Keurig Dr Pepper Inc (KDP) 2010 Q4 法說會逐字稿

Good morning, and welcome to Dr Pepper Snapple Group's fourth-quarter 2010 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 Aly Noormohamed, Senior Vice President of 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 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 disclaimers 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, and we undertake no duty to update these forward-looking statements.

During the call, we may reference certain non-GAAP financial measures that reflect the way we evaluate the business, and which we believe provide useful information for investors. Reconciliations of those non-GAAP measures to GAAP can be found in our earnings press release and on the Investor Relations page at www.DrPepperSnapple.com.

This morning's prepared remarks will be made by Larry Young, Dr Pepper Snapple Group's President and CEO, and Marty Ellen, our CFO. Following our prepared remarks, we will open the call for your questions.

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

Thanks, Aly, and good morning, everyone. Before I share our goals and priorities for 2011, it's probably worth spending a few minutes recapping our 2010 achievements, as well as my views on the overall health of the economy and the consumer. 2010 marked the third and final year of our key foundational investments. We've built an efficient hub-and-spokes supply-chain model, culminating in the opening of our Victorville, California, regional center. This plant added much-needed juice capacity in the West, which has enabled us to serve accounts faster, and compete more effectively.

We also made significant information technology upgrades, enabling better business decisions, and did it without any business interruption. We standardized handhelds and SAP across our DSD business; and earlier this month, we went live with our warehouse-direct SAP upgrade. We're also making great progress in Mexico. I'm also thrilled with the capabilities we've added in revenue margin management, marking return on investment, and under Marty's leadership, Rapid Continuous Improvement.

RCI has gained momentum across the organization, and I'm seeing visible engagement by the teams. To share one recent RCI example, our Aspers plant recently reduced package changeover time on the Hawaiian Punch line, from 87 minutes to 24 minutes, a 72% reduction. This gives the plant more flexibility to meet customer demand, enabling it to reduce inventory and inventory handling and storage costs.

And finally, through new agreements with Coke and Pepsi, not only have we secured the distribution of Dr Pepper, Crush, Canada Dry, and Schweppes, but by the end of 2011, we will have repatriated approximately 25 million cases annually to our Company-owned DSD business. This gives us critical scale in key markets, and gives us the opportunity to grow some of these brands nationally.

While we continue to operate in a challenging macroeconomic environment, the positive trends I shared with you last quarter have continued. We're seeing sequential improvements in restaurant traffic, immediate consumption, and consumer discretionary spending. In the fourth quarter, BCS volume grew 1%, lapping 4% growth in the prior year, with our key trademarks posting solid gains. Dr Pepper grew 3%. Our Core Four plus Crush grew 1%. Hawaiian Punch was up 3%, and Snapple was up 4%. Mott's declined 6%, however, this was on the heels of 23% growth in the prior year.

For the full year, BCS volume grew 2%, also lapping 4% growth in the prior year. Trademark Dr Pepper grew volume 3%, lapping 2% growth in the prior year. The successful re-stage of Snapple continues to demonstrate our team's ability to both fix and profitably grow brands we inherited from our former parent. AC distribution of our six-pack reached 86% in grocery, with 22 markets now over 90%. Share grew 240 basis points, and profit per case is up double digits. And just as important, both consumers and retailers tell us they love the changes.

2010 also highlighted our ability to gain solid traction against our long-term growth priorities, namely, build the brands, grow per caps, and RCI. In both grocery and convenience, we increased the availability of our core SKUs of our key brands. Fountain momentum continued, as we reached 100% distribution of regular Dr Pepper in McDonalds, and installed 43,000 incremental valves, lapping 51,000 installs in 2009.

We also made significant progress against our cold-drink expansion strategy, with 31,000 net new placements, despite an unprecedented level of business closings. Our brand investments are paying off, with brand equity scores up 320 basis points, lapping strong gains in 2009. Increased distribution and availability, stepped-up consumer communications, and continued share gains have resulted in healthy per capita consumption increases, ranging from 0.2 servings to 1.4 servings across our key trademarks. Clearly, the investments we have made over the last three years are paying off.

Moving on to results for the quarter, net sales were up 4%, reflecting sales-volume growth, positive pricing, and deferred revenue recognition under the Pepsi/Coke licensing agreements. As a reminder, we lapped contract [pack] losses during the quarter. Segment operating profit on a currency neutral basis increased 2%, reflecting net sales growth, higher packaging, ingredient and transportation costs, and a $19 million increase in marketing. This brings the increase in our four-year marketing investment to $36 million, slightly higher than our beginning of the year expectations, and an $89 million, or 25%, increase since 2008. EPS for the quarter, excluding certain items, was $0.67, reflecting solid top-line growth, higher marketing investments, and below-the-line favorability in corporate and in taxes.

We enter 2011 stronger than ever. Four years ago, we laid out a strategy for this business, and we have not deviated from it. We will build our brands by creating excitement, and engaging our consumers, our retailers, and our bottlers with strong innovation and the national launch of Sun Drop. We'll also leverage new marketing and analytic capabilities to optimize brand spending and free-up resources for further reinvestment.

We will grow per-capita consumption through expanded availability of our products in take-home, immediate consumption, and fountain. We will install 30,000 to 40,000 incremental fountain valves, and place 35,000 net new cold-drink machines. With a continued shift to flavored CSDs, branded leadership in the ambient juice aisle, and strong momentum behind Snapple, we're confident we can win more than our fair share of space.

As I mentioned earlier, we have strong momentum behind RCI. We clearly understand the need for productivity and waste elimination, given the challenging input-cost environment. We will continue to build an RCI mindset, and over time, this will further enhance our customer value proposition and drive greater levels of productivity.

Now, let me highlight some of our trimester 1 innovation and activation plans. In CSDs, we kicked off the year with a strong national media plan for 7UP, featuring our Ridiculously Bubbly campaign with David Spade. We'll keep this excitement going with the introduction of new 20-ounce PET packaging.With a refreshing new look and improved grip, we're seeing improved on-shelf merchandising, as well as positive consumer feedback. Look for this new package across 7UP, Sunkist and Canada Dry, beginning in April.

Sun Drop is without a doubt, our big bet for 2011. Through an innovative multi-year partnership with MTV Network, we're introducing Sun Drop nationally, extending the brand beyond its strong Southeastern roots. Sun Drop targets the large and growing citrus segment, as well as millennials, who are 25% of the population and have $500 billion in buying power. We're thrilled that MTV Scratch Marketing Group is developing all aspects of Sun Drop's marketing program, ranging from new graphics to advertising and promotions. Sun Drop will be featured in some of MTV's hottest properties, including the 25th anniversary season of The Real World, and will be sampled at key music events and college campuses.

Moving on to non-carbs. We'll continue to win the West with Mott's and Hawaiian Punch. We'll step up regional media support and drive increased usage with our Hispanic consumer. At the beginning of the year, Punchy, the iconic Hawaiian Punch mascot, got a 21st-century makeover with a new computer-generated design that appeals to the drink's target audience. This is 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 multi-pack, single-serve, 10-ounce PET offering, available in four flavors.

54% of all tea buyers purchase multi-serve packages, so we're launching Snapple premium in a 64-ounce package. It will be available nationally in six flavors, with a $2.49 everyday retail price. 2011 will be a huge year for Mott's, as we support three innovation planks with strong national TV advertising. We're launching 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 with national media, coupons and sampling. And Mott's will enter the vegetable juice category in the US with the introduction of Mott's Garden Blends, 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 to Marty to walk you through some of our below-the-line items and 2011 guidance.

Thanks, Larry. And good morning, everyone. As you saw in our press release, we had a number of items impacting our results below segment operating profit. In our corporate expenses, we recorded an $8 million curtailment gain, as we terminated retiree medical coverage on certain US plans. We also recorded $3 million of commodity-related mark-to-market gains, as compared to gains of $6 million last year. On a full-year basis, we recorded a $1 million gain compared to mark-to-market gains last year of $18 million. Also included in corporate expenses this year was $3 million of fees related to the Coke transaction, bringing Pepsi/Coke transaction fees to $11 million for the year.

We continue to leverage our productivity office to fund certain opportunities. For the quarter, we spent $7 million on a variety of productivity improvements, bringing our full-year spend to $30 million. Between our 2009 and 2010 investments, we expect to realize $33 million of cumulative savings in 2011, an $18 million increase over 2010.

In December 2010, we offered to repurchase a portion of our 6.82% notes due 2018. The purpose of this transaction was to proactively manage down our $1.2 billion 2018 maturity tower. Approximately 40% of the notes, or $476 million, were tendered. As a result, we recorded a $100 million loss on extinguishment. In January 2011, we raised $500 million of five-year debt, at a much lower coupon of 2.9%. Ongoing cash interest savings will be approximately $18 million a year.

Moving on to tax, we had three items that drove the 24.8% effective rate for the quarter; these are included in a table in the press release. Excluding these items, our tax rate was 35.6%, still a little better than the 37% that was implied by our third-quarter guidance.

Full-year cash provided by operating activities was over $2.5 billion. This included $1.6 billion of one-time, non-refundable cash payments from the Pepsi/Coke licensing agreement. Ignoring those payments, we still had a very strong cash flow performance. We continued our focus on driving trade working-capital improvements, reducing our cash conversion cycle by 8.5 days to 38 days, a $70 million benefit to free cash flow. We still have lots of room to improve in this area, and I'm confident that RCI will be an important contributor. For the year, capital spending totaled $246 million, down $71 million from last year, as we completed key supply-chain and IT projects, while continuing our investments in cold-drink equipment.

As we said before, and it's worth reiterating again, we remain focused on returning excess cash to our shareholders. In 2010, we returned $1.3 billion in the form of dividends and share repurchases.

As Larry mentioned, we entered 2011 stronger than ever. The investments we've made over the last three years are paying off. We have strong momentum in the business, and our RCI capabilities are improving every day. At the macro level, and as Larry said, consumer sentiment is improving, and discretionary spending is on the rise.

Against this backdrop, and in line with our long-term guidance, we expect net sales to increase 3% to 5% in 2011. The carryover benefits from the Pepsi/Coke licensing agreement will add approximately $27 million, or 0.5 point, to net sales growth. We expect the growth in our portfolio to continue, as we gain new distribution points, launch a strong line-up of new products, expand Sun Drop nationally, and increase our share of immediate consumption. We expect the competitive pricing environment in 2011 to be positive, and anticipate net pricing to be up around 2%.

For the full year, we expect diluted earnings per share to be in the range of $2.70 to $2.78. This reflects healthy top-line growth, a very challenging input-cost environment, with rising packaging, ingredients and fuel costs, continued strong management in the middle of the P&L, and continued investments in our brands, people and RCI to support the long-term health of the business. Below the segment operating profit line, corporate costs will be increased by $18 million in 2011, primarily driven by increased ABA fees and higher stock-based compensation costs, partially offset by the absence of the Pepsi/Coke transaction fees and the post-retirement plan gains we recorded in 2010.

Our interest expense will represent a rate of about 4.5% on our approximately $2.6 billion of debt, as we benefit from a low-rate environment on our floating rate positions, and the benefits of the December 2010 tender offer. Our full-year tax rate is expected to be approximately 35%, which is lower than our normal 37% to 38% tax rate, as the taxability of the Pepsi/Coke proceeds drives an $18 million, one-time tax benefit. In terms of cash flow, we remain focused on increasing our free cash flow yield, as a means of enhancing our return to our shareholders. We will continue to drive improvements in our cash conversion cycle, targeting at least a three-day improvement in 2011. And we expect capital spending to be approximately 4.5% of net sales. Partially offsetting free cash flow growth in 2011 will be approximately $90 million of income tax payments related to the Pepsi/Coke licensing agreements. We expect to repurchase approximately $400 million to $500 million of our common stock in 2011, subject to market conditions.

With respect to packaging and ingredients, given our hedged positions and current spot prices for our unhedged positions, we expect packaging and ingredients to increase total cost of goods by 6% to 7% on a constant volume-mix basis. More than half of this increase is expected to come from higher apple and other juice concentrates, and to a lesser extent, aluminum. We're also seeing higher transportation costs, both in terms of fuel costs for our Company-owned fleet, as well as higher lane rates from our common carriers. This is expected to add $20 million to $30 million to our cost base in 2011. While we will continue to drive productivity across our entire cost base, we will do so with an eye to also making the appropriate long-term investments to sustain and grow the health of our brands and this business.

For your modeling purposes, let me highlight a couple of things that will impact quarterly phasing. First, new product launches, the Sun Drop expansion, as well as packaging, ingredient and transportation cost inflation, are all more pronounced in the first half. This will result in stronger top-line growth, but weaker operating profit growth, with the second quarter being our most challenging quarter.

Second, I'm thrilled with the progress we're making behind Rapid Continuous Improvement. It's gaining momentum across the organization, and we're already seeing some of the financial benefits in terms of inventory reductions, capital avoidance, and cost reduction. But more important is the engagement of our organization, from the top down. In fact, Larry and I will be on an improvement project in a few weeks with some of our business-unit sales teams. The goal is to improve selling productivity. Every executive leader in the Company is actively participating, and we are supported now with about 25 highly-trained Continuous Improvement managers. We're well on our way to achieving our three-year goal of $150 million in productivity savings.

Our 2011 guidance includes a number of other considerations, as well. As I already mentioned, incremental deferred revenue amortization from the Pepsi/Coke deal will add $27 million to net sales and segment operating profit. The absence of Victorville start-up expenses, and Williamson strike costs, will benefit our cost of goods comparison by $27 million. On a comparable basis, corporate expenses will increase by a net $18 million, due to higher spending behind ABA initiatives; our Let's Play program, a community partnership to get kids active; higher stock-based compensation costs; and the absence of Pepsi/Coke transaction fees and the post-retirement plan gains. Finally, foreign currency is expected to be only a slight benefit to net sales and profit growth for the year.

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

Thanks, Marty. Before we open the lines for questions, let me leave with you a few thoughts. We enter 2011 stronger than ever. We've invested in our supply chain, our information technology systems and our people, and most importantly, in our brands. These investments are clearly paying off, with distribution, availability, brand equity, market share, operating effectiveness, and organizational engagement are all growing strongly.

We laid out a strategy for this business, and we have not deviated from it. As I've said before, there is plenty of runway in this business, but it requires a relentless focus on execution; and I think we can all agree that we are winning. Add to this very exciting momentum behind our RCI initiative, and we have all the ingredients to grow and enhance the returns of this business in 2011 and beyond.

Operator, we're ready for our first question.

Thank you. (Operator Instructions) Our first question is coming from Steve Powers of Bernstein.

Hi, good morning. Thanks. I was wondering if you could just provide a little more commentary around the 6% to 7% college inflation. And specifically, how much you are assuming you can offset, and what the sources of that offset is -- how much price, how much productivity, and what will be the net impact of mix?

Hi, this is Marty. Good morning. 6% to 7% COGS inflation is our overall estimate. We should remind everything that about one-third of that is in the juice concentrate area, so it affects our juice business. That's important to point out, because we're seeing in that category what we would call less resistance to pricing increase from customers. Everybody is taking price through that channel, and when we're seeing less resistance, so that's good. So, when we look at our overall pricing, the fact that a third of our inflation seems to be in a category less resistant to price increase, we look at our supply chain opportunities and our RCI opportunities, we'll still probably have a gap. But I think we can close the gap to a substantial degree.

Okay. So, I guess, I'm thinking about it in terms of 3% to 5% top-line growth, you're going to get -- is a point, half a point of benefit from the deferred revenue in there. Is probably a point, as I look at it, from volume coming back from the Coke system, in terms of beneficial mix, just as you realize both the full price realization on those unit cases. So, it doesn't feel like there is a ton of -- given those benefits and assuming some positive volumes, it doesn't seem like there is a lot of inherent price increases outside of the Mott's business. Is that a fair read?

Talking about pricing of 1% to 2% in CSDs, probably more so in the juice category.

Okay. And then, maybe some more clarity on your volume assumptions going forward, CSDs versus non-carbs. You have a lot going on in Mott's, but also a lot going on in the carbs area. What are your assumptions there, and specifically, how much incrementality out of Sun Drop are you assuming?

Well, you know, the Sun Drop, Steve, is really new. We just launched that first of the year. We're thrilled to death with what we're seeing already on it. It's above our expectations, but still very early to be calling it. As we kind of look at our numbers, we look at long-term growth expectations for the total category of -- you know, LRBs up about 1%; our non-colas, flat to up 1; teas, up mid- to high-single-digit; and then, juice and juice drinks, up about 1%.

Okay, great. Just one quick last one on advertising expense next year -- in line with sales, ahead of sales, slightly below?

Steve, our guidance on marketing -- we'll be up a little bit in marketing. Nowhere near the increases we've had in the past, because we don't need to. We're seeing clear signs from our marketing ROI initiatives, and I think we've done a pretty good job of reallocating spending that now looks like was less effective than maybe we thought previously.

As Larry said, we have a pretty robust pipeline of innovation this year, and we have -- I would say a fair amount of money behind those product launches. But we've been able to find -- call it marketing productivity, call it improved marketing effectiveness, and the rest of our spend to make those allocations.

Thank you very much.

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

Thanks, good morning.

Good morning, Judy.

Larry, I wanted to just probe this pricing environment issue a little bit in CSDs. It seems likes over the last few months, the commentary around the pricing environment has kind of gotten worse. I think in most of last year, I would think that a lot of the industry participants characterized the pricing environment as rational. It seems like now there is kind of increased concern about that competitive activity heating up more, even in the face of higher costs.

So, I'm just wondering if you can give us your perspective on what you think is going on. And as you look out over the next six to 12 months, what are some of the milestones that you are kind of looking for as to whether you would gain confidence in that pricing environment? Or there is more risk to that pricing environment?

Judy, I've really not seen the pricing heat up any. It's been -- we continue to see very disciplined and rational pricing. We continue, on our DSD business, to take price opportunistically. On our beverage concentrate business, we took an increase there of single-digit pricing, effective January 1. We've communicated all of our warehouse direct pricing, and we'll see the benefit of that in Q2. And as Marty mentioned earlier, it seems that it was a lot less resistance there on pricing. Our DSD prices, moving up now, I would say about 1%.

So, I've not really seen any issues out there of it getting more competitive. Price has been very rational. I think as we go through the year, I mean, the one thing -- I don't think anybody really has the crystal ball to see where these commodities are going to go. They are kind of moving all over the place. But I think that makes it even more positive for a rational pricing, and also the consumer coming back. We are just very excited about what we're seeing, the trends. Our fountain food service is up, QSR is up. Our single-serve in convenient and our 20-ounce -- so, we're looking at everything as -- it's very healthy out there right now.

So, the fact that the industry is taking kind of 1% to 2% type of pricing in CSDs, when costs are probably up sort of mid-single, that's not really a surprise development?

No, because we can till get -- and I think we'll see some more as we go forward. Like I said, we take it opportunistically. We're seeing different parts of the country have a little different pricing. But we feel very confident with it.

Okay. And then, Marty, just the question about share buyback. Because it looks like the pace of buyback did slow pretty materially in the fourth quarter, and then, even your comment about $400 million to $500 million for 2011 seems below what you've done for the full year of 2010. So, just wondering if you can comment on what's driving that caution, in terms of the buyback slowdown.

Let me just comment on the numbers. Fourth quarter, we were in open market. We did have to respect some blackout periods, so maybe we lost a little time there. But in terms of the macro view for next year, obviously, this year benefited because of the one-time payments we received for the licensing agreement. If you work through your models and expectations of cash for next year, and so, you have a view on our profitability -- I reminded you in my prepared remarks there is a $90 million tax payment coming due, which you might not readily see in your models or numbers.

You think about, we're going to refinance some debt in December. But that, presumably, will be a refinancing. And be reminded that we need -- we have a fairly substantial $500 million tax payment in Q1 of 2012. And that will, in essence, be the remainder of all of the taxes we'll need to pay on that money. When you work through, it leaves us $500 million -- $400 million to $500 million of free cash flow to acquire shares, which means we're not intending on levering the Company specifically to do that. We're simply using it as an allocation of our free cash flow.

Okay. And then, just in terms of the CapEx number, it sounds like 2010 came in a little bit below; and then 2011, your long-term 5% of sales, as it relates to CapEx number, has also come down. What is driving that? Are you pulling back on some of the cooler investments that you've initially planned? Just wanted to get some color there.

Not at all. I would say maybe there was $10 million or so of timing that will carry over into 2011. I would say better, and shrinking capacity. This is not -- I won't give [lean] credit for this, just yet. But this is exactly what happens. You need less space. You could produce more with less. And that's why capital reduction or capital avoidance starts to become a very large benefit in [lean]. I would say the biggest part of this was really better capacity utilization and capacity planning. And I think we can get better at it.

Okay. So, do you have a target of -- just in terms of once all the programs are done? Are we looking at kind of 4% of sales, or can we get to even below that number, from a CapEx perspective?

I don't think you'd ever get below 4%, Judy.

All right, thank you.

Your next question comes from the line of Christine Farkas with Merrill Lynch.

Thank you very much. Good morning, Larry and Marty.

Good morning.

I have a couple follow-up questions, just to close out the pricing environment. I'm wondering if you have any commentary, specifically on the retailer environment. Is there pushback? Are they accommodating? Are different segments looking at this differently, and does it prevent you from, perhaps, pushing more on price than you would like?

No, we really -- we haven't seen that much pressure, because you take most of our retailers, they have their store brands. They are under the same pressure we are. They have the commodity costs coming in. They may not be buying as well as we do, we don't know. Some of them do, some of them don't. But they don't want to see that gap get too big on the index of their store brands to ours. So, I think it's been -- it's been very healthy out there.

We always look, everyday, making sure that we still continue to give value. I mean, we have to have pricing to cover COGS, but we also want to make sure that we don't alienate the consumer. We want to make sure we have the right price points, the right packaging, the right mix -- and then, making sure that we have that consumer involved in different types of promotions. So, that's where we're putting a lot of focus.

Okay. Great. And then, on the cooler program, certainly a lot of incremental coolers going out there, a cold drink. How do we measure the returns? At some point, is this going to be just greater growth in single-serve? Or what are the metrics we should be looking at under that program?

Yes, I'll let Marty answer most of that. But, exactly -- the single-serve is what you have. If you've noticed before, I've always said, to grow our per caps, if people are not enjoying your products at work, at play, and while dining, they're probably not going to buy it at the supermarket. So, it's a long-term halo effect. But we're already seeing growth in our 20-ounce, our single-serve was up in the fourth quarter. And so, how do you put an exact model? I'll let Marty kind of see if he has an idea on that. But it's hard to do.

No, I think Larry hit on it. And while a small -- a smaller part of our cold drink placements are full-service vending, that's fairly easy, we measure through-put through the machines. And, if we're not getting the through-put, then we're looking to replace the machine, and not buying (inaudible). And coolers, it is simply taking the common single-serve packages, measuring the gains we're getting from the accounts, with respect -- it's not an exact science, but our finance people on the commercial side of the business look at this regularly. And I think it is impacting our view on capital effectiveness, and I think it's shaping it in a positive way.

Has the needle moved on per capita consumption? Are there metrics that could you share?

Yes, I mentioned in my prepared remarks, we've seen across the brands -- we don't really have the brands broken out, but we've seen increases of 2010 from 0.2 to 1.4.

Okay. And then, Marty, just to back up on the taxes. I just want to understand, with respect to the 35% range for 2011, and that trended down in the fourth quarter, as well, versus expectations. Is this a more permanent level, or are we looking for something higher post-2011?

Post-2011, as I said, it will be higher, maybe back to the 37% to 38% range. We're getting a one-time benefit in 2011, as a result of the taxability of those payments in 2011, that actually affect certain tax credits and give us some incremental tax credits in 2011.

Got it. Thanks so much.

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

Yes, thanks. Hello, gentlemen.

Good morning, Mark.

On the juice business, and then coming back to commodities more broadly -- but on juice, it sounds like you're expecting and seeing, as everyone is, more cost pressure there. So, what is your outlook for those particular costs from here? What kind of assumptions are you making from here? And then, any comments on hedges. And then, B, on juice, how do you think about the elasticity in that segment of your business, given that the pricing increases are greater there?

Mark, let me take the -- let me just take, I think, part of that question. With respect to juice and commodities, we're talking, of course, principally apple juice and apple juice concentrate. It has -- it has pretty much doubled in price on a per-gallon basis, year-over-year. Now that said, and in our guidance, going into the year, we probably have just under 50% of that or so covered. It's been influenced by a lot of things -- major sources, supplies, China, and it is what it is. And everybody is exposed to it. But I like our -- look, in the face of rising prices, you wish you had everything covered. But, given where we came from, I sort of like our covered position, given sort of where the tone of the market is right now on pricing.

Yes, and what we've seen, Mark, as you know, everybody is taking price on juice. And the apple juice is very, very heavily weighted towards private label. And they were the first to move on price, so -- and that was very encouraging.

And what do you think about the effect, either on your business or the juice categories you're in generally, of this pricing on the volumes?

Well I think that's one reason I had the juice in there at 1%. I feel very strong we can still grow it. Probably not as robust as it was, but we had the Win the West still going for us. We are going into our first full year with Win the West, and we're just seeing some great momentum out there. We're very happy with it. And then, also, for the Mott's, the applesauce was not affected by this as much as the concentrates for the juice.

Okay. That's very helpful. And then, if we think about the rest of the basket, you can give us some sense either about rest of basket or aluminum specifically, what sort of hedges you have in place for the rest of basket, and what kind of assumption you're making about how that basket, from a market perspective, is likely to perform over the next year or so?

Mark, let me -- so, let's break down the basket. 6% to 7% expected inflation overall. About a third. So, let's take two points for juice. So, now we're talking 4% to 5% for everything else. Our major dollars are in the categories of aluminum and PET and corn. Aluminum being large. We have reasonable cover, more so in the first half of the year. So, we're comfortable with our cover. And if I knew where the prices were going, as they say, I would probably not be on this conference call.

Fair enough.

But it is about -- thinking about where we want to be, relative to where we think others are hedged, so we don't -- we try to stay cost competitive over the long-term.

That's helpful. And then, finally, RCI, I guess there has been a little bit of confusion. If we think about your three-year number of $150 million, there's been a little bit of confusion out there over to what extent that's in the P&L, and to what extent it's other things, such as working capital declines. Can you update us -- really, a two-part question. A, can you update us on what that number -- what component of that number is P&L-related? And then, B, any color on how much of that number you think you'll get from a P&L perspective in 2011, in light of '11 being a more challenging cost environment than you thought a couple of quarters ago?

Right. I would say, look, the $150 million of productivity, roughly over three years, I would ascribe half to income statement items and half to working capital and capital spending. That's not a precise number, but that's a pretty good way for all of you to think about it. We have some internal targets, and I haven't shared them on a micro-quarterly, or annual basis yet. We're just getting started. I can give you anecdotes. We probably have, I think, about 75 projects that various people have identified. And I think they are interesting, because they're not just costs.

Now, I'm going to have to help everybody remember that this is about growing your business, improving sales. That's why I wanted to talk about Larry and I being involved with one of our sales teams, and actually working with them to eliminate waste and improve sales. On the cost side, as you know -- anecdotally, I'm going to be in one of our plants in a couple of weeks -- it's Aspers, Larry mentioned it. The reason Larry brought up that changeover and the importance of that changeover on Hawaiian Punch is because that is a precursor activity to an entire view of that product line, and truthfully, our view that we can create a [pull] system. The benefits for that plant is eliminating an entire outside warehouse, and I think the all-in cost on that project in warehousing and transportation is $6 million.

And that project, I would expect us to almost have completed -- I'm going to be on that project in a couple of weeks in early March. And so, we have lots of those opportunities. I've been reluctant, so far, to try to put a price tag on everything by quarter, by year, for 2011, because it will start to distract the organization in our RCI initiatives. I think we are building something quite good here, and I think quite different.

That's great. Thank you, Marty. Thanks, guys.

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

Thank you very much. Following up on Mark's question there. You guys historically, sort of philosophically, have been relatively shorter duration in your hedging, if I remember correctly, following discussions we've had. It sounds like maybe you've gone a little bit longer here, but you haven't really bumped that up a whole lot. So, can you maybe talk a little bit about how you are viewing those types of hedging, philosophically?And then, also, are you assuming -- and as we look to the back half where you are less hedged, are you assuming -- are you just taking current prices and extrapolating them out, or do you have your own internal forecast in terms of how you think they're going to move?

I think -- there's a lot in that question. Let me just say, in terms of what we've done recently, we raised some of our cover towards the end of the year, going into the fall and Q4, because that's an important time of the year when you think about pricing. And so, when we think about commodities and costs, we want to think about, well, what's the importance of that with respect to the competitive market plays? And that's different, of course, than just thinking about commodities in the sense of certainty in your P&L.

One could certainly hedge everything, and at least for some period, give everybody certainty in cost. But not sure what kind of risk that would create to a business, if not everybody else has done that, and you wake up and find you're cost-disadvantaged. We don't think we're necessarily advantaged or disadvantaged, we think we're pretty much where everybody else is, based on our sort of dissection of what others have said. And that's what we want. I mean, in terms of, philosophically, that's where we want to be.

Got it. Okay. And then sort of any -- and so, any thoughts on sort of the back half then, sort of the second part of that?

No, I -- I don't think we have thoughts about where these costs might go. Obviously, relative to history, they are high. You could find -- you could find periods of time in history when some of these costs have been as high. So, it's really about continuing to roll our cover, and take a view of when we think we ought to expand it. And I think we've had a pretty good track record so far, of being able to do this reasonably well. It is a broad basket, and many of the costs are influenced by their factors.

So, it's -- I'll tell you it's something -- we sit down and look at it on a weekly basis. And so, we're updated on a weekly basis in terms of our view of these commodity markets -- what's influencing them, from oil prices to weather to the dollar, and trying to make some judgments. But I wouldn't say we're trying to call markets. We're not trying to do that, we would never try to do that. And we're trying to look at that against what we see competitively in the marketplace, ala pricing.

Okay. That makes sense. And then, switching gears entirely here, you guys are obviously excited about the Sun Drop piece. And in the past, I don't remember you saying it today, you referred to it as sort of the next Crush. And the one difference would be that Crush -- and some of this is because of Sunkist, moved to a different system, and saw the brand really come back and get revitalized. So, can you talk about what is different now on Sun Drop -- where you say, okay, our system is more capable of taking this brand and executing and growing it, as opposed to Crush, when you relied on a shift into a competitive system? Thanks.

Right. Yes, I think what you have to look at there on that, John, was whenever we did the Crush, there was only 40% distribution out there at the time. A lot of our independents had the Sunkist. We don't allow dual existence. And so, we needed to find another route to market, to get that out there at 100%. You can see some similarities on Sun Drop, where it was only in the Southeast -- and a very, very strong brand in the Southeast.

I think when you look at what we've done with getting the partnership with MTV, and then a three-year investment with them and ourselves, the plans that are put together, I'm very excited about. The results in -- Sun Drop has been out there not quite a month, and we are way ahead of our expectations. The distribution is ahead of where we ever dreamed it would be. We're actually going to have to pull marketing probably forward, to cover the execution that the guys have done. Some of the best execution I've seen in a long time.

Great. Thank you.

Your next question comes from the line of Caroline Levy with CLSA.

Good morning, everybody, thank you. A couple of quick questions. Your top-line was very good in the fourth quarter, relative to the difficult environment. On the margin side, even lapping some easy comps, margins were down in each division, if I'm not mistaken. And, just wondering if you can walk through, in the three different divisions -- concentrate, packaged beverages, and [lab] can, what the big drivers of the lower margins were in the fourth quarter.

Carolyn, this is Marty. Good morning.

Good morning.

Let's go through it by segment. In the -- in beverage concentrates, the major factor was the increase in marketing. That's where a lot of marketing funding went. So, that offset the positive they had from the revenue amortization from the Pepsi and Coke deals and pricing. In the packaged beverage business margins -- I'm talking about, of course, about segment operating profit margins.

Yes.

On the negative side, and we talked about it in the release, actually, they took a 200-basis-point hit year-over-year because of LIFO inventory provisions. Now, that said, a big part of that was a gain in last year's P&L and a smaller charge this year. But the net effect in terms of movement in margins was down 200 basis points. Commodities and transportation took them down another 100 basis points; and more or less, that offset any benefits they got from supply chain efficiencies and some other upsides. It's a lower contract sales mix. We've talked about that in the past. It was always very low-margin. They had less of that, so on a mixed basis, that improved their margins. But their big hits were commodities and LIFO.

And then, [lab can]?

In LAB, again, the big hits would have been in -- again, we've stepped up marketing there. Actually, our IT investments that Larry referred to, we made a major part of our SAP implementation was to get our entire business there on a common SAP platform. I would tell you, in the quarter, my notes say that was about a 230-basis-point impact on margins alone. Fairly substantial. So, between that sort of one-time, some stepped-up marketing, they took a hit on commodities -- actually, offset whatever other efficiencies they had.

Okay, thank you very much. And then, going forward, concentrate margins should not be impacted by commodity costs, if I'm correct. That's just really how much you're investing in the business.

That's correct.

So, should we look for those actually to expand, given that you've stepped up so much in the last two years on marketing? Margins should expand in concentrate?

We would hope so.

And then, separate from that, on the pricing side, what's so interesting is, you're very bullish on the outlook for pricing, very optimistic. And Pepsi and Coke were both quite pessimistic. Coke sort of saying they didn't necessarily plan to cover cost increases with pricing, and Pepsi is saying it was very competitive and they weren't sure they would be able to do so. So, what's different for you guys?

Well, one, I think there may be more of a battle out there on colas. We're in the flavors, that's what we do. So, we're feeling happy with that. Our CSDs, I mean, we look at it and say on CSDs, we can capture 1% to 2%; and juice, we're probably going to be somewhere around 2%, or maybe a little greater than 2%.

Great. And I just want to clarify, again -- on the margins, this is the last question on beverage concentrate. You're saying you spent up in marketing. You had a huge upspend in the year-ago fourth quarter, so that was -- you're saying you did another big upspend on top of the big upspend.

Yes, correct.

Great. Thank you very much.

Your next question comes from the line of Bill Leach with TIAA-CREF.

Good morning, everyone.

Hi, Bill.

Marty, can you tell me how many shares you had outstanding at year-end, rather than quarter average? And when you give your EPS guidance, what are you assuming in terms of shares outstanding this year?

I'll tell you, we have about 224 million shares outstanding at the end of the year. And I don't know that we actually share our share count, other than to say that on your numbers of $400 million to $500 million of share repurchases of some assumed price.

Okay. And, in your interest expense guidance, you refer to $6.2 billion of debt, but I look at your balance sheet and I only see the $2.1 billion.

Yes, because we did the $500 million refinancing of the tender in January.

I see. So it wasn't showing that. So, we just use 4.5% times [$2.6 billion].

Correct.

Okay. And on the corporate expense guidance, are you saying it will be up $18 million year-to-year? Is that the bottom line?

That's -- for your purposes, that's the guidance.

Okay, great. Thanks very much, and congratulations on the good year.

Thank you.

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

Larry, I was wondering if you could talk about brand Dr Pepper, I think this is the third or fourth quarter where you've had volume up 3% or so. Can you talk about some of the drivers there?How is relative performance in the third-party bottler territories, how much of that might be coming from food service, just some color behind that?

Absolutely. As we've shared, our fountain food service has been doing very well. But we are just thrilled to death with the execution by our partners, our bottling partners out there. We're seeing very strong growth in the fourth quarter, with Pepsi system up plus a little over 3%. Coke system up over 3%. So, we're very, very happy with that. We're doing a lot on our low per cap areas, where we're going. And we've shared that plan with you guys, where we're getting more fountain, we're getting more cold drink. We want to grow those per caps, and that's where we're so confident on our growth, long-term.

So, as long as we can continue that great relationships with our partners, great promotional activity, we think the Dr Pepper brand will continue. And this is eight years that it's just continued to gain share and grow. So, we're very bullish on it. We've got a test out there right now with Dr Pepper 10 that we're looking at. So, what we're seeing in just the first month is just very exciting, very bullish. So, we're going to use that, and it's basically a 10-calorie Dr Pepper with a proprietary sweetener. And, so, we're very confident with what we can continue to do. And I'm very excited about what we're doing in the low per-cap markets. The low per-cap markets are really starting to pay off.

Thanks. And I was actually going to ask about Dr Pepper 10. I mean, that seems like a pretty logical progression for the brand. Would that -- do you anticipate that will go national without being in all the bottling territories?

Well, you know, it's less than a month, and the results so far are very exciting. Right now, we're looking at the -- if it continues like this, having a full launch in October, fourth quarter. You always hope that you have a problem, and if you need more money, pulling something forward. But we're very excited with it. The test markets are doing very, very well.

Okay. And then, sorry, just back to the long-term revenue guidance. Is it still your expectation that you can get about a point or so of volume a year, just from white space? You've talked about that in the past. Is that still a target?

Yes, I think that's a very good target.

Okay. And then, just lastly, for Marty. Just on the timing of the share repurchase, do you still expect that the -- the remaining authorization would be done by sort of first half, 2012?

We have just under $900 million, if you're referring to just the -- almost the $900 million that is remaining under the $2 billion. Yes, we'll do $400 million to $500,00 million this year, and then we'll [consume] that. And, of course, probably at some point, expand -- ask our Board to expand the authorization, because we don't -- we intend to do this for the long term.

Okay. Thank you very much.

Your final question comes from the line of Damian Witkowski of Gabelli & Company.

Hi, good morning.

Good morning, Damian.

Believe it or not, I still have questions. So, if you miss your top-line projection, let's say you hit [3%]. Do you think it's going to be due to volume, or price miss?

Well, I don't plan on missing it. But I think it's a mix in there. I'm feeling good with -- I'm feeling good about pricing, where we're seeing pricing right now. Like I said earlier, I don't see any indication that it's -- I don't know why we would come down on pricing. I think another one, as you know, the consumer reversal is just very, very exciting to us right now. I mentioned in the third quarter, we were seeing improvement, that improvement continues. QSR is showing positive trends. Our single-serve in convenience is growing --

And you haven't seen a slowdown -- you haven't seen a slowdown, even in the convenience channel, when the gas prices began spiking? It doesn't sound like --

No. And I think what's helping us there, Damian, is the gas prices are going up slowly. There is not that giant spike, like there was in the past. You're not going through that shock.

And then, no one really -- seems like talks much about Mexico. But with your number of shares shrinking, this actually becomes sort of a real contributor to earnings, if it could turn -- turn in the right direction. And I'm wondering, just looking back, what do you think of that business, and what's a -- I know this year was an investment year, but can we get back to sort of 20% plus EBITDA margins in that business?

Well, we're not really setting a target on that, but we're very bullish on the Mexico business down there. We have a lot of innovation going in place. We have innovation behind Squirt, Crush, Penafiel, we're doing some new packaging. We have a new Clamato flavor. We're entering the light cola market, which is growing very quickly down there.

And I think the biggest thing is Jim Johnston, our President of Beverage Concentrates and [lab can], is right-sizing the business. He's into RCI projects down there, eliminating waste. We're optimizing the routes we installed. We're increasing distribution and availability. So, we feel good about Mexico. Mexico can always be a challenging market down there. But we're still behind our Mexican business, and we feel that we can grow down there.

Okay. And then, Marty, you raised $500 million in early January, and so now you're sitting at about $800 million in cash. And $2.6 billion of debt. Is there a reason to have that much cash? Because your -- your big tax payment is not until Q1 of 2012, correct?

That's correct. The reason we have -- we're going to buy back shares.

Okay.

And that's -- in essence, we needed to -- you remember the debt we took out in December, we paid roughly $576 million to take out $476 million. And so, we in essence refinanced $500 million of that, because it wasn't our intent to, certainly, delever at sort of the disadvantage of the share repurchase program.

Okay. And then, just remind me, how big of a component of your cost of goods sold is natural gas?

I don't -- it's small.

It's small. Okay. So, that's not a big -- okay. All right, congratulations on a good year.

Thank you, Damian. I'd like to thank everybody for joining the call today, and for your continued interest in Dr Pepper Snapple Group. Thank you.

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