Keurig Dr Pepper Inc (KDP) 2012 Q3 法說會逐字稿

Good morning, and welcome to Dr Pepper Snapple group's third quarter 2012 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, 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.

Thank you, Carolyn, and good morning, everyone. I'll start this morning by saying that we continue to operate in an unpredictable and uncertain macro environment. Consumers' wallets continue to be strained, making them more cautious as we move closer to the upcoming presidential election. In this environment, providing value to our consumers, retailers and bottling partners, while ensuring that we drive profitable volume remains key to our strategy. During the quarter, we continued to execute disciplined pricing in the marketplace, and we invested in our well-loved brands to ensure long-term, sustainable brand health. And once again, rapid continuous improvement produced tangible financial results including improved cash flow, which we will return to our shareholders.

For the quarter, bottler case sales declined 3% on 4 percentage points of price and mix. CSD volumes declined 2% in the quarter. Dr Pepper decreased 1% as declines in our base business were only partially offset by growth from both Dr Pepper TEN and our fountain business. Our core five brands declined 6% for the quarter, as we made conscious decisions not to repeat some aggressive pricing on specific packages in certain channels from the prior year. Hawaiian Punch declined 14% in the quarter, as one of our largest retailers did not pass through our July 2011 price increase to consumers until just after Labor Day in 2011. Snapple grew 4% for the quarter as our targeted local market expansion strategy continues to ensure that Snapple is enjoyed by consumers across the country. Diet Half and Half Lemonade Iced Tea continues to gain distribution, and has quickly become one of the top four selling SKUs in our Snapple lineup. And the initial results from our partnership with America's Got Talent are very encouraging.

Mott's declined 10% in the quarter with juice down 12%, as we again, made a deliberate decision not to repeat a hot promotion at a large retailer. Our sauce business declined 6% on price increases we took this quarter to help offset the increased cost of apples resulting from the Spring freeze in the Northeast. Year-to-date, bottler case sales declined 1% on 4 percentage points of price and mix. Our flagship Dr Pepper grew 1% on growth from Dr Pepper TEN and our fountain business. Our core five brands decreased 1%, and in line with our expectations, both Hawaiian Punch and Mott's posted volume declines of 19% and 10%, respectively, due to the significant pricing actions we took in mid-2011. Our Snapple business increased 3% year-to-date.

Moving on to our financial results, our volume results clearly demonstrate our commitment to disciplined pricing, and I'm happy to say we're seeing positive benefits from our actions on the bottom line. On a currency-neutral basis, our net sales were flat for the quarter, as 4 percentage points of price mix were offset by volume declines and unfavorable segment mix. Specifically, the net sales per case difference between our packaged beverage business and our concentrate business. Segment operating profit increased 4% in the quarter with the benefits of price and mix and RCI productivity improvements partially offset by lower volumes and higher margin investment of $9 million. Reported earnings per share were $0.84 for the quarter versus $0.71 in the prior year. Core earnings per share, which excludes commodity-related gains and losses, were $0.79 for the quarter versus $0.74 in the prior year. As I said earlier, we continue to invest behind our brands to keep them top of mind with consumers. I'm pleased to say we have a solid lineup of activity for the fourth quarter that will excite consumers while giving our bottling and retail partners strong programs to execute and drive display activity.

It's game time, and Dr Pepper is back, owning college football season. Each week, college students of any age can enter to win $2,500 in tuition by submitting videos online to highlight how they can make an impact. Five lucky students will be selected to compete in the tuition throws at each of the conference championship games, and the winners will win $100,000 in tuition each to make their college dreams come true. Through our multi-year ESPN and FOX partnership, this campaign will reach over 100 million consumers, generating over 1 billion media impressions. And with all this excitement around football, I'm thrilled to say that we've partnered with the Chicago Bears to be the exclusive provider of CSDs and other beverages at Soldier Field. Bears fans are enjoying Dr Pepper and our other flavored brands while cheering on their favorite team. This partnership is leading to significant brand activation programs in the Chicago area.

We're bringing the treat to Halloween with our core five Halloween-themed eight-ounce cans and two-litre bottles that will drive incremental displays and points of interruption at retailers across the country while providing mom an alternative solution to candy treats. We know that music is a lifestyle passion point for our Hispanic consumer, so we're sponsoring the Latin Grammys and partnering with Enrique Iglesias. We're offering consumers a chance to attend a private performance with Enrique, and tickets to the awards show in Las Vegas. The Latin Grammys has over 11 million viewers and is the number-one Latin music brand. We'll drive local activation in key Hispanic markets with Latin Grammy street parties featuring performances by the Latin Grammy artists. And we'll light up the holiday mixer season with our green bottle holiday program, driving incremental display and retail activity featuring 7UP and Canada Dry.

But it's not just about creating fun, flavorful beverages. We take our social responsibility seriously and we continue to look for ways to address the growing issues of obesity in the United States. So two weeks ago, in partnership with other beverage companies, we announced our participation in a program in Chicago and San Antonio to roll out vending machines that provide calorie counts. Since the launch of our Let's Play initiative, we've provided millions of dollars to help build or fix up 822 playgrounds, giving more than 2 million children a great place to play.

I'll close by saying that we're thrilled to see we jumped 6 points in the American Consumer Satisfaction Index this year, as DPS led the beverage manufacturers with a score of 87. With that, let me turn the call over to Marty to provide further information on our financial results and our full-year guidance.

Thanks, Larry, and good morning, everyone. Before I begin, you'll notice that included in our press release, we added reconciliations of net income to core earnings on a line item basis. Hopefully, you will find these schedules helpful when updating your models. Now, financial results. Reported nets sales for the third quarter were flat with last year as we maintained disciplined pricing actions across the Company. Combined, product and package net pricing and mix were up 4 points in the quarter, roughly 2 points each. This was offset by 1 point of negative segment mix due to lower sales of finished products. Sales volumes were down 3% in the quarter, as we made decisions not to repeat some pricing and promotional activity that occurred last year with some retailers on specific packages on our Mott's and core five brands.

Gross margins were up 300 basis points in the quarter, increasing from 56% last year to 59% this year. Positive price mix increased gross margins by approximately 140 basis points. Consistent with our comments last quarter, packaging and ingredients on a constant volume mix basis were essentially flat in the quarter. However, we recorded a $7 million LIFO charge in the quarter driven primarily by the higher cost of apples. This compares to a $4 million LIFO charge in the prior year, resulting in a year-over-year reduction in gross margins of approximately 20 basis points. Ongoing RCI productivity benefits were the primary factor offsetting this increase. Changes in certain commodity prices at the end of the quarter caused us to record $18 million of unrealized mark-to-market gains on commodity hedges with approximately $15 million in cost of goods and the rest in SG&A. This compares to an $11 million unrealized mark-to-market loss last year with approximately $9 million in cost of goods. This favorable comparison improved reported gross margins by about 160 basis points.

SG&A for the quarter excluding depreciation increased by $2 million. Marketing investments were up $9 million, and there were planned cost increases in field sales and service resources, as well as transportation cost increases due to higher fuel prices. These increases were offset by ongoing RCI productivity gains and the change in unrealized gains on commodity hedges of $5 million included in SG&A. Depreciation expense decreased this quarter by $2 million. Reported operating income for the quarter was $308 million compared to $261 million last year. Excluding the impact of mark-to-market gains and losses in both years, operating margin represented 19% of sales this year, an increase of 120 basis points from 17.8% last year.

Moving below the operating line, net interest expense was $31 million, $2 million above last year as we previously refinanced some low floating rate debt. Our effective tax rate for the quarter was 36.3%, below our full-year guidance of 37% as we captured some tax planning benefits in the quarter, which were already considered in our full-year guidance. Moving on to cash flow, year-to-date, cash from operating activities was $264 million after $531 million of taxes we paid earlier in the year on the Pepsi and Coke licensing agreements. Capital spending year-to-date was $143 million compared to $148 million last year. This brings year-to-date free cash flow, adjusted for the taxes on the Pepsi and Coke licensing agreements, to $652 million, a net income of $459 million.

Leveraging RCI, we continue to focus on working capital and CapEx management, and our cash conversion cycle has improved by six days, well ahead of our goal for the year. Working capital management, specifically trade receivables, inventories and accounts payable, have been a source of $73 million of cash flow this year compared to $38 million outflow last year. Through September, total distributions to our shareholders were $475 million with $262 million in share repurchases and $213 million in dividends.

Before I review our full-year guidance, let me provide you with a brief update on RCI. 19 months into our continuous improvement journey, we couldn't be more proud of our results and the enthusiasm of our people to eliminate waste in every process. To recap some of our achievements, we've seen broad engagement across the entire organization with over 2,800 of our people participating in over 200 Kaizen events occurring across 60 locations. We have a full calendar of improvement activities, and we're beginning to make good progress across our DSD business, which is a big part of our RCI focus this year. We've closed 10 outside warehouses and reduced miles traveled by 1 million miles. This not only reduces cost, but it's also good for the environment. We've significantly reduced inventory levels and sustained them through the summer selling season while improving customer service levels as we get better at producing products closer to customer order cycles. We've now identified over $103 million in annualized 12-month cash productivity, and we're beginning to demonstrate meaningful improvements in both operating profit and cash flow, which you saw in our results this quarter. With the progress we've made thus far, I'm confident that we'll achieve our goal of 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, the macro economic environment remains challenging, driving cautious and unpredictable consumer behavior. We remain focused on executing our strategy to deliver profitable volume while investing in our brands and our business over the long term. Net sales in the third quarter came in below our earlier expectations, but profit did not. We continue to invest behind our brands. You should note that on a year-to-date basis, through the 6th of October and as reported by Nielsen, our CSD volume share was up 0.3 point, notwithstanding the difficult CSD volume environment resulting from both higher price points and a difficult macro environment. So we believe we're making the right decisions across the portfolio and the channels.

Considering our third quarter results and where we are year-to-date, we now expect approximately 2% net sales growth for the year. But we are maintaining our full-year core EPS guidance range of $2.90 to $2.98. On a total company basis, we expect net pricing and mix to be up about 3% to 4% for the full year, consistent with our year-to-date results with sales volumes down 1% to 2%. For the full year, we still expect packaging and ingredients to increase total cost of goods sold by 2% on a constant volume mix basis. As a reminder, costs will be inflationary in the fourth quarter due to the higher cost of apples. We expect marketing investments to be up $10 million to $15 million for the full year as we execute programs to drive relevance and awareness with our consumers. This will result in a decrease in the fourth quarter, which last year included $10 million for the launch of Dr Pepper TEN.

We continue to experience higher field labor costs, including higher health and wellness costs, which may be a little more pronounced in the fourth quarter. Higher transportation expenses, both in terms of fuel cost for our Company-owned fleet, as well as higher lane rates from our common carriers, will add approximately $13 million to our cost base in 2012, with the largest impact occurring in the fourth quarter. Net interest expense will now be around 4.6% on our $2.7 billion of debt, and we continue to expect our full-year tax rate to be approximately 37%. With the productivity benefits we're seeing from RCI, we now expect capital spending to be in the 3.5% to 3.75% range on net sales. With higher free cash flow, we now expect to repurchase approximately $400 million of our common stock subject to market conditions, further demonstrating our commitment to return all excess cash to our shareholders over time. With that, let me turn the call back to Larry.

Thanks, Marty. Before we open the lines for questions, let me leave you with a few thoughts. As we said repeatedly this morning, we remain committed to our strategy of driving profitable volume and sales growth while ensuring return on every dollar we invest. We remain committed to always delivering value to our consumers while ensuring that we're investing wisely in this business and our brands for long term. As we knew it would, RCI is delivering tangible results on our financial performance and cash flow, improving profitability every quarter and creating a sustainable, improved operating platform for the long term. And finally, we remain committed to returning excess cash to our shareholders, as we've demonstrated with our increased share repurchase commitment for the year. Operator, we're ready for our first question.

(Operator Instructions)

Our first question is coming from John Faucher with JPMorgan.

Good morning. Two questions, both related to the soft drinks business, which is -- and I apologize if you mentioned this in the prepared remarks. In terms of looking at the very strong pricing on the concentrate business, can you talk a little bit about what drove that? Was that a reduction in the promotional programs they referred to in the prepared remarks? And then also, on the share stuff, your shares are up year-to-date, but there definitely seems to have been a falloff in the share performance over the past couple of months, let's say the past three or four months. It appears as though Pepsi's maybe seeding a little less share in the category. Can you talk about your share dynamics, and if you have seen a falloff here, what are the key steps you can do in order to get those back up? Thanks.

I'll take the share piece and let Marty kind of pick up the piece on the pricing and what you saw there. On the share, we're very happy with where we see the shares. I said in the prepared remarks, we're up for the quarter 0.3 point. We also mentioned that there was some activity last year that we ran that we decided we just were not going do again this year in some of the large retailers. Which I think, as you see the financial performance, was the right decision. There was a couple of four weeks periods that we were a little lighter, but we knew that because of the activity. But I think everybody has seen in the last, they're coming back, and we feel very confident about going forward.

John, it's Marty. The first part of your question, I believe, went to pricing in concentrate. We have not taking any further pricing in concentrate since the beginning of year price increase.

No, I guess what I was looking for, and I apologize for this, but -- hold on a second. You know, if I look at the GAAP in beverage concentrates volume versus beverage concentrates revenue, what's driving that sort of -- that big gap there?

Well, if you're looking at volume and revenue, you'd be looking at the effect on a per-case basis of the price increase from last year. It would be up because of the price increase.

Okay. And was the promotional -- you know, you discussed the promotional impacts. Was that having -- was that a benefit this quarter, as well? When you talk about some of the reduced volume due to not repeating some of the promotions from last year?

Would not be on the concentrate side, John. No, that would be on the packaged beverages.

Okay, got it. Thank you.

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

Thanks, good morning. The first question on your Dr Pepper, the base brand. If the overall volume on Dr Pepper was down 1%, how much was the base down?

The base. You mean the total Dr Pepper?

No, you said the total Dr Pepper was down 1%. But you had growth in Dr Pepper TEN, but the declines in the base business. How much would the base be down?

The base was down approximately 2%.

2%, okay.

Yes.

And just your general view of the Dr Pepper trademark, obviously, the overall industry is a little bit soft as pricing went through. But you've been investing a lot into the brand marketing. So when you assessed the base brand being down around 2%, how would you characterize that performance? Do you think there's some cannibalization from Dr Pepper -- the DP TEN brands, and as you think about going forward, what volume expectation do you think that we can see from the base Dr Pepper brand?

Yes, the base, Judy, was in-line with the industry, so it didn't really concern us that much. We're still seeing -- we're still very positive on Dr Pepper TEN. You know, it's a new brand; launches take a long time. People have to have patience; you guys have heard me say that before. I think we're very happy with the base. We look at what we're having with the -- comparing to the industry, we're happy. With what we've got in place for the fourth quarter with football coming up, we're very bullish on the brand. We're already seeing some -- with college football, I mean, Dr Pepper owns it, so it's really paying great benefits for us.

Okay. And Larry, when you talk about the choppy macro environment just in terms of the industry, generally, I look at the pricing in the industry and the impact on volume. It doesn't seem like the elasticity is really that much worse than what we've seen historically. So when you talk about the choppy macro, are there any signs that you're seeing that makes you a little bit more nervous about what's going on with the consumer, or is this just kind of --

Not at all, Judy. We continue to remain cautiously optimistic about the US economy. I think that we might have been -- we haven't seen it go down, but I think we might have been expecting a little bit more of an improvement. I think as soon as we get this election over, I think we're going to see a lot of different attitudes. I think there's some fear out there. We're seeing a little bit of the low end being challenged out there. But as we mentioned in our prepared remarks, we've got a lot of programs put together right now for the balance of the year to deliver value to these consumers.

Okay. And then finally, just in terms of your pricing guidance, so I think you said 2% to 2.5% for the full year. Now, it sounds like it's closer to 3% to 4%. Can you just comment on what's giving you confidence about better pricing going forward, and do you think that that continues into 2013, even in a more moderating commodity environment?

Yes, I think our confidence on it is just as we've seen across the industry, the discipline that's out there; everybody's been very disciplined. We've -- you know, you're not seeing any knee jerk reactions, which I think are very positive for the industry. We feel that being a part of that, that we're confident where our pricing will be. And in 2013, we're hoping it gets back to where it's a little more normal, where we can look at some of the inflation and cost and get -- maybe get back into 1.5%, 2% of pricing.

Okay, got it. Thank you.

Your next question comes from the line of Bryan Spillane with Bank of America Merrill Lynch.

Hi, good morning.

Good morning, Bryan.

Question, the operating cash flow, you know, very strong again this quarter. And I think if we kind of strip out the effect of the tax payments in both years, it's -- the annualized run rate looks like it's for cash from operations running; could be somewhere in the close to the $900 million level on a normalized basis. So I guess two things. One, the improved performance, is it sustainable? And then second, is there something that could actually cause it to accelerate further so that the cash productivity actually increasing from this level. And then finally just, what you're doing with that cash. It's great to see the share repurchase increase now, but just thoughts on dividend increases versus share repurchases; you think about your cash flow uses going forward.

Hi, Bryan, it's Marty. Thank you. Let me say I wish we could sustain operating cash flow at $900 million. But of course, we can't create increased cash flow from working capital indefinitely, which is why I wanted to call out this morning in my prepared remarks that year over year, it was over a $100 million change with a big positive contribution this year. You can see line item by line item where it's coming from, our inventories are down, they've been down through the season, which is not traditional in this industry. That's my way of communicating that lean processes are working, but we can't count on working capital to be a source of cash indefinitely. And I'll remind everybody that we focus on inventories as much for cash flow as we do because of all the attendant costs that go with inventory, warehousing, transportation, handling cost, break shrink. These are a lot of costs items in the DSD business, and when you have less inventory, those costs go down. That's a big part of our RCI push in supply chain.

Yes, we're taking up our share repurchases because we have -- we're coming in better than we thought cash wise, and that's been our commitment. With respect to the allocation of free cash flow between share repurchases and dividends, I told many of you when I've been out on the road that we like our balance now. But believe that we have the ability to raise our dividend over time to create a track record as a Company that is able to do that. I cannot speak for the Board. The Board will take this subject up in earnest once a year, as they do in the early part of 2013. I would say that we believe that even today, we have the ability to take dividend up even beyond the level of any near-term earnings increase. And so, I will leave you with that.

Thank you.

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

I'd like -- Larry and Marty, just to reopen a conversation that we've had together before about your top line guidance. As you know, we think you're sometimes a bit ambitious with regards to your top line outlook, and that risk detracting from the bottom line and cash return progress I think you're making. Really, two questions. First, what's the source of the top line disappointment in Q3, relative to where you thought it would be in late July? And does it make you at all rethink that long term, that go-forward algorithm? Because it does seem at least like your revenue guidance for the remainder this year has shifted materially toward pricing relative to volume, which I think you formerly expected to be up a little bit, and now, it's going to be down 1 to 2. How are you thinking about the top line with respect to -- versus where you were in late July?

Yes, I think from what I said earlier, Steve, from late July, we saw some promotions and some activity from a year ago in certain packages and certain retail customers that we decided against, that we were not going to repeat those. So that's what's kind drove down for the third quarter. My confidence in where we are on our numbers is that we continue to see the flavors growing in the category and becoming a larger part of the CSD category each year. And where our brands are positioned, we're going to be able to capture that.

We also look at it and say this economy is not going stay the way it is right now; it's going to improve. We feel very good on that. It didn't improve quite as much as we thought, but I think after the election, we'll see things start to turn around and maybe a little more confidence out there. And just the biggest piece, though, is the flavors. I think if there's another piece besides the flavored CSDs, we know we got hit hard with some price increases with Hawaiian Punch and Mott's. We had a very large retailer that did not take their increases until after Labor Day, so basically, mid-September. There's going to be upside there just by lapping that type of pricing from a year ago.

Okay. Second, if I could, a question on cash. Going back to the question that Bryan raised and more specifically, if we think about DPS as a $3 earner with improving working capital and decreasing CapEx needs, why shouldn't DPS be a $2 dividend payer at this point?

I'm not going to comment on where the level of dividend could be. It's a Board matter, but --

Okay.

As I said, we could pay a higher level of dividend than we do today with no further positive change in our business model. So the Board will certainly take that up.

Okay. And then one last question going back to -- the beverage concentrate, the question that John raised. As you said, volume has been trending down to 2% year-to-date, and that's contrasted against the flattest to slightly positive BCS volume trend in CSDs, in brand Dr Pepper, specifically. Could you talk about what's driven that disconnect, down 2% in concentrate versus the BCS numbers, and how you expect those numbers to trend going forward, sales volume versus BCS and CSDs?

Steve, it's Marty. You have a lot of volatility when you compare the two numbers quarter-to-quarter. So if you go -- if you were to cycle through the year, the fourth quarter is traditionally characterized by various bottlers buying ahead, if you will, of the year-end price increase, so you'll always have more shipments than BCS in the fourth quarter. That tends to turn around in the first quarter as you get sell-through on that. Then you typically, though, do lag through the summer selling season, and then toward the end of the year, you turn back around again. So I think you have to look at the whole cycle and add them all up.

Okay, thanks.

Your next question comes from the line of Bill Schmitz with Deutsche Bank.

How do you think about the 3% to 5% sales growth rate over the longer term? Both for your company and the industry?

Bill, it's Marty. As I've said before, and I think Larry just gave all the background. If you look at the composition of our business, roughly 80% CSDs, 20% non-carbs and you look at where we're positioned in the flavored category as opposed to colas, our long-term view in 80% -- in that 80% of our business is CSDs, in sort of a weaker environment is only zero to 0.5 point of growth. Now, it's been more challenging this year, but zero to 0.5 point, maybe upwards of 1 point in a better environment. As Larry just said, in the 20% portion of our business, the non-carbs where Mott's and Hawaiian Punch are the lead brands at least on the top line, they've been specifically challenged. You would not predict those kind of trends going forward, so we just got to lap that.

But longer term, you look at the juice category -- I forgot Snapple, of course. Snapple has been growth; there's tea, juice and tea. You look at those categories, you have no reason to believe that they're not at least mid-single digits, if not a little higher growth over the long term. You do a weighted average, maybe you get 1 point to 1.5 points of overall company volume, and now you can figure 2 points to 2.5 points of price and or mix, and you're within the range. Do we believe the top end of the range is challenging? Certainly. But you could easily get there.

Okay, that's helpful. Just in terms of rationality in the marketplace, I mean, if these volume trends persist, do you think everyone's going to stay rational, especially if the pricing begins to lap because I think it's uncertain, whether or not those elasticity curves still hold.

I truly do believe they will. I think it's -- we went so long without taking any price, and there's not too many items that you can see in the grocery channel that have had the pricing, the flat pricing we've had in CSDs. The CSDs at the price we have today, Bill, are still a great value, and it's our job to show people that's still a value. It's still a great taste; it's fun, it's refreshing. And I feel very bullish that the pricing will stick.

Great. Thank you very much, guys.

Your next question comes from the line of Kevin Grundy with Morgan Stanley.

Hear me okay?

Hello?

Hello, can you hear me okay?

Yes.

Sorry about that, guys. So two questions for you. So first Marty, with respect to your EPS guidance for the year, so you're sticking with the $2.90 to $2.98. But if my math is right, that leaves you about $25 million, $30 million band or so in operating profit for the fourth quarter, which seems pretty wide. I was hoping you could walk us through the puts and takes there based on where we are today. And if you could comment on what you're seeing, based on where we are today, your cogs inflation for fiscal 2013. Thanks.

I'll cover some of that. I'm not going to spend too much time trying to model you down -- all the way down to your numbers and your models; I simply can't do that. I gave you the top line guidance for the full year in my prepared remarks. Cog's up 2%, and again, we would have been better but for the impact of the apple price increase because of the freeze. We said this number before so I'll give to you again. On a full-year basis, that impact in terms of cost of goods and because we're on LIFO, we're expensing the cost, actually in many cases, before we sell the applesauce, but that's the way it works. About $18 million of higher cost, which is in our 2% year over year increase, I would tell you about 50% of that was in the third quarter, expect the other 50% in the fourth quarter.

I talked in my prepared remarks about SG&A expenses. We have all year, have had planned labor costs in our field organization. Sales and service people, whom we think are pretty important to helping us drive the business, and that's not an area where we cut expenses. Our industry lobbying fees are up, not surprising given the regulatory environment, and we talked about that being up $5 million. And of course, marketing in the fourth quarter, which will be positive in terms of a year over year comparison because we spent a lot more last year when we rolled out Dr Pepper TEN. The other thing, I think, as I said in my prepared remarks, it was $13 million in transportation costs for the full year. Mostly due to higher fuel costs, and you can expect about 50% of that in the fourth quarter. That's about all I can cover.

And then if you wouldn't mind, Marty, can you comment also on your outlook today for input inflation and cogs for 2013?

It's too early. We're still putting our plans together, and we'll comment on that when we're prepared to talk about 2013 guidance.

Okay, thank you.

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

Larry, on the Dr Pepper brand and the Dr Pepper trademark, can you, A, just tell us -- it sounds like you think the brand gets back to growth. And B, talk a little bit about what you're seeing that helps you achieve that. And one thing that the data seems to suggest, I'm not sure this is the case, is that the Dr Pepper TEN introduction helped late last year, helped early this year. It's not proven quite as beneficial as the year wears on. So interested in your thoughts and the opportunity for innovation for the brand. Again, just more fundamentally, how you think you're going to get this brand back to growth from a total trademark standpoint.

Right, right. Well, like I said earlier, Mark, on Dr Pepper we are -- for the third quarter, it was in line with the industry; maybe a little better, so we were not that concerned about that. The programs we have in place right now, we look at it and say, with football, everything in place, the Dr Pepper TEN is -- I think people sometimes look at it and think TEN's like an extension to Dr Pepper. It's not. You know, our TEN is a new platform. It's a new launch, it's a new brand. And so those brands take time, and they take patience; we're not seeing a lot of cannibalism on the Dr Pepper from the TEN, so that's very encouraging for us. But it takes time to educate people and get people understanding what TEN is.

Whenever you look at our football programs, we've got the football programs, and we're including TEN in those, also. And on the Dr Pepper TEN, our repeat rates are growing, and just continue to grow. They're making us very pleased with what we're seeing come in on those, and the number of consumers that are coming into TEN that left CSDs. We get them back into CSDs, and whether it's TEN or whatever they pick up, we're getting them back into the category. We're seeing the same thing with our tests on our TEN in the core products. We feel we have something there that make us very bullish. As Marty mentioned, 80% of our business is CSDs. That's where we live and die.

So you feel good about that particular brand or that DP TEN and --

Dr Pepper and DP TEN, yes.

But I'm still trying to connect the dots here. Because the trademark, and I realize the category's tough and the consumer environment's tough, but I think still you have the long-term view that the trademark grows. And just wondering what you're seeing that at least, I'm not seeing that gives you that view.

Well, I guess I look at it and one quarter doesn't make me change my views. We've had some tough times, we're flat year-to-date, the quarter was a little tougher quarter than normal, but we also have a little insight to what we have going with our programs and what's going to happen in the fourth. Whenever we go through our 2013 guidance, we'll give you guys some idea of the programs we have on all of our brands at that time. But we really have nothing for us to show us to have any type of alarm on our brand, Dr Pepper.

Okay, great. Then if I could change topics. The RCI is doing well. You've taken down the CapEx view for the year. Should we infer that this improvement in the CapEx view is a sign of the potential for the CapEx as a percentage of sales longer term to be a little lower than what you've guided to in the past?

I would say, Mark, right now, yes, we'll give you CapEx guidance going forward. When we went public, it was clear the initial CapEx spending truthfully included some investments that you wouldn't expect to continue annually in your CapEx, building out the supply chain, IT systems, things we've talked about in the past. I do think we're starting to guide to a level where we ought to be; I'd be disappointed if we can't sustain. I can't commit to it, of course. But clearly, when you look at the benefits of RCI and you think about physical capital, just simply warehouses, we don't need more warehouses. We might need a real estate department to start selling the empty ones. But -- I know, so I don't know how low it can get.

We're trending lower year-to-date, just we're running the numbers year-to-date, about 3.2. We still think it's going to be in that range, and we're going to be rigorous on capital. We are going to be really rigorous on capital. And that will flow through the discussions Larry and I will be having through this planning season with our operating managers. And when we come out of that, we'll share our views.

Okay, great. Thank you, guys.

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

Good morning.

Good morning.

Looking at volume and CSDs, in particular, just curious is there in terms of channels, sequentially, any one that got better or worse, whether it be immediate channel or take home?

No, I think, pretty consistent. We continue to grow in convenient and gas. We're happy with our up and down the street, our cold drink programs are paying benefits. I think if you look across the large format, we've performed in line or in -- exceeded what the industry did. That might be where there might be a little more -- you see a little more of the consumer stress. But once we look at convenient and gas and our quick serve, we're very happy. Our fountain food service continues to grow, our 20-ounce continues to grow, and our guys continue placing more cold drink accounts and equipment out there.

Is there a way to actually -- do you think there was any negative effect from package sizes decreasing? And again, you can go to the supermarket these days and buy a Dr Pepper in a much smaller can. Is there a way to call that out if that had any negative impact?

Well, we've looked at it. It gives a broad choice, and there, I think some of the smaller packages might have brought some people in that were not buying the product before. We are predominantly 20-ounce, but I think now that we have the packed choices out there, we're picking up some new users. So we don't have anything showing us that that had any impact on -- negative impact.

Okay. And then, if you look at non-carbs and Mott's, in particular, and Hawaiian Punch, you have to take tremendous pricing, obviously, and some of it didn't get passed along until now. But is there any discussion about maybe repackaging that, as well, in terms of making it a little bit more affordable? Are customers really are trading out of the category altogether because it's too expensive, or are they going to a private label brand?

There's two very different animals there between Hawaiian Punch and Mott's. Of course, with Mott's and the apple juice, the big player there is private label, but it always has been. Like I said in my comments, we made some decisions not to copy some promotions we did last year. And after lapping this pricing, there's a positive uptick there no matter what, just on the pricing. But we've also got a lot of great programs put together on it.

Then over to Hawaiian punch, the Hawaiian Punch is the biggest one. The lap is just now starting, so I mean, fourth quarter is a positive there, but we've also done some items with Hawaiian Punch. Instead of just having the one price point on a gallon out there, we've got 32-ounce packages out there, we've got the 10-ounce that's in a 6-pack, an 8-pack. We have a 12-pack we just did with a shrink wrap that's fairly new into the market, and we're seeing great take on that. So that makes us very bullish on Hawaiian Punch coming back, being the great, sweet, cheap treat for mom, and we've given her several different ways to buy it.

And then lastly, just on the gross margin, the last 160 basis points of benefit, I didn't quite catch what was behind it. I know that pricing and mix were about 140 basis points. Could you just go over that again?

Damian, it's the commodity, the mark-to-market impact on commodity gains and losses. I don't know if you've had the chance to go through the whole press release, but if you go into the schedules in the back of the press release, where we've taken these factors out to get to our core earnings, you'll -- and you take a calculator to that page, you'll be able to find the gross margin without that impact.

Okay, that's perfect. Then just lastly, is it too early to talk about China and apple supply for -- I guess, when does pricing gets set in November? Any idea how that's looking for the apple concentrate?

It's too early.

Too early, okay. Thank you.

Your final question this morning comes from the line of [Caroline Webby] with [CLSA].

My questions have been answered. Thank you.

Thank you, Caroline.

Thank you, good morning, Caroline.

Good morning.

Well, thanks for joining us on the call today. And we continue to be very happy with your interest in Dr Pepper Snapple. We'll see you all next quarter. Goodbye.

Thank you, this concludes Dr Pepper Snapple Group's third quarter 2012 earnings conference call. Please disconnect at this time, and have a wonderful day.