our fourth quarter 2010 and trimester one 2011 innovation and activation plans that will continue to increase awareness and relevance of our brands. In the fourth quarter, we'll keep strong bottler and retailer momentum going behind the 7-Up relaunch, with holiday display contests, national TV, and we'll bring back 7-Up Pomegranate with Antioxidants again for a limited time. Early reads on the 7-Up relaunch are very encouraging. In the month of September, BCS volume was up 3% compared to a year-to-date trend of down 6%. It's early days yet, but we believe we're on the right track.

We will continue to win the west in Mott's and Hawaiian Punch, with strong fourth quarter retailer activity in accounts including Wal-Mart, Kroger, Target, and Safeway. And the first trimester of 2011, we'll expand this critical initiative by increasing regional media support and step up investments aimed at increasing usage with our Hispanic consumer.

In January, Punchy will get a full makeover. This will be the first new graphics and merchandising update for Hawaiian Punch in 10 years. And kids will get to enjoy their favorite treat on the go, with the launch of a new multipack single-serve 10-ounce PET offering, available in four flavors. We'll keep the excitement going on Snapple with a national launch of a 64-ounce multiserve offering. This package has performed extremely well in its test markets.

And finally, we believe 2011 will be a huge year for Mott's as we support three key innovation points with strong national TV advertising. We're relaunching Mott's For Tots with the introduction of four new SKUs with nutritional benefits and new single-serve packaging. We'll continue to support Mott's Medleys in national media, coupons, and sampling. And Mott's will enter the vegetable juice category in the US with the introduction of Mott's Garden Blend, made with 100% vegetable juice. This product has been a huge hit in Canada, driving strong growth there.

Now let me turn the call over it Marty to walk you through some of our below the line items for the quarter and our guidance update.

Thanks, Larry, and good morning, everyone. In the third quarter we continued to make productivity office investments to streamline processes and drive efficiencies. In the quarter, we invested approximately $7 million, with $4 million recorded in corporate expense and the balance in the segments. Year-to-date, these investments stand at $23 million compared to $18 million in the prior-year period.

During the quarter, we also gained momentum behind our rapid continuous improvement initiatives, or RCI for short. A great example of this is the project we just completed at our St. Louis facility. This is, in fact, a breakthrough for us. So let me share some highlights.

In an effort to reduce the need for a local warehouse in St. Louis, we embarked on an RCI initiative to reduce inventories in a certain product line by 70%. Well, after only a two-week effort, we achieved a 60% reduction. Not bad in our view. Line change over time was reduced by 60%. Warehouse transfers were reduced by 40%, as we now ship to a number of customers direct from the end of the production line. And we reduced costs associated with this operation by 60%.

So as not to overstate the financial success of this achievement, the combined inventory reduction and annual cost savings is a little less than $1 million. Small by your measures, but this is an enormous breakthrough in thinking in the traditional business model, and it is creating enormous energy inside our organization to deploy these learnings across our entire system. I have been asked by many of you to provide measurable financial targets for our improvement goals. Typically these are seen as productivity improvements in working capital, capital spending, and operating costs. It's still early, but it's not unreasonable for us to achieve productivity improvements of $150 million, maybe more, over the next few years.

Now turning back to the slide. As you think about the corporate line for the quarter, let me remind you that this is where we record our unrealized mark-to-market gains or losses related to our commodity hedges. Year to date we've recorded $2 million in losses versus $11 million in gains last year, a swing of $13 million. By year end, we expect this swing to be about $23 million. Our tax rate for the quarter was 37.7%, bringing our year-to-date rate to 38.2%, in line with our full-year guidance.

Moving on to cash flow, we spent $154 million net on capital so far this year. This is tracking in line with our full-year target of approximately 5% of net sales. We have returned over $1 billion to our shareholders in the form of dividends and share repurchases. With our original $1 billion program almost complete, and with the receipt of the Coke licensing payment, we expect to repurchase additional shares in 2010 under our second $1 billion authorization.

Now let me move on to guidance. As Larry mentioned, our quarter and year-to-date net sales are being negatively impacted by a couple of things. The deemphasis of contract manufacturing and negative product mix. Partially offsetting these declines is revenue recognized under new licensing agreements. With the completion of the Coke deal, we will record an additional $7 million of licensing revenue in the fourth quarter, with $3 million of transaction expenses recorded in the corporate line. Given these factors, we now expect 2010 reported net sales to grow in the 1% to 2% range.

Moving on to EPS, we expect diluted earnings per share, excluding the first quarter tax item, to be in the $2.35 to $2.43 range consistent with our past guidance, but up $0.01 for the Coke transaction. Unchanged from our prior guidance, we continue to expect packaging and ingredients to increase cost of goods sold by less than 1% for the full-year 2010 on a constant product mix basis, and expect the effective tax rate to be approximately 38%. With that, let me turn the call back to Larry.

Thanks, Marty. Before we open the lines for questions, let me leave you with a few thoughts. The macroeconomic environment remains challenging, and its impact on consumer behavior continues to create a degree of uncertainty. Our portfolio of leading and preferred non-cola CSDs, teas and juices, are healthy, gaining share, and growing brand equity. We remain focused on executing the strategy we laid out at the time of our spend, and will continue to invest in the business and our brands for the long term.

As Marty outlined, we're seeing early wins with RCI. By the end of 2013, we believe RCI will deliver $150 million annually of incremental productivity, providing both incremental return to shareholders and further resources to invest in growth. With our foundational investments almost complete, we can turn our full attention to expanding our distribution and availability opportunities, and unlock the full potential of this business. Operator, we're ready for our first question.

Thank you. (Operator Instructions). Our first question is coming from Judy Hong of Goldman Sachs.

Thanks, good morning.

Good morning, Judy.

Larry, maybe you can update us on your view of the consumer as you sit here today versus a few months ago. I know that you were a little bit more optimistic earlier in the year and then it sounded like you were more cautious in the last conference call. I was wondering what changed over the last few months or so and the implication for the beverage category as a whole over the next six or 12 months.

Right. Judy, I think I remain cautiously optimistic. We're seeing an uptick. We're seeing little more traffic. We're seeing some improvements in our 20-ounce, which is very encouraging. I think another one that I watch a lot is our fountain food service, as we start to see that volume come up, a lot of times that's a very good indicator that the consumer might be spending a little more and getting out. So with what we're seeing right now, I'm feeling better about it, but it's still tough out there. But I'm feeling better than how I was a few month ago.

Okay. And then somewhat related to that, if we think about your sales growth, obviously some of the manufacturing products that you're de-emphasizing had a big impact on your sales growth. It seems like that will dissipate as you get into the end of the year. But the other portion has been sort of the negative mix that you've experienced. So I'm wondering if you can talk about how you envision kind of mix playing out over the next few quarters and when you would actually start to see mix turning positive for your portfolio.

Yes. I think one of the things we look at as we bring that contract back down, you kind of saw in my message there that it brought down a lot of the net sales and volume but had no impact on SOP. And with the volumes we're bringing back in house from Coke and Pepsi, it just makes so much sense to have something that's much more profitable right on our lines instead of making investments and running contract pack. We feel great about that. We lap it in December, the comps get a lot better in December.

And I think it's still going to be a little tough, probably still kind of run along the same trends with some improvement for the first trimester. But the flavored CSDs still growing are very, very encouraging to us. Our Snapple is still growing, so I think we're going to see a lot better mix in 2011. A slow start in the beginning.

Okay. Marty, finally, thanks for giving us some quantification of the productivity savings here with the $150 million. Could you give us more color in terms of the phasing of the savings that you'd envision. Is this more of a 2012 kind of event or beyond or you would start to see a bit more in 2011? And then as you think about these savings, you think some of these will need to go back to the business for marketing or other types of investments, or is this something that we could see drive margin improvement going forward?

I would say, Judy, your first question goes to savings. And I talked about the $150 million in productivity, so it's not simply all cost reduction. But we look at productivity everywhere. Clearly, the curve has to accelerate over time. This organization, as you can tell from my remarks, I'm very encouraged. We've added a number of resources to drive this program through the organization, and I can tell you that it's clear that the organization is starting to pick up speed. There's also a learning process here that comes with being good at lean.

So it would be trouble assume that the phasing sort of accelerates over time -- I don't want to put too many definitive timeframes on it. I think in the next two to three years, we could get to that level of annual savings. That should not be unreasonable based on early returns and opportunities we're starting to see. That St. Louis improvement I referred to, small in dollar terms. But enormous in its change to the way the business has traditionally been operated in sort of that segment of the business. And that learning is deployable elsewhere in the business.

In terms -- one of the things we're really expecting out of the savings is in fact to allow us to create resource to invest in growth. Not all of it. Shouldn't need all of it. There's no reason to believe we need it all. Some should go to improve returns for shareholders. But it's real clear, this is an opportune way for us to create resources, to beat back cost inflation in other areas of the company and provide resources to invest in growth, clearly.

Great. Thank you.

Our next question comes from the line of Christine Farkas with Banc of America Merrill Lynch.

Thank you very much. Good morning, Larry. I have a question, I was wondering if you could give color on Latin America. We saw some declines in profits. And I'm wondering how much of that is planned route investment or if we're seeing something structural change in the business.

Yes. You're exactly right. I think people have to understand that our Mexico base is small. We've made some big investments in Q3 in marketing, IT, DSD routes, had about a $7 million impact to our SOP.

And then I think there was -- if everybody looks at not just our business but Mexico as a whole, there was quite an impact by the weather, and then there's just been some fierce competition down there. Our sales volume was up 1%, but our BCS down about 3. So we've got some priorities down there that we're looking at constantly. We want to optimize our routes that we installed in 2009 and 2010. We want to get our IT platform with SAP complete, and we have some great innovation with Squirt, Crush, Penefiels, some new packaging, and of course, always looking at things with our Clamato, which is so strong there.

It was a little bit of tough quarter, easy to explain, we knew some of it was there. But we're still very optimistic on our Latin America business.

Okay. Thanks for that. And on the back of that, Larry, or maybe Marty, you didn't change -- your guidance went up because of the Coke payment. But I want to understand in light of the business in Latin America as well as the strike costs, was that $0.04 in your prior guidance for full-year earnings, or is this something that you see being offset with underlying operations or lower corporate expenses?

For the most part, it was -- it was included. Maybe obvious things we didn't talk about specifically during the negotiation process, as I'm sure you can appreciate.

Okay. Thanks for that. And last question on Snapple, if I could. There might have been some anecdotal evidence or concerns as the summer progressed that super premium Snapple might have been having a tough time. We saw Snapple slow in the second quarter versus the first but pick up a little bit in the third. I'm wondering if you can give us a little color on the brand trends, what you might have tweaked in your programs or what you're seeing in the consumer there.

Yes. I think, if we really break it down and look at it, Snapple, the first half, the laps in H1 were easier than H2. If you look at the trend that's been running, Q1 of this year, it was up 16.4. Q2, 9.4, Q3, 9.7. We're looking at basically the same for Q4 in that lineup somewhere there.

As far as in the premium, we're happy with the premium. We've got more activity going on behind it. We're keeping going with the customer, consumer, and distributor. And then on the super premium is a very, very small piece. And we're looking at some changes there and kind of tweaking the super premium piece of the business in the first trimester.

Okay. Thanks for that.

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

Hi, guys. I may have missed it, but you mentioned you're moving on to the second part -- the second $1 billion on the buyback now that you have the Coke money. Did you give us a read by how much you expect to have done by year end?

No this is Marty. We have not. We could -- we've actually, if I look at it, as data as of yesterday, we've slightly gone through the first $1 billion. And as of yesterday we've got about 227 million shares outstanding, I think as of yesterday. So we are now on to the second $1 billion repurchase authorization, and we have not communicated at all how much we intend to do during the quarter.

Got it. And then second question, could you give us a read on the cold drink readout and how you're seeing trends progress in C stores.

Yes, cold drink and fountain are both on track. We're real happy with what we're seeing out there. This is -- we'll be going into our third year. And placements are still very positive. We've still got a long ways to go. The high throughputs are still easy to pick up.

Fountain is way ahead of where it's at -- where their target was to get, their incremental vows, they're going to exceed it quite handsomely. And as I mentioned earlier, when we look at the C store and especially our 20-ounce and our single serve, we're starting to see an uptick there, not only just in our added incremental distribution and availability, but the accounts that we're already well represented in. So that makes us very encouraged that the consumer's kind of picking up, plus we had that opportunity for increased distribution and availability.

Thank you.

Your next question comes from the line of Carolyn Levy of CLSA.

Question on Wal-Mart and Sierra Mist. Just if you could comment on what what changes you've seen at Wal-Mart since they had that aggressive discounting on the big CSD brands and then that's been done away with. Do you feel like you're regaining traction there? And then on Sierra Mist, they've obviously got a big push behind their brand recently. And it sounds like 7-Up's relaunch has gone very, very well. What are you seeing from the competitive set?

Well, I'll start with Wal-Mart. Wal-Mart's getting more back to business as usual and what we were used to. I know we're very happy with it. I know Wal-Mart is, too, I think the consumer is.

So more back to more in the actionality, things like that, the pricing's much more rational, and still looking at how do we deliver value. So we're happy with what we're seeing in Wal-Mart. We're very happy with our Wal-Mart performance. Great partners. So we're happy there.

On Sierra Mist, with our 7-Up relaunch, we had great execution. We're very happy with it. The only thing I can really say about Sierra Mist is any time there's activity no matter who it is, new innovation, it's good for the category, good for the lemon-lime category. We get more excitement in there and we keep moving.

Like I said in my call in September, our volume was up 3% on 7-Up, which was very encouraging. We had markets like Michigan that were up 35%. I went out and hit nine markets in 3.5 days across the United States, and just saw some unbelievable execution out there. And our guys are great at execution, but I think what encourages me the most is feedback I get from store managers and people working in the stores and the consumer that just really loves the new crisp, clean, ridiculously bubbly taste of 7-Up.

Thank you. Also, Larry, could you tell us a little bit about how Dr Pepper is performing in the markets where penetration is much lower than average.

Yes. You mean our low per cap markets?

Yes.

Yes. We're very pleased. Our plan, the strategy, the tactics we have in place in our low per cap markets are really starting to pay off. Not only with just the execution of Dr Pepper getting more availability, but the addition of addition of Dr Pepper Cherry, Dr Pepper Cherry is performing very well in those markets. And we're getting a lot more activity on our diet brands. People are really starting to realize our message that, Diet Dr Pepper doesn't taste like a diet.

We're happy there, that's driving us good growth. And a lot of that I think's what we've been able to do in fountain food service again. So many of our low per caps were where we are not on McDonald's. And we're getting those in, we're close to getting to 100% of McDonald's done. And starting to see some great growth in low per cap markets.

Thank you. And then on Snapple premium, did you give volume on that?

Snapple premium, yes. Q3 the premium was up 13%.

So no negative mix shift at Snapple itself?

Still declining the super premium.

Sorry, I meant super premium. I'm sorry.

Yes. Super premium is -- it's only 4% of our total. So it had a negative impact. But it's just not that big a piece of our business.

Right. And then lastly, I think you said commodities were up $28 million in the quarter, and if you can sort of give any guidance as to if we stood where we do today with commodity prices.

Yes. Clarify the comment in Larry's remarks. That $28 million was not just commodities, it was packaging, it was ingredients, let's not forget transportation costs are up, as well. So commodities itself were not that big.

Here's our view of the sort of cost inflation. Clearly a number of the commodities including corn, aluminum, are up. We said we were going to be up on a COGS per case basis, this year 1%. Clearly, if we look at current spot prices and take into consideration our hedge position, we're going to be -- we're going to be up greater than this. We're halfway through our planning process.

As we did this year and as we'd expect next year, our supply chain has done a great job of finding other offsets to this cost inflation and the commodity basket, which I think you all know the commodity basket that we tend to talk about here is low 20, 21%, 2% of our total cost of goods. So we'll be higher. That said, about halfway through I suggest our planning process for 2011. Right now look at sort of your low single digit pricing, it looks like that will cover in dollar terms, not percent terms, in dollar terms all of the COGS inflation.

In the context of the savings that you can see several years from your programs, do you expect a large chunk of that to cover commodity costs or just a small part would go to covering commodity costs?

Caroline, I don't know what commodities are going do the next three years. So it's hard to comment. But that will be always -- whether we have cost inflation or not, we will improve. And we will find opportunities to create resources for shareholders in marketing. So that's unrelated. We don't do it because we see inflation in commodities, but you're sort of right. At some level, you put it all together. And if anything, it -- it creates a little more catalyst in the organization to go after opportunities because you really want to try to offset this as much as you can before you simply have to go to pricing.

Excellent. Thank you very much.

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

Thank you very much. So I guess in listening to this sort of the qualitative commentary about the top line, you guys sound really pleased with how things are going. And, you talked a little bit about the lost co-packing piece in terms of that being a negative impact year over year, but that's getting less. So I guess what I'm really trying to -- what I'm struggling this sort of, okay, why -- what happened versus your expectations, because it seems as though the negative mix from Hawaiian Punch is something we've been seeing for a couple of quarters. You're getting the positive mix from Snapple.

Can you just give me kind of the big delta versus your expectations as opposed to the year over year, and then secondly, Larry, you talked about some opportunities in terms of creating the next Crush. I guess, I think the perception in the market is some of that was distribution driven as the Pepsi system got behind it. Can you talk about how you've improved your distribution over the last 12 months in terms of the Company-owned distribution, and how you can now take some of your own brands and blow those out maybe in a way that you used to rely on the Coke or Pepsi distribution model for? Thanks.

Yes. Absolutely. And I think we've looked at the top line. I think it's pretty much in line with kind of what we were -- our comments from Q2 and plus in September. A lot of it is from where we were planning, John, we thought the consumer would be up a little more than where it is right now. We're starting to see it little later than we anticipated. So then as far as the contract pack piece, as you saw, it's quite a bit of the miss. And we bring in the Coke piece, we're going to be putting more of our own products through those lines which makes so much more sense for us.

I think on the other pieces, I'm looking at what we have as another Crush. As we bring these brands on, and I could mention -- there's $15 million coming from Coke, that was very small to CCE but can be big to us in our Company-owned DSD. However, the biggest piece is what now our marketing team can do to where we have more control of a brand, whether it's in our system or whether it's in Coke or Pepsi's, we no longer have a brand in three systems. We were able to make them much more uniform. So we can look at those, put a lot more spin behind them, get national programs that can be executed flawlessly, and start seeing growth off of those.

Plus, the other Crush, we're looking for that. We think we've got some great ideas. And we never limit it to whether it would be in a third-party bottler or in our own Company-owned DSD. Those are the things we're looking at. We'll have pretty soon.

I think the other one, John, is just our distribution availability. I mean now that we've got most of our work done, the foundation laid, it gives us much more time to really focus on that. And it's one of the key operating measures we're using for the team. We're gaining in CSDs, Mott's and Snapple, we're up right now almost 200 basis points. We're encouraged by that. And then you can probably tell I'm feeling a lot better about the consumer. I love seeing the team come together, the investments we've made, they're going to starts paying off for us here.

Okay. And then -- thanks. And then one followup. I'm sorry, I was trying to pick up on this. Was the impact from contract, net loss contract manufacturing greater than you had anticipated? Or was it in line with your expectations?

I don't think it was greater. We're pretty well on track there.

Okay. Thank you.

Your next question comes from the line of Mark Swartzberg of Stifel Nicholas.

Thanks, good morning, everyone.

Good morning, Mark.

I guess, Larry, as you think about carbonated soft drink sales growth, dollar case sales growth looking beyond 2010, are you comfortable telling us what you think is a sustainable rate as we try to think about -- it seems like you're beyond the benefit of distribution for Crush, core four seems like there's an opportunity with 7-Up. Can you comment what you think is a sustainable rate of growth for CSD's for this year, for you?

What we look at for us is low single digit. You hit all the right things right there. I mean we've got -- we still expect some great growth with Crush. We have great programs with our partner there. We've got the brands that we're bringing back in house that give us an opportunity to put really solid programs and execution across our retail partners. And when you look at the flavors continuing to grow as a percentage of the category, it just puts us in one great position to feel very confident about that low single digit.

Is Sunkist an easier to fix or tougher to fix problem? I know you link it with Crush when you look at it, but how do you think about the Sunkist brand?

It's improving. When we put our plan together what we thought the cannibalization would be, I mean, we're pretty well in line what we thought would be there. We are 100% dedicated to Sunkist. That's the brand for our Company-owned DSD, when we're going to get behind it. We think we've got great plans for 2011 to turn that around.

Okay. And then I had a question for you, Marty. But on cost, but one last thing here, Larry, the marketing spend up a lot this year. I mean, you can make the argument, frankly, that your BCS should have done better. But of course the environment's been tough. But as you look at the level of marketing spend, and how you've been spending it, what would you say about the returns you've been getting, how you've allocated those dollars, any thoughts on how that marketing spend has impacted your business?

Yes. I've been very happy with the returns. Remember, I think it was in the second quarter we talked about how we'd implemented a return on margin investment program. And I mean, we look at these brands, and we spend where we get response. I mean, when the brand reacts to the spend, we stay on it. When it doesn't, I mean, we're in a position where we can move. Like you saw in the second quarter when we had the pricing with Wal-Mart, we were able to move pretty quickly and move some of that spin.

The way the brands have been underinvested through the years, I don't really know where the right level's at, but we watch it very closely. Our return on market investment is helping us to look at that. And I think a great example is like I mentioned in the call, I mean, Q3, our media GRPs were up 90%, and the dollars were only up 30%. So that's given us some very, very huge leverage there.

Great. And then just on the commodity and larger cost outlook, Marty, transportation costs, an issue in the quarter. Don't seem like they're going to be going away any time soon. Could you tell us a few things there, firstly percentage of COGS, that's transportation and then how you're thinking about that impacting your P&L and what you can do to hedge that looking out.

Mark, we don't break that out specifically. I'll tell you that component of the increase that Larry talked about in the quarter was less than $10 million. And we have no reason to believe those costs will decline. We do some hedging around fuels as part of that cost management program. So that's in our thinking.

My earlier comments, I talked about COGS. We understand where transportation costs are. Of course in the RCI world what you attempt to do now is reduce transportation costs, as I said in St. Louis. We're no longer driving product from the plant to a warehouse. This is exactly the kind of stuff you go do, particularly when faced with this stuff to reduce costs.

And so, look, it's going to be up, as I said. We're going to have more commodity than in the 1% -- sorry, COGS inflation, more than 1% this year. Commodity's a big part of it. We'll get it with supply chain savings, and a little bit of pricing.

Fair enough. Thank you, guys.

Your next question comes from the line of Carlos Laboy of Credit Suisse.

Good morning, thank you.

Good morning, Carlos.

Larry, I was hoping you could give us more granularity on Snapple. Is there indeed a positive mix for Snapple here, or is there a net drag on pricing at Snapple. And also while we're on the Snapple issue, you can speak about packaging. You mentioned something about upsizing which drives volumes, but what's happening to the number transactions? How are they behaving in the -- in your core single-serve business of Snapple?

Yes. If you look at just Snapple, there is some negative mix there. On the super premium, but the premium, we're just thrilled to death with what we're seeing on the premium with the growth. I mean, we're growing at double digit, we're getting pricing, the price is up. The reformulation and the new six pack put us at a much greater price point and convenience for the consumer. And we think that trend is going to continue.

Value as we've always said on the value side of it, we do that very strategic. And also very -- defensively where we need to go against the highly discounted tea prices. Still our number-one focus will always be premium. The 16-ounce glass, that's where we're number one. We're very happy with the performance, and we know it will continue.

With Q3 being up 13%, I mean, that's something we've been looking for, for quite a few years, and our distributors and our customers have us convinced, that will continue. You look at the ACV on our six pack in grocery, the latest four weeks, we're at 86%. And everybody thought that the six pack wouldn't work when it was a 12 pack package that was given away for years. Very, very encouraged.

We've got our shares up four points. We're just looking at it and thinking that Snapple's here for the long run, and we're pleased with it. And the premium -- you want to always remember the premium, the 16-ounce glass, that's 85% of our total Snapple business. So that's the big one. So net-net pricing was up?

Price? Oh, absolutely.

Okay. And can you educate us also on the strike on those $15 million costs? What kind of things are included in those $15 million in costs? And with the cost-cutting program you've got in place, do you see this being a problem elsewhere, in other facilities? Yes, well, number one, I'm going to let Marty give you the breakout on that. I'll give a little color on the strike. You guys have heard me say before it was -- it had the highest cost in our system. It had the lowest productivity. And it's not a matter of going out doing cost cutting. We have a supply chain optimization strategy we've put together in 2006. We've been very successful at implementing it.

You can never say never on a strike. But we have -- we feel very happy with where our supply chain's at right now. This was the big one that stood out. And sometimes you cannot address them until you do have a contract come up. So we always said that we wanted to get it in line with the rest of our facilities and competitively against what our competitors were out there able to do it for, plus deliver the great products at a great value to our consumer. And our customers out there. So with that, I'll let Marty kind of break out how those costs work.

It's pretty straight forward. As Larry said in his opening remarks, our number-one objective was to service customers. So we still produced applesauce for our customers. Williamson was running with a temporary work force. The cost of that labor was higher than our permanent work force. We did use some outside co-packers to increase volume, we had to ship them apples, so we had the cost of shipping apples. From the Williamson plant, less volume, unfavorable manufacturing absorption. A little bit less favorable yield on apples, again, because of the temporary nature of the work force. Those are the principal categories that drive the $15 million.

Thank you.

Your next question comes from the line of Ann Gurkin of Davenport.

Good morning.

Good morning, Ann.

Most everything's been asked. I just wanted to ask if weather positively impacted you this quarter? Seems you've been warmer than expected. Yes, sorry.

Oh, I think if we go across the entire United States, it kind of gets to be a mixed bag out there. So I wouldn't say that had that much impact. If anything had a little bit of an impact, some of it July we would still kind of get over some of the heavy load from the second quarter, the deep discounting and pricing. If I had to pick one area for weather, which was bad, was I think everybody, was Mexico.

Okay. And then secondly, just on pricing or level promotions for next year, it seems like you all are pretty optimistic that should improve. And I guess what's behind that expectation? Can the industry be rational? Are we going to see kind of market share chasing -- can you just comment on that.

Oh, I think we've seen the trends we're looking at right now, the pricing's very rational. I think everybody's come to the conclusion that pricing goes down. We all go down, and that doesn't necessarily deliver more volume or value to the consumer. From a promotional activities up, which we like, I mean, that's -- keeps excitement in the category, drives more people into that beverage aisle.

But we feel good about the pricing. We think pricing's going to be okay. We're not seeing anything in the last few quarters to tell us that it wouldn't. And there's been some investments made that you need to get a return on, too, in this industry.

All right. Thank you.

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

Good morning, Larry.

Good morning, Andrew.

I was wondering, could you talk about the growth of your CSD brands. Particularly, brands, Dr Pepper, in the Pepsi and Coke bottling categories. Since the revised agreements were signed, how is momentum in those markets overall for you?

Yes. You won't see anything on Coke in this quarter, we all got done basically in the fourth. And we're starting to see some changes here. But we had good growth with CCE, almost up 1%, a little below 1%. Pepsi was a little over 1%. So we're very happy with that. PVC with Crush was up 6%. And this all was done with the July overhang I just mentioned a moment ago.

Okay. And then I just wanted to go back to An's question about the pricing environment. Is it fair to say you haven't seen any change in competitor pricing or promotion behavior since summer ended?

We haven't, no. It's been very rational.

Okay. And then just last for Marty. I know you talked about starting into the second leg of the share repurchase, into the fourth quarter. Is it still fair for us to assume that with the Coke cash received, that $700 million received that you would start to pass that through in 2011? Because I know you had some -- I think you had some deferred tax coming due next year. The Coke cash allow you to continue to pass through the share repurchase?

The answer is -- is yes on the Coke cash. And the answer on the tax, the taxes for both transactions, $500 million it $600 million, I'll remind everybody that the biggest part of that will be paid in the first quarter of 2012.

Okay. Thank you.

And your final question this morning comes from Damian Witkowski of Gabelli & Company.

Good morning, Marty, my question is what you were just talking about, which is when is the majority of the tax bill coming for the two payments from PepsiCo and Coke. It sounds like you said the majority of it is in 2012.

That's correct.

But how big -- can you just quantify how big it's going to be in 2011?

Yes. The way it's going to work is the taxes will be paid at the rate on the accounting income, this amortization, okay? So you're going to have the $9 million a quarter, the $7 million a quarter, for the year. And we will only pay tax on that amount of income that we put on our books, if you will, in 2011. The balance all due, the tax in the $1.6 billion, the balance all due first quarter, 2012.

Okay. And then just going Snapple, out of curiosity. If you look at you're super premium which is a very small portion of it but still, are actually you losing doors, or these same-store sales shall we say declines in that particular segment of the category?

No, I wouldn't say we're losing any doors. Most of that is in grocery where I think some of it may have been self-inflicted with our restaging of the premium and getting much more convenient six packs and things out there. So we're not losing any doors. Still doing okay on the cold side. I'd look at most of that loss in the grocery channel. You got to remember, too, with this economy, Damian, it is at a very high price point. I think that's the things we look at on that.

Okay. And Larry, one last thing. I mean, if you look at the 20-ounce and the C&G channel, what do you attribute the sort of rebound there to? I mean, is it just people getting -- seems like unemployment continues to be a drag. But --

Yes. Unemployment's a drag, but I think, Damian, that some of the programs we've put together for our retailers to help drive traffic, so we're getting a little more traffic in there. I think the consumer's starting to feel a little better. So that gives us a little uptuck. And then a combination of the retail execution we've been able will to do out there.

So is this mostly the improvement you're seeing mostly in territories where you're per caps are higher than average?

Oh, no. No, it's across the board.

Okay. All right. Thanks. And congratulations.

Thank you. Well, I want to thank everybody for joining the call today. And especially for your continued interest in Dr Pepper Snapple Group. Thank you.

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