Keurig Dr Pepper Inc (KDP) 2011 Q3 法說會逐字稿

Good morning and welcome to Dr Pepper Snapple Group's third quarter 2011 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 Carolyn Ross, Vice President Investor Relations. Carolyn, 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 this call, we may reference certain non-GAAP financial measures that reflect the way we evaluate the business and which we believe provides 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, Carolyn, and good morning, everyone. Let me start by saying how pleased I am by our performance and accomplishments this quarter, notwithstanding the challenging economic environment and continued input cost inflation. The combination of price, mix, and productivity is allowing us to partially offset these cost increases while still providing value to our consumers and our retail partners.

For the quarter, bottler case sales were down 1%, lapping 2% growth in the prior year. We once again posted industry leading growth in CSDs with volume flat in the quarter. Year-to-date, bottler case sales were flat, in line with our expectations giving the higher than normal levels of pricing. Dr Pepper volume was flat in the quarter, lapping 2% growth last year. Dr Pepper fountain volume grew 4% on new distribution gains, and Dr Pepper TEN added almost 1 million cases. Combined, our Core 4, Sun Drop, and Crush brands were flat. Canada Dry continued its trend of double-digit growth, while Sun Drop added 2 million incremental cases on continued distribution gains.

Snapple was up 2%, lapping 10% growth in the prior year, with continued distribution gains in both six-pack glass and 64-ounce PET. Our juice portfolio experienced larger price increases, particularly Mott's, as the price of apple juice concentrate doubled this year. With mixed single-digit pricing, Hawaiian Punch volume was down 10%, while Mott's declined 6% on double-digit pricing. Net sales for both brands increased in the quarter, with Mott's up 4%. Hawaiian Punch net sales increased 5% from the combination of pricing and increased single-serve package mix. While raising prices at these rates is never desirable, these results are consist with our goal of achieving profitable volume growth.

For the quarter, currency-neutral net sales grew 4%. Price mix added 3 points to growth, while deferred revenue recognition and repatriated cases under the Coke licensing agreement added 1 point to growth. Segment operating profit on a currency-neutral basis increased 7% or $21 million. Included in last year's results were $15 million of strike related costs. Sales improvements, the benefit of price increases, and productivity improvement from RCI were able to significantly offset the headwinds of cost inflation, which was almost $60 million in the quarter. Marketing investments in the quarter were lower than a year ago, but are up $13 million year-to-date. We expect further increases in the fourth quarter to support Dr Pepper TEN, 7UP, and other initiatives resulting in full-year marketing up $20 to 25 million. For the quarter, diluted earnings per share grew 18% to $0.71.

Now moving on to innovation. I'm thrilled with the level of excitement and energy the national launch of Dr Pepper TEN is bringing to the Dr Pepper trademark. As I mentioned earlier, Dr Pepper TEN BCS volume was almost 1 million cases, with concentrate volume higher as our bottling partners built their inventories. And this was ahead of the national media launch. Our tongue-in-cheek "It's not for women," media campaign is generating huge press coverage, online buzz, and social activity, with over 136 million impressions to date. We're seeing strong engagement with our target consumer, 25- to 34-year-old males with 4 times the average number of posts and comments on Facebook and Twitter. We're also leveraging our great association with college football to drive huge consumer awareness and trial behind this great new product, as well as the entire Dr Pepper trademark.

Looking ahead, let me highlight some of our fourth quarter 2011 and trimester one 2012 innovation and activation plans that will continue to increase awareness and relevance of our brands. In the fourth quarter, we'll drive strong bottler and retail momentum behind 7UP with our new Be 7UP advertising campaign, featuring popular singer, songwriter, and current judge on the hit series The Voice, Cee Lo Green. 7UP and the Hispanic core four are partnering with crossover artist Carlos Santana and sponsoring the Latin Grammys, the number one rated Hispanic awards show of the year. Consumers will have a chance to win a VIP party with Santana and tickets to the award show in Las Vegas. Local activation will include Latin Grammy street parties and acoustic sessions in 5 markets. We'll spread holiday cheer with limited time offers - 7Up Mixed Berry Antioxidant, Canada Dry Cranberry, and Schweppes Black Cherry. And we'll provide consumers with party solutions with our combined CSD and mixer programs in select retailers.

Moving to Snapple, we've partnered with a Grammy-award winning band, Maroon 5, to bring consumers "Tea Will Be Loved." This limited-time flavor is available on shelves now and supports the charity Feeding America, and as part of this collaboration, Snapple and Maroon 5 are donating almost 2 million meals to help fight hunger. Half & Half is the second fastest growing tea segment, and consumers want a diet offering, so we're introduce Diet Snapple Half & Half Lemonade Iced Tea with natural flavors and only 5 calories. This great tasting tea will be available later this year, with media and programming beginning in January 2012. And we'll keep the energy behind Dr Pepper TEN going in the first quarter, as we partner with one of country music's hottest artists, Blake Shelton, to lead the manliest ACMAs ever.

With that, let me turn the call over to Marty to walk you through our results and a 2011 guidance.

Thanks, Larry, and good morning, everyone. Before I cover corporate items and our guidance, I want to be sure that everyone understands the impact that cost inflation and volatility in certain commodity prices had on our third quarter results, as reflected in our gross margins, which were 280 basis points lower this year. First, higher overall input cost inflation increased cost of goods sold by almost $60 million, and reduced the year-over-year gross margin by 370 basis points. Next, this higher inflation also required us to record a $4 million LIFO inventory charge, as this method of accounting currently expenses these costs instead of capturing them in inventory. This drove a further reduction in the gross margin comparison of 20 basis points, as there was no LIFO reserve addition last year in the quarter.

And finally, the reduction of certain commodity prices at the end of the quarter caused to us record $11 million of unrealized mark-to-market losses on commodity hedges, $9 million of which is in cost of goods sold, and the rest is in SG&A. This reduction in COGS compares to a $4 million unrealized mark-to-market gain last year, resulting in a further gross margin reduction of 80 basis points. These items all taken together reduced year-over-year gross margins by 470 basis points. Just a reminder that these unrealized marked-to-market losses on commodity derivatives are included in corporate expenses and will be included in segment results when the contracts settle.

Now, moving to below the line items, corporate costs were $82 million for the quarter, compared to $63 million last year. Without mark-to-market impacts in both years, corporate costs were $71 million compared to $67 million last year. We expect corporate costs in the fourth quarter, including unrealized mark-to-market impact, to be around $75 million. Net interest expense was $29 million, $2 million below last year and a good run rate for the fourth quarter. Our effective tax rate for the quarter was 34.7%, and included $5 million of Pepsi and Coke transaction-related tax benefits. This was about 130 basis points lower than our Q3 expectations, due primarily to certain higher tax credits that result from lower levels of capital spending.

Moving on to cash flow, year-to-date cash from operating activities was $580 million, including $43 million of cash taxes paid on the Pepsi and Coke licensing agreements. Remember that the largest portion of taxes on these transactions, $535 million, will be paid in the first quarter of 2012. Capital spending was $148 million compared to $170 million last year. This brings free cash flow, adjusted for the Pepsi and Coke taxes, to $475 million as compared to net income of $440 million. We continue to focus on working capital and CapEx management, and our cash conversion cycle has been improved by 6 days, well ahead of our goal of a 3-day improvement. Through September of this year, total distributions to our shareholders were $608 million, $425 million in share repurchases, and $183 million in dividends.

For the year, we continue to expect net sales to grow in the 3% to 5% range. Our guidance assumes balance of year pricing in the 3% range, with full-year volume flat. Also included in our net sales guidance is about 2 points of benefit from the Pepsi and Coke licensing agreements and foreign exchange. Full-year earnings per share are still expected to be in the $2.70 to $2.78 range. With continued volatility in the commodity markets, and at forward prices for our unhedged positions, we now expect packaging and ingredients to increase total cost of goods at the top end of our 7% to 9% range on a constant volume mix basis. We continue to expect transportation costs included in SG&A to be up about $35 million.

As Larry mentioned, we now expect marketing investments to be up $20 million to $25 million for the year, to support key innovation planks and to remind consumers of the value of our brands. This is particularly important given rising prices and increased consumer purchasing pressure. As a reminder, year-to-date marketing investments through the third quarter were up $13 million. Our EPS guidance also assumes a full-year tax rate of approximately 35%, which includes an $18 million one-time benefit related to the Pepsi and Coke transactions. In terms of cash flow, capital spending is now projected to be approximately 4% of net sales as RCI is beginning to provide improved capital productivity. Finally, we remain on track to repurchase approximately $500 million of our common stock in 2011, subject to market conditions.

We continue to make excellent progress behind our developing rapid continuous improvement capabilities. We're eliminating waste in all aspects of the business, in the selling process, in marketing and promotional execution, in delivery and manufacturing, and in back-office functions. We are now focused on implementing visual management tools to ensure alignment of improvement goals within every team throughout the organization. We're also replicating achievements across different locations and ensuring consistency of process. With strong senior leadership engagement and cross-functional team participation, we're well ahead of the internal targets we set for ourselves. In fact, across our entire system, we've increased selling time, increased our speed to market in cold drink placements and in innovation, taken 6 day sales out of inventory, closed 7 warehouses and significantly reduced space in 2 more, and improved our cash flow through capital avoidance. With these early successes, we believe we're well on our way to achieving at least $150 million of cash productivity benefits through 2013.

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

Thanks, Marty. Before we open the lines for questions, let me leave you with these thoughts. Our teams remain committed to executing our focused strategy. We're building per capita consumption and gaining distribution in core packages, with 23 cold drink placements -- 22,000 cold drink placements and 23,000 new fountain valves year-to-date. We're driving priority brand execution in the cola system with tie-in rates up double digits. We're turning around our business in Mexico and seeing margin trend improvement, and we continue to deliver above category trends in CSDs, teas, and shelf-stable juices. We're committed to always delivering value to our customers and ensuring we're investing wisely in this business for long-term, sustainable growth. We're winning with RCI, with increasing levels of activity and engagement and delivering cash productivity savings. And finally, we remain committed to returning excess cash to our shareholders with a view of providing very attractive shareholder returns.

Operator, we're ready for our first question.

Thank you. (Operator Instructions) Your first question comes from the line of Judy Hong with Goldman Sachs.

Thanks. Good morning.

Good morning, Judy.

Marty, I'm having a little bit of trouble just reconciling fourth quarter based on your full-year guidance. Your net sales growth guidance of 3% to 5% for the full year implies that Q4, if you take the midpoint of that, may be flattish to up slightly in terms of sales. So I'm just wondering, is there any reason to think that the sales will be much weaker in fourth quarter?

And then on the other hand, if I try to look at your earnings guidance, it actually implies a pretty nice pickup in terms of growth. So I'm just trying to reconcile your sales guidance and then just ticking down to your earnings guidance,, what it implies for Q4.

I won't comment specifically on an earnings number for Q4, but again, as I said in my prepared remarks, -- full year up 3% to 5%. We've not been more specific in terms of the sales range. We did say volume flat, pricing up 3.

Everybody needs to be careful on cost of goods. As I said, we're now going to be at the upper end of that year-over-year increase in costs. If you do the math in Q3, it was about 9%. It was actually greater in Q2, actually 11%, which we thought back then would happen. So you need to factor in that full increase in your Q4 models.

I'm not sure what else I can really help you with to get you to your number. Those are, I think, are the key factors that should drive your models.

Are there anything below the line that's going to give you more of a benefit in Q4?

Taxes. Again, you'll need to take the full-year tax rate back up to 35%. As I said, interest expense, run rate this quarter, pretty good for next quarter, and marketing. Remember, marketing now, down this quarter, will be up, from 13 to some number that puts us in the $20 million to $25 million range.

Okay. And then, Larry, just in terms of what you're seeing as it relates to elasticity from the price increases that you're taking, maybe you can help us understand the trends that you're seeing, maybe comparing CSD versus non-carbs.

Yes, I'll start with the non-carbs. Like I said, we haven't seen when we took such large increases on juices, especially with apple juice concentrate doubling, but you know, it's starting to kind of level off. The volume has been hit, but if you notice, whenever I mentioned in my prepared remarks that our net sales were up, so we're getting it in the right position.

On CSDs, the third quarter, we were still lapping, in the beginning of third quarter, some very aggressive pricing on CSDs. So, there's a large difference between where we were back at $5 in July and looking at a 24-pack now, probably more on average of $7, somewhere in that timeframe.

We're seeing the consumer looking at different packages. We're doing much more with our PET, different things with 12-pack, 18-packs, 20-packs, half liter PET. So we're trying to get where the big price difference doesn't just stand out as much, and it looks like it's really starting to work for us so we're encouraged by that.

Okay. Thank you.

Your next question comes from the line of Steve Powers with Sanford Bernstein.

Hi, thanks. Just on housekeeping, apologize if I missed it, but I think taxes came in, Marty, about 100 basis points, I think more than 100 basis points, lower in the quarter than you guided to last quarter. It sounds like advertising was down, was supposed to be up, and has been reduced for the full year, in terms of the year-over-year increase. What were the drivers there of those changes?

Steve, I'm sorry, the first part of your question go to CapEx?

No, I'm sorry, taxes. I think taxes you had guided to imply 36% tax rate in Q3, and it came in below 35%.

Yes. As I said in my prepared remarks, believe it or not, the benefit actually comes from lower capital spending due to a certain tax credit we get on domestic manufacturing profits that's higher, the higher the profits are, and therefore, the less depreciation you have in that tax calculation, which is driven by capital spending, and particularly now with bonus depreciation in place, actually benefits that tax credit.

So spending less capital raises that certain tax credit, and as you saw in our financials, we spent less capital.

Okay, that's very helpful. And on the advertising?

On the marketing spend, as we said, we're down, and most of that's due to timing, so that we're sure we're aligning our pull activities with our execution and activation in the field. That's the real reason. We've not really postponed or canceled any marketing plans, and I think everybody on this call knows that we've pulled back a little bit. Going into this year we spent -- we increased marketing $85 million --

$85 million.

-- from two years ago, when we began to cushion on building our brands, and when you factor in this year's full-year increase, it's going to be over $100 million, which for a company our size is not such a small increase.

I think another thing, too, Steve, you've heard us talk about how we've really went in and started looking at our return on marketing investment. We went to a lot more local instead of so much national. It's given us more flexibility where we're not having to lock for the year. We can be nimble with it, we can move it, and we're really getting where we can tie it regionally to the activation in the customer for the consumer, so that's probably the biggest driver I would look at.

Okay. If you look -- given that your competitors are signaling some pretty significant step-ups in US marketing investments next year, how much is this tied to just waiting and see what develops? I know it's just early stages, but how are you thinking about marketing plans for next year in that context?

Yes. We're in the process right now of putting those together, and like we've said since we went public, we will spend, on our brands, we will build and enhance our leading brands.

I keep hearing that there's going to be more spending. That excites me. It's great for our category. We get more activity out there. As the tide rises, all ships rise with it. So it's not something that really has a concern for us.

Okay. So, a similar kind of step up again next year wouldn't -- we shouldn't be surprised by that?

You know, we're just going to look at it right now. It depends on how our programs go together. What we want to do is get more for the buck -- more bang for the buck there. That's why we're doing the marketing return on investment, but we will stay -- we will do what we need to do out there in 2012.

Okay. And then lastly on-- going back to pricing. In packaged beverages, your release implies that the 5% sales growth was driven mainly by pricing. But you factor in four points of volume growth, another point from FX that appears -- really, there wasn't much price. Is it -- is what I'm seeing there just materially positive rate offset by materially negative mix?

No, I don't -- Steve, this is Marty -- I don't think so. With that -- they had that level of pricing in the packaged beverage segment, so I'm not sure the numbers you're referring to.

Okay. More generally, then -- I'm looking at net sales up 5, sales volume up 4.

Right, and you've got the impacts. Remember, packaged beverage has pricing. They also have the effect of the repatriated brands that came from the Coke system, because those are now DSD cases with a higher net sales value. So on a dollar basis that's also driving part of the increase.

Okay. Still -- I'll follow up off-line. I'm still not getting the math there.

Okay. And just lastly on packaged beverages, is there -- it seems that -- I got caught off-guard a bit by Snapple decelerating from the growth rate we saw in Q2, Q3. You talked about gaining distribution -- continued distribution in that brand. Any sense for what caused -- I know the comp was slightly harder, but the deceleration was pretty material. Is sell-through just slowing that much?

We were very pleased with this -- lapping 10% last year in the third quarter, and like I said in my prepared remarks, we've got more products coming out right now with the chari-tea and also with our Half & Half coming out.

So plans we have in place for Snapple, we were not concerned at all with our Q3 being 2%.

Okay, thanks.

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

Yes, thank you very much. I wanted to follow up on the marketing side. And, in terms of looking at the change in timing here. How much of that is simply, going back to Steve's question, looking at the -- sort of the underlying category growth rate, what have you? Because it seems now as though you're potentially losing share in CSDs, which hadn't been the case before.

And can you talk a little bit about, with this change in spending for this year, do we want to plow some of that forward into next year? So I guess the question is, is it -- is it sort of a change, and now we're working off a lower base, or is it again just sort of pushing this into the next couple quarters, seeing how the pricing is going, and how the competitive environment goes? Again, I understand that you guys are up nicely over where you were two years ago, but the market share dynamics seem to be a little bit different now. Thanks.

Yes, it's Marty. Let me -- Larry may or may not add to that.

First of all, with respect to your share comments, if we look at what the Company has reported this quarter, with us being flat in CSDs and everybody else being down, it looks like we still performed relatively well.

I continued to remind everybody that when it comes to marketing spend, we've got a big internal effort, and have had a big internal effort on the quality, or the ROI, from that spend. And that, as I said previously to a number of you, has allowed us to reallocate marketing and actually look at some of the spending that's not been so effective, converting a lot of national spend to local spend, which is more -- which is cheaper. It just costs less.

And so, I want to continue to remind everybody that when we think about spending increases and whether or not that does or does not add or subtract from growth and share gain, implicit in that is that somehow all the base spend is effective or directed properly. And I think we've discovered that we've had a chance internally to reallocate money to more effective programs.

And we look at them all very closely, John. I think one I gave you an example of before was, we had not had any spend on A&W for a lot of years, and we put money behind A&W, and it performed just the same as it did before. So, we can look at that and say that money is better spent somewhere else.

So we do that, actually on a weekly basis, looking where it's at, and Marty meets with the marketing team once a month, basically saying, we know what worked. What didn't?

Okay, thanks. And then, looking at the raw materials guidance out for the fourth quarter, and I guess -- as we look at this, it's sort of tough to plan for the marked-to-market stuff. In your guidance for the fourth quarter, is there any sort of marked-to-market impact there, and do you have any advice in terms of how we should sort of are model that out? Because most of the companies actually end up excluding a lot of the marked-to-market things that you guys actually included in this quarter.

John, it's Marty. If I could help you model it, I'd probably be a commodities trader. Needless to say, yes, we do include it in our full results. Right now, our guidance has no impact.

I did look yesterday. If we were to mark to market as of yesterday, we'd maybe have a couple million dollar positive, but that's as of yesterday. So right now our guidance assumes that number. There's no marked-to-market in the quarter.

Got it. Thank you very much.

Your next question comes from the line of Wendy Nicholson with Citi.

Hi. My first question, just following up on John's question on the gross margin in the fourth quarter -- is it fair to say with the benefits of pricing now all having flown through, the gap, or the delta, in gross margin pressure in the fourth quarter should be sequentially less than we saw in the third quarter?

It might be -- on a percentage basis, it might be a little -- it will be a little less if you do the math.

Okay.

So, you need to model that. And the other thing I would tell you is, as I said, we are on the LIFO inventory method. And, I said we recorded $4 million this quarter, and there could be a similar adjustment for -- or addition to the LIFO reserve next quarter.

Okay. Because as we look at the guidance, or the implied guidance, if you will, for the fourth quarter specifically, there's a big range there on -- an $0.08 range, and I'm trying to figure out what the variables are. It sounds like you've really drilled in on the costs. You've gotten your pricing in.

I'm trying to figure out what the variables are that might, through the quarter, lead to you come in at the high end versus the low end. Is it really all about how Dr Pepper TEN does in the marketplace? Is it about the competitive environment? Can you give us any direction there?

Well, yes. I think -- the uncertainty always will be top line related for the most part. What happens to volume, particularly, or the price-volume trade off, behavior of the consumer. Our commodity costs are fairly well known now through the balance of this year, and obviously SG&A. But for again, marketing going up, shouldn't surprise anybody.

So -- but there are a lot of variables that affect that top line.

Okay. And then my last question is on Sun Drop. I know you talked about the continued distribution gains here in the third quarter, but where are we sort of inning-wise? Are we towards the end of your distribution potential for that brand? And how is that trending, market share-wise, relative to your going in expectations? Thanks.

Yes. No, we're not -- we're just really getting started. Right now, on grocery, our ACV is about 92% and on convenience, 56%.

Like we've said before, when we put this program together, it's a three-year initial that we've locked in solid, so I would -- and at the end of three, we're not stopping there. We're very happy with what we're seeing it do. We've got some markets that are just really performing well. So if I was looking at innings, I'd say we're probably at the top of the 3rd.

Terrific. Thank you.

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

Good afternoon, guys.

If could I ask about Dr Pepper TEN a little bit. When it came to Crush and Sun Drop, we knew they were highly incremental to your portfolio, Dr Pepper TEN could be more cannibalistic than the others. Could you give us some context on what you saw in some of your test markets before deciding to roll out nationally, and then what you're seeing now, after rolling out?

Yes. You know, it's still very early from the national rollout. We launched at 10/10, where we're really saying that's the date to go. But, our results from the test market -- and I think this is what a lot of our partners wanted us to move this thing forward from 2012 -- was that in those test markets -- and they were very diverse, and trying to -- high per cap, low per cap, and medium per cap. Where we had Dr Pepper TEN, we showed growth in Pepper and Diet Pepper, and those are the most encouraging numbers you'll ever look at.

As I said, we're very pleased with what we're seeing going forward since 10/10. Not enough data to really lay it out complete, but we'll probably have a little bit of an idea in a couple of weeks, after we get October closed up. But everything we're seeing, everything we're hearing, not only from bottling partners but customers and consumers, they are thrilled to death with it. We're bringing people into the Dr Pepper trademark that had left for -- whether it's non-carbs, whatever, they're coming back in because of the great taste, the bold taste, and the 10 calories.

Got it. To make sure I understand what you said -- in those markets where Dr Pepper TEN existed, Dr Pepper regular also accelerated? Is that what you had said?

Yes.

Got it.

And Diet, too.

And Diet. Second question, just on cap utilization - over the last couple of years, you've repatriated some brands, you've -- there's been some RCI initiatives, you've launched some new brands. Where are you on cap utilization, how do you feel about it, and should we get a return to volume growth? How should we think about the price volume dynamic on profit?

What was the first part of that question? This is Marty.

On cap utilization.

Talking about capital?

Capacity.

Capacity.

oh, capacity.

There's no real issues in capacity. In fact, it's possible over time we will add lines, but what RCI is doing for us -- it's freeing up a lot of space (inaudible) in our plants. And so I would not expect any real significant capital spending to support volume growth.

Right.

And we're getting to where, not only with the inventories, but a lot of ours have been on the changeovers. That's what's bringing down the inventories. We don't have to run as long of runs, and also makes the productivity, efficiency, and the capacity greater on that line.

Got it. Thank you.

Your next question comes from the line of Brett Cooper with Consumer Edge.

Good morning, guys. I just wanted to get an update on -- your founding volumes up 4, and you're obviously adding valves. When you look into 2012, are you still adding fountain valves at McDonald's from that agreement, or has that ended?

Those were completed the end of last year, but our team -- like I said, we've hit an incremental already this year that I think 23,000 valves. And, we keep very aggressive targets every year on these, and the guys just continue to close them, so we're very pleased with that.

Plus, we're seeing, in the -- for the fountain traffic is up, mainly driven by QSR, which is a very, very positive force, telling that you say the consumer is -- there's traffic a little better, spends a little better. But, yes, we will continue that momentum through 2012.

Alright. Thank you.

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

Thanks. Morning, everyone. Larry, on -- I was hoping we could step back -- it's really a follow-on to John's question -- and kind of get a state of the union on the carbonated portfolio. Because while it continues to do better than the category overall, the relative performance has really not been as good as it was last year and in the prior year.

So could you talk a little bit more about where you think the portfolio stands? And then I had a couple of follow-ups specifically on Crush and the core Dr Pepper trademark.

Yes. No, I'm -- we're very pleased with how the portfolio stands right now. You know, if you go down through it -- with what we've been able to repatriate, we're getting those in place. You see the numbers that we're getting on our Canada Dry brand out there, and it continues to grow double-digit. We've got basically -- with the introduction of Crush, Sunkist took a little bit of a hit, but we're starting to see Sunkist improve and some great plans for 2012. You heard me talk about what we're doing with 7UP in Q4 with Cee Lo Green.

We're very pleased with what we're seeing right now, and also what we have planned for 2012. (We'll never say) it's not tough out there right now. It's a tough economic environment, but I think we're doing all the right things, and we've got the right things in place to go forward.

Great.

And then, as we think about Crush specifically, can you talk about the path to seeing that brand stabilize on a sequential basis? Year-on-year it's declining, but as you think about getting that sequential stability, where do you think that -- when do you think that might happen, and what do you think is involved in achieving that?

Well, I think all of -- I think we're going to see it a lot more stable in 2012, across the entire flavor category there. What I had mentioned about what we're doing with Sunkist -- Crush had two fantastic years, lapping some very, very big numbers. We have no issues.

We're very pleased with what our partners are doing out there with Crush and the plans for next year. And, like I mentioned awhile ago, as the tides come up, everybody rises with it. Fanta has done a lot. Crush. Sunkist. So I think actually, when you look at the flavor category, we are accelerating getting that to 55% of the category.

Great.

And then, finally on the brands here -- Dr Pepper improved, even if you back out the benefit of Dr Pepper TEN late in the quarter, it did improve sequentially. Can you talk a little bit more about that improvement -- the role of fountain, whether it actually returned to a positive number in the state of Texas? I'm trying to get a better feel for what's going on, excluding the DP Ten --

I think the biggest one that you would look at there, Mark, is that -- what we're doing with our strategy of increasing per caps. Where we went out, and we identified each location we were going to go -- going away from national marketing to local marketing, getting the cold drink equipment in, getting the fountain equipment in. So our low per cap markets are doing very well.

As I mentioned a moment ago, we still had some tough numbers to lap in Q3 from July, some very low pricing. And so we're looking at it right now, saying we're pleased with the performance of Dr Pepper and very encouraged with what Dr Pepper TEN will do for us going forward.

In Texas, specifically, sequentially, how is the brand doing?

You know, Texas is still a little soft, but that's our biggest market, had some of the hottest pricing. There was some $3.88 numbers down here last year, so that was pretty aggressive.

But what we're seeing going forward, we're very pleased with it.

Great. And then finally, Marty, just housekeeping here. That $20 million to $25 million increase in marketing spend for the year -- can you give us the year-to-date number? Is it somewhere in the $5 million to $10 million range?

In terms of percentage increase?

No, the dol -- you're saying -- I think you're saying $20 million to $25 million increase in marketing spend for the year.

For the year, correct, with $13 million of that increase already year-to-date.

Got it. Great. That's what I was looking for, that $13 million.

Great. Thank you, guys.

Yes.

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

Thank you. This is Michael Lavery for Caroline. How are you doing?

Good, Michael.

Good. You said that the contract volume was up double digits in the quarter. Is that likely to keep up? And what did that add -- about a point to total volume growth?

No. The contract business, which was up, and on a revenue basis in the PB segment, about two points. We would not expect that to continue. And as we said before, that business, while helping us on the sales volume, really drops no real significant profitability to us.

Right, it's more operating efficiencies. Capacity.

Is it -- are you moving away from it? Is that something that might decline?

We readjusted it a couple years, finished it up last year, and made sure we had the right ones in there. And -- but it's a small percentage of our total volume.

Okay. And on Sun Drop, it looks like that added maybe about a 1/2 of a point to total volume. How does that compare to your expectations for the run rate on that?

Well, I don't know the exact number it added, but it's right on track where we want it to be. We're very pleased with it.

And when you had given the ACV for that brand, are those numbers -- I mean, 92% in grocery is obviously fairly high. What up side do you see from that where it is now?

Do what now?

For the 92% in grocery ACV, how much higher can that go?

Well, we're happy with the 92% there. Our focus is going to be on convenience and gas up and down the street. You've heard me say before, I want it to where we're doing all this spend on the marketing. We've got it top of mind. I want to have it close at hand so when people are at work, play, and dining, they can buy one, and when they go to the supermarket, they've got one there waiting for them.

Okay, sounds good. And then lastly, on pricing, I think this may be following up on Steve's question a little. I just want to understand, in packaged beverages, it looks like you've got the 4 points of volume growth, and then the repatriation adds even more to that, and a little bit from currency. So, it does look like it implies price mix is negative, but what are the things that would make that -- it sounds like you're getting the pricing, so is mix that big of a hit, or is the contract volume part of that?

Let's do this on a revenue basis, okay? 3 points, pricing. 2 points, the contract business. The repatriate brands, probably.5 point,.5 to 1, in terms of how you round it, okay? And that should account -- that's 5.5 to 6%. So a little decline -- a little bit of a decline in all -- we'll call it all other business.

Oh, so the volume number that you give is the 4%, includes the contract and the repatriation impact?

Yes, all volume.

And all the percentage I just gave you on a revenue basis.

Okay. All right, thank you very much.

Your next question comes from the line of Barclays Capital.

Good morning. I just wanted to confirm that you still intended to refinance the upcoming $400 million maturity that comes due in December. And also, as you think about managing your debt maturity profile and your average duration, do you look to do something in the shorter to intermediate term in terms of issuance or potentially longer term? Thank you.

The answer is, yes, we are working on that refinancing right now. We fully intend to refinance that $400 million. I cannot disclose at this point the (tenor) that we're thinking about in terms of duration. I just can't talk about that at this point.

No, that's helpful. But just broadly speaking, how do you view managing the maturity profile overall?

We try to blend that. Maturity profile is driven by a couple of things.

First of all, eliminating any refinancing risks, thereby not having too much debt coming due in any one window or short window, which is why we did the tender last year to start to take down that big $1.2 billion tranche that we had. I think you could probably expect us -- there's no reason for us to go out very long on the curve. We have some 2038's out there that were put in place by Cadbury when they spun us. Unlikely we're going do anything like that, and again, part of that is swapped to float, so the (inaudible) rate on that is not too great.

So, I think you can think about what I would characterize as medium term.

That's very helpful. Thank you.

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

Good morning, everyone.

Hi, Carlos.

Hi. Larry, on Mexico, why not generate cash from the sale of an underperforming and subscale business here? And if the decision is to keep it for the long haul, what can you tell us about the plan that maybe gets these trends in volume and revenues reversed?

Well, as you can see, Carlos, our Mexico business just continues to get stronger. We're very encouraged with what we're seeing down there. When you look at the -- you hear Marty and I talk about RCI. Mexico is -- I started to say probably, not probably -- they are leading our organization in kaizens and projects and productivity improvements.

You know, we look at it every day. I mean, we're very encouraged with it. We're encouraged with our team. We see a lot of opportunities. You know, we've got growth in all of our brands down there. Our Squirt's up almost 8%, Penafiel's up 4%, Clamato up 25%.

I think we're just kind of at the beginning of what we can really do. I've not really had anybody come in and want to buy it or do anything, so I'd always to have look at if the they did, but I also, as you can tell, probably don't need a whole lot of extra cash.

Larry, that business is not losing share of volumes and share of revenues?

No.

Okay. Thank you.

You're welcome.

Your next question comes from the line of Dara Mohsenian with Morgan Stanley.

Good morning. Larry, I wanted to follow up on Dr Pepper TEN, given your enthusiasm there. What percent of Dr Pepper volume did the brand reach in your test markets, and is that a reasonable proxy for the total US with a full national roll out?

Yes, it's kind of what we use as a benchmark. Our test markets were just, I think, a little bit above 5% of total trademark, and that's very encouraging when the test market is the regular and diet group.

Okay. And the brand obviously garnered very strong trial in the test markets. Can you discuss or give us some quantification of the repeat rates on the brand?

Right. We're doing the same trial in the other markets. That's why we ran the test markets. It was to get the findings on how to go out. And, what we're seeing on repeat, it's just very, very encouraging.

It's tongue in cheek when we say it's just for men and 10 bold, manly calories. We're seeing across the board people excited about the brand, buying the brand, consuming the brand. And I think we've just kind of scratched the surface of where this can go, because moms are even picking it up for children to put back in the home because there's only 10 calories there, when there were not carbonated soft drinks there before.

Okay. And then Marty, I know you don't want to give specific guidance for next year, but can you at least discuss conceptually the level of commodity cost pressure you expect in 2012 relative to 2011? Is it a significant drop-off from the high single digit rate of increase we saw this year? Or, are you still expecting significant pressure next year?

Let me -- I'll give you a color that I think I can give you. It's not going to prove any specific numbers for next year.

Okay, so this year it's 9%. And I think everybody knows that we manage our hedging program within certain minimums (and maximums) by commodity, so that says we are not, nor do we ever intend to be, fully hedged 9 or 12 months out. That's not the way we view the world what.

What I would tell is that, right now our first quarter, I would call reasonably covered. You can interpret that as more than 50% for key commodities. A little less in that Q2, and lesser amounts in Q3 and Q4. I can tell that you much of that cover for the important commodities -- for us, that's aluminum and corn, PET rounds tout big three. I would say much of that cover was put on more recently.

Okay, that's helpful.

And then can you talk about the pace of share repurchases as we move throughout 2012, and you've got the refinancing here short term, as well as some of the cash taxes under the bottling deals? So, I just wanted to get an update on would kind of pace we should expect in terms of repurchases.

The tax payment in the first quarter will have no impact on next year's pace because, in our guidance this year of $500 million, and with the refinancing of the debt in the fourth quarter, we end the year with more than enough cash to make that payment. So in essence, it's coming out of this year's cash flow.

So, when you put that aside, what it will be is a function of how you view the free cash flow generation number for next year, and subtract out our dividend. And the balance we would expect to deploy to our share repurchase program.

Okay, thanks.

Your next question comes from the line of Jeff Farmer with Jefferies & Company.

Good morning. I only have one question at this point. I just wanted to come back to Dr Pepper TEN. Do you see any other low-calorie or no-calorie brand extension opportunities for the portfolio? So essentially, anything else out there in the pipeline that you can give us some color on?

Yes, you know, we're going to -- we're constantly looking at that, and our R&D team is constantly looking at what we can come up with that's better for you with the great taste of all of our brands. We want to stay very focused on Dr Pepper TEN right now, so that gives them time to look at the learnings from it. You know, I wouldn't -- I don't think there's anything immediately in the pipeline. It can be, because it's a great platform, but we want to make sure that we do Dr Pepper TEN right before we put another one out.

Okay. Then actually, just a real quick follow up. This is already asked on Snapple in terms of the volume (acceleration), but if you look at the ACV for the 64-ounce bottle, I think you had said on the last call it was high 30s -- where does it stand now? And, was that a contributor to the volume growth (acceleration) for Snapple?

Absolutely. It's up to 53%. It's just been -- it's been a home run for our Snapple team. You know, we're still out there, we got plenty of runway left. But also, you know, where we do have it, we're seeing great repeat, so it's a great package for us.

Okay, and then just -- so nice distribution wins for the 64-ounce bottle going from high 30s to mid-50s. That's a nice, I guess, tailwind from that perspective. To get to plus 2% volume growth in aggregate, what was the major headwind that caused that? What was the offset?

Really no headwinds. If you look at the total tea category, it was a little softer. I think, also we saw growth in our six-pack. So, if you look at lapping that 10% from a year ago, that was the biggest contributor right there.

Okay, thank you.

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

Yes, good morning.

Hi, Damian.

Marty, do you have the actual number of shares outstanding currently as of yesterday or today?

I believe it is $214.4 million.

Great, thank you. And then, on the marketing cost side, year-over-year, how much did you benefit in the third quarter, dollar-wise? It was less than a year ago, so I'm just wondering what the difference is.

At a year-over-year basis, we were down about $13 million.

Okay.

Year-over-year in the quarter.

And just in the third quarter. And you still think you're going to be up $25 million -- $20 million to $25 million?

Let me back up. We were down $4 million in the third quarter.

Okay, that makes more sense. And you're up $13 million year-to-date. And then, Larry, on -- just stepping back --

You said down $13 million?

No, up $13 million, year-to-date.

Up $13 million, down year-over-year, end of quarter four.

Larry, on the consumer -- the state of the consumer, maybe by channel and geography, it sounds like QSR was a nice benefit in the third quarter, traffic was positive. Are there any channels that are really doing worse than you expected, maybe even 3 months ago, as well as products?

No, I don't think worse than I expected. I mean, we're seeing a little up tick in QSR, in convenient and gas. As I got some of the convenient and gas guys, they're very positive. They'd like to see it stronger. They'd like to see construction back and everything, but we're seeing off of a new base some growth, some traffic increases, some ticket rings going up. Some of them are even -- one of the larger chains is adding several hundred stores. So they wouldn't do that if they didn't feel good about it.

I think the biggest one is large format. We're still, through the year, have been struggling with large format, and some of the pricing from a year with one of our largest retailers. That's where the biggest sticker shock is whenever you look at going back a year ago, and there were prices out there from $3.88 to $5. Today they're $6.98 to $7.18. It takes awhile for the consumer to get over that. So that's why we're doing so much more with 6-, 12-, and 18-pack, PET in the.5-liter, 1-liter, 1.5-, 2-liter, and it's helping us get through that tough spot right there.

And, are you seeing any difference in execution of a blue versus red system?

No, two great executers.

Thank you. Congratulations.

Thank you. Well, thank you --

That was our final --

Go ahead.

That was our final question. I'll turn the floor back over to you for closing remarks.

Thank you. Well, thank you so much for joining the call today and for your continued interest in Dr Pepper Snapple Group. And go Rangers

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