Keurig Dr Pepper Inc (KDP) 2011 Q4 法說會逐字稿

Good morning, and welcome to Dr Pepper Snapple Group's Fourth Quarter and Full Year 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 Kelly, 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 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, Carolyn, and good morning to everyone. Before I review our fourth quarter results and share our 2012 priorities, I'd like to take a few minutes to recap a few of the great wins our team had in 2011. 2011 certainly poised significant challenges for our industry. The macroeconomic environment remained weak, as input cost inflation drove price increases across consumer staples, further straining consumers' discretionary spending. Despite these conditions, our results proved resilient, once again showcasing the strength of our brands and the dedicated focus of our teams, as they execute against our strategy.

We increased the distribution and availability of our core SKUs in both grocery and convenience, with CSDs up 8 points in grocery and up 2 points in convenience, where it is much harder to penetrate with limited space. Snapple and Mott's also gained 2 points in grocery. As part of our licensing agreement with Coke and Pepsi, we repatriated approximately 15 million cases back into our Company-owned distribution system, and out-performed the internal targets we set for these brands. As I've said many times, the alignment of these brands in our system gives us leverage with retailers and allows us to run national programming in accounts where we were not able to do so previously. We're excited about the opportunities that lie ahead for these brands.

We increased immediate consumption availability and drove sampling occasions with over 43,000 new fountain valves and 25,000 incremental cold drink placements. Our Coke and Pepsi bottling partners continue to drive strong priority brand execution, with display tie-in rates on regular Dr Pepper up close to 2% across both systems. With strong sponsorship from our executive leadership team, rapid continuous improvement, or RCI as we call it, is gaining traction across the entire organization, helping us drive significant value internally and with our customers.

We launched Sun Drop nationally, and partnered with MTV to develop a compelling marketing campaign that speaks directly to the millennial consumer. Our campaign featuring Matty, the Sun Drop girl, attracted close to 9 million YouTube viewers in 2011. Using breakthrough flavor and sweetener technology, we introduced Dr Pepper Ten, a product with the same taste and mouth feel as regular Dr Pepper, but with only 10 calories per serving. Our tongue-in-cheek It's Not for Women campaign's generated over 230 million media impressions. We delivered value and convenience to our consumers with new package offerings, such as Snapple 64-ounce take-home and Hawaiian Punch 10-ounce singles. While others pulled back on their brand investments, we continue to invest behind our brands, engaging and connecting with our consumers to drive long-term growth, all while returning almost $775 million to our shareholders in the form of share repurchases and dividends.

Now let's move on to results. For the quarter, bottler case sales declined 2%, lapping 1% growth in the prior year on 4 points of pricing. Dr Pepper grew 2% on the national launch of Dr Pepper Ten and continued growth in fountain food service, lapping 3% growth from the prior year period. Our core five brands which are core four plus Sun Drop, declined by 4% and together with Crush, the total decline was 6%. Sun Drop added nearly 2 million incremental cases in the quarter, and Canada Dry grew 6% on top of 8% growth in the prior year. Both Hawaiian Punch and Mott's declined double digits on larger relative price increases that were implemented in the second half of the year. Snapple grew 10% for the quarter, and continued to out-perform the industry, proving that this brand is not slowing down.

For the year, bottler case sales declined 1% on 3% pricing. Dr Pepper grew 40 basis points as we lapped McDonald's installs in the prior year, grew local fountain availabilities, and launched Dr Pepper Ten. Combined, our core five and Crush brands declined 1%. Sun Drop added 9 million incremental cases, and Canada Dry posted double-digit growth for the second consecutive year. Mott's and Hawaiian Punch declined single digits, while Snapple grew 7%, fueled by our new take-home 64-ounce PET package, and continued middle-of-the-country expansion.

On a currency-neutral basis, our net sales increased 4% for the quarter, reflecting 4 points of pricing and 2 points from repatriated brands and favor mix, partially offset by lower volume. Segment and operating profit increased 2% for the quarter, with revenue growth partially offset by higher packaging and ingredient cost, and the previously disclosed provision of the $18 million related to certain legal matters. For the full year, segment operating profit increased 1%, as net sales growth of 4% was partially offset by higher packaging, ingredient, and transportation costs, the legal provision, and incremental costs associated with the repatriation of our brands. As I mentioned earlier, we have continued to invest behind our brands over the past several years and this year was no exception. We increased our marketing investment by $15 million, driving over $100 million of incremental investment behind our well-loved brands over the last three years. EPS, excluding certain items, was $0.82 for the quarter, and $2.79 for the full year, a 16% increase over last year and a solid finish to a challenging year.

We are entering 2012 stronger than ever, which gives me great confidence that we can continue to execute against our strategy and continue to deliver strong shareholder returns. We will continue to build our brands, with strong activation behind Dr Pepper Ten and Sun Drop, as well as the rest of our core brands. We remain committed to investing in our brands, and we will leverage and refine our marketing return on investment disciplines to ensure we are getting the best return for every dollar we spend. Growing per caps remains our single-largest opportunity. We will continue to expand the availability of our products in take-home, immediate consumption, and fountain, with at least 25,000 incremental fountain valves and 20,000 to 30,000 new cold drink machine placements. We'll capitalize on our recent wins in local markets, including our Snapple middle-of-the-country growth strategy, and 14 Canada Dry expansion markets, and apply those learnings to additional markets as we continue to focus on gaining distribution and availability in these key low-per-cap markets. We will continue to put strong focus on execution excellence.

While Marty will say that we are still in the early stages of the RCI journey, I am thrilled with the level of execution and executive sponsorship and engagement that we have across the organization, behind our developing capabilities. We experienced great wins in 2011, but the runway is long, and I'm confident with our great brands and RCI underpinning everything we do, we will continue to drive value for our customers and consumers, while improving productivity and returns. You just heard me say that our 2012 plans were stronger than ever, and our first trimester reflects just that. We kicked off the new year with a focus on our diet portfolio, reminding consumers that they don't need to sacrifice great taste for calories. Dr Pepper is one of a kind, there is no other beverage like it. Dr Pepper's new Always One of a Kind campaign celebrates the uniqueness of all Dr Pepper drinkers. Blake Shelton, one of country music's hottest artists, will prove that Dr Pepper Ten is a guy's-guy drink at the 2012 ACMAs, and we're giving our consumers the chance to see the performance live.

We're engaging the Hispanic consumer by partnering with Lucha Libre a popular wrestling association with a strong Mexican heritage, to drive awareness and trial of Dr Pepper Ten. Facebook has 160 million active monthly users in the United States, and over 50% of them log in daily, so we'll grab their attention with our core five Facebook credits program. This program offers Facebook credits that can be redeemed for virtual goods on specially labeled core five, 20-ounce bottles. Millennials have a passion for music. Sunkist and Sun Drop are partnering with the Billboard Music Awards to offer these consumers a chance to win a VIP trip package for four to the show in Las Vegas. We're not stopping there. We know that flavored CSDs continue to grow, now holding a 51.5% share of the category. We're launching Sunkist Grape and Sunkist Strawberry, offering our consumers a variety of flavors to enjoy.

Half and Half is the second-fastest growing segment in the tea category, and there is no national diet offering, so we launched Snapple Diet Half and Half Lemonade Iced Tea, with only 5 calories per serving, and made from the best stuff on Earth. New Snapple Diet Half and Half will be supported with a new advertising campaign, a national FSI, and strong online and social media programming. With plans as strong as these, it should come as no surprise that our 2012 marketing expenses will be up approximately $10 million to $12 million in the first quarter. Now let me turn the call over to Marty to walk you through some of our below-the-line items and 2012 guidance.

Thanks, Larry, and good morning everyone. As I did last quarter, before I cover corporate and other financial items, I'd like to briefly outline the impact that both cost inflation and volatility in certain commodity prices had on our gross margins for the quarter. Higher input costs increased cost of goods sold by approximately $50 million, reducing gross margin by 360 basis points year over year. This higher inflation also required us to record a $5 million LIFO inventory provision, as compared to a $3 million provision in the prior year.

We also recorded $7 million of unrealized marked-to-market losses on commodity hedges in cost of goods, driven by reductions in certain commodity prices at the end of the quarter. This compares to a $3 million unrealized marked-to-market gain last year. As a reminder, unrealized marked-to-market losses on commodity derivatives are included in corporate expenses, and will be included in segment results when the contract's settled. All together, these items reduced fourth quarter year over year gross margins by 440 basis points. Positive pricing was the principal factor that allowed us to somewhat offset these headwinds and limit the gross margin decline to about 200 basis points.

Now, moving to below-the-line items. Corporate costs were $76 million for the quarter, compared to $67 million last year. Without marked-to-market impacts in both years and certain other one-time impacts in 2010, corporate costs were $69 million, compared to $75 million last year. Net interest expense was $28 million, $5 million below last year. Our effective tax rate for the quarter was 32.5%, and included $5 million of Pepsi- and Coke-related tax benefits. This was a little better than our previously communicated fourth quarter expectation.

Moving on to cash flow. For the year, cash from operating activities was $760 million, including $54 million of cash taxes paid on the Pepsi and Coke licensing agreements. We also paid out $25 million in the fourth quarter to terminate an interest-rate derivative used to hedge our fourth-quarter debt refinancing. As a reminder, the largest portion of taxes on the Pepsi and Coke licensing deals will be paid in 2012, with approximately $508 million in the first quarter and $23 million in the second quarter.

For the year, capital spending was $215 million, down $31 million from last year and below our full-year guidance, partially due to timing, but also reflecting some of the early benefits from RCI. We remain very committed to returning excess cash to our shareholders, as we further demonstrated last week with our announcement of a 6.3% increase to our quarterly dividend rate. In 2011, total distributions to our shareholders were $773 million, $522 million in share re-purchases, and $251 million in dividends. As Larry said, RCI is gaining traction across our entire organization. We are extremely pleased with the progress we made in 2011 behind our developing RCI capabilities. With strong senior leadership engagement and cross-functional team participation, we're eliminating waste in all aspects of the business, freeing up critical resources to focus on building our brands and growing per-caps.

In our first 10 months of practicing and learning RCI, and with the participation of over 1,200 of our people in 92 kaizen events, we were able to increase selling time, increase our speed to market in cold drink placements, speed innovation, take eight-day sales out of inventories, close seven warehouses and significantly reduce space in two more. We implemented over 250 safety improvements, improved our cash flow through capital avoidance and achieved $57 million of annualized cash productivity. When we began RCI early last year, we set out to engage the organization and begin a long journey towards creating a real continuous improvement mindset. This is not a productivity improvement program with a defined end-goal. Rather, this is about creating a sustainable business model of continuous improvement, underpinned by a mindset of relentless focus on providing value to our customers and consumers. In fact, as we get better at it, we will involve customers and bottling partners so that we can strengthen the entire value stream. Based on our early results, I remain extremely confident that we'll achieve at least $150 million of cash productivity over the first three years of this journey.

Moving on to 2012 full-year guidance. As Larry said, we have strong momentum in the business, and despite a challenging macro environment, we remain focused on executing our strategy to build our brands, grow consumption, and develop a continuous improvement mindset. We believe our 2012 plans should enable us to grow net sales near the low end of our 3% to 5% long-term growth range. We base this growth expectation on a view that net pricing will be up about 2% to 2.5%, with 0.5 points or so of volume increase. Considering our hedged positions and current market prices for our unhedged positions, we expect packaging and ingredients to increase total cost of goods sold by 2% to 3% on a constant-volume mix basis. We're also expecting 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 about $13 million to our cost base in 2012.

Below the segment operating profit line, corporate costs will increase by approximately $8 million, primarily driven by increased ABA fees to continue to support industry initiatives. Our net interest expense will be around 4.5% on our $2.7 billion of debt. This is an increase of $8 million over 2011, as we refinanced low floating rate debt last November. Our full-year tax rate is expected to be approximately 37%, and you should view this as our normal rate now that we've lapped the one-time tax benefits from the Coke and Pepsi transactions. Finally, we expect capital spending to be about 4% of net sales. We expect to re-purchase approximately $350 million to $375 million of our common stock in 2012, subject to market conditions. For the full year, we expect diluted earnings per share, excluding the impact of commodity-related marked-to-market gains and losses, to be in the range of $2.90 to $2.98. While we will, of course, continue to identify these marked-to-market impacts for you, they will no longer be included in our core EPS guidance.

Now, let me highlight a couple of things that will impact quarterly phasing and help you update your models. First, as we've been expecting, Mott's and Hawaiian Punch volumes will be challenging through the first half of the year, as the brands cycle price increases taken in the second half of 2011. Second, as you know, concentrate sales are weaker in the first quarter as bottlers cycle through their annual December buy-in. Third, while our cost of goods sold guidance is up 2% to 3% for the full year, a large portion of the packaging and ingredients inflation, together with fuel cost inflation, or approximately $35 million in total occurs in the first quarter. Our 2012 guidance also includes a few other considerations. Reported segment SG&A will be favorably impacted by the absence of the $18 million litigation item recorded in the fourth quarter this year in the packaged beverages segment. Based on current expectations, foreign currency is expected to be a slight headwind to net sales and profit growth for the year. Hopefully these points of clarification are helpful to you. 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 2011 results and 2012 plans once again demonstrate our teams are executing against our focused strategy. We're gaining distribution in core packages and driving trial with new fountain valves and cold-drink placements. We're bringing new users to the franchise with exciting new product technology like our Ten platform, and with new packaging on existing products, like our multi-serve Snapple premium 64-ounce PET. We're committed to delivering value to our customers while ensuring we're investing wisely in this business for long-term, sustainable growth. We had great wins with RCI in 2011 and strong engagement across the organization, but the runway is long and our teams are committed to making RCI a sustainable, competitive advantage. 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)Steve Powers, Sanford Bernstein.

Hi. Thanks, guys, good morning.

Good morning.

Good morning, Steve.

It sounded like your Q4 marketing spend was only up about $2 million year-over-year, versus I think you had said $7 million to $12 million coming into the quarter, and that was a guidance -- that was a guide down versus your Q2 guidance. Especially with -- competitors have announced in terms of brand reinvestment plans -- why should we be comfortable with that trend? I think you said up $10 million to $12 million in Q1, that's a good start. A, will you hit that number, and then B, I don't think you said the full year, what's planned beyond that?

I certainly wouldn't look at that as a trend, Steve. Like we said in Q1, we're coming in $10 million, $12 million more. Also, I think you've got to take into consider the return on market investment initiative we've been putting in place. That we're making sure that we're getting more bang for our buck, spending more smartly, spending more on local instead of national, going after the low per cap markets, spending heavily in Hispanic markets. It's a little hard to look at that and say that's a trend.

Steve, it's Marty. Let me just add a couple of things. Number one, again, we spent a little less in Q4 than our guidance. Some of that was -- we have a unique program, we think, on Sun Drop with MTV. It's a pay-for-volume sort of program, and those volumes were down a little bit in the quarter. What I'd tell you is, as we continue to say, we are spending on everything that we want to do and can execute on. Our spending up in Q1 reflects that, and also reflects the fact that Q1 last year was probably our low -- I know our lowest marketing spend quarter, and Q2 was our highest. We're spending what we want to spend on, marketing ROI is causing us to redirect spend. We've talked before about shifting higher cost marketing dollars that are spent on national programs into both local programs and social media marketing, and all-in we'll still spend 7.5% of our -- roughly 7.5% of our sales on marketing.

Okay, and then switching if I could to the top line. Given the difficult volume trends that we're seeing outside of brand Dr Pepper and Snapple, can you help us get a little bit more comfortable with the 3% top-line growth next year? I think you said pricing will be up 2% to 2.5%, with a half point or so of volume. Can you talk about how that breaks down CSDs versus non-carbs, and maybe specifically highlight brand Dr Pepper versus the Core 4, versus the non-carb portfolio?

Steve, it's Marty. Our roughly 3% guidance [for next to the] top line, as I said, 2% to 2.5% in pricing. If we think about that for a moment, like everybody, we took our concentrate price increase January 1, so that's in the market, along with all the other sellers of concentrate. If we look at the pricing we took last year, and just consider the roll-over, the continuation of those pricing levels into 2012, you get just a little more than 2 points of pricing. Actually, nothing has to happen from here to cause that number to change. We assume, like we're hearing everybody say, that pricing is expected to remain rational in the marketplace. We see no data or evidence that suggests anything different. We've got a 0.5 point about of expected volume growth. As we said, we know we're cycling in the first half for the year some tough comp's because of price increases in our warehouse direct business for both Mott's and Hawaiian Punch, but we get to the second half of the year, we actually cycle the impact that we saw this year when we all took higher pricing and volumes took a hit.

Okay. With all the initiatives you've got in the core four, do you expect that portfolio to grow, or maybe it's Core 5 or Core 6 now, but can that portfolio grow this year volume, or is it going to be (audio difficulties) a drag on the total portfolio?

No, I don't think it's going to be a drag. We're looking at it being flat to up maybe 0.5%

So in line with the overall Company?

Correct.

Just lastly, then I'll stop. SG&A expense control this quarter was at least a lot better than we had expected. Can you talk about what's going on there, and how much that can carry over into fiscal 2012? Thanks.

Of course, I assume, Steve, we're eliminating the $18 million of litigation that's included in SG&A in the reported results, so yes, SG&A was down probably $16 million without that. I would say we had fairly good performance across almost all categories, the spending, we're even lapping a couple of headwind's as you said, marketing up $1 million or so, I think a little bit of -- a $2 million headwind in marked-to-market, and underlying inflation in the business -- salaries, wages, health care, et cetera, probably worth $10 million or $11 million. Against that, we had some favor ability. FX helped somewhat. We're lapping some fees we paid last year to Coke and Pepsi and some other things, and that helped us. Fuel down, IT cost down.

I look at this and say, when we're done -- because I know everybody wants to talk about how much is RCI benefiting us. I'd put that number in the $4 million to $5 million range year-over-year just for the fourth quarter, reminding everybody that we really started 10 months ago, February, 10 months 2011. So many of the things we worked on during the year are only really beginning to bear fruit. That's the way I would characterize the quarter's SG&A performance.

Dara Mohsenian, Morgan Stanley.

Larry, you mentioned the marketing increase in Q1 of 2012. Did you give the full-year number also?

We did not. It's basically -- what we're kind of planning right now, it's going to be up slightly, but we just look at it as trying to manage it flat with what I talked about on our return on marketing investment, how we're moving to the social media, more of the local over national. So there's an increase in there, it's probably maybe about equivalent to what's in the first quarter, but basically looking at it saying we'll take all of it in Q1, and then stay pretty flat the rest of the way up.

Okay. How large are these efficiencies you're seeing, and sorry to harp on this, but just given the enthusiasm for the Ten products and market share's decelerated a bit for your business, and the big increase obviously coming from competitors in terms of spending in the US, I'm surprised you're not up more even with efficiencies. Can you just give us some type of quantification for how much efficiency you think you're getting?

Well, the efficiency's across the board on all these things. To your question, I get very excited when I see that the competition's spending more on marketing. I mean, that's good for our industry. We haven't stopped spending. We keep increasing. We've increased $100 million over the last 3 years. They're my partners out there, also. With our agreements and our priority brand, I think it's good for the entire industry. When the tide rises all the ships rise with it. So I have no concern there at all.

When I look at our plans for 2012 as I said in my prepared remarks, I don't think I've ever been more confident what we can do in 2012. The groundwork we've done the last 3 to 4 years, and what we've been able to do with RCI underpinning the plans that we have, we're very excited about it. Then you look at how we've been shifting the platforms. Our focus is low per-caps, and to do low per-caps, you have to have local marketing. Some of that marketing will be in the way of local media. Some of it will be local activation. We'll stay very focused on that, and to Marty's point, we will spend what we need, and we will spend what we'll return and we can activate.

Okay. Then Marty, thanks for the comments on RCI quantification in Q4. Can you give us some sense of how much incremental benefit you're expecting from RCI in 2012 relative to 2011, or at least help us frame the magnitude?

I would tell you there's just a lot of opportunity. You look at what we did in 2011 and if we probably did nothing more, we could probably put $10 million to $15 million of improvement in cost into operating results. I'll also tell you that we did 92 improvement projects this year, and I think the calendar this year is to do more than 150. I will just tell you, there is more opportunity available to us than I think we even realize. That would be common with other people that I think have done this before in other industries, in other companies. We are very early at it. I know the balance sheet improvements are very visible. You see our inventories are well down, and service levels to our customers are up.

As I said, we're operating with less warehouses, less touches and moving of inventory. We probably reduced -- people tell me it could be upwards of hundreds of thousands of miles of transportation, and so there's just a lot of opportunity. I wouldn't -- I know you all want to model the numbers for next year. We could carry over the benefit, I suggested. How much more we can get is yet to be determined, but I want to remind everybody, this is about improving value to our customers. I know I'm sounding like a broken record. When you do that and you get rid of all the waste, you get improvement. As I said, we're not too far away from actually involving some of our customers in this process. We will help them improve. It will improve our relationships with them. We've already had suppliers involved with us, and they've helped up improve, and we've helped them improve. Like I said, this is not a program for two or three years that we will then declare some success at the end. So I hope that's helpful.

That is, thank you. Then last, Larry, on Dr Pepper Ten, we've done some survey work that indicates repeat rates are only in the high 20%s for the brand, which is a little bit lower than a typical staples launch. Can you just give us a sense of your view on repeat rates, and given the scatter data sales have decelerated a bit the last couple months, I just wanted to get your commentary on staying power of that brand, and the repeat rates that you're seeing.

Yes, and I look at it to our plan. We're not seeing the deceleration in how we planned it. The biggest thing is that the repeat that we're seeing is above our expectations. We had a good long test on it, the test markets. I can tell you this, the brand as far as a percentage is staying right along with what we saw in the test markets. It's one of those items that you probably heard me say before, it's something that we have to change in this industry that sometimes we don't have patience. We've got lots of patience on this brand. We're seeing some very strong execution. Our shipments are up very good. Our bottler case sales continue to grow. Our grocery HCV's at 92%. Our convenience is over 60% now. We have very strong brand impressions.

With what we have planned for 2012, with Blake and all the different things coming in, we will continue to push that. The numbers -- it's one of the reasons we look at Ten that we looked and said we're going to start doing the Core 4 Ten, because the numbers are there that make us very encouraged.

Okay. Could you give us any sense for the range of repeat rates that you're seeing?

No, it varies by market. I can tell you that we've got some markets that the performance is almost mind- boggling in Texas, Oklahoma, Salt Lake City, Little Rock, Arkansas. There's some numbers of out there that people probably wouldn't believe me if I told them what they were. We're still going after it in the lower per-caps. That's where our focus is going to be. That's going to help us in low per-caps with Dr Pepper Ten, but we're very pleased with what we've had so far in the launch.

Okay. Thank you guys.

Mark Swartzberg, Stifel Nicolaus.

Thanks, good morning, guys.

Hi, Mark.

I guess a follow-up to Dara's question, then a couple others. Dr Pepper, as you look at that trademark, it kind of had a mixed 2011 and ended with strength. Do you think that, knowing what you know about Dr Pepper Ten and the other initiatives you have in the pipeline, are you looking for growth for that brand this year?

Absolutely.

Okay, great. Then your pricing view for North America this year, you're saying 2% to 2.5%. You've taken some pricing in the fourth quarter. Is that 2% to 2.5% view really a function of what's already been taken, along with any assumptions regarding mix, or do you think there's a little more to be taken now that Super Bowl is past?

Of course, we'll watch what's going out there, Mark. As I said, pricing is very rational, very disciplined. Marty explained that we do have a couple of points carry over, so that does leave some room for some more pricing. Mix is always kind of a -- it's one that we manage very closely with our revenue management -- how can we switch the mix to the right packages, but never taking our eye off of delivering value for our customer and our consumer. Is there a chance for probably more pricing? Maybe a little bit more, but the carry-over is a big portion of it.

Okay, got it. Then Marty on commodities, I may have missed it, but can you give us an update about how well you're hedged, and we have the rate you're looking for, but level of confidence, if you will, given how the actual markets might play out over the year?

Yes, we are more fully hedged going into 2012 than we were at this time last year. Probably the two keys for us, of course, aluminum and corn. Without giving you the numbers, I would say our coverage on aluminum is probably double. Our cover on corn is probably 20% higher than it was last year. We feel pretty good about where we are, and particularly where we are relative to the competitive set.

It seems -- I know it's pretty early, but just assuming the markets for those specific commodities and other key commodities stay where they are, are you thinking -- can you give us any thoughts on how 2013 might shake out? I know it's very early, but assuming these markets stay where they are, knowing what your hedges are in fact, can you find yourself on a flat to down commodity situation next year?

Well, it's very early to talk about 2013. We do have some cover already into -- but not a lot. You would normally -- we would normally not have a lot in 2013 at the beginning of 2012.

Got it.

We've got an approach to how we think about putting on our hedges, timing, time of the year, depending upon the nature of the underlying commodity, we think we've thought this through and that's how we'll execute the program. It did result in us picking up some coverage, as I just said, going into 2012, as compared to where we were a year ago.

Fair enough. Then I don't know if you can -- how far you can go on this, Larry, but obviously Pepsi's talking differently about their view of their bottling assets over the kind of intermediate term, and there's some confusion out there about whether if at all either in the Pepsi system or the Coke system you're eligible for a scenario where in a re-franchising you get a re-franchising payment. When you look at those contracts that you have, is there anything that prevents you from being in the situation you were a couple years ago when they decided to take the bottling assets in-house?

Well, one, Mark, I'm not -- I'll give you two points. I'm not going to speculate on that, but two points toward your question is, 1, we have a change in control in all of our contracts, and number 2, I've never charged a bottler to transfer a product in my life.

Okay, fair enough. Thanks, guys.

Thank you, Mark.

Bill Schmitz, Deutsche Bank.

Hi guys, good morning. Can I start with first a housekeeping question and then a real question? What's the tenor of the share re-purchase going to be? Are you going to wait to sort of pay the taxes in the first quarter and then accelerate the purchase after that, or is it going to be spread pretty evenly throughout the year?

We haven't disclosed that, Bill. There may be a few more shares bought back in the second half of the year but -- I wouldn't make too large a distinction in your model for that.

Okay great, that's helpful. Then I know it's really early and beginning into the year, but are there signs that the consumption trends are starting to improve a little bit? You look at some of the convenience store data and it looks like it's starting to really accelerate. Are you seeing that on the immediate consumption side at all, or is that just sort of a weather anomaly?

No, we definitely are. That's one of the things that gives us the confidence. You heard us in our Press Release say we're cautiously optimistic. We're seeing -- you heard me talk about in the third quarter that we were seeing traffic up in QSR, traffic up in convenient and gas. That trend is continuing, plus now the ring, the spend is increasing, the spend per ticket. That encourages us greatly. As we watch our numbers here with our cold drink and up and down the street, we're seeing a change there. So we're seeing that start to move the right direction, and it encourages us tremendously for 2012.

Got you. How do you desegregate weather from sort of like real macro improvements and real consumption gains?

Well, like I said, the thing we watch is -- it's a combination of both, but whenever you get the traffic, people are starting to feel a little better about the economy. Then whenever you start seeing that each one of those rings is starting to increase, that they've kind of moved away from strictly 100% value to more of what is convenient and something that they really want to have and enjoy.

Got you, great. Thank you very much.

Thank you. Your final question this morning is coming from Caroline Levy of CLSA.

Good morning, everyone. A lot of housekeeping, actually. Could you just repeat your goal for CapEx as a percent of sales, and I think it compares to a 3.6% rate this year. Am I correct on that?

Carol it's Marty, good morning.

Hi, Marty.

I said about 4%. We were lower this year, but as I said in my prepared remarks, some of the lower spending this year was timing between the fourth quarter and 2012, so we should be at about 4%. I think maybe long-term expectation we could probably operate on a little less than that.

Okay. Then you didn't -- what was your guidance for full-year share re-purchases, $350 million, did I hear that right?

$350 million to $375 million.

Okay. Under what conditions could you see that going up? I'm trying to understand if you feel you're under-leveraged right now.

No, it's not about leverage at all. It's about returning free cash to our shareholders after our dividend, and we expect to fully deploy that, and keep some level of operating cash on hand, and we do pay attention to market conditions. We do not put and have not had the program on any sort of auto pilot as I refer to it. We will be buyers in the market. We've already had a -- we had a program in place the beginning of the year, so it's going to be a buy program that could trade through the window, so we've already deployed $75 million in the market so far. I don't know what's executed under that because we're sort of blind to that right now, but I hope we've picked up a lot of shares here in the first six weeks of the quarter.

So again, in terms of your leverage, which looks very low, are you comfortable at your current levels, or do you see any -- would you ever leverage up to buy back shares?

No Carolyn, our debt leverage is where we target it to be, and where we want it to be.

Okay, great. Then I just want to confirm, did I hear you say that you thought RCI could be around $25 million in savings this year?

In 2012?

Yes.

I said if we carry over everything we did in 2011, probably $10 million to $15 million, and we'll see -- we're going to in essence double the activity in 2012. But I've not put a number on it.

Okay. Then mix, did you indicate what mix is for the guidance for 2012 for mix?

No.

Do you think it will be positive or negative?

It will be about flat.

Okay. I think that is everything, actually. But again, the tone of business going into the first quarter, we've had very warm weather. Do you think if you could factor out the weather, that you'd still see this better tone of business, or is it limited to C stores?

I wish I could factor out weather. I probably wouldn't be selling Dr Pepper. I'd look at it and say, Carolyn, that still for Q1, as an industry, we're still lapping some very aggressive pricing from the back half of last year. I think we're going to continue to see numbers more like fourth quarter, maybe some improvement, but it's still lapping some unprecedented price increases that were taken in trimester three. So I think we're going to have our challenges in the first trimester, but very excited about what we're going to be able to do in the second trimester and third trimester, because we're finally getting pricing where it should be, and then we can start building. Everyone has said they're going to be spending more money, more marketing, more activity, and that helps drive the volume for us.

Just a couple more. In the first quarter, obviously you're going to spend a lot more money, you've got more of a negative volume from the pricing going up. Number 1, did pricing go up more in the first quarter than it was up in the fourth quarter, or was it all carry-over? That's the first question.

It's carry-over from the fourth quarter.

And when in the fourth quarter was the pricing increase?

That actually was taken in the third quarter.

So there's no incremental. Then are you indicating you could have kind of flat earnings in the first quarter, or down?

I think as you work your numbers and kind of some of the things we've given you, we've been very clear, first quarter is our challenge, mainly driven by commodities. The biggest piece for us to overcome on the commodities is Q1, and but still, you've heard me say this before, I don't operate too much on quarters. I mean, I'm very -- you heard our numbers for the year, and I'm very confident on our 2012 numbers, but we're doing the commodities and then a lot of marketing in the first quarter. I'll just kind of let your model kind of show where that's at.

No problem. I just wanted to have my expectations in the right place. That was more the idea. So Marty, if I may just go back. CapEx came in below expectations this year. The 4% sounds like that's the high end of what you think you'll spend for '12.

I think that's fair. Right now, that's our view, we'll spend 4%. I don't have any reason to believe we'll spend more than 4%, but that's our expectation right now.

Great, thank you so much.

You're welcome.

Thank you, Carolyn.

John Faucher, JPMorgan.

Thanks, good morning everyone.

Good morning, John.

Good morning, John.

Just wanted to follow up on -- as I look at your guidance and sort of factor in the higher tax rate year-over-year, that implies a big swing in the operating profit trend. From -- if you strip out the Coke and Pepsi payments, down about 4.5%, 5% over the last couple years to up sort of mid-single digits at the low end, maybe sort of more of a high-single digits. Can you talk about the factors that get you either the low end or the high end of that range, in particular going back to the question about the competitive spending levels. If you see that start to come in and put a little pressure on market share, do you have that flexibility, you think, to say okay, yes, we're not just increasing marketing spending in the first quarter, year-over-year, but sort of taking it forward from that as well.

I guess that leads to the second question, which is a little bit of a clarification on the raw materials guidance, because I think you guys guided sort of the impact of raw materials on COGS. Is there a sort of COGS other than raw materials number in there as well, or is that all sort of one? If that makes any sense.

John, it's Marty. Let me try to take pieces of this question. I think the first part of your question went to some of the operating profit structure, if you will, in terms of looking at --

Yes.

I'm trying to create some sort of baseline going into 2012. Let's inspect first 2011 as the baseline. 2011's a tough year to look at because of the cost inflation, but if you actually take out -- we've done this. Take out just a handful of things that I think we'd all agree are non-comparable items and I'll rattle off the legal matter we had this year, the Williamson strike last year, or the significant change in marked-to-market results year-over-year. The Pepsi and Coke transactions, both the increased revenue amortization this year, that will be flat line now going forward in 2012, as well as the fees we paid on those transactions a year ago, if you do all, actually margins are down 100 basis points. Coincidentally they're down 100 basis points on a reported basis, but to be sure, factoring those items you sort of get the same answer. The interest interesting point here is that when you now take commodities and higher fuel cost, better pricing this year, that would have predicted 150 basis point decline for the year, but the he decline was only 100. So it was actually 50 basis points of improvement underlying everything else.

I wish I could tell you exactly where it was. By the way, it's not segment mix. It's not about having more of our business in concentrate. Actually, there's a slight even headwind there, because segment mix -- actually a little less concentrate and a little more LAB this year, but probably not enough to move the needle significantly. We actually have some underlying operating improvements. Whether it is mix due to having, for example, higher sales of Snapple, which is a relatively good margin sale for us, or whether it's just efficiency and improvement, there's actually a nice data point as a trend. Hopefully we can continue that into 2012. That's the operating income piece. On your COGS question, we said 2% to 3% would cover everything. That's total COGS.

Got it. Then sort of how you think about the flexibility sort of high end versus low end. Again, because we're all in sort of new territory here with Pepsi's announced spending. How do you -- what decision points do you think you make across the year to say okay, it is more -- understanding the rising tide analogy, but what causes you to look at this and say okay we need to respond to this with more marketing dollars of our own? And I'll stop there, thanks.

Yes. No, I think at any time if we saw that we would respond. That's one of the things we've done, but we don't really feel we're going to need to. Everything we're looking at in the plans we've seen, especially the first trimester's already put to bed, the second trimester we're working on it now, everything's telling us that we've got the right plan in place. That's one of the beauties of RCI, and why Marty and I keep saying that it's not a cost reduction. RCI is for growth. We're going to grow this business with what we can do in RCI, and so it always makes more things available for us to do. I think, like I said, I'm excited about seeing more spend coming into the industry, and I think we're all going to benefit from it. I feel very confident, John.

Sort of keeping with that, then -- so I guess I'm not quite done yet. Does the extra spend as a bottler, as well as a concentrate Company, and as someone whose brands are bottled and distributed by Pepsi as well as Coke, does this give the retailers a view that maybe they're going to put more support behind this category, or can you talk about how the retailers are viewing sort of this reinvestment cycle that we're seeing?

We are. We're seeing the retailer invest. He understands that it's doing a lot of -- drives a lot of traffic. We're seeing our display activity up. I think another piece, John, that kind of helps as you tie to the increased marketing spend that the industry's been talking about, we truly benefit from that with our relationships with our partners, with priority brand on Dr Pepper, those displays are out there on both sides and Dr Pepper and Diet Dr Pepper are there with them. Just a lot of things that are playing to our benefit this year.

Got it, thanks.

You're welcome. I think that was our last call, so I want to thank everybody for joining us today and especially for your continued interest in Dr Pepper Snapple. Thank you.

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